Picture the scene: the Sales teams from a CDMO and Sponsor are delighted to have finalized the principles of a manufacturing deal, the relationship is off to a strong start, but now the dreaded ‘template’ is issued. Suddenly, everything comes to a grinding halt while the commercial and legal teams battle out the details within the development and manufacturing agreement (DMSA).
Gerry Kennedy, commercial and intellectual property partner at Keystone Law, has spent over 20 years navigating the complex world of pharmaceutical contract negotiations. His experience includes overseeing facilities across Singapore, Spain, Switzerland, and the US at Lonza and working in the cell and gene therapy space at Ascend.
In this episode of the PharmaSource podcast, Gerry explains why getting CDMO contract negotiations right is crucial for building successful partnerships. He shares practical strategies for accelerating deal timelines, avoiding common pitfalls, and structuring agreements that work for both biotechs and CDMOs from the very first conversation.
Templates Arrive Too Early
The importance of the DMSA cannot be overstated since it touches on every aspect of the relationship, covering batch delivery, supply chain, finance, shipping, quality, regulatory, intellectual property (IP), and more.
Once we move into the negotiation of the DMSA, the perennial business complaint is “Why does it take so long?”, and the reason stems from the initial template (whether provided by the CDMO or Sponsor), Gerry explains. The template DMSA is frequently sent to the other side without explanation of its underlying structure or intent, meaning that the party doing the first mark-up (the famous ‘redline’) will include unnecessary changes due to misconceptions or misunderstandings. This same mistake is, in turn, repeated by whoever does the next mark-up.
“These documents ping pong back and forth,” Gerry notes. “Where the relationship starts going sideways is often due to a lack of communication. A new document arrives having been marked up by one side and goes to the other, and internally you read it, and you say, ‘My goodness, I can’t believe the changes they’ve made. Why have they done that?'”
These mark-ups might have taken 2-3 weeks to produce, and so very quickly you’re at a time disadvantage, and the negotiations can descend into recriminations.
The Term Sheet Solution: Commercial Clarity Before Legal Complexity
“Term sheets work – just keep the lawyers away from them!”
The main objective is to finalize the document quickly and efficiently by reducing the number of mark-ups that are exchanged between the CDMO and Sponsor.
Certain conversations should happen before anyone looks at a contract, and the template shouldn’t be the start. An agreement should be reached on as many commercial terms as possible, and this is best achieved through term sheets. This document allows teams to align on all commercial terms before any legal template is introduced. One important element here is that both sides can see the concessions that are being made across different issues; this can often be muddied when you have a 30-page document full of redlines. Agree as much as possible commercially and then use those elements to populate the template.
A properly structured term sheet covers all commercial aspects without legal language. This includes identifying the correct facility, establishing pricing, defining batch quantities, outlining cancellation terms, and addressing capacity planning issues. The document allows teams to ask critical “what if” questions and document answers in plain commercial language.
“What if this batch failed? How quickly can we get back into the facility?” Gerry explains as examples of questions that belong in a term sheet. “You are looking at these commercial issues purely in commercial terms, not legal language.”
The critical success factor is keeping lawyers at arm’s length during term sheet negotiations. While legal oversight remains valuable, the document must stay commercial in nature.
“Where term sheets, in my experience, fall down is letting the lawyers get too close to them,” Gerry warns. “When lawyers go in and change the term sheet, you end up with a document that should only be two or three pages suddenly becoming ten pages full of legal wording.”
Once commercial teams have aligned on a robust term sheet, legal teams can efficiently translate those terms into the formal DMSA. This creates a solid foundation that both sides recognize, dramatically reducing the back-and-forth negotiation cycles.
Building The Relationship
“Establish lawyer-to-lawyer contact early on; you’re seeking collaboration, not confrontation.”
Even with a solid term sheet foundation, one simple step can prevent weeks of negotiation delays: having a conversation before sending the legal template.
A lawyer has to be alert to potential misconceptions and misunderstandings, and the purpose of this call is to explain the intent of certain sections in the draft DMSA – “this is what we are trying to do, but if you’d prefer to word it differently, we are open to discussion”.
This ensures a more efficient start to the negotiations and should be repeated throughout. A tennis match of firing new DMSA drafts at each other is the last thing anyone wants.
A communication-first approach can transform contract negotiation from an adversarial document exchange into a collaborative problem-solving process.
“Schedule more discussions to delve into the details of negotiated terms, eliminating misunderstandings, with fewer mark-ups being exchanged, all leading to a quicker signature of the DMSA and an improved relationship.”
Small Biotech Considerations
Small biotechs face unique challenges in contract negotiations. Unlike large pharmaceutical companies with extensive legal resources and proven templates, small biotechs often lack the resources to develop comprehensive contract frameworks.
“I would advice resource-constrained biotechs not to try and create their own template,” Gerry begins. Instead, small biotechs should take comfort in the CDMO’s experience. Established CDMOs have refined their templates through hundreds of relationships, structuring them around proven operating models.
“Small biotechs, can take comfort in the level of experience that the CDMO has and that the template is structured for the work that the small biotech needs done,” Gerry advises.
One common concern among small biotechs is being “bumped” for larger customers. While this fear is understandable given their size, Gerry emphasizes it should be addressed through contract language rather than template ownership.
“Within my experience, a small biotech sometimes is worried about being bumped for a large customer,” Gerry acknowledges. “If they have good legal advice in this area, that point will be covered in the contract.”
How to Structure IP Ownership That Protects Both Parties
Intellectual property ownership represents one of the most sensitive aspects of CDMO contracts, particularly for small biotechs where IP constitutes their primary asset. Fortunately, the industry has developed relatively clear conventions that work well for both parties.
“Generally in the CDMO and pharma customer relationship, there is a fairly clear distinction on ownership of IP,” Gerry explains. “You would talk about it as product and process.”
The framework is straightforward. Any improvements made to the product typically belong to the pharmaceutical customer or biotech. This protects the innovator’s core asset.
From the CDMO perspective, they retain ownership of improvements to the manufacturing process. This makes sense given that CDMOs invest years developing their manufacturing capabilities.
“From a CDMO perspective, they’ve expended many years of effort and experience developing their manufacturing process,” Gerry notes. “It’s important that they keep any improvements to that process because ultimately that will benefit future customers.”
Small biotechs sometimes resist this arrangement, wanting to own any innovations that occur during their product’s manufacture. Gerry advises against this position.
“If you’re using a good CDMO and you’re using their manufacturing process, you’re actually getting the benefit of all improvements that have been made in past years,” he explains to biotech clients.
The key distinction is that manufacturing process improvements aren’t specific to any single product. An improvement discovered while manufacturing one customer’s product could just as have been discovered while manufacturing another customer’s product the following month.
While this represents the high-level framework, the details require careful attention from both IP teams and scientists to ensure clear boundaries.
Enjoy this content? Read our related article on negotiating CDMO contracts for flexibility and cost control.
