Licensing 101: In + Out-Licensing
What is Out-Licensing?
There are essentially two types of licenses. Out-licenses, which involve a company licensing its technology to a third party in exchange for royalties or other consideration ; and in-licenses, which involve a company acquiring the right to use the technology of a third party in exchange for royalties or other consideration.
An out-licensing program can be lucrative for a company, but all licensing programs are accompanied by administrative costs that potential licensors should consider before embarking on a licensing effort. The potential licensor will need to allocate resources towards a variety of tasks, including, supplying information to potential licensees about the technology, protecting the technology, negotiating the licenses, monitoring the use of the technology by the licensees, and collecting/monitoring royalties, just to name a few.
Nonetheless, a well-executed licensing program can offer a number of benefits to a company. Reasons for to out-license a technology include:
To generate income – If a company is not making or selling products incorporating a certain technology, out- licensing can provide an avenue for generating income from an under-utilized technology.
To enable a second source – A company may license a technology to a competitor if the company is unable to manufacture a product in-house, or of the market is reluctant to accept a device that has only a single source.
To improve market strength – Licensing can be used strategically to stimulate market demand for a product, by establishing certain licensed marks or methods as the standard within an industry.
To minimize legal costs – Licensing can be used to neutralize infringers, thereby avoiding the legal expenses associated with an infringement claim.
Expand into an export market niche through regional licensing – Licensing can also be used to generate revenue in markets where it may not make sense for a company to have an actual sales presence.
In short, companies considering an out-licensing program around a specific technology should view out-licensing a potentially long-term and stable revenue stream, that is likely to incur ongoing administrative costs.
What is In-Licensing?
Licensing is, perhaps, the most common commercialization pathway for a company, outside of having a technology owner exploit the technology itself. Licensing occurs when the owner of a technology (or other entity with rights to a technology), the licensor, grants a third party, the licensee, the right to exploit the technology in some fashion.
In-licensing enables a company to acquire a technology without taking the time and/or using the resources necessary to develop the technology in-house. Specific reasons for in-licensing include:
Reduce time and cost of development – By in-licensing a product or technology, the time and cost required to bring a product to market can be significantly reduced. In fact, a study by Mercer Capital Management (http://www.outsourcing-pharma.com/Preclinical-Research/Why-research-Just-in-license) suggested that big pharmaceutical companies should abandon drug discovery and focus on in-licensing compounds from other sources. The study found that the revenues generated from investing $1 billion dollars into in-house drug discovery were $14 billion, while the return from in- licensing $1 billion dollars of third-party developed compounds was $22 billion. The reasons for the higher return on the licensed compounds, was that products could be launched more quickly, and thus generated revenue more quickly.
To meet the market standard – Many current manufacturing/production standards specify proprietary technologies. In order to compete in the market, companies must obtain all of the necessary licenses to such technologies.
Freedom to operate – In-licensing can provide a company with freedom to operate. A risk for any company, particularly in sectors in which there is extensive patenting, is that it may introduce a new product that incorporates third party intellectual property. In such cases, without prior authorization of the patent owners, the risk of being accused of infringement is high. In-licensing the relevant technology can be a cost-effective way for a company to avoid expensive legal actions and/or disruption to the company’s business.
