UCL School of Management

Research project

R&D licensing contract design and negotiations

Summary

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).

Relevance

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.

Selected publications

Crama, P., De Reyck, B., & Degraeve, Z. (2008). Milestone payments or royalties? Contract design for R&D licensing. Operations Research, 56 (6), 1539-1409.
Crama, P., De Reyck, B., Degraeve, Z., & Chong, W. (2007). Research and development project valuation and licensing negotiations at Phytopharm plc. INTERFACES, 37 (5), 472-487. doi:10.1287/inte.1060.0255 [link]
Crama, P., De Reyck, B., & Degraeve, Z. (2013). Step by step. The benefits of stage-based R&D licensing contracts. EUROPEAN JOURNAL OF OPERATIONAL RESEARCH, 224 (3), 572-582. doi:10.1016/j.ejor.2012.09.014 [link]
De Reyck, B. (2016). Licensing Contracts: Control Rights, Options and Timing. Management Science. doi:10.1287/mnsc.2015.2386 [link]

Link to the publication’s UCL Discovery page

Last updated Wednesday, 9 March 2016

Author

Research groups

Operations and Technology

Research areas

Management science

Research topics

Decision analysis; Licensing contract design; Management of innovation; Negotiations; New product development; R&D management