intellectual property and innovation in health care in wales · 2.3the research governance...

Intellectual Property and Innovation in

Health Care in Wales

A Framework and Guidance on the Management of Intellectual Property in the NHS in Wales

February 2005

FRAMEWORK AND GUIDANCE ON THE MANAGEMENT OF INTELLECTUAL PROPERTY IN THE NHS IN WALES

NHS Wales IP Guidance i

Foreword

1. This document, which is based on the ‘Framework and Guidance on the Management of Intellectual Property in the NHS’ published by the Department of Health in 2002, sets out a framework and guidance for the management and exploitation of Intellectual Property (IP) in the NHS in Wales.

2. This paper is principally for senior staff of NHS Trusts, Local Health Boards and the National Public Health Service, including Chief Executives, Directors of Research and Development, Finance, Clinical Operations and Human Resources. It is also important for Independent Providers of NHS Services.

3. It is recognised that NHS bodies do not generally have the in-house capacity to identify and manage the commercial exploitation of IP, and developing such skills may not be cost-effective. The Welsh Assembly Government has set in place a procurement process to provide a NHS IP service in Wales. This IP service will be set up in early 2005 with the purpose of providing advice to NHS bodies and maximising the commercial exploitation of IP.

4. The primary purpose of exploiting IP and innovation is to improve the delivery of healthcare within the NHS in Wales; the secondary purpose is to generate income available to help support NHS bodies.

5. By virtue of the Directions issued by the Assembly in October 2003 under section 7(3) of the Health and Medicines Act 1988, LHBs and NHS Trusts in Wales have been conferred the income generation powers set out in section 7(2) and (7A) of that Act. The Directions empower those bodies to set up companies for the purposes of exploiting IP (“spin out companies”) or to invest in such companies. This document contains information about the types of spin out companies that can be set up as well as a list of issues to consider.

6. This Framework and Guidance is advisory and should not be seen as a substitute to seeking appropriate professional advice.


NHS Wales IP Guidance ii

Contents

Foreword iContents iiDefinitions iii

1. Purpose and Scope 1

2. Managing Intellectual Property 2Commercial exploitation 4The appointment and role of the IP Service 4Commercial exploitation agreements 6IP arising from research involving patients or healthy human volunteers 6Licensing agreements 8Companies as vehicles for exploiting NHS IP 8Income arising from the commercial exploitation of IP 8Accounting for income, expenditure and losses 10Audit of spinout companies 11

3. ‘Statement of Collaboration’ on Intellectual Property 11Research collaboration with Higher Education Institutions in Wales 12Collaboration agreements to exploit IP 13

4. Employment Guidance 14General Principles 15Ownership of IP 15Copyright 17Jointly appointed or managed staff 18

AppendicesAppendix 1: Negotiating a Licence Agreement 22Appendix 2: Setting up a spinout company 23Appendix 2A: Setting up a spinout company - CHECKLIST 34Appendix 3: Directions relating to the Exercise of Power under Section 7(2)

of the Health and Medicine Act 198836


NHS Wales IP Guidance iii

Definitions

In this Framework Document the following terms shall have the following meanings:-

1977 Act means the Patents Act 1977;

1988 Act means the Health and Medicines Act 1988;

1998 HSC means HSC 1998/106 issued by the Department of Health

entitled “The Management of Intellectual Property and

Related Matters – An Introductory Handbook for R&D

Managers and Advisers in NHS Trusts and Independent

Providers of NHS Services”;

2001 Act means the Health and Social Care Act 2001;

IP Service means the All Wales NHS Service for the Exploitation of

Intellectual Property and Innovation;

Assembly means the National Assembly for Wales;

Directions means the Directions issued by the Assembly to NHS Trusts

and Local Health Boards in Wales under section 7 of the 1988

Act on 14 October 2003;

IP means intellectual property.


NHS Wales IP Guidance 1

1 Purpose and Scope

1.1 Intellectual Property (IP) means products of creativity or innovation which can be

given legal recognition of ownership as Intellectual Property Rights through, for

example, patents, trademarks or copyrights. This document sets out a

framework for the management and exploitation of IP for the benefit of patients

and for the purposes of income generation in the NHS in Wales. This framework

and guidance applies to:

- NHS trusts in Wales

- Local Health Boards

- NHS Wales Service Providers (e.g. general practitioners, dentists) who

provide services in Wales under arrangements with Local Health Boards.

1.2 This framework and guidance is effective from December 2004 and is intended to

support the Directions. The advice outlined in this Guidance is NOT a

substitute for seeking appropriate legal advice.

1.3 The purpose for the exploitation of IP arising from NHS activities is to generate

income to support the improvement of health and healthcare delivery. It will not

always be the case that the exploitation of IP by means of maximising income is

the best option. There will always be other strategic priorities to consider such as

sharing the IP to improve health/healthcare delivery for the maximum number of

patients and provide savings to Welsh NHS bodies.

1.4 NHS bodies generally do not have the in-house skills to identify and manage the

commercial exploitation of IP and in the vast majority of cases it will not be cost-

effective to develop these complex skills in-house. Therefore, the IP Service will

be provided and will operate through a network partnership between Welsh NHS

bodies, the academic sector and the commercial sector, providing advice at the

centre and promoting interaction on the exploitation of IP and innovation at the

periphery.

1.5 Innovation occurs naturally in the NHS through the work of its employees,

through the delivery or the management of patient care, in the education or

training of employees or through Research and Development (R&D)

programmes. Examples of innovation include a novel treatment, a new



diagnostic, a new device, a new drug or the new use of a drug, use of data,

software, training material, a treatment protocol, or a new management system.

1.6 This framework will have direct relevance to all NHS employees and in particular

to all NHS employees engaged in clinical and non-clinical research either funded

through the NHS or undertaken in collaboration with others such as research

charities and the academic sector.

1.7 The framework sets out the responsibilities of NHS employees and the IP Service

in relation to the cost-effective exploitation of IP, including raising awareness of

and training in the management of IP and Innovation.

2 Managing Intellectual Property

2.1 The 1998 HSC Framework remains in operation with the following additions:

- IP generated by a NHS body from activity that lies outside R&D is now

included within the management structure as outlined in the 1998 HSC;

- With effect from 1st April 2003, Local Health Boards, in place of Health

Authorities, have entered into arrangements with Service Providers for the

provision of health care. There will be implications for the way Providers treat

IP arising from their activity;

- LHBs and NHS Trusts may now set up companies to exploit IP subject to the

Directions.

2.2 Since 1998, NHS bodies have had the power to exploit IP in order to generate

income to improve the delivery of healthcare. The 1998 Policy Framework for IP

generated from R&D allowed this income to be retained by the NHS body which

created the IP and to share the income with those responsible i.e. the inventors.

The remit has been extended to include IP generated outside of R&D within the

same IP management framework.

2.3 The Research Governance Framework for Health and Social Care in Wales –

November 2001, refers to the potential for the commercial development for some

advances in health and social care. Successful commercial development

depends on the protection of IP and commercial confidentiality. It is essential that

clear guidance is given to staff, researchers, research funders, care



organisations, university and commercial partners and agreements put in place to

clarify and agree the ownership, exploitation, and income arising from IP

generated by research conducted by NHS employees, including research

undertaken by them in collaboration with others.

2.4 There is no formal responsibility on NHS bodies to capture data on IP associated

with patient care through clinical audit. However, it is anticipated that NHS

bodies and their employees who generate the innovation would wish to bring it

into the same IP management framework as for R&D within the NHS.

2.5 It is intended that the IP Service for the NHS in Wales will harness and build on

existing collaborations, commercial development expertise and good practice

that exist within the academic and healthcare sectors across Wales. However, it

is important that a lead person in each NHS body is identified as first point of

contact to provide initial advice to NHS employees, including those who hold

honorary contracts, on IP and its potential for exploitation.

2.6 The primary purpose of exploiting IP and innovation is to improve the

health/healthcare delivery within the NHS in Wales; the secondary purpose is to

make more income available to support NHS bodies. There will be cases where

the exploitation of IP with the purpose of maximising income is the best option,

but there will also be other strategic priorities to consider such as sharing the IP

to improve health/healthcare delivery for the maximum number of patients and

providing savings to the NHS as a whole. It would be inappropriate to discard IP

because the financial return is small if that IP would improve the health or

healthcare delivery to patients in Wales and beyond. The remit of the IP Service

will include the evaluation and dissemination of IP, linking with the Assembly’s

Innovations in Care team to disseminate ‘best practice’ across the NHS, and the

commercial exploitation of IP for income generation. All the elements of NHS IP

should form an integral part of any commercial exploitation strategy in particular

the exploitation of IP that may not necessarily be associated with financial gain.



2.7 The aim is to capture and exploit innovation in line with the Assembly’s strategy1,

to improve health and healthcare delivery, for the benefit of the Welsh economy

and in particular to encourage in-ward investment into Wales. Since the issue of

the Directions by the Assembly under section 7 of the 1988 Act, NHS Trusts and

LHBs may use spinout companies to exploit IP. These will normally be in the form

of a Small and Medium Enterprise (SME) who in turn will be able to access other

funding opportunities (e.g. Welsh Development Agency programmes), designed

to promote the Welsh economy and support small businesses.

2.8 The 1998 HSC applies to NHS Trusts and Independent Providers of NHS

Services. Independent Providers of NHS Services are persons providing primary

and general services under the National Health Service Act 1977.

2.9 Independent Providers will provide NHS Services under arrangements with a

Local Health Board (LHB), if it is likely that the LHB will be in a better position to

exploit IP. If the Independent Provider agrees to the transfer of ownership to the

LHB then the requirement to share benefit with the Assembly will be waived. The

LHB will take ownership of the IP and be responsible for the exploitation.

Commercial exploitation

The Appointment and Role of the IP Service

2.10 NHS bodies generally will not have the in-house skills to identify and manage

the commercialisation of IP. In the vast majority of cases it will not be cost-

effective to develop these complex skills in-house. The IP Service will operate

through a network of partnerships between NHS bodies, the academic sector and

the commercial sector providing advice at the centre and promoting interaction on

the exploitation of IP at the periphery.

2.11 In the event that a NHS body wishes to obtain advice from any organisation

or body other than the IP Service, that body will need to take account of

1 ‘The NHS Plan 2000’ A Plan for Investment A Plan for Reform; ‘Excellence and Opportunity’

A science and innovation policy for the 21st Century; ‘The Government’s response to the Baker Report – ‘Creating Knowledge, Creating Wealth’ Realising the economic potential of Public Sector Research Establishments



procurement legislation and value for money policy. In some instances, it may be

necessary to conduct a competitive tender depending on the value of the

contract. Procurement should be in line with Public Services Contracts

Regulations 1993.

2.12 The IP Service has three main aims:

- to raise awareness of the importance of IP;

- to ensure the evaluation and dissemination of IP with low income potential

but of benefit to health/healthcare delivery;

- to identify the most cost-effective route of the commercial exploitation of IP in

the NHS in Wales.

2.13 The IP Service will have a strategic IP role and will assist NHS bodies in

training and awareness raising. In addition will provide guidance on the following:

- development of management protocols for the exploitation of IP;

- the development of collaboration agreements with academic and

commercial organisations;

- an assessment of risk, including the costs of exploiting the IP;

- the benefits to the NHS (both tangible and intangible) of exploiting the IP;

- the projected financial return of the IP;

- commercial funding opportunities, including the potential for engaging in

contract research and the provision of consultancy services;

- the process to spinout a company, including advice on the content of the

business case prior to submission to the Assembly for authorisation under

the Directions.

2.14 The IP Service will develop and oversee the implementation of a core training

programme to raise the awareness of the potential for exploitation of IP. The

programme will be delivered in partnership with local providers in liaison with the

NHS lead person who has designated responsibility for the exploitation of IP.

Training costs will normally be met by the NHS body commissioning the training.

2.15 A Welsh NHS body acting independently and not in a collaboration

agreement will be expected to meet the full costs of the identification of IP, initial

patent protection and exploitation. NHS bodies involved in collaboration

agreements will negotiate with their partner organisations the share of costs



associated with the commercial exploitation of IP. The IP Service will issue

guidance on proposed formulas of shared cost.

Commercial Exploitation Agreements

2.16 The main ways of obtaining income from the exploitation of IP are listed below:

licensing or assigning the IP to an existing commercial company in return for

fees and royalties;

licensing or assigning the IP to a newly-formed spinout company set up

specifically to exploit the IP in return for fees, royalties and equity.

2.17 The chosen method of exploitation must have demonstrable benefits to the

NHS. The decision-making process must be transparent and defensible and

clearly indicate that a full risk assessment has been undertaken.

2.18 Collaboration agreements, involving other organisations such as universities

and commercial partners, must not prejudice future research and training

activities in the subject area of the IP. For example an agreement needs to allow

the NHS body to retain the right to use the IP for NHS internal research and

training purposes.

2.19 The IP Service will issue guidance on collaboration agreements, which will

clearly define and agree IP ownership and IP management issues well before

the commercial exploitation agreement is finalised.

IP arising from research involving patients or healthy human volunteers

2.20 Human tissue and biological samples may be obtained by NHS employees

during the course of their duties in delivering healthcare or whilst involved in

NHS R&D. Patients should always be informed when material left over following

diagnosis or treatment (described as surplus to clinical requirements) might be

used in research projects. Fully informed explicit consent must be obtained if it

is anticipated that such samples might be used in research, whether immediately

or in the future. In the event that samples, subject to fully informed explicit



consent, are transferred to a university for further research, it may be appropriate

to negotiate a NHS share in benefit derived from subsequent exploitation. All

research involving patients or healthy human volunteers is subject to ethical

approval being granted. If there is any doubt when dealing with human tissue or

biological samples, advice should be sought from the relevant Ethics Committee

or nominated representative.

2.21 Consideration may be given to the transfer of human tissue and biological

samples to a third party, either to carry out research (in its own right or on behalf

of a NHS body) or to enable the third party to evaluate the materials for possible

licensing arrangements. The transfer of materials, which are dependent on

written consents being obtained, will be subject to the terms of a Materials

Transfer Agreement, which must be completed prior to the transfer of materials.

The IP Service will issue guidance on the content of a Materials Transfer

Agreement and also work in collaboration with Local and Multi-Centre Research

Ethics Committees.

2.22 It is important that patients acting as participants in a research programme are

made aware of the potential benefits of allowing commercial access to IP arising

from research material which may provide significant benefit to health both within

and outside of Wales. It is also important that the role of an individual’s sample in

the generation of future profits is likely to be minimal as well as impossible to

quantify. Therefore, the patient or healthy human volunteer will not be entitled to

a share in any profits arising.

2.23 Patenting of inventions based on, or using, biological material of human origin is

covered by section 76A of and Schedule A2 to the Patents Act 1977

(implementing in part the EU Directive on the Legal Protection of

Biotechnological Inventions (EC 1998/44)). To comply with the law, a person

from whose body the material used for an invention is taken must have had an

opportunity of expressing free and informed consent. This should be borne in

mind when there is a possibility that human material collected for research may

be used directly in making a biotechnology product. For example, if a cell line is

to be made and used for commercial purposes, the donor must be consulted and

consent obtained.2

2 MRC Ethics Series – ‘Human Tissue and Biological Samples for use in research’



2.24 It is important to note that the Human Tissue Bill and other EU Directives such

as the EU Directive Tissues and Cells Directive may impact on this area.

Guidance will be issued by the Assembly on all new legislation in this area.

Licensing Agreements

2.25 A licence agreement is a low risk way of exploiting IP. Consideration should be

given to the negotiation of preferential benefits for the NHS i.e. such as

preferential terms of sale and terms that are likely to give patients in developing

countries access to products at a reasonable cost. The IP Service will issue

guidance on negotiating a licence agreement. A checklist of points to note prior

to entering into a licensing agreement is attached as Appendix 1.

Companies as Vehicles for Exploiting NHS IP

2.26 By virtue of section 7(7A) of the 1988 Act and the Directions, the Assembly is

empowered, through the Minister of Health and Social Services, to authorise

NHS bodies to form or participate in the formation of companies and to invest in

companies for income generation purposes. In particular, NHS bodies may be

authorised to participate fully in companies established to exploit NHS IP

including acquiring shares. Authorisation will be dependent on a business case

approved by the Welsh Assembly Government’s NHS Finance Division. The IP

Service will issue guidance on the development of a robust business case and

work with NHS bodies to develop individual business cases prior to submission

to the Assembly for authorisation in line with the Directions. Appendix 2 outlines

the process for setting up a spinout company.

Income arising from the Commercial Exploitation of IP

2.27 Income from the successful commercial exploitation of IP, either through the

sale or licensing of IP, or through the dividends or sale of shares, will normally

be received by the NHS body, which is the owner of the IP.

2.28 There is generally no legal requirement for a NHS body to share the income

with an employee inventor who created the IP in the course of employment or



normal duties, unless the employee’s contract of employment specifies this.

However, it is advised that sharing the income with the inventor will provide an

incentive to employees to support the exploitation of IP.

2.29 NHS bodies should agree their reward policies and make them known within

their organisations. The Introductory Handbook3 indicates that it is usual practice

to give the inventor a share of approximately one third of the residual income.

The reward policy relevant to inventors who hold shares in spinout companies

will be agreed when those companies are established through appropriate

shareholder agreements.

2.30 However, section 40 of the Patents Act 1977 provides that an employee whose

invention belongs to an employer and in respect of which a patent has been

granted may apply to the High Court, or the Patents County Court of the

Comptroller-General of Patents, Designs and Trade Marks for compensation if

the patent proves to be of ‘outstanding benefit’ to the employer.

2.31 Where income is derived from collaborative R&D with universities, NHS bodies

should ensure that the NHS reward policy is similar to that of the employees in

the collaborating university. It is advisable to agree ownership, exploitation and

the reward policy at the initial ‘agreement to collaborate’ stage.

2.32 When IP arises from NHS/university collaborative work normally employees of

both organisations will have contributed to the IP. In that case, it may be decided

that the university is best placed to manage the IP and its exploitation. If this is

the case the university should ensure that the patent/legal expenditure is

recovered prior to the distribution of the residual income in line with the agreed

reward policy.

2.33 There are also circumstances where NHS bodies may collaborate with the

private sector. In such circumstances the parties should enter into a

collaboration agreement, making specific provisions which deal with such

matters as the ownership of IP, the exploitation of the IP and the sharing of any

revenue generated by such IP. Additionally, such issues as the licensing of any

3 ‘The Management of Intellectual Property and Related Matters: an Introduction Handbook for R&D Managers and Advisers in NHS Trusts and Independent Providers of NHS Services’



IP will need to be considered and appropriate professional advice should be

sought in negotiating and drafting the collaboration agreement.

Accounting for Income, Expenditure and Losses

2.34 NHS bodies are able to retain residual income less the amount distributed to

their employees subject to the provisions outlined earlier in this guidance. It is

normal practice to reward in some way the unit that generated the IP with the

remaining surplus used generally to improve health care provision. This can

include further investment in IP. All relevant IP-related income, expenditure and

surplus or deficit should be disclosed separately in annual accounts.

Memorandum trading accounts for IP activity should be maintained, as these will

be required to support the retention of surplus funds.

2.35 Due to the different financial regimes operating for Trusts and LHBs, any

NHS body likely to have an interest in a spinout company should contact the

Assembly’s NHS Finance Division to discuss the details of the investment.

2.36 The manual for Accounts for NHS Trusts and LHBs will be re-drafted to

include guidance on accounting treatment for fixed asset investments. This will

result in investments in spinout companies limited by shares being accounted for

as a fixed asset investment in the balance sheet with any income from shares in

undertakings in which the NHS body has a participating interest being disclosed

as a separate line in the Income & Expenditure Account for Trusts or the

Operating Cost Statement for LHBs.

2.37 Where the IP has been assigned to an outside company in return for a royalty

payment or licensing fees, and not as equity investments, such income should

be accounted for as operating income received in the Income and Expenditure

Account or the Operating Cost Statement

2.38 In the event that an item of IP (e.g. a patent or shareholding) turns out to be

worthless, or have a value lower than the balance sheet carrying value, then the

asset and the costs of its management will deemed to be “impaired” and the fall

in value should be taken to the income and expenditure account of the NHS

body for that year.



2.39 It is by no means certain that every filed patent will bring a return to the NHS

and impaired value in the majority of cases should be expected. The main

concern will be the failure of a NHS body to identify opportunities which could

bring benefit to the NHS, or to manage these opportunities appropriately and to

learn from them.

Audit of Spinout Companies

2.40 It will be a requirement for any spinout company set up to exploit IP to make

available its annual audited accounts to the NHS body. Auditors of NHS bodies,

the Auditor General for Wales and Audit Commission in Wales will have right of

access to the accounts and records of the these companies for the purpose of

their audit of the connected NHS body.

3 ‘Statement of Collaboration’ on Intellectual Property

3.1 The introduction of a new policy framework under the 1998 HSC for the

management of intellectual property was accompanied by a ‘Guide to

Collaboration in R&D between the NHS and other Research Funders’4 which

summarises the way NHS bodies may collaborate with non-NHS bodies. This

document is a statement of collaboration on IP which sets out the principles

under which NHS bodies and their funding partners should treat IP arising from

R&D they jointly fund. For this purpose R&D means work which is intended to

produce new knowledge which is generalisable and which is planned to be

widely disseminated. A Concordat formalises the arrangements with the Medical

Research Council5.

3.2 The Wales Office of Research and Development (WORD) recognises and values

the fact that much of the R&D which it supports and from which IP is likely to

arise is funded jointly between WORD and others including universities, statutory

research councils, registered charities, government departments and the

European Commission. It also recognises that many of those who carry out R&D

under contract from WORD are employed by a university or jointly by a university

and a NHS body.

4 ‘A Guide to Collaboration in R&D between the NHS and other Research Funders’



3.3 The majority of the academic sector has in place arrangements for the

management of IP generated from research, including an agreed reward policy to

deal with generated income. This guidance has many similarities to the academic

process for the management of IP, and advises that where possible NHS bodies

should work closely with the IP Service and the academic sector through

Collaboration Agreements in order to maximise the benefits to be derived from the

exploitation of IP.

3.4 Where research collaboration exists the issues of ownership and management of

IP must be addressed in the R&D contract. The research partner will need to

recognise in the R&D contract that the NHS body could be a contributor in the

generation of IP even if the R&D is placed with a partner university. The contract

should outline the recognition of the NHS body as a beneficiary in the event that

IP has commercial value.

Research collaboration with Higher Education Institutions in Wales

3.5 The R&D contract must include a collaboration agreement between NHS bodies

and universities which details the following:

the ownership of the IP;

the management of the IP, including the responsibility for patent, legal,

and exploitation costs;

how generated income will be shared i.e. reward policy;

3.6 The purpose of the collaboration agreement is to ensure a process that will

maximise the outcome to the benefit of the organisations and the employees.

The collaboration agreement is essential even if the inventor (originator of IP) is

employed by one organisation. Partner organisations generally make an indirect

contribution to the employment costs as well as a direct contribution to research

costs and therefore contribute to the development of the IP.

3.7 Ownership issues include:

employment status and sources of funding of the inventor;

contribution to funding of the R&D activity by each party;

5 ‘Concordat with Department of Health’



contribution to and ownership of background and foreground IP.

3.8 It is advised that a commercial exploitation agreement is drawn up which should

include:

provision that the party owning the IP agrees to grant a royalty-free

licence to the other party allowing the use of the IP for further research;

a commitment to use all reasonable endeavours to exploit the IP;

a commitment to share benefits on fair terms (reward policy);

an agreement to offer assignment of the IP to the other party if the party

owning the IP fails to exploit it.

3.9 Consideration should also be given to joint ownership of IP with one organisation

being given exclusive rights to the commercial exploitation and a suitable reward

policy relevant to input and expenditure. The management of the IP including the

responsibility for meeting exploitation expenditure should be agreed between

both parties.

3.10 The reward policy between inventors involved in the exploitation of particular

IP should be similar to ensure that there is no financial or other disadvantage

resulting from employment status.

Collaboration Agreements to exploit IP

3.11 The emphasis must be on collaboration and not competition and it is advised

that a framework agreement be developed that details a transparent operating

relationship between the NHS body and the partner organisation.

3.12 The IP Service will provide guidance on the content but the following outlines

the principles to be adopted:

the development of a simple generic process to identify and manage

intellectual property arising from NHS Wales and a partner organisation,

detailing ownership, responsibility for managing IP and the associated

costs, and a defined reward policy;

inventions made by employees belong to their employer. Where a person

has both a substantive contract with his or her employer and an “honorary



contract”, it will be the employer and not the body with whom he/she has

the honorary contract who will normally hold the rights to any such IP;

that the NHS body and the partner are committed to ensuring that each

receives the appropriate return on any direct or indirect support for

research leading to the generation of exploitable IP;

that ownership of the IP wholly by either the partner organisation or the

NHS body, with an appropriate revenue-sharing agreement that reflects

the contribution of each party, is preferable to joint ownership;

that the partner organisation and the NHS body are committed to

highlighting IP that might be of interest to each other, with a frequent

exchange of information on research activities.

4 Employment Guidance

4.1 The 1998 HSC sets out the following:

that ownership of IP may require explicit recognition in employees’

contracts of employment;

the need to agree a policy on ownership of IP for employees holding joint

NHS/university appointments or for employees engaged in R&D away

from their place of employment ;

recognition of the need to provide an incentive to NHS bodies for the

appropriate and cost-effective commercial exploitation of IP by allowing

them to retain income generated and to establish schemes to share this

income with their employees.

4.2 The Research Governance Framework (Wales)6 requires NHS bodies who

employ researchers to ensure that contracts are in place between the NHS body

and research employees, and agreements in place between the NHS body and

the research funders and care organisations, about the ownership, exploitation

and income from any IP arising from research conducted by NHS employees.

NHS bodies have a responsibility for ensuring that employees identify and

protect IP.

6 Research Governance Framework for Heath and Social Care in Wales – November 2001



4.3 The 1998 Framework is now extended to cover IP derived from the management

or delivery of patient care. Contracts with employees should be agreed similar to

those detailed in paragraph 4.2.

4.4 Dealing with IP in contracts of employment can be complex, but it is important

that when IP arises the legal ownership is clear. The employee also needs to

know how the NHS body intends to manage the IP and the reward policy if the IP

is exploited successfully to produce income.

4.5 This Employment Guidance is to help NHS bodies act correctly both in

conforming with research governance requirements and with the Management

Framework for Intellectual Property in Wales as outlined in Part 3 of the 1998

HSC and to inform employees. It also provides advice on related contractual

arrangements entered into by those working in some way with the NHS.

4.6 It is recognised that many NHS employees have employment contracts

negotiated through their professional organisations and that amendment to these

contracts will need to be agreed with the professional body. Local arrangements

may be possible in the interim.

4.7 This Employment Guidance is issued in respect of NHS employees. However,

Independent Providers may find the content useful in agreeing how to deal with

IP in their organisation.

General Principles

Ownership of IP

4.8 The owner of the IP has exclusive rights to license others to carry out certain

agreed activities or to exploit the IP commercially. As a result, IP is of

commercial value to its owner and it is important that IP-generating organisations

such as NHS bodies properly provide for its regulation and protection.

4.9 NHS employment contracts do not normally include provisions for dealing with

the ownership and exploitation of IP, without which confusion and conflict may

arise. There is a risk that inconsistent and inappropriate employment conditions

may be introduced. Employees may believe they have rights in IP which they do



not have. The complexity of dealing with IP rights means that there many

benefits in confirming the statutory provision in writing between the employer and

the employee.

4.10 In the absence of express contractual provision, ownership of IP is determined

by statute. Generally, under statute an employer will be the owner of IP

generated by an employee in the course of employment or normal duties unless

the employee and the employer have agreed otherwise. Such an agreement

does not have to be in writing and can have arisen from custom and practice.

Any agreed custom and practice should ideally be reflected in writing in the

contract of employment. Where there are no contrary agreements then this

should be stated expressly in the contract of employment. In the case of

patentable IP there are additional conditions which must be met in order for the

employer to own the IP rights:

the IP must arise in the course of normal duties, or in the course of duties

falling outside the normal duties but specifically assigned to the employee,

but it must also have been reasonably expected that IP might arise from

such duties;

in the case of patentable IP, the employer not the employee will be the

owner where the invention is made by the employee in the course of

duties which because of their nature and particular responsibilities,

impose on the employee a special obligation to further the interests of the

employer.

4.11 Deciding legally whether IP might reasonably be expected to arise in the course

of normal employees’ duties has proved difficult in the past. For NHS employees

engaged in R&D, patentable IP might reasonably be expected to arise in the

normal course of duties and ownership would be with the NHS employer. In the

case of NHS employees delivering patient care, or employed in another capacity,

it will be a question of fact as to whether IP might reasonably be expected to arise

from these duties. New terms of contract would make it clear that the generation

and reporting of IP is part of every employee’s duties.

4.12 If IP does arise, for example through the work of a nurse or a doctor, the

inventive steps need to be defined precisely in a patent application and shown to

have industrial application. In the normal course of events the IP would have



arisen through the use of NHS resources which gives the NHS body a strong

claim to the ownership of the IP.

4.13 NHS policy is for the NHS body to share with its employees who generate IP,

the benefit derived from any successful exploitation where the IP has been

assigned to the NHS body. Employees who are prepared to sign, or have already

signed, amended employment contracts which contain revenue-sharing

arrangements may already be in a position to benefit. Each NHS body should

agree a reward policy.

Copyright

4.14 The 1998 HSC includes copyright as one of the categories of IP owned by the

NHS, when it arises during the course of an employee’s employment. To

encourage employees to publish freely in academic or professional journals or

electronically, the ownership of copyright will normally be assigned to the author

and the claim to financial benefit waived. However, the employment contract

should give the NHS a world-wide, irrevocable, royalty-free licence and reserve

the rights to itself at no cost to reproduce and use the publications for its own non-

commercial purposes e.g. training or further research, as a condition of the

assignment of the ownership to the author. Once assigned the NHS will have no

further rights in the work.

4.15 There are some items of copyright that the NHS will wish to retain and not to

assign. These include:

- course or training materials or patient information leaflets produced by an

employee in the course of NHS employment and which are produced, used

or disseminated within or outside the NHS;

- any software programme generated by an employee during the course of

their employment;

- any designs, specification or other works which may be necessary to protect

rights in commercially exploitable IP.



Jointly Appointed or Managed Staff

4.16 There are a number of staff working in the NHS who hold joint appointments

with another organisation and are either wholly or partly funded by another

organisation i.e. a university, medical charity or a commercial sponsor.

Alternatively an employee in a university holding a university contract may be

wholly funded by the NHS. In the normal course of events the principle that the

employer holding the employee contract would own the IP with a commitment to

share any benefit arising from the IP would hold. In the case of joint

appointments or managed staff the principle is insufficient on its own to decide

ownership; individual consideration will often be necessary. The factors which

affect the decision will include consideration of the source of funding for the post

and resources used to support the post i.e. holding an honorary clinical contract.

Where possible the issue of ownership of IP arising from jointly appointed or

managed posts should be included in the employment contract.

4.17 The revenue sharing and income streams arising from the exploitation of IP

should be agreed between the joint employers and will normally be based on:

- the proportion of funding and resources from each party, including access to

NHS facilities and equipment and the involvement of patients;

- IP management resources i.e. patent costs, provided by each party;

- ownership of background IP.

4.18 Where the ownership of the IP does not lie with the NHS, the contractual

conditions should include:

- a commitment to the exploitation of the IP;

- a commitment to share the benefit with the NHS;

- in the event the other party fails to exploit the IP to the satisfaction of the

NHS, a commitment to assign the IP to the NHS;

- a commitment to acknowledge the NHS contribution in any publication.

4.19 An honorary contract that purely recognises the research status of a NHS

employee or the NHS service status of a university contract would not affect the

ownership of IP. The ownership of IP should continue to remain with the



organisation holding the substantive employment contract. Where a university

appointment, which includes a NHS service provision, is supported by NHS

funding the provisions outlined in paragraph 4.20 would be expected to apply.

4.20 Senior academics who hold honorary contracts with the NHS may receive an

additional contribution to salary in the form of a distinction award that recognises

outstanding professional work of wider benefit to patient care in the NHS. This

work can include R&D, innovation and improvement to the delivery of healthcare.

It is recommended that there is a formal agreement between the university and

the NHS on the management and exploitation of IP arising from work which

involves the use of NHS resources.

4.21 The management of IP generated through NHS/university R&D or the delivery

of patient care can be complex. One approach would be to agree joint ownership

with one party having exploitation rights with a commitment to share equally the

costs and benefits. The equal share will be open to negotiation with the share

formula being appropriate to the investment of both parties in the IP

management process.

4.22 NHS R&D carried out jointly between charities and the academic sector is

covered by the Guide to Collaboration7. In particular the arrangement with the

Medical Research Council is formalised by a Concordat8. Section 4 of this

document deals with Collaboration Agreements.

4.23 IP arising from employees seconded into or out of the NHS will be owned by the

employer organisation unless otherwise agreed between the parties. In all such

cases, the NHS body should formally agree with the other party the management

and ownership of IP. Where appropriate the NHS would seek ownership of the

IP and negotiate revenue sharing and income streams arising from exploitation.

4.24 Employees may have a part-time NHS contract and may be self-employed part-

time (i.e. private practice). In general, IP arising through the NHS contract work

will be owned by the NHS (see paragraph 4.11), IP arising from work

unconnected with the normal NHS contract duties, will be owned by the

employee. Where NHS contract duties overlap self-employed work, the

7

‘Collaboration in R&D between the NHS and other Research Funders’



ownership is less clear cut and IP may be owned by the NHS if it is construed

that it relates to duties under NHS employment. If there are circumstances which

make it more likely that the IP arose within the self-employment the IP may be

assigned to the NHS and a revenue-sharing agreement negotiated with the

employee. In order to avoid confusion, clear provisions relating to the

management and exploitation of IP should be included in the NHS part-time

contract.

4.25 Where the NHS acts as host for training purposes it is advisable to treat the

trainee within the training agreement as a NHS employee and subject to NHS

management arrangements. A trainee may not be an ‘employee’ for the

purposes of the statutory provisions regulating IP. It is advisable therefore that

specific provision is made within the training contract for ownership of IP rights

generated to vest in the NHS. It is important to clarify the ownership issues

before the trainee starts in a fair, reasonable and clear contract. In the event that

the trainee is employed by a third party then there is a requirement for an

agreement with the third party to enable the IP to be owned by the NHS.

4.26 For other third parties who are not NHS employees such as consultants, there is

normally a consultancy contract rather than a contract of employment. In the

event that IP is generated, statutory provisions will mean that the NHS will not

automatically own the IP. The NHS would normally wish to retain IP arising from

consultancy work, therefore this needs to be explicit in the contract of

engagement.

4.27 The Research Governance Framework for Health and Social Care in Wales

requires NHS bodies to have in place agreements with employees on the

management and exploitation of IP. In the case of existing employees whose

contracts do not deal with the ownership of IP, NHS employers will wish to take

appropriate steps to incorporate the relevant terms in their contracts of

employment. NHS employers cannot change the terms of an employee’s

contract without the individual’s consent. A unilateral action which results in a

fundamental variation of an employee’s terms and conditions of service may give

rise to a claim of breach of contract or constructive dismissal.

8 ‘Concordat with Department of Health’



4.28 It is advisable to seek professional advice in the case where NHS employees

have previously had a contractual right to exploit NHS IP for their own gain.

4.29 NHS employers will wish to issue employees with guidance on the

arrangements in place for the management and exploitation of IP. These will

include:

- the role of the IP Service;

- the availability of training to raise awareness to identify and exploit NHS

IP;

- the guidance on management of IP and copyright in particular;

- the revenue-sharing agreements;

- the arrangements for employees engaged in R&D.

4.30 Employees need to be aware who has delegated responsibility for dealing with

IP issues.



APPENDIX 1Negotiating a Licence Agreement

The Table below sets out the types of issues that need to be considered during the negotiation of a licence agreement between a NHS body and a commercial organisation. The list is not exhaustive and should be used as a guide only. It is important to seek the advice of the all-Wales IP Service and appropriate professional advice prior to entering into a licence agreement.

Issue Details to be considered for inclusion in the documentation

Parties Specific parties involved

Licence – subject matter Accurate descriptions of the technology to be licensed, including patent registration details, the licence documentation may refer to a Schedule. For IP that has not been registered, reference to particular documentation that identifies the IP (such as laboratory notebooks) should be included

Field of Use A clear definition of technical application, technical aspects, product markets etc. giving use of the technology to be permitted under the licence. Defining by customer type needs careful consideration.

Geographical Scope The territory to be covered by the licence. Tthis can be a country, several countries or part of a country, considered in relation to each type of right.

Type of licence Exclusive, non-exclusive or exclusive in relation to some areas, fields or applications

Qualifications to exploitation of licence

Performance Targets, such as:- Negotiated % royalty rate on Net Sales Value of each product sold in

a given year- the inclusion of minimum royalty payments on sales in a given year- provision to stop supply at less than market value

Consequence of failure to meet agreed targets:- loss of exclusivity- termination of licence

Term The period of the licence, break periods, renewal provisions and detail on the conditions that could lead to termination. The maximum period should not usually exceed the term for which the IP remains valid.

Rights granted under licence

A clear specification of how the licensee is allowed to use the IP, e.g.:- manufacture, use and sale- R&D on prototypes and products based on the technology- Subcontracting conditions where previously agreed

Sub-licence rights Sublicensing conditions include prior approval of the licensor and a repeat of the main licence limitations such as manufacture outside the territory

Research Rights The licence needs to ensure that NHS bodies retain the right to use the IP for internal research and training purposes

R&D responsibilities An outline of the continuing R&D responsibilities of the licensee including associated costs and conditions

Assignment and change of control

Detail of the circumstances in which either party will have the right to assign the licence and the effect of change of control or ownership of the licence.

Exploitation responsibilities

Best or reasonable effort should be made to exploit the IP. Specific targets and minimum royalty rates should be included in the agreement along with details of performance monitoring and measures to deal with substandard



performance

Transfer of Technology The means by which the licensee receives the technology, disclosure, samples. Technical assistance. Training etc.

Technical Assistance A clear specification of the type, limitations and period of assistance and associated costs

Mutual assistance A clear statement of the responsibilities of both parties

Training A clear specification of the training offered and associated costs

Benefits to NHS patents To include, where possible, preferential terms of sale to NHS bodies not associated with the IP.

Patients in developing countries

Where possible, terms should be included to provide products at a reasonable rate to patients in developing countries9 (reflecting provisions in the Directions)

IPR protection Partner organisations - collaboration agreements which clearly indicate the ownership of the

IP to be included in the licence agreementCosts

- licensee to be responsible for the continuing costs of patent protection- detail of the implications if the patent is not maintained- responsibility for registering the licence

Patent Infringement- licensee to be responsible for costs associated with patent

infringement- licensor may need to retain control if the IP is licensed to more than

one licensee

Warranties A licensor could warrant:- that the IP has not been assigned previously- that the IP has not previously been licensed

A licensor should not warrant:- the validity of the IP- the quality of the invention

Liability - the cost of product or trademark liability will lie with the licensee- the licensor will be indemnified - provision for indemnification if the IP infringes third party rights

Payments - Payments to a VAT registered licensor are subject to VAT- The licensee should assist in the recovery of withholding taxes (i.e. on

royalties received from overseas)

Royalty Rate Consider- rate based on sales not profits- frequency of calculation/payment i.e. quarterly- anti-avoidance provisions to stop supplies at less than market value- variable rates for different levels of aggregate sales- royalty provision beyond all/some of the licensed IP

Audit/Monitoring - detail of audit and monitoring procedures

Currency - normally the payment will be in sterling- provisions for currency conversion should be made if sales on which

royalties are based are in a different currency- provisions for changes to the Euro

9

Framework & Guidance on the Management of Intellectual Property in the NHS Part 2 Appendix 2



Confidentiality Include a clear statement of the responsibilities of both partiesIncluding:

- transferred information, materials and samples- procedure for return of information and samples

Publication Consider- the responsibilities of both parties on the publication of information

relating to the technology- clearance to publish

Marking Requirement- to state that the product is patented i.e. manufactured under

patent licence from…

Specification Include a detailed product specification

Trademarks/Licensor’s name

Where applicable- application of licensor’s trademark or name- Approval- Detail of quality control

Publicity Specific obligations/requirements- approval of the public relations content- provisions for joint or a share in publicity

Termination Detail of events that may lead to termination of the licence including:- breach- insolvency- change of management control- challenging validity of licensors IP

The effect of termination- such as royalty accounting,- disposal of stock etc.

Third Party Rights Is provision necessary to allow third parties to have rights under the Agreement by virtue of the Contracts (Rights of Third Parties) Act 1999, or should such rights be expressly excluded for the avoidance of doubt?

Dispute Resolution Provision for escalation of disputes and for resolution by arbitration or conciliation in place of / prior to action in the Courts

Law/jurisdiction English/Welsh law to apply to the contract which should be subject to either:i) non-exclusive of English/Welsh courts, orii) exclusive jurisdiction of English/Welsh courts, except where injunctive

relief is needed elsewhereWhere the validity of registerable IP is at issue, the contract should be subject to the jurisdiction under which the IP is registered



APPENDIX 2

Setting up a Spinout Company

1. Types of Company

There are two distinct circumstances in which it may be appropriate to establish a

company for the purpose of the exploitation of NHS IP:

The first is where the company is not intended to make a profit and uses its

available income and property only in furtherance of its objects. In such

circumstances it is usual to set up a company limited by guarantee (“CLG”).

CLGs are often best suited to companies seeking grants or sponsorship

funding, such as the NHS IP hubs in England, charitable companies, and

clubs. The CLG has no share capital and the liability is fixed to a sum

(normally of a nominal amount) guaranteed by its members.

The second is where the company is intended to grow in value or act as a

route to market. In such circumstances a spinout company limited by

shares will be the appropriate corporate structure.

2 Companies Limited by Shares

It is appropriate to set up a spinout company where it is clearly demonstrated as

being the best option for exploiting IP for the benefit of the NHS in Wales. This will

usually occur at the point where a product has reached a certain stage of

development, or a product is ready to be taken to market. As indicated above, NHS

spinout companies will normally be set up as companies limited by shares. It will be

the only option, where there is no appropriate existing commercial company in the

area, or it has not been possible to gain a licence contract and there is clear

indication that the exploitation of the IP will provide income generation.



The added value of setting up a company limited by shares, is in the potential for

approaching venture capital companies and business angels with a view to attracting

significant investment.

Once such a company is set up, the ownership of IP will, in most cases, be retained

by the NHS body until external funding is brought into the company. However, there

may be greater benefit in assigning the IP early before it has any substantial value.

The All-Wales IP IP Service will provide advice and guidance on the value of using

the spinout company route, as well as the ownership of IP generated. However, NHS

bodies should take appropriate legal and professional advice before putting forward a

proposal to set up a spinout company. It is particularly important to take advice on tax

planning opportunities in terms of both direct and indirect taxation and liability.

Shareholdings

Shares in the company will usually be issued for a small sum (e.g. £1 each). The

liability of the shareholders will in practice be limited to the value from time to time of

the shares that they hold. Shares may be issued to a NHS body in return for

assignment of the IP to the company, but tax advice should be sought as to the most

appropriate route of licensing or assigning the IP to the company. As the spinout

company becomes more profitable so the market value (price for which it might be

sold) of the shares will increase and shares may be offered to other parties to raise

capital. However, NHS bodies’ financial yield may take the form of capital growth

(increased value on sale of shares) or revenue (dividends paid on the shares held).

NHS bodies will usually hold equity shares in the company. This will be done

normally without further investment, since further public investment may amount to

state aid and contravene the EC Treaty.

As new investment comes into the spinout company there will be a need to issue

new shares. This should be taken into account at the outset when the initial

percentage allocation of shares in the spinout company is agreed and appropriate

professional advice should be sought prior to determining the potential shareholdings

in the company. The balance has to be drawn between taking a large percentage of

shares initially in the knowledge that as new shareholders come into the company



there will be dilution, or taking a smaller number of shares initially and building anti-

dilution provisions into the Shareholders’ Agreement (see below).

Company Directors and Nominated Officers

An NHS body taking shares in a spinout company will normally elect to have one of

its employees either act as a director of or as an observer (“nominated officer”) sitting

on the Board of the company.

Where an NHS employee acts as a director of a spinout company, that employee will

owe separate duties of care to his or her employer, namely the NHS body, and to the

spinout company. As director he/she will owe a fiduciary duty to act in the interests

of the company and to make full and honest disclosure to shareholders before they

vote on any resolutions in general meeting.

Generally, where company directors act honestly and within the scope of their

authority as directors they will not incur personal liability for their actions. Directors

may, however, be held personally liable in certain other situations, for example where

the company becomes insolvent and it is declared by the Courts that fraudulent

trading or wrongful trading under the Insolvency Act 1986 has occurred.

Certain NHS employees (in particular Chief Executives), because of their position,

may be held to be shadow directors. This will arise where such persons exercise

control (overtly or behind the scenes) over the running of the company such that the

directors of the company act in accordance with their directions or instructions. Care

must be taken to avoid NHS employees becoming shadow directors of companies,

because in such circumstances they will owe the same duties to the company as

held by the directors (outlined above) and therefore any shadow directors may incur

personal liability where they breach such duties.

A director appointed by an NHS body should have no personal financial interest in

the company. The extent of protection built into the Shareholders’ Agreement or the

Articles of Association will aid any director representing the NHS body when voting

on certain issues. Appropriate legal and professional advice should be sought in

order to minimise the risk both to the NHS body and the NHS employee.



An NHS employee acting as nominated officer will have a duty to the NHS body but

will not have the right to vote at any board meetings. However, the Articles of

Association should give rights for the nominated officer to receive information and to

speak at board meetings. The NHS body and the employee acting as nominated

officer will need to be careful not to act in such a way as will constitute a risk of that

officer becoming a shadow director for the reasons outlined above.

3 Company Documentation and Agreements

Memorandum and Articles of Association

Whilst the format of the Memorandum and Articles of Association will vary, there are

certain issues which will in most circumstances need to be addressed. The

documents should in most cases provide the NHS body with a veto over:

any reorganisation of the spinout company share capital;

creation of share options;

issuing of further shares

The Memorandum and Articles of Association will set out the relative shareholdings,

the rights of the shareholders, voting rights and Board membership. The Articles of

Association should deal with the future allocation and transfer of shares as new

external investment is introduced and should protect the future rights of NHS body

shareholders as new shares are issued, through:

rights of pro-rata allotment;

rights of pre-emption (right of first refusal for the other shareholders).

Shareholders’ Agreement

Further consideration may need to be given to having a shareholders’ agreement.

This would allow for the shareholders to deal with their interests by contract as they

see fit. For example, where spinout companies have shares issued to the public

sector a shareholders’ agreement could be used as a means of passing as much of

the risk as possible to external investors, as a consequence reducing the risk and

liability of the public sector. Shareholders’ agreements may also contain anti-dilution

provisions, including a right to veto the issue of new shares, in order to maintain the

controlling interests of the initial shareholders in the company. However, it is



essential that appropriate legal advice is taken as to the drafting of all documentation

and agreements prior to the incorporation of the company.

Exploitation Agreement

An exploitation agreement will generally be required, covering the manner in which

the IP is to be developed. The agreement should generally provide the NHS body

with the first refusal over the IP or an option to buy back the IP, in the event that the

spinout company ceases to trade or the NHS body believes the company has not

exploited the IP (over a specified period), or has ceased to exploit the IP.

Other Agreements

In the early stages of establishing a spinout company, it may be necessary to allow

access to NHS physical assets (such as laboratory space and equipment). Access

should only be allowed where the physical asset is not required for direct patient

care-related activities. A formal agreement outlining cost and conditions of use

between the spinout company and the NHS body must be approved by the NHS

body’s board. The conditions governing the use of physical assets must include

confidentiality provisions. Cost recovery should be based on Costing for Contracting

DQ: What is this?. Where the assets are not owned by NHS body (e.g. where

provided by PFI), the NHS body will need to check its rights to allow the spinout

company to use them.

NHS Employees in Spinout Companies

NHS employees responsible for generating NHS IP should be given the opportunity

to participate fully in the commercialisation of the IP provided that:

they have created or contributed towards the creation of IP which can be

commercially exploited;

they have a potentially important role in the successful exploitation of that IP;

the NHS body has agreed the probity of the arrangements including

addressing areas of possible conflicts of interest; Standing Financial

Instructions should be applied, amended as necessary; the NHS body has a

recognised process for the management of the commercial exploitation with



access to high quality expertise through a collaboration agreement with the

academic sector;

the exploitation of the IP brings added value to the NHS in Wales and

contributes to the economic prosperity of Wales;

the NHS body owns shares in the spinout company reflecting its investment

or interest in the intellectual assets;

the commercialisation of the IP does not compromise the key objectives of

the NHS body.

Participation in the company will include holding shares in the company (i.e. being a

member of the company), acting as a director or holding a consultancy post with the

company.

Employees holding Shares

Shares can be held whether or not the person remains an NHS employee, is

seconded to or employed by the spinout company. Allocation of shares to NHS

employees will need to be subject to relevant agreed reward policies. Care should

be taken in allotting shares to NHS employees, the employees may be liable for

income tax if the shares are deemed to be a benefit of their employment.

Professional advice should be sought by the NHS body and the employee.

NHS employees must be made fully aware of the risks as well as the potential

benefits arising from becoming a shareholder.

Contractual and Regulatory Requirements

NHS employees must obtain the explicit permission of their employers and enter into

a formal agreement with them prior to participating in the work of a spinout company.

A new contract of employment may be required if the work in the spinout company

conflicts with the NHS normal working hours. The agreement must detail the roles

and responsibilities of the employee, payments to be made to the employee, the

amount of time to be spent on spinout company business and, most importantly, the

ownership of any IP generated by the employee whilst working for the spinout

company.



To avoid any potential conflict of interest an NHS employee who is currently working

for a spinout company should not act as the NHS body’s contact with the company

on day to day matters and should not be involved with negotiating any form of

contract between the NHS body and the company. In particular, the employee

should not be permitted to conduct, or participate in, an NHS clinical trial where a

spinout company product is being examined. Other codes of practice on commercial

sponsorship may also be relevant.

In the event that the NHS employee is an employee by virtue of being an executive

director of the NHS body, then both the employee and the NHS body must ensure

that there is full compliance with the appropriate Membership Procedure and

Administration regulations. The NHS body may impose restrictions on involvement at

Board level meetings on account of individual pecuniary interests and other relevant

Standing Orders relating to conflicts of interest.

Approval Process to set up Spinout Companies

NHS bodies are required to submit a business case to the Welsh Assembly

Government’s NHS Finance Division for all spinout companies they wish to establish,

including CLGs. The IP Service will provide guidelines in order to develop best

practice in the NHS and to maximise the benefits to NHS patients through the

exploitation of IP.

It is essential that a robust business case is prepared demonstrating the assessment

of risk to the NHS, and setting out a suitable process for the commercial exploitation

of IP, financial assumptions and projected cashflow. The NHS body’s Chief Executive

will be accountable for minimising the potential for liabilities and maximising benefits

to the NHS body from the commercial exploitation of IP.

The business case will set out:

why a spinout company is the best option for the commercial exploitation of

the IP, in particular specifying the added-value to the NHS;

details of the option appraisal undertaken to arrive at this conclusion;

the management structure, the funding sources, the costs, benefits, the

marketing strategy and, in particular, the identifiable risks and the process for

managing that risk.



The IP Service will develop and provide guidelines on the content of business cases

in line with the guidance provided in the Capital Investment Manual, which will

include advice on proposed shareholdings and revenue sharing arrangements.

NHS bodies are required to ensure that published accounts and reports, including

changes to the Memorandum and Articles of Association of established spinout

companies, are submitted to the NHS Finance Division.

NHS bodies need to be alert to the first signs of problems in spinout companies,

which include:

failure to achieve forecast targets;

continual requests for further finance;

liabilities exceeding assets;

rapid staff turnover;

failure to produce statutory accounts or regular management accounts

throughout the year, or experiencing difficulty in doing so;

negative feedback from auditors.

It is important therefore to have an effective management reporting system, both

within the spinout company and within the NHS body overseeing the operation of the

spinout company. Failure to monitor and understand the performance of the

company may prove costly.

Independent Providers

An Independent Provider of NHS Wales Services which generates IP from NHS-

funded R&D is required under the terms of the 1998 HSC, as part of the agreement

sharing revenue generated by the exploitation of IP created or contributed towards by

the Independent Provider, to allocate an agreed percentage of the income generated

to support NHS-funded R&D. In the event that the IP is exploited through a spinout

company set up independently of the relevant Local Health Board, agreement with

the Welsh Assembly Government will be required, in particular in relation to the

ownership of shares and probity.



An Independent Provider can also generate IP with commercial potential through its

delivery of patient care, and provided that no NHS resources have been utilised to

develop this IP, it can establish a spinout company outside its Local Health Board

and without reference to the Welsh Assembly Government.



APPENDIX 2A

Setting up a Spinout Company - CHECKLIST

Issues for consideration before the preparation of a robust business case to set up a Spinout Company. The advice of the all-Wales IP Service and appropriate professional advice must be sought before the business case is submitted to the Welsh Assembly for ministerial approval.

Issue Details to be considered

Preliminary Considerations

Management of IP

- Has the IP been protected adequately?- Is the ownership of the IP clearly defined?- Are the relevant agreements in place i.e. confidentiality, collaboration

(where applicable), Material Transfer etc.Option Appraisal - Has a full Option Appraisal of the potential commercial exploitation

routes been explored?- Does the Appraisal clearly demonstrate that setting up a Spinout

Company is the best option?Risk Assessment - has a risk assessment been done?

- Does the risk assessment assess the risk/liability to the NHS body, NHS personnel both individually and collectively, product liability

All-Wales IP IP Service/Professional Advice

- has the appropriate advice been sought from the IP Service and professional bodies

Key Questions Chief Executive - Is there a clear Management of IP policy in place?

- Does it include clear procedures and responsibilities for the setting up, controlling and monitoring of spinout companies?

- Are you satisfied that the option appraisal and risk assessment clearly demonstrate that a spinout company is the best option for the exploitation of the IP?

- Has advice as to whether setting up a spinout company is the appropriate structure for the proposed activity been taken from a) the IP service and b) professional advisors?

- Is there a clear reporting structure in respect of company activities?- Have the potential liabilities of the NHS body, NHS personnel,

company directors and shadow directors been assessed?- Has a NHS employee been nominated to attend Board meetings on

behalf of the NHS body? - Has the royalty sharing policy been agreed?- Has the Memorandum of Understanding/Shareholder’s Agreement

been assessed and agreed with the appropriate professional body, and are they in place?

- Has clear guidance outlining roles and responsibilities, been given to those NHS staff who will act as directors, shadow directors, and company secretary, and the representative of the NHS body

- Has a preliminary business case been prepared, including:i) The feasibility of the projectii) Strategic objectives of the spinout, operational objectives

for the first year of tradingiii) The proposed management structure



iv) Constraints i.e. is the proposed company allowed to use name of the NHS body and its reputation

v) Financial projections including cashflow for the first year of trading

vi) Full assessment of risks and sensitivitiesvii) Exit strategyviii) Timetable of company formation

Potential Spinout CompaniesKey Questions

Business Case Consider the following:- Is the IP adequately protected?- Have you undertaken a full risk assessment and option appraisal that

clearly demonstrates that a spinout company is the best route for exploitation of the IP?

- Have you taken advice from a) the IP Service b) the appropriate professional body?

- Do you have clear strategic objectives, operational objectives for the first year of trading?

- Have you considered the management structure?- Detailed financial projections, including key assumptions and working

capital requirement are essential- The permanent capital requirement- Risks and sensitivity analysis- An understanding of the true costs, contribution to overheads, and

rates of return required- Is there an agreed royalty sharing policy?- The intended exit route- The expectations of the NHS body in the event of any unexpected

losses- Has a nominated officer representing the NHS body been appointed?

A typical business case will include:i) Executive Summaryii) Corporate Objectives (Strategic and Operational)iii) Background Informationiv) Products/services – detail of IP to be exploitedv) Market and Market Strategyvi) Research & Developmentvii) Basis of Operationviii) Management structureix) Principal risks and problems, including the potential for

personal/product liabilityx) Financial Information – include key investorsxi) Finance required and its application



APPENDIX 3

Directions relating to the exercise of powers under section 7(2) of the Health and Medicines Act 1988

In exercise of the powers conferred on the National Assembly for Wales by section 7(3) and (4) of the Health and Medicines Act 1988 (10), sections 16BB and 17 of the National Health Service Act 1977 (11), the National Assembly for Wales makes the following Directions :-

Commencement, Application and Interpretation

1. – (1) These Directions shall come into force on [ ] 2003.

(2) These Directions apply to Wales only (12).

(3) In these Directions –

“the 1977 Act” (“Deddf 1977”) means the National Health Service Act 1977;

“the 1988 Act” (“Deddf 1988”) means the Health and Medicines Act 1998;

“the 1990 Act” (“Deddf 1990”) means the National Health Service and Community Care Act 1990 (13) ;

“business case” (“achos busnes”) means a document which relates to a proposal by a relevant body for the exercise by it of any of the powers in subsection (7A) of section 7 of the 1988 Act (14) Act in relation to the company, in connection with the exercise by it of any of the powers in subsection (2) of that section, and which sets out –

(a) how, in the view of the relevant body, the exercise of the powers in subsection (7) will facilitate or be conducive or incidental to the exercise of the powers conferred by subsection (2), and the rationale for exercising the powers in subsection (7A), as opposed to taking other measures, in connection with the exercise of the powers conferred by subsection (2);

10

1988 c. 49.11

1977 c.49. Sections 16D and 17 were substituted by section 12(1) of the Health Act 1999 (c.8); section 17 was amended by Schedule 5, Part 1, paragraphs 5(1) and (3), to the Health and Social Care Act 2001 (c.15); section 18A was inserted by section 5 of the Health Act 1999. 12

The functions of the Secretary of State under section 7 of the 1988 Act and sections 16D, 17 and18A of the 1977 Act, are, so far as exercisable in relation to Wales, transferred to the National Assembly for Wales by article 2(a) of the National Assembly for Wales (Transfer of Functions) Order 1999, S.I. 1999/672.

13 1990 c. 19.

14 Subsections (7A) and (7B) were inserted by section 5 of the Health and Social Care Act 2001 (c. 15); the

powers referred to in subsection (7A) are expressed by that subsection to be powers included within the power in section 7(2)(g) of the 1988 Act.



(b) the projected income and expenditure for the company, in so far as is practicable and appropriate in the form described in sections 226 to 232 of the Companies Act 1985(15) and any statutory modification or re-enactment thereof for the time being in force, over a period of at least 3 years, or the period during which the body proposes exercising the powers in subsection (7A), if less;

(c) the projected income which it is anticipated will be made available for the improvement of the health service, through the activities of the company connected with the exercise of those subsection (7A) powers, over the period referred to in paragraph (b) above;

(d) the commercial assumptions and operational plans in relation to the company’s business which form the basis for the projections referred to in paragraphs (b) and (c) above; and

(e) how the body proposes to manage any financial risks to it or to any other relevant body which may arise from its exercise of the powers in subsection (7A) or from the activities of the company connected with the exercise of those subsection (7A) powers;

“the company” (“y cwmni”) means the company in relation to which a relevant body proposes to exercise any of the powers in section 7(7A) of the 1988 Act;

“document” (“dogfen”) includes information transmitted using electronic communications;

“dormant company” (“cwmni cwsg”) means a company which has never traded;

“electronic communications” (“cyfathrebu electronig”) has the same meaning as in section 15 of the Electronic Communications Act 2000(16);

“the proposal” (“y cynnig”) means the document referred to in paragraph (a) of the Schedule to these Directions;

“relevant body” (“corff perthnasol”) means

(i) a National Health Service trust all or most of whose hospitals, establishments and facilities are situated in Wales; or

(ii) a Local Health Board established under section 16BA of the 1977 Act.

15

1985 c.6. These sections were inserted by sections 4 to 6 of the Companies Act 1989 (c.40). Section 228

was amended by S.I. 1992/3178,1993/3246 and 1996/189 and by the Welsh Language Act 1993, section 30.16 2000 c. 15.



(4) In these Directions, save where the contrary intention appears, any reference to a numbered direction is a reference to the direction which forms part of these Directions and which bears that number, and any reference, in a direction which forms part of these Directions, to a numbered paragraph is a reference to the paragraph of that direction which bears that number.

Proposal for the exercise of the powers in section 7(7A) by a relevant body

2. – (1) The National Assembly for Wales directs that, save as otherwise

allowed by it, a relevant body shall not exercise any of the powers in

subsection (7A) of section 7 of the 1988 Act in connection with the

exercise of any of the powers in subsection (2) of that section, unless it

has submitted to the National Assembly of Wales a proposal, and the

other information and documents specified in the Schedule to these

Directions and the National Assembly for Wales has notified the relevant

body that it considers that the proposal-

(a) satisfies the tests specified in section 7(8) of the 1988 Act;

(b) where the body is a National Health Service trust, satisfies the criteria specified in section 5(9) of the 1990 Act (17); and

(c) represents an appropriate exercise of the powers in subsection (7A) by the relevant body, having regard in particular to the matters specified in paragraph (2) below.

(2) The matters referred to are –

(a) the financial risks for the health service and the financial

benefits for the health service (in terms of greater income

for improving the health service) which appear to the

National Assembly for Wales to be associated with the

proposal;

(b) where the proposal concerns the exercise of the powers in

subsection (7A) in connection with the powers in

subsection (2)(f) (ideas and intellectual property), the basis

on which the ideas or intellectual property may be made



available to bodies in developing countries that are

concerned with the delivery of health care in those

countries, following the exercise of the powers in

subsection (7A); and

(c) where the proposal concerns the exercise of the powers in

subsection (7A) in connection with the powers in

subsection (2)(f) (ideas and intellectual property), the

conditions on which the ideas or intellectual property may

be made available for the purposes of the health service,

following the exercise of the powers in subsection (7A).

Conditions applying to the exercise of the powers in section 7(2) and (7A)

3. The National Assembly for Wales directs that a relevant body which exercises any of the powers in subsection (7A) of section 7 shall, subject to any enactment, rule of law or any person’s contractual or proprietary rights -

(a) save where otherwise allowed by the National Assembly for Wales, exercise the

powers in subsection (7A), and any powers in subsection (2) in connection with

which the powers in subsection (7A) are exercised, in accordance with the

proposal which has been the subject of a notification by the National Assembly for

Wales as referred to in paragraph 2(1) including the documents referred to in

paragraph a(vii) and (viii) of the Schedule to these Directions, but otherwise

excluding any documents attached to the proposal;

(b) exercise the powers in subsection (7A) in accordance with

any restrictions laid down by the National Assembly for

Wales at any time (being restrictions which do not have

retrospective effect) relating to –

(i) the amount of money or other property which the

body may provide in connection with investment in

the company, including any restrictions as to the

17

This provision was inserted by section 14 of the Health Act 1999 (c. 8).



amount which may be provided within a particular

period or periods of time; and

(ii) the amount which may be provided to or in respect of

the company by way of loans, guarantees or other

financial provision, including any restrictions as to

the amount which may be provided within a particular

period or periods of time; and

(c) in exercising the powers in subsection (7A), and any

powers in subsection (2) in connection with which the

powers in subsection (7A) are exercised, have regard to any

relevant guidance issued by the National Assembly for

Wales.

Information concerning the exercise of the powers in section 7(2) and (7A)

5. The National Assembly for Wales directs that where it has notified a

relevant body as referred to in paragraph 2(1), the relevant body shall

supply the National Assembly for Wales with such information in its

possession, or to which it is entitled, concerning –

(a) the exercise by it of any of the powers in section 7(7A) of

the 1988 Act, and any of the powers in section 7(2) of the

1988 Act in connection with which the powers in section

7(7A) are exercised; and

(b) the activities of the company connected with the exercise of

those powers,

as the National Assembly for Wales may request at any time.

Annual report



6. The National Assembly for Wales directs that, where it has notified a relevant body as referred to in paragraph 2(1), the relevant body shall, no later than 30th September in each year, serve on the National Assembly for Wales a report giving –

(a) a summary by reference to the financial year ending on 31st

March of its exercise of any of the powers in section 7(7A) of the 1988 Act in relation to the company, and of any of the powers in section 7(2) of the 1988 Act in connection with which the powers in section 7(7A) were exercised;

(b) on the basis of the information in its possession, or to which it is entitled, a summary of the activities of the company connected with the exercise of those powers; and

(c) particulars of any changes to the Memorandum or Articles of Association of the company, and of any statutory returns made to the Registrar of Companies, during that year.

On behalf of the National Assembly of Wales

2003.



SCHEDULEParagraph 2

Information and documents to be submitted

5 The information and documents referred to are

(a) a document (“the proposal”) setting out which of the powers in section 7(2) it

proposes to exercise, describing the subject matter of that proposed exercise of

powers, and –

(i) setting out the power or powers in section 7(7A) which it proposes to exercise in

connection with the exercise of the power or powers in section 7(2);

(ii) where it proposes to exercise the powers in subsection (7A) by forming or

participating in the formation of a company, setting out the type of company in

question and its proposed name, and attaching a draft of the documents to be

submitted for registration of the company including a draft of the Memorandum

and Articles of Association;

(iii) where it proposes to exercise the powers in subsection (7A) in respect of a

dormant company, and where the exercise of the powers involves the transfer or

allotment of the shares in the company-

(a) setting out the type of company in question and its name and

proposed new name (if any);

(b) setting out the names of the shareholders in the company

before and after the proposed transfer of or allotment of shares

in the company; and

(c) attaching a copy of its Memorandum and Articles of

Association and of any document required to be submitted

under the Companies Act 1985, including sets of its annual

accounts, for the three financial years preceding the

submission (or, if less, for the financial years since the creation

of the company);



(iv) where it proposes to exercise the powers in subsection (7A) in respect of a

dormant company, and where the exercise of the powers involves a change in

the membership of the company-

(a) setting out the type of company in question, its name and

proposed new name (if any);

(b) setting out the names of the members of the company before

and after the proposed change in the membership of the

company; and

(c) attaching a copy of its Memorandum and Articles of

Association and of any document required to be submitted

under the Companies Act 1985, including sets of its annual

accounts, for the three financial years preceding the

submission (or, if less, for the financial years since the creation

of the company);

(v)where it proposes to exercise the powers in subsection (7A) in respect of an

existing company (otherwise than in respect of a dormant company), setting out

the identity of the company and attaching a copy of its Memorandum and Articles

of Association and of any document required to be submitted under the

Companies Act 1985, including sets of its annual accounts, for the three financial

years preceding the submission (or, if less, for the financial years since the

creation of the company);

(vi) setting out any proposed arrangements for the appointment of officers or

members of the body as directors of the company and with respect to any other

form of involvement of the body in the management of the company;

(vii) attaching a copy of any actual or proposed agreement between the

shareholders or members (including any proposed shareholders or members) of

the company, or between the shareholders or members and any other person or

persons, in connection with the proposed exercise of the powers in subsection

(7A), the management of the company or the activities of the company

connected with the exercise of the powers in subsection (7A);



(viii) attaching a copy of any actual or proposed agreement between the body and

the company (whether or not together with any other person or persons) in

connection with the proposed exercise of the powers in subsection (7A), the

management of the company or the activities of the company connected with the

exercise of the powers in subsection (7A), including any agreement with respect

to the fees or other benefits to which the body is to be entitled, or which it may

potentially receive, in that connection;

(ix) setting out details of the type (and, where appropriate, the amount) of any

investment or of any loan, guarantee or other financial provision which the body

proposes that it will make to or in respect of the company, including the number

of shares in the company which it is proposed will be acquired by the body;

(x)setting out how the relevant body proposes to reward individuals it employs, or

contracts with, in connection with any fees or other benefits accruing to it from

the exercise of those powers;

(xi) setting out the grounds on which the body considers that the criteria referred

to in paragraph 2(1)(a) and (b) will be satisfied; and

(xii) setting out the conditions that will apply as referred to in paragraph 2(2)(b)

and (c);

a) a business case in respect of the proposal; and

b) any other information or documents the National Assembly for

Wales may require concerning the proposal.

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