Licensing agreements are contractual arrangements that allow a licensee to use, manufacture or sell particular assets with permission from the contractual owner. Licensing has been integral for smaller companies to gain access to resources, including specialist regulatory expertise or manufacturing and marketing capabilities. These are usually only resources that larger pharmaceutical partners or medical device companies may possess. The essential component is to be able to adequately evaluate the technology on offer, to ensure all value is captured. Here are the pros and cons of licensing agreements from the licensor’s perspective:
The biggest advantage to a licensing agreement is the potential for the inventor to earn revenue passively, through a continuous stream of income without having to exert effort or lose ownership rights. In other words, the licensee does most of the commercialisation work to make profits and the licensor will receive a percentage of the profits, without outlaying capital to fund the venture. In addition, the licensor will not have to incur expenses related to product distribution, marketing, sales, manufacturing, design work, etc. This revenue stream may continue for many years.
It may be more efficient to license out new products if the firm does not have the funding capacity or commercialisation resources to take up production of the intellectual property themselves.
A licensing agreement may enable a firm to enter foreign markets more quickly. There are fewer risks imposed upon the firm compared to the regulatory and financial ramifications of setting up locally. A license will also allow for products to be supplied locally when there is no opportunity to manufacture in the locality. The licensor may also learn about new customer segments and the possibility of redesigning their products to meet their needs. Overall, licensing may assist the company to commercialise its IP or enter new markets more effectively and with greater ease than on its own.
Risking Loss of the IP
Intellectual property owners assume risk when they choose to license their products. A licensing agreement may open the doors for piracy or owners may have the technology stolen or replicated in the absence of good legal representation and a strong patent strategy. Monitoring a licensee’s use of the licensed product is also costly. A good example is software piracy and its illegal distribution.
When the licensor is licensing the technology in exchange for royalties based on sales, then the proportion of revenue earned is dependent on the performance of the licensee to make sufficient levels of sales. The licensor is also dependent upon the licensee to make quality products with its technology, to ensure that its reputation is maintained. In these instances, it may be worth negotiating a guaranteed annual minimum royalty.
Control of Technology
A negative aspect to licensing is that a company’s control over the technology is weakened. The technology has been transferred to the licensee, who is free to use the technology to their discretion.
At Inner Maven, our consultants can assist you to look at the pros and cons of your considered market strategies, to ensure your technology reaches the market in the most profitable manner. In addition we are well versed in the many factors you must incorporate into a well-developed licensing agreement.