Drug development is a risky business, requiring large investments, long gestation periods, and intellectual property (IP) protection.
Consequently, complex risk-sharing transactions, such as joint ventures, co-development agreements, collaboration agreements, platform partnerships, licensing and cross-licensing, co-promotion agreements, etc., are prevalent in this industry. Key structural considerations in such deals revolve around IP ownership, decision-making rights, termination triggers, regulatory ownership, and commercialization splits (territory-based or royalty-based).
They also contain complex economic waterfalls involving milestone payments, options, and earn-in features.
When such an arrangement is present between related parties, deal valuation becomes critical to demonstrate to tax authorities that the arrangement has economic substance and is priced at arm’s length. Tax authorities often challenge arrangements post-commercialization, which happens many years after the deal is entered into. An Advance Pricing Agreement (APA) is an effective tool for managing tax risks.
CRA experts have negotiated multiple bilateral APAs involving transaction structures where related parties are involved in the development of a drug and share in the risks associated with development and commercialization processes.
