I elaborated on the risk implications, in terms of risk reduction, when firms enter into join ventures. In particular I focused on the biotechnological sector which is an industry in which we can find several joint ventures. I choose to analyse two case studies: TerraMarine Pharmaceuticals and Amgen Inc. I elaborated on these two case studies through information collected on the web and financial newspapers. Concerning to TerraMarine case study I also obtained an interview with Dr. Vicky Webb, a biotechnologist that leads TerraMarine research.
In conclusion I found that the two case studies present evidences that there is an effective overall risk reduction after the collaboration, even if in the Joint Venture between Amgen and Johnson & Johnson there were some legal problems. This demonstrates the underlying instability of joint venture.
Joint Ventures are very common nowadays especially in particular sectors in which firms have to face with high expenditures and high risks. The biotechnological sector is one of these sectors because the expenditures in R&D are considerable and the risk is represented by the uncertainty of the success of the research. A joint venture is an entity formed by two or more different parties which undertake a common economic activity. In a joint venture the two parties have to contribute both financial resources (equity) and at the same time they share revenues, expenditures, know-how and also risk.  Through some kinds of cooperation between competitors, such as joint ventures, firms are able to reduce this risk component. We can say that after the analysis lead during the course of Risk Analysis and International Business in which we studied all the benefits that sharing risk and income could bring to both parties. In income sharing model one party may accept a lower, shared payoff in return for a more certain payoff, according to its risk aversion, because risk is lower when a risky income is shared across more than one person/organisation. So hence are better off.  In addition to this explanation we can add some macroeconomic variables such as geographical diversification and market diversification in which the parties may gain from entering into a joint venture. My essay wants to elaborate on this topic through all these considerations using two case studies that should confirm that JV brings a sort of risk reduction to the parties. My aim is to understand if JVs really reduce effective risk exposure to the parties through the analysis of some case studies belonging to the biotechnological industry.
LITERATURE SURVEY - ANALYTICAL THEORY
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Concerning this topic I found interesting literature material. According to Karem J. Hladek (2002)
Joint Ventures bring not only benefits but also some potential problems. The author refers in particular to R&D joint venture which is our case because we are elaborating on biotechnological sector. He summarizes the benefits in 4 groups: spreading cost and risk of R&D, access to technology and technical know-how, access to markets and competitive positioning.
Firms choose to engage a R&D Joint Venture for several reasons but probably we can consider the main one the ability to spread cost and risk of R&D. Often this activity, which consists in the development of new products imply high costs. A Joint Venture allows firms with scarcity of financial resources to develop new product and to stay at the forefront technology.
In addition R&D Joint Venture allows who is involved not only to pool their financial resources but also, in some cases, to obtain funds from governments  .
There are several risk involved in R & D activity even if the firm has enough financial resources to sustain the development of new products, such as:
- The risk linked to the possibility "that the expected R&D breakthrough does not occur, does not occur fast enough, or requires more financial or technical resources than originally expected" (Hladek, 2002, pag. 189).
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- The risk associated to the uncertainty of the future consumer demand for a certain product. In high technological sectors there may be a quite long period of time between the start of the study of the new product and the effective end of the research when the product reaches the consumer. During this period the tastes of the consumers may have changed.
- There is another risk that depends on the actions of the others competitors in the market. In addition to the risks of timing and success to the R&D, there is the risk that competitors can create a better product, gaining a bigger market share.
- Research and Development activity presents some negative risks: it can be an expensive and uncertain activity in terms of returns and it can "fall behind in the technical expertise necessary for the next generation of product development" (Hladek, 2002, pag.189). This risk component is very important in the biotechnological sector, as we will see later on, because the competition is tough. Some firms adopt the policy to undertake several R&D activities with many partners in order to ''diversify their financial investment over several R&D efforts - spreading the risk inherent in any one project''  (Hladek, 2002 pag. 189)
Besides the risk component, there are some other reasons that urge firms to undertake JVs. One of them is the need to access to technology and technical know-how. "A firm may look to a partner to provide access to new technology or proprietary know-how or else to provide technical skills complementary to its own" (Hladek, 2002, pag.189). This is a very important point because in every joint venture there is this aspect and we will analyse it in TerraMarine Pharmaceuticals JV.
Another advantage of JVs is also represented by the opportunity to expand its market with the access to new markets. This fact is common in the international JVs. "Given the fixed costs of innovation, the larger the market, the higher the joint venture's expected rate of return from R&D activities" (Hladek 2002, pag.190) We can find this aspect in Amgen Joint Venture with Johnson & Johnson
The last advantage is represented by the possibility to create an alliance between rivals firms in the same sector in order to decrease the risk of uncertainty surrounding future competition. Doing this you will reduce the number of rivals in the same industry and if the JV is created at the initial stages of product R&D, the firms can create a common technical standard that will reduce the future competition.
As we said, on the other hand JVs bring also some potential problems. These problems are mostly linked with the different nationality of the parties in the JV or ''when the collaboration occurs at the base of each firm's competitive advantage - new product development. These problems imply a high rate of failure of JV" (Hladek, 2002, pag.189) In conclusion for Karem J. Hladek Joint Ventures lead benefits to the firms that undertook them (especially in terms of risk reduction) but they can also bring some problems that can involve the failure of the Joint Venture.
The work of Farok J. Contractor and Peter Logrange (2002) is more focused on the reasons why firms cooperate in general and risk reduction is the main objective of Joint Ventures. According to the authors risk reduction is achieved through four different processes ways: spreading the risk of a large project over more than one firm, enabling diversification in a product portfolio sense, enabling faster entry and payback, and cost subadditivity (the cost to the partnership is less than the cost of investment undertaken by each firm alone).
The risk reduction can also be obtained at the level of political risk. A local partner in a joint venture may have influence to "steer the joint venture clear of local government action or interference" (Contractor and Logrange, 2002, pag.12). This aspect is very important in joint ventures that involve developing countries.
In some cases JVs are the result of government industrial policy. In that case the political risk is low: the government is willing to host the joint venture and it will not create problems to the management of the joint venture.
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There are also theories contrasting the belief that joint ventures bring risk reduction. One of them is the theory supported by Roy Chowdhury (2001) that shows how the rate of JVs formation is increasing nowadays but at the same time he found that they are very unstable. He demonstrates through data collected by previous researches that Joint Ventures are not so stable. For example
"Killing (1983) surveyed 37 international joint venture and found that 36 % of them
performed unsatisfactorily. Kogut (2002) studied a sample of 92 U.S. based joint
ventures and found that by the sixth year about half of them had terminated their
relationships. Mckinsey did a worldwide survey of more than 200 alliances. Median time span of joint ventures was found to be seven years only. In more than 80% of the cases, it ends up with one partner selling its share to the other." (Roy Chowdhury, 2001, pag.1) This instability can be explained by general problems associated with JVs:
Problems related to MNCs
Dividend and investment policies
Ownership and control problems
Concerning about the biotechnology sector I will explain the development of a drug and the risk underlying it relaying on the work of Friedman (2006). Drugs are substances that affect the functions of people and are administered to cure diseases and symptoms. The Food and Drug Administration (FDA) regulates drug marketing, requiring manufacturers to prove their products to be safe and effective. In the drug development, these potential drugs are tested in increasingly complex and realistic situations to prove their efficacy at all events.
The author summarizes the entire process of drug development in three basic stages: discovery, development, and commercialization. The fact that ,"less than 1 percent of early candidate compounds make it through the drug development process''  , should make us thinking about the effort and the risk that firms have to bear in order to develop a new drug to commercialize.
Current estimates of development times for small-molecule drugs are 10-15 years with an estimates average cost of $802 million per approved drug  .
Once a drug obtains the approval from FDA to be commercialized, it will be protected by patents that were filed before clinical trials began. "With an average of twelve years of patent protection remaining after FDA approval, marketing and sales efforts must generate revenues and expand market penetration to deliver a return on R&D expenditures". (Friedman, 2006, pag.37) So after the long and expensive way that bring a drug to become commercialized there is another important (and expensive as well) phase for the biotechnological firm that consist in sustaining considerable marketing expenditures in order to obtain a dominant position in the market and a brand loyalty of the consumers before the patent expires.
There is another important concept for the risk implication that the author mentions which is the pipeline diversification. As we have just said, biotechnology product development is full of unexpected hurdles. "Accordingly, it is imperative that companies have multiple products in development to provide alternatives in the event that individual researches fail. Multiple products are essential to support long-term growth  " (Friedman, 2006, pag.250)
DATA AND EMPIRICAL ANALYSIS
TerraMarine Pharmaceuticals is a three ways partnership between NIWA (National Institute of Water and Atmospheric Research), Crop & Food Research and Malaghan Institute for Medical
The goal of the joint venture, formed in 2002, is to develop non-steroidal anti-inflammatories from native plants, animals, and micro-organisms.
The peculiarity of this joint venture consist in its specificity given by the environment in which the parties collaborate and the individual competence that each party bring to TerraMarine.
First of all the country in which TerraMarine operates is New Zealand. This country offers an environment with a wide variety of flora and fauna, especially coming from the sea, which is proper to the creation of new medical compounds. Another important feature of this joint venture is that each institute brings a complementary expertise to the joint venture.
NIWA is used to treat and collect a huge variety of marine organisms and classify them with a good taxonomy competence. In addition they have a complementary expertise in aquaculture which is essential because they are able to farm potentially useful organisms instead of harvesting them from the wild. Crop & Food Research provides a complementary collection of terrestrial plant sample, knowledge in farming and expertise in the chemistry of natural products. Finally it brings specialised screening capabilities and expertise with animal models of disease.
In order to have a wider range of skills TerraMarine is also sub-contracting some of the chemistry and drug research to laboratories in Otago and Auckland Universities, as well as engaging with two important clinicians in the field of anti-inflammatory who assist the trials. So every party in this joint venture "provide technical skills complementary to its own", as Hladek said in the literature part.
The TerraMarine activity consisted in collecting and screening more than 2000 samples from a huge variety of native organisms.  Each sample can have several hundred different chemicals, so after a series of screens, they have to see which, if any, have anti-inflammatory properties.
TerraMarine has already identified two promising anti-inflammatory compounds from marine organism. The first of these was patented in September 2005, and now is being refined to improve its effectiveness and usability. The next step will be to study what is the behaviour of the compound in the human body. The second compound is undergoing further development before TerraMarine applies for a provisional patent.
For a biotechnology firm it is very important to own a patent because it means that the firm effectively owns the rights to use the chemical structure of the compound for a particular purpose (in this case, as an anti-inflammatory drug) for 16 years. Since TerraMarine has already obtained the patent, now start the challenge for TerraMarine to develop the compound into an effective and safe anti-inflammatory drug, taking a reasonable period of time.
As we already said, drug development is relatively slow and uncertain process so the risk component is always considered. On average the activity of research takes 10-12 years before the drug obtain the approval to be commercialized and the vast majority never make it. However the management is optimistic about TerraMarine future because with these two promising compounds already in the pipeline, and a large store of samples still to test, they hope that TerraMarine can develop new treatment for diseases like gout from New Zealand's natural resources.
So uncertainty in activity like these plays a considerable role during every step of the R & D.
TerraMarine is an unincorporated Joint Venture which means that they do not have a Board (They have a management group), no shareholder, nor produce an annual report that is publically available. The three parties have signed an unincorporated JV document that describes the function of TerraMarine and how the three institutes function within the Joint Venture. Funding for the research was entirely from a 6 year Government grant worth NZ$1.7 million per year. 
In order to have a more precise picture of TerraMarine, I interviewed Dr. Vicky Webb, the biotechnologist that leads TerraMarine's research about risk implication about this joint venture.
The main important concept that emerges from the interview is that none of the parties would commercialise a pharmaceutical alone. This is an important fact that supports the thesis of Hladek in which joint ventures are a way to overcome limited financial resources spreading income and risks. Also the fact that the funding came from the Government also significantly reduced the risk for the JV partners. So the risk reduction is evident in this case study. Anyway there is still a certain level of uncertainty in the joint venture because they are still far to discover a drug that can be commercialized and may yet fail at some critical hurdle. 
This joint venture has a precise target which is to get an anti-inflammatory for gout disease which is common worldwide with a high incidence in New Zealand (one on twenty New Zealanders  ). It is especially problematic for older people, for whom existing gout relief drugs can have serious side-effects. This is a very important aspect that urges TerraMarine to develop new anti-inflammatory. Worldwide demand for them is growing because of ageing populations. The market for non-steroidal anti-inflammatories in the US alone was estimated at US$3.4 billion (NZ$5.4 billion) in 2002 
Another interest case study is given by Amgen Inc., an international biotech company that employs around 17,500  people and this makes Amgen the largest firm in the biotechnological industry. It is located in Thousand Oaks, California. The company activity consists in the development of new products of advanced in recombinant DNA and molecular biology and launched the biotechnology industry's first blockbuster drug. Even the great size of company, Amgen has the need to cooperate with other firms through several ways: venture capital, joint venture and other business relationship, such as licensing.
Amgen Ventures is a corporate venture capital fund addresses to provide emerging biotechnology companies to develop pioneering discoveries focused on developing human therapeutics. The fund offers early-stage companies access to Amgen's extensive expertise while providing Amgen into external research innovations. This is a good way for Amgen to create future collaboration with competitors. The presence of this fund in this company represents the need of biotechnological firms to have the so called "pipeline diversification" already explained in the literature part from Friedman.
Kirin Amgen Joint Venture
Another possible way to cooperate with other firms is with joint ventures. Amgen Inc. in 1984 funded a JV with Kirin Holding Company Limited, the so called KA (Kirin-Amgen Inc.)
Kirin Brewery Company Ltd. Is a Japanese and Korean company that operates in several sectors (Food and Beverage, Logistic, Engineering, Restaurant, Pharmaceuticals Business and Agribio Business). Kirin -Amgen JV was born as a 50-50 joint venture with Kirin and Amgen in 1984. "Ka develops and commercializes certain of our and Kirin's product rights, which have been transferred to this joint venture".
To be more specific "Amgen has conducted research, has developed and possesses certain existing technical information, technology and know-how relating to genetic engineering which has enabled it to clone and express the gene for human erythropoietin and Amgen is continuing to develop human erythropoietin. (EPO)"  Kirin and Amgen in 1984, when the joint venture was formed, believed that these genetic techniques will have important application to the development of therapeutic product. They wanted to form a joint venture that has the purpose to develop, create and sell worldwide erythropoietin for human therapeutic use. Kirin and Amgen believe that "a joint business effort between them dedicated to such purposes would be mutual benefit to the accomplishment thereof and that compatibility between Amgen and Kirin is such that substantial economic returns may be gained by each through cooperative effort" 
Johnson & Johnson Joint Venture
By 1985, however the funds obtained from this agreement proved to be insufficient and in order to avoid another financial loss, Amgen enter into a joint venture with Ortho, a subsidiary of Johnson & Johnson company.
Kirin retained the rights to sell the rights to sell Epogen in Japan and China while Ortho retained the rights to sell the product for some indications in the United States. Initially, the alliance was fruitful and led to the development and patenting of Epogen.
"As the collaboration led to patents and it became clear that a blockbuster drug was in the making, the agreements made when the alliance was created became issues of dispute between Amgen and Johnson & Johnson, particularly the licensing of some Epogen marketing rights to Johnson & Johnson". (Schweitzer, 1997, pag. 58)
Throughout the 80s and the 90s legal battles were fought on the basis of the interpretation of the 1985 agreement. Protection of its rights and patents was an issue of big concern for Amgen because in 1997, Epogen accounted for approximately 50% of Amgen's sales. Unexpectedly for Amgen, sales growth for non--dyalisis indication became especially strong. As a result, Amgen received only $1.2 billion of the drugs $3 billion 1997 worldwide sales (Schweitzer 1997). This fact urged Amgen to file a patent infringement lawsuit to protect its rights to Epogen, the source of the company success. Currently Amgen has five patent related to Epogen that together claim to cover all versions of Epogen made in cells of vertebrate (Pollack 2000).
In 1998 a lawsuit was filed on the basis of Johnson & Johnson's attempts to gain the rights to sell a new version of Epogen.
Amgen prevailed, however, and won all the rights to the new once-a-week version of Epogen (Schweitzer 1997). With the average retail cost of 8000$ a year for a kidney dialysis patients, today Epogen is Amgen's, and the biotech industry's bestseller, with a worldwide sales in 2000 of about $4 billion (Pollack 2000). Despite the protracted legal tangles with its former strategic partner, Amgen has become one of the world's leading biotechnology companies.
Amgen joint ventures with Kirin and Johnson & Johnson were driven by different motivations comparing to TerraMarine case study. First of all Amgen's Joint Venture can be considered sale's joint venture in which the parties agree to have the rights to sell in certain geographical area in order to penetrate new markets and increase the revenues (geographical diversification). Instead TerraMarine joint venture is a R & D joint venture in which all the parties come from the same country and the aim is just to discover new drugs.
On the other hand Amgen joint ventures can not be considered satisfactory concerning the risk component. Especially the JV with Johnson & Johnson presents some problems during its life.
Amgen management, when entered the joint venture with Ortho in 1985, did not expect to incur in legal problems with the other party concerning the interpretation of some parts of the 1985 agreement. This can be considered the instability that Roy Chowdhury and Bruce Kogut mention in their work linked to the ownership and control problems, even if this group does not fit perfectly for this case. Only after ten years of legal battles Amgen reached to have a satisfactory performance from the join venture.
CONCLUSION - POLICY IMPLICATION
In conclusion these case studies, belonging to two different kinds of joint venture, show us several risks involved in the Joint Ventures. In the first R&D joint venture TerraMarine, the theories of Hladek are perfectly shown firstly as exchange of know-how. In fact each institute has complementary expertises that are brought into the joint venture in order to maximise the resources of the parties. In addiction this joint venture is peculiar because it receives annually a grant from the New Zealand government. This fact is quite common in the biotechnology industry or in R&D joint ventures  . This joint venture does not involve the risk reduction due to geographical diversification because the country is within the same country. The aim of the joint venture is very clear and it is sure that would be a market for the product because gout is a disease very common in New Zealand (but also in other developed countries) and so the government is interest to promote and finance Terramarine to solve this social problem. The presence of the government grant reduces the risk for all the three parties that participate to the joint venture.
The second case is more typical and shows us the classic features of a corporate Joint Venture. In this case for example the geographical diversification plays an important role. In fact Amgen entered in a joint venture with Johnson & Johnson in order to increase the revenues that during the 80s' where not satisfactory and so Amgen, after entering the Kirin- Amgen Joint Venture, decided to cooperate with Johnson & Johnson giving the rights to sell Epogen in US market for some indication. These two joint ventures helped Amgen to penetrate in new markets (Asiatic and U.S.) but the only after several years of legal battles between the parties. In general sale's joint ventures are a good way to reduce risk penetrating new market with local partners but in this particular case Amgen's management could not predict. So joint ventures are good ways to reduce risk because in both cases the parties gained from these agreements but there is a sort of instability that can bring some problems and Amgen case shows it clearly.
REFERENCES AND BIBLIOGRAPHY
Contractor Farok J,Logrange Peter 2002 "Why should firms cooperate? The strategy and economics basis for cooperative ventures" in Cooperative strategies in International Business ed. 2 - Item notes: v. 2 - Graduate School of Management at Rutgers University and the Wharton School of the University of Pennsylvania. pp. 8-12
Friedman Yali 2006 "Building biotechnology: starting, managing, and understanding biotechnologies companies "ed ThinkBiotech Washington DC pp. 29-40, 250
Hladik Karen J, 2002 "R & D and International Joint Ventures" in Cooperative strategies in International Business ed. 2 - Item notes: v. 2 - 2002 - Graduate School of Management at Rutgers University and the Wharton School of the University of Pennsylvania. pp. 186-192
Killing, J.P., 1983, Strategies for joint venture success (Praeger, New York)
Kogut, B. 2002, A study of the life cycle of joint ventures, in F.J. Contractor and P. Lorange, eds., Cooperative strategies in international business, (Lexington Books).
Pollack 2000, "Two Paths to the Same Protein" in the New York Times Tuesday, March 28, 2000
Roy Chowdhury, Prabal and Indrani Roy Chowdhury 2001 "Joint venture instability: a life cycle approach" Indian Statistical Institute, Delhi Center and National
Institute of Public Finance and Policy pp.1
Schweitzer Stuart O. 1997 "Pharmaceutical economics and policy" pp. 57-59
AMGEN - Amgen Overview - http://www.amgen.com/about/overview.html [30 June 2009]
AMGEN - Amgen Ventures - http://www.amgen.com/partners/amgen_ventures.html [30 June 2009]
Amgen Wikipedia- http://en.wikipedia.org/wiki/Amgen [4 July 2009]
Joint Venture Wikipedia -http://en.wikipedia.org/wiki/Joint_venture [4 July 2009]
NIWA TerraMarine - New drugs from nature: the TerraMarine partnership http://www.niwa.co.nz/news-and-publications/publications/all/wa/14-3/terramarine [13 July 2009]
Shareholders' Agreement of Kirin-Amgen, Inc., 11 May 1984 http://www.techagreements.com/agreement-preview.aspx?num=119708 [15 July 2009]
In this case risk is measured in variance.
Here there is an example to clarify.
Risk-sharing works when the individual distributions of income are independent (or negatively correlated). Suppose, A and B have identical income streams:
YA (A's income)
YA* (A's mean income) = 50 and Var (YA) = (50)2
YB* (B's mean income) = 50 and Var (YB) = (50)2.
By pooling their income and agreeing to a share of half, each can have a distribution of income as follows (assuming their incomes are independently distributed)
Now the mean income is 50 but the variance is (50)2/2. Hence both are better off. And if incomes are perfectly correlated but negatively, they get 50 with certainty.