Presentation to the Board of Regents: Proposed Changes to Regents Policy “Commercialization of Intellectual Property Rig

1. Presentation to the Board of Regents:Proposed Changes to Regents Policy“Commercialization of Intellectual Property Rights” Tim Mulcahy and Jay Schrankler Planned for June 11, 2010 Board Meeting

2. Framing the Issues • University derives significant benefit from a robust technology commercialization operation • Federal policy requires Universities to commercialize technology developed with federal support • Technology commercialization is a costly function • Seeking ways to normalize funding for technology commercialization comparable to peer institutions • Need to identify changes to current policy that would be necessary to achieve this

3. Benefits of Technology Commercialization • Amplifies impact of U discoveries Improves public health and well-being Generates multifaceted economic benefits: new companies, additional jobs, revenue growth Provides funds for further research and for research infrastructure investments • Serves as an extension of U’s threefold mission of research and discovery, teaching and learning, outreach and public service

4. Technology Commercialization Revenue Supports the Strategic Goals of the U • Exceptional students Helps colleges and departments support deserving students Funds $50 million Presidential Scholarship Fund Provides matching funds for donor contributions • Exceptional faculty and staff Rewards inventors Funds research and scholarly activity through opportunities like the Imagine fund Supports faculty through Innovation Grants that help bridge the gap between sponsored research funding and the point where the a technology could be licensed or become a start-up

5. Revenue Supports Strategic Goals of U(Cont’d) • Exceptional organization Supports responsible stewardship of resources and encourages outstanding performance Provides matching funds for major instrumentation purchases • Exceptional innovation Showcases research achievements and brings University discoveries to the world Funds Innovation Grants to further develop promising technology Used for Ignition Investments, early-stage loans made to a University start-up company to help enable a successful launch

6. Accomplishments: Significantly improved Disclosure evaluation timeliness and thoroughness Implemented a rigorous analysis process for prospective IP Communication through technology evaluation process Operating by strategic business units Leveraging industry contacts and experience of new team Targeted and innovative marketing efforts Improvements ahead More efficient royalty distribution processing Expedited agreement processing Material Transfer Agreements Confidential Disclosure Agreements Inter-institutional agreements New evaluation process for University-based start-ups Office for Technology Commercialization (OTC) Strategic Initiatives

7. OTC Current Funding Model • Exclusively self-funded through royalty revenue • Receives no central administrative (O&M) funds • Major royalty revenue stream (Glaxo, >90% of total) in decline as patent coverage sunsets Assumes all the risks and the costs associated with IP protection and licensing • Must entirely cover costs for ‘winners’ as well as ‘losers’ • Current funding model is an exception among peers

8. Model Needs to Change • Key source of OTC funding is going away Drop may even be steeper… difficult to accurately forecast decline • OTC staffing level and operating budget are appropriately scaled to research volume and peers • If not resolved, larger benefits of technology transfer to the U will be diminished

9. Balancing Costs With Benefits • Current situation requires a workable solution that accomplishes the following: Strikes more appropriate balance between the U’s risk of investing in the costs of tech transfer with the rewards received by all stakeholders Maintains faculty inventorship/entrepreneurialism incentives Compels licensees to pay appropriate fees(industry recognizes there is a cost of doing business) Helps to sustain the cost of technology transfer operations after decline of royalty revenue from our current “blockbuster” (Glaxo)

10. Current BOR Policy: U Assumes All Risks and Administrative Costs Total Income Net Income Total Income Net Income (net of $25K patent costs) ~15% $127K $34K $10K 33% Faculty 33% Faculty $102K $34K $10K $31K $31K 33% Dept/College 33% Dept/College ($185K) ($65K) $34K ($151K) ($45K) $10K Costs Costs 33% OVPR (net loss) 33% OVPR (net loss) Current UMN Policy Licensing Example 2 Current UMN Policy Licensing Example 1

11. U Model Out of Sync With Peers How they fund tech transfer Combination of… Gross=charge taken prior to expenses Net=charge taken after expenses *Held privately

12. Additional Benchmark Data: Big Ten Distribution typically occurs NET of patent expense reimbursement; have not yet received data from Purdue & Penn State

13. Summary of Strategies Used By Others to Support TTOs • Reduce or cap faculty, department, college distribution amounts • Support via endowment • Support via central administration allocation • Partially fund tech transfer with a service fee The U, however, currently does none of these

14. What Are We Proposing? • Reduce or cap faculty, department, college distribution amount • Support by endowment • Support by central administration • Implementation of tech transfer service fee comparable to peers This will necessitate a Board of Regents policy change

15. Recommendations • Maintain • 1/3rd, 1/3rd, 1/3rd split • Faculty and departments should be incentivized for their hard work and support of commercialization • Aggressive OTC financial goals • Proposed Change • Modify OTC business plan to incorporate a 15% service fee • Discontinue consideration of fees received from industry for conducting OTC-related administrative duties as royalty • Allow U investments in commercially focused efforts to earna financial return

16. Service Fee Better BalancesRisk/Reward Ratio Total Income Net Income Total Income Net Income % of Net Income Total Income Net Income ~15%* ~15% 33% Faculty Faculty 33% Income Dept, College, or Unit Faculty Dept, College, or Unit 33% 33% 33% Dept, College, or Unit 33% OVPR 33% OVPR OVPR Peer Normal (regardless of revenue stream) Current UMN Policy (w/large Glaxo stream) Current UMN Policy (w/out large stream) *Partial cost offset for OTC Costs for OTC Services Income

17. Conclusion • Implementation of the proposed 15% service fee will bring financing of the U’s tech transfer operations into alignment with those of other major research universities and will help to normalize OTC budget in the post-Glaxo era