The propensity and speed

of technology licensing

Seminar at Ceará State UniversitySeptember 30th 2017

Ian P. McCarthy

PAPER 1:

“Licensing speed: Its determinants and payoffs”

with Karen Ruckman, under review at the Journal of Engineering and Technology Management

PAPER 2:

THE AUTHORS

Karen Ruckman

Beedie School of Business,

Simon Fraser University

Ian P. McCarthy

Beedie School of Business,

Simon Fraser University

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MY BACKGROUND: BUSINESS

Pentagon Radiators (Alcan)Philips Electronics

Footprint Tools

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MY BACKGROUND - ACADEMIC

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MY BACKGROUND - OTHER STUFF

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MY BACKGROUND - OTHER STUFF

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MY BACKGROUND - OTHER STUFF

WHAT IS LICENSING?

• Licensing is an activity where the owner of IP (the licensor), allows another party (the licensee) the rights to use, adapt and commercialize the IP.

• A patented technology has IP protection for a finite period of time.

• Parties can earn monopoly profits until this patent protection period expires.

WHAT IS LICENSING?

As of 2017, the university had received more than $320

million from royalties (20%)

The 9 inventors (6 scientists, two trainers and a lab technician)

have received $1.3 billion.

LICENSING INCOME- US UNIVERSITIES: LIFE

SCIENCES 2015

B Huggett - Nature Biotechnology, 2017 - Nature Research

THE MARKET FOR PATENTED IDEAS: THE

ECONOMIST

• In 2005:

– U.S. patent licensing revenue is $45 billion annually

– Worldwide, the figure $100 billion and growing fast.

– IBM earning over $1 billion annually from its intellectual-property portfolio in 2005

– HP's revenue from licensing has quadrupled in less than three years

• The global licensing market was estimated to be worth $200 billion in 2011 (Alvarez and Lopez, 2015)

• There continues to be increasing supply and demand for technology

THE RISE OF LICENSING

Adapted from Chesborough 2004

THE RISE OF LICENSING

Adapted from Chesborough 2004

RESEARCH ON LICENSING (AND

PATENTING)

• Why firms license technologies (e.g., Rockett, 1990)

• What factors affect the propensity to engage in licensing (e.g., Fosfuri, 2006; Nagaoka & Kwon, 2006)

• How different approaches to licensing impact licensing outcomes (e.g., Gallini & Wright, 1990).

• The duration and timing of the patent application and approval process (Popp, Juhl & Johnson, 2003; Gans, Hsu & Stern, 2008)

IN OUR RESEARCH WE …..

• Surprisingly no research attention has been paid

to:

– Why some patents get licensed and others do

not? (paper 1)

– The determinants and payoffs of licensing

speed (paper 2)

PAPER 2: WHY SOME PATENTS GET

LICENSED AND OTHERS DO NOT

• Despite the considerable market for

patented technologies, many patents

remain unlicensed.

• We seek to understand why some patents

get licensed, while others do not.

WE KNOW THAT PATENT

CHARACTERISTICS ARE IMPORTANT.

The complexity, breadth and perceived importance of a

patent make it more attractive to licensees and increase

its chances of being licensed.

BUT WHAT ABOUT THE OWNER OF THE

PATENT?

We address this gap.

It’s important that companies

know which characteristics to

capitalise on so as to be better at

licensing out.

Patent Characteristics

Patent complexity (+)

Patent age (+)

Patent scope (+)

Patent citations (+)

Licensor Characteristics

Licensor size (+/-)

Licensor experience (+)

Licensor research intensity (+)

Licensor research age (+)

Past relationships between a licensor and licensee (+)

The likelihood a patent will be licensed.

WHAT WE LOOKED AT

OUR APPROACH

We identified a set of biopharmaceutical patents

that were licensed.

For each of these licensed patents we identified

a set of 19 alternate patents that could have

been licensed but were not.

To do this, we used topic modeling to analyse

each licensed patent and then identify

remarkably similar patents that were not

licensed

DATA

• Biopharmaceutical licensing agreements from the RECAP database by Deloitte.

• An initial search = 297 non-university licensing agreements (1993 and 2008)

• After data matching across three databases, the default sample was reduced to 93 agreements.

• RECAP provided information about the past relationship history of each partner.

• Accounting data (revenues and R&D expenditures) from Compustat and filings with the US Securities and Exchange Commission.

• Data for patent-based variables came from the NBER US patent citation data file (Hall et al., 2001) and its 2006 update.

SOME OF THE LICENSOR VARIABLES

• Technological prestige = Licensor’s average number of non-

self forward citations on patent stock within 5 years after

patent granted

• Licensor depth = Number of patents granted to licensor in

same IPC as licensed patent during 5 years before

agreement, logged

• Licensor breadth = Number of different IPC classes in licensor

patents that were granted within 5 years before agreement

• Licensor experience = Number of license agreements during

5 years before agreement involving the licensor

THE PATENT VARIABLES

• Patent complexity = Number of technological claims made by

the patent

• Patent age = Year of agreement minus year patent was

granted

• Patent scope = Number of IPC categories listed on the patent

• Patent citations = Number of backwards citations listed on the

patent

LICENSOR CHARACTERISTICS THAT IMPACT

THE LIKELIHOOD A PATENT WILL BE LICENSED

HOW THE LICENSOR CHARACTERISTIC

IMPACTS THE LIKELIHOOD A PATENT

WILL BE LICENSED

Licensor prestige: The extent to which a

licensor is viewed favorably by licensees.

Prestigious licensors have a greater

chance of licensing-out as licensees

are more likely to know about and be

attracted to them due to the increases

in licensor standing, visibility,

credibility, and the benefits by

association

Licensor experience at licensing: The extent

to which a licensor is practiced at licensing.

Experienced licensors learn from prior

licensing activity which makes them

more proficient at licensing-out and in

turn increasing the likelihood their

patents will be licensed.

FINDINGS

LICENSOR CHARACTERISTICS THAT IMPACT

THE LIKELIHOOD A PATENT WILL BE LICENSED

HOW THE LICENSOR CHARACTERISTIC

IMPACTS THE LIKELIHOOD A PATENT

WILL BE LICENSED

Licensor technological depth: The extent to

which a licensor specializes in a particular

technological area.Individually technological depth and

breadth have no impact on licensing

likelihood.

However, licensors strong in both

technological depth and breadth have

greater learning and innovation

capabilities and these also combine to

increase a licensor’s ability to license-

out.

Licensor technological breadth: The

technological scope of a licensor’s past

patenting efforts.

FINDINGS

THE TAKEAWAYS

1. The halo effect.

Licensees are not just making licensing

decisions based on quality of the patented

technology, but also on the reputation of

and technological fit with the licensor.

Prestige makes a licensor more visible to

licensees. It is also makes licensors more

legitimate and attractive to licensees.

THE TAKEAWAYS

2. Experience matters.

Experience allows licensors to accumulate

the specific knowledge, people, and

routines required to find and do deals with

licensees

Experience increases a licensor's ability to

be known to and selected by potential

licensees.

THE TAKEAWAYS

3. Organizational learning

enhances licensing likelihood.

A licensor’s technological depth and

breadth balance the knowledge

processes for technology transfer

transactions.

Depth and breadth combined, signal

to prospective licensees that a

licensor possesses the efficient

ability to convey and transmit

technical ideas.

“Licensing speed: Its determinants and payoffs”

with Karen Ruckman, under review at the Journal of Engineering and Technology Management

PAPER 2:

INNOVATION SPEED

• Fast innovation =

– greater revenue returns (Ringel, Taylor and Zablit, 2015)

– more new product development (Acur, Kandemir,

Weerd‐Nederhof and Song, 2010)

– growth in sales and initial public offerings (Eisenhardt, 1989).

• Fast innovation =

– less impactful and profitable outcomes (Steen and Dhondt,

2010)

– mistakes and inefficiencies (Crawford, 1992).

• To help resolve this conflict, we explore the determinants and

impact of licensing speed.

INNOVATION SPEED

• Research on innovation speed has

focused on the speed for all three

stages of the innovation process:

– the conception of an idea

– the development that idea,

– and the eventual

commercialization of that idea

WHY THE SPEED OF LICENSING?

• The market for licensing patents is big and

growing.

• Patented technologies are protected for a

finite time period:

– licensing slowly reduces the value of

the technology to both licensor and

licensee (Hegde, 2014; Markman et al.

2005).

– fast licensing = hurried sub-optimal deal

and lower price and reduced returns

(Allain, Henry, and Kyle 2011; Mauleon,

Vannetelbosch and Vergari, 2013).

IN OUR RESEARCH WE …..

• Surprisingly no research attention has

been paid to licensing duration or

speed.

• In response we examine:

– Which licensor and patent

characteristics determine the

speed of licensing?

– How does the speed of licensing

impact the post agreement

payments to licensors?

Licensing speed = the elapsed time from when a patent for a technology is

filed to when the licensing deal for the technology is announced.

Patent filed

Patent approved

Patent licensed

LICENSOR PROMINENCE

• Licensor prominence = a licensor’s standing or status relative

to other licensors, as perceived by potential licensees.

• It is a signal of the latent value of a licensor’s patent

technology offerings, which impacts licensing speed through

different kinds of visibility, appeal and power effects.

– Hypothesis 1a. Licensor age increases the time it takes to reach a licensing agreement.

– Hypothesis 1b. Licensor size increases the time it takes to reach a licensing agreement

– Hypothesis 1c. Licensor prestige increases the time it takes to reach a licensing agreement.

LICENSOR KNOWLEDGE STRUCTURATION

• Knowledge structuration is the extent to which a licensor’s

knowledge portfolio is based on multiple or a few technology

domains (George at al 2008).

• Knowledge structuration indicates a licensor’s breadth and

depth of technological expertise, which is linked to learning

and exploration capabilities (e.g. Ahuja and Lampert, 2001;

Rosenkopf and Nerkar, 2001).

– Hypothesis 2a. Licensor technological depth increases the time it takes to reach a licensing agreement.

– Hypothesis 2b. Licensor technological breadth increases the time it takes to reach a licensing agreement.

PATENT DESIRABILITY

• Forward citations = knowledge impact of a patent (Duguet and MacGarvie 2005), an indicator of the value and desirability of the patent (Ceccagnoli et al. 2010; Harhoff, Scherer, and Vopel 2003).

• Patent scope = breadth of technological areas cited by the patent’s technology (Ruckman and McCarthy, 2017; Sakakibara, 2010).

• Claims = building blocks of a patented invention, and they are indicative of the purview of the invention (Hall, Jaffe, and Trajtenberg2001).

– Hypothesis 3a. Patent forward citations increase the time it takes to reach a licensing agreement.

– Hypothesis 3b. Patent scope increases the time it takes to reach a licensing agreement.

– Hypothesis 3c. Patent complexity increases the time it takes to reach a licensing agreement.

PAYOFFS TO LICENSOR

• The payoff to a licensor is typically an up-front lump sum

and/or royalty rate paid as a percentage of the final sales.

• Previous research looks at which type of payoff will

predominate (see: Kamien and Tauman, 1986).

• We focus on how licensing speed affects the payoffs.

– Hypothesis 4. A slower licensing speed increases the payoffs to the licensor.

DATA

• Same industry and data sources as for Paper 1

• Different variables for the hypotheses

MODEL

• Dependent variable = (Time 1 – Time 0)

– Time 0: date of patent application

– Time 1: date of licensing agreement

• Survival analysis

• Log-logistic model

RESULTS

• We find that strength in licensor prominence (H1), licensor

knowledge structuration (H2) and patent desirability (H3), all

work to slow down the time it takes to licensing-out a patented

technology.

• This suggests that strength in these factors endow licensors

with an abundance of licensing opportunities that:

– increases the size, complexity and duration of the licensing

out-task, and

– allows licensors to take their time to review, negotiate and

select the most attractive offer

RESULTS

• The results show that slower licensing speeds are associated

with higher royalty rates (H4).

• There also evidence that licensor size, research intensity, and

prestige and patents with a high number of forward citations

and scope, reduce royalty rates.

• Licensee size and patent complexity act to increase lumpsums.

TAKEAWAYS

• While innovation speed is important, when it comes to

licensing, it is beneficial for licensors to slowly and carefully

license-out patented technologies.

• There are different stages and aspects to the innovation

process, and the benefits of being fast or slow can vary for

these.

• Licensing is not just a functional transaction based solely on

the quality and suitability of a patent. Perceptions about the

licensor matter.

• A licensor’s knowledge base and related organizational

learning capabilities (knowledge structuration) influence the

speed of licensing.

TIMELINE PAPER 1

• May 2009 = Idea for paper

• Dec 2012 = First submission to the Strategic Management Journal

• Aug 2013 = Second submission to the Strategic Management Journal

• May 2014 = First submission to Research Policy

• April 2015 = Second submission to Research Policy

• May 2015 = First submission to Industry and Corporate Change

• Jan 2016 = Second submission to Industry and Corporate Change

• June 2016 = Third submission to Industry and Corporate Change

• July 2016 = Accepted by Industry and Corporate Change !!!!

• July 2017 = Published in Industry and Corporate Change !!!!

Dr. Ian

McCarthy

@toffeemen68

Professor, Technology and

Operations Management

Beedie School of Business

Simon Fraser University

Ian McCarthy

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