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CASE 1:Abgenix and the XenoMouse
1. A cost and benefits analysis:
The hand-off option
A Hand-off refers to the option of surrendering certain exclusive access rights to the use of a product for a specified purpose. An upfront payment is made as well and an agreement directing that further payments should be made if the product's success advances to certain levels. This agreement also stipulates that a certain percentage of royalties on sales should be paid out to the company selling the product.
In this case one of the options that Abgenix has is to hand-off the ABX-EGF product to Pharmacol. This is a an already established pharmaceutical company which, as far as Abgenix is concerned, has the necessary skills for guiding the product through the rest of phase I, phase I/II, phase II and Phase III.
A hand-off to Pharmacol whose marketing capability is firmly in place would enable Abgenix to evade the numerous expenses of introducing a new drug to the market. However, before Abgenix actually sells off its exclusive rights to Pharmacol investigations have to be made regarding its ability to actually succeed in finalizing production of ABX-EGF. The major purpose of this investigation would be to ensure that if the deal goes through, Pharmacol will be able to obtain enough revenue from the product to generate a high royalty rate on sales.
Pharmacol considers this as an extra ordinary opportunity and it was clearly aware of the market potential for the product if the development process proved successful. Due to this awareness, they are likely to pay very high royalty rates.
The payments to Abgenix would be as follows if the deal pulled through:
- Initial payments would be $ 5 million
- At the start of Phase II trials $ 5million
- If / when Phase III trials commenced $ 8 million
- If / when they received FDA approval $ 10 million
Phase III trials would be carried out by Pharmacol as per their agreement and Abegenix would receive a 10% royalty on sales in perpetuity. Ray Withy predicted a $700 million sales revenue per year when the market was fully developed in 10 years.
This option is relatively an easy one since the only responsibility that Abgenix is burdened with is providing the ABX-EGF. Once Pharmacol acquires this product they will be required to carry out human trials, oversee the regulatory process, and finally market the product effectively. If it does this successfully them Abgenix will, in addition to the initial payments, receive high royalty rates from the sales.
The hand-in option
A hand-in is an agreement between two companies where two companies combine resources to produce and market a product. One company brings in their product into the partnership which the two companies set out to work on. This company is compensated for its contribution to the partnership. However, once this compensation has been completed the two companies share any responsibilities and benefits that may arise.
In this case, Biopart which is a biotechnology firm specialized in oncology is the second option for Abgenix. This arrangement would involve the two companies coming together to form a partnership which could tentatively be classified as 50/50.
Biopart had established itself as the leading firm in recombinant DNA technology. Its revenues for the year 1999 were $510 million and it had established a good reputation for innovation and managing the regulatory process. Instead of receiving a substantial fee plus royalties from Biopart as would be the case in a hand-in agreement, both companies would run the project and share any costs and profits that they would incur.
This deal would be beneficial to Abgenix in the sense that it would retain controlling interests in testing, production and marketing of ABX-EGF unlike the previous option where they hand over all these interests to another firm. However, this would be a new venture for Abgenix which was yet to carry out a hand- in joint venture agreement. It would also ensure that they took part in critical decision making involving the pro The cost effectiveness of this deal is highly dependent on whether or not the product is successfully launched into the market.
The general parameters of their deal would be:
1. Initial payments on signing the deal would be $ 5 million and an additional $ 5 million would be paid at the onset of Phase II trials/
2. After this phase, all costs and revenues would be equally shared by Biopart and Abgenix.
3. The two companies would conduct Phase II trials jointly. Biopart would lead the testing on Phase III trials with little involvement from Abgenix.
4. Given its existing reputation for the sale of cancer therapies, Biopart would take the lead in the marketing phase. It was up to Abgenix whether or not they desired to create their own sales force to work alongside Biopart representatives.
Product development costs over the whole of this period were estimated to be as follows:
Year 1 $ 10 million
Year 2 $ 20 million
Year 3 $ 25 million
Year 4 $ 35 million
Year 5 $ 35 million
In addition to these production costs, an additional $ 15 million would be required for the pre marketing launch activities in the year of the product's launch. Cost of goods sold would be approximately 10% of sales. These costs would be shared by the two companies as per their partnership agreement.
The 'go-it alone' / ' Do Phase II's and Then Decide' option
This option requires Abgenix to exert itself into developing the necessary in-house skills to sail the product through FDA approval. Upon attainment of this approval then they should also be able to market this product. This option will incur high costs and it will take time before the product becomes profitable even if product sales are successful.
In terms of financial returns a hand-off to Pharmacol seems to be the best option. This is because these financial returns are highly dependent on successful attainment of FDA approval as well as effective marketing of the drug. Pharmacol had, in 1999, recorded sales of $12B. Abgenix would not incur any costs once the deal was finalized. The Chief Business Office, Ray Withy, predicted that with this arrangement ABX-EGF would be introduced into the market within five years.
The Abgenix/Biopart partnership would require large amounts of money to facilitate development of the ABX-EGF product. It is also estimated that this option will also take approximately five years to get the product to the market.
The third option would require Abgenix to incur costs amounting to approximately $28 million on its own. If the year 1 and 2 developments prove to be successful then it would provide the company with a high bargaining power to either opt for a 'hand-off' or a 'hand-in' agreement.
In my opinon the best option which would result in the company incurring minimum costs and reaping sufficient benefits would be an immediate hand-in agreement with Pharmacol.
2. Joint Venture Agreement
JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT ("Agreement"), made and entered into as of this _____ day of _____, 20___, by and between __________of __________ ("_") and __________ of __________ ("_").
ARTICLE I GENERAL PROVISIONS
1.01 Business Purpose. The business of the Joint Venture shall be as follows: [Describe Business Purpose]
1.02 Term of the Agreement. This Joint Venture shall commence on the date first above written and shall continue in existence until terminated, liquidated, or dissolved by law or as hereinafter provided.
ARTICLE II GENERAL DEFINITIONS
The following comprise the general definitions of terms utilized in this Agreement:
2.01 Affiliate. An Affiliate of an entity is a person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control of such entity.
2.02 Capital Contribution(s). The capital contribution to the Joint Venture actually made by the parties, including property, cash and any additional capital contributions made.
2.03 Profits and Losses. Any income or loss ofthe Partnership for federal income tax purposes determined by the Partnership's fiscal year, including, without limitation, each item of Partnership income, gain, loss or deduction.
ARTICLE III OBLIGATIONS OF THE JOINT VENTURERS
__________ is responsible for all operations and decisions of the Joint Venture and will be compensated for providing various services.
ARTICLE IV ALLOCATIONS
4.01 Profits and Losses. Commencing on the date hereof and ending on the termination of the business of the Joint Venture, all profits, losses and other allocations to the Joint Venture shall be allocated as follows at theconclusion of each fiscal year: __________ _____% __________ _____%
ARTICLE V RIGHTS AND DUTIES OF THE JOINT VENTURERS
5.01 Business of the Joint Venture. __________ shall have full,exclusive and complete authority and discretion in the management and control of the business of the Joint Venture for the purposes herein stated and shall make all decisions affecting the business of the Joint Venture. At such, any action taken shall constitute the act of, and serve to bind, the Joint Venture. __________ shall manage and control the affairs of the Joint Venture to the best of its ability and shall use its best efforts to carry out the business of the Joint Venture. __________ shall not participate inor have any control over the Joint Venture business nor shall it have any authority or right to act for or bind the Joint Venture.
ARTICLE VI AGREEMENTS WITH THIRD PARTIES AND WITH AFFILIATES OF THE JOINT VENTURERS
6.01 Validity of Transactions. Affiliates of the parties to this Agreement maybe engaged to perform services for the Joint Venture. The validity of any transaction, agreement or payment involving the Joint Venture and any Affiliates of the parties to this Agreement otherwise permitted by the terms of this Agreement shall not be affected by reason of the relationship between them and such Affiliates or the approval of said transactions, agreement or payment.
6.02 Other Business of the Parties to this Agreement. The parties to this Agreement and their respective Affiliates may have interests in businesses other than the Joint Venture business. The Joint Venture shall not have the right to the income or proceeds derived from such other business interests and, even if they are competitive with the Partnership business, such business interests shall not be deemed wrongful or improper.
ARTICLE VII PAYMENT OF EXPENSES
All expenses of the Joint Venture shall be paid by _____ and shall be reimbursed by the Joint Venture.
ARTICLE VIII INDEMNIFICATION OF THE JOINT VENTURERS
The parties to this Agreement shall have no liability to the other for any loss suffered which arises out of any action or inaction if, in good faith, it is determined that such course of conduct was in the best interests of the Joint Venture and such course of conduct did not constitute negligence or misconduct. The parties to this Agreement shall each be indemnified by the other against losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by it in connection with the Joint Venture.
ARTICLE IX DISSOLUTION
9.01 Events of the Joint Ventures'. The Joint Venture shall be dissolved upon the happening of any of the following events: (a) The adjudication of bankruptcy, filing of a petition pursuant to a Chapter of the Federal Bankruptcy Act, withdrawal, removal or insolvency of either of the parties. (b) The sale or other disposition, not including an exchange of all, or substantially all, of the Joint Venture assets. (C) Mutual agreement of the parties.
ARTICLE X MISCELLANEOUS PROVISIONS
10.01 Books and Records. The Joint Venture shall keep adequate books and records at its place of business, setting forth a true and accurate account of all business transactions arising out of and in connection with the conduct of the Joint Venture.
10.02 Validity. In the event that any provision of this Agreement shall be held to be invalid, the same shall not affect in any respect whatsoever the validity of the remainder of this Agreement.
10.03 Integrated Agreement. This Agreement constitutes the entire understanding and agreement among the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, restrictions or warranties among the parties other than those set forth herein provided for.
10.04 Headings. The headings, titles and subtitles used in this Agreement are for ease of reference only and shall not control or affect the meaning or construction of any provision hereof.
10.05 Notices. Except as may be otherwise specifically provided in this Agreement, all notices required or permitted hereunder shall be in writing and shall be deemed to be delivered when deposited in the united States mail, postage prepaid, certified or registered mail, return receipt requested, addressed to the parties at their respective addresses set forth in this Agreement or at such other addresses as may be subsequently specified by written notice.
10.06 Applicable Law and Venue. This Agreement shall be construed and enforced under the laws of the State of __________.
10.07 Other Instruments. The parties hereto covenant and agree that they will execute each such other and further instruments and documents as are or may become reasonably necessary or convenient to effectuate and carry out the purposes of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
Signed, sealed and delivered in the presence of:
3. Business form
I would recommend a general partnership business form. This form creates a 50/50 type of partnership. Both companies share all costs and expenses that might arise. The two companies also share profits any other benefits.
The potential benefits and costs available in this type of partnerships as opposed to other business forms include:
- The two companies will equally share the development costs.
- This business form also provides the partners with a shared sense of financial commitment.
- The two companies are also provided with an opportunity to pool their resources and combine their expertise and their strengths. These partnerships are very successful especially if each partner contributes their strengths to the venture.
- Fewer formalities are involved. This is mostly in relation to licenses.
- Separation of roles and specifications of duties, goals to be attained and a general agreement with regard to the partnership.
- This separation also increases the rate at which work is done
The individual partners are however responsible for determining whether or not the partnership agreements succeed.
CASE II: Return Logic, Inc.
1. Whether or not LLC is a good business form for a venture capital fund?
A LLC is a business form that provides the desirable features of a corporation and those of a partnership. This business form has limited liability features as well as operational flexibility and efficient tax arrangements. A venture capital fund is a form of investment fund that manages money from investors and it seeks private equity stakes in startup and small scale and medium scale businesses which exhibit a promising growth potential.
The owners of the company are members and in most instances the time that the LLC can exist is limited. This duration is pre-determined when the organization is being created. The advantages of this business form for a venture capital fund is that the owners' personal liability is greatly limited despite their participation in the running of the business.
Business profits and any losses that are incurred in the course of carrying out business transactions can be allocated separately from ownership interests. In this type of business form one can decide how they will be taxed. They can be taxed either as a partnership or as a corporation.
A limited liability company is said to have a separate legal existence separate from the shareholders and its managers. It is said to be a separate legal entity. Any suits instituted against the company do not affect the shareholders. The company name is protected and cannot be used by any other establishment.
A limited liability company is also said to have everlasting life once it has been formed. Termination can only take place in the event that it is wound-up, liquidated or by order of a court of law.
Beneficiaries of pension schemes enjoy better benefits than the beneficiaries of other types of pension schemes. In this form of business it is relatively easy to introduce other investors and shareholders.
The major disadvantage of this business form is that requires a lot of money to establish as compared to a general partnership or a sole proprietorship. It is therefore difficult for individuals who do not have a lot of money to establish such a company.
2. a) Insight ventures' valuation of the company
The valuation provided by Insight venture capitalists in the form of the term sheet provided the investment amount as $3,000,000. They further provided that the percentage and total equity owned would be: $3,000,000 which would represent 45% of the ownership interest in the company. This percentage is greater than what the founders/ entrepreneurs had anticipated. To ensure that they are able to pursue this venture capital which they consider the best deal they are likely to be offered, certain steps have to be taken.
The first step would be to reduce the percentage of controlling interests that the venture capitalists own. This would be essential so as to ensure that the founders/ entrepreneurs retain controlling interests in the company. It would also ensure that their original idea/ business plan is not tampered with. Despite the fact that this offer is a very good one it is not worth it if they will lose their company in the process of acquiring a capital source.
The provision that the board of directors will be composed of individuals who are specified by the investor is also not appropriate. The initial plan was that the original founders of Return Logic, inc would all be equal partners to this extent then it would be unreasonable for them to sit down and select one among them who would take up the role of CEO. This requirement that there should only be one CEO selected from the three entrepreneurs would also create a rift between them as is already evident. This would eventually lead to a breakdown of the original company and their vision would be lost.
The provision that the investor has a right of first refusal when it comes to purchase of any securities of the company which the founders intend to sell or transfer to a third party renders the decision making powers of the investors inferior to those of the investors.
In my opinion, this valuation sets out to infringe upon the rights of the founders. This exhibited throughout the term sheet. For instance, the anti-dilution protection clause provides that the investor will have the right to proportional adjustments for stock dividends, mergers, reorganization or recapitalization. This clause further allows for the adjustment in the conversion price based on the percentage of the company which is being sold at a lower price.
Insight ventures' valuation of the company is in a way both good and bad. It is bad to the extent that it sets out to infringe upon the rights of the current equity owners, and it is good to the extent that it estimates the values of the 45% of the ownership interests as $300,000.