As our case is new, we must think and act anew. – Abraham Lincoln

For more than a quarter century, I have been negotiating and living with contracts involving all types of sponsors, from the world’s largest pharmaceutical companies to biotechnology startups and entrepreneurs working out of their homes. Risk sharing in these relationships is currently a popular topic in blogs, trade magazines and conferences that serve our industry. This paper is a contribution which I hope many will find helpful. I have found that equitable risk sharing can lead to the kind of long term relationship that benefits both parties. My perspective is that of a leading CRO/CMO which provides niche, high value manufacturing for clinical trials and low volume commercial products, as well as premium drug lead development services. In my experience, the most satisfactory contracts are those which bind the parties in a “joined at the hip” relationship.

The Past Did Not Prepare Us For The Present

When I started out, there was a comfortable orderliness to the industry. Blockbusters on the market were providing a generous return on investment (ROI), and new drugs with exceptional promise seemed to be steadily flowing through the development pipeline. The resistance by third party payers was in its infancy. The IP and liability challenges faced by big pharma in those days were really just bumps in the wide, smooth highway. Although only non-core activities were outsourced, there was ample opportunity for high quality service providers, and sufficient funds to pay for these services.

I mention the “good old days” only to emphasize the drastic change that we have witnessed. Worse, the rapid change came without a road map for the future. For big pharma, the uncertainty about the best path forward, combined with an overpowering sense of urgency for aggressive action, were in my opinion two of the factors which led our industry to embark upon a massive outsourcing of development and manufacturing services to China and India. A rationale for the continued escalation of offshore outsourcing has been that it will provide access to extremely large drug markets. I hope so. Many of us fear, however, that western big pharma may not enjoy full access to these markets, after having transferred expertise, funded the creation of a large drug development and manufacturing infrastructure, but simply created competitors of the future.

The New Paradigm

Movement of business to offshore suppliers has profoundly affected the North American CRO/CMO service sector. Those of us who have persevered are stronger because we have become even more focused on delivering value and building relationships. Circumstances have changed our customers too. Developing new drugs today is an order of magnitude more difficult, more expensive, and more uncertain, and the ROI for success is dwindling. Sponsors need us and we need them more than ever, and it makes sense that this interdependence should involve involve 2 a deepening sense of commitment by both of the parties to a project and to each other. Risk sharing is an essential part of this paradigm shift.

Companies like Dalton have survived because of our understanding that we can accept only measured risk of appropriate size. Dalton is predominately a project based business; in our business model, we don’t have capital to put at risk and wait for a highly uncertain return at the end of a 10- to 15-year product development cycle that we do not control. We don’t have a steady cash flow from product sales, and therefore must generate regular revenue from projects on a ‘cost plus’ basis. When we assume contractual risk, what we are looking for is an alignment of risk by both parties, and an appropriate distribution of risk according to the capacity of each in the spirit of fairness.

Our business model does not always align with that of the sponsor. What I notice in some larger sponsors is the view that outsourcing is seen primarily as an exercise in risk transfer – the initial proposed contract is often asymmetrical. This is the antithesis of the concept of a community in which sponsors and vendors can jointly prosper in the new paradigm.

In the matter of how risk should be shared between sponsors and CMOs, the industry is still learning. A consequence is that there is not a large body of best practices precedent to draw upon, nor is there a large body of case law governing contractual relationships. Another area of the CMO/sponsor relationship management that will be of great benefit is the development of legal expertise which specializes in writing contracts that would balance risk sharing relationships. In the meantime, we are seeing the slow evolution of a beneficial risk sharing culture, advancing on a contract by contract, clause by clause basis.