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Real Options Conference 2023

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Value Share Appropriation and Payment Structure In Biotechnology Licensing Deals

A main issue in patent licensing agreements is the contract payment structure and how this distributes the value created between the licensor and licensee. In this article, we analyze the key factors affecting the allocation of value between the licensee and licensor from a real options perspective. In doing so, we explicitly recognize the value of real options embedded in the development process and the sequential structure of licensing contracts. We test our hypotheses on a sample of 175 licensing deals in the U.S. biopharmaceutical industry. Our results show that the value appropriated by the licensee is higher when the agreement is signed in the later stages of technology development, when a lower fraction of the payments is made in upfront fixed fees compared to royalties, and when therapy volatility is lower. Further, the value captured by the licensee is higher in licensing schemes where the licensee pays for development or there is co-development. The study contributes to the contract design literature in R&D alliances and provides insight for future research to incorporate real options to disentangle the complexities of inter-firm strategies in innovation ecosystems. We conclude with implications for the design and management of licensing deals and for policymaking.

Lenos Trigeorgis
Durham Business School
United Kingdom

Francesco Baldi
University of Turin and LUISS Guido Carli University

Raffaele Oriani
LUISS Guido Carli University


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