DEVELOPMENT/SUPPLY/MANUFACTURING/DISTRIBUTION ISSUES[1]
The advent of the COVID-19 rapid antigen test launched at-home diagnostics to the forefront of conversation in the life sciences industry. Many believe this is only the beginning. As the share of telehealth services increases, drawing interest away from traditional healthcare services models, startups and established companies alike are positioning themselves to take advantage of the growing market for technologies and products that enable non-lab-based diagnostics capable of being purchased without a prescription and conducted entirely at home. But to minimize risk and maximize revenue, companies need to be careful in negotiating crucial provisions when contracting with third parties. MoFo’s LST+L Group provides a list of the top seven issues to consider when drafting and negotiating agreements with suppliers and developers around the development, clearance, and commercialization of at-home diagnostics in the United States.
The negotiation of favorable terms in relevant supply, manufacturing, and distribution agreements will be key to a company’s success in this emerging field, and companies should take care to include appropriate modifications to standard terms.
1. Carefully Negotiate for a Favorable Allocation of Intellectual Property Rights
Development, supply, manufacturing, and distribution agreements may result in the creation of new intellectual property or improvements or modifications to existing intellectual property. By default in the U.S., an inventor of a patentable invention owns the patent rights to the invention unless such rights are assigned to a different party. This is true even if someone else paid for the development.
Failing to ensure that a company owns all intellectual property rights to any intellectual property developments relating to its products may result in inadvertent roadblocks to its future efforts in product development or patent protection. All intellectual property terms should be carefully crafted so as to minimize the risk that a counterparty could impact a company’s development, control, and commercialization of its products. Furthermore, such provisions should include a present-tense assignment, a back-up license grant in the event the assignment fails, and a “further assurances” clause requiring the counterparty to perform additional acts that may be necessary or desirable to perfect or evidence the company’s ownership of all such intellectual property.
2. Include a Strong Supply Obligation
Manufacturing and supply agreements include an obligation on the supplier to supply the purchased products, but the strength of this requirement varies. Some only require that the supplier use “reasonable efforts” to accept orders and supply requested products, while others include a hard obligation not only to meet the forecasted amount, but to meet a reasonable increase.
Recent supply chain disruptions have underscored the need to ensure the supplier’s commitment to supply. Companies should ensure that their agreements with suppliers and manufacturers strictly require the supply of all forecasted amounts. Companies may also consider (a) requiring a safety stock of product with an acceptable shelf life, (b) requiring that the supplier validate a second source of supply, (c) requiring that the supplier transfer or escrow all manufacturing know-how necessary to manufacture the product (if this is not already known to the company), and (d) requiring preferential or at least non-prejudicial treatment in the event the supplier is unable to fulfill all of its customer supply obligations.
3. Account for Demand Uncertainty in Forecasting
Variances in disease prevalence and other factors such as market penetration and widening distribution channels may variably impact demand for at-home diagnostics, posing challenges to the stability of any forecasting and delivery of products necessary to ensure product availability. Companies should take care to limit the length of the portions of forecasts binding on the company in order to account for such difficulties.
4. Use Enhanced Confidentiality Provisions
Although it is common to rely on standard confidentiality definitions, companies should be careful to include an expansive definition of confidential information, so as to protect as much of their proprietary information as possible. Such definitions should also include in the company’s confidential information any derivatives generated by a counterparty based on such company’s confidential information.
Companies may also have to disclose their trade secrets to suppliers, manufacturers, and others to properly manufacture and commercialize their products. As trade secret protection only subsists so long as the information is subject to reasonable efforts to maintain secrecy, companies should further ensure that any obligations of confidentiality, non-disclosure, and non-use with respect to trade secrets continue for so long as the information remains a trade secret under applicable law or is not publicly known.
5. Pay Attention to Limitation of Liability Provisions
Companies should take care to include broad limitations on their liability, including express disclaimers of any indirect, incidental, consequential, special, exemplary, punitive, or multiple damages (including lost profits), and clearly indicate aggregate caps on liability.
Counterparties may insist on these limitations being two-way. Companies should strongly consider carving out liabilities that are either consequential in nature or third-party liabilities properly allocated to the counterparty, such as indemnification, breach of confidentiality, or intellectual property infringement.
6. Negotiate Force Majeure Provisions in Light of Potential Supply Chain Disruptions
In recent years, the production, cost, availability, and supply of raw materials and components necessary for various products, including at-home diagnostics, as well as for ancillary supplies, have been subject to significant volatility. The uncertainty caused by disruptions and shortages in supply chains have negatively impacted many companies in the life sciences industry, and especially those that rely on the supply of hardware components, like home diagnostic companies. Additionally, because of the specificity of their products, companies may find it difficult to source interchangeable components. Force majeure provisions excuse a party’s failure or delay in performance of its obligations under a contract due to circumstances beyond its control. Such supply disruptions have elevated force majeure provisions from boilerplate to an essential provision for negotiation.
In response to market volatility, suppliers and manufacturers may attempt to broaden the scope of what constitutes force majeure to excuse failures to supply. It is essential for companies to negotiate force majeure provisions that do not unduly impact the company’s business. For example, companies should seek to exclude known or foreseeable circumstances, circumstances that could have been prevented with reasonable or due care, circumstances resulting from the supplier’s negligence or failure to plan, and circumstances that require reasonable efforts to remedy. Companies should also require that the supplier (a) notify the company of its intent to rely on the force majeure provision, (b) provide supporting documentation of the impact on the supplier, and (c) resume performance as soon as possible. Companies may also consider termination for extended force majeure circumstances and making the necessary arrangements in advance, such as with a tech transfer or the release of manufacturing know-how from escrow.
7. Maintain Control of Contract Modifications in Response to Regulatory Changes
Many diagnostic tests launched during the pandemic, including the COVID-19 rapid antigen tests, were marketed through FDA’s Emergency-Use Authorization (EUA) pathway, with the understanding that such authorizations would eventually lapse, requiring such products to obtain regulatory clearance. FDA has also issued transition roadmaps for such products that set forth guidance for the transition of companies to normal operations.[2] Additionally, the sale of at-home diagnostics may be subject to further governmental oversight and regulation at both the federal and the state level.
It is important to ensure that agreements with authorized distributors of any diagnostic products ensure compliance with the various conditions of any applicable regulatory approval, as well as other governmental authorizations, which may change from time to time. Also, any supply or distribution agreements should take care to establish mechanisms for modifying terms necessary to meet compliance requirements, from the labeling of products to required recordkeeping, and companies should take care to account for varying regulatory requirements across jurisdictions and over time.
[1] This is the second in a series of three articles addressing the licensing and regulatory considerations for at-home diagnostic companies. The first article focuses on issues in structuring customer agreements.
[2] FDA, In Vitro Diagnostics EUAs – Antigen Diagnostic Tests for SARS-CoV-2, (last visited Dec. 1, 2023).