LONDON ¿ With the equity markets effectively closed, European companies needing to raise money should look for ways to release the value tied up in their intellectual property.

This advice came from Walter Flamenbaum, partner at Paul Capital Royalty Funds, a purchaser of health care royalties, who spoke last week at a session on ¿Raising Finance for Biotech by Using Intellectual Property, the Undervalued Asset,¿ at the second annual BioIndustry Association CEO and Investor Conference held here.

¿Once you recognize IP has value, you should think about how to develop it and share, or transfer, the risk to others,¿ he told delegates. As yet, few such specialized funding instruments are available in Europe, but in January 2001 SkyPharma plc, of London, pioneered this route, raising US$30 million in private equity from Paul Capital to fund Phase III trials of DepoMorphine, in return for a portion of future royalty and revenue streams.

Then in July, ML Laboratories plc, of Warrington, Cheshire, agreed to a #17.5 million funding deal with Paul Capital to enable it to accelerate U.S. clinical trials of Adept, a product for the reduction of surgical adhesions. In return, Paul Capital will receive an undisclosed proportion of the royalty and revenue streams from Adept and two other unnamed products until 2010.

Peter Shennan, chief financial officer of ML Labs, noted that companies such as ML Labs, which are still net-funding R&D, need lots of cash. ¿Equity markets are in some senses the best way to go for cash, but they are cyclical and directed by sentiment.¿

In addition, with share prices so depressed, the dilutive effect of raising money on the public markets is exaggerated, giving companies a further incentive to look elsewhere for funding.

¿But irrespective of the conditions in the market, there can be advantages to other types of finance, for example, it is project-specific and ring-fenced,¿ Shennan said. ¿The risk is being taken by informed people, who rely on revenue streams and therefore there is a lot of due diligence. This is unlike a bank, which will give you a loan, but won¿t take any of the risk.¿

Marc Schuler, director of Bioconnect AG, of Frankfurt, Germany, a consultancy that advises on biotechnology licensing deals, said the collapse of the Neuer Markt, Frankfurt¿s high-tech market, means lots of German companies are having problems raising money. ¿In an immature market like Germany there are not many alternative sources of finance. There clearly is a lack of this type of specialized financing, and there clearly is a need for toolboxes to help companies raise money in additional ways.¿

Most German biotechnology companies have been set up by researchers and academics. ¿Most are driven from the R&D end, and [executives] don¿t have experience in finance,¿ he said. ¿There is no understanding of alternative financing.¿

Schuler said that to date there have been no funding deals in continental Europe involving the purchase of royalty streams. ¿But we will see much more of these kinds of instruments in coming years.¿

The problem of liberating the value tied up in intellectual property is not limited to cash-starved biotechnology companies, said David Holbrook, of IC Innovations, the technology transfer arm of Imperial College, London. ¿The universities are waking up to the fact that they are sitting on fantastic wealth in human and intellectual capital, that they have hitherto not exploited.¿

In general, technology transfer offices are viewed as a service to academics to advise on patenting or facilitating the transfer of IP to industry. ¿This is often for peanuts, or little or no return,¿ Holbrook said.

But now there is a squeeze on public funding for universities. ¿Like any good business they are now looking for alternative means of bringing in finance,¿ he said. As a result, technology transfer offices are becoming asset management offices with a brief to extract the maximum value from a university¿s IP.

Imperial College has spun out 60 companies, about half of which are in life sciences. In total the 60 companies have attracted investment of #90 million (US$128 million). ¿One of the key reasons Imperial College has done a lot of spinout is that it is often the best way to commercialize a technology,¿ Holbrook said. ¿With licensing you are very vulnerable to a change in the priorities of the licensee. It is better to create a shell around the IP as a node for external finance, and bring management in to get the technology to the stage where it is proven.¿

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