Why Get Sleepless with Indian Pharma / Biotech Partnering A Structured Framework for Successful Western Partnering with India; Outsourcing, Alliances,

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

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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

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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

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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.

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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


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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


Norms

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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

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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


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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

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Key Areas of Challenge in Negotiating, Designing and

Implementing Western / Indian Deals

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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.

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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

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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

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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

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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.

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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

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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

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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.

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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.

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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

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Framework and Approach to Managing Key Relationships

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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

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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


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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


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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


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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


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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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Attendee Questions / Discussion

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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

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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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mailto:[email protected]



http://www.nishithdesai.com/


Documents

Why Get Sleepless with Indian Pharma / Biotech Partnering A Structured Framework for Successful Western Partnering with India; Outsourcing, Alliances,