Start-Up Companies, the University

From Innovation to Industry

Hosted by:

School of Biological Sciences

Office of Technology Alliances

GSM Center for Entrepreneurship & Innovation

June 11, 2004

Thank You to Our Sponsors:

All Conference Attendees Will Receive this CD:

Introduction

Program

Speakers

Presentations

Sponsors

Resources for Start-Ups

Hosted by:School of Biological Sciences

Office of Technology Alliances

Center for Entrepreneurship & Innovation

Reports:Start-Up Companies Founded on UCI Technologies

Faculty/Industry Partnerships

Faculty Handbook

UCI Technologies Available forLicensing

FOUR REASONS TO BE OPTIMISTIC ABOUT START-UPS

AT UCI

OPTIMISM FOR START-UPS

#1

Venture investing is coming back

Biotechnology and Medical Device Venture Investing in 2003

Industry Number of Deals/Funding/ % in Region

Southern California

Los Angeles

Orange County

San Diego

Biotechnology

Deals

Funding

% So. Cal. $

46

$395M

100%

4

$43M

10.9%

6

$45M

11.4%

36

$306M

77.7%

Medical Devices & Equipment

Deals

Funding

% So. Cal. $

24

$216M

100%

4

$1M

0.5%

14

$155M

71.8%

6

$60M

27.7%

* Data from the PricewaterhouseCoopers - Thomson Venture Economics – National Venture Capital Association Moneytree Study


#2

Big Pharmas must fill their pipelines

Top Ten Selling Drugs in 2003

Drug Company 2003Sales

Year offPatent

1 Lipitor Pfizer $ 9.2 Bn 2010

2 Zocor Merck $ 4.9 Bn 2006

3 Norvasc Pfizer $ 4.2 Bn 2007

4 Zyprexa Eli Lilly $ 4.2 Bn 2011

5 Paxil Glaxo $ 3.5 Bn 2006

6 Zoloft Pfizer $ 3.0 Bn 2006

7 Procrit J&J $ 2.9 Bn 2013

8 Pravachol BMS $ 2.8 Bn 2006

9 Fosamax Merck $ 2.7 Bn 2007

10 Effexor Wyeth $ 2.6 Bn 2008

• Total 2003 Sales - $ 40 Bn

• Percent of Sales off Patent by 2010 – 82%

Substantial Revenues at Risk Due to Patent Expiry

2009-20132003-2008

Abbott

Roche

Novartis

JNJ

AZ

BMS

Wyeth

Glaxo

Pfizer

Merck

7

9

21

15

16

15

3

18

37

40

0 20 40 60 80 100

Percent of 2003 Sales Coming off Patent

41

26

27

42

24

17

13

4

15

8

% % % %% %


#3

The rewards for successcan be great

Eyetech Pharmaceuticals: A Successful Deal with Pfizer

Since its inception in 2000, Eyetech Pharmaceuticals has:• Raised $150M of private equity• Completed IPO (ticker: EYET) raising $146M at $21/share• Employed over 150 people in 3 states (Boston home office)

Eyetech recently negotiated a landmark deal with Pfizer:• Develop & commercialize Macugen™ in all ophthalmic

indications, including Age-elated Macular Degeneration and Diabetic Macular Edema. (Phase 3)

• Entails US co-promotion, profit-sharing, R&D funding, ex-US royalties and equity investments of $770M


#4

UCI has the experience and the capability to help start companies

UCI Start-Up Company Activity30 companies created, 23 still active

242 jobs created, 202 of which are in Orange County and 240 are in California.

License/option agreements with active start-ups transferred rights to: • 40 issued patents • 84 patent applications • 10 copyrighted works

UCI Start-Ups have contributed over $30M to UCI :• $21M in research funding• $2.8M in patent costs to protect UC-owned inventions• $5.2M in royalties and fees

New Drug Discovery CenterUnder Early-Stage

DevelopmentMission is two-fold:

1. To promote transdisciplinary efforts in basic drug discovery research

2. To facilitate the validation, optimization and commercialization of potential new drugs discovered through these efforts

Champion: Dr. Daniele Piomelli

Department of Pharmacology

Start-Up Companies, the University & the Faculty Entrepreneur

An OverviewLarry Cohn, PartnerStradling Yocca Carlson & Rauth

The University PerspectiveDavid Schetter, Assistant Vice Chancellor Research & Technology Alliances, UC Irvine

The Faculty Entrepreneur PerspectiveGary Lynch, Ph.D., ProfessorPsychiatry & Human Behavior, College of Medicine, UC Irvine

OVERVIEW

What Technology is Suitable for a Start-Up?

Alternatives to Forming a Start-Up

Faculty Considerations: Why Commercialize? What Impacts?

Academics vs Biotech

Disclosing and Assigning Inventions

Starting and Developing the Company

Financing the Start-up

Operating the Start-up

Exits

What Technology is Suitable for a Start-Up?

A great invention does not necessarily make a successful business

Two classes of inventions • Incremental improvements • Breakthrough or a platform technology

Start-ups with multiple products/services are more likely to be successful

Alternatives to Forming a Start-Up

Publish and put in the public domain

Out-license through the Office of Technology Alliances

UCI releases invention – individual out-licenses to an entity

Faculty ConsiderationsWhy commercialize your invention?

• Professional recognition • Doing good for mankind • Part of the University’s mission as a public

research institution • Financial rewards New area of intellectual

pursuit – business

Faculty Considerations: (continued)

Impacts on the individual inventors and founders

• Do you want to be a professor or an entrepreneur?

• Inventor’s role in company

1. Technology founder - equity interest

2. Consultant

3. Scientific Advisory Board member

4. Management – full-time or part-time

5. Board of Directors – member or Chair

Faculty Considerations: (continued)

Impacts on the individual inventors and founders (continued)

• Significant drain on time for:

1. Research and teaching

2. Family and friends

3. University and department administration

• Interferes with academic relationships

• Financial interest in the start-up creates conflicts of interest and conflicts of commitment

CostTime and lots of itcompanies eat up as much time as is available….

ATADAirline travel addiction disorder (ATAD) is the number one psychiatric disorder in contemporary US corporations. Incidence in white, male executives over age 45 is nearly 100%. Victims are characterized by an irresistible urge to take a flight when they have been home for more than 2 weeks. This leads to a constant nagging to go on useless trips. This will not be a problem for any of the growing number of academics who already suffer from ATAD. But if this does not include you, then remember that ATAD, at best a nuisance, is contagious and at present untreatable.

Academics v BiotechNo evident reason that research productivity should suffer.• more outside activity but gain in collaboration

and point of view• new standards for evaluating work can be

healthy• large increase in the amount of money being

spent on the project generally results in much greater progress than otherwise would be possible.

Academics v Biotech

The major balance problem arises from having two lifestyles.

Many, perhaps most, founders coming from universities find themselves slowly distancing themselves from their old lives or slowly returning to it.

Disclosing and Assigning Inventions

Signing Patent Acknowledgement is a condition of UC employment

Disclosure of all patentable inventions is required as is assignment of those within scope of employment or when UCI resources are involved

Administered at UCI by the Office of Technology Alliances

University may release rights back to the inventor (or to federal government if federally funded) if not commercializable

Disclosing and Assigning Inventions(Continued)

University will seek to commercialize inventions while protecting the University’s rights

Competing interests: Fairness of Opportunity vs. Economic Development.

UCI announces opportunity via publications and Web-avoid “Pipelining”

Inventor(s) share in proceeds of University out-licensing

Starting and Developing the Company

Shaping and Selling the Idea“….Truth! What is truth?….” P. Pilate ( 0030 AD)

Change your mindset

You have been trained to present things in NIH language

The NIH et al process is weird; e.g., no performance review; degree of expected exaggeration

To the world at large, your current way of shaping and presenting ideas is bound to seem odd.

The above probably has more to do with the failure of academic scientists to communicate with entrepreneurs than anything to do with the complexity of the material being presented.

Who is to be involved? Academic colleagues do not always make the best business partners

Business consultants – the world is full of new business “consultants” who would like to assist you. Proceed with caution.

Professional advisors – attorneys, accountants, FDA regulatory professionals

The Leonardo Principle

Common Business solution: hire a few da Vinci’s

Tech solution: buy a statue. there is only one da Vinci….don’t waste your money on cheap imitations

On the other hand, the blimp sized Ego commonly found in academic science can throw a start-up completely out of balance.

Many tech problems do not have a business solutione.g., Need a Mona Lisa for the new palazzo

The Business Plan

Technology hurdles

Regulatory hurdles

Competitive landscape

Market realities – cost of products/service

Securing Intellectual Property Rights

In life sciences, patent rights are essential.

Inventions disclosed to and patents prosecuted by the University.

Start-up needs to secure rights from the University, through OTA

Stage 1: Option to acquire license – useful to “lock-up” rights while organizing and seeking financing• Term of option approximately one year• Low up-front cost• Must cover patent prosecution costs during

option period

Acquiring property rights – A two-stage process…

Stage 2: After organizing and concurrently with seeking initial financing, finalize license from the university• The entire business may live or die with this license

agreement. • Inventor/entrepreneur’s conflict of interest in the license

relationship • University will require diligent commercialization• Payments to the University.

a. Cash – patent expenses, upfront fees, milestones, royalties

b. Equity (stock) in start-up company

c. University sharing with inventor – cash/stock.

Acquiring property rights – A two-stage process…

The Start-up Landscape

Early StageCompany

License Rights

Up Fronts, Milestones, Royalties

Invention

Information

Financial Split

Consulti

ng

Consulti

ng Fee

s

Academic Inventor

Technology Transfer

Office

FamilyColleagues

Department

Public/MediaUniversity Admin.

Competitors, Investors

Corporate Partners

The Inherent Tensions

UNIVERSITY• Create and propagate

knowledge for the public good

• Narrow Scope of License

• Revenue

• Academic Freedom

• Control of Intellectual Property

• Diligent Development

START-UP• Financial return to investors,

founders and employees using knowledge

• License

• Expense

• Confidentiality

• Control of Intellectual Property

• Commercial Flexibility and Uncertainty

UCI/Start-Up Collaborative Research

Implemented through a research contract

High leverage for the start-up (use of labs, equipment, instrumentation)

Payment of full overhead required

Conflicts of interest need to be disclosed and managed

Provides access to improvement inventions & new inventions in the field

Fulfills early-stage diligence requirements

UNIVERSITY

PRINCIPALINVESTIGATOR

SPONSOR/LICENSEE

OFFICE OFTECHNOLOGY

ALLIANCES

Direct Cost Revenue

Revenue from Fees,

Royalties

Salar

y/Fa

cilit

ies

Inte

llect

ual P

rope

rty

New Knowledge/Diligence

Comm

ercial Rights

A”Win-Win-Win” Strategy for Industry/UC Partnering

& Overhead

- Roy

alty

Sha

res

Finding Initial BackersACTIONS

PATENTS…. shape the idea before bringing it to the university let alone to initial backers.

PUBLICATIONS…. play a much larger role than is generally recognized.

PRESS…. let the university press office open the doors.

Economist articles >> Defense companies >> VCs >> Meno Corp >> Synaptics

The Press Is a Whimsical But Sometimes Useful Creature

5 July

Two successive but unrelated articles in a major magazine prompt a startup

16 August

New York Press Really

Counts Because

That’s Where the Money Is

The New York Times Prompts the Formation of a Second Company

The New York Times >>New York Investment Bank >> Cortex >> IPO 2 years later

One year later….

But Be Careful: The

Press can Turn On You

In a Flash

The LA Times several years later.

Finding Initial Backers

ATTITUDES

Be warned: Raising money is probabilistic …….chance and historical accident play a huge role.

The law for finding initial backers: “Use a big N to compensate for a low p“.

Financing the Start-up

Develop the business model and reflect it in a well drafted business plan

Be realistic in financing needs • Development always takes longer and costs

more than planned• Do not develop a Maybach when a Toyota is

what will sell

Financing the Start-up: Financing Sources

Boot-strap with personal internal resources • Maximum control• High personal financial risk• Limited funds may slow development

Friends and family financing • Give up less control• Relationship issues• Limited funds may slow development• No “deep pocket”

Government grants• Give up little control• Spend a lot of time writing grant proposals• Slow funding• Limited funds may slow development

Business angels • Give up more control• Often a hit-or-miss proposition• May or may not find “deep pocket”• Investors may have unrealistic expectations



Incubators• Short-term solution only • Expensive early stage assistance

Venture capital • Ultimately you will likely relinquish control

• Will press hardest on valuation – expensive funding

• Bring hands-on expertise

• Bring wide network of industry and financial contacts

• If company is progressing, additional funds are available


Corporate venture capital/strategic alliance

• Wide variety of forms – for example:

a. Up-front cash for distribution right when product is developed

b. Straight equity investment

c. Collaborative development with funded R&D costs.

• Beware of entangling alliances which restrict future operations or exits

Setting Up the Company

1st strategy: build the company and the products will follow

• IPO about 2 years after starting the company• Second round financing (15MM) about 4

years laterLarge building, full scale laboratories, senior scientists, senior business people

The law of irresistible consumption : if you have it, you will probably spend it.

Setting Up the Company

2nd strategy: build the product (1 or 2) and the company will follow

• Series A for $3.5MM. Build and test a system for classifying human brain waves. Secure IP for an in vitro model of human brain aging.

• Series B for $4MM. Multi-center testing. Launch 1st product 2002. First partnership. No sunk costs, university partners, minimal staff.

The law of irresistible consumption : if you have it, you will probably spend it.

Setting up and Operating the Start-up

Academic or professional management.

Relationships with Management and the Board of Directors

Protecting intellectual property

Segregating duties as a consultant/officer from those of a professor – avoiding conflicts of interest.

Incentives – Returns to the Founder-Scientist

ExitsAcquisition • Role of the faculty entrepreneur in selling the

company a. Risk allocation between founders and investors

b. Post-closing consulting, non-competition.

• Structuresa. Tax consequences

b. Liquidity

IPO• Risks of being officer or director of a public

company

Documents

Start-Up Companies, the University