If you can t do it better, why do it? -- Herbert H. Dow

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1 Maximizing Return on R&D Investments t in Tough Economic Times A Large Company Perspective Dr. Susan Butts Sr. Director, External Science & Technology Programs The Dow Chemical Company Past President, University Industry Demonstration Partnership, National Academies

2 About Dow A science and technology leader with annual sales of $54 billion Founded in 1897 by Herbert H. Dow in Midland, Michigan Supplies plastics and chemical products to customers in 160 countries From 156 manufacturing sites in 37 countries Employs 46,000 people globally If you can t do it better, why do it? -- Herbert H. Dow 2

3 Topics Some R&D investment facts Does the investment pay off? Globalization b li What drives industry decisions Government-University-Industry partnerships: p challenges and opportunities June 25, 2009 NGA Best Practices - R&D Investment 3

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5 How Much Is Spent on R&D? Figures for 2006*: Funding / Performing World - ~$900B (estimated from 2002 data) US Only - $293B US-Located Companies (primarily from product sales) $192B / $209B US Federal Government (tax dollars) $81B / $32B All Other (U&C, non-profits, state & local government) $20B/$53B $53B US Universities (primarily from Federal Government) $8B / $40B *inflation adjusted 2000 dollars June 25, 2009 NGA Best Practices - R&D Investment 5

6 The Good News Investment in R&D produces a significant return for society and for business. June 25, 2009 NGA Best Practices - R&D Investment 6

7 Growth from Chemical Sciences R&D CCR $1 B/yr Federal R&D Funding In Chemical Sciences $5 B/yr $10 B/yr Chemical Growth in Industry Chemical R&D Industry Funding Operating Income* Basis: *estimated from CCR study **extrapolated from LANL study by Thayer, et al., April 2005 using REMI economic model $8 B/yr Growth in Taxes** 0.6 M New Jobs/yr** $40 B/yr GDP** Growth June 25, 2009 The Council for Chemical Research 7

8 The Bad News It takes more than a decade for the investment to pay off. June 25, 2009 NGA Best Practices - R&D Investment 8

9 CCR June 25, 2009 NGA Best Practices - R&D Investment 9

10 Factors that Drive Globalization Access to markets Availability of global communication tools easy to share information hard to keep information and product demand local Interdependence of national economies Energy costs, raw material costs, cost of transporting goods to market June 25, 2009 NGA Best Practices - R&D Investment 10

11 Factors that Drive Globalization Availability of skilled workforce for manufacturing products for knowledge generation high quality universities favorable IP terms for sponsored research Competitive labor costs New markets, growing demand Infrastructure t support Government supported incentives June 25, 2009 NGA Best Practices - R&D Investment 11

12 Over Arching Mission For Companies Maximize Long-Term Shareholder Return (stay in business) Invest to create most value through h making/selling products or services Balance short-term viability against long-term value Avoid destroying value June 25, 2009 NGA Best Practices - R&D Investment 12

13 Why and How Big Companies Do R&D Do R&D to create a competitive advantage in the market Try to place smart bets - invest R&D and capital dollars (manufacturing assets) on those technologies that have The best chance of success in the market The greatest return - sales volume/profit margin The winners have to cover the cost of the losers Competitive advantage also factors in where to do R&D and manufacturing June 25, 2009 NGA Best Practices - R&D Investment 13

14 Balancing Risk & Reward Minimize Risk Technical risk Financial risk Commercial risk Legal risk/liability Maximize Reward Competitive advantage Sales & profits Market position Product performance June 25, 2009 NGA Best Practices - R&D Investment 14

15 Comparison of High-Level University Mission: Create Public Benefit Missions i Company Mission: Maximize Long-Term Shareholder Return Educate citizens Create & disseminate knowledge Enable new products, services, jobs by technology transfer Protect safety and security and public assets Provide infrastructure and essential services Promote economic welfare Invest to create most value through producing products or services Balance short-term viability against long-term value Avoid destroying value Government Mission: Protect and Promote Welfare of Its Citizens June 25, 2009 NGA Best Practices - R&D Investment 15

16 How to Balance Missions Guiding Principle: A successful partnership should support the mission of each partner. A partnership in conflict with the mission of any partner will ultimately fail. Seek the common ground that can satisfy all three missions May need to define success or benefits more broadly Understand the risk, cost, and time required to commercialize technology June 25, 2009 NGA Best Practices - R&D Investment 16

17 Industry Challenges in Working with Universities iti and State t Governments Intellectual Property (IP) Issues Government funding for industry research often comes with onerous restrictions on company rights to IP University research agreements often limit the sponsor s access to IP and require additional payment for use of IP Timing and Flexibility Issues Industry makes decisions and takes actions very rapidly compared to governments or universities Location Issues State governments and universities want to restrict activities and benefits to the state or region Large companies may have many external R&D partnerships around the world June 25, 2009 NGA Best Practices - R&D Investment 17

18 Promoting Industry R&D Investments Set realistic expectations for licensing revenue for state universities Focus on benefits of research funding and of getting technology into the marketplace rather than on licensing dollars; right metrics Better IP terms for industry-sponsored sponsored research will attract more research funding More affordable technology licenses will increase industry interest in developing university inventions Support university-industry industry research partnerships for development of pre-competitive technology Promotes technology advancement for all relevant industries Creates centers of expertise within the state Capitalize on existing strengths in the universities rather than following the crowd for federal funding Provide financial incentives for company R&D/manufacturing investments in the state Provide direct funding for industrial research without IP strings Reduces cost/risk of technology development for the company Creates or preserves high-tech jobs in the state June 25, 2009 NGA Best Practices - R&D Investment 18

19 Supplemental Slides

20 US University Licensing Experience $200B Research $2M : 1 disclosure 100,000 disclosures (discoveries) Opportunity Assessment (Triage) Commercial potential Technical advantages Protectability Inventor profile? 50% $4M : 1 application $1.6B : 1 $1M license 0.13% 50,000 Patent Applications 25% 2.5% 125 > $1M 25,000 2,500 Licenses Start - ups $8M : 1 license Positive exit (liquidation) June 25, 2009 NGA Best Practices - R&D Investment 20

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26 Sponsored Research Funding Exceeds Licensing i Revenue 3,000 Sponsored earch ns of $) ndustry S Rese (Million In )2,500 2,000 1,500 1, ense Inco ome lions of $ Net Lic (Mill Source - AUTM Licensing i Survey, Fiscal Year 2004 June 25, 2009 NGA Best Practices - R&D Investment 26

27 R&D Investment Choices Trade offs in R&D investment decisions balancing upfront costs against potential returns Create new value (long term, high risk, high return) Discover and develop new products Preserve existing value (short term, low risk, moderate return) Extend or expand current products Avoid destroying value (long term, variable risk, negative return; also cost of not doing R&D) Loss of competition advantage Replacement or disruptive technology June 25, 2009 NGA Best Practices - R&D Investment 27

28 Typical Stage Gate Process for New Product Development Discovery Gate 1 Idea Screen Second Screen Di Driving i New Products to Market Go To Development Go To Testing Go to Launch Stage 1 Gate 2 Stage 2 Gate 3 Stage 3 Gate 4 Stage 4 Gate 5 Stage 5 Scoping Build Business Case Development Testing & Validation Launch Robert Cooper, Winning at New Products, Perseus Publishing, 3 rd Edition(2001), pg. 130 Post-Launch Review June 25, 2009 NGA Best Practices - R&D Investment 28

29 Why a Good Product May Fail Even if There is Market Demand Probability of Commercial Success Depends on Characteristics of New Product Lower Cost Marginal High Higher Cost Low Marginal Poorer Performance Better Performance June 25, 2009 NGA Best Practices - R&D Investment 29

30 Why Good Science May Not Successfully Commercialize Technology is not reproducible Technology does not scale up from lab to plant Cost or quality problems in manufacturing Insufficient market demand Consumers don t want/need the product Poor timing Poor path to market June 25, 2009 NGA Best Practices - R&D Investment 30

31 2003 Industry Survey Polled members of the External Technology Directors Network of the Industrial Research Institute t Question: Do you/your company agree with the following statements: A) IP issues are an impediment to working with US universities B) We sometimes choose to work with a foreign university (rather than aus university), esit and getting better IP terms is one of the reasons for doing this Responses: 100% agreed with statement A 50% agreed with statement B June 25, 2009 NGA Best Practices - R&D Investment 31

32 Foreign Universities Offer Better IP Terms to Research Sponsors US Universities 31% Foreign Universities 15% 69% 85% Sole university inventions assigned to Dow or owned jointly Sole university inventions solely owned by University June 25, 2009 NGA Best Practices - R&D Investment 32