Expert Meeting – Commercialization of Marine Biotechnology Håkon Hauan Director Innovation Norway, Madrid Faro, 11 th October 2012.

Industrial Research and Development Cooperation between Norwegian and Foreign Companies Guidelines for Foreign Companies acting as demanding customers Innovation Norway is a government agency uniquely empowered to unleash entrepreneurship and cultivate a thriving culture of productive innovation. This presentation highlights the purpose and scope of the financial program designed to foster Industrial Research and Development (IRD) cooperation between Norwegian and Foreign Companies

Furthermore, if the foreign company is a supplier of defence equipment to the Norwegian Armed Forces and has incurred offset obligations, contributions to IRD projects may qualify as offsets if the product or technology to be developed is covered by the technology areas included in the Norwegian offset guidelines. IRD contracts between foreign companies and Norwegian SMEs are implemented as grants to the latter. The grants are calculated as a percentage of the project cost of the Norwegian SME. There are no contractual relationships between Innovation Norway and foreign companies in connection with IRD projects. The support program is called Industrial Research and Development Program (IRD). It is a market and demand driven innovation program aimed at Norwegian companies looking for opportunities to develop new products, processes or services for demanding customers, Norwegian or foreign. In 2012 alone, Innovation Norway will spend about NOK 300 million on new IRD contracts. This guideline is addressed to foreign companies interested in becoming the demanding customers of Norwegian companies with new products or solutions not yet available on the market. Innovation Norway offers a support program that makes grants available to Norwegian companies, especially small and medium sized enterprises (SMEs) that are developing new products or services for foreign or other Norwegian companies. The support program may cover up to 60% of the development costs incurred by the Norwegian companies. The support is based upon a contractual cooperation (IRD contract, see explanation below) where the foreign company acts as a demanding customer to the Norwegian company. The foreign company must have a need for the new product or solution and the Norwegian company must meet the requirements set forth by the foreign company. The product or solution to be developed should demonstrate a high level of innovation and represent a novelty in the market. The cooperation must be a real partnership where both parties contribute with the resources and competence necessary to successfully carry out industrial development projects. To qualify for an IRD project, the project contribution of the demanding customer in terms of workload and funding must be at least 20% of the total eligible project costs. In order to obtain an IRD contract supported by Innovation Norway, the foreign company should look for a Norwegian company with competence and ability to develop the products or solutions the foreign company seeks. The benefits for foreign companies entering into IRD projects with Norwegian SMEs are two-fold: - significant reduction of project cost and financial risk - opportunity to collaborate with Norwegian SMEs with unique skills and knowledge in the relevant product areas 1. Introduction

An Industrial Research and Development Contract is a contractual agreement between a Norwegian company, preferably a SME, and a foreign or Norwegian company to collaborate on development of new “state-of-the-art” products, processes or services. The partners in an IRD contract are: Supplier company - which should be a Norwegian SME (small or medium sized company) Client company (customer) - which may be either a foreign or Norwegian company The role of the supplier company is to develop a new product or service that the client company needs. The client company shall not only be a demanding customer but also participate in the project to enable the supplier company to develop the product or service that would satisfy the requirements of the client partner. The IRD program provides support (cash grants) to Norwegian SMEs (supplier companies) with the skills, abilities and capacity to solve development needs of a demanding customer. To qualify for a grant, a project must represent an innovation in its business area and the end result must have a significant market potential beyond delivery to the client. Projects with either limited technology, product development or market prospects, will not be eligible for the IRD program. The outcome of an IRD project may vary, but these results are typically:  A product or prototype as the first version of a unit that can either be marketed as a product in its own right or as a component of a larger system.  Software for which there is an independent business idea and that can be marketed as a separate product or service.  A system integration, with significant new capabilities.  A new production process. 2. Industrial Research and Development Contracts Norwegian SMEs in any industry sector can apply to Innovation Norway for IRD support. However, Innovation Norway will give priority to business areas where Norway is especially well placed to succeed. Important priority areas are offshore oil and gas, environment, maritime business development, as well as marine business development and energy. There is also a considerable focus on the health sector and other areas that involve large-scale public procurement, including industrial development linked to defence procurements and offsets.

The supplier company is responsible for submitting the application to Innovation Norway for IRD support on behalf of the whole project. The grant is given to the Norwegian supplier company to cover up to 45%, or if an EEA bonus is applicable, up to 60% (see explanation below) of that company’s development cost. Companies eligible for grants are normally Norwegian SMEs with the competence and ability to develop new products or services not currently available in the market. The Norwegian companies must fulfill the SME criteria as defined in the state aid regulations of the European Economic Area Agreement (EEA). Norway is a signatory to the EEA Agreement The maximum amount of government support to companies is limited according to the EEA Agreement - which applies the same state aid and public funding rules as in the EU. The European Union (EU) state aid rules define an SME as an enterprise having less than 250 employees. The EU applies three categories of enterprises: small, medium-sized and large. Small enterprises have fewer than 50 employees and an annual turnover or balance of no more than EUR 10 million. Medium-sized enterprises have employees and an annual turnover of no more than EUR 50 million, or a balance of no more than EUR 43 million. Large enterprises have more than 250 employees. 3. Supplier Company (Applicant) As an exception, IRD grants may be given to a large supplier company if the project involves Norwegian SMEs and they benefit from sharing of competence, transfer of technology or new market opportunities. An EEA bonus provision may increase the support level by 15 % if the project involves a collaboration between at least two independent companies of which at least one is a SME (< 250 employees) or the R&D-activities are carried out in at least two different EEA-countries. Moreover, to qualify for this EEA bonus, neither the supplier company nor the client company may incur more than 70% of the total eligible costs. Size of supplier company No. of employees Max. annual turnover Max balance Small <50EUR 10 million Medium EUR 50 millionEUR 43 million Large >250 Support levels Grants are calculated as a percentage of the project cost of the supplier company: Size of supplier company (no. of employees) Small <50 Medium Large >250 IRD projects 45% 35% 25% EEA bonus, 15% addition 60% 50% 40%

As a demanding customer to the supplier company, the client partner is expected to participate actively in the development project by contributing to the specifications, being an important reference client and strengthening the market potential for the product developed by the IRD project. This means for example access to new market channels and strategic partners. The client partner must have sufficient resources (competence and financial) to manage its part of the IRD project. Foreign suppliers of defence equipment to the Norwegian Armed Forces are well positioned to gain significant benefits as client partners in IRD projects. When a defence contract exceeds NOK 50 million, foreign suppliers have to accept offset obligations. If they enter into IRD contracts as client partners, the investment they make in the IRD projects may be deducted from their offset obligations provided that the technology area of the project is included in the offset guidelines of the Norwegian Ministry of Defence (MoD). The benefits will be two-fold: 1.Offset credits with factor up to 7,5 (subject to approval by the MoD) 2.Benefits accruing to client partners in IRD projects (as described in this guideline). 4. Demanding Customer The IRD program can support development projects from the pre-study phase up to and including the industrial prototype/pre-commercial phase. It may also include testing and monitoring of whether the prototype meets specifications, including a 0-series production. This is in accordance with European Union (EU) regulations for research, development, and innovation. 5. Duration of IRD projects

The aim of the IRD program is not only to develop new products or services, but also to ensure that the product/service will be properly and professionally marketed. Consequently, it is of no interest to Innovation Norway to support projects that do not have clear market objectives. Market opportunities in addition to the business of the client partner is of great importance while considering support to IRD projects. The supplier company is expected to submit a business plan that shows how marketing and sales will take place, including the resources and marketing expertise the company possesses. The client partner may contribute both as a marketing channel and as an important reference for the supplier, as illustrated in the figure: 5. Commercialization of the Products/Services from IRD Projects Normally, there is no mutual ownership between the supplier and the client company in IRD projects. It is acceptable, however, for the client company to control up to 25% of the share capital or voting rights of the supplier company. 7. Independence – Supplier and Client Partner Also with respect to dependency between supplier and client partner we must follow national and EU-regulations Client company Supplier company Project Market Reference

Concept: Thank you for your attention

Innovation Norway – the Basics While a supplier’s approved project cost serves as the basis for determining the amount of an IRD grant, Innovation Norway also includes costs incurred by the client company as a basis for approving any grant. Head office Local offices in Norway and abroad Our overarching mission is to further strengthen the competitive stature of Norwegian companies by supporting their growth initiatives through quality innovation. Through Innovation Norway, companies enjoy access to a robust enterprise support system and an array of financial resources. We offer advisory, promotional, and networking services, as well as key competence building measures. Norway’s flourishing entrepreneurial spirit, combined with Innovation Norway’s local knowledge and global networking reach, sets the stage for the increasing emergence of innovations driving economic growth here at home and abroad. Innovation Norway is committed to: Enhancing the level of innovation within Norwegian enterprises and across industry Building highly competitive Norwegian enterprises serving both domestic and international markets Effectively promoting Norwegian enterprises Promoting Norway’s status as a world-class tourist destination Stimulating development in rural areas Transforming ideas into successful business cases Championing collaboration between enterprises, knowledge communities and R&D institutions

The supplier company submits the project application to Innovation Norway, receives the grant and is the primary contact for Innovation Norway. The supplier company is responsible for reporting progress and budgets to Innovation Norway while the project is in progress. The relationship between the client company and the supplier company is regulated by the IRD contract. Documentation in connection with Innovation Norway's application process includes: Project application – a document describing the actual IRD project. This document must contain key information Innovation Norway needs for processing the application. IRD contract (Cooperation agreement ) – a document regulating the relationship between the demanding client and the supplier company involved in the project. If the IRD contract is not complete at the time the application is submitted, as a minimum, there must be a letter of intent between the parties. The IRD contract must be accepted by Innovation Norway before any grants are offered to the supplier company. 8. Project Application The IRD contract is a binding cooperation agreement between the supplier company and the client company. Innovation Norway is not a party to IRD contracts. But the contract should include certain provisions which are necessary for Innovation Norway to grant funding to the project. Parties planning to enter into IRD contracts should clearly specify prerequisites, conditions and potential prior to commencing the project. In particular, issues relating to utilising results, rights of ownership, user rights and royalties must be clarified. There is an IRD contract template and guideline available to parties considering IRD project cooperation: Link: The template lists issues that need to be clarified prior to entering into IRD contracts. However, the list cannot cover all possible forms of cooperation and tasks within the project. It is up to the parties to draw up an agreement tailored to the project in question. Innovation Norway has the right to see the agreement/contract to ensure the objectives of the IRD program are fulfilled. 9. The IRD Contract

The IRD grant is calculated on the basis of the approved project cost of the supplier company. Innovation Norway, however, has a need for information about the total project cost, including the cost carried by the client company. Most IRD projects last for 1-3 years. In general, the projects must have sufficient financial resources to bring the project results to the market. Milestone financing is an option available to the applicant (supplier company). Innovation Norway is free to terminate or continue funding the project at each milestone. Each milestone should be fully financed before the project activities of the respective milestone start up. 10. Project Cost In general, a claim for disbursement of a grant from Innovation Norway must be based on the overall project accounts, which are also to be certified by the client company. Normally, the grant is disbursed in arrears in accordance with the project accounts, in line with project progress and in relation to the agreed milestones. A maximum of 90 per cent of the grant can be disbursed before the project is concluded and the final report is submitted. Under special circumstances and subject to approval, up to 30 per cent of the grant can be disbursed in advance. Further information in the Standard Terms and Conditions, confer appendix. The final report should contain a section about marketing and updated plans for launching the product or solution on the market. 12. Terms of Disbursement If the application for a grant is approved, Innovation Norway will impose certain standard terms and conditions when allocating the funds. Confer appendix. 13. Appendix - Standard Terms and Conditions for Grants (available on request) - IRD contract template Standard Terms and Conditions for Allocation of Grants