Increases in alliance activity between research-intensive firms and incumbents is puzzling because it is challenging to contract upon highly uncertain R&D activities. Our paper extends prior research by exploring the relationship between firm capabilities and gains from trading ownership rights. This link is important because the allocation of ownership rights has been shown to influence alliance outcomes. Using data based on a survey of biotechnology firms, we find that both current and future capabilities provide strong explanatory power for understanding firm valuation of ownership rights. These ownership rights are ultimately allocated across firms in order to maximize their gains from trade.