© 2013, Ilika plc

Open InnovationDr James Green

Director of Intellectual Property, Ilika plcIPO Fast Forward Seminar, Wednesday, 29th January 2013

University of Southampton Science Park

Disclaimer: The views expressed in this presentation are the views of the speaker and do not necessarily reflect the views or policies of Ilika plc or its Board or of its subsidiary companies

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Success from Innovation (I)

Innovation is a process full of “unknowns”

“Basic research is what I am doing when I don’t know what I am doing”

Wernher von Braun

“To the investor, it can seem that he is being invited to support a horse of uncertain breeding, in a race of indeterminate length with the possibility of there not even being a consolation prize at the end!”

Embryonic Capital for Innovation – “Technology Transfer Practice In Europe”, C D DesForges and J Green, TII/EC SPRINT Conference, April 28th/29th, 1994

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Success from Innovation (II)

“If a man can make a better mouse trap than his neighbor, the world will make a beaten path to his door.” Attributed to Ralph Waldo Emerson by Sarah S. B. Yule in “Borrowings: A Collection of Helpful and Beautiful Thoughts”

“In truth, odds are stacked astronomically against inventors, and no marketing outfit can change them. There are around 1.5 million patents in effect and in force in this country, and of those, maybe 3,000 are commercially viable. ” Attributed to Richard Maulsby, director of the Office of Public Affairs for the U.S. Patent & Trademark Office by Karen E. Klein, Business Week, November 10, 2005, “Smart Answers” .

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An “Insider” View

– Innovation Paradigms: Definitions• “Open innovation” can mean different things to different people,

depends on sector of industry, place in value chain, company size

– Factors Changing the Innovation Paradigm– Some Examples of Open Innovation

• patenting & licensing of university IP• intercorporate licensing• “open” pharmaceutical company

– Ilika Experience• company derived from specialist expertise at Southampton University• in-licensing of IP from universities• acquisition of IP and special facilities from SMEs• joint development and marketing partnerships worldwide

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Innovation Paradigms

Reference: Chesbrough, H. (2003), "Open Innovation: The New Imperative for Creating and Profiting from Technology", Harvard Business School Press.

“Closed” innovation principles

•The smart people in the field work for us. •To profit from R&D, we must discover it, develop it, and ship it ourselves•If we discover it ourselves, we will get it to the market first. •The company that gets an innovation to the market first will win. •If we create the most and the best ideas in the industry, we will win. •We should control our IP, so that our competitors don't profit from our ideas.

Open innovation principles

•Not all the smart people in the field work for us. We need to work with smart people inside and outside the company. •External R&D can create significant value: internal R&D is needed to claim some portion of that value. •We don't have to originate the research to profit from it. •Building a better business model is better than getting to the market first. •If we make the best use of internal and external ideas, we will win. • We should profit from others' use of our IP, and we should buy others' IP whenever it advances our business model.

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Changing the Innovation Paradigm– “Closed” Innovation Evolved Historically from

• companies needing critical mass for R&D to support production and market control

• wide separation of the roles of universities and companies• staff seldom changing jobs (concentration of in-house knowhow) • low government participation in industrial policy

– Factors Involved in Change• internationalisation/globalisation (new challenges)• rate of technological change (how to keep up)• research funding and growing role of universities and governments• wider licensing of corporate and academic IP• venture capital and spin-outs, start-ups etc• increased mobility of skilled labour (“technology on the hoof”)

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Intellectual Property

– IP in “Closed” Innovation (DIY Approach)• company researches, develops, makes and markets own products • essentially defensive – to exclude competitors• the “Smaug Effect” and associated costs• “Not Invented Here Syndrome” and associated constraints

– IP in Open Innovation (Pick ‘n Mix Approach)• protecting product/process but can license-in or license-out in whole

or in part• creating IP as a tradable commodity• acquisition or sale of complete business sectors and associated IP• bargaining chips in joint ventures• comfort for investors in start-ups or spin-outs• evaluating the broader IP landscape becomes more important

especially with globalisation

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Some Examples (I)– Patenting & Licensing of University IP

(progressive decentralisation and more “open”)• Sponsored research and consultancy (sponsor owns IP)

• University IP – formerly NRDC monopoly on state-funded research (leading to BTG) undertaking patenting and licensing

• BTG monopoly ends in 1980s - universities own their IP and take responsibility for exploitation

o competitors to BTG (eg Research Corporation ) with similar business model of assignment and revenue share

few big successes had to cross-subsidise rest of portfolio (takes time) decline in volume of licensees due to M&A activity (less customers)

o universities set up own patenting & licensing departments similar issues of cost/success and declining volume of potential licensees

o involvement of venture capital and seed funds (spin-outs, start-ups etc) led to new economic activity and wider benefits

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Some Examples (II)

– Intercorporate Licensing • companies look at cost-effectiveness of in-house R&D and its

support of the business model

• review of the cost effectiveness of large international patent portfolios

• volumes of research output and IP “sitting on the shelf” rather than being worked

• revisiting the “Smaug effect” to realise valueo licensing of non-core IP in novel applications o licensing to company spin-outs or sale

divesting non-core business, IP and staff economic regeneration projects with development agencies

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Some Examples (III)– “Open” Pharmaceutical Company

• organised round the management functiono experienced professionals

• license-in or acquire technology opportunitieso from academia, research institutionso from large pharma companieso from tenants in its own incubator laboratories

• outsource development, clinical evaluations/trialso using CROs (themselves spun out following mergers of large

pharma companies)

• manufacture through established companieso using spare capacity on existing FDA approved plant

• marketing via well-established leading distributorso before building up own sales force

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The Ilika Experience– High Throughput Materials Discovery

• combinatorial research techniques developed at School of Chemistry, University of Southampton.

• Ilika Technologies Ltd founded in 2004 as a spin-out for developing materials in energy, electronics and biomedical sectorso initial finance: SULIS University seed-corn fund and IP Groupo associated IP licensed-in from University o established international reputation for rapid development of

novel materials; secured commercial partnerships with blue-chip companies

o further rounds of venture capital in 2006 and 2007o admitted to AIM 14 May 2010

• Altrika established as subsidiary for the biochemical activitieso licensing –in IP from Edinburgh, Sheffield, Southamptono purchased GMP manufacturing assets in 2009 and acquired cell-

based skin regeneration therapies, Myskin® and Cryoskin®o Altrika and its cell-based technologies sold to Adiposet in 2012

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Ilika Materials Discovery Platform

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Ilika Materials Discovery Platform

• Simultaneous synthesis of multiple families of materials versus traditional step-wise approach

• Each ‘field’ on chip is addressable and can beanalysed in a high throughput manner

• Control over composition

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Ilika Materials Discovery Platform

“hot spot” identified

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Ilika Approaches to IP– High Throughput Platforms

• defensive - protecting core technology for synthesising and screening large numbers of candidate compounds

• licensed-in from Southampton• independent improvements by Ilika (eg informatics)• joint developments with Ilika’s industrial partners

– Promising Compounds• focus: hydrogen storage; phase change memory; fuel cell catalysts • some licensed in from Southampton• some developed by Ilika or with university chemistry departments• joint development and scale-up work with Ilika’s industrial partners• contract research for industrial clients

– Novel Instrumentation• acquisition of novel design for mass spectrometer and associated IP

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Ilika Business Model

– Contract Research• high-margin research and development services (IP client owned)• short-term cashflow benefit• builds relationships with customers• potential route for future Joint Development Programmes

– Joint Development Programmes• preferred route to market (maximises likelihood of commercialisation)• cost-sharing minimises cash burn• IP owned by Ilika and licensed to partners (or other arrangement on

case-by-case basis)• milestones and royalties on end product sales

Low cash burn and significant upside potential from milestones and Low cash burn and significant upside potential from milestones and royaltiesroyalties

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Open or Closed Innovation?

– Can you really do it all yourself?• The skills• The financial resources• The technical, support and management functions• Sales and marketing function worldwide

– Is it commercially sensible to do it all yourself?• Is there expertise out there you could use?• Are there out-sourcing opportunities to specialists?

– Consider existing models being used by others• Innovation in the aerospace or telecomms industries

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Working with Others - Practical Issues

– In any successful partnership you need• The necessary skills• Sufficient project resources• Commitment at senior level• Common aims

– Issues to consider and define carefully• What do partners bring• Who does what• What are timescales• Who owns inventions• What is field of collaboration• Contingencies

Unless these points are well understood, thought out and planned, not Unless these points are well understood, thought out and planned, not even the cleverest legal agreements can save you from problems!even the cleverest legal agreements can save you from problems!

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Management Issues - Control– In “closed” innovation you have overall control

• Resources (staff, financial)• Timelines• Intellectual property and strategy• Commercialisation strategy and tactics• Response to “events” and “unknowns”

– In open innovation you have shared control• Effective control only of your own contribution• Little control over your partners (and legal disputes take time)• Possible divergence of aims and objectives

o for Intellectual Property (ownership issues)o for Commercialisation

• Differing responses to “events” and “unknowns”

The management of Open Innovation is very time-consuming and The management of Open Innovation is very time-consuming and needs regular attention throughout the process (gives control freaks needs regular attention throughout the process (gives control freaks

lots of very bad days!)lots of very bad days!)

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Management Issues - Partners

– Universities/Institutes• Access to advanced science/technology• Motivation and timescales differs from industry• Confidentiality vs publication

– Large Corporations• Can address very large markets• Slow to progress through its management/legal process• Large corporations can override smaller partners• Innovation project small compared to core business

o may lack support at sufficiently senior levelo easily terminated when core strategy changes

– SMEs• Faster decision making processes• May lack critical mass/resources for a sustained “campaign”

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Questions & Discussion