Reed Smith In-depth

Life sciences collaborations often involve long-term complex commitments. For business development professionals and in-house lawyers, mitigating risk means striking a delicate balance at every phase of the life cycle.

At the contracting phase, parties must balance clarity with flexibility to allow for unknown future circumstances. At the operational phase, they should balance managing alliances with preserving rights. Finally, when a dispute arises, they must balance the competing objectives of enforcing rights and fostering a long-term productive partnership.

This briefing highlights steps business development professionals, alliance managers and in-house counsel can take at each stage of the life cycle of a typical life sciences transaction to reduce the frequency of these disputes and protect their employer’s position when such disputes do arise.

Life sciences disputes

The cross-border nature of life sciences collaborations provides a fertile ground for disputes, with subject-matter spanning jurisdictions, often with very different markets, cultures, regulatory systems and laws. This is further complicated by changes in market conditions that inevitably arise during the lifetime of a collaboration.

Disputes can arise from a myriad of issues and across many types of transactions, from licensing and M&A to research and development collaborations or manufacturing and supply arrangements, and can occur at any stage in the post-signing relationship. Disputes may arise from issues spanning the failure to complete an M&A transaction to those covering the ownership of co-developed intellectual property (IP) or stock-outs caused by a contract manufacturing organisation’s failure to perform.

The most notable disputes, weighted in terms of frequency and value, tend to be those relating to the achievement or otherwise of milestones linked to the development or commercialisation of an acquired or licensed molecule, commitments which are often linked with a party’s obligation to make commercially reasonable efforts (CRE), further discussed below.

Recently, the fallout from the COVID-19 pandemic and regulatory changes in various jurisdictions have further prompted disputes.

The contracting phase: CRE clauses

Before entering into any contract, parties should conduct thorough due diligence on each other, the assets that are intended to form the subject matter of the proposed arrangement and the regulatory environment in which the assets operate. That initial work will serve to inform the nature of the collaboration and obligations going forward.

When negotiating a collaboration, the priority for a business development manager or in-house lawyer is to agree clear and unambiguous rights that can be readily enforced. Bearing in mind that for contracts spanning several years, it is not unusual for those who negotiated the contract to move on, leaving successors to perform the obligations based solely on the wording of the contract.

A common source of dispute is the CRE obligation requiring a party to make commercially reasonable efforts to achieve an outcome. A co-developer might hold its counterparty to CRE obligations to make expenditure or achieve progress. An IP rights holder might claim that a manufacturer or distributor has not used CRE to produce or promote/distribute the product. A seller may hold a buyer to CRE obligations to achieve certain milestones that would trigger earnout payments for the seller.

CRE clauses do not stipulate that a party must achieve precise metrics, such as sales, spending or work targets. Such precision might be considered impossible during a long-term collaboration. Instead, CRE clauses may state that a party must use CRE to achieve those metrics. However, this flexibility also opens the door to debate and disagreement further down the line as to whether this standard has been met.

Parties may want to limit ambiguity in CRE clauses by defining what is meant by CRE in the contract or, more specifically, what conduct would not constitute a breach of CRE. But even when the concept of CRE is defined in a contract, it is usually by reference to broad standards. This might be an objective test, for example, conduct that may be reasonably expected given a drug’s potential, stage of development and other market circumstances. Alternatively, it may be subjective, for example, stipulating the same diligence that the performing party took in relation to its own drugs.

In either case, if a dispute arises, the parties will need to lead evidence to prove their case on whether the expected standard of CRE has or has not been achieved, which may involve adducing expert evidence as to market practice or witness evidence as to prior conduct. For cross-border transactions, parties should bear in mind that standards in different jurisdictions may vary, so it is important to have a meeting of minds when determining CRE standards.