Science and TechnologyWritten evidence submitted by the Royal Society of Chemistry

The RSC welcomes the opportunity to respond to the House of Commons Science and Technology Select Committee inquiry into Bridging the “valley of death”: improving the commercialisation of research.

The RSC is the UK Professional Body for chemical scientists and an international Learned Society for advancing the chemical sciences. Supported by a network of over 49,600 members worldwide and an internationally acclaimed publishing business, our activities span education and training, conferences and science policy, and the promotion of the chemical sciences to the public.

This document represents the views of the RSC. The RSC’s Royal Charter obliges it to serve the public interest by acting in an independent advisory capacity.

The RSC Response

What are the difficulties of funding the commercialisation of research, and how can they be overcome?

1. In the UK, investment by venture capitalists has fallen to very low levels. Investment in start-ups has always been particularly low compared to investment in the later stages of commercialisation, but since 1996 it has significantly reduced.

2. The venture capital investment remained relatively low, with investments in UK companies falling to £677 million in 2009, from £930 million in 2008.1

3. The old venture capital model of commercialisation of research consisted of three stages of funding leading to an initial public offering (IPO). Although a healthy IPO market is essential to the success of the venture capital industry,2 the IPO exit model has virtually disappeared. This was replaced by separated funding rounds and earlier-stage public and private companies struggle to fill the gap in between.3

4. The most common funding difficulties are at seed and start-up stages, when the risks associated with investment are high. The lack of private funding is, pre-dominantly due to risk aversion on the side of investors, the slow IPO market and the low returns to investors. On average the time taken to successfully exit through flotation now averages almost seven and a half years, the longest time seen over the past two decades. This has a knock-on impact on a venture capital fund’s ability to invest in new companies.144

5. To increase private funding, actions are necessary from a wide range of stakeholders from Government institutions to the R&D companies themselves:

Government

De-risking the proposition to investors by introducing co-financing measures (eg R&D tax credits, public procurement policies, collaboration on R&D projects, including research clusters together with academic institutions). A successful model often cited is that of the Defense Advanced Research Projects Agency (DARPA), an office of the US Department of Defense responsible for funding the development of many technologies for use by the military.4

Improvement of taxation system to incentivise private investors offering seed and start-up funds.

Increase public funding for public private partnerships.

Innovative companies

Utilise non-returnable funds available in the UK and Europe for early proof of concept in order to develop stronger cases for investment. These include: translational research grants eg follow on funding from Research Councils, SMART funds from the Technology Strategy Board, Regional funds; European collaborative programmes or Local/regional funds.

Technology Strategy Board, Technology Transfer Offices (TTOs), learned societies

Establish strategic partnerships between public and private sector eg the US Enterprise Development Programmes which foster linkages and partnerships between investors, entrepreneurs and other key players in the commercialization process.

Establish research initiatives focusing on market perspective and covering the full supply chain.

Maximize the use of funds by reviewing the key growth areas and supporting those as a priority. Increase public funding for demonstration projects and stimulate co-ordination and joint use of funding.

Improve knowledge transfer and access to intellectual property by setting realistic expectations regarding the commercial value of IP (role of TTOs).

Are there specific science and engineering sectors where it is particularly difficult to commercialise research? Are there common difficulties and common solutions across sectors?

6. Life sciences, biotechnology, pharmaceuticals, medical devices and clean technology are perceived as cash intensive and slow at providing return on investment. These sectors are just a few examples of sectors struggling to attract venture capital, hence incurring delays in commercialisation of research.5

7. With IPO exit no longer a common option for venture capitalists, the primary (and essentially exclusive) exit is primarily through large pharmaceutical companies. Indeed, these large companies are reliant on in-licensed assets for around 50% of their development portfolio. However, they will place high demands on what they license in and in the main, will not invest until the asset has at least achieved Proof-of-Concept (PoC) in patients. This presents a series of challenges for investors who are looking at the biotech sector—their investment becomes longer term (beyond the traditional five-year term that a VC would usually work with), costly and risky (attrition is typically around 75% for Phase 2 clinical trials).

8. In the fragmented model for medicines research that is now emerging, revitalising the biotech sector by making the discovery-to-PoC segment more attractive to investors will be a key factor in underpinning commercialisation of UK-based research discoveries. There are a number of levers to achieve this.

9. Firstly, the substantial investment in biological/biomedical research needs to be accompanied by investment in key partnering disciplines (chemistry, chemical biology, systems modelling etc) to ensure that the biological targets selected have the best chance of delivering successful PoC studies. In addition, there is a window of opportunity now to embed experienced medicinal chemists in academic centres of drug discovery to ensure that the development candidates that emerge from academic laboratories and form the basis of the biotech pipeline build upon the wealth of knowledge that exists in the pharmaceutical industry around factors that drive attrition. This will go a long way to addressing the risk component.

10. Secondly, it is important that the parameters/criteria required for reimbursement (and therefore, commercialisation) for a particular disease are well understood and transparent so that research and clinical efforts can be targeted towards delivering these end-points. This requires improved communication across the sector, including regulatory authorities, funders, industry, academia and investors.

11. Thirdly, in order to address the issue of scale of clinical trials, effective biomarkers/diagnostics need to be developed to ensure that the study design is optimised in terms of patient selection and endpoints. This will require improved collaboration between clinicians and drug discovery groups and if successful, would be expected to have a major impact on the cost, timescale and risk associated with clinical PoC studies. As such, this would make the area of medicines R&D much more attractive to the investor community.

12. Each sector faces difficulties in slightly different areas in their development, but they all have similar barriers. Barriers are not necessarily linked to availability of funds, although access to capital is a commonly identified obstacle. Advice to support commercial decisions, market identification, commercial skills, access to pilot and demonstration facilities are also known to be barriers.

What, if any, examples are there of UK-based research having to be transferred outside the UK for commercialisation? Why did this occur?

13. A weakness in the UK is the declining manufacturing base. The high costs in the UK labour market historically have resulted in companies outsourcing the manufacturing of their products in other countries. In some instances technology is sold abroad to make it more viable to produce goods.6 However, for high-tech industries requiring a graduate workforce, the UK is now competitive with most China and India.7

14. Manufacturing is not the only reason R&D companies chose to commercialise their research abroad. Tax implications, risk sharing, entering new markets, proximity to feedstocks, high growth markets and gaining further investment from public funding in countries with friendly policies for investment eg Singapore and the BRIC countries, are also cited.

15. Many examples of commercialisation abroad can be found in the pharmaceuticals sector. For example in April 2011, Pfizer and Shanghai Pharmaceutical signed a memorandum of understanding to develop and commercialize a Pfizer product in China8. Pfizer chose this option as a way to expand its presence in China, share risks of product development or obtain further investment by partnering with a successful IPO (Shanghai Pharmaceutical).

What evidence is there that Government and Technology Strategy Board initiatives to date have improved the commercialisation of research?

16. The RSC recognises that initiatives such as Knowledge Transfer Partnerships (KTP) and Knowledge Transfer Networks have provided an important step towards commercialisation of research by improving academia-industry collaborations. KTPs are bringing the economy £6 for every £1 invested in the scheme.9

17. An example of a successful Knowledge Transfer Partnership is that between Brocklesby Ltd and the University of York’s Department of Chemistry. Brocklesby Ltd produces biofuel from vegetable and animal oils from the food manufacturing sector. The company entered the KTP partnership with the aim of exploiting new markets by developing valuable chemicals from a by-product of biodiesel production that was costing the company £50k/year in disposal charges. The KTP partnership developed new applications, methodologies and products turning a cost into profit; Brocklesby Ltd has now additional revenue of £197k/year rising to £975k/year in three years.

18. As a result of this collaboration, the University of York has increased its research on bio-resources and biofuels, published a series of articles in peer reviewed publications and used specific equipment and methodologies available in a commercial institution.

19. A few other intangible benefits of KTPs are the access of industry to highly qualified workforce to address specific problems in their processes over a determined period of time. On the university side, KTPs are providing a great contribution to workforce up-skilling, which is supported from Government funds.

20. Chemistry Innovation Knowledge Transfer Network (CIKTN) facilitated numerous collaborative projects which received funding through Government or European initiatives.10

21. One of these is BIOCHEM,11 a project funded by the European Commission, whose aim is to provide practical assistance to SMEs in developing new business, including help and advice in acquiring funding throughout the product development cycle to full commercialisation.

22. Since 2006 Chemistry Innovation has leveraged more than 130 collaborative projects with a value over £134 million that have an estimated potential value to the UK economy of £1.3 billion.12

What impact will the Government’s innovation, research and growth strategies have on bridging the valley of death?

23. The RSC welcomes the Government initiatives proposed in the ‘Innovation and Research Strategy for Growth’. The Government is investing in the right measures to improve the climate for commercialisation of research, eg reforming the tax system, providing extra funding to support VC investments, support for innovative technology SMEs and creation of large scale technology demonstrators.

24. We also welcome the Small Business Research Initiative (SBRI), aimed at supporting innovative ideas from companies, and in particular small companies, through public procurement. In 2010–2011 the UK’s public sector spent approximately £236 billion on goods and services,13 which is significantly higher than the annual investment in all aspects of research and innovation of £11 billion. Under the SBRI scheme, it is important that the Government ensures the decisions for granting the contracts are made on lifetime value and not only short term cost savings.

25. The Stratified Medicines Innovation initiative will help accelerate development programmes and could lead to improved survival for clinical candidates. However, in order to ensure sustainable success for the sector, there is a need to invest in platforms and collaborations that will support the discovery phase, bridging drug discovery and clinical research, for the reasons highlighted under question 2.

26. The creation of the High Value Manufacturing Catapult Centre (HVM) is welcomed by the RSC. This initiative will allow better access to facilities, reduce the risk to innovation and bridge the gap between universities and businesses. Access to facilities could be improved by providing funding to small and medium enterprises (SMEs) to use the new facilities. A good model was the funding offered for the Industrial Biotechnology pilot plant facilities at the Centre for Process Innovation and this should be replicated for other centres part of the HVM Catapult.

27. A review in due course of the effect of the recently announced Government policies for bridging the valley of death would be welcomed.

Should the UK seek to encourage more private equity investment (including venture capital and angel investment) into science and engineering sectors and if so, how can this be achieved?

28. The RSC believes there should be a better balance between public and private sector funding for research, as private investments sometimes limit the proposals to be taken forwarded based on financial gains and not necessarily on the true potential for growth. An example is green technologies, which often face difficulty in raising private capital, due to mainly a long payback period (usually eight to nine years).

29. The RSC recommends an increase of investment of public funds for more solid proof of concept and de-risking path to market, as these will incentives investors to unlock more funds.

30. Tax incentives for investment should be given to individuals or private funds offering financial support for seed and early stage development in science and engineering projects. The RSC welcomes the recent fiscal announcements in the 2011 autumn statement and in particular the Seed Enterprise Investment Scheme (SEIS), which gives hefty tax reliefs to investors directly funding eligible start-up companies, from April 2012.

What other types of investment or support should the Government develop?

31. The RSC recommends public sector funding to be directed towards areas where there is a societal need, but no support currently exists eg R&D in and commercialisation of vaccines or antibiotics. The discovery of new antibiotics has become critically important because of the emergence of bacteria resistant to current drugs.

February 2012

1 NESTA (2010) Venture Capital - Now and After the Dotcom Crash.

2 Deloitte (2011) Global Trends in Venture Capital: State of the IPO Market.

3 Ernest and Young (2011) Beyond borders Global biotechnology report 2011.

4 Defence Advanced Projects Agency (2012) www.darpa.mil

5 SCI Riding the funding rollercoaster (2011)
www.soci.org/News/BioResources-Funding-Agri-Innovation

6 Royal Society of Chemistry (2011) Materials that don’t cost the earth report
www.rsc.org/costearth

7 Ray Elliott (2012) personal communication, Syngenta.

8 www.bloomberg.com/news/2011-04-21/pfizer-shanghai-pharma-signs-deal-on-potential-partnership.html

9 Debbie Buckley-Golder (2011) personal communication, Technology Strategy Board.

10 Chemistry Innovation KTN https://connect.innovateuk.org/web/case-studies

11 BIOCHEM project www.biochem-project.eu/

12 Chemistry Innovation annual report 2011
https://ktn.innovateuk.org/c/document_library/get_file?p_l_id=55409&folderId=99992&name=DLFE-35412.pdf

13 Business link (2012) www.businesslink.gov.uk/bdotg/action/layer?topicId=1074033478

Prepared 11th March 2013