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The new math for drug licensing
Big pharmaceutical houses rely on drugs developed by others—particularly biotechnology companies—to fill the gaps in their product pipelines. But pharma's licensing strategy has a serious flaw: deals are often struck too late to generate maximum value. A Monte Carlo simulation of 10,000 licensing agreements shows that pharma companies would capture the maximum value in 85 percent of all cases by acquiring the rights to a drug in the early (preclinical) stage of development even if that meant paying a lot more than these companies now offer for early rights.
The take-away: Pharma companies are overdiscounting for the uncertainty of preclinical licensing deals. They—and the biotech companies—could do better by agreeing to richer terms for licensing rights early on.
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© 1992-2003 McKinsey & Company, Inc
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