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What Steps Should Pharma Suppliers Take in Light of the Carillion Collapse?

on Monday, 12 February 2018.

When Carillion went into liquidation recently, it left a trail of losses on big contracts and accumulated debts of over £1.5bn. Carillion's liquidation will have a significant impact on a number of stakeholders, including its suppliers.

So, what does this have to do with pharma and life sciences businesses? First, if further evidence were needed, it shows that no business is too big to fail. CROs, CMOs and other product and service providers have contracts with big pharma that account for a large proportion of their business. Some may be lulled into a false sense of security that big pharma is too big to fail. Likewise, others supply products to big retail pharmacy chains, some of whom have been lengthening their payment terms in recent years, and paying themselves a prompt payment discount if they settle within three months. This can have a dramatic impact on the cashflow of much smaller suppliers.

But what now after Carillion?

Businesses need to consider and plan for the insolvency of business partners, however unlikely that may seem. They need to protect themselves and prepare for the worst.

Could a big pharma company fail? What if they suffer severe reputational damage from the way a clinical trial has been conducted, or the way clinical trial data has been presented? Or what if a product on the market leads to multiple claims after a major bout of adverse reactions? Alternatively, what if they suffer a late stage clinical trial failure for a potential blockbuster that leads to a collapse in share price and confidence?

Similar issues could equally beset seemingly robust retail pharmacy chains, who are coming under increasing financial pressure from the Government's pharmacy budget cuts, or may also suffer a damaging reputational issue, for example over the standard of care provided when dispensing medicines.

Effects on Third Parties

The scale and speed of the liquidation of Carillion is sending shockwaves among its many suppliers and the ripple effects of its failure are likely to have a significant impact on many businesses connected to it. The ramifications will be felt far and wide, not just to direct suppliers, but also to others who supply those suppliers (and further down the chain), such as recruitment and marketing service providers.

For many suppliers, a contract with Carillion would have been one of their largest, if not the largest. These businesses face an uncertain and potentially catastrophic future.

Suppliers to an insolvent corporate trading partner will most probably be left in the unenviable position of being owed substantial debts (for which they must claim in the insolvency process as creditors and are likely to receive very little or nothing at all by way of a dividend) and a loss of future revenue. At the same time, any recourse normally available to them against a solvent company is unlikely to be appropriate or legally possible.

Company directors also need to understand their personal duties (and potential liabilities) in the face of their company's resulting financial difficulties.

What Can Suppliers Do?

It is easy to say to suppliers that they should re-balance and try to reduce their exposure to any one customer, or reduce credit periods. We have advised clients on strategies like this. The reality, though, in a 'David and Goliath' world, is that some are content to have the business and defer worrying about possible problems, or simply don't have the resources to reduce business with a significant trading partner while finding alternative sources of revenue.

So what else can be done?

It is worth reviewing your contracts carefully, and regularly. First, if you supply goods, such as APIs, excipients, finished products or packaging, do you have a well-drafted "retention of title" clause? One of the main aims of a retention of title clause is to give the supplier of goods priority over secured and unsecured creditors of the buyer if the buyer does not pay for the goods, more often than not because it is insolvent. A properly drafted clause should allow the unpaid supplier to retain ownership of and reclaim possession of its goods.

Changes to insolvency legislation and processes mean that many older contracts are often simply not fit for purpose. A well-drafted contract will include provisions governing what is to happen on the insolvency of either party; it should, for example, clearly state whether the contract is to terminate automatically or only at the instigation of the other party, and what the triggers for termination are.

Of course, there is a limit to what can be achieved in documentation, and if practicable any party entering into a commercial contract should ensure that a proper credit control system is in place. Where the supplier has concerns as to the financial position of the company, it should also consider obtaining alternative forms of security (eg a bank guarantee or letter of credit) and taking out credit insurance.

Finally, Take Advice

Any business contracting with anyone - even with a big pharma company or a multiple retail pharmacy chain - would be well advised to prepare for the worst and minimise the potential fallout should the unthinkable happen. This means getting advice from experienced insolvency professionals to review contracts and options available in the event all or a significant part of their revenue dries up, or they find themselves with a large non-collectable debt. A "wait and see" approach will likely mean that a business is ultimately forced into a much more difficult position at short notice with fewer and more limited options. Acting at the outset of the relationship, or before problems arise, is always the best advice.

The Insolvency & Restructuring team at VWV can provide the advice needed. We specialise in all aspects of corporate insolvency and restructuring and can also draw on the expertise of other large teams within the firm, working closely with the pharmaceuticals & life sciences, and healthcare, sectors.

If you want to speak to anyone about these issues and plan ahead, or if you have concerns about any of your existing trading relationships, please contact Mark Tempest in our Insolvency and Restructuring and Pharmaceuticals and Life Sciences teams on 01923 919 345.

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