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Corporations looking at China for pharmaceutical R&D must ensure terms of contract

With the globalization of pharmaceutical research and development (R&D), many multinational corporations and research organizations look to outsource part or all their pharmaceutical R&D. Contract Research Organizations (CROs) in China have made great innovation in value proposition, value chain and value networking to facilitate global and local R&D integration.

Chinese CROs are now being considered as an essentially important and highly versatile integrator of local R&D capability for global drug discovery and innovation.

While China has prospered in its R&D capability in the past decade, how to integrate the rising pharmaceutical R&D capability of China into the global development chain for innovative drugs remains challenging.

Since 2008, the Chinese government has invested massively to support drug development in the country. This has not only strengthened the research teams and upgraded laboratory facilities in local institutes, but also attracted many Chinese scholars overseas to return and establish their own technology firms in China.

These efforts have greatly contributed to the emerging pharmaceutical R&D capabilities in the country. However, there are still excessive government restrictions on foreign organizations, while local pharmaceutical companies can be highly skeptical about the motivation of foreign enterprises seeking R&D cooperation.

In China, the Contract Research Organization (CRO) sector continuous to develop and it is expected to become a feasible channel to facilitate the integration of local R&D capabilities into global discovery and development.

Because of the characteristics of pharmaceutical R&D and to establish an effective risk control system, it is important to ensure that the terms of the R&D contract are detailed and comprehensive, and the rights and obligations of both parties are stipulated clearly.

Pharmaceutical R&D agreements can be classified into two categories: the pharmaceutical commissioned development contracts (more commonly used in outsourcing) and the pharmaceutical cooperative development contracts.

The executing and performing parties of a pharmaceutical R&D contract are the party entrusted with conducting R&D work and its entrusting counterpart. However, due to the characteristics of technology development, especially for pharmaceutical R&D outsourcing projects, pharmaceutical enterprises usually impose special requirements on the experience and credentials of the scientific researchers who provide the services.

For this reason, some pharmaceutical R&D contracts will expressly state that R&D projects shall be carried out by specially designated scientific research personnel of the entrusted party.

If the entrusted party’s contract designated technical personnel are unable due to events beyond the entrusted party’s control to do the research, such as the resignation of one of its members, the entrusted party may risk breach of contract. To avoid this, a leader of a research group or project can be designated as the performing party, to avoid including all the technical personnel’s names in the contract.

In general, contracts include a deadline. Similarly, pharmaceutical R&D contracts usually specify a contractual period that is often associated with the completion cycle of the R&D project. This period may be difficult to determine due to the uncertainty in the technology development process, which can lead to situations where the contract has already expired, but the project is still ongoing, and the contractual obligations have not yet been completely performed.

Both parties to the contract could agree to use the project development cycle of the pharmaceutical R&D project as the contractual period, while also specifying a maximum period for the performance of the contract.

In China, to obtain tax benefits, both parties are required to register the technology contract with the competent technological administration department. The performance period of the contract is required for such registration, and it must be a fixed period, or else the registration of the technology contract cannot be completed. Therefore, for pharmaceutical R&D contracts, both parties must establish a fixed performance period in the contract, which can be relatively broad bottom-line.

Regarding payments, the contractual parties generally establish an arrangement that includes an initial payment and milestone payments. Some R&D projects with promising commercial prospects may include an agreement on a sales commission after the successful commercialization of the subject of the R&D project.

Milestone and sales payments can easily lead to disputes and require special attention from the contractual parties. When setting milestones, expressions that refer to the process of pharmaceutical R&D or the full provision of R&D services should be used, instead of terms that indicate the ultimate outcome of the milestones such as “ensure”, “achieve”, “attain” or “accomplish”.

Intellectual property (IP) issues are important for both parties in technology development contracts, especially pharmaceutical R&D contracts. The allocation of intellectual property rights and the agreements on subsequent development rights must always be included in pharmaceutical R&D contracts.

The law clearly stipulates how to determine the ownership of IP rights and how to determine the right owner if the contracting parties haven’t made special agreements on the attribution of IP rights in the commissioned development contract.

In practice, both parties will make the ownership of IP rights in the R&D contract particularly clear and insist that the IP rights generated under the R&D contract should be owned by the entrusting party. Although it is difficult for the entrusted party to obtain the ownership of IP rights, the second-best thing is to obtain the right to use IP rights, at least within a certain geographical and time range.

In commissioned development contracts, to avoid disputes, the contracting parties often include agreements on the ownership of the technological work products developed by one party on the basis of the technological work products of the project after its completion.

However, such agreements on subsequent technological work products should be careful not to fall under the category of “illegal monopoly of technology” and be deemed invalid agreements. According to the law, “a technology contract that illegally monopolies technologies or infringes upon others technological work product is invalid.”

In general, R&D data and materials generated during the contract are sent to the entrusting party together with the research results. In some cases, the entrusting party only requires a final written research report or some of the R&D data and materials and leaves the remaining documents in the possession of the entrusted party.

This information could be used in the subsequent pharmaceutical registration filings. Therefore, the entrusting party would want the entrusted party to preserve these basic R&D data and materials for a period, but not an unlimited amount of time.

The Good Laboratory Practices for Nonclinical Drug Research states that for the research used as the application materials for registration, the archives shall be preserved at least 5 years after the drug is marketed.

For research that is not used as the application materials for registration, its archives shall be preserved at least 5 years after the date of approval of the summary report. Materials that do not fall under the scope of research archives shall be kept for at least 10 years.

Both parties should clearly agree on how to deal with the data and materials after the expiration of the preservation period and how the corresponding costs should be borne.

Finally, to protect IP rights, the entrusting party often demands that the entrusted party does not engage in the same or similar R&D contracts, especially for innovative drug projects. Obligations of non-competition to the scientific research personnel involved in the project should be clearly established.

To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.


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