The Perils of Purchase-Order Contracting In Pharmaceutical Transactions - Pharmaceutical Technology

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The Perils of Purchase-Order Contracting In Pharmaceutical Transactions
Purchase-order contracting is a commonly used approach to conducting commercial transactions, but it is a risky proposition when applied to pharmaceutical transactions, including the buying and selling of contract services and pharmaceutical ingredients. The authors examine the contract provisions covered in a commercial-supply agreement that are likely to be omitted under purchase-order contracting and the risk-reduction benefits that a commercial-supply agreement can offer in pharmaceutical procurement.

PTSM: Pharmaceutical Technology Sourcing and Management
Volume 3, Issue 9

Recalls typically cause a material financial impact on the company's finances, often jeopardizing a company's financial viability, subjecting the company to negative publicity, and potentially damaging a company's reputation. In addition, recalls almost always trigger parasitic mass-tort litigation across the globe, financially dogging a company for years and distracting it from bringing other drugs to market or expanding operations. It is no mystery that the plaintiffs bar in the US and around the world has targeted the pharmaceutical industry as a potentially deep-pocket industry.

Recalls are often due to manufacturing and/or distribution of products that present a public health risk. As of 2005, the Center for Drug Evaluation and Research reported that the top 10 reasons for drug recalls involved:

  • Miscellaneous current good manufacturing practices (CGMPs) deviations
  • Failed US Pharmacopeia dissolution-test requirements
  • Microbial contamination on nonsterile products
  • Lack of efficacy
  • Impurities/degradation of products
  • Lack of assurance of sterility
  • Lack of product stability
  • Labeling errors
  • Misbranding
  • Incorrect packaging/container.

Given the inevitability and significant impact of recalls, as well as the predictability of the most common problems triggering recalls, most suppliers and purchasers would be well advised to anticipate these contingencies and to attempt to allocate and manage the risk ahead of time via a commercial-supply agreement. As discussed above, purchasers typically try to negotiate warranty provisions to ensure compliance with product specifications, regulatory requirements, shelf life, and quality standards.

One of the questions contracting and procurement professionals will certainly be asked by company executives during the events leading up to and including a recall is who is responsible for the underlying problem and what are the company's legal rights and obligations vis--vis the other contracting party under the supply contract. Assuming the contract does not address the above problems and recall-related expenses, including post-sale remedial costs and financial impact issues, contracting and procurement professionals will likely have some Monday morning explaining to do.

Other risks include False Claims Act investigations and litigation by the federal government permitting potential treble damages. An example of such claims involves situations where drugs have not been manufactured pursuant to GMP, and as such are deemed adulterated, and the manufacturer has received government payments under Medicare or other government programs for the drugs. The federal government has been aggressively pursuing False Claims Act litigation against pharmaceutical companies and has obtained several highly publicized record settlements during the last few years. Allocating responsibility for these matters in a commercial-supply agreement helps the parties manage this ever-increasing risk, which is inherent in pharmaceutical transactions.

Business interruption and market share loss from supply delays. The significant legal risks inherent in pharmaceutical procurement contracts also arise out of the simple fact that pharmaceutical sales are big business and the time and financial investment in bringing drugs to market (even generic drugs) can be substantial. Should problems arise in getting drugs to market and/or keeping them on shelves, the financial consequences in terms of lost profits and investment can be devastating for even the largest pharmaceutical suppliers and buyers. Delays in supplies can occur for a number of reasons and can have similar consequences as product recalls.

Frequently, supply problems occur under single-sourcing and just-in-time arrangements when production disruptions arise. These arrangements often provide suppliers with significant bargaining leverage. As such, purchasers often plan for possible supply-chain disruptions by sourcing their products from numerous suppliers in various geographic locations, and by keeping adequate inventory on hand to cover short-term demand. In situations where significant unexpected increases in materials and labor cause suppliers to lose money under fixed contracts, suppliers often refuse to perform until purchasers agree to new terms. Unless "workout agreements" can be negotiated to ensure profitability, many suppliers in these situations often exert considerable leverage on purchasers by simply refusing to perform. Litigation often arises in these circumstances, which can be expensive and time-consuming, further adding to a party's overall damages. Although having a commercial-supply agreement in place will not ensure continued performance by each party, it will squarely put the non-performing party in the position of having breached a written contract, providing the performing party with a much more secure legal position.


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