Taking Technology Transfer Up a Notch
While many research universities have active commercialization programs, some generate only marginal amounts of revenue, or are relative newcomers to the process. The Wisconsin Alumni Research Foundation (WARF), affiliated with the University of Wisconsin–Madison, is notable in its history of long-term success.
By David Tobenkin
Since its inception in 1925, the Wisconsin Alumni Research Foundation (WARF) has earned more than $800 million in patent royalty revenues, paid more than $170 million to faculty and staff inventors, and returned more than $1.25 billion to the University of Wisconsin-Madison, while also building an endowment with a present asset value of more than $2 billion. For the year ending in June 2011, the foundation (a private, nonprofit organization that supports UW-Madison) earned $57.7 million from licenses on the university's innovations.
Business Officer spoke with Darrell Bazzell, UW-Madison vice chancellor for finance and administration; and, in a joint interview, with Carl Gulbrandsen, WARF managing director; and Janet Kelly, WARF communications director, to learn more about the program. (To read about other ways institutions are generating revenue, see "Revenue Refill" in February 2013 Business Officer.)
How does WARF work? How are projects selected, technologies funded and marketed, and deals struck?
Gulbrandsen and Kelly: Since its founding in 1925, WARF has served the UW-Madison scientific community by patenting the discoveries of university researchers and licensing these technologies to leading companies in Wisconsin, the United States, and worldwide. Every month, a group of about 20 people-made up of WARF managers, intellectual property experts, and licensing professionals-meets to review prepared written summaries for each invention disclosed by university researchers during the previous month. Intellectual property staff members develop a summary of each invention and give a verbal overview to the group that addresses several criteria, including the invention's ability to meet patent requirements, withstand patent challenges, create commercial demand and market potential, and be of potential benefit to society.
The group votes on each invention. If it is accepted for patent protection, we begin patent proceedings and develop a technology summary to interest potential customers. Our licensing staff then begins marketing the technology to organizations capable of developing it and bringing it to market.
When such technology transfer takes place and revenues are generated, WARF distributes the income from commercial licenses to UW-Madison, the inventors, and their departments. As the figure shows, this process creates a continuous loop of activity.
How are the transactions structured in terms of third-party responsibilities and compensation?
Gulbrandsen and Kelly: Each licensing deal is handled uniquely, and because of WARF's private, nonprofit status, the foundation offers its licensees confidentiality, which can be very important when dealing with new product and process development. Descriptions of the most common WARF licensing arrangements are available online.
The foundation shares the royalty revenue generated by a licensed technology with the technology's inventor(s), the inventors' academic departments, and the UW-Madison Graduate School. The inventor or inventor group generally receives 20 percent of the gross royalty revenue generated by a licensed invention. In the case of multiple inventors, the 20 percent is split equally among all inventors. Payments are made to the inventors in the month following receipt of the royalty payment.
WARF's grant to the university is unrestricted, meaning the university can spend the gift as it sees fit. The inventors' departments receive a grant equaling 15 percent of the gross royalties generated by the licensed technologies. If applicable, the department share can be split among multiple departments. After the inventor and department shares are allocated, the remainder of WARF's annual grant is distributed by the UW-Madison Graduate School to support a variety of projects and programs each year.
How has WARF changed over time?
Gulbrandsen and Kelly: The foundation has undergone many changes in response to the times and needs of the university. It has grown from two employees in its earliest days to about 75 today. During the past decade, it has expanded the number of affiliate organizations that support the university by helping to start three of them: WiSys Technology Foundation, which provides similar patent and licensing services to most of the other University of Wisconsin institutions statewide; WiCell Research Institute, which provides pluripotent stem cell research support and cells for researchers on campus and around the world; and the Morgridge Institute for Research, a private, nonprofit biomedical research organization located in the heart of campus.
In addition, WARF served as the building project manager and owns two thirds of the interdisciplinary Wisconsin Institutes for Discovery facility, which opened in 2010. The complex houses the Morgridge Institute; the institute's public counterpart, UW-Madison's Wisconsin Institute for Discovery; and a main-floor public space for science and learning called the Town Center.
Describe some of your landmark or groundbreaking technologies and related transactions.
Gulbrandsen and Kelly: WARF licensed several home-run technologies early in its existence, including its very first by biochemist Harry Steenbock, who helped found WARF to ensure appropriate management of his breakthrough discovery for enriching the Vitamin D content of foods and other substances. His invention, initially licensed to Quaker Oats, led to the virtual elimination of the bone disease rickets, which affected people around the world.
In addition, other successful licensed technologies include Warfarin, which was used first as a rat poison and later compounded as a widely used blood-clotting medication; an organ transplant solution; a tablet coating; MRI technologies; human embryonic stem cells; and the organization's biggest success, Zemplar, a Vitamin D therapy for kidney patients licensed by Abbott.
How much does WARF provide to the university's bottom line and how is the university using that money?
Bazzell: Total funding provided to the university in each of the past few years has been approximately $50 million. The major categories of expenditures are recruitment and retention of faculty, graduate student fellowships, matching funds for external awards, and an annual competition open to all university faculty for flexible research funding. Within these categories, decisions are largely faculty-driven, using faculty committees.
Given WARF investment earnings and direct revenues from research products, how stable is this source of funding for the university? How should CBOs at other research higher education institutions view the potential for this type of revenue source to, for example, offset state funding cuts?
Bazzell: The WARF annual gift amount is based on a rolling average of factors related to licensing income and endowment earnings, making it relatively stable in spite of fluctuations in license payments and stock market volatility. It's our view that the revenue should be used to provide a margin of excellence related to the research enterprise and not as a source of base-budget operating revenue.
What is the role of business officers and related financial and business positions in helping to facilitate the foundation's activities? How were they involved in setting it up and in contributing to its continued operations?
Gulbrandsen and Kelly: The foundation employs attorneys and finance and investment professionals on its staff and also uses a wide variety of legal and investment firms. WARF was found by nine wealthy alumni, including Steenbock, the inventor of UW-Madison's first patented discovery. The initial capital totaled $900, and the foundation was governed by five volunteer trustees.
What best practices can you offer to business officers in helping to support such programs?
Gulbrandsen and Kelly: From WARF's experience: Start 80 years ago, license several home-run technologies, attract a talented and successful board, work with and support innovative faculty, hire talented and passionate staff, and invest wisely.
Gulbrandsen: Seriously, business officers need to be good cheerleaders for these programs. From the top administrators on down, they need to provide risk capital and give latitude to faculty to take risks. They should be comfortable that this is an important activity for the university to engage in, while figuring out the resources that can be used without adversely affecting tax law or taxpayers.
Bazzell: It is important for central business offices to prioritize support of the research enterprise when determining resource allocations. A robust research environment boosts the success of the researchers in all ways, including the development of potentially patentable technology.
The theme of Business Officer's related story is finding new revenue sources to make up for state budgeting cutbacks. How viable a revenue source is technology transfer for universities? How much can such efforts be grown?
Gulbrandsen and Kelly: Most experts in university-based technology transfer recognize that a few blockbuster technologies generally are responsible for driving and maintaining the most successful tech transfer operations in the industry. The discovery of breakthrough technologies requires a university to attract talented faculty, staff, and students eager to apply their research to solve real-world problems.
With smart financial management, licensing revenues can be used to build an endowment that, over time, can deliver substantial investment returns that fund both the organization's patent and licensing operations to seed future discoveries, and deliver additional revenues to the university.
These are the mission, practices, and cycle established 87 years ago that have made WARF successful:
- Promote, encourage, and aid scientific investigation and research at the University of Wisconsin-Madison and the Morgridge Institute for Research.
- Help commercialize the technology arising from that research for the benefit of humankind.
- Invest the proceeds of the organization's commercialization efforts and use the added value from investments to promote, encourage, and aid further scientific investigation and research at and within the University of Wisconsin-Madison and the Morgridge Institute for Research.
How do you find the next blockbuster project for commercialization?
Gulbrandsen: We rely on the knowledge of faculty to tell us what the market demands. We have an Accelerator Program, in which we enlist a group of 30 experts from the industry who sit down with WARF staff a couple times each year and help us look at what the foundation can realistically do to advance the technology. From that, we get an idea of what to invest in and what the likelihood is that the technology will be commercially successful. We have 1,200 U.S. patents in our portfolio and 2,000 applications pending. Within that, we have technologies that have moved along the track toward successful commercialization.
Our major revenues over the past few years are from Zemplar, a form of Vitamin D used to fight renal disease, that will go off patent in 2014. Then we have to look for something else. Our hopes are high for PurTox, a toxin that can be used for cosmetic and therapeutic uses. It is in the third stage of clinical trials, and we hope it will be filed with the Food and Drug Administration sometime this year and launched globally next year. It will take a few years for PurTox to produce revenues, but we think this has the potential to far surpass what Zemplar brought to the university, which was hundreds of millions of dollars.
What commercialization mistakes might research universities make?
Gulbrandsen: First of all, the environment has changed. In the past 10 years, it has become harder to license early-stage technologies, providing a new technology to a new company. Companies are shedding risk. They want technologies that are already developed. The biggest mistake that universities and those that are promoting technology transfer make is that their expectations are far too high as to what can be done in the early stages of the process.
In the life sciences, it takes 10 to 15 years to get something to market. It's unrealistic to expect faster results. On average, it is seven years from disclosure of technology to any real return on technology from commercialization. It's always interesting to hear people say that universities aren't doing a good job at commercialization—most of those comments reflect unrealistic expectations of what universities can do at the stage at which an invention comes out of the university. Some have criticized us for not creating enough companies. Yet, we've started more than 60 companies over the past 10 years. Some have been very successful and few have actually failed. Most are paying taxes, employing staff, and—while they may not be currently profitable-—they are functioning companies and have a fair chance to succeed.
What new developments are taking place in commercialization efforts?
Gulbrandsen: It's continually challenging work, further complicated by what is happening in the United States with new patent law, which makes it harder for universities to obtain patents and enforce them. The [Leahy-Smith] America Invents Act passed in September 2011 and its final provisions take effect on March 16. It moves to a first-to-file, rather than a first-to-invent, regime. That weakens the grace period we have had to get to the patent office.
Now there will be a rush to the patent office to get research protected, and for universities without resources, it will be difficult to compete. We'll be filing more provisional applications and being pickier about what we support. We'll file fewer patent applications, given that a race is on and in a university open environment, research may be published before the application is filed. This means the possibility of losing the rights to the research.
We are also dealing with how we handle information technology (IT). How does the university help launch such technologies and bring value back to the university for IT technologies that are not patentable subject matter? Instead [of patents], these companies tend to rely more on the people who founded the company to gain market advantage.
In late 2012, we invested in a company that grew out of UW-Madison called StudyBlue, with no patentable technology. It has 20 employees in Madison [Wisconsin] and 20 in San Francisco. The company started producing tools to allow students to make flash cards and now is becoming a social networking company for study purposes. It has 2 million subscribers and an index of about 80 million flashcards used to study. The company is not profitable yet, but is generating revenue, and we expect that it will be in the black in three or four years.
This company also appealed to us because it supports education, and our charter is for the public good. Developing and distributing innovations that improve lives is one of our investment criteria.
DAVID TOBENKIN, Washington, D.C., covers higher education business issues for Business Officer.
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