Buying Commercial R&D Frederic Quan 22 April 2002 Frederic Quan 22 April 2002

Technology Contracts Business 3 Commercial Need for R&D Derived from high technology business model –Many industries successfully used –Widely taught in business schools high profitability business use technology as product differentiation forward pricing to build volume use technology to come down the learning curve high reinvestment in R&D to maintain lead Need technology from R&D to lock out competitors Derived from high technology business model –Many industries successfully used –Widely taught in business schools high profitability business use technology as product differentiation forward pricing to build volume use technology to come down the learning curve high reinvestment in R&D to maintain lead Need technology from R&D to lock out competitors

Technology Contracts Business 4 Graphical Illustration of Business Model $ Dollars $ Volume - Number of Units Cost Curve CompetitorsLeader Loss Pc Cerceuvir Profit

Technology Contracts Business 5 Maintaining Competitive Advantage Need to be technically superior –Must meet customer needs better than anyone else Be the high volume supplier –To insure the highest profitability High reinvestment in R&D required –to produce proprietary technology –to maintain profitability and market position Conclusion: Need to do what no one else can Need to be technically superior –Must meet customer needs better than anyone else Be the high volume supplier –To insure the highest profitability High reinvestment in R&D required –to produce proprietary technology –to maintain profitability and market position Conclusion: Need to do what no one else can

Technology Contracts Business 6 Technology Advantage is Paramount Must have to succeed Survival of business enterprise dependent on it –Almost akin to DoD’s need for technical superiority –Purchase of needed R&D or technology is IMPORTANT! Market need to be the only supplier –Proprietary technology limits competition Must have to succeed Survival of business enterprise dependent on it –Almost akin to DoD’s need for technical superiority –Purchase of needed R&D or technology is IMPORTANT! Market need to be the only supplier –Proprietary technology limits competition

Technology Contracts Business 7 How Do We Buy Technology? Very CAREFULLY to preserve market Sources - Internal Research & Development Academia Government Labs Other Businesses Need to be able to “lock-up” technology –How best can we do that? Very CAREFULLY to preserve market Sources - Internal Research & Development Academia Government Labs Other Businesses Need to be able to “lock-up” technology –How best can we do that?

Technology Contracts Business 8 Discussion So Far Technology very important to business model Need to keep technology proprietary –Prefer research to be confidential Needs to be cost effective –Many competing sources for technology Technology very important to business model Need to keep technology proprietary –Prefer research to be confidential Needs to be cost effective –Many competing sources for technology

Technology Contracts Business 9 Business R&D Model Perceived valuation can vary greatly –Working out may take time Need trust factor among parties Is it a win-win for both parties? –Deals can vary greatly straight sale to buying company? –Not limited to cash transactions Need to be careful of antitrust & competitiveness regulations Perceived valuation can vary greatly –Working out may take time Need trust factor among parties Is it a win-win for both parties? –Deals can vary greatly straight sale to buying company? –Not limited to cash transactions Need to be careful of antitrust & competitiveness regulations

Technology Contracts Business 10 Academic Business Model No change to existing academic behavior –Freedom to publish anything –Do what they want to do, when they want to do it Industry pays for research –University owns resultant IP from Bayh Dole –University gets royalties from industry using IP Conclusion - expensive danger of publicity can it be truly proprietary? No change to existing academic behavior –Freedom to publish anything –Do what they want to do, when they want to do it Industry pays for research –University owns resultant IP from Bayh Dole –University gets royalties from industry using IP Conclusion - expensive danger of publicity can it be truly proprietary?

Technology Contracts Business 11 Government R&D Model Public owns everything –Anyone can access, everything is available –Unsaid: Trying to profit from public research is bad, we need to share CRADA’s are favored contractual instruments –U.S. Competitiveness Clause –Technology becomes public after 5 years background technology also Government labs are totally ignorant about profitability –Most workers are proud they haven’t a clue Industry Fear: Heaven help us if we stumble across anything of economic significance Public owns everything –Anyone can access, everything is available –Unsaid: Trying to profit from public research is bad, we need to share CRADA’s are favored contractual instruments –U.S. Competitiveness Clause –Technology becomes public after 5 years background technology also Government labs are totally ignorant about profitability –Most workers are proud they haven’t a clue Industry Fear: Heaven help us if we stumble across anything of economic significance

Technology Contracts Business 12 Government R&D Model (continued) Take government money to do research –Contract types Federal Acquisition Regulations –fixed price –cost plus –many cost based variations –Other Transactions (most appealing type for commercial companies) Usual Problem areas - CAS Audit IP difficulties Export restrictions Take government money to do research –Contract types Federal Acquisition Regulations –fixed price –cost plus –many cost based variations –Other Transactions (most appealing type for commercial companies) Usual Problem areas - CAS Audit IP difficulties Export restrictions

Technology Contracts Business 13 Problem Areas Can you use IP generated on project? –Reduction to practice rule Export restrictions Difficult to maintain trade secrets Long term supply agreements to primes Lack of enforceable non-disclosure agreements Really high margins are frowned upon –Competitors can protest in court Can you use IP generated on project? –Reduction to practice rule Export restrictions Difficult to maintain trade secrets Long term supply agreements to primes Lack of enforceable non-disclosure agreements Really high margins are frowned upon –Competitors can protest in court

Technology Contracts Business 14 Conclusions Government and academic sources problematic –Due to regulations and publicity difficult to extract high profitability –Only use for marginal projects or to augment core competencies Internal R&D may be the best option –Justify sourcing outside Government and academic sources problematic –Due to regulations and publicity difficult to extract high profitability –Only use for marginal projects or to augment core competencies Internal R&D may be the best option –Justify sourcing outside