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Research and Development Project Valuation and Licensing Negotiations at Phytopharm plc

Department of Management Science and Operations, London Business School, Regent's Park, London NW1 4SA, United Kingdom
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
Department of Management Science and Operations, London Business School, Regent's Park, London NW1 4SA, United Kingdom
Phytopharm plc, Corpus Christi House, Godmanchester, Cambridgeshire PE29 2HY, United Kingdom
pcrama{at}london.edu
bdereyck{at}london.edu
zdegraeve{at}london.edu

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.

Key Words: project valuation; negotiation; pharmaceuticals; decision analysis; Monte Carlo simulation; real options

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				P. Crama, B. D. Reyck, and Z. Degraeve Milestone Payments or Royalties? Contract Design for R&D Licensing Operations Research, November 1, 2008; 56(6): 1539 - 1552. [Abstract] [PDF]