Joint Venture between Pharma and Biotech Companies- A Study

By: DR.H.N.RAMESH, MBA, Phd. Mr. AJAY KUMAR T.R, MBA

An Overview of Joint Venture between Pharma and Biotech Companies- A Study

Abstract: Joint venture is an important corporate strategy, the firms follow in recent years to reap the superior benefits from the markets. Although, there are host of factors influence companies to form venture, cost of commercialization and shorter exclusivity duration are the main driver in most of the Joint Ventures. In recent years more number of ventures can be seen in the Pharma and Bio-tech industry than others. Research and Development, Technology, Investment and Cross boarder marketing opportunities are attributed to be responsible for increased ventures in for Pharma and Bio-tech industry. Present article attempts to throw light on Joint ventures in contextual factors in Pharma and Biotech industry caused the alliances, post alliance conditions and the forms of J.V organizations etc. The article also discusses the case of joint venture between Eli Lilly and ICOS.

Key words: Joint Venture, Enterprise, Strategic alliance, Pharmaceutical, Bio-technology, Drugs, Company.

Introduction:
A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise . The venture can be for one specific project only, or a continuing business relationship such as the Fuji Xerox joint venture The goal of a joint venture are often the same as those in a licensing/R&D structure, the main difference seems to be that the biotech company has either the technology or the size (with a sizable cash reserve) to engage in an equal partnership with a pharmaceutical company. Another possible reason for entering into joint ventures may be the complexity of the collaboration (more complex projects require closer collaboration) or the number of partners (multiple partners requires a new organizational structure).
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Multinational firms are frequently confronted with restrictions about the ownership structure of their foreign operation by local governments. In particular, developing and transition countries often impose shared ownership agreements, hoping that this might facilitate beneficial technology spillovers for their local industries. Multinationals, on the other hand, are not always happy about such forced international joint ventures, precisely because of the risk of involuntary spillovers.

http://en.wikipedia.org/wiki/Joint_venture as on 04th December 2009

Declining productivity, through Research & Development, rising costs of commercialization, increasing buyer influence, and shorter exclusivity durations have driven the average cost of launching a successful new drug to $1.7 billion, reducing minimum expected returns on new investments to an unsustainable level of 5% . To facilitate drug development and to lower the cost and risk of launching new drugs on their own, pharmaceutical companies have increasingly turned to strategic alliances with biotechnology companies. These alliances can be categorized roughly as follows: 1) co-marketing agreements; 2) R&D/ licensing arrangements; 3) joint ventures; and 4) Merger & Acquisitions. In 2003, the U.S. Food and Drug Administration (FDA) approved only 21 new drugs, marking a steady decline since a peak of 53 in 1996 . Developing new products involves high costs & longer durations which have resulted in pharmaceutical companies collaborating with biotechnology companies to aid drug development and to lower the cost and risk of launching new drugs on their own. Since 1998, 20,000 alliances have been formed in the industry, with an annual average growth rate of 25% . Alliances among biotech & pharmacy firms are not a unique phenomenon in the industry. The frequency of firms participating in inter-firm collaborations has increased dramatically over the last fifteen years. Revenues from alliances have more than doubled during the 1990s, increasing to 21% for the top 1,000 U.S. firms by 1997 . This trend reflects the perceived benefits from collaboration. Firms may transfer technologies, achieve economies of benefit, and access unique advantages that may be difficult to develop in-house. Firms may also partner with competitors to set standards in an industry or to meet difficult time goals for development of new technologies. The below table indicates the Volume and Value of deals during 1997-2007. It clearly shows that both the value & volume are increasing rapidly over the past decade & has gained a sprint effect since 2005.
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Jim Gilbert, Preston Henske & Ashish Singh, Rebuilding Big Pharmas Business Model, IN VIVO, (November 2003). Peter Landers, Drug Industrys Big Push into Technology Falls Short, WALL ST. J., February 24, 2004 4 Bryan Bergeron & Paul Chan, BIOTECH INDUSTRY: A GLOBAL, ECONOMIC, AND FINANCING OVERVIEW 1 (2004). 5 L.M. Fisher, How Strategic Alliances Work in Biotech, STRATEGY+BUSINESS available at http://www.strategybusiness.com/press/article/8840?pg=all&tid=230. 6 J.R. HARBISON & P. PEKAR, JR., SMART ALLIANCES: A PRACTICAL GUIDE TO REPEATABLE SUCCESS pg. 24

Source: http://www.globalbusinessinsights.com/ Intellectual property rights are under risk during alliances due to unintended transfer of valuable technology or know-how to their partners. These risks can be mitigated by choosing an appropriate alliance structure. Firms have a myriad of forms to choose from in organizing their alliance activities, ranging from simple licensing arrangements to more complex forms, such as the equity & non-equity joint venture. These collaborations generally involve a contribution of technology and/or R&D efforts by at least one party (usually the smaller party) and some sort of investment and/or service by at least one party (usually the larger party). Formal structure provides a means for firms to set out partner rights and obligations, articulate alliance goals and expectations, align incentives, and provide a framework for decision making and adapting to unforeseen contingencies. The unique formation of the pharma-biotechnology industry which has all the ingredients such as the staggering financial needs, the unpredictable and catastrophic liability from drug developmenthas helped trigger the recent boom in alliances. Recent studies have shown that pharma-biotech alliances are 30% more likely to gain FDA approval than a drug developed independently .
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Drug Development; Pharma-Biotech Alliances Present Lower Risk Opportunities, DRUG WEEK, January 9, 2004

Biotech-Pharma Industry
The makeover of the pharmaceutical industry over the past ten years has profoundly altered the environment of technology transfer in life sciences industry. With the expiration of key patents for many of the industrys leaders, the pharmaceutical industry has come under increasing pressure to invigorate its channels with potential transfers with their biotech counterparts. Pharmaceutical Companies The pharmaceutical company spends hundreds of millions of dollars to pass the drug through the regulatory authorities and to market the drug to consumers, with the goal of extracting as much profit as possible before the patent on the drug expires. This business model primarily aims to do three things jointly: 1) fill the regulatory channel with new drugs; 2) finding new competitive drugs for the ones already in the market; and 3) developing new formulations of proven highly popular drugs. The business model that has served the pharmaceutical industry well for much of its existence is under attack from two different trends. First, the cost of drug development has risen over the years, requiring larger investments to discover the highly popular drugs. Secondly, the in-house research departments of large pharmaceutical companies have not been able to match the fast growing innovative new technologies. In 2003, the U.S. Food and Drug Administration (FDA) approved only 21 new drugs, marking a steady decline since a peak of 53 in 1996. The number of joint ventures in pharma-biotech industry has swelled in the last ten years. Pharmaceutical companies contribute to pharma-biotech partnerships in two major ways. Pharmaceutical companies generate revenues from their patented drugs, which they use to promote their internal and external R&D efforts. Secondly, they are capable of significant manufacturing, distribution, marketing and legal expertise to sustain in the marketskills that are vital to bring a drug contender to market. Biotech Industry The biotech industry has evolved over the past twenty five years. In the initial years, many players tried to follow the examples of Genentech and Amgen in becoming self and fully run pharmaceutical companies, expecting to displace the big pharmaceutical companies . When the odds of successfully launching an independently marketed therapeutic product were found to be economical than once expected, many of these firms switched gears to focus more on research and adopted multiple alliances to outsource the sales and distribution and legal tasks that the big pharmaceutical companies were better equipped to handle.
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CYNTHIA ROBBINS-ROTH, FROM ALCHEMY TO IPO: THE BUSINESS OF BIOTECHNOLOGY pg. 13-42

Although private investment in biotech startups reached $41 billion in 2000, two years later, there was net investment of only $1.9 billion (less than the venture capital investment of 20 years earlier) . And since 2000, there have been very few significant public equity financing windows open to biotechnology companies. In a down market, the cost of equity capital can be prohibitively high, assuming that it is available at all. There are two points of concern in any collaboration between a pharmaceutical company and a biotech company. For the pharmaceutical company, there is always a danger that it is budding a potential competitor through its collaboration with the biotech. A second point of concern lies in the fact that big and small companies have varied interests & many a times cannot be achieved along with the partner whose strategy is different and difficult to mitigate. In such cases, it is feasible to enter into a Joint Venture wherein the identities & strengths of both the partners remain without any compromises. Alliances between pharmaceutical companies and biotech firms can take a variety of organizational forms and involve many different payment structuresmilestone compensation, equity inoculation, royalty, etc. Thoughtful and properly structured collaborations can cut down costs, inject new product lines, increase market penetration and profits, and create long-term value for participants. The basic organizational forms, are as follows: Joint ventures, either formal or informal, in which a new entity is created to develop and/or market the candidate drug. Co-promotion or co-marketing deals under which both partners market approved products, the former under a single nametypically with a unified marketing effort directed by the pharma companyand the latter with separate marketing efforts not under a common name. Licensing agreements that give the pharmaceutical company rights to use the technology combined with discovery research and/or product development activities in which each party has a continuing role. A purchase of equity in the biotech partner by the big pharma partner.
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Joint venture in Pharma- Bio-Tech:

Eli Lilly and ICOS ICOS Corp. and Eli Lilly announced the creation of a 50:50 joint venture to develop and commercialize IC351 (Cialis), a PDE5 inhibitor, on October 1, 1998, as a treatment for sexual dysfunction.
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During the venture

it was decided that Eli Lilly retains the rights to sell the compound in the rest of the world while the joint venture (Lilly ICOS) owns the marketing rights for the compound in North America and Europe. The terms of the

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Thompson Venture Economics for National Venture Capital Association, INTL HERALD TRIBUNE, February 12, 2003 ICOS CORP., 10-Q for quarter ended September 30, 1998, Exhibit 10.1 (Limited Liability Company Agreement of Lilly ICOS LLC),

agreement, were such that, ICOS would contribute its intellectual property on all of its PDE-5 inhibitors, including IC351, while Lilly contributed about $100 million in cash to capitalize the joint venture for three years . Additionally, ICOS itself received a $75 million up-front payment from Lilly at signing and was slated to receive additional payments from Lilly as IC351 progressed. IC351 were to be split in the ratio of 50:50.
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Profits generated by the joint venture on any future sales of

ICOS had options including that of Bill Gates, Chairman of Microsoft & ICOSs biggest shareholder who was willing to finance the development of IC351 ; but it chose the 50/50 joint venture structure for a number of reasons. The joint venture with Eli Lilly provided the marketing power necessary to catch up to Pfizers Viagra, which already had a head start of two-years. As a co-venturer with Eli Lilly, ICOS was entitled to half of the eventual profits from the commercialization of IC351 while still retaining an equal control in the authority of the joint venture. The deal granted ICOS the right to participate in up to 50% of future marketing efforts, allowing ICOS to use the joint venture to build those downstream marketing skills in-house. The benefits that Eli Lilly was deriving out of the venture was, at the time ICOS had significant leverage because IC351 had just been through limited Phase II testing and had displayed encouraging prospects as a frontrunner. Thus ICOS was able to induce Eli Lilly into making substantial concessions by entering into a 50/50 joint venture rather than into a one-sided licensing agreement in which the pharmaceutical company would take most of the future economics.
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Analysts speculated at the time that despite the fact that ICOS had little cash, the biotech company had significant control because IC351 had just been through limited Phase II testing and had displayed encouraging prospects as a popular drug. ICOS was thus able to induce Eli Lilly into making substantial concessions by entering into a true 50:50 JV rather than into a one-sided licensing agreement in which the pharmaceutical company would take the most of the future economics.

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Id. Id. 13 Id. 14 Ralph T. King Jr., ICOS Strikes Deal With Eli Lilly to Develop Viagra-Like Drug With Fewer Side Effects, WALL ST. J., Oct. 2, 1998 15 J. William Tanner, Vector Securities International (January 6, 1999).

Conclusion
The basic structure of pharma-biotech alliances depends on the drug candidates in question and the relative positions of the pharmaceutical and biotech companies. For drug candidates that are in early stages of development, a joint venture structure seems to make the most sense. Biotech companies ceded the greatest control when their relative position vis--vis the pharmaceutical company was weakest. The fact that drugs in biotech-pharmaceutical alliances perform better in subsequent trials than products developed solely in-house by biotech or pharmaceutical firms confirms that co-development adds sufficient value to outweigh any moral hazard problems that result from sharing development responsibilities. Although biotech companies take a substantial discount on their first deal, this nevertheless appears to be rational, because a deal with a pharmaceutical company sends a positive signal to prospective investors. We find that biotech firms that have signed a deal receive substantially higher valuations from venture capitalists and other investors at subsequent financing rounds. The magnitude of this premium ($19.5 million in the preferred first-difference specification) offsets most of the discounted deal payments accepted by inexperienced biotech firms ($26.9 million). This evidence of positive effects of deals on subsequent financing is more consistent with the signaling model than with the simple gains from trade model.

References:

Books

Joint venture: international business with developing countries, Medury Bhaskara Rao, Vikas Pub. House, 1999

Handbook of Pharmaceutical Biotechnology, Shayne Cox Gad, John Wiley & Sons, Inc., June 2007

Joint Ventures, Alliances, and Corporate Strategy, Kathryn Rudie Harrigan, Bear books, 2003

Articles

Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality, Sean Nicholson, Patricia M. Danzon and Jeffrey McCullough, National Bureau of Economic Research, Inc, June 2006

SINO-AMERICAN PHARMACEUTICAL JOINT VENTURE TO BE SET UP, AsiaInfo Services, June 10, 1996 DuPont sets up joint venture in NW China, Xinhua News Agency - CEIS, Dec 21, 2006

Websites
http://m.hg.org/law-articles/area-intellectual-property/7594/An_Introduction_to_Chinas_Biotech_Industry http://www.thefreelibrary.com/Joint+ventures-s1141444 http://web.mit.edu/biostrategy/files/ http://en.wikipedia.org/wiki/Joint_venture http://www.globalbusinessinsights.com/