Science and TechnologyWritten evidence submitted by Dr Richard Worswick

Summary

1. Although attitudes towards the commercialisation of research have changed markedly over the last two decades, and the UK’s performance in high-technology manufacturing and knowledge-intensive services has improved, the main obstacles to successful innovation remain cultural, such as the status (and pay) of scientists and engineers (as opposed to that of those in, for example, the financial sector) and recognition of entrepreneurship as well as academic achievement. It is widely recognised that the UK has to do more to encourage young people to study and pursue training in science and engineering if we are to be competitive in world markets.

2. There are many notable successes among UK science-based companies, and measures introduced by the previous Labour and present Coalition Government—tax credits, changes to public procurement, support to universities and companies (eg through the Technology Strategy Board), financial investment in venture capital funds, etc.—have undoubtedly improved the environment for the commercialisation of science and technology, particularly in smaller companies. However, much more needs to be done to improve links between public sector bodies (such as the NHS) and science-based companies, and to build on initiatives to encourage the commercial application of scientific discoveries.

3. Supporting high technology companies, though vital to our longer term prosperity, will not provide a quick fix to the UK’s economic woes. With some notable exceptions, new technologies take time to develop and exploit. Emphasis on short term gains is not conducive to building new businesses.

4. Understandably, new governments and new ministers love to announce new initiatives, doing away with some schemes and bodies and creating others. In my view, changing the organisational structure around support for science and technology serves more to confuse than to improve. Better rapidly to build on the structures we have and provide continuity of support.

Biographical Note

1. I have spent most of my career in the management and commercialisation of science and technology and I have worked in both the private and public sectors. When the Laboratory of the Government Chemist Agency, of which I was chief executive, was put up for sale in the mid-1990s, I formed a company (LGC) which was successful in its bid to buy the agency from the DTI. During the decade following privatisation, I developed LGC into an international company providing analytical and diagnostic services and products to a wide range of private and public sector customers and with laboratories and offices throughout Europe, in India and in the US. I was fortunate that the decade from 1996 was an excellent time to build a new business—low inflation, steady interest rates, plentiful investment and loan finance, an expanding UK science budget, strong government support for innovation, etc. Obviously, the external economic environment has changed, but there are still fantastic opportunities to build new businesses. After retiring from LGC I was appointed part-time chairman in 2009 of Cobalt Light Systems Ltd, a company which had been formed to exploit a scientific discovery made at the Rutherford Appleton Laboratory (STFC).

2. This submission is essentially a case study of Cobalt Light Systems which may have relevance to the House of Commons Select Committee on Science and Technology’s consideration of how to improve the commercialisation of government-funded research.

The Story of Cobalt Light Systems Ltd

Scientific research and spotting an opportunity

3. In the late 1990s Dr Pavel Matousek was conducting research using the Central Laser Facilities at the Rutherford Appleton Laboratory (RAL) into the interaction of powerful lasers with materials. He discovered a way of obtaining a Raman spectrum from the bulk of some materials. (Raman spectra are produced by the inelastic scattering of light from molecules and can provide a unique “fingerprint” which identifies the material). Previous to his work, Raman spectra could generally only be obtained from the surface layers of materials, but Dr Matousek developed ways of obtaining spectra from beneath the surface of some materials. Although the work began using very powerful laser facilities, it became apparent that the same techniques (in particular “Spatially Offset Raman Spectroscopy”—SORS) could be used with less powerful lasers.

4. Fortunately, the Science and Facilities Research Council (STFC) had set up a unit, now STFC Innovations Ltd, to advise on the exploitation of intellectual property arising from work at the research council. The unit advised on patent applications (8 applications have been filed) and provided some funding to investigate potential applications of the technique.

5. Three applications were identified:

Biomedical: cancer and bone disease diagnosis.

Pharmaceutical: process control.

Security: screening of opaque bottles (eg for drugs or liquid explosives).

6. From around 2004 small amounts of “proof of concept” funding (totalling around £25K) were provided by STFC for different applications of the novel technology and this led to a patent application for SORS. In 2005 NESTA and Rainbow Seed Fund (who were to become investors) agreed to provide some more “proof of concept” funding (around £50K) and in 2006 a further £100k was provided by STFC to hire a development scientist and to fund patent applications.

Forming the company and raising capital

7. The task of developing a business plan and raising initial capital for the putative company (then called LiteThru) fell to the staff of STFC Innovations Ltd led by Dr Tim Bestwick, who had joined in 2003, having previously been involved in high technology and start-up companies. Approximately £700K was raised from the initial shareholders—Oxford Technology Enterprise Capital Fund (independently managed, but two thirds funded by Capital for Enterprise (BIS)), Rainbow Seed Fund (a government-funded enterprise), NESTA and some private individuals. STFC’s intellectual property was made over to the company in exchange for a shareholding, and the company moved from temporary accommodation in RAL to a recently completed building for start-up companies adjacent to RAL on the Harwell site. Association with STFC was particularly important at the outset in establishing the company’s credibility.

8. Darren Andrews, who had been STFC’s IP officer, transferred to the new company and a partner form Oxford Technology Management, David Denny, devoted much of his time to the company. Subsequently an experienced operational director and an applications scientist were recruited. I was appointed chairman in 2009 and a few months later Dr Paul Loeffen was appointed CEO. (Paul had had experience of start-up companies having led Oxford Diffraction Ltd, previously part of Oxford Instruments.)

9. The initial focus was on developing an instrument for pharmaceutical quality control. (The instrument can analyse the content of tablets or capsules inside blister packs at the rate of one per second.) The first sale of an instrument was made in December 2010. The company also sold several customised systems for research and security applications and was successful in an application for a grant of £100K from SEEDA to develop a hand-held probe for the system.

10. Following on from these early sales, we applied to HSBC for a £400K loan under the enterprise loan guarantee scheme to fund working capital. Although 75% of the loan was guaranteed by the government, HSBC insisted that three directors provide warranties for the remaining 25%. It seemed extraordinary that the company was having to pay premium interest rates when the bank had covered its risks completely. Moreover, HSBC required that the loan should be released in two tranches. The first tranche of £200K was released as agreed but the second of £200K, which was to have been released on achieving agreed milestones, was initially refused. Additional hurdles had to be jumped before the bank’s agreement was honoured.

Products and markets

11. From the outset several applications were foreseen for the novel Raman spectroscopy techniques. However, early in the company’s development the decision was made to focus initially on the market for pharmaceutical quality assurance. Feedback from potential users had been positive and the pharmaceutical industry was obviously a sophisticated customer with experience in the purchase of novel instruments.

12. Of other markets we investigated it became apparent that SORS might be a powerful technique for identifying liquids inside plastic, glass or cardboard containers. Initial discussions with airport operators and the security services elicited positive responses and in 2010 the Home Office (taking the lead on behalf of several government departments in the CONTEST strategy) awarded a contract to Cobalt Light Systems to develop a prototype liquid scanner for use specifically at airports. (A grant under the Knowledge Transfer Partnership scheme in collaboration with Hull University to investigate chemometric aspects of Raman spectra was of limited value, mainly because of the lack of commitment by the university.) However, the overall development programme has been remarkably successful and a scanner (Insight100) based on the prototype developed under the government contract was approved by the European Civil Aviation Conference (ECAC) (the body which oversees international agreements on airport safety and security) in December 2011. ECAC approval opens the door to significant markets for Insight100 if the regulations relating to taking liquids on board aircraft are changed, as expected, in 2013. In September 2011 we were informed that an application for a grant from TSB for £181K (45% of the costs of developing a prototype model of the liquid scanner more suitable for large scale production) had been successful. We have been disappointed by the administrative delays within TSB. Formal documentation (required before work can begin) has taken over four months to emerge from TSB’s bureaucracy, which has been deeply frustrating.

13. Using the hand-held probe developed with support from SEEDA, another product has recently been launched. RapID is an instrument which can check the analytical content of bulk chemicals in plastic or paper sacks which are delivered to pharmaceutical works. (Analysing material through outer containers avoids the current procedure of cutting bags open and taking samples for analysis in a laboratory.) We have already sold one RapID system and we believe there is a substantial potential market for this product.

14. The position today is that the Cobalt Light Systems has 16 employees and has products for sale in two markets—pharmaceutical quality assurance and liquid security inspection. A customised system has been supplied for medical research but it will be some time before the results of such research translate into a significant new market opportunity. The company is currently raising further funds from investors in order to support rapid expansion.

Ingredients for success

15. It is too early to trumpet Cobalt Light Systems’s success; although the technical risks are much reduced, there are still significant uncertainties relating to market uptake, timing and size of the opportunity. However, the company would not have reached its current position without some key ingredients:

The inventor scientist was willing to contribute to the new company but to entrust the exploitation of his ideas to others.

STFC’s support has been exemplary. STFC Innovations Ltd, established by the research council, is a small but highly professional and experienced unit. Their understanding (and initial funding) of patents provided vital protection for the company’s IP, and the incubator building unit adjacent to the Rutherford Appleton Laboratory has provided excellent facilities for an early-stage company. The proximity to national facilities has given Cobalt Light Systems credibility in building relations with potential customers.

The investors have been knowledgeable and supportive.

The early appointment of both the operations director and CEO were crucial. Both joined with experience that was considerably more than would be usual in a start-up company and were willing to work for modest salaries (while receiving share options which could provide rewards in the longer term).

R&D tax credits provided a vital source of funds for work essential to ensure products were sufficiently developed to attract customer funding.

A grant from SEEDA contributed to an important technical development. A contract from the Home Office enabled the development of a prototype instrument.

The relationship with our bank has been good. However, obtaining loan finance was not straightforward. Despite government guarantees under the Enterprise Finance Guarantee (EFG) scheme (the company met the ELG eligibility criteria), additional guarantees were required which reduced the attractiveness of the scheme.

16. There are some parallels with my experience at LGC, where new services were continuously being developed based on emerging technologies. A constant frustration was that the time horizons of investors and financial institutions were shorter than those of entrepreneurs trying to build new businesses. I was often struck by the fact that government departments in Germany and Japan, for example, were prepared to envisage much longer timescales in their relations with industry. The growth of LGC’s German operations was supported strongly by regional governments which provided significant capital grants, for example in relation to the company’s investment there. Government support to Cobalt Light Systems has been generous (and essential) but ending regional support and centralising funding through the Technology Strategy Board, while probably a sensible move, removed continuity. Small companies find it difficult to steer their way through constantly changing government initiatives.

Conclusions

17. The science on which Cobalt Light Systems’s products are based stems from research carried out by STFC. The research council played a pivotal role in helping spin this technology out and forming a company to exploit it. Units such as STFC Innovations Ltd play an essential part in bridging the gap between government research and commercial enterprises.

18. Whether directly or indirectly, Cobalt Light Systems has received significant financial support from the government. Without such support, the company would not have got off the ground. In general, government initiatives have been well targeted and well run, and the independent management of investment funds has led to a more knowledgeable and professional approach than would have been likely had the funds been managed by central government. Our lead investor is an Enterprise Capital Fund, where the tax regime enhances returns on highly risky technology investments. Early-stage funding of technology companies needs investors who are able to understand technology and are cognisant of the risks. R&D tax credits have been a particularly useful source of funds with minimal bureaucracy. Cobalt Light Systems’s experience of important TSB support has been soured by administrative inefficiencies.

19. Incentives to individual investors through the Enterprise Investment Scheme are very attractive. Business angels get a very good deal. However, it is regrettable that those employed by a company and who wish to invest in “their” company cannot take advantage of the EIS scheme.

20. While some technology businesses, particularly software businesses, can grow very rapidly, companies set up to exploit advances in chemical or physical sciences often take a long time to get going. Funding development programmes over an extended period presents a challenge. The UK’s preoccupation with quick wins is not conducive to building a business over the longer term.

21. Attitudes in the UK towards the commercialisation of research in universities and government laboratories have changed substantially over recent years. Fostering and accelerating this cultural change requires consistent leadership, sustained funding of the science base, and continuing encouragement of entrepreneurship.

February 2012

Prepared 12th March 2013