Electronic Thesis and Dissertation Repository


Master of Science


Applied Mathematics


Matt Davison, Greg Zaric


As the number of new drugs requiring companion diagnostics rises, more and more partnerships are formed between drug and diagnostics manufacturers to develop the necessary companion diagnostic. An increasingly significant issue is that of the optimal revenue/profit sharing or compensation schemes for such partnerships. We investigate the structure of an optimal compensation scheme under a scenario where a large pharmaceutical firm that is developing a drug intends to partner with a smaller diagnostics firm to develop a companion diagnostic test for the drug. We describe an optimal contract as one that maximizes the pharmaceutical firm's expected profits while offering enough incentives for the diagnostics firm to accept the contract and then work at an effort level that is preferred by the pharmaceutical firm. We formulate the problem of determining the optimal contract as an instance of the Principal-Agent problem. We then present a numerical approach for solving the problem.