In no other industry are alliances seen as more critical to innovation and success than in pharmaceuticals. Of the top 25 drugs today, 12 were discovered or developed by a company other than the one that launched them. The trend is likely to continue: in our survey of senior business-development managers in the pharmaceutical industry, 85 percent expected the number of alliances to increase over the next five years.

But the alliance landscape is evolving, particularly at large pharma corporations looking for the next blockbuster. As their R&D productivity continues to decline, smaller companies with attractive products have taken advantage of the seller’s market for new compounds. Businesses that only a decade ago would have been happy to sell marketing rights are now equally interested in acquiring new capabilities. These companies demand participation in the design of clinical trials and the formulation of marketing campaigns, to say nothing of a larger share of the profits. It’s no surprise that pharma alliances are becoming increasingly complex—and costly—to manage. Certainly, the average price (including up-front fees, milestone payments, and royalties) has continued to rise. In 2002, the industry experienced an unprecedented number of megadeals, with at least seven worth upward of...