UCL School of Management is delighted to welcome Niyazi Taneri, NUS, to host a seminar discussing ‘Perils of Bargaining Power in R&D Licensing’.
Research and development (R&D) license agreements present an opportunity for innovators (licensors) and their partners (licensees) to leverage each other’s complementary capabilities. Such synergies add to the intrinsic value of the R&D project at hand and create an upside for both parties to the transaction. Rather than focus only on drivers of the intrinsic value, it may seem natural for a firm to exploit a position of higher relative bargaining power for its own gain: On the one hand, an innovator with higher relative bargaining power may squeeze higher deal value out of its partner—creating further upside for the innovator. On the other hand, a partner facing higher payments at a continuation decision may terminate an agreement even when technical prospects are positive—a clear downside for the innovator. In this paper, we analyze an extensive dataset of over 1600 biotechnology licenses to understand whether innovators with higher relative bargaining power attain higher deal value, and investigate the complexities of how both deal value and its underlying drivers influence termination decisions. We find that innovators with higher relative bargaining power attain higher deal value than those with lower relative bargaining power. Ignoring the underlying drivers of deal value, we initially find support for the argument that a larger deal value creates a higher hurdle to clear for a “go” decision and increases the likelihood of a termination. Upon further investigation, we find that this observation is due to endogeneity: By inflating deal value beyond what should be paid for intrinsic value, higher relative bargaining power increases the probability of a downstream termination. In contrast, when deal value increases in its own right due to intrinsic value, the probability of a downstream termination decreases. Our findings have implications for how innovators should seek to increase deal value and how partners should set their internal incentives to avoid negative relative bargaining power effects.