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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
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
• Merger and Acquisition• Out bound
• Increasing capabilities• Taping foreign markets
• Inbound• Creating stronger presence
• Contractual Arrangements• Manufacturing• Research• Clinical trials
Emerging sectors for alliances
Hospital Sector• Investments• Consolidation• Specialty hospitals
• Medical device Sector• Globalization• Consolidation• Marketing & Distribution
• Biopharma / Technology• Vaccines• Nano-medicines
• Stem cell• Research• UCB banks
• KPO• Tele radiology• CDM
Alliance Types
5
Why Alliances / Strategic Supplier Relationships
Usually Do Not Produce the Value Initially Envisioned
6
30%
6%
64%
Foremost Cause of Alliance Failure among Companiesthat Have Participated in >20 Alliances
Poor or Damaged
Relationships Between Firms
Bad Legal and Financial Terms and Conditions
Poor Strategyand Business Planning
Alliances are failing because partners are
unable to work together effectively
Deal Failure Often Occurs Due to Relationship Difficulties
Copyright © 2010 by Vantage Partners, LLC.
7
Breakdowns in trust Build-up of negative partisan
perceptions Questioning of one another’s
motives Festering conflicts Little joint problem solving Feelings of disrespect/coercion East / West additional
challenge
Missed milestones
Lack of learning/innovation
Project delays
Dissatisfaction with partner’s performance
Unresponsiveness to changes in the market place
Perception that alliance is not adding value
Illustrative Relationship Issues…
…that Often Show up as “Alliance Difficulties”
Illustrative Ways Poor Relationships Show up as Partnership Difficulties
Copyright © 2010 by Vantage Partners, LLC.
8
Managing Differences: A Key Collaboration Challenge
CapabilitiesCapabilities
Business Processes
Org Structure
Strategy
Norms
Business Processes
Org Structure
Strategy
Risk Tolerance
Budget Cycle
Sense of Urgency
Resource availability
Governance structure
Overall business strategy
Basic business model, interests and goals
Decision-making criteria, roles and processes
Legal, Quality and Compliance Standards
What information to share and when by whom
Project management tools and processes
The collaboration
Partner A
Partner B
Copyright © 2010 by Vantage Partners, LLC.
Norms
9
Illustrative Differences and Their Implications:
Business Strategy and Objectives
• 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
CapabilitiesCapabilities
Org Process
Org Structure
Strategy
Norms
Org Process
Org Structure
Strategy
Risk Tolerance
Budget Cycle
Sense of Urgency
Resource availability
Governance structure
Overall business strategy
Basic business model, interests and goals
Decision-making criteria, roles and processes
Legal, Quality and Compliance Standards
What information to share and when by whom
Project management tools and processes
The collaboration
Partner A
Partner B
Copyright © 2010 by Vantage Partners, LLC.
11
Norms
Illustrative Differences and Their Implications:
Areas of Risk / Perceived Risk
• quality issues• legal / IP issues• timeliness• technical risk with product / service• actual value of product service• responsiveness / decision-making• overall management time required
• Increasing pressure to:• reduce cost• speed delivery• increase perceived quality
• 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
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,
• budgeting• project management• planning• metrics
• 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
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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
• Meeting label standards poses technical difficulties
• 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
16
Foreign Direct Investments (FDI)
Requirements:
• Hospitals – 100% permitted• Drugs & Pharmaceuticals – 100% permitted
if:o Manufacturing activity not involving
compulsory licensing or use of recombinant DNA technology and specific cell-tissue targeted formulations: 100% permitted
• Otherwise: FIPB approval required• Retail: Not permitted unless single brand
(up to 51%)
Challenges:
• Possibility of having a cap of 49% FDI under automatic route
• Regulatory approvals
• Possible delays
Advice• To understand and discuss the model and decide on the route well in advance• To consider alternative routes like FVCI etc
17
Foreign Exchange Management Act, 1999
• Transfer of shares of Indian company• Non - resident to Non-resident
• Automatic route• Resident to Non-resident & vice versa
• Automatic route….(with few exceptions viz where approval is required)
Challenges• Press Note of 2005
• Existing JV or technical transfer/trademark Agreement in same field before 2005 January
• Prior Govt. approval required of foreign/technical collaborations
•No approval required if:• Investments made by Venture
Capital Funds registered with SEBI
• Existing JV investment < 3%• Existing venture/collaboration
is defunct or sick
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
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?
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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
Successful Initiation and Ongoing Management
Day 1 Day XXX
Joint escalation methodology
Copyright © 2010 by Vantage Partners, LLC.
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StrategicCost / Infrastructure reduction
Knowledge Acquisition
Capability Acquisition
Access to new markets
Product Acquisition
Product outlicensing
Overall ‘partnering strategy’
Operational
Project Performance against goals / timelines
Customer acquisition
Customer satisfaction
Sales win/loss rates
Process efficiency
Product time to market
Product defect rate
Resource requirements (FTEs)
FinancialRevenue
Cost savings / reductions (fixed and variable)
Operating costs
Investment required
Profit
Relationship
Having a trusted partner for future collaboration
Degree of trust by teams
Level of mutual understanding
Ability to communicate effectively
Efficiency and quality of decision-making
Efficiency and quality of problem-solving
Level of senior management attention
Partner investment level
Be Specific About Objectives in All Categoriesand Then Set Measures for Monitoring
Copyright © 2010 by Vantage Partners, LLC.
31
Decision Driver Inform Consult Negotiate
Approval of joint development plan
Alliance Manager, or Project Team Lead,
Head of Development Team
All groups contributing resource to the project
Operating Comm
Partner Mngmt
CRO’s
Sr Management
Joint Steering Committee
Approval of Marketing Plan Head of Marketing Comm,
or Alliance Manager, …
Resource contributors
Country Mrkting
Country Mngers
Manufacturing
Sr Management
Joint Steering or Committee
Interactions with Regulatory Authorities
Project Manager Country Mngs Country Mngs
Joint Steering Comm
Head Partner ‘B’
Reg Team
Head of Partner ‘A’ Reg Team, Head of Joint Reg Team, …
Approval of investment community and press communications
Project Manager Country Mngs Heads Finance
Head Investor Relations
Joint Steering Committee or CEO’s, …
To develop internal alignment-Clarify decisions and roles and Responsibilities
Copyright © 2010 by Vantage Partners, LLC.
32
Decision Driver Inform Consult Negotiate
Has responsibility to preserve confidentiality and raise concerns with
Driver
Complex issues, actions, or decisions — disaggregated into specific sub-issues —
that will likely require consulting
and/or negotiating with different parties to determine what to do
Has responsibility to surface key decisions and apply the process
The interested and/or affected
parties: those who need to be informed about the decision (often because
they will need to implementit or will be impacted by
it)
Person to manage the process of getting to the decision, including ensuring that a decision
is made
The parties who may act as advisors to the decision-maker(s)
and whose views ought to be considered before taking action, but who do not have authority to vote on the decision or reject
whatever decision is made
Has responsibility to understand the interests
raised by others,and to engage in
constructive negotiation with Driver and others
in this role
The decision-makers: those people who have formal authority to actually make the
decision
Has responsibility to provide informed, considered input in
a timely fashion
To develop internal alignment-Clarify decisions and roles and Responsibilities
Copyright © 2010 by Vantage Partners, LLC.
33
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.
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101112
Copyright © 2010 by Vantage Partners, LLC.
34
Wrap-Up
• 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
36
Contact Information
• PDRM / Vantage Partners– Tom Honohan: [email protected]
[email protected]: www.pharmadevelopmentrisk.comWebsite: www.vantagepartners.com
• Nishith Desai Associates– Dr Milind Antani: [email protected]
Website: www.nishithdesai.com
• FDASmart Inc.- Ram Balani: [email protected]: www.fdasmart.com
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