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Research and Development Project Valuation and Licensing Negotiations at Phytopharm plc

Author

Listed:
  • Pascale Crama

    (Department of Management Science and Operations, London Business School, Regent's Park, London NW1 4SA, United Kingdom)

  • Bert De Reyck

    (Department of Management Science and Innovation, University College London, London WC1E 6BT, United Kingdom, and Department of Management Science and Operations, London Business School, Regent's Park, London NW1 4SA, United Kingdom)

  • Zeger Degraeve

    (Department of Management Science and Operations, London Business School, Regent's Park, London NW1 4SA, United Kingdom)

  • Wang Chong

    (Phytopharm plc, Corpus Christi House, Godmanchester, Cambridgeshire PE29 2HY, United Kingdom)

Abstract

We describe a research and development project-valuation model developed for Phytopharm plc, a pharmaceutical development and functional food company based in Cambridgeshire, United Kingdom. Phytopharm uses the model to value the projects in its research and development portfolio, and in licensing negotiations with potential product development and marketing partners. We include different valuation methods, including net present value, decision analysis, and Monte Carlo simulation. We also consider the technological risks of product development, as well as the uncertainty of commercial success. In addition to determining a value for a product in development, the model proposes appropriate licensing contract structures. A typical licensing contract specifies milestone payments and royalties to be paid by the licensee to the licensor. The contract structures adhere to an agreed-upon equitable split of the project value between the two parties. The model also generates critical information during the negotiation meetings, including break-even analyses, trade-offs, and bargaining zones. Phytopharm is currently deploying the model for use with its entire project portfolio.

Suggested Citation

  • Pascale Crama & Bert De Reyck & Zeger Degraeve & Wang Chong, 2007. "Research and Development Project Valuation and Licensing Negotiations at Phytopharm plc," Interfaces, INFORMS, vol. 37(5), pages 472-487, October.
    • Handle: RePEc:inm:orinte:v:37:y:2007:i:5:p:472-487
    DOI: 10.1287/inte.1060.0255
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    References listed on IDEAS

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    1. De Reyck, Bert & Degraeve, Zeger & Vandenborre, Roger, 2008. "Project options valuation with net present value and decision tree analysis," European Journal of Operational Research, Elsevier, vol. 184(1), pages 341-355, January.
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    4. Grabowski, Henry G. & Vernon, John M., 1994. "Returns to R&D on new drug introductions in the 1980s," Journal of Health Economics, Elsevier, vol. 13(4), pages 383-406.
    5. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
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    Cited by:

    1. Valdivia, Miguel & Galan, Jose Luis & Laffarga, Joaquina & Ramos, Juan-Luis, 2020. "A research and technology valuation model for decision analysis in the environmental and renewable energy sectors," Renewable and Sustainable Energy Reviews, Elsevier, vol. 122(C).
    2. Murali Agastya & Oleksii Birulin, 2023. "Optimal Task Scheduling under Adverse Selection and Hidden Actions," American Economic Journal: Microeconomics, American Economic Association, vol. 15(2), pages 660-698, May.
    3. Mario Barchi & Marco Greco, 2018. "Negotiation in Open Innovation: A Literature Review," Group Decision and Negotiation, Springer, vol. 27(3), pages 343-374, June.

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