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The timing of licensing: theory and empirics

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38 Pages
English

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Niveau: Supérieur, Doctorat, Bac+8
The timing of licensing: theory and empirics? Marie-Laure Allain†, Emeric Henry‡and Margaret Kyle April 27, 2009 Abstract Markets for technology licenses are thought to create efficiency gains by allowing for division of labor in research and development of innovations. However, these gains depend on the timing of technology transfer: the licensee should take over development at the stage at which he has an efficiency advantage. We show that in an environment with asymmetric information about the value of the innovation and where information becomes available over time, deviations from the optimal timing of technology transfer will occur. Competition between potential licensees has an ambiguous effect on this timing. For concentrated markets, in which there are few potential licensees, an increase in the number of potential licensees may delay licensing. The opposite is true for very competitive markets. We test these predictions with data on contracts signed between biotechnology firms and large pharmaceutical firms, and find evidence consistent with our theory. PRELIMINARY AND INCOMPLETE Jel Codes: L13, L24, L65. Keywords: Innovation, Licensing, Market structure, Pharmaceuticals, Biotechnology. 1 Introduction Licensing has become an increasingly popular means of transferring innovative technologies over the last decades.1 As markets for technology grow in importance, the timing of licensing becomes an essential consideration. For instance, in an industry with two firms and two main stages of research, one firm may be more efficient in conducting early stage research and the second more efficient in the final stage.

  • major pharmaceutical

  • innovation

  • licensing has become

  • licensing

  • licensing between

  • over development

  • costs ∆


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Thetimingoflicensing:theoryandempiricsMarie-LaureAllain,EmericHenryandMargaretKyle§April27,2009AbstractMarketsfortechnologylicensesarethoughttocreateefficiencygainsbyallowingfordivisionoflaborinresearchanddevelopmentofinnovations.However,thesegainsdependonthetimingoftechnologytransfer:thelicenseeshouldtakeoverdevelopmentatthestageatwhichhehasanefficiencyadvantage.Weshowthatinanenvironmentwithasymmetricinformationaboutthevalueoftheinnovationandwhereinformationbecomesavailableovertime,deviationsfromtheoptimaltimingoftechnologytransferwilloccur.Competitionbetweenpotentiallicenseeshasanambiguouseffectonthistiming.Forconcentratedmarkets,inwhichtherearefewpotentiallicensees,anincreaseinthenumberofpotentiallicenseesmaydelaylicensing.Theoppositeistrueforverycompetitivemarkets.Wetestthesepredictionswithdataoncontractssignedbetweenbiotechnologyfirmsandlargepharmaceuticalfirms,andfindevidenceconsistentwithourtheory.PRELIMINARYANDINCOMPLETEJelCodes:L13,L24,L65.Keywords:Innovation,Licensing,Marketstructure,Pharmaceuticals,Biotechnology.1IntroductionLicensinghasbecomeanincreasinglypopularmeansoftransferringinnovativetechnologiesoverthelastdecades.1Asmarketsfortechnologygrowinimportance,thetimingoflicensingbecomesanessentialconsideration.Forinstance,inanindustrywithtwofirmsandtwomainstagesofresearch,onefirmmaybemoreefficientinconductingearlystageresearchandthesecondmoreefficientinthefinalstage.Itissociallyoptimaltotransfertheinventionattheendofthefirststage.AnyotherWethankJoshGans,DenisGrombandJ.P.Benoitforcommentsonanearlierdraft,andseminarparticipantsatDuke,EARIE2008,LondonBusinessSchool,Lucca,Wharton,theUniversityofMissouri,HarvardBusinessSchool,Emory,INSEAD,Universite´LibreDeBruxellesandHECLausanneforusefulsuggestions.CNRS,EcolePolytechnique(91128Palaiseau,France,email:marie-laure.allain@polytechnique.edu)LondonBusinessSchool(SussexPlace,Regent’sPark,LondonNW14SA,England,email:ehenry@london.edu)andRPEC§LondonBusinessSchool(SussexPlace,Regent’sPark,LondonNW14SA,England,email:mkyle@london.edu),NBERandCEPR.1Estimatesofthesizeoftheglobalmarketfortechnologylicensingrangefrom$5.6billioninthe1980sand$36billionto$100billioninthelate1990s,andJapanesefirmsreportedearning¥340billion($3.2billion)fromlicensestoforeignfirmsin2002(OrganisationforEconomicCo-operationandDevelopment,2005).1
timingincreasesthecostofinnovatingandmightleadtotheinnovationbeingabandoned.Thus,thetimingoflicensingmayimpacttheoverallinnovationrate,andmayultimatelyaffecteconomicgrowth.Specializationindifferentphasesoftheinnovationprocessiscommoninmanyindustries.Forinstance,smallbiotechnologycompaniesmighthaveacomparativeadvantageinachievingearlystagediscoveriesincertainfieldswhilelargepharmaceuticalfirmsareconsideredmoreefficientinconductinglaterstageclinicaltesting.GuedjandScharfstein(2004)showcleardifferencesinthesuccessratesofdrugcandidatesincancerbetweenexperienced,largerfirmsandsmallbiotechfirms.InanarticleinNatureReviews:DrugDiscovery,KalamosandPinkus(2003)claimthat“[f]orthepharmaceuticalindustry,innovativebiotechcompoundshaveservedtobuttresslaggingR&Dproductivity...pharmabringsclinicaldevelopment,portfoliomanagementandcommercializationskillsthatarelackinginmanybiotechcompanies”.Boththeacademicliteratureandthepopularpressnotethatasignificantproportionofthedrugsmarketedbymajorpharmaceuticalcompaniesoriginatefromlicensingdealswithsmallerbiotechnologyfirms.Angell(2004)claimsthatonethirdofthedrugsmarketedbymajorpharmaceuticalcompaniesoriginatefromlicenseswithbiotechsoruniversities,andina2006surveyofinnovation,TheEconomistnotesthat“BigPharma’sR&Dactivityisnowconcentratedasmuchonidentifyinganddoingdealswithsmall,innovativefirmsasitisontryingtodiscoveritsownblockbusterdrugs”(Economist,2006).Understandingthefactorsthatinfluencethetimingoflicensingbetweenbiotechandlargepharmaceuticalfirmsisessential.Inefficientdelaycouldcontributetothedecreaseinproductivityinthisindustry.Thereissomeevidencethatpharmaceuticallicensingcontractshavebeensignedwithincreaseddelaysinrecentyears,aperiodalsocharacterizedbyalownumbersofnewdrugslaunched.Thisdelaydoesnotmerelyreflectanincreaseinthetotaltimerequiredfordrugdevelopment;rather,thetechnologytransferisoccurringatlaterstagesofdevelopment,afterthecompletionofmoreadvancedclinicaltrials.ThisisillustratedinFigure1,whereweshowthefractionofdealssignedineachdevelopmentphaseoverthelastthreedecades.Thisdelayintechnologytransferalsocoincideswithaperiodofincreasedmarketconcentration,astheindustryhasknownsubstantialmergeractivity.Thelinkbetweenthenumberofcompetitorsandthetimingoflicensingisoneofthecentralconsiderationsinthispaper.Itisanimportantissuethatcouldbecomeanessentialfactorinmergerreviews.Ifmarketsfortechnologyworkefficiently,thenthetimingoflicensingdependsonlyonthepro-ductiveefficiencyofthecontractingfirms.However,wefocusontwofactorsthataretypicalinmanyinnovativeindustriesandthatmaycreatedeviationsfromthesociallyoptimaltimingoftechnologytransfer.First,innovativeenvironmentsareoftencharacterizedbyasymmetricinformation.Theinno-vatorisoftenbetterinformedaboutthevalueofherideathanapotentiallicensee.Second,asresearchprogresses,informationisrevealedabouttheunderlyingvalueoftheinventionandtheinformationasymmetryshrinks.Forinstance,drugcandidatesundergoaseriesofclinicaltrialsrequiredforregu-latoryapproval.Onceaclinicaltrialphaseissuccessfullycompleted,outsideobserversbecomemoreconfidentofthedrugcandidate’svalue.Wecapturetheelementspreviouslydiscussedinatwoperiodmodelinvolvingonesoleinnovatorandnproducers.Thefirstperiodischaracterizedbyasymmetricinformation:theinnovatorknowsthevalueofherinventionwhereastheproducersareuninformed.Inthesecondperiod,theuncertaintyisresolved.Theproductiscostlytodevelopfromthefirsttothesecondperiodfortheinnovator,butiscostlessfortheproducers.Itisthussociallyoptimaltotransfertheinnovationtooneoftheproducersinthefirstperiod.However,theexistenceofasymmetricinformationcancreatedeviationsfromthissociallyoptimaltiming.Innovationsaretransferredbysigninglicensingcontracts.Anexclusivelicensecanbesigned2
betweentheinnovatorandoneoftheproducersateitherperiod.Theinnovatorbargainssequentiallywiththenproducers.Thismodelcapturesinanintuitivewaytheinfluenceofthenumberofpotentialbuyersofthelicenseontherespectivebargainingpowers.Indeedweshowthatanincreaseinnincreasesthebargainingpoweroftheinnovator.Inthecontextofthismodel,weidentifyanecessaryandsufficientconditionforalicensetobesignedinthefirstperiod.Weexaminehowthenumberofcompetitorsinfluencesthisdecision.Ifthenumberofproducersnaffectstherespectivebargainingpowers,butdoesnotimpacttheprofitsonthedownstreammarket,wefindthatanincreaseinthenumberofproducersdelayslicensing.Theintuitionisthefollowing.Anincreaseinthenumberofpotentialbuyersnincreasesthebargainingpoweroftheinnovatorandthepricesheobtainsinthesecondperiod.Theinnovatorthuswantstodelaysignature,whileproducerswanttosignearly.Theincentivesoftheinnovatortodelayneverthelessdominateasaconsequenceofherprivateinformation.Sheknowsthequalityoftheinvention,whereastheproducersconsiderthepossibilitythattheinventionisbad(andgeneratesnoprofits).Whenprofitsalsodependonn,anincreaseinthenumberofproducershastwocountervailingeffectsonthesecondperiodpriceforthelicense.Greatercompetitionincreasesthebargainingpoweroftheinnovator,butdecreasestheprofitsderivedfromtheinnovation.Theinnovatorobtainsalargersliceofasmallerpie.Forinitiallynonconcentratedmarkets,thesecondeffectdominatesandthesecondperiodpricedecreaseswiththenumberofproducers,thusleadingtoearliersigning.Theoppositeisgenerallytrueforinitiallyconcentratedmarkets.WethereforefindaninvertedU-shapefortheeffectofthenumberofcompetitorsonthedelayinlicensing.Thesetheoreticalpredictionsareconfirmedbyourempiricalanalysisonlicensesinthepharma-ceuticalindustry.Wecombinedataonlicensingdealsandtheirstageofdevelopmentatsigningwithdataonthenumberoffirmsindifferenttherapeuticclasses(firmswithdrugstreatingsimilardiseases).Controllingforvariousmeasuresoffinancialconstraintsandotherfactors,weconfirmempiricallytheinvertedU-shaperelationshipbetweendelayinsigningandthenumberofcompetitors.Thoughthequestionaddressedinthispaperwasmotivatedbytheparticularapplicationtothepharmaceuticalindustry,thetheoreticalmodelisquitegeneral.Theresultsshouldberelevantinindustrieswiththefollowingcharacteristics.First,thereshouldexistsomeasymmetryofinformationbetweentheinnovatorandpotentialbuyers,areasonablefeatureinmostinnovativesectors.Second,informationshouldberevealedduringthedevelopmentoftheinvention.Third,thereshouldbesomespecializationintheinnovationprocess.2Finally,exclusivelicensingshouldbeprevalent;thistendstobethecasewhendevelopmentcostsaresignificant,sothatnofirmhastheincentivetosinkthosecostswithoutexclusiverights.3Accordingly,webelievethattheresultscouldbeappliedmoredirectlytosectorssuchaschemicalsthantothecomputerindustry.Thepaperproceedsasfollows.Insection2,wepresentthemodelanddeterminethemainthe-oreticalresultsinsection3.Insection4,weexamineanumberofrobustnesschecks.Wetesttheseresultsondataonlicensingcontractsinthepharmaceuticalindustryinsection5and6.Insection7wecompareourpapertotheexistingliteratureandconcludeinsection8.Allproofsarepresentedintheappendix.2SeeAroraetal.(2001)foradiscussionofspecializationandthedivisionofinnovativelabor.3AccordingtoAnandandKhanna(2000),exclusivecontractsaremostcommoninchemicalsandleastcommonincomputers.3