Negotiating Medical Device, Pharmaceutical, and Biotechnology Product Sales Contracts

By Lisa Damhof

In today’s complex healthcare environment, medical device, pharmaceutical, and biotechnology manufacturers must navigate a highly regulated and competitive landscape when negotiating product sales contracts. Whether a manufacturer is working with Group Purchasing Organizations (GPOs), Integrated Delivery Networks (IDNs), or individual hospitals and clinics, a successfully negotiated contract hinges on understanding each stakeholder’s priorities and finding common ground, with the ultimate goal of providing patients with access to the products they need.

Manufacturers that account for the following considerations during contract negotiations, which often may be underappreciated or overlooked, are more likely to establish and maintain sustainable relationships with their customers.

Understand the Buyer

Before entering a contractual relationship with a buyer, a manufacturer should understand who the buyer is and how its goals, priorities, and perspective may play into the negotiations.

• Group Purchasing Organizations: GPOs represent multiple healthcare providers and systems and consolidate purchasing power, aiming to negotiate better terms and pricing for their members. GPOs are interested in facilitating member access to new and high-performing technologies, while managing costs. Manufacturers may be required to participate in a bidding process and should be prepared to consider various standardized terms that apply across a large member base.
• Integrated Delivery Networks: IDNs are healthcare systems composed of hospitals and clinics. IDNs often seek system-wide contracts focusing on standardization to streamline product training and improve efficiency.
• Hospitals and Clinics: Individual hospitals and clinics may operate independently from, or within, an IDN. Their priorities are often focused on budget constraints, clinical effectiveness, and ease of product implementation.

Key Negotiation Points

1. Pricing Structures
Competitive pricing is always top of mind, regardless of the buying entity. For GPOs and large IDNs, manufacturers may need to be prepared to offer tiered pricing models based on future purchase volumes, with clearly defined thresholds at each level. Such models may take the form of rebate structures or volume-based discounts.

In all product sales arrangements, both parties should carefully structure pricing discount and rebate models within the Discount Safe Harbor of the Anti-Kickback Statute. Manufacturers must ensure they have the logistics and procedures to implement and maintain these models. Failure to do so could place the arrangement outside the protection of the Discount Safe Harbor, increasing the risk of running afoul of the Anti-Kickback Statute.

2. Contract Length, Renewals, and Termination Clauses
The actual length of a product sales contract and subsequent renewal provisions are often underappreciated by manufacturers when the primary focus of the negotiation becomes just reaching a deal. Considering market and regulatory shifts, as well as potential changes within the manufacturer’s organization, the contract term should be for an established length rather than “evergreen,” often with capped renewal periods subject to both parties’ agreement.

Product sales contracts typically span between one and three years, but longer terms may be negotiated. Renewal clauses can benefit both parties; however, they should generally occur upon agreement of the parties to allow an opportunity to review and potentially renegotiate terms based on changes in the market or regulatory landscape, as well as shifts within the manufacturer organization, such as leadership and prioritized business stances.

Termination provisions should clearly define under what conditions the contract can be ended before its expiration date, such as breach of terms or regulatory actions. Reasonable notice periods should also be considered.

3. Compliance & Regulatory Requirements
Buyers expect assurances that products have received the appropriate approvals or clearances by the United States Food and Drug Administration (FDA) and meet all applicable regulatory requirements. In some cases, the customer may ask the seller to confirm that they have obtained all necessary state licenses in the state (for more on state licensing, see our February 6 alert). In contracts with larger buying entities, manufacturers should be prepared to include their responsibilities in the event of mandatory or voluntary recalls, safety notices, or adverse events.

4. Most Favored Nation (MFN)
GPO and larger IDN buyers will often expect to receive manufacturer assurances that the contract terms or pricing they receive are as good as, or better, than other buyers.

In negotiating MFN provisions, manufacturers should ensure that comparable terms and pricing are extended to similarly situated, non-governmental buyers purchasing a similar mix of products at like volumes. Manufacturers should take care to ensure their organization has the internal processes in place to sufficiently track the pricing and terms offered to its buyers before accepting MFN language.

5. Product Supply
All buyers expect reliable supply and logistics performance. Manufacturers should be prepared to negotiate and define delivery timelines, order minimums, inventory management practices, and mitigation plans for backorders or supply chain disruptions.

6. Limited Warranties
In all product sales contracts, manufacturers should include their own limited product warranty(ies) and a disclaimer for all other warranties, express or implied. Larger IDNs and GPOs will often require additional (or alternative) warranty language in their sales contracts, which manufacturers should carefully review and consider before accepting to ensure they are not assuming warranty obligations they cannot meet.

Best Practices for Manufacturers

To help manufacturers succeed in their buyers’ often competitive contracting environments, manufacturers should:

• Engage cross-functionally within their organizations: Manufacturer sales teams should engage with the company’s relevant business and legal teams to ensure alignment on key business stances before contract discussions begin, as well as throughout the negotiation process.
• Leverage real-world data: Provide evidence to buyers that demonstrates product value in patient outcomes and workflow efficiency for providers.
• Develop a contract negotiation playbook: As a manufacturer gains market share, it may consider developing a product sales contract negotiation playbook that outlines its ideal and fallback positions on prioritized business stances, along with its best alternative to a negotiated agreement (commonly referred to as its BATNA). Such a tool empowers stakeholders throughout the business to take an active role in supporting the contract negotiation process with previously approved positioning to move the contract forward more efficiently.
• Create a template contract: In parallel with the playbook, manufacturers should develop a template sales contract that incorporates preferred terms aligned with the company’s legal and business standards. A succinct, well-drafted template accelerates the negotiation process, establishes a favorable starting point, and helps mitigate risk by avoiding inconsistent or ad hoc language across customer agreements.

“Manufacturers that take a proactive approach to contract negotiations are better positioned to avoid compliance pitfalls and build relationships that stand the test of time.”
—Lisa Damhof, Associate Attorney, Gardner Law

How Gardner Can Help

Effective and organized product sales contracts are a vital, but sometimes under-prioritized, component of a medical device, pharmaceutical, or biotechnology manufacturer’s success in the market. Understanding the goals and constraints of the buying entity, while ensuring alignment on terms with their own business teams, can help manufacturers secure not only contracts, but also durable relationships in a rapidly evolving healthcare system and regulatory landscape.

For help navigating complex product sales negotiations, Gardner Law provides practical legal and regulatory counsel to FDA-regulated companies. Our attorneys have deep experience in structuring contracts that balance business priorities with compliance obligations. Contact Gardner Law to ensure your contracts are both competitive and compliant.