Science and TechnologyWritten evidence submitted by The University of Manchester

Background on the University

The University of Manchester, a member of the Russell Group, is the largest single site university in the UK. It has 22 academic schools and hundreds of specialist research groups undertaking pioneering multi-disciplinary teaching and research of worldwide significance.

According to the results of the 2008 Research Assessment Exercise, the University is one of the country’s major research universities, rated third in the UK in terms of “research power”. The University had an annual income of £808 million in 2010–11.

The University has an excellent track record of successful and beneficial relationships with business and industry. Partnerships with and work on behalf of business and industry are central to the University’s mission.

The encouragement of enterprise is a critical part of the University’s culture. Commercialisation of our intellectual property is consequently a fundamental part of our activity. This activity is managed by The University of Manchester I3 Ltd (UMI3)—the University’s wholly owned Innovation Group.

The University has a substantial track record of exploiting novel and innovative research findings through commercialisation of intellectual property. It currently has a portfolio of some 50 spin-out companies, and in the last four years has successfully licensed over 100 inventions to commercial parties. A number of UMIP spin out companies have achieved success securing an exit and capital return to UoM. Examples include: Nanoco, a company listed on AIM with a current market value of c £125 million; NeuTech Pharma a spin out sold to Novartis for over £300 million in 2006; and the molecular fungal diagnostic company Myconosticia sold to Cambridge-based Lab21 in 2011. A number of our ventures have also attracted significant venture capital funding, going on to launch products and generate revenues. Examples include the software optimisation company Transitive and healthcare technology spin-out Phagenesis.

We have set out below our responses to the specific questions which you have raised.

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

The main difficulties are that:

Licensing proposals are typically not of interest to business angels and venture capitalists and so “risk and development capital” is not available for these projects. They can be overcome by special funding schemes in association with corporates but often even they are not interested in seeing these projects at an early stage.

Spin-out propositions suffer from a lack of significant capital at the early stages where, generally speaking (and as with licence projects), only technology transfer offices understand the nature and scale of the potential and would be prepared to invest.

Data shows that UK venture investment, especially into early stage projects, does not have a good track record of (or is not perceived to be able to) generating better returns than other investment opportunities with shorter time horizons and arguably lower risk. It is therefore likely that it will remain difficult to secure this funding from the market in competition with other investment opportunities. The exception is the US style entrepreneur with deep domain knowledge which again is a scarce resource in the UK. An increase in the scale of venture activity would beneficially allow the kind of specialisation which would increase in turn the depth of domain knowledge.

In the absence of a fully functional market solution, much technology transfer funding therefore comes from quasi government funding. The question then is why the government should fund projects the private sector shies away from and the answer lies in capitalising on significant amounts already spent on the science base where relatively small amounts in relation to research spend could catalyse the massive research expenditure.

The original University Challenge Fund (UCF) was a very good vehicle for early stage spin-out funding, especially pathfinder and proof-of-principle funding, as noted by the Praxis-UNICO submission to this Inquiry. Another substantial funding initiative of this nature, having two significant components to it: pathfinder and then follow-on funding capability would be welcome and do a lot to bridge the gap. However, to deal with the issue properly, the size of each successfully awarded UCF would need to be in excess of the previous Scheme (this University’s UCF was originally £6 million to lever some £400 million of research expenditure, ie 1.5%).

Use of HEIF monies for licensing and spin-out proof-of-principle has been useful, as have been grants from the Gatsby Foundation and the Research Council’s various follow-on schemes. HEIF is critical to this field’s success.

The arrival of the Science or Translational Funding Awards, such as the Wellcome Seeding Drug Discovery Programme, have been very important and filled a gap, especially because they are significant awards (c £500K-£millions). Whilst these have mostly been in the bioscience field, they are beginning to be available in other fields such as engineering and physical sciences and we believe that these large scale translation schemes should be supported and increased.

The North West Venture Capital and Loan Scheme is a part of the landscape of funding though, due to the nature of some of its EU funding, there are output expectations (time, nature) placed upon the managers of these funds which often do not sit well with the longer-term nature and types/scale outcomes of research commercialisation spin-outs, which may act as artificial barriers/brakes on the decision making about such propositions.

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

There are particular challenges associated with many environmental technologies, in that the scale-up engineering costs, from laboratory to pilot scale and then to initial prototypes are significant (eg. wave power, wind power) and where business angels, seed investors find that the dilution effect on their investment, and the time to market, along with the associated market, legislative and engineering risks deter them from entry.

In addition, drug discovery and some other medical/life science IP remains a big challenge to commercialise because of the scale of funding required and the time from inception to market.

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

There are a number of well-known examples. These are listed in the Praxis-UNICO submission.

In particular, as a general observation, overseas investors and firms appear to have more substantial funds and appetites for acquisition. This means that the UK university system, its early stage investors and the taxpayers do much of the “heavy lifting” but that, in many cases, overseas organisations derive many of the benefits. Greater leverage for the UK could be achieved by providing more capital to follow-on early investments so that the chances of them surviving in the UK or being partnered with a UK firm are increased.

A particular concern is that IP holding companies in certain jurisdictions (for example Switzerland and Luxembourg) can benefit from lower tax rates, causing in some cases an exodus from the UK.

A general point is that the UK industry base is not well equipped to support physical sciences research, especially in fields such as electronics, and hence it is not surprising that foreign companies are able to capitalise on UK university research.

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

Initiatives such as “Catapult” are in the early stages but the goal of stimulating innovation by bringing together universities and industry in this way are an important part of the IP commercialisation landscape and will do much to bridge the gap for certain types of technology developments and obviously helps by introducing the “demand pull” dimension. The new “Feasibility Studies for Technology-Inspired Innovation” Scheme is also very welcome and would be relevant to spin-outs from universities also.

More established schemes, such as Knowledge Transfer Partnerships and “SMART” are ones which the University has found especially helpful and relevant to research commercialisation.

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

We have some discomfort with the phrase “valley of death” which implies that it is only necessary to get through this particular stage. In fact successful innovation is an interactive process in which commercialisation plans have to be effective in all stages and sometimes simultaneously. It is particularly important for many developments to secure the interest and commitment of potential customers even at an early stage. This not only gives investments more credibility, it also provides the innovator with invaluable feedback on the path to commercial products. An integrated strategy for commercialisation needs to include support for demand side measures.

However, if we turn to financial pressure points, though details of the Fund have yet to be released, the recent launch of a BioScience Fund will be an important stimulus to an expensive field of IP commercialisation.

The Policy statements from Ministers indicating that they are taking a variety of approaches to increase investments for applied research—to complement the venture capital approach to invention-led commercialisation—is the “right” way to see technology transfer since it is much broader than licensing and spinning out companies. The impact is difficult to comment upon at this stage: this will be easier to assess once the statements and ideas have been translated to specific actions/schemes.

6. 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?

There is a distinction between “private equity” and “venture funding” and “angel investments”. It is confusing and not helpful, to the university technology transfer scene, to see it as one. The track record of private equity in venture funding is variable, with 3i, as an ex public fund, closing its venture fund recently.

Universities should be encouraged to engage directly with angels and venture capital and supported in their attempts to do so. The University has been able to address this to a fair degree by “sponsoring” a dedicated (£32 million) seed fund (The UMIP Premier Fund) which is funded by institutional investors and managed by a venture capital firm, MTI Partners, which brings relevant direct links to the capital markets onto the local campus and thus allows MTI to invest the time and resource in order to gain a deep understanding of the deal-flow and the nature of the work (as opposed to a “remote” assessment on a project-by-project basis). We believe that the University’s Premier Fund” has proved to be a good model, but there are others too, such as Imperial Innovations (stock market listing) and the IP Group (relationships with a number of universities). A new and larger University Challenge Fund Scheme would enable universities to create a good foundation upon which to build and/or develop new approaches as well as enable connection to these existing investment vehicles.

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

There should be special, dedicated schemes and funds to assist the development of universities’ licensing business, since most market money (and many of the previous Government Schemes) is really only likely to be relevant for “breakthrough” technologies via spin-out companies.

Key components to success are the entrepreneurs and venture capitalists and corporate venturers who can act as mentors, sales people, and managers/directors for the spin-outs (and licence projects). The University has embraced the contribution of such individuals, through its Innovation Centre/Incubator complex. Much more should be done to include this dimension into the “more formal” professional management approach to technology transfer, eg. support for mentoring programmes, master classes, networking events, seminars, investment pitches/dragons’ dens.

We draw attention also to the demand side policies mentioned above, including use of public procurement and encouraging private buyers to adopt certain types of innovation.

February 2012

Prepared 12th March 2013