Identifying relevant activities in life sciences arrangements
Two investors form an investee to develop and market a medical product. One investor is responsible for developing and obtaining regulatory approval of the medical product that responsibility includes having the unilateral ability to make all decisions relating to the development of the product and to obtaining regulatory approval. Once the regulator has approved the product, the other investor will manufacture and market it this investor has the unilateral ability to make all decisions about the manufacture and marketing of the project. If all the activities developing and obtaining regulatory approval as well as manufacturing and marketing of the medical product are relevant activities, each investor needs to determine whether it is able to direct the activities that most significantly affect the investee”s returns. Accordingly, each investor needs to consider whether developing and obtaining regulatory approval or the manufacturing and marketing of the medical product is the activity that most significantly affects the investee”s returns and whether it is able to direct that activity. In determining which investor has power, the investors would consider:
(a) the purpose and design of the investee;
(b) the factors that determine the profit margin, revenue and value of the investee as well as the value of the medical product;
(c) the effect on the investee”s returns resulting from each investor”s decision-making authority with respect to the factors in (b); and
(d) the investors” exposure to variability of returns.
In this particular example, the investors would also consider:
(e) the uncertainty of, and effort required in, obtaining regulatory approval (considering the investor”s record of successfully developing and obtaining regulatory approval of medical products); and
(f) which investor controls the medical product once the development phase is successful.
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