Competition to license pharmaceutical compounds is becoming fierce. Drug companies used to rely solely on their own discoveries to deliver the next miracle cure. Nowadays, they are increasingly likely to license compounds discovered by others. These companies resort to licensing to beef up their product ranges and to satisfy their investors’ growth expectations, and because the risk-adjusted cost of doing so, their executives believe, is less than that of developing alternatives in-house. But as licensing grows more popular, the number of competitors vying for deals increases, negotiations and accords become more complicated, and costs rise.

Just getting a seat at the bargaining table can be difficult because the price is often so high, and organizations with compounds to license want to deal only with the strongest potential partners. Rockefeller University limited the number of contenders in the final round of negotiations for licensing rights to an obesity-related gene discovered by its scientists, and it then used an auction-style mechanism to push up the price to $20 million. Pfizer is expected to shell out $225 million, including an up-front payment of $85 million, as part of a 1998 agreement with Searle (Monsanto’s pharmaceutical division) to develop the promising anti-arthritis treatment...