Distribution Agreements

Pharmaceutical manufacturers can sell medicines to distribution companies who market the product themselves and profit from the sale to end customers. Like any commercial contract, distribution agreements have a large scope of terms. Examples of such provisions include minimum purchase requirements, maximum purchase quantities, restrictions on selling competing products, limitation of liability, and termination arrangements.

Pros:

  • Flexible – When terminating distribution agreements, manufacturers and suppliers are not required to pay the distributor compensation. This gives the seller a greater level of flexibility when managing the sale of its product.
  • Tax treatment – Distribution agreements allow for simpler tax structures as they only leave the company liable for tax in the country it is trading in, rather than all of the countries where the sales to end customers are made.
  • Revenue control – Greater revenue control is achievable by requiring a minimum number of unit purchases. These clauses reduce the risk of unsold product and can be used to make efficient use of production facilities.

Cons:

  • Less control over final price – Manufacturers, under UK and EU competition rules, cannot impose resale price maintenance schemes and therefore do not have control over the price at which the distributor will sell.
  • Art.101 restrictions – Distribution agreements are subject to the competition law restrictions set out in Art. 101 TFEU whereas agency agreements (see below) are not.

Agency Agreements

Agency agreements are similar to distribution agreements in many ways, however, they are used in slightly different circumstances. Instead of being a third-party distributor, an agent acts on the manufacturer’s behalf as an intermediary when selling medicines to customers. The agent does not purchase the product and re-sell it, as a distributor does; rather, they arrange for an agreement to be made between the manufacturer and the customer directly, in exchange for a commission.

Agency agreements are subject to statutory regulation. The leading law in this area is contained in the Commercial Agents Regulations 1993, derived from EU directive 1986/653/EEC. The regulations include, the right to ‘reasonable’ remuneration for the agent and the right to an indemnity or compensation payment for the agent upon termination/expiry of the agreement.

To ascertain whether a relationship is subject to the regulations, it must be decided whether the agent is a commercial agent. This is defined in the Act as being:

“a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the principal), or to negotiate and conclude such transactions on behalf of and in the name of that principle.” – Section 2 CAR 1993

‘Self-employed’ refers to a natural person, company or partnership. Employees and liquidators cannot be commercial agents. The role of the agent must be ‘continuing’, and it must be in respect of the sale of goods, not services.

Pros:

  • Lower fees – Agency commission is typically much lower than the mark-up distributors charge to customers.
  • Pricing control – Agency agreements circumnavigate resale price maintenance restrictions imposed on distributorship agreements. Principals retain the right to control the price of their goods.
  • Customer preference – Principal companies can directly determine their customer base when instructing agents without breaking competition law.
  • Terms of sale – Principal companies will retain greater control of the terms of sale.

Cons

  • Lump-sum payments from principals upon termination and expiry – This can be a costly expense to the company. In the UK this right is waived if the contract is terminated due to breach from the agent.
  • Complicated tax regime – A principal can be regarded as trading in a territory where a commercial agent is situated which gives rise to tax implications in that territory.
  • Financial risk – Agency agreements involve the principal holding legal title of the goods rather than a distribution company which increases the principal’s financial liabilities.

Broker Agreement

Pharmaceutical companies can sell directly to customers using the services of a broker for processes such as ordering and invoicing. Unlike distributors or agents, brokers have no part in the procurement of customers. In other words, they do not seek out customers, customers go to the broker if they want to purchase medicines from the company. Your business would therefore need to source and close all sales itself. Brokers ‘only’ take care of the paperwork.

Pros

  • All of the pros of selling with an agent are applicable to a broker.
  • Profit retention – the company will retain a larger amount of revenue because broker fees are lower than agency fees.

Cons

  • Cost of selling to customers – To make sales, a company will need to invest in its own sales department and have lawyers negotiate contracts.

So Which Option is Right for You?

Deciding on which agreement is right for your business is complex and should not be rushed. Whether you are conflicted on which type of agreement to choose, require help with drafting your chosen agreement or want advice on whether and how Brexit will affect your chosen agreement,* we are here to help.

* At the time of writing it is not known whether changes will be made to the CAR 1993. This is a live area of law. If and when something happens, we will be informed and prepared to advise you.

Wendy Lloyd-Goodwin, CEO and founder at LS Law, has over 20 years of professional experience in the life sciences sector. Contact Wendy at wendylg@lslaw.co.uk or +44 (0)1344 623 285 for any queries you may have.