Inter-firm partnerships - strategic alliances in the pharmaceutical industry

Abstract

In recent years, strategic alliances have become key to success in sectors such as pharmaceutical and high-tech industry. Strategic partnerships between start-ups and big pharmaceutical companies have become more prevalent and are typically motivated by the benefits that can be obtained from complementary capabilities. These contractual relationships typically use different financial incentives such as royalties, upfront or milestone payments. The best type of contractual conditions for these strategic alliances may not always be clear. We study three different types of contracts, milestone and optional upfront payment, royalty and optional upfront payment, and acquisition contract. We characterise the optimal decisions for each contract option and provide insights into the benefits each contract type offers for start-ups and big pharmaceutical companies.