Island Innovation

Monday, August 19, 2002

Arctic Circle to tangled tropical mangroves - but also technological constraints hinder the development of compact, unobtrusive monitoring devices. That is, until marine biologist Jeff Goodyear, president of Victoria's H.A.B.I.T. Research, put his mind to it.

In New York City, the frantic days that followed 9/11 meant increased traffic across New York Harbour. Ferrying of debris away from and equipment to Ground Zero was coordinated with security and safety in mind as well as timeliness as the prospect of buried survivors instilled a sense of urgency.

For marine lanterns to delineate an emergency response security zone in the busy harbour, the U.S. Coast Guard turned to Victoria high technology firm Carmanah Technologies.

While the telecommunications subset of the high technology sector continues to be ravaged by investors, regulators and customers, other technological subsets continue to soldier on. On Vancouver Island, technology companies best described as technological innovators and inventors continue to work in relative local obscurity. Increasingly though, their inventions, research and innovations are being heralded internationally. From the wreckage of 9/11, to the Ha Long Bay and Hai Phong Harbour of Northern Vietnam to medical research facilities the world over.

Colin Dobell, president of privately-held Inuktun, says that since the company's "MicroVGTV" (variable geometry tracked vehicle) was used to assist with search and rescue efforts after the collapse of the World Trade Center towers, public and financial interest in the company has increased.

According to Dobell, Inuktun is currently working on a project in conjunction with the U.S. Navy. The project involves the development and manufacture of a 'ROPI' (remotely operated paint inspector). Dobell says it will be a "vehicle which will fly into a jet fuel tank which has jet fuel in it, and perform inspections of the tank."

Inuktun was launched in March 1989, as a partnership between friends Al Robinson and Terry Knight. Dobell says Robinson and Knight - both of whom remain with Inuktun - have been "amazed at the growth of the company". Asked whether the years of toiling in relative obscurity hampered or enhanced Inuktun, Dobell insists it has been beneficial.

"We certainly are not well known locally, and that is not necessarily a bad thing. The majority of our business is in the U.S., a very small portion in Canada, and some overseas," explains Dobell. "We do not mind being obscure locally." Dobell suggests an IPO is a consideration for the increasingly high-profile Inuktun.

David Green, chairman of the board and chief technology officer of TSX Venture Exchange-listed Carmanah Technologies, has the unique perspective of heading two technology companies. One, Carmanah, in Victoria, the other, NxtPhase Corporation (a developer of optical high voltage equipment with 50 separate patents), in Vancouver.

Green says Victoria's talent pool is "excellent" but when it came time to market the Carmanah to customers and investors, "it was difficult to get people on a plane to Victoria." Green says the island's low profile and slower pace proved to be a hindrance and he struggled to morph Carmanah into a viable business from a long-term research and development endeavour. Key to the evolution, says Green, was Carmanah's pursuit and acquiring of patents. According to the Canadian Patents Database, Green received Canadian patent 2241044 on April 9, 2002 for Carmanah's 'Sealed Solar-Powered Light Assembly'. The technology is now deployed in Carmanah's products in regions as diverse as Vietnam; North Platt, Nebraska, rail yards; and the Indian port of Kandla. Carmanah holds patents for the same technology in Europe and the US.

Carmanah currently has three patents pending. In announcing the successful patent process, Carmanah CEO Art Aylesworth, noted that the patent provides the Harbour Road-based company with 20 years of exclusive North America-wide protection from the date the patent application was filed, and prevents the import of "copycat" products into North America.

Scan the annual report of any public company involved in product research and development - Lucent Technologies', for example, trumpets the fact its portfolio contains over 18,000 patents. For most companies, current, past or pending patents are placed front and centre as estimable assets, attesting to company ingenuity and research prowess. Patents are also presented as valued property of the intangible persuasion.

However, while Power Measurement, Carmanah, Inuktun and Stressgen Biotechnologies are afforded a degree of protection and prestige through their various patents, those same patents can exact a toll.

Once a patent is awarded, they become public documents. This means competitors are free to study exactly what went into making Carmanah's lights light, Inuktun¹s miniature two-way clutches clutch and Power Measurement's monitors monitor. Then rival engineers can then focus on finding ways to work around the patent.

Goodyear of H.A.B.I.T. Research says that while patents have a certain prestige, the idea of placing his technological diagrams and schematics in the public realm does not hearten him. Instead, he says trademark and copyrights are being considered for the various radiotelemetry receivers and transmitters he has developed. As far as patent-able content, Goodyear suggests circuitry within his miniature transmitter would very likely qualify.

If a competitor contests a patent or simply chooses to copy a patented product or procedure, it is up to the patent holder to protect their asset.

Glanford Avenue-based SressGen was faced with such a dispute in November 2000 when the biopharmaceutical company, which is focused on the development and commercialization of innovative stress protein-based immunotherapeutics, locked horns with Woburn, Massachusett's Antigenics. Starting in 1993, Stressgen had licensed a patent from Whitehead Institute for Biomedical Research in Cambridge, Massachusetts. The patent covers the use of stress proteins to prepare vaccines for treatment of disease. That was until the Opposition Division (OD) of the European Patent Office (EPO) revoked the patent the Whitehead Institute held on the stress proteins leased to Stressgen.

The OD agreed with Stressgen competitor Antigen that the Whitehead Institute's patent claims were too broad and promptly revoked the patent.

However, the ruling did not prevent Stressgen from using the disputed process and technology. The EPO simply thrust the material contained in the patent into the public domain. It meant no company in Europe holds a patent on the process and technology and all companies have the right to use stress proteins alone for therapeutic purposes.

So while the patent is now in the public domain, does this reduce Stressgens' intellectual stores, and therefore, assets? Depends on whom you ask.

While Stressgen and Antigenics dueled in 2000, the former's Toronto Stock Exchange listing took a hit. During the second week of November 2000, Stressgen's stock went from an opening price of $7.15 on Monday 13, to $7.05 on Tuesday 14, closing $7.00 on Friday 17. While the price volatility was not overly violent, trade volumes radically increased during the same period. On Monday 13, 75,438 shares changed hands; on Tuesday 14 (when the EPO decision hit the market) trade volume hit 204,345; and on Wednesday 15, 106,525 shares were traded. By Friday 17, things had settled down, with only 99,940 shares being exchanged.

Carmanah was forced to defend its technological property as well. According to Green, his former marketing manager jumped ship to work for a competition the late nineties.

"Suddenly there was someone with the exact same product $20 cheaper, go- ing to the same distributor, going after the same clients and causing total chaos," explains Green.

Green says Carmanah won the patent infringement lawsuit. Much to his chagrin, Green says Carmanah is currently in the process of filing another suit "against the same parties."

While Green declined to offer particulars, according to the Victoria Court Registry, Carmanah Technologies filed a lawsuit against Roland Buehler current general manager of Sidney's Sigma Technologies Inc., in 1998. "It `the lawsuit` has been a nightmare for us," says Green. "It was very serious and almost killed us." Green says that while the court costs were staggering (he declined to provide a figure) the marketplace confusion created by the event was the most damaging.

"A patent is only worth what you are willing to spend to protect it," admits Dobell of Inuktun. "It is more a marketing tool than anything - especially when talking with venture capitalists or when planning for an IPO."

"The reality is, they `patents` only protect you so much. If someone big with much deeper pockets than you decides to violate it, you are probably screwed," adds Dobell.

Besides a spirit or innovation, the other common thread running through almost every one of these companies are financing concerns. Market downturns have forced several to reconsider IPO timing if not IPOs entirely. Business consultant Murray Persicke says direct investment in companies, outside the traditional brokerage route is becoming more common. Persicke, who also serves as chairman of H.A.B.I.T. Research's advisory board, says companies who have matured beyond 'friends and family' investment but are still not at the institutional level have begun appealing to investors directly.

No matter how a company arranges financing, the expectation remains constant among the investing class, and that is that a return on investment is likely. For many companies who spend years, and in the case of Stressgen decades - in research and development, it is important to develop a revenue stream, no matter how modest, prior to issuing an offering memorandum.

For Stressgen it was bioreagent sales (for the three months ending March 31, 2002, Stressgen generated $1,405,000 in sales revenue). For H.A.B.I.T. Research, it has been modified designs and ingenious applications of the company¹s tiny transmitter/receiver units.

According to Goodyear, a 'pill size' transmitter was provided to Colorado Springs, Colorado. Apparently a 4.5-mile underground pipe was clogged. To find the location of the clog, the tiny transmitter was placed in the pipe and approximately two miles in the transmitter encountered the blockage. backhoe was used to expose the pipe and a relatively simple, cheap repair was exacted.

Ultimately, Goodyear sees H.A.B.I.T. Research's future through a glass of diversification and technology adaptation. This includes using the radiotelemetry technology for tracking not only wildlife but for use with Alzheimer patients, children and pets. He says revenue from these areas will allow him to continue work in his chosen discipline, which is marine biology.