University tech transfer offices play a central role in the biotech ecosystem, as the successful commercialization of an academic discovery is the aspiration of many young startups. Navigating – and optimizing – this tech transfer process is therefore critical to the health of the biotech sector.
Before sharing a few venture-specific perspectives on improving tech transfer, it’s worth highlighting the differential role of academia and tech transfer in biotech vs tech VC-backed startups, as an interesting dichotomy exists. While many of tech’s best entrepreneurs come straight out of (or skip) university and found great companies in their 20s, biotech’s typical scientific founders are professors who retain their roles as principal investigators within academia – and are paired with seasoned Pharma veterans who take on founding management roles. This nuance around the origins of the founders leads to an important difference in venture creation: most new biotech startups arise out of intellectual property created through academic research, often funded via the NIH, whereas the foundational tech, code, or app for most IT/software companies does not. This results in the fact that most tech founders own their inventions outright, whereas most biotech founders do not.
This key difference explains why university tech transfers offices (TTOs) play a uniquely critically important agency and gatekeeper role in the biotech sector. In 1980, the US passed its now famous Bayh-Dole Act, which gave universities the right (and responsibility) for conducting tech transfer out of publicly-funded research in exchange for a significant stake in the technology’s economics (usually two-thirds of the value flow back to the university vs the creator). Prior to 1980, government owned the rights to publicly-funded research, and, as you might expect, that didn’t catalyze innovation and entrepreneurship. Europe has now largely adopted similar Bayh-Dole-like legislation, but previously worked under a different system for IP rights where neither the government nor the university owned them; instead, the academic investigator owned these rights entirely – a regime often called the professor’s privilege. Sweden remains one country where the professor’s privilege remains, and has been highlighted in the recent CRISPR IP landscape: Emmanuelle Charpentier owns her part of the Doudna/Charpentier CRISPR IP personally (and licensed her rights to it as part of CRISPR Therapeutics founding). Further, given the tech/biotech description mentioned a paragraph above, it’s fair to say young tech founders by definition work under an IP system more akin to this professor’s privilege system.
Recent data from a Norway study suggests that their shift in 2003 from the professor’s privilege model to a university TTO agency model (akin to Bayh-Dole) shrank the number of startups by 50%, hurt entrepreneurship, and impaired the quality of the new ventures in the subsequent five years (here, here); I’m skeptical these data are large or robust enough to generalize the observations, as Bayh-Dole’s advantages over other systems are widely enumerated and celebrated (here). But it’s interesting to speculate on how successful entrepreneurship is linked to ownership – and how the agency problem of university tech transfer needs to be further optimized.
As a venture firm that helps create new startups, we’re big believers that equity – a share of ownership in the upside – is the ultimate currency of entrepreneurship. Leveraging that currency enables risk-taking, aligns incentives, creates a clarity of focus, and thus unleashes the creative energies required to tackle the challenges of technology transfer and commercialization.
At Atlas, we focus a lot of our attention on academic spinouts. In fact, since 2009, we’ve helped seed, incubate, or launch at least 28 startups out of academic labs. Based on that body of experience, and those prior, we have a reasonably informed perspective on what could be improved in general with tech transfer.
With that in mind, I’d like to highlight two broader themes that, if optimized, could greatly enhance biotech entrepreneurship: reinforcing and aligning the system around the centrality of the scientific founder(s); and configuring a TTO that more optimally solves the principal-agent challenge and engages externally with a collaborative mindset.
Centrality of the role of the scientific founder.
Maintaining deep connections with scientific founders is often very important to the successful launch and growth of young biotech companies. Beyond the founding observations that catalyzed their startups’ creation, the role of scientific founders as top advisors and research collaborators is often of huge value. Generally speaking, common tech transfer practices don’t often empower these critical relationships. Here are two more founder-centric suggestions to improving the process:
- Correct the negative impact of conflict of interest rules. The current system at many top tier academic institutions stifles the founder role by over-emphasizing “conflict of interest” rules, effectively prohibiting a scientific founder from having both equity in a startup and conducting startup-supported sponsored research. Most startups benefit greatly from the continued research of their founders, and these formal research agreements can be very helpful in the early stages of drug discovery and problem-solving. Not only institutions have these conflict rules, but many do. By example, Harvard Medical School’s rules (see the “I(b) Rule”) outline this prohibition for research support and equity holdings. Beyond institutions, this is also an issue for certain funding sources: HHMI have clear equity and company collaboration restrictions (here). While these conflict of interest rules may be valuable and appropriate for clinical work where patients are receiving therapy, the prohibition against combining equity and research collaborations is a real issue, and massively counter-productive to the successful engagement of scientific founders with their startups. We face this all the time in our startups.
- Engage founders transparently on the business issues. Many institutions (not all) treat their scientific faculty as employees rather than partners in their tech transfer process: as soon as business discussions around the proposed terms begin, the investigators aren’t often in the conversation. This creates a weird and inappropriate dynamic – sort of like dismissing the children from the table so the adults can talk shop. I’ve seen this happen first-hand on multiple occasions. This lack of transparency is also counter-productive and prevents founders from being able to adequately advocate for their positions (which typically involve at least one-third of the economics). Instead of removing scientific founders from the process, institutions should invest upfront in mechanisms to educate and inform about the tech transfer model and what it means for their founders – and then include them in the discussion.
It’s worth noting that the centrality of a scientific founder to a biotech startup changes over time. Often science at the startup evolves in different ways – new mechanisms, new emphasis, new additions to the pipeline. A company’s drug candidates could mature beyond expertise of founders. Or perhaps the founder’s research interests go elsewhere. In other cases, startups might need to be “immunized” against overzealous or potentially distracting scientific founders, altering the appetite we might have for their intimate involvement in a startup’s day to day affairs. All of these nuances can shape the degree of “centrality” of a scientific founder in a startup – but in general, we strongly believe the tech transfer model needs to reinforce and affirm the critical roles scientific founders play in startup formation and success.
One final observation regarding scientific founders is their equity stake. Typically, this comes in two forms: a share of the university’s tech transfer economics (a reflection of the past work and insight), and equity associated with an ongoing consultative role with the company (largely reflecting future contributions). On the former, I think it’s a fair question to ask whether one-third is the right share, especially when compared to the professor’s privilege model described above in places like Sweden. Should this be one-half, or even three-quarters, in favor of the creator vs the institution? Especially when you factor in the generous indirect cost recovery (overheads) that most successful investigators bring into the institution associated with their grant funding, it’s worth evaluating whether one-third is the right economic model – and one that aligns ownership incentives optimally.
TTOs as more effective agents of commercialization & entrepreneurship.
TTO’s primary challenge is to facilitate the transfer of academic discoveries in order to enable their commercialization – which in biotech brings hopefully innovative medicines to patients – while achieving equitable compensation for the university and their researchers. TTOs have to do this within limited budgets (especially for patenting) and typically small organizations. Further, many TTOs tend to be staffed with former scientists – who can be great on content – but lack significant industry experience. Lastly, TTOs face the classic agency problem: even while they are negotiating licenses that provide pecuniary rewards for their academic scientists and the university, case managers typically have no direct financial incentives. And they often have both an authority and information disadvantage when dealing with prominent scientists eager to spin out their technologies. All of these issues conspire to make TTO activities challenging, and in need of broader optimization.
Here are a few specific comments on ‘best practices’ for TTOs informed by our experience:
- Engender an appropriate appreciation of risk in the TTO – both for internal triage and external engagement: Translating academic science is very hard, and most often won’t succeed. A transparent discussion of the realistic risks of the project, and a thoughtful construction of the key experiments required to “derisk” those, is an important part of the tech transfer process. TTOs need to be fully cognizant of the “reproducibility crisis” and the common sense requirement to confirm, validate, and extend initial scientific observations before committing significant capital (here, here). Facilitating these replication steps can be of huge value-add to a project’s future success. From a venture startup perspective, this manifests as having an option-based exclusivity period under what looks like a Material Transfer Agreement to do one thing: let’s confirm this does what’s claimed. Scientists and TTO case managers who aren’t willing to engage in this confirmatory work are probably not ones we (or other VCs) would like to have as co-founders with us.
- Set reasonable expectations for early stage value capture: Understanding the relevant “role” of discovery vs the long road of translational medicine and commercialization is critical. Even the best academic insight into a new drug target is often a decade and extraordinary sums of capital away from being a medicine. Further, knowing what kind of projects are best for a NewCo versus a more traditional licensing deal is important. Big Pharma can and should engaged directly with academics (like UCB with Harvard, GSK with HSCI), but some projects are better enabled through startups (and the powerful currency of entrepreneurship). One of the frequent issues with figuring out an equitable value split is the use of complicated NPV models for drug discovery stage programs: in my opinion, these are utterly useless. NPVs at an early stage are meaningless measurements. Our industry can’t even forecast products well that are close to market (here), so to imagine an NPV forecasting model for a drug discovery program being remotely accurate is incredulous. But case managers in many TTOs consistently rely on this type of NPV modeling, unfortunately. The reality is that early stage projects, on a risk-adjusted basis, that have yet to enter industry-grade lead optimization and preclinical development have limited value. Institutions that want to move further up the value curve need to establish creative mechanisms for “gap” funding and bring market mechanisms into the mix. Harvard’s Blavatnik Biomedical Accelerator is one of these programs, and the recent Merck collaboration with Matthew Shair’s lab is evidence of its value (here).
- Recruit broader competencies and incentivize to mitigate the agency problem. TTO staffing models often rely primarily on former scientists-turned-case-managers. It’s certainly good to have that profile, but a broader complement of skills that includes former industry R&D and transactional executives is critically important. But compensation may have to change to recruit such veterans. Further, as mentioned above, these salary-based compensation models are not optimized for the agency problem. I’ve heard scientists comment with frustration that TTOs “get what they pay for” with their staffers; some incentive model for doing high equality deals could change the profile of the role and its ability to bring broader talent pools into the office. Should an individual case manager participate in the economics of their deal? It would be complicated to manage and fraught with challenges, but it would bring an internal market mechanism to where case managers spend their time and how they engage. This benefits of this internal market force may be worth wrestling down the challenges.
- Work with collaborative, experienced external venture creation partners: As I’ve mentioned on this blog before, venture creation models in biotech are changing (here); many venture firms are focused on the in-house incubation and launching of new startups, in a manner very different than a decade ago. In light of this prevailing trend, TTOs should seek to engage much more actively with startup partners pre-conception, especially those institutions outside of the top tier. Several examples of how to do this. Active outreach and open sharing of projects as they evolve and mature, well before when they are “ready” to launch into companies, is an important pre-market step. Scripps did this with us regarding PAD biology, which evolved many months later into our launch of Padlock Therapeutics. Another opportunity to to engage with outside venture advisors and IP teams to aid in creative patent strategies; this external input can greatly improve the substrate of a patent application. Lastly, launching NewCo’s and building founding teams with venture creation partners is often much easier. In cases where TTOs have already partnered with “pre-baked” B-grade founding management teams it’s very hard to unwind them and get excited: founding leadership teams are critical to get right. The prospect of spending energy at the launch of a startup trying to retool those teams because of early commitments from a TTO creates a much higher burden for engagement.
- See the forest through the trees: Licensing case managers that can see the big picture and share the broader vision are much more successful. Too often in the license process TTOs lead us down into the weeds, and wormholes in the ground, around minutiae on the deal. One example is around development plans: trying to be overly prescriptive about the details and due diligence requirements of what indications to go after and when create constraints on flexibility for a startup years in the future. If a TTO trusts in a good partner, these issues fade away. A good partner will advance the project in a way that maximizes its success – because the financial incentives are aligned to do so. In short, a collaborative big picture mindset, focusing on what really matters, is incredibly valuable, and often a hallmark of our most successful TTO partnerships.
These are just a few of the ‘best practice’ thoughts we have on tech transfer today. A number of institutions get some or all of this right more often than not; others less so. Given the critical importance that academic technology transfer plays in helping launch new biotechs – and by extension new medicines – we all have a vested interest in optimizing the process.