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15 December 2016Big PharmaNatalia Gulyaeva and Maria Sedykh

Pharma collaboration in Russia: the dos and don’ts

The life sciences industry has remained dynamic even in the years of economic downturn. Clearly, this high IQ industry is smart enough to adjust to the changing market conditions and to see the silver lining.

Russia has been called a “pharmerging” country along with China, India, Mexico, and other developing markets with large populations.

These countries were once considered the saviours of big pharma companies, given the immense patent cliff in the US and Europe. But over the last few years, the sales growth in such “pharmerging” markets has decreased.

According to IMS Health research, in 2016–2020 the new markets are expected to have just 30% of the sales growth from the worldwide pharma market.

IMS Health said that the decrease of sales growth in new markets is due to a number of factors, including pricing pressure for governmental contracts, state support for local manufacturers, lower economic growth, and currency devaluation in some countries (Pharmvestnik newspaper, No. 31 of October 4, 2016, Russia).

The main issues that big pharma companies face worldwide also affect their positions in these new markets: the patent cliff, the rise of generic drugs and lower research and development (R&D) levels.

Other reports support this and say that the “blockbuster” model of production is in crisis, mostly because of the decrease in the productivity of R&D.

The decrease in productivity is a result of the increased cost of R&D in general, driven by larger sample sizes used for clinical trials as well as the difficulty of developing safer and more effective drugs when there is already a successful one in the market.

All this inevitably forces pharma companies to start considering new business models and pay attention to small biotech/pharma companies with a more flexible business structure.

Big v small

Big pharma companies may cover a wider number of therapeutic areas, working through R&D stages with their own laboratories and scientists.

On the other hand, small pharma companies tend to focus on one or two therapeutic areas and work with research institutions and academia, helping save costs.

Experts claim that small pharma companies often specialise in “niche” products, as for orphan drugs the regulatory requirements are more favourable and the requirements for clinical trials are less burdensome.

There is also a thought that the rise of small pharma companies has blurred the once-clear division between basic science conducted “upstream” in university and government laboratories and applied research performed “downstream” in the commercial sector.

“It’s essential to ensure that a correct initial transfer or licensing of IP objects (patents, technology, know-how) has taken place.”

All this makes small companies attractive for big pharmas with excess capacity in manufacturing and marketing, as a collaboration with a small pharma company may help fill capacity or develop R&D scope and scale.

In Russia, collaborations between big pharma and small biotech businesses appear to be a business and legal tool addressing the Russian government’s call for localisation of production of pharma products in Russia.

Nowadays, different forms of collaboration are used, such as alliances aimed at localisation, R&D collaborations, etc.

Any type of collaboration should be thoroughly considered and a detailed structure should be developed.

Doing your homework

In any type of collaboration with small pharma companies it is essential to conduct a due diligence of the target.

Depending on the jurisdiction of the small pharma company, one must also take into account local regulatory practice and industry standards.

It is also very important to choose the appropriate governing law for the deal. For instance, the laws of many Commonwealth of Independent States (CIS) countries, including Russia, are fairly formalistic in the pharma field and still require development. Parties to the agreements often choose foreign law to govern the collaboration.

Still, the choice of governing foreign law does not preclude the application of mandatory provisions of local laws.

For example, under Russian law foreign law agreements must comply with mandatory provisions of Russian law such as regulatory, competition, intellectual property, data protection and other law provisions.

Due diligence of IP rights is a must, since the IP portfolio of a small pharma company commonly represents its key asset in attracting big pharma companies.

Consequently, it is important to ensure that IP rights are duly protected and, if needed, registered in respective territories.

With respect to patents, both the mechanism of Eurasian patent registration and the mechanism of patent registration via local patent and trademark offices (PTOs) are available in the majority of CIS countries, including Russia.

In Russia, Eurasian patents are more vulnerable than patents registered with the local PTO and many companies decide to obtain a Russian national patent rather than a Eurasian one.

In practice, this turns out to be particularly relevant for secondary patents, which cover, for example, a salt, a new indication, a new method of use, etc.

When assessing the patent portfolio from a pharmaceutical point of view, some specialists have suggested an analytical framework based on technological, commercial and legal factors.

Technological factors include technology evolution, types of technology, safety and efficacy. Market capacity, competition intensity and commercialisation feasibility fall within commercial factors.

Legal factors include the scope of patent protection, difficulty in inventing around, and procedural issues with the following indications: number of patent claims, family size, portfolio size, the age of the patents, legal disputes, Patent Cooperation Treaty applications, and accelerated examinations requests.

Getting it right

Just as it is essential to conduct an IP due diligence of the target’s or partner’s IP rights, it is equally important to consider all potential IP issues that may arise during the collaboration.

It’s essential to ensure that a correct initial transfer or licensing of IP objects (patents, technology, know-how) has taken place, agreeing in advance the allocation of rights to newly created IP objects and on the provision of the right to use the IP.

Also important is ensuring protection and, if needed, registration of the newly created IP objects.

In terms of R&D collaborations it is also advisable to develop and agree a clear step-by-step plan with timelines for researchers’ goals, as well as to establish a governance model for the project with regular meetings of working groups and managers.

For certain types of collaborations, it is very important to agree at the outset what may trigger the termination of the collaboration.

Although at the beginning of a collaboration nobody thinks of its end, a well-drafted termination clause is one of the cornerstones for collaboration, and the parties should always create an exit plan in advance.

It is equally important to reach an agreement in relation to a dispute resolution clause. In order to increase the chances of amicable settlement, it is always advisable to include prior litigation stages in the clause.

Such stages may include senior management oversight, the steering committee chair’s casting vote, mediation or independent expert advice.

Traditionally, the parties to the agreements covering the CIS area, including Russia, refer to arbitration as a way of resolution of disputes arising out of the agreement.

This is due to difficulties of potential enforceability of rulings of foreign state courts in the CIS area as opposed to enforcement of arbitration awards.

It is not uncommon that the arbitration clauses refer to international arbitration institutions such as the London Court of International Arbitration and the International Court of Arbitration.

Sometimes, parties choose the International Commercial Arbitration Court under the Russian Chamber of Commerce and Industry, located in Moscow.

With new regulations of arbitration in Russia, newly established local arbitration associations create a new forum for fair dispute resolution outside of state courts.

The life sciences industry remains flexible and ambitious and is continuously looking for creative business and legal solutions to respond to current market conditions.

While Russian and CIS laws and market practice still remain fairly formalistic, collaborations of big pharma companies with small pharma companies appear as a tool, enabling partners to develop their businesses and to address local Russian law requirements.

Due attention of business partners to the main business and legal aspects of collaboration at a very early stage of a project may secure a long lifecycle for collaboration projects in the pharma field.

Natalia Gulyaeva is a partner and head of the life sciences group at  Hogan Lovells. She can be contacted at: natalia.gulyaeva@hoganlovells.com

Maria Sedykh is an associate at Hogan Lovells. She can be contacted at: maria.sedykh@hoganlovells.com

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