Contract – CDMO Payment Terms and Risk Management

I. Payment Terms and Plans

After realising services required either or both development and manufacturing services, two parties ensure the payment terms and plan the payment for continuous flow of services and products to be received on schedule.

Understanding payment terms are equally important for both clients and CDMO service providers.

  • Clients can firstly examine their asset in current and future value, so that fair value can be estimated.
  • This will lead financial capability check if they have sufficient fund, cashflow or deposit to proceed in a certain stage.
  • Depending on their drug product strategy typically by stage (from CLD to commercial development/launch or licensing-out/sell-off during clinical stages or building a platform for multiple future assets, etc.), payment terms can be designed accordingly.
  • This will ensure that product development is undisturbed by unexpected shortfalls and guaranteed supply to meet schedules.

My earlier articles have covered key elements of services and materials for process development and manufacturing

In the world of CDMO, there are common criteria for setting up payment terms and payment plans. Following points are the most common. Summary of the payment terms are as below:

CDMO common criteria for payment terms

Each criteria is essential for CDMO service agreement payment terms. Here is the details of the each criteria.

1. Invoice Issuance and Payment Schedule
  • Invoices are typically sent when the process development is completed and/or a product is manufactured and released (engineering and commercial batches).
  • The invoice typically includes details such as purchase order numbers, product numbers, quantities, unit prices, freight charges, and total amounts due.
  • Clients are generally required to pay invoices within a specified period. In major CDMO companies, this is typically 30 days from the invoice date.
  • Depending on CDMO, service providers often require an advance payment. This is mainly for the inventory or components prior to start of the process, which are credited against future final invoices.
  • This ensures that there is initial funding for both CDMO and the client to cover the upfront costs incurred by the service provider/procurement.
2. Disputed Amounts and Escalation Procedures
  • If there is a dispute over a portion of an invoice, the client is expected to pay the undisputed amount while both parties work in good faith to resolve the disputed portion within a certain timeframe.
  • Contracts often specify the clause for resolution of disputes.
  • This approach ensures that payments are not entirely withheld due to minor disagreements and the bulk of payments continue to flow even if there are disagreements on specific charges.
  • For unresolved disputes, there are often escalation procedures involving senior executives from both parties to reach a resolution. This clause should also be stated clearly in the escalation procedures clause.
3. Interest on Late Payments
  • If the client fails to make payments on time, service providers usually impose an interest charge on the overdue amounts.
  • The rate is typically specified in the contract. For major CDMO companies, 1% per month which equals an annual rate of 12% for interest is typical. This can also be different where sites of the service provider are such as European countries or in the USA, Asia.
  • This acts as a deterrent against late payments and incentivise timely payments.
4. Handling Non-payment and Suspension of Services or Termination
  • If a client defaults on payment, the service provider may charge interest on overdue amounts.
  • The CDMO has the right to suspend services or delivery of products until all outstanding amounts are fully paid including interests.
  • Despite of undiscovery of any clauses for termination due to the payment failure in my studies, it can also be possible due to unforeseen circumstances.
  • In case of termination, any costs and loss of discarding materials, products and procedural charges such as bioreactor cleaning will also be charged. Clients may be able to recover remaining materials or products to a designated site after clearing the issue.
5. Late Delivery Credits
  • For clients, credits for late deliveries are typically available if all outstanding and  undisputed invoices have been cleared – paid in full (or rarely within a specified number of days outstanding).

II. Risk Management in CDMO Payment

Due to the long development cycle in drug development, payment risks are always high due to many unforeseen circumstances, which can distract or sometimes stop the development activities from clients.

Experienced CDMO service providers, therefore, are preparing potential risks associated with biologics development and manufacturing. In order to mitigate development and manufacturing risks, project management play a key role.

1. Project Management
  • Each project is unique and needs good oversights to cover E2E process.
  • Skilled CDMO establishes a steering committee with representatives from both parties to oversee project progress and resolve issues.
  • This ensures continuous communication and addresses potential problems early.
  • Appointment of project managers from both parties are also critical.
  • The project managers handle daily interactions and manage the project, ensuring that payment schedules and project milestones are closely monitored.
2. Risk Management in CDMO
  • There are also risks of clients mainly associated with funding, product development and regulatory approvals.
  • Well established CDMOs build a solid foundation to mitigate such risks systematically based on decades of experiences.

If you would like to understand techniques and methodologies how top CDMOs manage such risks and build mitigate strategies for safeguards, feel free to contact me.

About the author

Juha Kim is a CDMO business consultant and business operations strategist. Equipped with latest studies and business practices, he is building frameworks in the world’s renowned CDMO companies based on his experiences leading various projects in Lonza as a Director, Operations Finance and Business Development Korea roles during the time.

He is also a founder of Korea-Switzerland BioPharma Network (KSBPN) and Korea Pharma Biotech Directory (KPBD) to help establishing business opportunity leads in both directions.

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