Why Get Sleepless with Indian Pharma / Biotech Partnering A Structured Framework for Successful Western Partnering with India; Outsourcing, Alliances, JV’s or M&A’s Webinar February 9, 2010 FDA Smart, Nishith Desai Assoicates, Vantage Partners, Pharmaceutical Development Risk Management 1
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Why Get Sleepless with Indian Pharma / Biotech Partnering A Structured Framework for Successful Western Partnering with India; Outsourcing, Alliances,
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Why Get Sleepless with Indian Pharma /
Biotech Partnering
A Structured Framework for Successful Western Partnering with India; Outsourcing, Alliances,
JV’s or M&A’s
Webinar February 9, 2010
FDA Smart, Nishith Desai Assoicates, Vantage Partners, Pharmaceutical Development Risk Management
1
Introduction to Webinar Presenters
• Thomas Honohan: Partner- Pharmaceutical Development Risk Management (PDRM) and Senior Advisor to Vantage Partners
• Dr. Milind Antani : Head, Pharma & Life Science Practice, Nishith Desai Associates
2
Webinar Overview
Purpose:Identify key challenge and risk categories associated with partnering with Indian firms
Understand the implications of those challenges and risks
Discuss approaches for successfully addressing the challenges and risks
Deliverables:List of key challenge and risk areas including legal / regulatory
Framework, success factors and example tools for managing those
Slides from Webinar and select White Papers
Webinar Flow:
Overview general trends in Indian partnering, why alliances / supplier relationships are not as successful as we would like them to be and legal / regulatory environment
Discussion of some key challenge areas, associated case studies and approaches to their management
Attendee questions and discussion
Wrap-up
3
General Trends in Partnering in India
4
Trends in India -- Alliances
General Trend: Indian companies are working to ‘move up the value chain’ for
all alliance types
• Collaboration• Joint ventures• Out Licensing• In Licensing• Co-development
• reduce cost• reduce time• reduce infrastructure• reduce dedicated internal staff• share development risk• gain access to Asian market• produce generics for global mrkts
• Move up the ‘value chain’ by:• in /out licensing products• innovation• co-development• forming alliances• acquiring businesses• share revenues
Western Companies Indian Companies
Implications of Differences• parties enter negotiations with very different strategies and objectives for the deal• parties are reluctant to share their strategies for fear of losing negotiation ‘power’• the contract does not specifically address some key interests of one or both parties• upon implementation, specific objectives and measures are not put in place• as time goes on the partners become dissatisfied with each other• the projects miss milestones and value is lost for both parties• partners can’t adjust to change in business environment in a timely manner
10
Managing Differences: A Key Collaboration Challenge
• quality issues• legal / IP issues• timeliness• technical risk with product / service• actual value of product service• responsiveness / decision-making• overall management time required
• inadequate support from partner• unilateral decision-making• lack of info and expertise sharing
As Seen by Western Companies As Seen by Indian Companies
Implications of Differences• Misaligned expectations lead to an erosion of trust• Existing objectives and measures do not address respective concerns • Perception that the partner is ‘changing the rules’ / not complying with contract • Lack of trust feeds reduced sharing of information, plans, changes in strategy• Project delays, re-work, inefficient use of management time• Increased escalation of issues; possible need for arbitration• Destruction of deal value for both parties; sub-optimized deal
12
Key Areas of Challenge in Negotiating, Designing and
Implementing Western / Indian Deals
13
Common Areas of Difference Between Western & IndianCompanies Entering Into Partnerships
• cost reduction• time to market• product acquisition• product partnering• risk sharing• new business ideas• new capabilities• new product/feature dev• market share and penetration• business process innovation• knowledge transfer• capability transfer• competitive threat reduction
• quality of work • timeliness• technical risk for project• protection of IP• product / service valuation• decision-making speed• management ‘overhead’• joint planning• content / approach to business communications
• corporate structure• decision-making• negotiation style• transparency / sharing• collaborative style• problem solving style• crisis management• key business processes,
• responsiveness• sense of urgency• internal priority setting
Strategy / ObjectivesRisk / Perception ‘Cultural’
General• contract issues & concerns• IP protection concernsSpecific• Drugs & Cosmetics Act• The Patents Act• FDI in Healthcare• Investment Structure• Tax Incentives• Employment Law Recent developments• LLP Act• Competition Act• Developments in pipeline
Legal /Regulatory
14
Honoring IP in AlliancesIP issues involved
• the licensing or assignment of copyrights, trademarks, and patents, etc
• Situations: IP Owned / Licensed by the Company IP Owned / Licensed by CMO Sharing information confidentiality issues Development of new IP Issues & concerns
• Ownership Assignment No conflict model
Interests / Challenges• Western company not confident in
protection provided by Indian law• Western company not comfortable
with capability of Indian partner to manage IP
• Lack of knowledge and understanding of current IP rules and best approach to disclosure
• Indian company not confident that any of its innovation will result in their sharing / owning IP
• Possible lack of awareness, as well as concern on honoring IP, on part of Indian partner
Advice
• Properly drafted contract with inclusion of specific clauses, to address respective interests,mitigates the risk of concerns over honoring IP.
• Partners must be willing to share their interests during negotiations.
15
Drugs and Cosmetics Act, 1940
• Manufacturing of drug to require license License required for each manufacturing
location• Import of drugs
Prior license required from Drug Controller of India for certain drugs
• Clinical Trials New Drug: Prior permission of Drugs Controller
General of India required Mandatory registration of clinical trials Schedule Y1 in place labeled as per standards provided in Drugs and
Cosmetics Rules, 1945
• Medical Devices Drug or not? New schedule prescribed
Interests / Challenges• Western company is not convinced
that all requirements are necessary• Western company does not
understand the time and resource required to meet all requirements
• Classification of product is disputed, i.e., drug or not for devices
• Changes / improvements in the regulations at regular intervals
• Feeling that Indians might be used as ‘guinea pigs’ by western co’s
Advice• Implications of time and cost for compliance must be understood / agreed during negotiations. • Western partner needs some evidence / case examples of debated requirements.• Implementation plans must take into consideration time and cost of compliance.• Proper and detailed discussions with the Indian partner regarding the business strategy and requirements for the approvals especially with reference to specific situations
Advice• Proper due diligence of the company• To seek approval early• To discuss with Indian company on the business plan to assure key issues are addressed
18
Employment LawRequirements:
• Labor laws enacted by federal and state governments
• Plethora of laws; over 100 in number
• Certain laws enacted by the federal government but
implemented by the state government
• Series of compliances under various laws• Need for precise documentation, including with respect
to confidentiality and IP assignment• Necessity for structuring of compensation from tax
perspective• “At-will” employment concept not recognized, need for
reason for termination of employment• Indian immigration authorities get stricter with respect to
issue of employment visas for foreign nationals
Interests / Challenges• Western company does not
consider some aspects of employment law requirements as absolutely required
• Western company does not understand the implications of the law to the contract design and deal implementation
• Indian company feels insulted when Western company challenges their knowledge of local law
• Difficult to lay off Indian staff
Advice
• Implications of time and cost for compliance must be understood / agreed duringnegotiations.
• Western partner needs some evidence / case examples of debated requirements.• Implementation plans must take into consideration time and cost of compliance.
19
Competition Law
• Competition Act was promulgated in 2002. However, the substantive provisions were
notified only in May 2009. The predecessor of Competition Act i.e. MRTP Act has been
repealed.
• The substantive provisions of Competition Act pertain to:
• Section 3 - Anti competitive agreements (notified on May 15, 2009)
• Section 4 - Abuse of dominance (notified on May 15, 2009)
• Sections 5 and 6 – Regulation of Combinations (yet to be notified)
• Any agreement in the nature of price fixing, market / customer allocation, agreement to
limit production / supply of goods / services and bid rigging are considered per se illegal
under the Competition Act.
• Any agreement in the nature of conditional Purchase / Sale (tie in arrangement), exclusive
supply arrangement, exclusive distribution arrangement and resale price maintenance
shall be illegal if it causes an appreciable adverse effect on the competition in India
20
Work Hard to Identify, Agree and Document Specifics
General Advice:
• Minimize future disputes by clearly laying down the rights and obligations of each party
• Number of pages do not matter – shorter agreement may prove dangerous• Limit open issues as much as possible: if can not, agree, specifically, on what / how
they will be dealt with during implementation of the agreement• Explicit and unambiguous
• Definitions play a crucial role
• “to be mutually agreed” is the most abused expression
• Employ discipline and agreed process to achieve desired objectives of the negotiation, and ultimately, the overall business arrangement
Properly drafted contract with inclusion of specific clauses mitigates the risk of concerns, real and perceived, over honoring IP
21
Two Case Studies
• These cases are composites of actual cases in which Dr Antani and Tom have been involved.
• The composites have been created in order to A) keep confidential the names of the companies involved and B) to facilitate the Webinar given the limited time involved.
• These cases are meant to provide concrete examples of key differences and challenges discussed up to this point in the Webinar.
22
Case Study / Example #1:Strategy / Objectives
Cost Savings vs ‘Moving up the Value Chain’
• Description of situation:
o Western partner wants to access lower cost development and manufacturing
o Indian partner is looking to move up the value chain and acquire new capabilities / skills
o Indian company does not specifically articulate its needs during negotiation
o Western company does not have realistic view of time and cost of complying with Indian Drug and Employment Law.
• Implications of situation: o Negotiations are contentious as trust is challenged due to
different understandings of Indian Law, IP sharing and key objectives of the alliance.
o Deal is signed but there are trust issues and lack of specificity in contract.
o Conflict grew, trust eroded and milestones were missed. Western company takes issues to arbitration as they feel contractual obligations are not being met. 23
Case Study / Example #1:Strategy / Objectives
Cost Savings vs ‘Moving up the Value Chain’
• Recommended approach for avoidance / correction:
o Partners should have explicitly shared their individual objectives / interests, understand local requirements through use of legitimate examples / documents and worked to establish joint objectives and metrics to allow management against those.
• Conclusion:
• Reluctance to share interests, inadequate work to assure understanding of local requirements and lack of specific goals and metrics led to conflict and sub-optimal implementation. It is also unlikely that these partners will work together again. 24
Case Study / Example #2:‘Culture’
Western / Indian company
• Description of situation: o Western company wished to establish a majority stake
in a Joint Venture.
o Indian company felt threatened by the strong position of the Western company on this point
• Implications of situation: • The Indian company did not understand the underlying
interests of the Western partner
• Valuation and technical risk was not adequately assessed to provide a common foundation for use by both partners regarding valuation.
• Overall there was a perception of ‘lack of professionalism’ and delays resulted.
25
Case Study / Example #2:‘Culture’
Western / Indian company
• Recommended approach for avoidance / correction: • Independent parties were brought in to provide ‘legitimacy’ to
facts / data related to desire for majority stake and assumptions related to valuation
• senior management from both parties was involved to assure their respective interests and objectives were clear and transparent
• Conclusions: • Differences, perceived and real, between the parties related to
organizational structure, risk assessment / valuation, decision-making, transparency, responsiveness and joint problem-solving approaches were revealed
• Early damage to trust between the companies remains a challenge post-deal
• Post deal implementation effectiveness remains to be determined in this case
26
Framework and Approach to Managing Key Relationships
27
Minimizing and Managing Those Differences;
the WHAT That Needs to be Done is Pretty Obvious*
• Jointly identify important differences as early as possible; ideally during negotiations
• Clarify both joint and individual strategy and objectives for the partners
• Take the time to initiate the partnership with discipline and care making sure to address the key differences
• Monitor and manage by using agreed criteria and measures
* In fact, in our experience, we find these things are seldom done with adequate discipline
28
The HOW is What is Difficult
• How do you identify the important differences, in our case between western and Indian partners?
• How do you, individually and jointly with the partner, articulate those differences to assure joint understanding?
• How do you put in place management frameworks and tools to assure success?
29
Identify and plan for how to deal with differences
Define governance structures and
processes
Define the alliance evaluation process
Create joint alliance business and operations objectives and
plans
Transition from negotiation
Document detailed joint business plans
Implement / Build a resilient relationship
Build joint understanding of the deal mission and contract
Contract summary & negotiation context
Commitment tracking mechanism
Joint business plans
Operational plans by function
Joint alliance scorecard
Process for auditing and adjusting the
alliance
Portfolio reporting process
Alliance health check methodology
Operationalized governance structure
Aligned decision making rights & responsibilitiesCharters for committees & working teams
Common picture of desired working relationship
Working together protocols
Communication plan
Skill building plan
Activities
Deliverables
A Framework for Success: Activities and Deliverables for
Success Factors for a Productive Alliance / Supplier Relationship
Alliance objectives are clearly established and understood, and support each partner’s strategy.
Timely decisions are made by appropriate parties after consultation with jointly agreed stakeholders.
The financial agreement is fair and motivates jointly beneficial behavior.
Problem-solving and conflict resolution are handled in an effective, collaborative manner.
Strategic commitments are jointly agreed, tracked to completion, and met. Senior management and senior joint teams understand their leadership roles and act consistently with them.
Metrics are in place to track progress toward objectives, including evaluation of the working relationship.
Contract obligations are being met.
Communication between the partners is open, clear, and as frequent as necessary.
The partners proactively discuss and address key issues requiring resolution.
The spirit of the contract is understood and guides decisions that are not explicitly included in the contract.
The project is going according to plan and delivering desired results.
• Failure to meet initial objectives of negotiation and implementation of often due to:• Lack of transparency in sharing key interests for doing the deal• Different understandings of legal / regulatory and other business
requirements in India and their impact on time and cost• Lack of use of agreed, legitimate facts and data on valuing the deal• Lack of discipline and process during negotiation and implementation
• Advice:• Agree on process prior to negotiation and implementation• Test interests and understanding by developing very specific
language, objectives and metrics for the negotiation and implementation
• Manage actively, and jointly, by use of agreed objectives and associated metrics.
• Be aware that failure most often comes from poor or damaged relationships and behave in a way that establishes and preserves trust