When Competitors Collaborate, Who Wins? We All Do

In a White House–brokered deal, business rivals Merck and Johnson & Johnson will partner to manufacture the latter’s COVID-19 vaccine. Photo by Alex Gottschalk/DeFodi Images via Getty Images

By Rich Barlow for BU Today

President Joe Biden on Tuesday announced a rare and historic collaboration between two Big Pharma behemoths and rivals, Merck and Johnson & Johnson, in which the former will help manufacture the latter’s recently approved single-shot COVID-19 vaccine.

These collaborations don’t happen often, and when they do, it’s usually in pursuit of something big: in 2004, Sony and Samsung teamed up to research designs for flat-screen LED televisions. In 2011, Toyota and Ford started jointly designing a hybrid vehicle. Amazon (home of the Kindle) and Apple (iPad creator) partnered in 2007 to let Amazon place e-books on an iPad Kindle app.

Under the vaccine agreement, which could double the available amount of the J&J vaccine, Merck will use one of its facilities to make the vaccine and a second to package it. Seeking to speed up national inoculation against the virus, Biden invoked the Defense Production Act, bumping Merck to head of the line for obtaining machinery it will need to produce J&J’s vaccine, the third one approved and the only one requiring a single dose.

“This is an unprecedented situation and an unprecedented collaboration,” says Rena Conti, a Questrom School of Business associate professor of markets, public policy, and law and a Dean’s Research Scholar. She discussed the deal and its implications with BU Today.

BU Today: Were you surprised by the two companies’ agreement?

Rena Conti: No. International demand for this COVID vaccine far outstrips supply. Merck is the long-standing world leader in vaccine manufacturing. They have the scientific, regulatory, and manufacturing expertise to make this vaccine for the world. It is a terrific partnership between two industry giants.

Merck made a previous collaboration with Pfizer, correct?

Yes. Pfizer has the knowledge to make adenovirus-based vaccines and the manufacturing capacity to meet worldwide demand. What we can infer is that both leading companies in vaccine manufacturing know they can’t meet unprecedented demand for a safe, effective vaccine on their own. Both are acknowledging that manufacturing vaccines is risky at this unprecedented scale. Even if they could, on their own, manufacture enough vaccine to meet demand, they still need to manage the downside risk that something could go wrong in production. In other words, each company needs reliable backup capacity to make their product.

There are very few manufacturers that have the knowledge and capacity to make vaccines, so the options for partners to manufacture at scale and help act as backup are very limited.

How do you think Merck might be reimbursed for helping J&J, and are there risks to collaboration, such as loss of proprietary information between two former competitors?

The details of the contracts are trade secrets, but I would guess reimbursement has several components: reimbursement for up-front manufacturing investments, regulatory costs, and related costs; a percentage of total contracted sales; [and possibly] additional milestone or kicker payments for meeting prespecified supply and quality benchmarks.

The risks to the companies have less to do with transfer of intellectual property — after all, for vaccines, the process is the product, and the companies are by definition sharing the manufacturing process.

I think the bigger risk is one related to competing opportunities. These contracts involve a significant amount of up-front investment in manufacturing and labor dedicated to making one product. Once plants are committed to the production of one vaccine, they cannot be easily and cheaply switched to another vaccine.

We know that some portion of Merck’s total capacity for making an adenovirus-based vaccine is now invested in Pfizer’s product. This reduces Merck’s ability to make other vaccines for COVID or other infectious diseases. The benefits to Merck of this deal must outweigh the value of the lost opportunities, at least for now. While in normal times, we would worry that these lost opportunities might hurt consumers, in this specific circumstance, the value of recovery of our health and getting back to normal likely far exceeds the potential loss.

Do you see this happening more? Are cooperative agreements between competitors a trend, and why?

Unprecedented times call for creative leadership, including cooperative agreements between rivals. There is a significant amount of unmet need for new therapeutics, including combination therapeutics and combination diagnostic and therapeutic pairs. I hope one silver lining of the COVID pandemic will be a greater focus on biopharmaceutical investments that address unmet need and the reduction of barriers to facilitate this innovation. Creative approaches to intellectual property arrangements, contracts, financing, and regulation are needed.

For additional commentary by Boston University experts, follow us on Twitter at @BUexperts. Follow Rena Conti at @contirena1 and Questrom School of Business at @BUQuestrom on Twitter.



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