Research and Development Project Valuation and Licensing Negotiations at Phytopharm plc

Abstract

We describe an R&D project valuation model developed for Phytopharm plc, an emerging pharmaceutical company based in Cambridge, UK. The model allows the company to value the projects in its R&D portfolio, and is used for licensing negotiations with potential product development and marketing partners. It is based on different valuation methods, including Net Present Value, Decision Analysis and Monte Carlo Simulation. We take into account the technological risks during the development phases of pharmaceutical products, as well as the uncertainty in terms of commercial success. In addition to determining a value for a product in development, the model also proposes appropriate contract structures for licensing purposes. A typical pharmaceutical 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 in terms of break-even analyses, trade-offs and bargaining zones. It was used by Phytopharm during 2004 in its licensing negotiations for a novel product for the dietary control of obesity, which was licensed in December 2004 to Unilever, a multinational food company. Phytopharm is currently deploying the model for its entire project portfolio.

IP licensing: how to structure a good deal

“…Ruback and Krieger (2000) propose a decision analysis model to appraise a licensing contract without accounting for the entire problem solving process (from data collection to model design and implementation, including negotiation support). Crama, et al (2007) develop a valuation model using NPV, decision analysis and Monte Carlo simulation to assess the value of an R&D project carried out by a biotech company providing insights into the most appropriate licensing contractual structures and hints for negotiations.…”

Valuing technology along a timeline of technological maturity

“…Most companies are using standard financial methods, as found for example in the survey of valuation methods used at various stages of the R&D process in the pharmaceutical industry carried out by Hartmann and Hassan (2006). There are reports of modified DCF use by incorporation of Monte Carlo simulation or risk adjusted discount rates (Perdue et al, 1999;Crama et al, 2007). There are reports of modified DCF use by incorporation of Monte Carlo simulation or risk adjusted discount rates (Perdue et al, 1999;Crama et al, 2007).…”

R&D project scheduling when activities may fail

“…1. More details can be found in Crama et al (2006). Phase III in this project is subdivided into three runs of toxicological studies on animals, referred to as "Tox," and medical studies on humans, referred to as "Med."…”