International Arbitration & the Globalization of Life Sciences

Dechert is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we highlight significant issues which may impact businesses operating in Georgia. This article from Erica Stein, Alexandre de Gramont and Jonathan Schur at Dechert was first published in the November-December 2016 edition of CDR magazine http://www.cdr-news.com/categories/expert-views/6953-international-arbitration-and-the-globalisation-of-life-sciences and looks at arbitration in the life sciences sector.

The global life sciences industry, and the way in which its disputes are resolved, have evolved over the past two decades. Alexandre de Gramont, Jonathan Schur and Erica Stein of Dechert summarise the current landscape for international arbitration in this sector.

Although a variety of disputes are resolved through international arbitration, a high percentage of parties have traditionally come from a relatively small number of industries, such as energy, construction and shipping. That is unsurprising, given that companies in those industries have historically entered into commercial arrangements with international business partners, often in the developing world, or in countries with very different legal systems and cultures.

In such arrangements, each party typically wants to avoid litigating disputes in each other’s domestic courts, and so they agree to neutral and independent international arbitration.

More recently, as other industries have become truly global (i.e. developing, producing and selling higher percentages of their products in global markets), they also are turning to international arbitration as their preferred method of dispute resolution.

The life sciences industry is one of the most prominent examples. In fact, given the nature of life sciences transactions and the manner in which the industry has developed over the past two decades, it would be difficult to imagine an industry better suited to international arbitration.

THE GLOBALIzATION OF THE LIFE SCIENCES INDUSTRY

Cycles of invention and development come and go in the pharmaceutical industry but the past two decades have been remarkable in terms of growth in both traditional and new markets – including emerging markets.

A study of large pharmaceutical companies by industry publication Drug Discovery Today reported that during the 1995 to 2005 period, none of the companies listed had derived more than 20% of its revenues from emerging markets. By contrast, during the following decade of 2005 to 2015, most large pharmaceutical companies saw the size of their emerging market revenues grow to at least 25%, with the figure as high as 35% for one major player (Sanofi of France). Brazil, Russia, and China have accounted for much, but certainly not all, of the emerging market demand.

In part, because of this demand, the market value and geographic diversification of the pharmaceutical industry have increased dramatically. According to industry reports, in 2003, the market value of the global pharmaceutical industry was approximately USD 462 billion. Markets outside the United States and Europe accounted for around USD 133 billion, or about 29% of the total.

By 2015, the market value of the global pharmaceutical industry had more than doubled to USD 951 billion. Markets outside the US and Europe accounted for USD 362 billion of global value, representing an almost three-fold increase since 2003, comprising approximately 38% of the total global value.

Further illustrations of such growth and diversification can be shown by the fact that of the 308 pharmaceutical companies with at least USD 1 billion in revenue in 2015, 102 – nearly a third – are now based outside the US, Canada and Europe. Countries such as Brazil, China, Japan, India, Indonesia, Israel, Mexico, South Korea and South Africa all have significant pharmaceutical companies, with annual revenues exceeding or approaching USD 1 billion.

Such trends are not restricted to ‘big pharma’ – the mastodons of the industry. Specialty pharmaceutical companies that focus on particular niches or technologies adopt global strategies, often through licensing, co-development, co-promotion or distribution arrangements.

Even biotech companies developing novel drugs or drug development platforms, which lack the scale needed for late-stage development or world-wide commercialisation, seek both financing and opportunities for collaboration world-wide.

According to industry data, from 2004 to 2015, the global biotechnology market more than tripled in size (from USD 114.1 billion to USD 357.9 billion). In 2004, the United States and Europe represented about 76% of that market. In 2015, that share had fallen to around 62% – meaning that roughly 40% of global biotech firms are located outside traditional markets.

HOW LIFE SCIENCE DISPUTES ARISE

Developing and bringing a product to market, which requires clinical trials and regulatory approvals, is time-consuming and expensive, usually taking more than 10 years and hundreds of millions of dollars in investment. Multiple parties with global footprints may become involved in the development process. Financing is sought from venture capital and strategic investors on every continent. Once a product gets to market, the supply and distribution chain typically consists of multiple companies in multiple countries.

Beyond the challenges arising from globalisation, the contractual arrangements used in life sciences transactions are unusually complex. They mix issues of contract law, intellectual property law, administrative law, product liability law, antitrust and competition law, anti-corruption law, privacy and data protection, and niche issues in employment and corporate law.

They are generally long, complex, and heavily negotiated by specialists for whom it is a standard practice to spend a day in a conference room on the definition of the relevant product, two days to debate what development efforts should be considered ‘commercially reasonable’, or a week to hammer out a termination clause.

The industry has also seen a high number of mergers and acquisitions in recent years, creating issues as to the impact of changes in control and changing scientific and commercial priorities. These agreements are often entered into between companies of different nationalities, and increasingly include international arbitration clauses. As if this were not complicated enough, what actually happens during a complex, decade-long development programme is almost never what the lawyers were told to expect at the outset.

THE RISE OF INTERNATIONAL ARBITRATION TO RESOLVE LIFE SCIENCES DISPUTES

Given the profile of the life sciences industry, it is not surprising that companies are increasingly choosing international arbitration to resolve their global disputes. Its advantages are particularly well-suited to global life sciences disputes.

The principal motivation underlying international arbitration has historically been the desire to avoid domestic litigation in favour of resolving disputes in a neutral and independent forum. For life sciences companies doing business in emerging markets, or other jurisdictions with substantially different legal systems and cultures, that in itself is often a crucial goal. Both inserts show how arbitration is well-suited to this task.

The growth of international arbitration as a preferred means to resolve global life sciences disputes can be seen in the statistics provided by some leading international arbitration institutions. For example, the ICC International Court of Arbitration recorded an average of 30 international arbitration cases concerning health, pharmaceutical and body care matters submitted annually between 2011 and 2015.

The International Centre for Dispute Resolution (ICDR) – the international arbitration wing of the American Arbitration Association – reports similar numbers over the same period. The Arbitration and Mediation Centre of the World Intellectual Property Organization (WIPO) – reports that approximately 15% of its current case load involves the life sciences industry. Moreover, to accommodate these market needs, the ICDR and WIPO now offer lists of life sciences experts to act as arbitrators, as do JAMS and the International Institute for Conflict Prevention and Resolution.

CONCLUSION

Of course, court litigation may be the only option in cases where there is no contractual relationship between the parties. Many such cases in the life sciences industry, as well as cases where the parties have failed to include arbitration clauses in their agreements, will continue to be heard in domestic courts. But as in many other industries for which international arbitration has long been the preferred method of resolving cross-border disputes, it is anticipated that an increasing percentage of such disputes in the life sciences industry will be resolved through international arbitration.

KEEPING BUSINESS RELATIONSHIPS ALIVE

One particular aspect of why international arbitration is especially suited to the industry springs from disputes having arisen between parties with an ongoing business relationship that is important to preserve. Managing a research programme mobilising specialised (and expensive) teams and facilities is like operating a major airport, and the consequences of a shutdown can be catastrophic.

There are no time-outs in a clinical trial, as patients need to be treated and data collected, and a delay or cessation can compromise programmes that cost hundreds of millions of dollars. A pharmaceutical product for which there is a medical need must be offered for sale, even if there is a dispute pending, failing which the regulatory and reputational consequences can be significant. Furthermore, although the industry is large, it is also small in the sense that most participants know one another and tend to have multiple relationships over long periods.

As a result, when a dispute arises there is a lot to be lost beyond the immediate damage at issue. The fact that international arbitration is a consensual process, combined with its relative informality, often means it is more conducive to preserving a business relationship than litigation. The parties can recognise the ancillary risks associated with their dispute and work to minimise those risks, thereby keeping their relationship as productive as possible.

ADVANTAGES FOR LIFE SCIENCES LAWYERS

There are many advantages and features of international arbitration especially suited to global life sciences disputes. They include:

Confidentiality: Unlike court proceedings, which are largely open to the public, international arbitration is usually confidential (if the parties so elect and/or if the chosen rules so provide). For an industry that depends so heavily on intellectual property, including proprietary contract provisions and negotiating practices, confidentiality can be essential.

Arbitrators with subject matter or technical expertise: The parties can select arbitrators who have particular experience with a given subject matter, technology or industry. Given the extraordinary complexity of many life sciences disputes – not to mention the complexity of the industry itself – that feature can provide huge advantages over having disputes decided by a judge with no particular expertise or experience in the matter or even, in some jurisdictions, by a jury.

There are also practices in many life sciences agreements, be they product acquisitions, research collaborations, or licenses, that take time and experience to master, and for which a trained eye is particularly valuable, as one must understand not only what is there, but what should be there.

Procedures designed for the dispute in question: Another advantage is the ability of the parties to tailor procedures for the specific dispute at hand. For example, many disputes in the life sciences industry arise when the product is still under development – when time and resources are especially critical. The parties can design procedures for such disputes that will enable them to resolve disputes with particular speed and efficiency, similar to what the construction industry has done with dispute review boards to minimise disruptions to ongoing projects.

Fast and efficient resolution of disputes: Although international arbitration has come under criticism in recent years for its lack of speed and cost-efficiency, there is no question that it provides a faster and more efficient dispute resolution process than much litigation – where, in some jurisdictions, it can take over a decade to resolve even mid-size disputes.

Ease of enforcement: Treaties like the New York Convention, which provide for the recognition and enforcement of arbitral awards, have typically made it easier (and in some instances, far easier) to enforce arbitral awards abroad than domestic court judgments. The importance of ease of enforcement in high-risk jurisdictions cannot be understated.

Alexandre de Gramont is a partner in the Washington, DC, office of Dechert. He has extensive experience in international arbitration and litigation. He focuses his practice on international commercial arbitration and investment arbitration matters across a broad range of industries, including life sciences, energy and natural resources, and financial services, arising from nearly every corner of the globe.

Jonathan Schur is a partner in the New York office of Dechert. He advises pharmaceutical and medical device companies in structuring mergers and acquisitions, divestitures, licensing and distribution arrangements, joint ventures, and cooperative development and marketing relationships.

Erica Stein is a special counsel in the Brussels office of Dechert. She focuses her practice on international arbitration, including both commercial and investment arbitration matters. Her work touches upon numerous industry sectors, including life sciences, energy and telecommunications.

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Note: This article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.