Thursday, July 20, 2006

The business of risk.

The long tail of academic IP, ready to be licensed.

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Playing Matchmaker for Technology, With a Twist

By CLAUDIA H. DEUTSCH

Universities and research centers often have hundreds of technologies waiting for a company to come along to license them for profit. Trouble is, ferreting out the right business for the science can make finding needles in haystacks look easy.

Enter the Utek Corporation. Utek, founded by Clifford M. Gross in Tampa, Fla., is a technology transfer company with a twist: it will work only with publicly traded companies, and it will take its payment only in shares of stock. “The truth is, we’re really a specialty finance company,” Mr. Gross said.

Utek’s business model smacks more of trading floors than petri dishes. Most technology transfer companies make their money by acquiring technologies that they license out themselves, or by charging fees for brokering deals between inventors and users.

In Utek’s case, small publicly traded companies pay a $10,000 monthly retainer, and Utek agrees to comb universities and government agencies for whatever new technologies the company needs. When it finds a match, it has the technology scientifically vetted, then buys it for cash. Utek then forms a subsidiary whose only asset is that technology, and sells the subsidiary — generally for five times what it paid for the technology — to the small company for shares of stock. It agrees to hold onto that stock for at least a year.

In a nutshell, small companies are paying Utek a premium for access to technologies, while universities and laboratories are accepting a discounted price to minimize their own risks.

“A stock deal is speculative, who knows what the shares will eventually sell for,’’ said Nila Bhakuni, director of technology transfer at Rice University, which recently sold Utek a technology for synthesizing flavors and fragrances; Utek then swapped that for shares of the Industrial Biotechnology Corporation. “And people are more likely to sue a university with a large endowment than a small company, and our endowment cannot be compromised.’’

Indeed, Utek’s own investors are shouldering a great deal of risk. If the small company fails, its stock could be worthless. And, in fact, Utek has written off about a dozen once-promising stakes. Universities rarely offer warranties that they have not infringed on someone else’s patent, and Utek often takes on the responsibility of patent due diligence, efficacy checks and liability insurance. And Utek must compete not only with conventional technology transfer companies, but with the very universities and government laboratories with whom it negotiates.

The Rochester Institute of Technology, for example, started a formal licensing program in 2001, and Varda N. Main, director of the technology licensing office, has yet to call in outside help to commercialize a patent. “Our researchers know people in industry, and I know how to put together mailings and make cold calls,’’ said Ms. Main, who said her office has brought in $924,000 in licensing fees. “And I do get more money if I sell it myself.’’

Moreover, universities are under growing pressure from state and municipal governments to narrow, not widen, the net they cast for commercial partners. For example, the University of North Carolina at Chapel Hill, which does roughly 50 technology licensing deals a year, has used its technologies to help local entrepreneurs start 32 companies within the last five years. It has never felt a need to use Utek.

“We want to use our intellectual property to create local jobs and investments in our state, and we feel we have the capability in-house to do that,’’ said Mark Crowell, associate vice chancellor for economic development and technology transfer.

Still, Utek has a sizable following. It has already transferred 67 technologies, has equity stakes in 53 companies, 40 small companies paying that monthly retainer and a database of almost 32,000 technologies. It earned $5.9 million on revenue of $22.7 million in 2005. In the first three months of this year, revenue hit $11.8 million and operating income was $3.6 million. It is sitting on $60.1 million in equity stakes and cash, and just declared its first dividend, of 2 cents a share. It went public at $6 in October 2000; its shares closed at $20.90, up 19 cents yesterday.

But why the success?

For one thing, strides in biotechnology have caused a boomlet in new drug and fuel technologies looking for homes, and companies looking for inventions. “There are so many different molecules and proteins and processes to patent, and so many companies looking to use them,” said Kenneth Schoppmann, executive director of the Licensing Executives Society. “But big companies have big staffs for seeking out technologies, and small businesses just don’t.’’

For the technology transfer officers, Utek is simply another tool in their arsenal, albeit not the main one. “Our primary priority is to get our technologies into the marketplace,’’ said Charles T. Rivenburgh, director of intellectual property and technology licensing at Mississippi State University, which recently sold Utek a technology for using kenaf fiber to make cabinets.

Indeed, few universities or government laboratories sell Utek exclusive rights to their technologies, and most continue to search for new users after the sale. But the fledgling companies that are often the best prospects for commercializing innovations rarely show up on their radar screens.

“Large companies are less willing to take risks with new technologies, and Utek has access to clients that we don’t know about,’’ said Richard Bolin, commercialization manager for the National Renewable Energy Laboratory, part of the Department of Energy. Mr. Bolin sold Utek one technology for converting biomass to fuel only after a deal he was negotiating himself fell through. And he continues to talk to other companies about a technology he sold to Utek for use in making biodiesel fuel.

For the small companies that buy the technologies, though, the Utek connection has been crucial, not adjunct.

When Christopher d’Arnaud-Taylor wanted to create a business around making ethanol from forestry and paper wastes, he asked Utek to find him technologies to do so. He turned down a few, but bought five — for stock that has varied from a low of $1.50 a share to a high of $16. (Shares of his company, the Xethanol Corporation, were unchanged yesterday at $8.05).

“I outsourced technology search, because I do not have the time or energy to find or evaluate technologies myself,’’ said Mr. d’Arnaud-Taylor. Xethanol will begin production of cellulosic ethanol this month.

Even if the technology is an obvious fit, the deals can be hard to strike. The Trio Industries Group, a small company that wants to coat and cut doors and other parts for kitchen cabinets, has bought seven technologies from Utek, including a way to make panels from cornboards developed by the University of Illinois-Urbana, the kenaf fiber from University of Mississippi, and several adhesive technologies developed at Canadian universities. “They earned their retainer, without them we would never have gotten in the door,’’ said Robert E. Gyemant, Trio’s chief executive.

Now, with its technologies in place, Trio is finally building a factory, and expects to be producing by fall. Mr. Gyemant is predicting that by the end of next year, his company will be turning a profit on revenue of more than $10 million. Utek has a lot at stake: It now owns enough Trio stock so that Mr. Gyemant named it as a major investor in Trio’s registration statements. “They’re our third-largest stockholder,’’ Mr. Gyemant said.

Copyright 2006 The New York Times Company

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