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Big Man Off Campus
Former USF professor Clifford M. Gross wants to see that more federally funded research gets spun into moneymaking technology.
By Francis X. Gilpin
Associate Editor
A lot of people around Tampa Bay talk about a more efficient pipeline for university research to migrate into commercial production. Clifford M. Gross is trying to build one.
"The idea factories at these universities are somewhat disconnected from the marketplace," says Gross.
Gross is attempting to bridge the conflicting imperatives of the academic laboratory and the corporate boardroom. His vehicle is called Utek Corp., short for university technology. Gross does what is known as technology transfer in what he considers a unique way.
Utek incorporates a portfolio company to acquire technology rights from a school or lab for cash. Gross interests a startup in commercializing the technology. The startup client takes over the portfolio company, usually in consideration of stock. Ideally, once the product has sufficiently enhanced the value of the client's stock, Utek cashes out. The proceeds reward Utek investors and fund the start of the next tech transfer.
"Our model has a great deal of leverage because we're taking brainpower that's consolidated in the form of intellectual capital and we're using that as currency to acquire equity stakes in our customers," says Gross. "We're marking up university and federal lab intellectual capital."
Gross says universities are receptive to the arrangement, which he calls U2B. Unlike some traditional licensing deals, schools don't have to share royalties later on, except with the inventor. Utek has understandings with the University of South Florida, Johns Hopkins, Cornell, Virginia Tech and other research institutions that give it a crack at what comes out of their labs.
"It's quite legitimate," says John Fraser, director of technology transfer at Florida State University, which has a non-exclusive, research-review deal with Utek. "I think it's a solid approach."
Where did the Utek chief executive come up with the idea?
Seven years ago, Gross was lunching with George R. Newkome, USF's vice president for research at the time. Gross, a New York University Ph.D., had come to USF as an ergonomics researcher in 1996 after selling a Long Island company that advised manufacturers how to improve product safety. Newkome lamented that USF held scores of patents but was deriving comparatively little in the way of licensing fees.
Gross says Newkome asked how USF could improve the research office's batting average. Gross consulted the Association of University Technology Managers. The nonprofit group's data showed the federal government, mostly through the National Institutes of Health and the National Science Foundation, plowed $24 billion annually during the mid-1990s into university research. About 11,000 discoveries resulted.
Checking the number of patents converted into royalties, Gross was startled. He considered American taxpayers to be investors in the research. Gross says he calculated their return on equity at around 1.5% - and that was before tech-transfer expenses.
"It was obvious it's losing money and, actually, it's losing more money every year," says Gross.
"About 70% of the innovations, the discoveries, do not leave the universities, which, to me, is a profound waste," he adds. "It would be nice if the research made its way back to the marketplace to inspire the growth of companies in the U.S."
Gross started thinking about the missing ingredients in terms of real estate. "How many homes would be sold in America, if there was no such thing as a mortgage?" he says. Mortgages facilitate a market of real estate buyers and sellers. "I felt there was nothing there like that in the technology transfer space," says Gross, who holds 18 patents.
"Most companies need to outsource basic research because most companies are not good at basic research," he says. "Universities and federal laboratories are wonderful external suppliers of basic research that never compete with corporations." Gross saw an opening for something akin to a tech-transfer Multiple Listing Service - to further the real estate analogy - using his equity swaps as the financial underpinning.
U2B was born. Six months after their luncheon discussion, Gross came back to Newkome. "Well, why don't you do it?" Gross says Newkome challenged him.
Later in 1997, Gross left USF. Using money from friends and family, he formed what became Utek. The first U2B alliance was with USF, which looked to license a new blood test for detecting certain cancers and a method of color-staining magnetic resonance images. So far, USF has done four deals with Utek. A physician from USF's medical school and an economics professor from the business school sit on the Utek board.
"Our mission right now is not just to have good local relationships, but to become a leading tech transfer company in the world," says Gross.
In the fall of 2000, Utek managed to complete a small $6 million initial public offering amid the rubble of the tech collapse. It has been a rough few years, with net operating income sliding more than 90% from 2000 to 2002.
But Gross says the company's financial transparency is a selling point with universities and he doesn't regret going public. In fact, with Utek's stock-swap orientation, Gross prefers dealing with other public companies. Liquidating holdings is relatively easy. "There's an exit built in already for us," he says.
Utek has sold some of those stakes, but its cash position still declined 48% during 2002. The company had less than $800,000 on hand at the end of the year. Private-placement offerings and the proceeds from employees exercising stock options have since infused Utek with a fresh $2 million.
The regular capital calls since the IPO have helped Utek bring a dizzying collection of potential goods and services closer to widespread availability. Utek has placed bets on more than 20 enterprises. They're developing everything from ultra-illuminating safety apparel for emergency workers first-responding in the dark to fat substitutes for American dieters trying to get thinner and eat healthier.
Utek's net income declined 91% in the two years after the tech bust, with the company eking out a $153,643 profit for 2002. As a business development company, however, Utek claims its chief objective is growing net assets through the stock transfers.
"I hope his investors hang on long enough to see if it works," says Patricia Harsche Weeks, vice president of planning and business development at Philadelphia's Fox Chase Cancer Center, who also presides over the university tech managers' group.
Net assets were up $479,464 for the first nine months of 2003 and investors do seem to be warming to the stock. Utek common shares have risen from $9.25 a share in early October to above $11 early this month.
The bearded 45-year-old Gross oversees the Utek operation from close quarters above a bank branch in Plant City, where he now lives. In addition to his annual salary of $150,000, Gross owns 47% of the Utek stock.
The signs of a turnaround at Utek owe much to Circle Group Holdings Inc.
Two years ago this month, Utek entered into a strategic alliance with the Illinois company and received $22,102 in consulting fees. In August 2002, Utek sold Circle Group a subsidiary called Fiber Gel Technologies Inc. for stock. Fiber Gel held the worldwide rights to market a fat-substitute called Z-Trim that Utek had secured from the U.S. Department of Agriculture, discoverer of the natural carbohydrate.
As Z-Trim is prepared for rollout, Gross has watched Circle Group stock float up to $2. Utek received 3.8 million shares when it was trading around 18 cents. "The science is very good and we put it into a good pair of hands," says Gross.
Less successful was a Utek dalliance with Stealth MediaLabs Inc., an entertainment software developer. Utek received Stealth MediaLabs stock in 2001 when the stake was valued at $1.7 million. Utek has since written down the entire investment to zero. Gross says he is contractually prohibited from saying why.
Unlike a venture capitalist, Utek never gets involved in managing another company, even when it owns a substantial percentage of the stock. "We're only operating Utek," Gross says. His track record is such that Gross can joke about Utek's "eight spectacular failures" because the other 18 investments are still viable. A few could pay off big.
There is an assortment of other tech-transfer specialists, but Gross says none convert intellectual capital into stock certificates quite like Utek. Some of the other public tech-transfer outfits are based in the United Kingdom, where Utek has a subsidiary.
Gross says a 2004 economic recovery bodes well for the sector. Cost-conscious American corporations that slashed research and development spending should think twice about ramping up in-house efforts again.
"You can't just throw it like a switch, even if you get aggressive and want to fund R&D," says Gross. "Our position is most companies should outsource basic research because that's a very efficient way to manage venture risk. They can acquire innovations that have already been invented."
Weeks, the president of the tech managers association, says patience is certainly required in life sciences and other fields. "The best of universities take 10 years working on something," she says.
Still, Gross says even impatient corporate executives should embrace the type of university pairings that his company promotes.
"Basic research is a wonderful thing to partner out because of the high failure rates of research projects, wherever they're instituted," says Gross. "If you partner with the university or the federal lab, you're really partnering over a much larger base of shareholders, the U.S. taxpayers."
The big bets
Utek Corp. warns potential investors that its financial results largely depend on the performance of two public companies in which it has invested $2.3 million. Here is a profile of each of these non-controlled affiliates of Utek:
Circle Group Holdings Inc.
Previously known as: Circle Group Internet Inc.
Headquarters: Mundelein, Ill.
Founded: 1994
Net for first nine months of 2003: $1.3 million loss
Utek stake in company: 68%; valued at $6.6 million, as of Sept. 30
Utek involvement: In 2002, the then-Circle Group Internet acquired Fiber Gel Technologies Inc. from Utek for stock and warrants.
Primary focus: The Fiber Gel subsidiary is developing a natural carbohydrate called Z-Trim that is designed to reduce the fat content and calorie counts - while increasing healthy fiber - in baked goods, dairy products and processed meats.
The good news: The market price of Circle Group common stock jumped 140% in the first nine months of 2003.
Next challenge: Z-Trim undergoes a taste test at the Miami-Dade County Fair later this month.
GloTech Industries Inc.
Previously known as: R&R Ranching Inc.
Headquarters: Gainesville
Founded: 1998
Net for first six months of fiscal 2003: $301,404 loss
Utek stake in company: 14%; valued at $1.4 million, as of Sept. 30
Utek involvement: In 2003, GloTech acquired Advanced Illumination Technologies Inc., which holds a patent on an illuminated rope for emergency use, and Sport Technologies Inc., which has licensing rights to an illuminated safety helmet, from Utek in an exchange of stock.
Primary focus: Glotech, a development-stage company, is designing and marketing technology from the University of Florida that generates a light brighter than neon with virtually no heat from a polyester strip as thin as paper.
Good news: One of the resulting applications, an intensely lit bicycle called GlowBike, has been written up in BusinessWeek.
Next challenge: While GloTech signed a marketing deal last fall to sell illuminated apparel products to universities, the company was also complaining that unnamed brokerage firms were shorting its stock by improper means.
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