The pros and cons of distribution agreements

Published: 8-Dec-2016

For life sciences companies seeking to break into overseas markets, distribution agreements are central to success

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The UK has one of the strongest and most productive life sciences sectors in the world, generating an annual turnover of more than £50 billion. The sector comprises nearly 5000 companies (including non-manufacturing and service companies) and employs an estimated 175,000 people. Life sciences in the UK not only contribute to patient well-being, but also support employment and growth.

Building on their success in the UK, many life science companies are seeking to scale-up their operations and maximise their sales by expanding into overseas markets. A large, underserved, ageing population who are experiencing a rising number of diseases — but who also have increased health awareness and improving income levels — provide an important emerging market for life science companies. Many of these companies recognise the opportunities available to them overseas but are often discouraged by what they see as barriers to achieving success.

Appointing carefully selected distributors can be particularly useful as a way of enabling life science companies to sell their goods in a foreign marketplace and increase the sales of their products abroad, whilst also being able to concentrate on manufacturing and supplying products locally. The role of the distributor is to purchase products from the supplier, usually at a discounted rate, on its own account and sell them on, independently, at a profit.

Contracts exist for the sale of goods from the supplier to the distributor and from the distributor and the end customer. No direct contract is in place between the supplier and the final customer, leaving the distributor to bear the risk of those customer sales. In addition, the supplier reduces administrative costs and does not need to have an established place of business in the distributor’s territory. Distributors should also have local knowledge of the law and/or customs of the overseas market within the life sciences and healthcare sectors, and will often be responsible for much of the cost of selling the supplier’s products in that location. These costs might include transport, warehousing and marketing costs, as well as any loss caused by currency fluctuations.

Any business thinking of appointing a distributor overseas should seek legal advice before entering into a distribution agreement. In this article, Jasnoop Cheema, Commercial Associate at Greenaway Scott, explains how the appointment of a reliable, well-connected distributor with local experience and a good understanding of the market can be a low cost, quick entry route into an overseas territory, and how a robust distribution agreement is vital to success.

"We find that clients seeking to market and sell pharmaceutical products and medical devices abroad want to choose the right route to market through distributors who will buy their products and resell them in their own territory," notes Cheema. But how do you find the right distributor, keep them motivated and manage any potential problems that may arise? Successful distribution requires building a network that provides excellent geographic coverage, ensuring a good fit between your company and the distributors you work with. A distribution agreement, formalised in a clear written contract, is key to resolving these issues.

Securing the right terms for your distribution agreement is crucial to your company’s ongoing success, so we suggest that you strongly consider the following tips when appointing distributors and entering into a distribution agreement.

Distribution arrangements: exclusive or non-exclusive?

Businesses should think about whether they want to appoint a distributor on an exclusive or a non-exclusive basis. For example, giving exclusivity to a distributor would mean that one distributor alone would be able to sell their products in a specific geographical location. If the arrangement is non-exclusive, the manufacturer or vendor may supply other distributors in the same territory.

On the whole, our clients usually find that the advantages of providing exclusivity can prove attractive to potential distributors and can be tied into achieving sales targets. However, suppliers should be aware of any prior distributors they have already appointed in a particular geographical area. They may find it more beneficial to appoint a number of distributors in the same region on a non-exclusive basis, so they can work together and pool resources to market products in the same territory.

Minimum sales targets: setting the right goals

You should certainly include minimum sales targets in the agreement at the outset. Our clients have told us that by setting out what they expect to commercially achieve throughout the agreement allows them to monitor the distributor’s performance and ensures that the distributors are aware of their obligations from the very beginning of the agreement.

If businesses appoint distributors on an exclusive basis, then it would be commercially reasonable to expect distributors to sell the products in the territory for specific set targets. These can be agreed and set by the parties for the duration of the term of the agreement and can be reviewed annually, if necessary.

Regulatory licences: who’s responsible?

The benefit of appointing a distributor is that they are aware of the restrictions, regulatory licenses/quality standards and laws applicable to a product in the territory. If a medical device is being sold outside the jurisdiction of the supplier, it is standard commercial procedure to ensure that the relevant distributor obtains the necessary licences and consents to be able to market and sell the product in that region.

Our clients within the life sciences sector are aware of their need to comply with medical device regulations when marketing and selling medical devices in Europe. Businesses have responsibilities and requirements surrounding this particular area of sales, which include keeping up-to-date technical files, inspecting manufacturing facilities and obtaining CE marking on devices. Distribution agreements should therefore be clear in specifying which party is responsible for complying with local laws and policies in the country in which the products are being marketed and sold.

Product liability: managing risks

As distributors sell products directly to end customers in the territory, they may be just as vulnerable as manufacturers to product liability claims and losses. Suppliers must therefore take into account the extent to which they wish to indemnify their distributors in respect of any claims made against distributors by end customers as a result of defects in pharmaceutical products and medical devices.

It is important to include in the agreement the fact that suppliers have control over any claims made by end users and that distributors do not admit liability for products to customers without the permission of the supplier. We recommend including obligations within distribution agreements that ensuring all parties maintain adequate insurance cover throughout the duration of the agreement.

Intellectual property infringement: protect your brand

The parties entering into a distribution agreement should consider who is responsible in the event of a third-party bringing a claim against distributors for products infringing on third-party intellectual property rights. In this case, it would be reasonable for the supplier to obtain relevant insurance cover and provide an indemnity within the agreement, but may wish to limit the scope of the indemnity to purely cover claims bought by third parties for intellectual property infringement rather than a wide indemnity covering all types of losses and claims.

Businesses should also consider whether their pharmaceutical products or medical devices will display logos of the supplier when being sold by distributors in different territories. If the products contain logos and trademarks of another party, the distribution agreement should expressly provide the distributor with a licence to use the supplier’s logos and trademarks. It’s also a good idea to ensure that the agreement explains clearly that distributors obtain the supplier’s express permission before they distribute any marketing materials containing the supplier’s trademarks or make any claims or statements regarding the fitness or suitability of products for their customers.

Terms and conditions for the sale of products: orders, prices and payments

We tend to stress to our clients that they incorporate their terms and conditions for the sale of goods into all distribution agreements. This ensures that issues such as delivery of products, payment terms, passing of legal title of goods and limitations of liabilities, etc., are dealt with in detail for each contract of sale of the products without having to set out each aspect in full in the agreement.

Jasnoop Chema, Commercial Associate, Greenaway Scott

Jasnoop Chema, Commercial Associate, Greenaway Scott

Which distributor is right for you?

With a robust distribution agreement in place, it’s important that suppliers conduct some careful background research to appoint a distributor with a good reputation within the targeted geographical area, who is compatible with them and their life sciences business.

As outlined in the regulatory licences terms of your distribution agreement, suppliers need to ensure that their chosen distributor complies with local legislation and regulations when supplying the products to the end customers and that it meets quality standards for the supply of pharmaceuticals and medical devices. We know from experience that our clients must meet particular regulatory requirements in the UK, so their distributors (as part of the supply chain) should also keep up-to-date technical files and allow inspections of their premises. They should also be able to supply relevant training and demonstrations to the public.

The ability to meet sales targets is also an important area of concern in distribution agreements, so it’s useful to know if distributors have various bases or distribution centres within the region they are looking to target. If distributors need to meet large volume orders, then suppliers could do a site visit to these bases. If the products being delivered need to be stored in certain conditions, such as in temperature controlled centrifuges, then suppliers should ensure that the distributor has the appropriate equipment readily available to be able to store pharmaceuticals.

Pros and cons of using distributors

There are obvious benefits associated with using a distributor. These include being able to create awareness of the supplier’s brand on an international level and reaching a market in other territories that would be difficult to reach without incurring the time and expense of setting up a permanent place of business overseas.

Selling directly to distributors means that suppliers can pass on the large degree of risk associated with medical products, which also extends to responsibilities such as complying with local legislation and obtaining certain permissions and consents to sell certain pharmaceutical products or medical devices in other countries. Other benefits are that the supplier is not liable for selling goods directly to end customers; and, finally, that the task of monitoring sales for different customers in other countries is done by the distributor, thus saving on the supplier’s administration costs.

It’s important to point out the disadvantages too, to decide whether a distributor is the right route for your business. The most obvious disadvantage is the reduction of control over the activities of the distributor — managing how products are sold in each country, how prices are set or how products are ultimately marketed.

The supplier may find it more appropriate to have direct contact with the end customer where bespoke products are being sold, and be more in control of their sales. The supplier may also find it restrictive to appoint an exclusive distributor in a territory at an early stage. Suppliers should consider from the outset whether there may be a possibility to generate more business through a network of distributors in an area that, in turn, could create healthy competition and generate additional sales in the future.

Next steps

In conclusion, it is clear that the use of distributors can provide a relatively low risk, cost-effective solution to breaking into new, expanding overseas markets and can offer a great many tactical and logistical advantages compared with selling direct.

However, before setting off down the distributor route, it is important to enter into a clearly written distribution agreement with your chosen distributor to steer clear of any pitfalls that can be associated with overseas trading. That is why we highly recommend that life sciences businesses seek specialist legal advice before scaling-up their operations abroad and ultimately expanding their business’s ongoing success.

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