The path from a lab discovery to the boardroom of a multibillion-dollar biotech firm isn’t straight, short or easy. One of the toughest challenges can be bridging the “Valley of Death,” the gap between research funded by government grants and a more tested product worthy of venture funding or attractive to industry for licensing or acquisition.
The University of California system might have a way around that divide for UCLA and its sister campuses. Later this year, it will launch UC Ventures, a $250 million independent fund to invest in research-fueled enterprises on its campuses. Funded through the UC’s roughly $90 billion in pension and endowment funds, UC Ventures will selectively pursue home-grown opportunities at various stages. The idea is to generate attractive returns while supporting UC research.
“The UC Ventures fund is as exciting a step forward as we’ve had in that area for the UC System or UCLA,” said Roy Doumani, who teaches a business of science course at UCLA’s school of medicine, helped form the school’s California NanoSystems Institute, and has endowed chairs at the med school’s departments of medical and molecular pharmacology and urological oncology. “The longer we can keep developing technology on campus, the greater the value will be. So when we do go out to license it, the terms will be much more attractive to the university and inventors.”
UC’s new fund is part of a greater trend of research institutions becoming savvier and more sophisticated in how they handle the intellectual property generated by their scientists. What these organizations once saw as a perk is now being handled like a precious commodity and possibly a way to fund new research as government funding dwindles.
“What it takes to get a technology licensed or spun out, the environment is not what it was 10 to 15 years ago, particularly for health care technologies,” said Seth Levy, a managing partner and intellectual property attorney in Nixon Peabody’s downtown L.A. office. “If you’re going be one of the technologies that move forward, there’s work to be done on the side of academia to make it some of the most enticing opportunities.”
Levy has seen technology transfer offices inject more business savvy into their operations, hiring people with finance, business and industry experience as they work to take some of the risk out of their IP to make it more appealing to investors.
“As gaps in funding have gotten bigger, academics and health care providers have gotten smarter at backing their own work and making investments to get these things closer to the market,” he said.
Startup mind-set
The UC Ventures announcement came around the same time as the creation of UCLA’s Westwood Technology Transfer last year, a nonprofit intended to guide and improve how the university transfers its technology to the marketplace. The group’s board, which includes experienced executives from a range of industries and UCLA faculty, is meant to lend high-level, sophisticated business expertise to the school’s Office of Intellectual Property.
UC Ventures’ independent team, which is not employed by the university, will identify the most promising early stage UC startups with help from local venture capital firms and UC employees, and invest as the team sees fit. Select third-party institutional investors might also be able to co-invest. UC researchers are not obligated to pitch their projects to the new venture firm.
The funds will kick-start the campus spinoffs, giving them funding to gather more clinical data, make a prototype or create other proofs of concept helpful in getting investors or licensors to see the value in the companies, Doumani explained.
UC Ventures will also selectively participate in mid- and later-stage rounds for companies that have demonstrated clear potential and can use the funding.
Doumani explained that the university system, the campuses and inventors would all still get their share of equity in the company or royalties through licensing deals, but perhaps on better terms. Licensing fees tend to be higher when a technology is more developed, and it’s easier to keep more equity when you’re not desperate to find cash and accept whatever terms come along with it.
The fund also has a long investment horizon, which is often necessary when dealing with life sciences, and will aim to maximize returns.
The office of intellectual property at L.A.’s Cedars-Sinai Medical Center started doing something similar with its Tech Transfer Internal Fund, which launched in 2012.
Cedars carves about $1 million out of the roughly $15 million a year it gets from IP royalties and puts the money to work further developing researchers’ promising inventions.
“We got indications from patent attorneys that we could get better, stronger more licensable patents if we developed it further internally,” said James Laur, vice president for legal and technology affairs at Cedars. “Reduction of risk is the name of the game now.”
Los Angeles BioMedical Research Institute is also considering creating a private investment fund with capital industry sources. The idea would be to invest in inventions coming out of LA BioMed in exchange for first dibs to license the technology that succeeds.
“It would really enable LA BioMed and our investigators to get access to funding that otherwise wouldn’t be available to develop those potentially lifesaving clinical protocols, drugs or devices,” said Rubén Flores-Saaib, assistant vice president of business development. “And we could start to expand our presence and partnerships and depend less and less on the federal government to run our research.”
Risk, reward
There has been some resistance to encouraging researchers to keep an eye on the business world, based in the belief that financial incentives might ultimately be corrupting.
“You’re potentially pulling really good researchers into the money stream,” said Christopher Newfield, a UC Santa Barbara professor. He was concerned that a fund like UC Ventures could divert scientists’ attention from money-losing basic research that can be beneficial much further down the road and turn their heads toward more lucrative projects.
Doumani dismissed that notion.
“When they first talked about all this, some people said, ‘Oh no, no, it’s not good. It will corrupt faculty and students. They’ll try and do nothing but make money.’” he said. “My response to that is there will always be a few people that will do things that may not be appropriate. But what are we? A university to teach people and make sure they understand what’s right and wrong, what works and doesn’t work.”
Even with the UC system offering money to new ventures, economic risks remain.
“There’s no certainty just because you have a patent or intellectual property it’s really going to pay off,” said Bruce Blomstrom, president of Pasadena Bioscience Collaborative and director emeritus of Pasadena Angels. “Particularly if it’s biological or pharmaceutical products, you still have to get it through the (Food and Drug Administration) and through clinical trials. There are lots of obstacles on the way.”
Blomstrom also pointed out that there has to be a good, well-defined market for the ultimate product.
“We have spent the past three years carefully exploring how to enhance the technology commercialization efforts within the university ecosystem and that due diligence gives us confidence that UC Ventures is optimized for success,” wrote UC Office of the President spokeswoman Dianne Klein in an email. “The (Office of the Chief Investment Officer) will work with the UC Ventures team to help it develop its own resident expertise to mitigate any risks. We also intend to create an independent advisory board of leading figures in Silicon Valley to provide advice and industry insight to UC Ventures.”
Laur echoed those sentiments.
“Cedars-Sinai is taking on an additional layer of risk if the technology is not licensed or, as we see in some cases, the science doesn’t go where the inventors had anticipated,” he wrote in an email. “The substantiation for why it is appropriate for Cedars-Sinai (and any academic/nonprofit institution for that matter) to accept that risk is that bringing advances made in the laboratory to the market ultimately to benefit patients is a part of our charitable mission. It truly is a part of the role we play in society and so it is something that we really need to embrace if we are doing our job right.”
