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--> The Main Problems in Commercialization of Scientific Research Results A.P. Simonov Karpov Institute of Physical Chemistry Introduction Commercialization of the results of scientific research is an old problem. However, the transformation of a scientific idea into a product for industrial use (see Fig. 1) very often is interrupted during the first three stages of commercialization. Engineering is the most difficult stage of this process. At this stage, scientific results must be transformed by engineers into a real industrial process that can be shown to be efficient and profitable enough for companies to buy. This stage is quite expensive, especially in the chemical field. External funding often must be found to cover because, as a rule, research institutes do not have sufficiently large capital resources. In the USSR, research and engineering costs were covered by the state. However, because of shortages of money, even the best research results often could not be properly introduced into industry. Thus, most research ended only in patent applications, publications, and reports to the organizations that had ordered the work. Chemical plants supported some research projects, but they usually had strict plans for production and for products and were not interested in innovations. In Russia, scientists in state research institutions now encounter the same problem of capital shortages and insufficient government support. Privatized institutes have sharply reduced their investigations or changed the direction of their activities. The chemical industry remains stagnant, and chemical companies are only beginning to show some interest in improvement of the technologies they use. Therefore, investors or sponsors must be found to help research institutes complete the engineering stage of product development. In principle, the results of applied research or even an idea can be sold at any stage of their development, although selling results when they are ready to be used in industry is much more profitable. An institute that is able to sell the final product of its scientific activity, namely goods produced by its own plant using its own technologies, can obtain the highest possible profit. Some attempts
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--> Figure 1 Transformation of a Scientific Idea into a Product for Industrial Use by the Karpov Institute of Physical Chemistry to commercialize research results at different stages of development are described below. Experience of the Karpov Institute The Karpov Institute was founded in 1918 as an applied research institute but later became largely an academic organization carrying out both basic and applied research in most areas of modern physical chemistry. It is located at two sites in Moscow and has a branch in nearby Obninsk. The total staff numbers about 1,800, including 800 scientists. The Obninsk branch has been oriented mostly toward applied research and technology development, especially in the field of radiation chemistry. The institute's total budget in 1997 was about $6 million, of which the state provided $2 million and grants and contracts provided $4 million. Most of these funds were earned from the sale of products produced in Obninsk with the institute's own technology and facilities. Table 1 lists these products. Only products produced under a specific license may be legally sold. The institute's research nuclear reactor is in Obninsk. Fifteen years ago, in an attempt to use this expensive apparatus more efficiently, the decision was made to develop chemo-nuclear technology for obtaining radioactive medicines for diagnosis and therapy and to sell medicines rather than technology. With capital provided by the state, several new technologies have been developed, leading to industrial production of a wide variety of bioactive substances containing molecules marked by the radioactive isotopes of Tc-99m, 1–123, I13 1, Sm-1 53, Re-1 86, and W-1 88. These radiopharmaceuticals are sold to more than 290 state and private hospitals and clinics all over Russia. A considerable portion of the profits is spent on scientific investigations of the radiopharmaceuticals, a search for new medically selective molecular carriers of radioactive isotopes, development of chemical synthesis and purification methods, medical testing of new preparations, licensing of industrial production
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--> Table 1 Radiopharmaceuticals Developed at the Karpov Institute Isotope Chemical Form Production Start Application Mo-99 Tc-99m generator 1988 Diagnostic Sodium iodide in isotonic solution 1990 Thyroid gland diagnostics and therapy I-131 Sodium iodide in capsules 1998 Thyroid gland diagnostics and therapy EY=0.365 MeV Ortho-Iodohippurate of sodium 1995 Kidney diagnostics Rose Bengal 1995 Liver diagnostics T1/2=8.04 day Albunim 1997 Hemodynamics diagnostics Macroaggregates of albumin 1998 Lung diagnostics Meta-Iodobenzyl-guanidine 1998 Adrenal gland therapy I-123 Ortho-Iodohippurate of sodium 1998 Kidney-diagnostics EY=0.159 MeV N-isopropyl-para-Iodamophetamine 1998 Cortex diagnostics T1/2=13.3h Meta-Iodobenzyl-guanidine 1998 Miocarditis diagnostics (para-Iodophenyl)-ß-methyl-pentadecanoic acid 1998 Heart diagnostics Substances for chemical kits Oxabiphoric 1993 Skeleton diagnostics DMSA 1994 Kidney diagnostics Bromezida 1995 Liver and gall bladder diagnostics Tc-99m radio-pharmaceuticals Tetraphosmin 1998 Hear diagnostics Sm-153 Oxabiphor complex 1998 Skeleton therapy Rc-186 Microspheres of Albumin 1998 Joints therapy W-188 Re-188 generator 1998 Joints therapy and diagnostics of medicines, technology improvements, and limited research not directly connected with the field of radiopharmaceuticals. Other results of investigations in the field of radiation chemistry are used to produce semi-industrial goods: high-quality polymer filters for filtering water, juices, beer, and alcoholic drinks; high-voltage electric insulators; latexes for washable wall papers; and foam polymer materials. However, compared with
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--> the radiopharmaceuticals, these goods are produced on a much smaller scale and garner less money. Perhaps the best way for an institution to commercialize its research results is to produce products with its own large-scale production plant using its own patents, technologies, expertise, and other resources. But this approach has its drawbacks. First, not every institute has its own large-scale production plant. Second, large-scale plant operations can divert resources, including human resources, from research activities, especially as specialists engaged in business-oriented endeavors usually receive much higher salaries than scientists engaged in basic research. Finally, research institute personnel may not have the appropriate skills to determine market demand for products. Another way for an institute to commercialize its research results is to act as an engineering firm for a company. Using existing technology that it had improved, the Karpov Institute reconstructed the ammonia production line at one of the ACRON chemical company's plants to produce methanol. All expenses, including payment for the license for the initial technology, were covered by ACRON. But further improvement of the production technology was possible only through the use of institute's research and development. ACRON suggested that the institute pay to start a pilot plant and test the process. In the event of success, ACRON would repay the institute's investment and give the institute a portion of the plant's profit from the technology during a specified period of time. The institute agreed to this arrangement. In this particular case, the institute's expenses were not large and no money needed to be borrowed. If special funds existed to support engineering firms in the demonstration and testing of new or improved processes, similar arrangements could be widely used. In another attempt to commercialize its research results, the Karpov Institute constructed a fairly compact and automatically operating apparatus for production of hydrogen from natural gas, an apparatus convenient for users of both natural gas and hydrogen—such as electric power stations. To date, the institute has sold only one such device, which has been operating successfully at a Moscow power station for two years. The sale of additional units has been hampered by a shortage of capital for proper advertising of the product. Obtaining large bank credits to compensate for a deficit of capital is difficult and dangerous for an institute. It is difficult because, in general, banks pay little attention to scientific research and commercialization of its results, however sound the business plans. During the ongoing privatization process in Russia, banks are keen to acquire property. Obtaining large bank credits is dangerous because loans must be repaid in a short time, typically one year. In addition, bank interest rates are very high (now 36–40 percent). The ability of institutes to repay money spent on the development of a chemical process or construction of equipment depends on the financial state and stability of the companies on whose behalf such investments have been made. In this respect, foreign customers are in most cases more predictable and reliable than domestic ones
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--> and therefore are more attractive to research institutes. Moreover, foreign customers are easier to find and to strike a bargain with than domestic customers. Finally, obtaining bank credits is difficult for institutes because the terms of a deal between an institute and a bank are always the result of negotiations. At the present time, there should be preferential treatment for bank credits for research and development, including lower interest rates, longer-term credits, and state guarantees for debt repayment. Another approach to commercialization is the sale of research results that require additional investigation and testing to an independent engineering firm. The sale of semi-products allows buyers to offer much lower prices, to require exclusive rights on further refinements, and to stipulate strict conditions for future work. The seller has no choice but to accept almost every demand. Even when an institute successfully develops a commercializable product, further problems may arise. For example, the Karpov Institute's scientists developed a new electrode material for electrochemical synthesis of sodium chlorate and other oxidants. The electrodes, which contain much lower quantities of precious metals and last much longer in corrosive media than commonly used electrodes, were insufficiently tested in real industrial conditions. A Canadian chemical engineering company wanted to buy a license to produce and sell these new electrodes. However, the invention had been patented only in Russia, a situation that some western countries consider to be equivalent to the premature publication of an invention. Insufficient capital prevented the Institute from obtaining a patent at the right time and in the necessary number of foreign countries. As a result, the Canadian firm experienced difficulties when, in accordance with the licensing agreement, it attempted to patent the electrodes in the United States and other countries. These additional expenses for patenting and testing resulted in lower licensing payments to the institute. The institute's experience suggests that the state should support patent activity by creating a special fund that would provide low-cost loans to cover patent fees. Attempts to commercialize initial research results also can be problematic. The Karpov Institute's contracts with some large foreign companies, such as FMC, Hughes Aircraft, Bayer, and Haldor Topsoe, call for no distribution of intellectual property rights or of profits after commercialization; the firms retain these rights and profits. Further, no reward for investors is stipulated. The firms have strict conditions for the research and require permission for publication of research results. Although the institute attempted to prepare the texts of contracts in accordance with the recommendations issued on July 16, 1996 by the Joint Russian-American Commission on Economic and Technological Cooperation, it eventually signed documents that appear to be unfair. To illustrate, here is a citation from a document the Institute signed with an American firm:
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--> "Karpov Institute of Physical Chemistry (KIPC) agrees that any data and technical information (a) obtained directly or indirectly from the firm in connection with this agreement or (b) related to or derived from work on projects performed by KIPC under the terms of this agreement is the confidential property of the firm, and the firm has and shall have the right to exclude its use by others including KIPC......" Further, "KIPC agrees that it will be performing project work as requested by the firm and agrees to assign to the firm all rights, title, and interest in and to any idea, invention, know-how, trade secret, and improvement, which is conceived, discovered, or developed as a result of the work performance under this agreement. This term is to be effective for a minimum of 12 years from the completion date of the project work." The terms of contracts with domestic customers are less strict. However, these terms do not mean that domestic partners are more friendly. Rather, they reflect these partners' more limited market experience. Although the conditions of any deal are the result of discussion and consensus, some legally determined limits should apply to the basic terms of documents on cooperation, licensing, and confidentiality agreements. For example, the time period for exclusive rights of one of the partners should not be longer than three to five years. An award for inventors should be obligatory. The inventors as well as the institute where they work should receive a portion of the profit gained after the completion of the work. Former Vice-Premier V.B. Bulgak suggested that Russia form an organization to work out, on the basis of international practice and experience, legal standards for contracts involving Russian research institute—standards that would protect the rights of Russian scientists. Preparing and signing a contract in accordance with the recommendations mentioned above is much easier when the partner is a public organization, such as the National Science Foundation, the U.S. Civilian Research and Development Foundation, or the International Science and Technology Center (ISTC) (which was founded by the American, European, Japanese, and Russian governments to offer civil research opportunities to scientists who earlier had been engaged in military investigations). According to ISTC rules, the participants in a project financed by the ISTC are the owners of the intellectual property created during work on the project. These participants can submit patent applications when and where they wish. The inventors obtain a portion of any payments for implementation of the project. A Karpov Institute project that is financed by ISTC (#193: Design and study of new radiation stable materials for use as scintillators for radiation control) recently has been finished, and the
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--> ISTC will pay for three patent applications. Moreover, the ISTC will help find potential users of the patents. The experiences described above indicate that the main problem in commercialization of valuable scientific results is the severe shortage of capital at Russian research institutes and low investment activity in Russia. Other problems include a lack of qualified managers and experienced specialists in marketing technology, an absence of legal protection of technology, and inadequate laws regulating relations in intellectual property and patents. Nevertheless, money problems are the most serious at present. Perhaps the best research product to market is a license. A license reflects both the novelty of a technology (payment for a patent) and its scientific complexity (payment for know-how). A license agreement must be formulated very carefully. The Karpov Institute failed to sell a good license because it had not included in the agreements some provisions later found to be quite important. Among these provisions were (1) a business plan for the transformation of the invention into a commercializable technology with the buyer being responsible for fulfillment of the plan; (2) a stipulation that the inventors would participate as supervisors and consultants in this process; and (3) a list of countries where patents for the invention would be obtained and an indication of the time period for and costs of obtaining these patents. Typically the buyers of licenses are engineering firms that introduce technology into industry. The main portion of the license payment is provided by the customers who contract with engineering firms to introduce technology into their enterprises. Therefore, market demand for licenses strongly depends on investment activity. Today in Russia, the number of engineering companies is small and investment activity is low. Therefore, the sale and implementation of good licenses are in a depressed state. Normalization of the situation might be achieved, in part, by the creation of science and technology funds. Science and Technology Funds According to statistical data for 1996, approximately 61 percent of expenditures on research and development in Russia were covered by the federal budget, 27 percent by research institutes and organizations in the business sector, 6 percent by foreign sources, and 6 percent by funds ''independent" of the federal budget. These expenditures were mostly for research, not for engineering and implementation of technologies. A few well-known governmental funds, such as the Fund for Technological Development at the Ministry of Science and Technology, support of innovations in all industries. Perhaps several dozen small and practically unknown government funds are very narrowly oriented. Both kinds of funds are almost inaccessible. Equity funds in Russia are very limited.
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--> The funding crisis faced by research institutes that attempt to commercialize their achievements could be mitigated by science and technology funds (STFs) for implementation of technologies based on scientific research results. Domestic and foreign industrial companies and individual entrepreneurs, as well as the state, should establish STFs. Because funding typically is allocated to novel technologies that require no more than $0.5 million for development, an STF with starting capital as low as $2 or $3 million could have a significant impact. The state should stimulate formation of STFs by taxation policy. A portion of the profit of a shareholder of an enterprise would be transferred to the STF before any tax on the profit has been paid. The total sum of this tax would constitute the state's share of the STF's capital. STFs would provide loans at reduced interest rates to engineering firms that build and operate pilot plants based on new, cost-effective, and patented processes. The investor would repay the loan in full after the pilot plant has reached the expected project yield. Alternatively, the investor would repay the loan when profits are sufficient to cover the investor's expenses. The state, like any other STF investor, could sell its shares in an STF after a specified time. Before the state's exit from the fund, the profit gained by the STF would be taxed only when distributed but not in capitalized form. STFs should receive priority from the Export-Import Bank of Russia for financing their projects. The credit resources of STFs should be distributed on the basis of competition in which potential investors would participate. To further stimulate investor interest in STFs, the value added tax should not be imposed on activities supported by STFs. The state's interests in STFs might be represented by state research and engineering centers. (Chemical research institutes—such as the Karpov Institute—could play the role of engineering firms.) These centers must be able to carry out all preliminary technical and economic examinations of proposed projects and prepare necessary technical documentation for the investors. Initially the activity of each STF should be oriented toward a specific industry. Over time STFs could become interdisciplinary financial organizations. Legal establishment of Science and Technology Funds would not be difficult. The main obstacle would be the privileged tax treatment on profits and products. Conclusion The commercialization of scientific research results is a complex problem. Excellent and prospective scientific results, qualified and experienced personnel, good legislation, a favorable investment climate, and sufficient capital at research institutes are needed to solve the problem. In Russia, excellent research that could be the basis for new technologies abounds. However, qualified
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--> managers and good legislation are lacking. The investment climate has begun to change for the better. At the present time, the shortage of capital appears to be the main cause of inefficient commercialization. Without such capital, research institutes cannot develop scientific results to the point at which engineering or industrial companies can clearly understand exactly how to implement a new technology and estimate the profits from doing so. Science and technology funds might be of great benefit in solving this important problem, even in the absence of experienced personnel or proper legislation. Creation of STFs by American partners, industrial and engineering companies, and entrepreneurs would be desirable, as would these groups' more active role in improving the overall investment climate in Russia.
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