Technology Transfer - Royalty Reality by Terry Enga*
Based on an article Technology Transfer - Royalty Reality by Terry Enga that was published in TCE The Chemical Engineer March 2004 Issue 753
Technology transfer licensing can generate huge profits for some intellectual property owners. Realistically, most technology licensing is a more modest affair. Sadly a great deal of potentially valuable technology is never properly commercialised.
Professional chemical engineers surely don’t need to read an article about technology transfer – preaching to the converted. The major process industries are fully aware of the value of intellectual property (IP), and many engineers are working for large multinationals on a global scale. Someone is taking care of the IP. It’s all protected. It’s all up to date. It covers all territories. What about those small improvements – well they’re OK as well and anyway solutions can always be bought in when needed. Well, yes, maybe, for the big stuff anyway …. And yet….
Intellectual Property
There can hardly be an engineer or scientist working in the process industries who isn’t using some technology, software or other IP that is licensed, either knowingly or unknowingly. All those flow meters, the catalysts and filters, the machines and heat exchangers, the heaters and coolers, the methods and processes, the control software, all the procedures, other software, the databases, the brand names and so on and so on. At the end of each chain someone created the IP and someone exploited it, but this isn’t your problem.
And yet IP can be valuable. In 2001, American Universities generated nearly US $1.1 billion in gross licence income and their running royalties on product sales made US 850 million. While in the UK, university research income from business was 12.3% and in the USA was 10.1%. Of course some patents are more profitable than others. The Cohen/Boyer Cloning Patent for recombinant DNA cloning or gene splicing, ultimately realised about US $ 300 million in revenues.
IP can be in patents, trade marks whether registered or unregistered, or copyright, know how, registered design, or unregistered design. It can be for something tangible or a method for doing something. The proper drafting and filing of IP is best left to professional IP experts so that the widest possible protection is obtained. In the process industries, much of the IP in use, is for the direct benefit of the owner’s products and services and is likely to be well developed and market proven. Technology transfer is all about bringing technology to other organisations, industries and markets. There may be additional value outside the developer’s own market that is lying untapped. Technology transfer, maximises the return on the IP, brings in additional resources and market intelligence and shares the marketing burden.
IP has a sell by date. Time will run out on the patents, or perhaps better technology will arrive and start to take market share. Once the decision is made to exploit IP through technology transfer, the benefits of strategic partnerships, additional market presence and greater market intelligence can all flow back, provided care is taken to select licensees and territories and to ensure the licence terms are properly thought through.
Technology Transfer partners
The process industries are very familiar with collaborative projects - joint development of solutions, working alongside designers, contractors, manufacturers, operators and owners and financiers. These all tend to lead to a project focus. Technology transfer is also collaborative and either feeds into your needs or gives freedom to explore new markets. The other party involved should be the person or company to license to (or from). They may be a company able to bring additional technology to add to yours and make a better product. They may have an established market position in a territory or market sector that you are weaker in. They may have greater resources to further develop your IP. Surprisingly, they could also be an infringer of your IP – here the marketing and market growth decisions have been made by them – it’s just that you aren’t benefiting and that needs to be addressed.
Whoever they are, ultimately they need to see as much advantage in licensing your technology as you do and they need to recognise the benefits of working with you in particular. Technology Transfer is very much about relationship building and to last, it must be a Win-Win situation. It is important though that the whole is greater than the sum of the parts. After technology transfer, the IP should have entered a different organisation, market sector, or territory. It could be overseas, with all the additional factors of custom and culture to contend with. Care needs to be taken to ensure that direct competition for your existing market is legally controlled and grey market conditions haven’t been created.
External IP exploitation
In many cases, external IP exploitation is going to be a distraction from the owner’s core activities. This possibly explains why so much IP is never used by other industries, markets or territories until all IP protection has been lost. I believe there is a need for independent and confidential advice about technology transfer and IP protection and management services like those offered by Novarlis Ltd, so that the true added value associated with technology transfer can be realised. Then questions about whether the IP is ready for these new markets or needs additional development work after the technology has been transferred can be addressed without consuming owner’s time. Whether this is the case or not will greatly affect the value of the IP and the choice of recipient. The owner and IP recipient need to decide what level of support is needed during the technology transfer process.
The actual mechanism for technology transfer is outside the scope of this article, but could include technology transfer licensing, selling outright, joint ventures or spin out companies. Whatever route is chosen, the length of time left to run on the IP, the time needed for further development and the recovery of additional costs incurred by the owner and the recipient all need to be considered. However, be aware that the owner should not be locked into a licence deal that offers low returns if better prospects later develop.
Royalty reality
Technology transfer is mostly about money, but occasionally it can be for goods or services in kind. Sometimes it’s for free (where some other benefit accrues e.g. safety or welfare matters). It needs to take account of inflation, exchange rates and the value of the technology being licensed over time. Where money is involved there is the potential for conflict, for instance when royalty payments are not made or when either party is in some form of business difficulty.
It is absolutely vital to think out the terms and conditions of the licence agreement thoroughly before proceeding. Take note of every possible contingency however unlikely and examine every way royalties could be levied to determine which method gives the maximum return. This is of particular importance when the strength and depth of the relationship with the third party is put to the test, such as when after the agreement is operative and the nature and extent of the royalty payments is reviewed. The royalties may be disappointing after all the work put in, but in fact a little extra thought in constructing the agreement might have radically altered the position.
Other benefits
These relationships should be worth more than money alone or the technology that originally created them. The original relationships were based on mutual benefit around one particular piece of IP or technology. Where do you turn for your next technology licence? Where do you and they look first for technical solutions? In addition, by licensing your technology you gather market intelligence, customer feedback and new product ideas across a much wider range than you could obtain on your own. However these relationships formed or developed, whether by stick or carrot, what you put in determines very much what you get out.
Western Europe produces nearly a third of estimated world chemicals production. In the EU, 25,000 chemical companies directly employ about 1.7 million people with further employment in a broad range of downstream industries. The process industries are immensely successful and are well placed to apply technology transfer and other industries and markets would greatly benefit from having more access to the latest technologies. In 2000, according to the European Chemical Industry Council, CEFIC, the R&TD spending in the EU, the USA and Japan was 2.1%, 2.6% and 3.5% respectively (as a % of sales).
However, two examples show that there can still be winners and losers if one of the parties involved does not take the necessary care. Technology transfer will only flourish when all the parties reap the rewards.
Some years ago, a US university gave a licence to Procter and Gamble (P and G) for permitting P and G to add stannous fluoride to P and G's fluoride toothpaste. The university negotiated the licence on the basis of the value of the additive and not on the total value of the toothpaste as they should have done. As the cost of the additive was only a miniscule fraction of the sales price of the toothpaste, the university probably received only 4% or so of what they could have done if the royalties had been paid on the toothpaste. A similar situation may have arisen in relation to the anti-knock petrol additives patent (Midgley). Here the licensor charged royalties on the basis of the cost of the cheap additive and not on the price of the much more expensive petrol, although the royalty situation was complicated by the desire to quickly bring to market, fuel with the lead additive. In both of these cases, the owners of the original IP probably had some regrets.
Are you ready for Technology Transfer?
Technology Transfer - Royalty Reality