Expert insight:

The most critical issue to consider prior to proposing a Joint Venture

By Martin Austin, expert-trainer of The Pharma Business Development Course.

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In the pharmaceutical industry, one of the more common reasons for a joint venture (JV) is a research collaboration in which the two parties share skills, expertise or resources which neither has alone. The sharing of the costs and risks can make sense in such a speculative venture. Yet there are potential complications which need to be considered before proposing such a JV.

One of the most contentious of these issues is: who has control?

Many JVs are started on the basis of a 50:50 ownership and because of this can later run into problems if the owners disagree about the future direction of the venture. This can lead to a dissolution of the venture with one party buying out the other – which can itself become a complex transaction.

In other situations, JVs have been made where one partner has a dominating share in a 51:49 relationship. I was once involved in one of these during the 1980s. For a while it was difficult to achieve commercial success as a result of disagreements at board level, and it was only when the 51 percent partner seized control and insisted on the company being operated as a subsidiary that some kind of order was restored.

On a commercial basis therefore, JVs can be extraordinarily difficult to manage without a complete accord between the partners. Even a successful JV such as the AstraMerck JV created for the launch and promotion of Prilosec (omeprazole) in the US (which created a brand leader) had major consequences at the programmed end of the agreement: the break-up costs were reported to be $3.3 billion in compensation to Merck, which came at a difficult time for AstraZeneca. All JVs therefore are fraught with problems and need very careful consideration before selecting this as the preferred structure compared to the many others available.

A variation to the classic JV which has come into vogue is the granting or taking of an option to a development-level product. The concept behind such an option is the provision of a fixed level of cash which secures the product for the partner but does not obligate it to either take the product or fund it further. Yet having this option prevents the product falling into the hands of a competitor if it proves to be worth it as its development programme unfolds.

Genentech, for instance, in 1992 granted options to Roche on its pipeline of products in exchange for funding without direct control: as each product finished its proof of concept studies, Roche could exercise its option to license the products on a first refusal basis. This subsequently allowed Roche to acquire the whole company. Similarly, Novartis paid $50 million to Idenix for an option to license a phase II compound, and a smaller amount to Morphosys for options to pipeline products. Novartis now has a special fund dedicated to taking options.

There are advantages to both parties because of the lack of commitment and the provision of funds. However, if the option is not exercised by the partnering company, this may adversely affect the future worth as it may raise questions about the motive of the partner in abandoning a significant investment, even if the grounds for doing so were of a purely commercial nature

Last update: March 2017


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