R&D collaborations governed by licensing deals are becoming more prevalent in R&D-intensive industries. Such collaborations, however, are challenging to set up and manage due to technical and market uncertainty as well as incentive problems in R&D and marketing. Specifically, incomplete information and limited control over the partner’s development efforts creates adverse selection and (double) moral hazard issues, which we analyze using a principal-agent framework. We study how to best structure R&D collaborations and licensing contracts, in terms of the contract structure (phasing and timing), payment terms (milestone payments and royalties) and control rights (buy-back and buy-back options, launch control, renegotiation).
Pharmaceutical companies are relying more and more on in-licensed products to fill their declining development pipelines. The resulting frenzy of licensing activity has highlighted the issue of how to best structure such collaborations. Badly constructed contracts can jeopardize a product’s success. Examples include Neopharm terminating an agreement with Pharmacia because of its alleged lack of promotion, Gilead claiming that Roche underperformed at manufacturing and promoting Tamiflu, and Nektar accusing Pfizer of a poor marketing job after withdrawing Exubera. The authors applied the findings of their work in a licensing negotiation between Phytopharm and Unilever, enabling a successful multi-million dollar deal.
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