1. Towards Equitable Risk Relationships
Views on Risk Sharing in
Sponsor-CMO Contracts
Peter Pekos
CEO, Dalton Pharma Services
March 2014

2. 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.

3. The New Reality (Cont’d)
RISK SHARING
risk sharing.
more than ever.
 CMOs and sponsors need each other
 Both must have a deeper sense of
commitment to the contracted project.
 Strong trend toward contractual

4. 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.

5. 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

6. 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

7. 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.

8. 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

9.  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

10.  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

11.  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

12.  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

13.  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

14. 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.

15. Towards Equitable Risk Relationships
Peter Pekos
CEO, Dalton Pharma Services
Thank you!