Funding A New Chemistry Laboratory

The biggest task during my tenure as the Chairman of Oxford University’s Chemistry Department was to build a new research laboratory. The department is the biggest in the Western world, but by the 1990s some of its laboratories were barely fit for the purpose and not up to current health and safety standards. The cost was the main impediment: at least £50 million would be required. This type of problem was widespread in Britain where many of the university facilities, created in the 1960s, were getting very tired, and our organic chemistry labs included parts dating back to the early part of the twentieth century.

In response to this need the UK Government, together with The Wellcome Trust, set up a generous and imaginative scheme, the Joint Infrastructure Fund (JIF), to which one could make bids for funding projects, especially buildings. We were fortunate enough to receive the largest award given under the scheme, some £30 million. A further £9 million was secured from the Government’s university funding council, and several million more from charities. British industry contributed £250,000, a generous donation from Thomas Swan Ltd.

The final detailed plans for what we intended to be the best possible laboratory were costed at over £60 million, leaving a funding gap of about £20 million. It fell to me to find this sum.

The Beeson-Gregory Deal

In that period, before the dotcom bubble burst, it is now hard to comprehend, but business angels and finance groups were almost desperate to fund high-tech companies. In Oxford the London group IndexIT, founded by David Norwood, had been the investor in a number of spin-outs, and with the help of Melissa Levitt of the university’s Development Office, we made an approach to him seeking funding. David is a man of remarkable talent. He is an international chess grandmaster, and at about the time we started talking he sold his company to the ambitious London stockbroking firm of Beeson Gregory. In the spring of 2000 Beeson Gregory had a successful flotation which left them with a significant amount of cash in the bank, so our discussions with David and his colleagues became serious.

The initial suggestion from the Beeson Gregory side was for them to put up a sum of cash in return for the right to be the investor in spin-out companies emanating from the Chemistry Department. Unfortunately this was something I could not sell. The key step in founding a spin-out is the three way meeting involving the sponsors who provide the cash, the university that will be putting in the intellectual property, usually by means of a licence, and the academic involved, without whom the project cannot proceed. As explained earlier, the equity is then split into a compromise between the backers, the university and the academic or academics. If one party had the right to be the investor there would be no rational way of fixing the valuation or the relative shares. In addition, I could not commit my colleagues to receiving funding from one preferred or monopoly source. It was possible that some of us who had previously successful ventures might like to use our own money or, more likely, to remain with the sponsors who had supported the previous company.

The alternative, cooked up between us, was for Beeson Gregory to provide an upfront sum in return for a percentage of the university equity in all chemistry spin-outs for a defined period of time. The three parameters in the potential funding deal were thus the sum of money provided, the percentage of equity going to Beeson Gregory, and the length of time the agreement would run. My opening gambit, nervous since I was playing with a master chess player, was to suggest £10 million for one-third of the university equity and a ten year deal. In the end we settled for £20 million for half the university equity over a fifteen year period. It must be remembered that this arrangement was fixed within weeks of the high point of the stock market, just before the crash. Even without the benefit of hindsight the deal has delivered significant financial benefit to the university, allowed the completion of a magnificent laboratory, and established it as the flagship commercialisation partnership in Europe.

At the time, however, this was far from obvious and indeed it proved anything but easy to get this draft possibility accepted by the respective parent bodies. The initial reaction from the university was almost hostile. Phrases like “selling the family silver”, were bandied about and there was much angst about how the figures had been arrived at. The bank, I believe, looked at our track record, Medisense, Oxford Molecular, and Oxford Asymmetry, all spin-outs from the Chemistry Department. In the case of the latter pair, very successful IPOs had been achieved so that had the deal been done some six years earlier it would have been very profitable to Beeson Gregory. They also discussed the possibility of future spin-outs and were encouraged by what they saw. From my naive point of view £20 million over fifteen years for a venture capitalist would require perhaps a 20% annual return. If Beeson Gregory only owned 12%, half a typical university share in each company, then the market capitalisation of spun-out companies at the end of the period would have to run into billions for them to make significant returns. It had to be remembered, however, that although they had no right to be the supplier of capital, Beeson Gregory could nevertheless be so, and were likely to be in a strong position to know what was going on in the department to assist in decision making. Thus it was a possibility that Beeson Gregory could hold perhaps half of a spin-out. In some ways the real beauty of the deal was and is that once a company is formed, the interests of the bank and the university are identical: the more the spin-out company prospers the better for both. It is not the case that the more one party makes, the less the other receives.

On the university side, selling this deal was resolved by the Registrar, David Holmes, who had the courage to say: ‘We must do it.’ This was despite the fact that something like this had never been done before, which is always a powerful counter argument in Oxford.

With Beeson Gregory the final hurdle was to convince their chairman Andrew Beeson, a goal which was achieved over a lunch in David Norwood’s favourite Oxford restaurant. That meeting started rather tensely and I had the impression that things were not going as well as we had hoped, when one of those serendipitous events occurred which reinforce my belief in the cock-up theory of history. During the lunch Andrew asked if the tie that I happened to be wearing was the tie of Vincent’s Club, an Oxford club largely devoted to sportsmen. I replied that it was indeed, and he enquired about my sporting interests. On returning the conversation he revealed that he was a keen, indeed high-class player of real tennis, the ancient original tennis game with complex rules and scoring, played on indoor courts. I then asked if he had come across one of my chemistry pupils, Spike Willcocks, who was a notable university player. Suddenly there was a change of mood – all smiles as he knew and admired Spike and the deal was agreed. Subsequently Spike joined Beeson Gregory and its successor IP2IPO where his talent was a significant bonus on top of the funding deal.

Having the arrangement for funding agreed at the heads of terms level, we then brought in the lawyers, but most issues were readily soluble. The same arrangements were to apply to licensing agreements as to spin-outs: Beeson Gregory would receive half of what the university would have got. More problematic was defining who exactly was included amongst the academics as a chemist. Fortunately we had a simple and clear-cut definition provided by the government’s Research Assessment Exercise (the RAE), where all academics are entered under a particular unit of assessment, one of which is Chemistry. There is no way the department would want to cheat by redefining one of the members of staff as, say, a biochemist, since that would cost us funding. Any work done by someone defined as a chemist in this way is included, even if the actual research was done outside our labs, in Grenoble for example. Similarly, work done in our chemistry laboratories by outsiders who come in, perhaps to use some of our equipment, is excluded. It was also agreed that if a spin-out involved work of perhaps a chemist and an engineer, the academics could decide on the split between themselves, and this would determine how much of the input was from Chemistry and thus the Beeson Gregory percentage. In practice the academics have normally agreed equal shares.

Since the deal was with a public company it was a price sensitive issue and had to be conducted as a matter of secrecy. This meant that I could not consult my departmental colleagues and the wider university until the deal was formally announced. An email to all the faculty on the morning of the announcement explained the details of the arrangement and tried to answer the obvious questions, but we also had weekly lunches with the academics – four at a time – involving Beeson Gregory and Isis Innovation, the university technology transfer company. This gave the opportunity to ask questions, to understand the details and, most usefully, to explore the intellectual property opportunities, both existing patents taken out by Isis and ideas in the pipeline.

It was important for my academic colleagues, and indeed the outside world, to understand that we had not sold forward any intellectual property. The IP is owned by the university and would be licensed into the spin-outs, with it being returned were the company to fail. They also had to be reassured that their own rights and share of the equity in a spin-out are not affected, only the university portion. The real bonuses, however, were the input from Beeson Gregory in preparing business plans, the use of their analysts and, most importantly, particularly following the sudden loss of confidence in the stock market, in the raising of funds. During a period when finding the cash to launch spin-outs became almost impossible since they are too small for venture capitalists, the Beeson Gregory people, notably David Norwood, came up with the funding for some of the nine new companies from the department in the first four years of the deal.

Inhibox Ltd

The first of these new spin-out companies, Inhibox, was derived from my own academic research. I have led a reasonably successful career based in part on picking up ideas from other fields and adapting them to my own problems. The scientific side of Inhibox goes back to the brilliant idea of some Berkeley scientists who conceived the SETI project. SETI is an acronym for Search for Extraterrestrial Intelligence. NASA, the US space agency, records the radio signals that arrive on Earth at all times and from all directions. A piece of relatively simple computer code can analyse a signal to ascertain whether it is an intelligent signal rather than just noise, but since there are so many individual signals to process the only way to do this is to use a lot of small computers rather than a few big machines. The Berkeley group hit on the notion of getting the analysis software into a screensaver for use on home computers, and then issuing signals to analyse over the Internet. It is a brilliant idea and has come to involve over five million PCs. On the other hand this research has not produced a scientific result – ET has not yet been found to have rung in – but as a computational idea and to compare the speeds of different PCs it is not without value.

Some of the people associated with the project established the start-up company United Devices in Austin, Texas, to try to exploit the idea. In order to gain publicity and help raise funding they offered to run three pro bono projects and invited ideas, in space science, environmental science, and in health science. Much of my own research is financed by a US cancer charity, the National Foundation for Cancer Research (NFCR). With their encouragement I came up with the idea that we could adapt the SETI idea to look for potential anti-cancer drugs: doing essentially the same type of research done in pharmaceutical companies, but on a larger scale. Drugs are usually little molecules that work by binding to a specific target site on a protein and interfere with its action. Many protein targets are known and in the future many more are certain to be identified. Our idea was thus very simple: build a database of as many small drug-like molecules as we could, making sure that they had appropriate properties and we knew how to synthesise them; identify target sites and have a quick piece of computer code to calculate just how well each small molecule can bind to the site; finally, wrap them up in a screensaver and use the Internet to send the input to those PCs across the world running the project.

My partner in this was Keith Davies, another former Oxford chemist who had been the founder of the company Chemical Design. United Devices provided the distributed computing, with the initial project being sponsored by Intel. The success of the venture was amazing. More than three million PCs signed up, providing in excess of 400,000 hours of CPU time, permitting 14 cancer targets to be screened and yielding many thousands of potential drug leads: a long way from a drug, but an important first step. The intellectual property derived from this much publicised project belonged to Oxford University, but to make use of it the obvious avenue was to create a new company, Inhibox. One sensitive issue was the disquiet amongst some of the generous folk, who contributed time on their PCs when not using the machines themselves, about this being exploited for commercial gain. Money has to be involved since following up the computer predictions with synthesis of the molecules and testing them is far from inexpensive. To allay the fears of the public the shares in the company that would have gone to me were donated to the NFCR so that a large part of the hoped-for financial success of the company will benefit the charity, which will in turn recycle the cash back into cancer research.

Further Spin-Outs

Other spin-out companies from the department encompassed by the deal, and for which funding was found in a difficult period, include Pharminox, based on the work of the late Gordon Lowe and a large class of platinum compounds, Zyentia, a platform technology concerned with protein folding and drug development derived from Chris Dobson’s research, and Glycoform, drug delivery and carbohydrate work from Ben Davis and Antony Fairbanks. On the non life-science side Oxford Medical Diagnostics came from Gus Hancock’s work in physical chemistry. That company later merged with Avacta Group Plc, the Leeds University spin-out.

Four of the department’s spin-outs have already made significant progress, including three becoming Plcs, and ReOx, which found inhibitors for HIF (hypoxia inducible factor) through the work of Chris Schofield, obtained a multi-million pound contract with a major pharmaceutical company.

VastOx Ltd was founded in 2003 based on the work of Steve Davies. The company has expertise in carbohydrate chemistry, but most notably turns drug discovery on its head by using zebra fish embryos. Crudely, the modern form of the traditional drug discovery process involves having the target protein in solution in wells on a 96-well plate and having a robot add a different chemical molecule, the potential drug, to each well. One then seeks those compounds that bind most tightly to the target. In the VastOx case each well contains four cells of a zebra fish embryo and molecules are again added by a robot. One then seeks molecules which do something to the grown fish, that is have affected some target, and from a knowledge of the genetics of the zebra fish that target can be identified. If that proves to be an interesting target then one has an initial lead compound and, in addition, having been introduced into a vertebrate, one has some useful information about possible toxicological problems. The company had an IPO in October 2004 and, now renamed as Summit Corporation Plc, is a thriving small company with a market capitalisation of around £60 million.

Oxford Catalysts Group Plc came from work in inorganic chemistry conducted by Malcolm Green and Tiancun Xiao. They created novel catalysts that are carbides and can be used to generate superheated steam and hydrogen at room temperature. This work gives hope for the much desired energy solution of having a fuel cell driven by the reaction of the hydrogen with oxygen from the air to produce only energy and water. In the past the drawback to this notion has been storing the hydrogen. Their catalysts can also be used to clean up fossil fuels. The company had an IPO in 2006 and has a market capitalisation of some £60 million.

Oxford Advanced Surfaces Group Plc develops and commercialises advanced materials by modifying the surface properties with a range of applications – these include wetting properties, adhesion, metallisation and bioactivity. The company joined the Alternative Investment Market (AIM) by means of a reverse takeover of Kanyon Plc and now has a market capitalisation of £160 million.

Oxford Nanolabs, founded in 2005 and now renamed Oxford Nanopore Technologies Ltd, remains a private company but has received very significant funding and appears to have a very exciting future. Based on the research of Hagan Bayley, the company creates nanopores – small holes that may be adapted to detect different molecules – and is widely seen as the most likely contender to win the race to sequence the human genome, for as little as $1,000. They have recently concluded a collaboration with Harvard University and the University of Santa Cruz.

As far as Oxford has been concerned, the partnership started with Beeson Gregory has been wholly beneficial and much envied. The real importance, however, has been in the wider context since it led David Norwood to develop a new business model that has had a profound influence. A second university deal was made by David and his colleagues with the University of Southampton, but in that case it involved the entire university. Beeson Gregory did not provide an upfront sum, but rather bolstered the university technology transfer organisation by seconding a member of staff, and provided a £5 million fund to finance new spin-outs. This has been outstandingly successful with two of their spin-outs having had successful IPOs (OHM and SynAirgen) giving the university a multi-million pound return.

IP2IPO Group Plc

Beeson Gregory itself was merged with the Evolution Group, which set up a wholly owned subsidiary under the name IP2IPO – “intellectual property to initial public offering” – of which I became a non-executive director. In October 2003, IP2IPO was itself floated on the Alternative Investment Market, and became an independent company with Evolution subsequently disposing of all its shares by the spring of 2005.

In August 2004 I became chairman of IP2IPO Group Plc, by which time partnerships had been extended to include, as well as Oxford Chemistry and the University of Southampton, King’s College London with its major medical school and hospitals. The partnership with King’s is on the same lines as that with Southampton. IP2IPO is entitled to 20% of the university’s interest in spin-out companies based on IP created across the entire university for 25 years, and has set up a fund to provide seed capital for which it can receive additional equity if it invests. This arrangement makes it important for IP2IPO to assist in every way – helping with business plans, raising capital, and above all finding management, which is perhaps still the most significant bottleneck in the UK.

A fourth partnership involved the University of York. Their go-ahead vice-chancellor, Brian Cantor, was previously the head of the Mathematical and Physical Sciences Division at Oxford and thus familiar with, and attracted by, the idea of a partnership. With his support IP2IPO acquired a one-third interest in Amaethon Ltd, a company that had been formed to commercialise the IP created in the university’s plant genomics department – the Centre for Novel Agricultural Products. Again, IP2IPO provides the seed capital to spin-out companies created by Amaethon.

The University of Leeds, as we have seen, quite independently adopted a somewhat different path for the commercialisation of its science. In their case the role played in Oxford by Isis was outsourced to an independent company, Techtran Group Limited. Techtran were set up by Axiomlab Group Plc in 2002 to offer commercialisation services to research intensive institutions. They had their own team, led by Alan Aubrey and Alison Fielding, which includes people with backgrounds not just in science, but also corporate finance and management consulting. This team, being part of a commercial organisation, is better equipped than are the vast majority of technology transfer offices. The Techtran model has proved to be very successful with more than 20 companies having been created, of which four have become successful public companies either by IPOs or by reverse takeovers.

This interesting approach commended itself to IP2IPO, which first bought a 20% stake in Techtran with David Norwood becoming a director. Then, liking what he saw, IP2IPO acquired the Techtran group in January 2005, with Alan becoming CEO of IP2IPO and Alison the technical director of IP Group.

The annual report of IP2IPO for the year ending December 2004 showed a spectacular set of successes. Highlights of the report included the successful flotation of three companies, realisation of nearly £1 million from the sale of shares in a spin-out company, Offshore Hydrocarbon Mapping (OHM) from Southampton, and a market value of shares in quoted companies of £24 million. The company traded profitably and had over £30 million cash.

It is interesting to note that still the most productive and profitable part of the IP Group portfolio remains the original Oxford Chemistry deal, which has become established as the flagship commercialisation partnership in Europe and enabled the Group to become the leading European IP specialist.

Other Entrants To The Space

Not surprisingly this achievement has played a significant role in encouraging other companies and universities to enter into the space of exploitation of academic intellectual property.

Another entrant into the world of university IP and its exploitation with a novel variant is BioFusion, now Fusion IP Plc. This is an AIM listed company which raised over £8 million in the spring of 2005 essentially to exploit the medical research of the University of Sheffield, with whom it has a ten-year agreement. This really amounts to privatising the university technology transfer office for their defined category of intellectual property. Their basic idea is that the university concentrates on creating intellectual property while the company focuses on exploitation, having funds available to facilitate this. The university is a shareholder in the company. They have recently added an arrangement with the University of Wales, Cardiff.

A similar model has been followed by Imperial College, which in 2005 placed shares in its technology transfer organisation, Imperial College Ventures, and subsequently had a successful IPO as Imperial Innovations. Other new entrants include Sigma, which has partnerships with Dundee and Robert Gordon, Angle, partnered with Reading, and IPSO, which is linked to Loughborough. MTI have launched a fund focused on Manchester. The European Investment Fund has launched a Technology Transfer Accelerator Programme that has led to investments in IP Venture Fund, Leuven and the Manchester Fund.

IP Group Plc

In June 2006, IP2IPO, having changed its name to IP Group Plc, moved from AIM to a listing on the main board of the London Stock Exchange. Particularly in the recent period when raising funds for start-up companies has proved problematic, the group has developed a strategy whereby it uses its own funds to help create “incubation businesses” before raising the extra money to turn the successful small companies, referred to as “grubs”, into fully fledged entities. Formal deals now exist with the universities of Bath, Bristol, King’s College London, York, Southampton, Surrey, Queen Mary College London and Glasgow, as well as Leeds and Oxford.

Table 7 lists the companies created by the group, excluding a large number of incubation businesses, together with some valuations (taken in the summer of 2008).

There are 20 incubator stage companies with a fair value of £1.2 million. Those with a value less than £3 million amount to over 40 companies, having a fair value of about £32 million, while the 10 spin-outs valued at more than £3 million each are valued at £115 million in total. Table 8 gives more information about these latter companies.

The range of sectors covered by these spin-outs is given in Table 9, which serves to emphasise just how broadly based the portfolio has become.

The “Modern” Businesses

The model has worked very well, but there is a limit to the number of university partnerships which can be handled effectively, so a variant has been developed: the so-called “modern” businesses, the name being derived from the chess opening favoured by Dave Norwood. In this case IP Group has researched and then decided upon areas or topics where there is a need for a business, sourced top-level management and then sought out specific intellectual property in universities to provide the scientific basis.

Three such companies now exist:

• 1. Modern Biosciences is a drug development company that resources late-stage discovery projects from academics and other spin-out companies, conducts early proof of principle clinical studies and subsequently out-licences the resulting programmes to the pharmaceutical and biotechnology industries. They have agreements with the Universities of Aberdeen, Dundee, Manchester and Bradford.
• 2. In a similar way, Modern Water was established to build and exploit a portfolio of water technologies to address problems of the availability of freshwater and the treatment and disposal of waste water. The company was floated on AIM in 2007, and is currently valued at £53 million.
• 3. Modern Waste has a focus on technologies that improve the economics of waste and recycling with the intention of developing novel technologies into profitable businesses. It is a subsidiary of IP Group.

IP Group has grown to become a substantial business. Highlights of the 2007 Annual Report show that the value of its portfolio was £126 million, an increase in one year of 44%. Cash from sales of equity investments during that year was £8 million, an increase of 158%, while net assets rose to £214 million. Over £30 million was raised by portfolio companies in private funding rounds, with a similar sum being invested.

In all spin-out companies three aspects are vital: the scientific idea or technology, funding and management. There is no shortage of science. Funding ability is cyclical but is normally possible for the really convincing idea. The biggest bottleneck is finding suitable management, company chairmen and non-executive directors.