Building a Business > Technology transfer

Published online: 23 June 2003, doi:10.1038/bioent739

U2B: A new model for technology transfer

*Clifford M. Gross is CEO of UTEK Corporation, 202 South Wheeler Street, Plant City, FL 33566 (cgross@utekcorp.com).

Companies can accelerate their businesses by outsourcing basic research in this new approach to technology transfer.

Technology companies such as those in the life sciences need new discoveries to invigorate their product pipelines. Yet the cost of a basic research program is formidable and its value is difficult to assess. In addition, technology development cycles are long and often fraught with setbacks and disappointments. For public companies this is not just a tough patch in the corporate landscape but an ever-present conundrum because a company's value is largely based on the strength of its technology franchise. For management, this weakness—the lack of control over ongoing innovation—must be neutralized to meet customer needs and to achieve an optimal marketplace valuation.

From another perspective, it has been well documented that the majority of innovations developed at universities and federal laboratories never reach the marketplace¹. This is a profound waste of the intellectual capital produced by some of the most creative scientific minds in the world. To address this twofold problem, we have developed a new model for technology transfer called U2B (ref. 2). In essence, it states that to facilitate technology transfer, a financial instrument is needed that can monetize the present value of intellectual capital in the form of common stock or another equity instrument. U2B technology transfer bridges the gap between basic research and marketplace commercialization. To allow for the systematic closure of technology transfers, it is helpful for both the buyer and seller to value technologies with a common currency. This enhances the potential for creating an efficient market between producers and purchasers of intellectual capital in much the same way that a mortgage helps to create an efficient market between buyers and sellers of real estate.

The U2B model

An initial premise of this U2B intellectual-capital-to-equity exchange is that technology transfer must be market driven to enhance efficiency. Therefore, an entrepreneur should start with a well-defined technology acquisition need. Once a profile is constructed describing the type and state of development of the technology needed, an experienced technology transfer company can supply this profile with some of the many technologies available for license from federal laboratories and research universities.

A second premise is that companies need to minimize invention risk to maximize shareholder return on equity. Invention risk is defined as the total cost of the invention process, including capital, manpower and equipment. Most basic research programs do not result in the development of breakthrough technologies. Therefore, it is difficult to determine a priori the financial outcome of a basic research program. In contrast, outsourcing often produces a higher or better-understood rate of return on investment, when compared with deploying capital in-house in a non-core area.

Market-driven technology transfer begins when the technology need is directly fulfilled by the technology available for license (see Fig. 1). To facilitate acquisition of the license, the technology transfer company may help in setting up a special-purpose portfolio company to negotiate the license from the laboratory and facilitate the transfer. Once the portfolio company and the laboratory agree to the terms of the license, a stock sale agreement must be negotiated between the portfolio company and the public technology company, the final acquirer of the license. The portfolio company is then sold to the end acquirer for stock. This is a stock-for-stock exchange, whereupon all of the shares of the portfolio company are exchanged for a mutually agreed upon number of shares of the technology company. To obviate the buildup of inventory of depreciating assets (such as technology licenses), it is best to envision the U2B exchange as a "just-in-time" exchange of intellectual capital for acquirer company shares. The portfolio company contains the license to the intellectual property of interest, and therefore the ownership of this license is in effect transferred to the public technology company at the close of the transaction. In addition to the license agreement, the portfolio company may contain other intellectual-capital assets that the parties desire to transfer, such as a sponsored research agreement, a consulting agreement, a material transfer agreement, real property or cash. At the close of the transaction, 100% of the license royalties are paid to the research institution by the public technology company.

Fig. 1

		The U2B model for technology transfer. Note: In the version of this article initially published in print, Figure 1 was incorrect. The arrow representing stock should point to the parent tech transfer company, not the portfolio company it created. A corrected Figure 1 appears in the online version.

Variations on the theme

In practice, consideration paid to a university or federal laboratory for the acquisition of a technology license may also, in whole or part, be made in the form of equity depending upon the risk tolerance or applicable laws guiding the university or laboratory.

In our experience, technology transfers are substantially facilitated by the U2B model. We have applied this model successfully to close technology transfers from both universities and federal laboratories to biotechnology, biomedical and other high-technology companies. In using this model, some common features emerge:

• Intellectual capital may be acquired using common stock as a currency.
• Intellectual capital may be acquired in a profitable manner, with the assistance of a technology-transfer company, without imposing a sharing of royalties on the inventing institution. Rather, the U2B equity model uses corporate equity to finance the transfer of intellectual capital.
• The technology transfer process appears to be accelerated by the U2B model as a result of the sharing of risk among the inventing institution, the corporate purchaser and the technology transfer company.

Financial considerations

In the U2B model, technology transfer is structured as a "mergers and acquisitions" transaction, which more fairly accounts for the present value of the technology on a company's balance sheet. Also, according to generally accepted accounting principles (GAAP), research and development costs are required to be expensed as incurred, the near-term effect of which is the reduction of operating income. In contrast, the outsourcing of research with the U2B model structures the technology transfer transaction as a stock-for-stock acquisition; therefore the value of the acquisition may be capitalized based on the consideration provided (stock). The net effect is that a technology license acquired through the U2B model strengthens the balance sheet by the value of what is acquired. Therefore, outsourcing basic research may enhance both corporate intellectual capital and the asset value of an organization immediately after it acquires a license.

In summary, U2B is the first just-in-time technology-transfer tool that empowers companies to grow their intellectual capital in exchange for common stock without diminishing the inventing institution's royalties. This tool has the potential to increase the value of a wide range of companies by allowing them to outsource basic research to taxpayer-funded research institutions and finance this outsourcing with the one currency that most growing companies are long in: their common stock.

Further reading

Gross, C., Reischl, U. & Abercrombie, P. The New Idea Factory (Battelle, Columbus, OH; 2000).

Gross, C. & Allen, J. Technology Transfer for Entrepreneurs (Praeger, Westport, CT; in press).

References

1. Association of University Technology Managers Licensing Survey: FY 2001 Survey Summary, AUTM, Inc., Northbrook, IL (2001).

2. U2B is a registered trademark of UTEK Corporation.