Towards Equitable Risk Relationships

Views on Risk Sharing in

Sponsor-CMO Contracts

Peter PekosCEO, Dalton Pharma Services

March 2014

The New Reality

North American CMOs:

RISK SHARING

Sponsors:

New drug development is now:

More expensive.

More difficult.

ROI for success is dwindling.

Offshore competition forced greater focus

on building relationships & delivering value.

Extensively outsourced.

The New Reality (Cont’d)

RISK SHARING

risk sharing.

more than ever. CMOs and sponsors need each other

Both must have a deeper sense ofcommitment to the contracted project.

Strong trend toward contractual

Risk Sharing – The Ideal

can jointly prosper.

CMO & sponsor according to the capacity

Risk is appropriately distributed between

A community in which CMOs & sponsors

of each in the spirit of fairness.

Risk Sharing – The Reality

1. We are all still learning.

contracts is inadequately developed.

2. Beneficial risk sharing culture slowly evolving.

4. Legal expertise to help write risk sharing

contracts is still small.

3. Body of case law governing risk sharing

as risk transfer to the CMO.

5. Some larger sponsors still view risk sharing

Key Contract Considerations

1. Product specifications define deliverables.

2. Raw material sourcing, security, liability.

4. Timeline risks and penalties.

3. Pricing for under or over production.

facilities can have a downside for CMO.

5. Sponsor equipment ownership at contractor

Key Points for Project Execution

1. Encourage employees to try to see the

2. If possible, form joint management committee.

3. Communicate, communicate, communicate.

point of view of the sponsor.

EXAMPLE #1: Key Intermediate Supplier

Contract: synthesis of large scale batch.

Client obtained quote and time line from supplier of key

Supplier’s time line for intermediate was integrated into

After failed attempts to find another supplier, Dalton

Supplier informed Dalton that past experience was for

salvaged time line by making the intermediate in house.

small orders, and that meeting time line was impossible.

contract delivery schedule.

intermediate.

CONTRACT RISK ISSUES DALTON HAS FACED

Production contract for a pharmaceutical product over

Because several key raw materials were single source,

Expiry dates for the stockpiled raw materials were

Dalton signed contract after client (i) agreed to pay for

risks related to the raw materials.the raw materials in advance, and (ii) accept time line

critical, but no stability data existed.

three years, with severe penalties for late delivery.

needed at the outset inventory in hand for the 3 years.

EXAMPLE #2: Raw Materials Inventory

CONTRACT RISK ISSUES DALTON HAS FACED

Proposed contract: simple sterile fill for $75,000.

API provided by sponsor valued at $500,000.

Dalton refused demand to accept risk for API loss.

Accepting risk in cases like this might be considered

fee in the quotation.

by obtaining specific risk insurance and including the

EXAMPLE #3: Liability for Valuable API

CONTRACT RISK ISSUES DALTON HAS FACED

Proposed contract: $50,000 for supply of clinical

Sponsor wanted a $1,000,000 penalty if Dalton

Main risk involved third party raw material supply.

Dalton declined contract.

product for trial to start on a fixed date.

missed deadline.

It is not unusual for sponsors to try to negotiate

deductible.

risk-related penalties equal to their own insurance

EXAMPLE #4: Risk of Missing Contract Deadline

CONTRACT RISK ISSUES DALTON HAS FACED

Contract: sterile fill for worldwide distribution.

Problem: Defining regulatory requirements for MSA,

since client was unable specify all countries in which

Risk to be managed after initial product launch was

expansion to new regulatory jurisdictions.

product would be sold.

EXAMPLE #5: Regulatory Issues for Global Product

CONTRACT RISK ISSUES DALTON HAS FACED

Dalton selected for development & manufacturing

[This has happened several times.]

Financial involvement of sponsor in equipment

contract requiring specialized equipment it did not have.

If sponsor owns equipment at Dalton,

Who is responsible for maintenance when idle?

complex issues.

purchase, installation, and validation can involve

What is a reasonable fee for storage?

Royalty to sponsor if equipment used for other client?

EXAMPLE #6: Specialized Equipment Acquisition

CONTRACT RISK ISSUES DALTON HAS FACED

The Most Satisfactory Relationships are

30 YEARS OF RISK SHARING EXPERIENCE

because there is no other choice.

and the sponsor.

Contract irreversibly binds the CMO

Problems are jointly worked through

The sponsor cannot fire the CMO.

The CMO cannot fire the sponsor.

Typical contract period is 5 years.

Joined-at-the-Hip Contracts.

Towards Equitable Risk Relationships

Peter PekosCEO, Dalton Pharma Services

Thank you!