We have made significant strides in all eight of these programmatic elements. Today we will focus on our Intellectual Property — how we manage it and how we are doing. By the end of this presentation I hope you will share my enthusiasm for the value of this enterprise to our tripartite mission.

Before continuing I would like to give you a sense of how we are organized and introduce to you the key players. I have already introduced Gary Weber to you. Gary, who came to us from PPG where he served as Senior Vice President for Science and Technology, heads up our team of professionals who work with businesses and industries in Pennsylvania, across our nation, and around the world.

Art Heim is Director of our Industrial Research Office. Art and his staff link companies with appropriate faculty and research centers. Currently, Penn State has master agreements with 14 major industrial partners, such as Air Products, Berg Electronics, Ford Motor Company, and Hershey Foods Corporation.

Dan Leri is Director of our Research Commercialization Office. Dan promotes the start up of new companies by helping faculty and staff secure funding from multiple sources of early stage capital, such as seed funding, angel investors, and venture capital funds, and identifies mentors and management team members.

Ron Huss is Director of our Intellectual Property Office, the IPO. Ron and his staff are responsible for the management of intellectual property, including the patents, trademarks, copyrights, and trade secrets.

Jack Gido is Director of PENNTAP, the Pennsylvania Technical Assistance Program, a state-related program with a network of technical specialists throughout the Commonwealth that provides free scientific and technological assistance to Pennsylvania’s smaller businesses to improve their competitiveness.

Donna Holmes is Director of the Small Business Development Center, part of a national network of more than 950 centers, 16 of which are based at colleges and universities in the Commonwealth. These centers provide guidance in obtaining SBA loans and in managing small businesses.

Vic Russo is Director of the Ben Franklin Technology Center of Central and Northern Pennsylvania, one of four regional centers of the Commonwealth’s Ben Franklin Partnerships. Ben Franklin provides financial support, technology and management experience, and ways to link public, private, and educational resources to help strengthen the high technology components of the state’s economy.

Karen Dickinson is the Director of Innovation Park at Penn State (formerly known as the Research Park). The success of Innovation Park is an integral part of our vision for technology transfer and development at Penn State as I will discuss later.

Penn State’s Intellectual Property Office the IPO, is comprised of a director, a number of technology licensing officers (TLOs) and associated staff support. We engage students at every level to assist in various aspects of the work of the office. Undergraduate students in the Eberly College of Science assist TLOs with technical assessments and evaluations of invention disclosures. The IPO has interns from the MBA program assisting with business issues associated with intellectual property management, including assessment of marketability of inventions. The IPO has had several Dickinson School of Law summer interns assist with analysis of legal agreements and inventorship, patent searches, assessment of patentability, and review of patent case law. One of the former interns, Livinia Jones, is now a registered patent attorney; she was hired by McQuaide Blasko and works closely with Mark Righter, our attorney of many years. This spring we are embarking on an interesting experiment. Four undergraduate students from the Department of English will intern in IPO during the spring and summer semesters. Don Bialostosky, the Head of the English Department, and Gary Weber conceived of the idea of utilizing English students skilled in parsing, reading and understanding complex literature to assist IPO staff in tracking key concepts through multiple drafts of complex and lengthy agreements, especially licenses. As we all know, there are many outlets for the talents of students in English and we hope to open the eyes of some of these students to a very interesting set of possibilities.

To understand how we manage intellectual property, we should say a word about the Penn State Research Foundation known as PSRF. PSRF, so named in 1992, is a subsidiary of The Corporation for Penn State. PSRF is responsible for managing our intellectual property portfolio, - overseeing the costs of protecting, litigating and maintaining patents. PSRF is also responsible for the distribution of royalties and other revenues associated with the inventions generated by our faculty and staff as you will see in details to follow. PSRF is governed by a board of up to 15 members.

Now, I would like to take you through the intellectual property process from the moment a faculty member is hired. One of the many forms that new faculty, staff, and graduate students sign when starting employment at Penn State is the "University Intellectual Property Agreement Form". This agreement assigns to the University all rights that may be acquired in inventions, discoveries, or rights of patent, which are conceived or first, actually reduced-to-practice using University facilities or resources or are in the field of expertise and/or within the scope of responsibilities covered by employment, appointment, and or association with the University.

It is the responsibility of the technology transfer arm of the Research Office to provide cradle to adulthood service to University personnel as they develop intellectual property. The first step in this process is the discovery that occurs during execution of a grant or contract. At this point University personnel are enjoined by the terms of the Intellectual Property Agreement to disclose to the University any intellectual property developed. To do this, an "Invention Disclosure" form is submitted to the IPO.

As shown in this slide (below), the number of invention disclosures has increased markedly in recent years; for the year 2000, 204 disclosures were received. I would like to present a brief description of a few of the discoveries that have reached the disclosure stage:

• "In situ delivery of ceramide analogues as a novel preventive therapy for restenosis" is a technology that uses a naturally occurring lipid to coat implantable devices, such as stents, thus, preventing reclosure of vessels after angioplasty. The inventor is Professor Mark Kestor in the Department of Pharmacology in our College of Medicine. A patent is now pending.
• "Wireless infrared multi-spot diffusing communications system", is an approach which uses infrared waves when radio frequency is not appropriate. As an example, this technology is being explored for use inside the Pittsburgh airport. The inventor is Professor Mohsen Kavehrad in the Department of Electrical Engineering.
• "High efficiency moving magnet loudspeaker" is a technology in which refrigeration uses sound waves rather than conventional electricity. A number of companies are looking at this technology for use in deli cases and with frozen foods. The inventor is Steven Garrett Senior Scientist at the Applied Research Laboratory and Professor of Acoustics. A patent is now pending.

Upon receipt of the disclosure form, the Intellectual Property Office screens the inventions and discoveries for patentability, commercial potential, and marketability. The IPO then attempts to find a licensee willing to underwrite both the cost of patent prosecution and any further research required to bring a concept to the stage of commercialization. The marketing process itself sets the value of the technology.

As you see in this slide (below), PSRFs licensing revenue seems to have fallen drastically when compared to 1999. Our 1999 revenues were exceptionally high due to the liquidation of $1.4-million in stock. If you remove the stock liquidation from the 1999 figure, the licensing revenues for 2000 were up by about nine percent. As you will see in the discussion to follow, we currently hold equity in several companies that have licensed our technology. Thus, in the future we again will realize significant leaps forward in licensing revenues.

In the best case, the technology is licensed to a large or small company and that entity will take on the fiscal responsibility of patenting the intellectual property. Alternatively, we may elect to patent the intellectual property ourselves, if we believe that the technology has great commercial potential and a licensee is not immediately apparent. In cases where commercial potential has not been identified through these processes, we ask Research Corporation Technologies in Arizona to try and find a company interested in licensing the technology. If no licensee is found, we attempt to get funding agency approval to return the technology to the inventor, enabling the inventor to pursue the technology using his or her own personal resources.

If the University’s decision is to patent, a provisional patent application is filed and a $75 fee is paid, giving Penn State full U.S. and international patent protection for one year. Conversion of the provisional patent application to a full U.S. patent application costs on average $16,500 and takes 2-3 years to complete, but the invention is protected throughout this process. If a licensee is found for the invention, every effort is made to have the licensee pay or reimburse the University for patent expenses. For the year 2000, the IPO filed 178 U.S. provisional patent applications, and filed 102 full U.S. patent applications. During 2000, 44 U.S. patents were issued to Penn State bringing our total issued patents to 223.

Within 30 months from the time the provisional patent application is filed, the decision must be made whether or not to obtain foreign patent protection and, if so, in which countries. The University only files for foreign patent rights if the licensee is willing to pay the costs associated with this process - which can cost $50-$100,000 - with filings usually taking place in Europe, Canada, and Japan. Some countries, particularly in the developing world, do not honor patents.

At the time that technology is patented, $1,000 is provided by PSRF to the inventor or inventors. This is an ideal time to determine the distribution pattern, as it is a lot easier for inventors to agree on distribution of $1,000 than $100,000. When royalties are distributed or equity liquidated, all the expenses incurred by PSRF are reimbursed. Once reimbursements have been honored, PSRF retains 40% of the remainer, and disburses 40% to the inventor or inventors, and 20% to the administrative unit of origin.

Let’s take a look at a few examples of our top royalty producing technologies:

• "Transformed stress direction acoustic transducer", was invented by Drs. Robert Newnham, Shoko Yoshikawa, and Qi Chang Xu, and licensed to Input/Output, Inc. This invention is a compact, highly reliable transducer, capable of functioning in hostile environments such as those found in arenas including: under water petroleum exploration detectors, fish finders, optical scanner units, and ink jet printers. To date, PSRF has received just over $395,500 in revenue.

• The "Bending beam creep test device" invented by Dr. David Anderson and his colleagues in the Pennsylvania Transportation Institute and College of Engineering, and licensed to Cannon Instrument Company, is a unit used to measure the flow properties of asphalt cement. This invention has produced $237,000 in revenues.

• "Pelletized mulch" invented by George Hamilton in the College of Agricultural Sciences, and licensed to Lebanon Chemical Company is sold under the name "PennMulch". This product, made from shredded newsprint or other recycled paper, is used to cover newly seeded turfgrass on golf courses, home lawns, sports fields and other turf areas. To date, this invention has produced $212,000 in revenues.

• "Microwave Sintering of Tungsten Carbide" is a technology based on a series of patented inventions by Rustum Roy, Dinesh Agrawal, Jiping Chang, Mahlon Dennis, and Paul Gigil of the Materials Reserach Laboratory and licensed to Dennis Tool Company. This technology uses microwaves rather than traditional heating techniques to create superhard materials for machining and wearing surfaces. To date, PSRF has received $105,000 in revenues.

Historically two of our most successful patents come from the College of Agricultural Sciences:

• Our top revenue-producer to date is the "delayed release mushroom nutrient", invented by Professor Lee Schisler and his graduate student, David Carroll and licensed to Spawnmate, Inc. This discovery enhanced the growth of mushrooms and provided PSRF with $2.7-million in revenue. Both the patent and the license have expired.

• "Creeping bentgrass" was discovered by Professor Joseph Duich and licensed to the Penncross Bentgrass Association. The development of turfgrass varieties, of which the "first varieties" produced revenues amounting to over $2.3-million. The "second varieties" have been added and have produced $110,000 in revenues to date.

Licensing decisions are dictated by the University’s obligation to transfer technology in a way that benefits society. This necessitates that licensees have resources to successfully commercialize the technologies in question. Where these conditions are met, the University may agree to accept an equity position in a company in lieu of a licensing fee and/or sales-based royalty arrangement.

I would like to take a few minutes to discuss with you three inventions, or sets of inventions for which we have accepted equity in lieu of royalties.

Last year during our presentation on Research we talked about the establishment of EIEICO, a company launched by private investors. The company began with an initial investment of $3 million; PSRF received 22% equity in the company. Three agricultural technologies, one a genetic marker for boar taint (the unpleasant odor associated with pigs), the second a technology dealing with artificial insemination of ruminants, and the third a poultry feed supplement, were bundled together to form this start up company located in Centre County. Since the contract was signed two exclusive sublicensing agreements have been signed with large agricultural industries, a $365,702 research contract has been executed with the University allowing for employment of a postdoctoral fellow in the College of Agricultural Sciences, and a research laboratory has been established at Zetachron, one of our incubators.

Chiral Quest LLC. is a company based on technologies developed by Professor Xumu Zhang of the Department of Chemistry. A word about the technology; many compounds are synthesized and although the product is pure chemically, the product may have different configurations. Often only one configuration will be effective for a designated purpose, for example, as a pharmaceutical; and in the worse case scenario other configurations may be toxic. Dr. Zhang has developed families of catalysts capable of "locking" chemicals into a single, desired configuration. Eight catalyst families consisting of 13 invention disclosures and multiple patent applications have recently been licensed to Chiral Quest LLC, a start-up company organized by Technology Assessment and Development, Inc., a State College company. PSRF will receive ten percent equity in Chiral Quest for the licensing rights. Development of the technologies will continue both in Professor Zhang’s laboratory within the University and in Chiral Quest’s laboratory in the Zetachron building. It is Chiral Quest’s intention to license this Penn State technology widely throughout the pharmaceutical and possibly agricultural and chemical industries.

Another example is the artificial heart developed at Hershey Medical Center. William Pierce, Emeritus Evan Pugh Professor of Surgery, Gerson Rosenberg, Professor of Surgery and Chief of the Division of Artificial Organs, and their team developed a total artificial heart that can be implanted in the space created by removal of the patient’s heart. The system also uses an implanted controller and energy transmission system. This invention stems from a 25-year-old research activity at Penn State funded for many years by NIH. Because this technology is now so advanced, NIH will no longer continue to support development of this device. Fortunately, an industrial partner and recognized leader in the field, ABIOMED, was identified to help Penn State researchers continue their work as they move toward clinical trials of the device. ABIOMED will have exclusive rights to the Penn State Heart and will have access to future advances in related implantable replacement heart technology. The terms of the transaction consisted of payment to PSRF by ABIOMED of 60,000 shares of common stock currently worth about $1.3 million.

As we construct for you our long-term vision for Tech Transfer at Penn State, we should say a word about Innovation Park. As you know, the Park was established 13 years ago to serve a variety of functions. As we now enter the 21st Century in earnest, we are planning for the full development of the Park. We see Innovation Park as the location for incubators that will house our start up technologies. We see these fledgling companies graduating from our incubator to fully contained companies in more mature space with some of these companies eventually emerging in freestanding buildings at the Park. In keeping with our developing concept of the Park, we are in the process of engaging a new developer who will assist with the completion of the remaining acreage.

Having provided you with a perspective on what we have accomplished and where we are going, I would now like to put our position into a national context. Looking at the 1999 data, within the CIC we rank 7th in licensing income and 5th in terms of patents issued. At a national level we rank 40th in licensing income and 16th in terms of patents issued. It is important to recognize that our position is a reflection of several points. First, and most importantly, Penn State became engaged in this game in earnest in the mid-1980s. The University of Wisconsin began in 1929 with the discovery of Warfarin, a well-known pesticide, and today a component in a frequently prescribed blood thinner. Of course, great success can come from hitting the "big one". Florida State University, which is not amongst the top tier research institutions, is ranked number 3 in licensing revenue because of one 5-letter word "TAXOL". A successful technology transfer activity cannot bank on hitting the big one, but rather must make a concerted effort to disclose, license and patent a broad range of promising technologies. The differential between our ranking in licensing income (40th) and patents issued (16th) in 1999, speaks to the aggressive approach we are taking to this enterprise, and gives us every reason to predict increased success in the next several years.

A final question then, is how will the University benefit from a successful Tech Transfer enterprise? If we look at The University of Wisconsin, we can see that their foundation with its $1 billion endowment got its start over 70 years ago and has been fueled by many successes starting with the discovery of lWarfarin as I have already said, and synthetic vitamin D. The royalties from those first discoveries, and others since that time have generated the endowment, which is now being used to seed research and fund graduate education. This certainly is our long-term goal as well.

But we find ourselves in a "catch 22". Before faculty can even secure the grants to conduct the research that will lead to the discoveries we have talked about this morning, they often need some seed money to obtain preliminary data necessary in this competitive environment. And once the key discoveries have been made, federal funding agencies often are no longer willing to support the research; however, the technology is not fully developed and so a gap is created because companies are not yet willing to invest. In a mature Technology Transfer program, such as we can see in the example at the University of Wisconsin, the funds provided by the royalties, licensing fees and sale of equity provide this seed and gap funding. Given our late arrival in this arena, we are not yet at that point. To help jump start the system, we have initiated a development project to raise funds for Research and Technology Development. Time does not permit me to go into detail describing how we plan to utilize these funds once the money is raised; but this summary slide helps me show you the three steps, (1) research, (2) technology development, and (3) commercialization, that comprise the complete activity, and to suggest to you that we look to a melding of endowed and nonendowed funds, met later in the evolution of the intellectual property by investment funds to lead to the economic success of our technology. Over time, the commercial success will lead to increased resources for reinvestment in these funds.

I will end, where I began by suggesting to you that the fruits of our labors will lead to support for research and education, economic development in the Commonwealth, and intrinsic value achieved by the realization of the types of technology we discussed with you today.

Thank you