A Case Study on the Design of Pharmaceutical R&d Licensing Deals

In today’s intensely competitive business environment, pharmaceutical companies are augmenting their product pipelines by in-licensing proprietary compounds or drug discovery-related technologies from external sources. In a sample case study, the OptFolio model of pharmaceutical R&D portfolio management is used to evaluate the optimal stage to license developmental drugs in three distinct therapeutic categories in the face of technological and market uncertainties. Partnership deals are modeled within a decision tree as a series of continuation/abandonment options for the licensing pharmaceutical company, and Monte Carlo simulation is utilized to perform a sensitivity analysis of key managerial assumptions regarding market value and technical success probabilities. Using a proposed preclinical alliance deal as an example, the decision model determines the fair value of the abandonment option to guide the licensee in the negotiation of specific deal terms. The managerial implication of this analysis is that a real options approach to designing a licensing agreement enhances the deal’s expected value because of the ability to control downside risk via the abandonment option.