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European Pharmaceutical Contractor

Kinks in the Chain

Over the past 10 years, pharmaceutical companies have shown a willingness to use outsourcing as an ongoing part of their overall business strategy. The relationship between third-party suppliers for manufacturing, R&D, logistics and warehousing must be strong in order to meet the potential for delivering a robust solution, while maintaining strength in key areas. This has underpinned an increase in external third-party collaborations and diversification in these areas.

Closures of in-house R&D centres in Europe and the UK over the last 10 years have been noted, with a view to appointing external providers. According to the Office for National Statistics, R&D expenditure in the UK decreased by 15 per cent – or £727 million – in 2012, compared with 2011 statistics. This figure may represent a trend towards outsourcing such functions in order to take advantage of labour, synergies, efficiencies and favourable tax policies offered by other territories, including cross-border European transactions.

Managing Strategic Collaborations

The task of assembling an efficient, high-quality supply chain, which is both flexible and integrated, can present a challenge to business in any arena. The supply chain forms a critical path based on collaborative relationships between a business and its various supply chain partners, as well as between each of the partners themselves. A manufactured product does not simply arise from the manufacturing process itself; it relies on the timely supply of raw materials, active ingredients, packaging and labelling. Typically, the warehousing and logistics provider must also be able to communicate and work well with the manufacturer if there is direct delivery. Equally, third-party nominated suppliers of raw materials and packaging must integrate with the manufacturing and supply chains.

Inevitably, it will be a balance between obtaining cost efficiencies and ensuring that an integrated approach is shared by strategic supply chain partners. In order to sustain a structure which is both efficient and a platform for a healthy and sustainable business, the management of these strategic collaborations is an integral part of the process. This can be achieved through a range of mechanisms, such as choosing the right partner, managing the relationships effectively, being clear as to the partner’s obligations, and ensuring a clear contractual process is in place which outlines responsibilities and imposes specific obligations on the partners to work together.

Smoothing the Kinks

While the cost efficiencies in themselves are desirable, sufficient energy must be harnessed with the collective will of all those in the supply chain in order to smooth out any kinks – otherwise the benefits of the model and cost reductions can easily be eroded.

Take the example of partner computer systems being unable to talk to each other. Once up and running, if one partner wishes to make a change to its IT systems, this can have a knock-on effect on others in the supply chain without that partner being aware of it. One way of assisting in smoothing over these problems – in addition to a robust procurement procedure – is to have a contract in place which adequately protects all parties.

Carefully Selected Partners

When choosing a partner, the tender process and vendor due diligence will form an important part of the journey to ensure the most suitable choice. Even if the partner has adequate resources, consider if these are pooled in an effective way and whether the partner has experience of cross-border integration with other suppliers. Selected partners, therefore, should be suitable not only in terms of expertise, resources, financial health and reputation, but equally be able to offer experience in cross-border transactions, as well as flexibility.

Undertaking a vendor due diligence programme prior to appointing a partner can greatly enhance the benefits of success. In particular, asking a potential partner for practical examples of how it has worked in synergy with other partners in the supply chain can be a worthwhile exercise. A well-drafted contract can enhance the process by seeking to include the responses to tender and due diligence responses. Otherwise, be aware that these can be excluded through the entire agreement clause in the contract, and the business may not be able to rely on them.

Change Control and Innovation

An advantage of partnering with suppliers who specialise in a specific area (for example, R&D, logistics, warehousing, pick and pack, or manufacturing) is that the business can benefit from processes and improvements which have already been brought to the market. In effect, the business can leverage the benefits of reliability and innovation which the supply chain partner has already invested in. Given that it is unlikely that any business will be able to supply and develop all of its required resources in-house to the same level of expertise as that of an experienced outsourced partner, then partnering with a supplier who has a particular specialism is valuable.

Conversely, some partners may be so entrenched in their ways that they are unable to adapt to business demands or innovative business solutions, or integrate with other partners. A well-drafted contract containing a Change Control Procedure can enable the business to require its partners to engage in proposals it suggests, but equally should not require the pharma business to adapt to new procedures introduced by the supplier, if unwelcome.

Flexibility versus Obligations

Flexibility of suppliers is key, both in terms of how the supply chain partner can adapt to business changes, and how the parties may exit the business relationship. By ensuring there are sufficient provisions in a contract to deal with change requests and exits from the arrangements, a seamless transition and handover between partners can be arranged. Consider including suspension rights in the contract – which are useful as they give the flexibility of either suspension or termination, depending on the circumstances.

At the same time, arguably one of the most useful clauses in any contract is the inclusion of a specific obligation on supply chain partners to cooperate with each other. It can seem innocuous at the time of negotiation, but it is then easy to point out if supply partners are not collaborating.

Exclusivity

A well-positioned supply chain will appreciate the importance of not granting partners exclusivity in respect of their specific area. Take manufacturing for instance – in practice, there may be few alternative manufacturers immediately available to join the chain. However, if an encumbered manufacturer has been granted exclusivity, it can mean that the business is unable to use a backup supplier during any exit period, or in a period of high demand. It can be in the business’s interest to ensure that it can either dual source or, at the very least, threaten to dual source. This will also enable supply partners to hand over in an appropriate, seamless manner. If exclusivity has been granted, this option may not be available.

If negotiating with manufacturers, the alternative to exclusivity can be to agree to guarantee minimum volumes. If exclusivity is granted, consider drafting and negotiating to ensure it falls away during any notice period or if demand is unable to be met.

Backup Plans

In practice, contingency, disaster recovery, backup plans and alternative suppliers can be waiting in the wings. Consider including a provision in the contract for the handover of documents, dossiers and raw materials, if supplied free of charge by the pharma business. For example, if the entire stock of the active ingredient is with an underperforming manufacturer, then simply being able to appoint another manufacturer is unlikely to be sufficient unless the active ingredient can be recovered, particularly if it is costly or in short supply.

Look out for ‘force majeure’ clauses which relieve the supplier of its obligations in the case of events beyond its ‘reasonable control’. Consider tailoring these or pruning them back so that suppliers can be terminated in the event of a force majeure.

Cross-Border Perspective

Inevitably, as European barriers fall, the potential for cross-border supply chains is on the increase. The majority of European pharma legislation is based on European Directives, which brings difficulties with it as there is some flexibility in how these requirements are implemented for each local jurisdiction.

It is therefore key to ensure that the supplier is sufficiently capable in the country in which it is based, and in any other jurisdictions where the services will be supplied. The governing law of the contract does not, in itself, mean that local legislation can be ignored, and in managing a portfolio of R&D or clinical trials, local laws will need to be taken into account – particularly if licences, permits and authorisations depend upon these being met.

Contractual Structure

The structure of the arrangements may need flexibility. Consider whether, in group company scenarios, the supplier will be contracting with each of the group companies or one parent company. This can lead to both tax issues and lack of flexibility. If the entire agreement is terminated, all countries can lose the benefit of the arrangement.

It may be that the supplier is not sufficiently versatile to meet one of the country’s requirements and, therefore, flexibility in the contracting arrangements may need to provide for the supplier to be relieved from one particular country while being retained for other countries. Alternatively, using a master agreement with countryspecific schedules and annotations can prove useful.

Workforce Issues

Be aware that in managing strategic operations, issues can arise from the Acquired Rights Council Directive 2001/23/EC (TUPE). This too can have local law implications when appointing a new supplier, exiting from the supplier in order to bring operations in-house, or appointing a successor contractor. In effect, this can mean that the dedicated workforce of one supplier (together with the liabilities attached to those employees) can be transferred to a new supplier. While, on the face of it, not an issue for the pharma business itself, it can lead to cost issues and difficulties in finding a new successor supplier.

Equally, if outsourcing for the first time or bringing a function back in-house, the business may inherit or lose employees with key knowledge. Therefore, in order to allow for future flexibility and cost planning, managing such issues via the contractual process is highly desirable.

Ownership

During the course of provision of the services, the supplier may well create new processes, databases or documentation, or hold dossiers which the business will be reliant upon. Ensuring both the integrity of these and that, post-relationship, the company still has the right to use them with any successor contractor can be key, depending upon the arrangement. In the case of R&D, appropriate provisions dealing with intellectual property ownership will be crucial.

Exit Handover Procedures

Ensuring the appropriate procedures are in place to enable a handover to a successor contractor, or the move of services back in-house, is key to managing the supply chain. A welldrafted contract will contain handover and exit procedures, as well as provisions to enable the supply chain parties to discuss any matters through a management committee. In certain cases, it can impose a specific obligation on an existing partner to meet and cooperate with an incoming partner, or others in the supply chain.

Conclusion

While managing relationships and a secure procurement process are key to smoothing the kinks in the supply chain on cross-border strategic collaborations, a well-drafted contract can support the process.

Reference
1. Business enterprise research and development 2012, The Office for National Statistics, 22nd November 2013


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Beverley Flynn is a commercial partner at Stevens & Bolton LLP where she has a particular focus on major contracts and commercial advisory work. Specialist sectors include pharma, IT, retail, healthcare and critical life sciences. She has significant experience in strategic alliances, IT and ecommerce, warehousing, outsourcing and logistics. Beverley also leads the firm’s data protection practice, advising on cookies, international transfers, data protection policies and subject access requests, as well as other data issues such as freedom of information.
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Beverley Flynn
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