Managing Contract Relationships: A BPI Theater Roundtable at the 2015 BIO Convention

FUJIFILM DIOSYNTH BIOTECHNOLOGIES (WWW.FUJIFILMDIOSYNTH.COM)

On Wednesday 17 June 2015, Patricia Seymour (senior consultant at BioProcess Technology Consultants) chaired a midday roundtable titled, “Managing the Contract Relationship.” She brought together a panel of four experts with different perspectives (contract manufacturing, cell and protein therapies, and legal negotiations):

Panel Introductions
Koen Hellendoorn: Based in the United Kingdom and the United States, FujiFilm DioSynth Biotechnologies is a contract manufacturing organization (CMO) with about 15 years’ experience in recombinant proteins. More than 1,000 employees work with clients both large and small on process development and good manufacturing practice (GMP) operations. The company recently acquired a Texas CMO (Kalon Biotherapeutics) that focuses on viral vaccines and cell therapies. Hellendoorn spoke of how a CMO can build a strong relationship with customers through solid contracts that defend both parties when something goes wrong without hampering collaboration through expected ups and downs.

Justin Skoble: Based in Berkeley, CA, Aduro Biotech is a small biopharmaceutical company with three platform technologies: attenuated microbial immunotherapies (based on Listeria monocytogenes), cellular immunotherapies (based on Cell Genesys technology), and small molecules. After an initial public offering (IPO) in April 2015, Aduro is growing and partnering out some programs with Janssen and Novartis. Skoble himself is responsible for identifying CMOs, negotiating contract terms, and overseeing the resulting relationships.

Tom Douville: Kolltan Pharmaceuticals is a small, private biopharmaceutical company with about 40 employees. Founded on technology from Joseph Schlessinger’s laboratory at Yale University, the company focuses on monoclonal antibodies (MAbs) and antibody–drug conjugates (ADCs). Douville manages outsourced chemistry, manufacturing, and controls (CMC) and associated laboratory activities: generating requests for proposals (RFPs), selecting CMOs, and overseeing outsourcing relationships while providing technical support for legal and business teams involved in negotiations.

Lily Vakili: Faber, Daeufer & Itrato PC represents biopharmaceutical companies and CMOs in contract negotiations. Vakili spoke of balancing risk and leverage. She said that legal teams should support scientific and business groups rather than the other way around. But strategy depends on leverage.

Panel Discussion
Seymour began by asking how approaches to risk management — e.g., related to batch failures, intellectual property (IP), and timelines — evolve as companies move through the phases of development. Vakili said that negotiating strategies differ by stage (preclinical, clinical, and commercial) and company situation (e.g., private or public, level of funding, required timeline). She said there is more flexibility at the preclinical stage, but that companies should be careful even then not to agree on terms they can’t work with going forward. Standards and regulations are more rigid at clinical and commercial phases, so the obligations of both parties become more stringent as development progresses.

Vakili said that companies need to start with a good sense of what risk they will accept. CMOs want to protect themselves until the point at which they are confident about specifications. She said that different product types face different levels of risk based on process complexity and IP. So technical and legal groups should be involved early on. CMOs need to protect their liability and ability to work with multiple clients.

Douville said that small companies always worry about money (especially when they depend on venture capital), which translates to a focus on time. Phase 1 data drive investment, so getting there faster helps a company derisk its overall program. Platform processes help by reducing optimization work, shortening the time to investigational new drug (IND) filing. In contract negotiations, small companies must balance cost and time.

Seymour asked about milestone incentives. Douville said that because early phase risks are higher, CMOs are less willing to agree on such “carrot-and-stick” terms. Small companies depend on partnering relationships in which CMOs feel invested: early success leading to more work later on.

Skoble’s company is in a different position: well financed with products in phase 2B and processes that are consequently more developed. He said that risk tolerance depends on a company’s size, phase of development, and financial status. In phase 1, his company worked to get proof-of- concept data with unique products and processes just starting development — all inherently risky. Now it needs a CMO that can support its eventual commercial needs. “Those contract manufacturers tend to be more risk averse,” Skoble pointed out, so the sponsor must take on more risk itself. One contract manufacturer wanted a committed, long-term relationship, and Aduro decided that a multiple- year program was appropriate. Aligning their timelines made commercial supply the “carrot at the end of that stick.”

Hellendoorn offered a CMO perspective. His company uses three types of contract: a flexible, two-page preclinical R&D agreement with short termination clauses; a clinical- stage agreement with GMP requirements; and a contract for commercial supply. So the company can provide early stage customers with needed flexibility. Antibodies may be commoditized, more or less, he said, but nonantibody products involve scientific uncertainty early on. At the clinical stage, both clients and CMOs have GMP assets to protect, making contracts more complicated.

Seymour then asked the panelists for case studies. Two years after finalizing one contract, for example, her team found some misunderstandings between the parties about access to “proprietary” information when it came to regulatory filings (an IND application). Such access should have been spelled out in advance. To some people, there may be nothing proprietary about how to run a familiar analytical method, but for others such assumptions may need to be explicit. With truly proprietary data, a drug master file (DMF) with the agency can be cross referenced.

Batch delays or cancellations are important, as well, and may be inevitable in early development. CMOs don’t like downtime any more than sponsors like losing product. So a CMO can plan to be flexible, promising to move a client into the next reasonable place in line should a delay arise — but not the end of the line — with no penalties involved. Such delays are often difficult enough for small companies without adding fees.

Hellendoorn said contracts are intended to protect both parties. CMOs want to keep clients from radically changing schedules on the fly. But it’s also in their interest to make each customer’s product successful. One client wanted to delay manufacturing by three months, he recalled, but balked when reminded of its contractual obligation. The companies were able to find a compromise together. He said that such discussions help everybody — and that larger CMOs can provide more flexibility. Skoble highlighted the importance of planning for worst- case scenarios together, with everyone working to make delays as few and as short as possible.

Douville agreed. “Most of my experience has been very collaborative and positive.” He recalled working with one CMO through phase 2 manufacturing and another for phase 3 and early commercial supplies. During negotiations, failed batches and related timing issues were “sticking points,” and defining an initial batch tied into it. The CMO’s initial position was that any process change made the next batch an initial batch, reducing the company’s liability. But the client was bringing in a clinically validated manufacturing process for phase 3 development and wanted engineering runs to be considered the initial batches. Their compromise defined an initial batch in GMP manufacturing as one with a process change significant enough to notify the FDA. The client might end up paying for a failed GMP batch, but the CMO was liable for small changes.

Vakili continued on the theme of batch failure. Clients want to say, “If you fail to meet specifications, then that’s a nonconforming product. You should replace it.” But failures have causes. CMOs may show one to be the result of sponsor action or inaction. And if a CMO does provide some kind of remedy, then the sponsor may want to make the decision on what that might be. If the CMO wants to rework or reprocess materials, the client may or may not agree. Drug-product manufacturers might be willing to remanufacture a new batch, but only if the client provides new drug substance. Here Vakili emphasized the relationship between the parties. Legal remedies are an expensive and time-consuming last resort; people would rather sit down and work out a solution together. Clear language and good understanding of the contract from the start can help prevent problems.

Seymour agreed. “The failed-batch definition can evolve over the phases of development, she said, and batch failure is more likely at earlier stages. “Most CMOs I’ve been working with are pretty reasonable about what a specification failure means.” Negotiations are dominated by the party with the most control (leverage) — in most cases, the CMO. But no reasonable company would refuse to take responsibility for its own GMP violation. Setting specifications is a joint effort, and they should be broad at first and tightened as a drug progresses. And assigning fault is not always easy.

Vakili then brought up the issue of caps on liability, which can negate the contract terms if set too low. Seymour added that insurance is an additional concern. She cited a shipping problem in which leaks compromised a whole batch. It wasn’t the CMO’s fault, but rather the carrier’s — and thus covered by that company’s insurance.

Delivery is another term that often must be defined: the point at which a sponsor takes possession of material and therefore controls it. Hellendoorn said his company uses the ex-works approach, a trade term meaning that sellers deliver goods at their own place of business, with all transportation cost and risk assumed by buyers. But his company supports “whatever it takes to get the product safely to our customer.” Experience teaches many CMOs about packaging and shipping, so they can recommend shippers and help clients develop shipping risk profiles.

Vakili added that such details can depend on where a product is made and where it’s going. An Indian CMO may be expected to take on more liability, for example, when import/ export issues are involved. And Seymour explained that CMOs are eager to move product. Warehousing incurs risk, and as long as a product remains on site, the manufacturer remains liable for it.

IP Protection: Vakili also cautioned against confusing ownership with delivery. Drug companies want to say they own everything rather than on payment or delivery. From the CMO perspective, however, IP issues can come into play.

“Companies do go out of business,” Seymour said. During bankruptcy proceedings, a client could be unable to take possession of its own material without proving ownership. She said that 20 years ago, CMOs wanted to own everything; now many are more flexible in that respect, providing clients with full unencumbered rights to their own IP (and vice versa).

Hellendoorn said it all depends on the starting point but that, yes, his company has become more relaxed over the past decade. It can be difficult to patent protein processes. Few sponsors manage to do so. “We don’t want to invent ourselves out of the market,” he said. If a CMO comes up with a good idea for one process, it would like the option of using that again later — agreeing not to use it for the same molecule, however, which could enable biosimilar competition down the road. “Some customers want to go a bit further,” he explained, “and talk about a class of molecules.” And the CMO is willing to negotiate such terms — with incentives. But exclusivity for a whole indication area is too broad. “A lot of the know-how we’ve built up over the years comes from other customers,” he pointed out. “So bear with us and understand that we need to keep doing that.”

Speaking of platform technologies, Skoble said that Aduro keeps ownership of process IP, negotiating terms (with advance notice) when a CMO performs process development work. And Douville said that it’s best to spell things out early on — even though doing so can take some time.

Vakili agreed. “Neither party wants to be blocked from doing business.” All clients benefit from their CMOs’ ability to work freely. But drug companies invest a great deal of money in R&D and shouldn’t be blocked from further developing their own products. Nonexclusive royalty- free (NERF) licenses can provide a solution. Especially in regions without strong IP protection, technology transfer is otherwise complicated. And Vakili said that companies can find ways to “sweeten the deal” (e.g., through exclusivity agreements and minimum-purchase obligations).

The value of IP can be somewhat subjective, Seymour pointed out, and widespread bioprocess capabilities are making it less of an issue overall. Hellendoorn agreed. His company has proprietary technologies, but clients need to be convinced of their worth. Some customers have looked at the terms and waffled, at which point the CMO is willing to negotiate — because it would prefer to use its own expression system, for example.

“We like milestone payments,” he went on. “We’ll invoice you if we’ve actually done what we set out to do.” That involves some risk, but his company sees it as a competitive advantage to be able to estimate labor and model costs, then put a price on a given milestone.

Skoble likes milestone-based contracts as a means of aligning client and CMO expectations. It’s sometimes difficult for small companies to commit to something with broad scope, not knowing whether they will have enough money down the line, so early stage projects need more flexibility. Douville heartily agreed, and Vakili pointed out the importance of process complexity.

When Seymour asked for parting comments, Vakili advised due diligence. If a CMO provides a contract with its proposal, the sponsor’s legal counsel can look that over for red flags. “Know who you’re dealing with,” she said. “Sometimes you can have great people on the science and technical side and then a crazy legal contract that’s going to delay drug development.” Seeing that can help sponsors make informed decisions.

Seymour agreed. If it takes more than a day or two to get a confidential-disclosure agreement (CDA), she said, that suggests that it could be difficult to do business with a given CMO. Rigid legal stances can hurt an outsourcing business and ultimately turn away customers.

 View the full presentation videos from the BPI Theater at BIO 2015