Creating contracts for outsourcing in the biopharma industry
Abstract:
Creating a strong agreement which takes into consideration all the relevant aspects of an outsourcing relationship is the cornerstone of a successful partnership between a foreign entity and Indian CMO/service provider. This chapter discusses the key elements of an outsourcing contract and the negotiations and discussions which are required to be undertaken in formulating such a contract. The formulation of a term sheet will allow the respective lawyers to draft the terms required on a mutual understanding of each party’s needs. This chapter contains both the general and the specific terms, conditions and clauses which are usually found in an outsourcing agreement.
6.1 Biopharma outsourcing
Outsourcing makes it possible for companies to use their internal resources more efficiently and to focus on their core competencies. In biopharmaceutical manufacturing, outsourced projects can cover all areas of R&D, manufacturing, marketing, testing and service.
India, with more than 200 companies in the bio-technology sector along with the availability of cheap and skilled labour, thrives in the biopharma sector.
Outsourcing biopharma into India attracts a lot of legal compliances along with the necessity of a perfect biopharma outsourcing agreement. This chapter is aimed at guiding the outsourcer in entering into an effective biopharma outsourcing agreement with an Indian service provider so that both the parties are put in a win–win relationship.
6.2 Preliminary documentation
An outsourcing agreement is an outcome of several discussions and negotiations between the parties to the contract, i.e. the ‘outsourcer’ and the ‘service provider’. During these discussions, the parties should record the progress in their negotiations and understandings as these will lead to the formation of preliminary agreements. These preliminary documents play a vital role as they form the stepping stones in formalising and finalising various aspects of the outsourcing agreement. Some of these preliminary documents include the following:
6.2.1 Confidentiality agreements
Every step of negotiation will involve disclosure of proprietary and financial information about the outsourcer and the service provider. Particularly, in the case of the biopharma industry, this information is very valuable and should be kept confidential. Therefore, before entering into any negotiations, the first step each party should take is to value the level of trust it has towards the other party, and the second is to enter into a confidentiality agreement to determine the confidential information management strategy as early as possible.
Following are some of the terms and conditions that must be incorporated into a typical confidentiality agreement:
• It should clearly indicate that the parties are bound by the contract. The parties should identify all parent and subsidiary companies, their foreign counterparts and the relationship that exists between them in order to determine the parties to be bound by the agreement.
• The agreement should define the term ‘confidential information’ and this definition should be vast enough to cover any sort of proprietary or financial information to be disclosed to the other party.
• It should impose an obligation upon the recipient of confidential information to keep the information in a confidential manner and not to reproduce, transform or transmit information. The agreement should further provide for a declaration from the recipient to use such information received only for the purpose for which it has been received.
• The duration or time period for which the disclosed information must remain confidential should be clearly spelt out.1
• The agreement should provide for documents to be excluded from its purview, such as any information that must be disclosed by law or any information that the recipient is able to prove was already with it before the other party disclosed it.
• The agreement should also provide for a declaration that the parties should return or destroy the information on the request of the disclosing party.
• Most importantly, the agreement should provide for the laws applicable in case of a dispute and the method of settlement of such disputes arising out of disclosure of confidential information.2
6.2.2 Term sheet
A term sheet (TS) states the key terms, strategic intent, commitments and objectives of the parties, thereby avoiding ambiguity and misunderstanding among the lawyers and the negotiation team as to their mission in negotiating the contract. The TS is generally non-binding unless it is worded to make it binding.3 To make the TS clearly a non-binding agreement, it should include a statement that it does not include all the essential terms of the contract and the parties will attempt to draft a final agreement on the same context which will be binding. The TS becomes binding if the parties expressly make the entire contract, or certain terms such as the confidentiality agreement or the agreement that the parties will not enter into negotiations with other parties for a certain period, etc., binding upon them.
6.2.3 Preferred provider agreement (PPA)
With a preferred provider agreement (PPA), the parties expect greater efficiency as they get more accustomed to each other. They can negotiate for preferred status with the expectation that both the parties can benefit. The outsourcer may offer to limit the number of service providers so that he can get discounts in return for the increased volume of work offered to a particular service provider. On the other hand, the latter may expect to reduce the business development costs and to receive a steady stream of work from the outsourcer. Thus the PPA leads to a win–win situation where both the parties benefit.
6.3 Drafting of the biopharma outsourcing agreement
The relationship between the outsourcer and service provider is governed purely by the contract executed by them. Obligations regarding service standards are not based on trust but by the contract itself. Therefore, the parties should make sure that the contract specifies accountabilities, performance criteria and standards, sets aims and objectives, and provides for regular monitoring.
Furthermore, the parties cannot use a standard template for all their outsourcing needs. For example, in the biopharma industry, outsourcing R&D will involve different issues to be addressed in the contract, whereas outsourcing production of pharma products will involve a completely different set of issues. Therefore, outsourcing contracts should be tailor-made to suit the parties’ needs and risks involved in the activity.
6.3.1 General terms and conditions
Some of the basic terms and conditions would include the following:
• The parties to the contract should be clearly identified, including the parent and subsidiary companies and their foreign counterparts.
• There should be clear use of definitions to avoid ambiguity and unnecessary repetition.
• The contract should state legislations, codes and guidelines applicable.
• The contract should state the effective date from which it comes into force.
• A formal clause of appointment whereby the outsourcer appoints the service provider for performing the services contracted.
• The duration of the contract and the terms of termination of the same.
• The consequences of termination, including disposal of the rights and obligations accrued and the payments due.
• A clause of ‘force majeure’ making neither party liable for non-performance of the obligations under the contract caused by circumstances beyond the parties’ control.
• The address for correspondence for both of the parties.
• A clause explaining the dispute resolution system and jurisdiction.
• Schedules providing a detailed description of the services, budget, terms of delivery of product and the terms of payment.
6.4 Specific considerations in different types of agreements
6.4.1 R&D outsourcing contracts
The following are some of the important clauses which a R&D outsourcing contract should contain:
• Intellectual Property Rights (IPR). IPR covered in the contract is divided into background rights and foreground rights. Background rights are the rights which exist with the parties before the agreement, and foreground rights are the rights which accrue or get created through the contract. Generally, the background rights rest with the respective parties whereas the freshly created foreground rights go to the sponsor, i.e., the outsourcer. The outsourcing contract should licence the service provider to use the background rights of the outsourcer for the purpose of carrying on R&D activities.
• Patents. The contract must specify the existing patents of the outsourcer and should cover the expected future patents and patent applications along with corresponding foreign rights which accrue from the contract.
• Know-how. The contract must state the know-how transferred or to be transferred between the parties and should clearly describe the know-how relating to its subject matter.
• Ownership of data, information and rights. This part of the contract should first state the continued ownership of the background rights of the parties and the permitted levels of their access by the other party. Second, the contract should state the rights and obligations of the parties to secure the IPR arising from the contract. Third, the contract should state the ownership of the future IP created as a result of the collaboration.
• Improvements/inventions. This part of the contract is very important. The outsourcer may generally claim his rights over all of the IP and other incidental IP created as a result of the R&D contract. On the other hand, the service provider may also claim his rights over them. The contract should be aimed at settling this difference between the parties.
• Publication. The parties should have a clause in their contract which restricts both parties from disclosing the existence of the agreement and the identity of the other party to third parties. Second, the contract may also restrict parties from publishing any information regarding the activities of research and progress/development in the same without the written consent of the other party.
• Trademarks. The outsourcer should specifically define his trademark with the registration number and should clearly specify his unregistered trademarks too. The outsourcer should make the service provider declare that it will use such trademarks only for the activities specified under the contract and not otherwise.
6.4.2 Contract outsourcing manufacture of pharma products
The following are some of the important clauses which a contract of outsourcing for the manufacture of pharma products should contain:
• Confidentiality and data protection. Apart from the confidentiality agreement, the parties should include a confidentiality clause whereby the parties agree to hold the financial and proprietary information confidential. They should also declare that they will abide by the data protection laws of the country to which the contract is outsourced, i.e. in the case of India, the provisions in the Information Technology Act, 2000 (as amended), dealing with data protection obligations.
• Technology transfer. The outsourcer will have to transfer technology to the service provider for the purpose of the manufacture of the drugs/product. Specific clauses in the contract clearly stating the purpose for which such technology should be used, and other provisions relating to control of such technology, should be included.
• Out-licensing of IP. Where the service provider develops, manufactures and supplies drugs to the outsourcer, it may provide for a clause whereby it may license out the IP held by it to the outsourcer for the purpose of registering it in the latter’s market. A typical example of such a deal would be the one entered into between Indoco and Aspen.4
• Performance terms. The outsourcer should make sure that the service provider assures:
– the method of manufacture and supply of the products as per generally accepted industrial standards;
– the quality of the product to be manufactured will be in compliance with applicable guidelines;
– compliance with local laws, standards, procedures and guidelines issued by the appropriate governing bodies relating to ethics;
– technical or service level agreements will be executed and adhered to.
The outsourcer must make sure that the service provider takes the responsibility of getting regulatory approvals for the products manufactured by the latter at its own cost. If not, it would add to the costs incurred by the outsourcer on getting the product manufactured. An example for transferring the responsibility of getting regulatory approvals would be the Biocon–Pfizer agreement.5
• Financial or commercial terms. This clause in the agreement would deal with the terms and conditions relating to payment by the outsourcer for the services (to be) offered by the service provider. Modes of payment and the other necessary particulars should be specified clearly.
• Assignment/sub-contracting. The outsourcer would not appreciate the service provider further assigning the outsourced work to a third party for two reasons:
Thus there should be either an express prohibition on assignment or indemnity coverage from the service provider.
• Orders and forecasts. In order to enable the service provider to plan its manufacturing schedule, the outsourcer should provide an advance notice of its requirements and should also provide for a forecast of what it might be requiring in future. Therefore, a clause in the contract providing for the same is vital.
• Terms of sale. The terms of sale, including the basis of delivery, price and the basis of pricing, the extent of the service provider’s right to increase the prices on certain justifiable circumstances, should be well settled in the contract.
• Failure to supply. In the contract, the outsourcer may provide for a right to license a third party to produce the product or acquire the product from third parties on the default of the service provider. In such a case, the outsourcer should be indemnified for the loss, extra costs and other damages incurred by him because of the service provider’s failure to supply.
• Liability on recalls. The parties should make provisions in the contract to inform each other about the safety and efficacy of the product, and should also settle issues relating to the potential liability which lies upon the parties on the recall of the product or any claims arising out of a product defect.
• Warranties and indemnities. Warranties are contractual promises provided by one party to the other. The outsourcer should make sure that the service provider warrants the performance of his contractual functions at every stage. There can be warranties relating to the quality of the product produced, timely deliveries, and confidentiality and labour issues amongst others. The contract should also provide for indemnity, as it may become difficult to mitigate the actual loss suffered by the party. Therefore a clause specifying the amount of damages that the party breaching the warranty should pay should be provided for in the contract.6
• Insurance. In order to indemnify the outsourcer fully, the service provider should insure all of its activities under the contract.
6.4.3 Marketing agreements
Marketing agreements enable the service provider to develop a product, manufacture it and supply the same to the outsourcer who markets it in his country. A typical example of a marketing agreement would be the agreement between Indoco and Watson Pharma.7An important clause to be added in such agreements would be the exclusive licensing clause, whereby the outsourcer can obtain exclusive marketing rights, thus preventing the service provider from licensing the same products to competitors of the outsourcer. An example of such an exclusive marketing agreement would be the Reddy–Cipla licensing deal.8
6.4.4 Service level terms and document
All the above outsourcing agreements involve services rendered by the service provider which are received by the outsourcer. A service level agreement (SLA) fixes the performance criteria of these services provided by the service provider. It further provides specific targets to be achieved by the service provider and the metric system to measure the services provided by them. Generally the service provider agrees to a proposal which gives a platform for the service provider to make a counter-proposal with terms suiting the needs of the outsourcer. The SLA may also include terms of pricing and timely deliveries and other service benchmarks other than the service level terms.
6.4.5 Measuring of services
The most important and difficult issue is to prepare a perfect instrument/measurement system used to measure the services provided by the service provider. The three most important issues which should be considered by the outsourcer before choosing a measurement system are:
• Accuracy. A measurement system with a larger margin of error will increase the risk faced by the outsourcer in the deal.
• Cost: The costs involved in maintaining such a measurement system would include the costs for running the system and the burden the process places on people.
• Transparency: The measurement system should also provide for good access to the data instrumental in measuring the services.
Furthermore, the measurement system selected after considering the above issues should be able to measure the following service levels:
With a perfect service level measurement system, the SLA will be an effective tool promising efficient service from the service provider.
6.5 Conclusion
India has become a favorite R&D destination where outsourcers can tap the large pool of inexpensive scientific and technical workers with good links for academic and research facilities. It also provides an environment where innovation is supported by the product patents regime. With a perfect biopharma outsourcing agreement, an outsourcer can achieve its objectives efficiently.
1Typically in perpetuity.
2Typically a dispute resolution process.
3While the Term Sheet is generally non-binding, certain terms are binding; such as costs incurred by each party are to be borne by the respective parties. The terms of the Term Sheet are subjects to the confidentiality agreement and that is usually an inclusivity period which has to be adhered to.
4Drug-maker Indoco Remedies Ltd formalised a contract-manufacturing deal with South Africa-based Aspen, the largest pharmaceuticals manufacturer in Africa. As per the deal, Indoco would make tablets, liquids and creams for Aspen. Indoco out-licensed its intellectual property on some of its ophthalmic products to Aspen for registration in South Africa and other markets.
5The deal is to commercialise four of Biocon’s bio-similar insulins. The deal gives Pfizer exclusive rights to sell Biocon’s products (Recombinant Human Insulin, Glargine, Aspart and Lispro) in most countries. The deal puts Biocon in charge of development, manufacturing, and supply of insulin products and regulatory approvals. While manufacturing the products could help the company keep a sufficient margin, the responsibility of getting regulatory approvals could increase costs.
6Please note that liquidated damages will have to be proven in a court of law in India.
7Mumbai-based drug-maker, Indoco Remedies Ltd, made an alliance with Watson Pharmaceuticals Inc. to develop and manufacture generic sterile products for the US market. Under this agreement, Indoco will develop, manufacture and supply products to Watson for the US market. The deal is worth $679 million. The two companies have agreed that development costs, including the bio-study, clinical trials costs, legal fees and net profits from the sale of these products would be shared by Watson and Indoco in the agreed proportions.
8Pharma major Dr Reddy’s Laboratories Ltd entered into an agreement with Cipla Ltd for exclusive marketing rights of seven products in the over-the-counter (OTC) and prescription segments in Russia and Ukraine. The agreement enhances Reddy’s presence in the OTC space and in therapy areas of gastroenterology, dermatology and oncology in Russia and Ukraine.