Ed Kenney

Innovations Foundation

525 University Avenue Suite 925

M5G 2L3 Toronto

Canada

This morning, we had some questions from the audience regarding university based technologies. What is patentable? What should be patented? What does it cost? How do we commercialise it? For better or for worse, that is the arena we live in every day.

Today, I will describe our organisation, to give an idea of the set up, of the way we are doing business, and to give an insight in at least one group in North America. Further, I will present a case study about our most successful project today. It is a diagnostic test for genetic disease in swine that we have licensed all around the world.

• Innovations Foundation
• Malignant Hyperthermia
• Conclusions

Innovations Foundation

In 1980, the University of Toronto (UT) had some technologies beginning to generate money. This was an interesting development. Universities can handle such a situation in three ways. One is taking the licensing function and putting this together with the contract research function. There will always be a contract research offices on campuses trying to generate money for the university and the licensing function is similar to their work. The second is to have the licensing organisation separate from the universities contract research work, letting the licensing organisation run itself. If, after a certain period, this organisation does not make money, it should not be in that business. The third option is not to be in the licensing business at all. There are plenty of companies handling inventions from universities, e.g. British Technology Group in Europe, and Research Corp. in the USA.

The University of Toronto decided to set up a small company, owned by the university, called the Innovations Foundation (IF). They attracted new people for this firm from the private sector. The firm does not report to the university, but to a board of directors. From 1980 to 1990 the invention policy was very traditional. When a scientist made an invention, he/she disclosed it to the University. The University payed the salary of the scientist and owned the invention. The University then assigned ownership of all inventions to the Foundation. For a period of ten years, the expenses grew, and the income of the Foundation was very low. Also, during the same period, the number of invention disclosures at the university dried up to 10 % of disclosures ten years earlier. The situation had to change.

The university took a few key decisions. The main one was to change the invention policy to allow the inventors to take personal ownership. The inventors agree that, if they take this road, they will pay the university 25 % if they make any money. Remember, the university operates independently from IF and at this point IF became non-exclusive licensing agent at the University. Also the personnel of IF changed - I came in 1991. The new invention policy and the new people of IF together raised the invention disclosures from ten to one hundred in one year. From the first day of the new policy, IF had no exclusive right to the disclosures of the inventors any more. It meant that part of our job was to convince the inventors that we offer a good service. On the other hand, we were not forced to work with all inventors. We could choose our technology very carefully. Our present portfolio is about two third medical and biotech, one third physical science projects.

We also looked further than the university for inventions. We have work from teaching hospitals - each teaching hospital being its own entity - too. I am proud to say that the research done at the UT medical school and the teaching hospitals together represent the third largest group of medical research in North America. We are only behind the California system and the Harvard system as far as total research is considered. So the fishing waters are fertile.

However, the rules of the hospitals do not always coïncide with the university rules. This often makes things rather complicated. For example, we may have had a team of five inventors approaching us. The university inventor may want to be the owner of the invention, in the case of one hospital, the hospital is the owner, and so on. Our first job is to sort out which party owns the invention.

IF gets about 125 to 150 inventions per year, of which we take twenty to work on. Being selective is one of the keys to success in our business. The selection process is a lot less scientific than you might think. We rely heavily on the inventors. Secondly, the market research is done by ourselves. We call companies we know in a certain area. This way we can determine ourselves whether any companies are interested in an invention. The third and most important part is patent protection. In the end this is what we sell: patent rights.

What kind of inventions do we take? We only take on things that are simple, clean and straight forward. If possible, we leave the grey area to the technology owners. We take in technologies, but we are not looking for a small improvement. We need inforceable, unquestionnable patents. We will not take in a process to make something a little bit cheaper; process claims are less interesting in our eyes. In the pharmaceutical area there are a lot new users for existing compounds: we will never license this type of invention.

From the twenty projects we take in every year, we license about ten. Out of those ten one or two will generate some significant royalties, e.g. $100,000 a year. So actually 2- 4% of all inventions will make significant money.

IF is a small group, with four professionals, and two support staff. Our backgrounds vary, but we are not lawyers, nor geneticists, nor agricultural experts. In fact we are salesmen.

Malignant Hyperthermia
The second part of the talk is a real life example. The technology was invented by professor David MacLennan, a geneticist at the University of Toronto and Dr. Peter O’Brien, a veterinarian at the University of Guelph, Canada. With pigs, lean meat is important. In the USA, pig farmers are payed for lean meat and by the pound, so the bigger the pig, the better it is. Some breeds from Easthern Europe, being both: lean and big, were crossed into our pigs.

The disease

However, due to a mutation, part of the pigs were susceptible to stress: a certain disease with a genetic origin (malignant hyperthermia). In the seventies, 83 % of the pigs were normal, 15 % were carrying one copy of the gene, and 2 % were carrying the disease on both alleles. The pigs carrying two copies of the gene for the disease either die before they reach the slaughter house or, if they reach the slaughter house, the quality of the meat is very poor. It is pale, soft meat that does not hold its water very well, called PSE.

The research

In the first instance, David MacLennan was working on malignant hyperthermia on the human side. Humans are the only other mammals to get this disease. He was using the pig genome because it was simpler. He discovered a single point mutation that predicted the presence of malignant hyperthermia in swine with 100% accuracy. Continuing work on the human side had not resulted in one single mutation that predicted 100%, but numerous little mutations that are still only up to 20 or 30% describing the particular disease. We actually filed some early patents on the human side, hoping to find one big mutation and getting a genetic test for people. We did not find it, and it has costed us about $100.000 on patents. World wide more research groups were looking for this type of mutation. It actually was a big race. MacLennan’s discovery was confirmed by Peter O’Brien (Guelph) who had some test pigs. In O’Brien’s case, the owner of the technology was the University of Guelph (UG). The Foundation clients were MacLennan and UG. However, in this case, when we make money and split, all five parties will get money: the two inventors and the two universities and the Foundation.

The test

In December 1990, MacLennan and UG granted us the right to grant licenses to their discovery. The patent was not sold to us. The test itself is a blood test, a DNA-test. For the test one needs a blood sample from a pig. >From the blood a lab can extract the DNA, cut it with enzymes, and amplify it using PCR technology. On the PCR technology the labs have to pay a royalty as well to Hoffman LaRoche. Then the pieces are separated on a gel, and the result can be read. The lab must have a license from us to perform the test legally in countries where we have patent and trademark protection.

Licensing strategy

How can you make money out of such an invention? We had a few goals. 1) We wanted the whole industry to be able to use the technology. In this industry were a few big players, and a lot of little breeders in the market. 2) We wanted a fair return for the university.

We faced a few problems. If this test is used diligently, and the strategy is to eliminate the mutation, it is a goal you will surely achieve after just a few years. We had to recognise the potential short life-time of the invention. Not being familiar with the market, we found out that licensing such a test was totally new for this industry.

In the first place, we had to decide who should be the licensees. It could be the laboratories, that do the test, or the breeders.The breeders are the ones who really know what the value of the test is. By using this test they can advertise that their nucleus animals are free of this mutation and eventually all of the progeny. Another decision we had to take was, to license it exclusively to a company so that it can have a monopoly in this area, or license non-exclusively to a lot of companies. We decided the breeding industry should control the test. If the laboratories were going to control the tests, we would get less returns, e.g. 5 or 10% of the price of the test the lab is offering.

In order to protect our rights, we set up a dual licensing strategy, with a patent and a trademark. We filed patents very quickly, and almost worldwide. Scientists like to publish. Often they value this more than money. In order to keep infringers away, the patenting had to take place before publication. If you publish, even give a lecture, in Europe, it is not possible to get patent protection. In North America it is still possible to get a patent after publication, because there is a one year grace period. About a month after we filed our patents, McLennan published, in 1991. We also established a trademark, which is another way to protect property. Trademark rights go longer than patents; you can even collect royalties under trademarks, e.g. Coca Cola, Marlboro, Harley Davidson. The idea behind it was, if we could successfully promote the trademark, and after 5 or 10 years when the testing has decreased, maybe the mark would have some value. The dual licensing strategy means that we licence the laboratories to do the test, and we collect the royalties from the breeders. We did take trademark HAL-1843 in a lot of countries. The name of the trademark: ‘HAL’ stood for ‘Halothane’, which was a test used prior to this one, and ‘1843' is a site of a mutation on a gene. We have used the trademark commercially since 1992.

When trying to commercialize the test in different countries we discovered that, in every country, the pig breeding industry is set up differently: some centralised, some decentralised. It meant that one licensing plan for the whole world would not work.

At first we licensed PIC, and shortly after to Cotswold: companies with geneticists on their staff. They knew how to control the mutation to produce a better product. In Canada we have a number of small breeders across the country. The Canadian Pork Council, the association of Canadian pig breeders agreed to become a master license holder. When a breeder wants a test to be done, he can go to any laboratory he chooses. Further he pays a royalty fee to the local organisation. The royalties are collected automatically and sent to us. The National Pork Producers Council in the USA did not agree with this strategy, and sent us to the state breeding organisations and breeders directly. Here we had to use another strategy. We addressed the breeders directly by advertising with a toll free telephonenumber. We gave free licenses in the USA to the breeders. They agreed to use a trademark when they advertise and to do testing at an approved laboratory. With the laboratories they agreed to collect royalties: $12. In each country we contacted, we had to find a different solution. In Italy, we have countrywide a deal with one of the breeding associations. We also have national licenses in Australia, South-Africa, and New Zealand.

And we have agreements with some swine breeding companies and organisations, and with purebred organisations. In The Netherlands, it is a laboratory that does the tests. There are service laboratories with international licenses in Canada (three labs), USA (three labs), The Netherlands, Germany (two labs), Italy, England, Australia, Brasil and South Africa.

Approximately the cost of the test is, for the laboratory, about $15. We have maintained $12 royalty in the USA since the beginning of the programme. When the programme started, the laboratories charged $50-60 for the test. Our $12 royalty is fixed. We put the labs in competition with one another. Now the lab prices have came down to the $15 level.

The total gross royalties of the HAL-1843 test are about $Cdn3,500,000.

From 1990 until now, we learned a lot about enforcement too. You can not prevent somebody from using the test until your patent is issued. In the European system, there is a way to translate claims early in the game. Then, once your patent is issued, there is a chance to go back and get back royalties. In the USA, once we had the patent issued, there were already five labs doing the test. We had to enforce our rights by putting each one on legal notice. Eventually one of them signed. And the rest we had to shut down.

Conclusions

We learned a lot in patenting and trademarketing the HAL-1843 test. Firstly, I want to summarize the highlights.

1. We came with a creative programme. In each country we went to, we created a different deal.
2. It was a good strategy to license the breeders, and not to licence the labs directly, at least at the start. Thus we set the value of the technology by the people who can use it. That way we kept a higher royalty payable to us.
3. The trademark was a good idea. The programme only began five years ago. In the next five or ten years, we can tell what is the long term value.
4. Being flexible in each market is important. There is no such thing as a standard agreement. And we were flexible
5. We had a lot of meetings in a lot of foreign countries. Actually meeting the people you have to deal with, makes all the difference in the world. You can not do this job by the telephone. You have to go see the people.
6. Last but not least, we stuck to our guns. People will tell you all kind of things along the way, but if you stick to your ideas, you can get something done.

Now the other side of the coin. What should we have done better, should we start today.

1. We should have filed patents in the USA first. In the USA it is not possible to collect back royalties after patents issue.
2. We clearly should have known more about the patent rules in Europe. We would have been able to collect a little bit more in back royalties if we had done that.
3. You can not be on the road enough. Never. There are certainly more people, we could have visited along the way which would have led to more deals.
4. And then, if you have the choice, never be the first test in the industry. It is better to be the second, and let someone else blaze the trail. The path is nice and clean now, and we have the scars to prove it.