Joint Ventures in the Pharmaceutical Industry
[Volume 2, No. 1]

The following was excerpted from a talk given by Donald S. Brooks, Esq., at that time Senior Counsel at Merck & Co., Inc.

Some studies indicate that the average life expectancy of joint ventures is no more than 3.5 years. Moreover, although this is only an average, many ventures collapse even earlier, oftentimes within the first 18 months of joint activity.

What, then, is necessary to make a successful venture?

First, you must select the "right" partner. Typically speaking, before the parties enter into any venture, there will be a chemistry, at least at the highest levels, that will make the venture possible. In addition to "chemistry" at the top, the culture of the partners should be similar. In fact, companies with mutual respect and comparable size work best. To most ventures the partners bring a lot of baggage, i.e., their own way of operating. Such extra baggage may not always be the best for the venture, but it's disastrous if the two cultures and their baggage are headed in opposite directions. What is needed in any venture are clear objectives and targeted milestones.

Second, select the right joint venture management with appropriate incentives. To the extent that the joint venture is being staffed with personnel from one or both partners, such people should be compensated at least as well as those similarly situated in the partner companies - and such compensation should be tied to joint venture performance in order to provide the necessary incentive to both join the joint venture and work for its success. Temporary staffing by the partners with the prospect of a return to their original company will not provide the right message and is not in the long-term interests of the venture.

Third, enhance opportunities for the sharing of knowledge and experience. In this connection, provide incentives for sharing rather than disincentives.

Fourth, learn new skills and opportunities from your partner. Cross fertilization can be extremely valuable to both partners.

Fifth, provide disincentives to termination.

Sixth, design a fair and balanced agreement.

Finally, devise performance measurements for the venture so that the parties have a clear idea of where the venture is headed from the beginning.

There are several items which are of particular significance in enhancing the stability of joint ventures.

The issue that is the hardest to negotiate in any joint venture is termination and/or dissolution. Since this is the negative side of the transaction, it is difficult to negotiate. As two lovers are trying desperately to get married, the introduction of the prenuptial agreement or "what happens if there's a divorce," can throw a wet blanket on the proceedings. Yet these provisions, if constructed well, actually serve to enhance rather than detract from the stability of the venture.

Another important means of enhancing the stability of a venture is to provide a fair and balanced agreement. Rather than attempting to initially value each party's contribution, the agreement can begin with each party's evaluation of his or her contribution. A review of these evaluations can then take place at a later date as a reality check. At this time, adjustments can be made by the partners to assure that neither party is disadvantaged. Accordingly, this provides a win/win situation in a very complex area and avoids difficult and perhaps impossible negotiations. However, to make this work the venture has to pursue its interests in an independent fashion. The parties should not be in a position to pressure the venture to act contrary to the venture's own perceived best interests in order to provide an advantage with respect to one party's contributions.

Another issue which tests the stability of joint ventures is one where one partner has greater success than the other. This can occur when the owners are in competition with each other or when the rewards obtained by one party are greater than those received by the other. In either case, the disfavored partner is not going to feel strongly about continuing support for the venture. Similarly, a belief that continuing the venture will be to one's economic disadvantage is going to be a significant disincentive to strongly pursuing the interests of the business.

In addition to the mechanisms to enhance the stability of joint ventures noted above, there is one other approach to ensure their success. In a nutshell, this involves paying close attention to a venture after it has been formed. In this regard, give responsibility for all joint ventures to a senior executive of the company with an organizational structure focused on managing joint ventures. This provides consistency with respect to board and partnership representation and with respect to policy matters.

Joint ventures are an effective way to accomplish one's growth objectives. Although they have a built-in management challenge, if they are long term in nature, there are a variety of mechanisms which can be used to minimize their instability.

Asherman Associates, Inc.
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