Universal Display/Samsung Display – Nothing yet
The OLED Patent License Agreement between Samsung Display and Universal Display (OLED) expired on December 31, 2017, as well as the material purchase agreement signed at the same time (August 22, 2011). We had hoped that a new agreement would be signed before the expiration, however thus far that has not been the case, with the company issuing a carefully worded press release stating, “The Registrant and SDC are engaged in on-going discussions regarding a formal long-term extension of these agreements. The Registrant expects the parties to continue to conduct business during these discussions. The Registrant intends to provide an update once a resolution to these discussions is completed. No time frame has been established for the completion of these discussions.”
The previous contracts, which were originally signed back in 2005, were updated in 2011 to reflect the needs of both parties, particularly as Samsung Display was actively producing OLED displays using UDC materials. The license agreement called for a yearly license fee (paid bi-annually) in lieu of a per unit royalty, and escalated each year through 2017, allowing SDC to manufacture licensed products using UDC’s patented methods and processes, and giving access to all future patents during the contract period, with certain exceptions. It did not give SDC, or its affiliates the right to manufacture the phosphorescent materials needed for such devices and prohibits SDC or its affiliates from participating in any challenge to UDC patents. The license fees (below) were set based on both parties expectations for the growth of the OLED display segment and Samsung Display’s growth within it, and while some question whether such a non-unit based fee was correct, we believe that at the time, it was, and provided UDC with a guaranteed income, regardless of the ebb and flow of Samsung Display’s demand, and gave SDC the ability to expand its small panel OLED business without a per unit royalty to burden cost.
The supply agreement, which covered UDC red and green phosphorescent organometallic emitters, included certain minimum purchase requirements, but did not cover any other UDC materials, including a blue phosphorescent emitter, should it have been offered during the contract period. We believe SDC satisfied the minimum amounts every year that the contract was in effect, although we believe that UDC would have worked with SDC to allow a push of those minimums into the following year if necessary. What was most important about the material supply agreements was how the price of each material was determined.
Given a particular formulation of an emitter, UDC set a base price per kilogram and shipped to SDC on a purchase order basis. A cumulative total of purchase value of that material was kept, and the price per kilo dropped as each successive cumulative volume point was reached until a ‘terminal’ value at which new purchases would not affect the price. This process was applied to each material, not just separately to red or green phosphorescent materials, but to each successive new formulation that reset the discount bar back up to the initial price when SDC began its use. This encouraged UDC to continue to improve materials to maintain its already high margins, and while one might assume it kept SDC from adopting those new materials, as the price per kilo would rise, most of those material usage decisions made by SDC were based on improving the performance of the displays, which also included a number of other factors that were more important to timing than the cost of the materials.
Moving forward, UDC and SDC must now work through not only the details of a new long-term contract that faces some of the same issues indicated above, but a number of new factors are now present, some of which we present here.
BLUE – A blue phosphorescent emitter is now closer to reality than when the updated contracts were signed, and the inclusion of a third[1] primary phosphorescent material in the contract would need to be accounted for in the license fee arrangement.
GROWTH – When the updated contracts were signed, the OLED space was in its infancy, and both parties had to rely on estimates and forecasts that included considerable speculation as to the growth of the industry. Today there are far more indicators that can help to guide such estimates and should the new contract be based on that growth, would change the yearly license fee escalators.
MATERIAL USAGE – Samsung Display continues to grow its OLED business by adding capacity and consequently their material usage requirements continue to grow. UDC must determine new ‘break points’ for cumulative material usage discounts based on current and planned future capacity expansion without pushing SDC to explore alternative materials.
PATENT EXPIRATION – Some of UDC’s basic patents are expiring this year and while we expect it will not change the overall IP protection that UDC garners, it has to be a point of negotiation for SDC. We believe there will be some attempts by other suppliers to produce phosphorescent emitter materials over the next few years as some of the early material IP patents expire, but we expect all will be challenged in various courts worldwide by UDC. While the outcome of such litigation is extremely complex, subject to a variety of nationalistic biases, and likely to continue for years, it is a point that Samsung must consider given its vast resources in specialty chemicals. The previous contract was quite specific about UDC being the only supplier of phosphorescent materials, but if a supplier can levy a successful challenge to UDC’s expiring IP, Samsung will not want to be prohibited from using an alternative producer. This would not extent to the ‘device’ patents that specify the use of phosphorescent materials in a device, which would still be covered under UDC’s portfolio, but could give Samsung some leeway in the negotiations.
ALTERNATIVE MATERIALS – While some of this is covered in the IP section, most of the emitter materials produced by UDC are based on organic molecules attached to a heavy metal, primarily Iridium. In most instances the UDC patents also cover platinum and Osmium based organic emitters, but much research is being done to find emitters based on other metals or polymers, which would not be covered by UDC material IP. TADF’s[2] have been a focus of a number of well-funded companies as an alternative to UDC’s phosphorescent emitters and SDC would have to consider the potential for these materials to be substituted for UDC phosphorescent emitters in some products.
We have barely scratched the surface of the potential points of negotiations between UDC and SDC, and given the complexity and constantly changing OLED landscape, we had relatively low expectations for a new contract before the end of 2017. That said, until negotiations are finalized formally, both parties are working under limited contractual protections, and if the format of the new agreement remains the same, a license payment from SDC would be due in 2Q. Hopefully these issues will be resolved before then, but we expect little change in SDC’s material buying patterns in the interim.
[1] UDC actually provides a number of phosphorescent emitter colors, including a yellow/green used for OLED TV, but blue material was outside of that group.
[2] Thermally Activated Delayed Fluorescence
The previous contracts, which were originally signed back in 2005, were updated in 2011 to reflect the needs of both parties, particularly as Samsung Display was actively producing OLED displays using UDC materials. The license agreement called for a yearly license fee (paid bi-annually) in lieu of a per unit royalty, and escalated each year through 2017, allowing SDC to manufacture licensed products using UDC’s patented methods and processes, and giving access to all future patents during the contract period, with certain exceptions. It did not give SDC, or its affiliates the right to manufacture the phosphorescent materials needed for such devices and prohibits SDC or its affiliates from participating in any challenge to UDC patents. The license fees (below) were set based on both parties expectations for the growth of the OLED display segment and Samsung Display’s growth within it, and while some question whether such a non-unit based fee was correct, we believe that at the time, it was, and provided UDC with a guaranteed income, regardless of the ebb and flow of Samsung Display’s demand, and gave SDC the ability to expand its small panel OLED business without a per unit royalty to burden cost.
The supply agreement, which covered UDC red and green phosphorescent organometallic emitters, included certain minimum purchase requirements, but did not cover any other UDC materials, including a blue phosphorescent emitter, should it have been offered during the contract period. We believe SDC satisfied the minimum amounts every year that the contract was in effect, although we believe that UDC would have worked with SDC to allow a push of those minimums into the following year if necessary. What was most important about the material supply agreements was how the price of each material was determined.
Given a particular formulation of an emitter, UDC set a base price per kilogram and shipped to SDC on a purchase order basis. A cumulative total of purchase value of that material was kept, and the price per kilo dropped as each successive cumulative volume point was reached until a ‘terminal’ value at which new purchases would not affect the price. This process was applied to each material, not just separately to red or green phosphorescent materials, but to each successive new formulation that reset the discount bar back up to the initial price when SDC began its use. This encouraged UDC to continue to improve materials to maintain its already high margins, and while one might assume it kept SDC from adopting those new materials, as the price per kilo would rise, most of those material usage decisions made by SDC were based on improving the performance of the displays, which also included a number of other factors that were more important to timing than the cost of the materials.
Moving forward, UDC and SDC must now work through not only the details of a new long-term contract that faces some of the same issues indicated above, but a number of new factors are now present, some of which we present here.
BLUE – A blue phosphorescent emitter is now closer to reality than when the updated contracts were signed, and the inclusion of a third[1] primary phosphorescent material in the contract would need to be accounted for in the license fee arrangement.
GROWTH – When the updated contracts were signed, the OLED space was in its infancy, and both parties had to rely on estimates and forecasts that included considerable speculation as to the growth of the industry. Today there are far more indicators that can help to guide such estimates and should the new contract be based on that growth, would change the yearly license fee escalators.
MATERIAL USAGE – Samsung Display continues to grow its OLED business by adding capacity and consequently their material usage requirements continue to grow. UDC must determine new ‘break points’ for cumulative material usage discounts based on current and planned future capacity expansion without pushing SDC to explore alternative materials.
PATENT EXPIRATION – Some of UDC’s basic patents are expiring this year and while we expect it will not change the overall IP protection that UDC garners, it has to be a point of negotiation for SDC. We believe there will be some attempts by other suppliers to produce phosphorescent emitter materials over the next few years as some of the early material IP patents expire, but we expect all will be challenged in various courts worldwide by UDC. While the outcome of such litigation is extremely complex, subject to a variety of nationalistic biases, and likely to continue for years, it is a point that Samsung must consider given its vast resources in specialty chemicals. The previous contract was quite specific about UDC being the only supplier of phosphorescent materials, but if a supplier can levy a successful challenge to UDC’s expiring IP, Samsung will not want to be prohibited from using an alternative producer. This would not extent to the ‘device’ patents that specify the use of phosphorescent materials in a device, which would still be covered under UDC’s portfolio, but could give Samsung some leeway in the negotiations.
ALTERNATIVE MATERIALS – While some of this is covered in the IP section, most of the emitter materials produced by UDC are based on organic molecules attached to a heavy metal, primarily Iridium. In most instances the UDC patents also cover platinum and Osmium based organic emitters, but much research is being done to find emitters based on other metals or polymers, which would not be covered by UDC material IP. TADF’s[2] have been a focus of a number of well-funded companies as an alternative to UDC’s phosphorescent emitters and SDC would have to consider the potential for these materials to be substituted for UDC phosphorescent emitters in some products.
We have barely scratched the surface of the potential points of negotiations between UDC and SDC, and given the complexity and constantly changing OLED landscape, we had relatively low expectations for a new contract before the end of 2017. That said, until negotiations are finalized formally, both parties are working under limited contractual protections, and if the format of the new agreement remains the same, a license payment from SDC would be due in 2Q. Hopefully these issues will be resolved before then, but we expect little change in SDC’s material buying patterns in the interim.
[1] UDC actually provides a number of phosphorescent emitter colors, including a yellow/green used for OLED TV, but blue material was outside of that group.
[2] Thermally Activated Delayed Fluorescence
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