Science and TechnologyWritten evidence submitted by The Higher Education Funding Council for England

Declaration of Interest

1. The Higher Education Funding Council for England (HEFCE) was established by the Further and Higher Education Act 1992 as a non-departmental public body operating with a high degree of autonomy within a policy and funding context set by the Government. The Council’s main function is to administer grant provided by the Secretary of State for Education and Skills. We provide independent advice to the Secretary of State on the funding needs and development of higher education including relations between HE and the economy and society. We currently provide £150 million per annum in HE Innovation Fund which supports a broad range of knowledge exchange activities between universities and colleges and the wider world, which result in economic and social benefit to the UK. Further information about the role, policies and funding allocations of the HEFCE can be found on our web-site.1

HEFCE Role and Policy in Knowledge Exchange

2. HEFCE plays a part in the Government’s innovation eco-system as an higher education (HE) institutional funder. Since the 1990s, the Council has developed policies to support universities and HE colleges to contribute further to the economy and society. This has been through providing a stream of funding for “knowledge exchange” (KE)—the range of inter-actions between universities and businesses, public services and the wider community that lead to economic and social impact. These inter-actions are described and measured in the HE Business and Community Inter-action (HE-BCI) survey.2

3. Our support for KE is provided through HE Innovation Funding (HEIF), which is now an entirely formula allocation to universities, based on performance measures from HE-BCI, standing at £150 million per annum over the period 2011–15. We expect universities to use their HEIF allocations most effectively to achieve impact, developing and enhancing their own strategic approaches to KE.

4. Research commercialisation through technology transfer is a component of KE. However, KE is much wider, reflecting the variety of roles that universities play in the innovation eco-system, including:

(a)research exploitation such as contract and collaborative research;

(b)knowledge based facilities and equipment;

(c)knowledge diffusion and networking;

(d)development of human capital;

(e) entrepreneurship;

(f)community engagement; and

(g)and the contribution of HE to the competitiveness of places.

All these contributions support the development of knowledge and entrepreneurial skills for innovation, but also help to increase the innovation capabilities and absorptive capacity of firms, places and this nation.

5. A 2004 paper from US/Europe3 defined the different models for exploitation:

The historic Open Science model whereby academics published findings and industry had sole responsibility for commercialisation based on scanning literature.

The Licence model, adopted in the United States following the Bayh Dole Act of the 1980s, whereby universities took greater responsibility to licence intellectual property (IP) from federally funded research to industry.

The Innovation model, prevalent in Europe, whereby universities play a much greater and richer variety of roles, as described above as knowledge exchange.

6. Academic experts of innovation have criticised Open Science and Licence models (the “linear” models) on grounds that these will lead to under-utilisation of research ideas because of: failures to transfer and absorb “tacit” knowledge; and their inappropriate focus on supply not demand influences (market pull). This has led to policies that bring universities into close engagement with business, and which spur two-way communication.

7. The 2004 paper also notes that the USA benefits from a great number of technological businesses. If European countries do not adopt innovation models, it is likely that new technologies will gravitate anyway to the USA. Hence a challenge for the UK is develop new technologies, but also to make these “sticky” (to ensure some benefits accrue to this country). Even the USA has become more interested in wider KE and the “stickiness” issue (such as in clustering policy) in recent years.4

8. For all the reasons above, HEFCE supports and incentivises universities to have regard to IP, but to take strategic decisions on the best modes of KE to deploy. Universities are diverse; different universities are best placed to make very different contributions to the innovation eco-system.

Trends5

9. Overall KE performance in England has improved in the last 20 years; total KE income has increased from just under £2 billion in 2003–04 to £3 billion in the last year of the HE-BCI survey, 2009–10.

10. Income from IP licensing is a very small part of total KE income. IP income from licensing stands presently at around £58 million and has increased by around 85% since 2003–04. There are two main modes of commercialisation of IP, licensing IP to an existing business, or the spinning out of a new company. World good practice generally favours licensing. (Indeed many in universities believe that good practice is to engage closely with business and agree to licence IP to the company at the outset, with the university benefitting in ways that fit its mission, such as through contributions to research funding. In such cases, there is then no IP that needs to be handled by the university either in licensing or spin-outs arrangements.) Universities house many academic entrepreneurs and provide environments to develop the entrepreneurs of the future. However, they are not primarily commercial bodies, but public good organisations that wish to work with and support industry for wider public benefit. It is therefore more time and resource efficient, and consistent with the university role, to license IP to an established wealth creator. However, sometimes a new technology may be so innovative that it does not have an obvious client, and hence a university is then acting appropriately in the public good to spin out the technology itself (and often the spin-out will be acquired by an established wealth creator along the line).

11. We share data with the USA6—and publish a US-UK commercialisation comparison within the HE-BCI Survey. Unsurprisingly, given the USA’s large scale of technologically based businesses, the USA leads on licensing—with licensing income being 3.7% of total research income, compared with UK at 1.3%. However, UK leads on spinning out new companies, generating one new spin-off per £23 million of research income compared to £56 million per company in the US.

12. In isolation, neither patents nor spin-outs are good measures of performance. Patents are an input to commercialisation; licensing income provides a better view of impact (the value placed by the company related to likely results). Spin-outs should be judged in terms of their longevity, and that they build in terms of wealth and jobs. We collect more detailed information on spin-out performance in HEBCI including longevity, employment, turnover and level of external investment. At the beginning of the century there seemed to be an over-emphasis here in producing new companies with a relatively high number being formed but many remaining effectively dormant. As KE practice became embedded, the number of new companies being formed reduced year on year while the number surviving for three or more years rose consistently, suggesting that HEIs were being more strategic in their commercialisation decisions.

13. We also collect data on methods of commercialisation in HE-BCI, such as the use of specialist third parties. A number of these (usually experts in IP law) have developed in recent years and have links with specific HEIs or departments. The exact relationships vary and the details may be kept confidential for commercial reasons. At the lower end of engagement the third-party may simply have paid a fee to have first refusal over any IP originating in the HEI or department Other examples are where all IP generated is automatically assigned to, protected and exploited by the third party. In these examples it is very difficult to gauge the efficiency and effectiveness of interactions given the limited data available (it’s likely of course that one conclusion is that more IP is being exploited than we know about).

14. International experience is that IP management is very costly; most universities that have large-scale commercialisation capability will spend considerable sums on IP management and protection. Spending in UK universities on the protection of IP has increased from £13 million to nearly £30 million since 2003–04 (but it is worth noting that while both MIT and Stanford receive higher levels of income from IP than any UK HEI they spend even more in proportional terms on protection).7 However, only a few patents usually generate much revenue and some of these will go off-patent shortly after the significant returns begin to flow given the long timescales and low success rates associated with IP commercialisation. This is therefore a risky area and very careful judgement is needed on the scale of IP activity that is worthwhile in any particular university. We believe judgement and experience in universities in this country has improved considerably in recent years. We give some examples of innovations and good practices below. In many cases though, sound judgement may be to do less not more on IP management and protection. We note that even in the USA universities struggle to cover costs; and leading edge performers there who do make a profit still need to use their considerable alumni income to smooth revenues and costs.

University Approaches

15. We ask for strategies from universities periodically, linked to HEIF,8 which describe overall policies and procedures adopted for KE, including commercialisation. Strategies submitted to us last year for 2011–15 HEIF are presently being compiled into an overview report by PACEC researchers, which will be published in Spring 2012.9

16. Our general impression from strategies is that there is a considerable dynamism in KE in the HE sector. Universities are driving hard to work with businesses toward economic growth. As well as incentives from KE funding, universities are driven to work with business to improve employability opportunities for new students, as well as to further their effectiveness in deriving research impact. Universities are also very concerned by cost, given overall uncertainties in the fiscal and public funding environment. Universities are restructuring and keeping a close eye to most effective and efficient KE approaches.

17. In terms of commercialisation narrowly, we see three major trends:

(a)Universities are innovating in new ways to exploit IP. This includes exploring and adopting “open innovation” models of collaboration with business and “easy access” approaches to IP (where costs or legal arrangements for handling IP are kept low and simple, often as part of a wider strategic relationship between the university and businesses). The University of Bristol and Kings College London are examples of institutions exploring easy access approaches.

(b)Access to proof of concept funding and other support for commercialisation varies across the sector. Even when the economy was in recession, some universities were positive about gaining necessary funding. This is not always just about the university’s IP expertise, as much as the industrial sector for commercialisation or even institutional brand and connections. Any university Tech Transfer Office (TTO) worth its salt would like more proof of concept funding to improve its results, but it is not necessarily a present constraint. Surrey University said to us in its HEIF 2011–15 strategy: “the University of Surrey does not believe that lack of Venture Capital or Business Angel support is proving to be a bottleneck for Surrey based start up companies. HEIF 4 funding has helped provide an active entrepreneur and investment community around the University which will be developed further during HEIF [2011–15]… most of the remaining bottlenecks are due to issues beyond HEFCE and BIS control, such as the macroeconomic situation and seismic shifts in global industry”.

(c)Universities are being inventive to cut costs and increase efficiency in commercialisation. As well as commercial suppliers, some universities are very active in extending their capability to provide services to other universities, in the UK and overseas (an example here is Oxford University’s commercialisation vehicle, ISIS innovations). Some universities are being highly prudent in reviewing the cost-effectiveness of IP activity and scaling back if appropriate. For example, Aston University said to us in its HEIF 2011–15 strategy: Following the departure of the Head of IP.., the [University] did not recruit a successor but has trialled outsourcing most of its IP management through using ISIS. This trial has both demonstrated the cost-effectiveness and the wider experience base gained through outsourcing these activities, and Aston will be formally tendering for this service early during the new HEIF programme. Like many universities, Aston grew its patent portfolio rapidly over recent years with a resultant increase in patent costs. Following internal analysis, and an external review by ISIS, we shall be reducing the size of the portfolio, setting more rigorous criteria for patenting in future and with a greater focus on those patents which have a clear route to commercialisation. Cranfield has a similarly successful relationship with Imperial Innovations.

International Working

18. Universities, naturally, and increasingly, work in global research networks, and contribute to the solution of global challenges. Their commercialisation work is not therefore solely focussed in the UK, though universities obviously are highly committed to contributing to this country’s prosperity.

19. We undoubtedly do see evidence that universities work with overseas companies, and that some UK invented IP is likely then to end up overseas, where this is the only way forward to develop the research.10 However, much R&D in this country is funded from overseas; and many UK companies strong in R&D now operate globally. The considerations of how research commercialisation can bring benefit to the UK are very complex then, given globalisation of both research/universities and R&D based companies. We suspect international knowledge protectionism will not work, so the challenge for all countries is to increase their ability to capture a range of domestic benefits from commercialisation processes operating globally—the “stickiness” challenge.

Tech Transfer Offices

20. It is worth making a comment here on the nature of TTOs.

21. HEIF (along with many other sources) supports the overall KE infrastructure in a university, which includes: KE strategy and leadership in the institution; academic development in KE practice; and professional KE infrastructure.

22. Around a half of HEIF funding 2011–15 is being used by universities for professional infrastructure, with the residual for strategy and leadership and academic development. Around a half of infrastructure funding supports the research commercialisation agenda (including IP but also collaborative and contract research), with the residual for other KE aspects described in paragraph 3.

23. While many universities may incorporate an exploitation corporate vehicle, the vast majority do not have staff established in a TTO with a sole purpose to exploit IP, but instead have capacity, centrally or across faculties, to support a range of KE/impact activities (and most universities will also have various forms of KE infrastructure-sharing collaborations). In only one university—as far as we are aware—is the exploitation company not wholly owned by the university (Imperial Innovations).

24. There are a diversity of views on the balance between academic and TTO roles and responsibilities (and of inventors and institutions) in commercialisation. However, from our experience of working with other developed economies (including commissioning a number expert studies on US practices), professional Tech Transfer capability is seen as essential to effective process around the globe. The very thorough US review on this topic in Footnote 194 is well worth studying on all these matters.

25. At HEFCE, we respect the autonomy and professionalism of senior university managers to make judgements on when and how they set up Tech Transfer arrangements. Tech Transfer capacity is smaller and less expensive in the UK than the USA, and costs are less. This may reflect that our universities lack ambition—or that with less overall funding (including the substantial alumni and philanthropic contributions in USA), our universities are sensibly prudent.

Funding for the Development and Exploitation of New Technologies

26. The Committee’s enquiry is primarily focussed on the funding arrangements for early stage development and adoption and commercialisation of technologies. HEFCE is not itself directly involved in these matters (though universities can use HEIF for proof of concept if that is their priority); no doubt universities and their KE professional associations will comment on their experiences.

27. A word of caution though—we do not think that financing issues particularly relate to university commercialisation. The vast majority of new technologies in the world that become commercially adopted will be devised and developed in the business world, by entrepreneurs, technology consultants, large and small businesses and in supply chains (albeit, we believe, infused and informed by university ideas and human capital development). To illustrate this, we estimate that only 19% of patent application filings from UK were from the universities here.11

28. What is important in determining what is worth commercialising is the market (together with factors like leadership and management, as well as finance). Universities have changed their character significantly in recent decades, in the UK and globally, to play a greater part working with business and developing the next set of entrepreneurs. Universities are therefore undoubtedly in the market for financing commercialisation, but we believe the issues raised by the Committee are more generic to commercialisation activity conducted everywhere, including, but not limited to, university activity.

February 2012

1 www.hefce.ac.uk

2 www.hefce.ac.uk/econsoc/buscom/hebci/

3 “Models of, and Missions for, Transfer Offices from Public Research Organizations”, by Gilles Capart and Jon Sandelin at http://otl.stanford.edu/documents/JSMissionsModelsPaper-1.pdf

4 See for example US National Academies (2010) “Managing University IP in the Public Interest”, which reviews Bayh Dole, and recommends amongst other things that USA adopt a broader KE not TT model.

5 Data is drawn from the UK HE-BCI Survey, developed by HEFCE and now run by HESA. Overall HE KE performance captured in HEBCI reflects a number of drivers, not just HEFCE funding for KE, but overall policies of Government and the range of innovation and research funders. HEFCE works closely with other funders, such as TSB and RCUK, in developing complementary policies on KE, including analysis of HEIF strategies.

6 Through the US Tech Transfer professional body AUTM.

7 http://web.mit.edu/tlo/www/about/office_statistics.html and http://otl.stanford.edu/index.html

8 See HEIF 4 examples of strategies linked to www.hefce.ac.uk/econsoc/buscom/heif/heif.asp.

9 We and PACEC would be happy to make overview results and strategies available to the Committee.

10 As an example, Imperial College said to us in its HEIF strategy: “Given the economic environment, it is now more important for the College to develop geographic diversity within its portfolio of industrial partnerships. Between 2008–09 and 2009–10, our research income from non-EU industrial sources increased by over 18% (£9.7 million to £11.5 million) at a time when our funding from industry generally decreased. Building on this success, we will extend our corporate partnership support by investing in a pilot international scheme with a view to furthering our understanding of the international market. Initially targeting the North American region.

11 Using HE-BCI data and data on patents from Elsevier International Comparative Performance of the UK Research Base 2011 (report for BIS).

Prepared 12th March 2013