Marcus,
I wanted to summarize my analysis of the key drafting considerations for the most favored nation pricing clause in the PPC-4187 Exclusive License Agreement between Penterra Pharmaceuticals Corp. (Licensor) and Meridian Bio Therapeutics Limited (Licensee), in advance of circulating the initial draft to Jonathan Firth and Rebecca Liang at Lam, Cheung & Firth LLP (Meridian's counsel).
As you know, the Term Sheet executed August 4, 2023 established the framework for the MFN pricing obligation. I have been coordinating with Anita Fremont (Penterra GC) and Leland Cho (SVP, Business Development) on the commercial parameters underlying the clause. Set forth below are my recommendations and open questions for your review.
**1. Core MFN Pricing Mechanism — Proposed Structure**
*Reference Price Definition.* I recommend anchoring the MFN floor to the lowest net price at which Penterra (or any of its licensees) sells PPC-4187 in the United States or any EU5 country (Germany, France, Italy, Spain, United Kingdom) for the same dosage strength (25 mg and 50 mg film-coated tablets) and comparable pack size.
*Floor Calculation.* Meridian shall not offer, or cause any of its Affiliates or sublicensees to offer, PPC-4187 (under any trade name, including PENTECLAR) in any country in the Licensed Territory at a net price that is more than 15% below the lowest such U.S./EU5 net price.
*Territory.* The clause would apply across all countries in the Licensed Territory: PRC (including Hong Kong SAR and Macau SAR), Japan, Republic of Korea, Australia, New Zealand, Singapore, Thailand, Malaysia, Indonesia, Philippines, Vietnam, and Taiwan.
*Net Price Definition.* Precise definition of "net price" is critical here. I recommend specifying that permitted deductions are limited to trade discounts, rebates, chargebacks, returns, and government-mandated price reductions. We should expressly exclude deductions for distribution fees or other costs that could artificially reduce the reference price and thereby lower the MFN floor.
**2. MFN Adjustment Payment Calculation**
If Meridian breaches the MFN pricing obligation in any calendar quarter, Penterra would be entitled to an MFN adjustment payment equal to:
> (MFN floor price − actual net price) × units sold in that country in such quarter
I recommend defining the "MFN floor price" as 85% of the lowest applicable U.S./EU5 net price for the relevant dosage strength and pack size as of the first day of the applicable quarter (though I flag the timing question in Section 8 below).
On characterization: there is a question of whether the adjustment payment should be treated as additional royalty income or as liquidated damages. I recommend characterizing it as a pricing adjustment or true-up rather than as liquidated damages. A liquidated damages formulation invites enforceability challenges under New York law — in particular, the requirement that actual damages be difficult to ascertain and that the stipulated amount be a reasonable estimate. A pricing true-up framing avoids that threshold inquiry entirely.
Per Leland Cho, Penterra's strong preference is that the MFN adjustment payment be additive to, and not a credit against, earned royalties under the tiered royalty structure (8% / 11% / 14%). I intend to draft accordingly.
**3. Quarterly Reconciliation Mechanics**
I propose the following reconciliation framework:
- MFN pricing compliance to be reviewed and reconciled on a quarterly basis, within 45 days of each calendar quarter end. - Meridian to provide Penterra with a quarterly MFN compliance report containing: (a) weighted average net price by country, dosage strength, and pack size; (b) total units sold by country; and (c) calculation of the MFN floor price based on Penterra-supplied U.S./EU5 reference prices. - Penterra to furnish Meridian with its U.S./EU5 reference price data within 30 days of each quarter end to enable Meridian's compliance calculation. - Any MFN adjustment payment due should be payable within 60 days of the end of the applicable quarter.
I also recommend including audit rights specific to MFN compliance. Penterra should have the right to audit Meridian's pricing records on terms at least as favorable as (and ideally separate from, or in addition to) the general royalty audit right. Given the distinct data sets involved — pricing by country and SKU versus aggregate net sales — a standalone MFN audit mechanism would be cleaner.
**4. Sublicensee Compliance / Flow-Down**
The MFN pricing obligation must flow down to all sublicensees. The Term Sheet provides that Meridian may grant sublicenses with Penterra's prior written consent (not to be unreasonably withheld), and each sublicense must contain terms no less protective of Penterra's rights, including the MFN pricing clause. I recommend drafting to make Meridian jointly and severally liable with any sublicensee for MFN adjustment payments arising from that sublicensee's pricing.
There is an interaction to flag here: the Term Sheet provides for a 50% sublicense income pass-through to Penterra (net of documented out-of-pocket development costs). If a sublicensee's pricing triggers an MFN adjustment, the question arises whether that adjustment reduces, or is netted against, the sublicense income pass-through. I recommend keeping these two mechanisms separate — the MFN adjustment should be payable to Penterra independent of the sublicense income calculation. Conflating them would create an undesirable incentive structure and significant accounting complexity.
**5. Comparable Provisions in Recent Pharma Out-License Transactions**
For context, I reviewed several recent Asia-Pacific out-license transactions involving JAK inhibitors and other specialty dermatology compounds where MFN pricing clauses were included. A few observations:
- MFN provisions are increasingly common in cross-border pharma licenses where the licensor retains rights in major markets (U.S., EU) and licenses to a regional partner. The principal concern is that aggressive pricing in APAC markets could create reference pricing pressure in the licensor's retained territories — a dynamic that is particularly acute for Penterra here. - The 15% floor is within market range. Comparable provisions have used floors ranging from 10% to 20% below the reference price. - Some deals use a "weighted average" approach across all retained-territory countries rather than a "lowest price" approach. The "lowest price" formulation in our Term Sheet is more protective of Penterra, which I believe is appropriate given Penterra's position as licensor. - Notably, a number of comparable deals include exceptions for government-mandated pricing — for example, pricing reductions required as a condition of China NRDL inclusion or Japan NHI drug price listing. I flag this for discussion in Section 8 below, as it is likely to be a significant point of negotiation with Meridian.
**6. Interaction with Royalty Structure and Indemnification**
The MFN adjustment payment is distinct from the tiered royalty obligation. Royalties (8% on annual net sales up to $50M, 11% on $50M–$150M, and 14% above $150M) are calculated on actual net sales, while MFN adjustments are calculated on the pricing differential. I will draft to ensure these operate independently.
On indemnification: a breach of the MFN clause by Meridian would constitute a breach of covenant, triggering Meridian's indemnification obligation. Under the current Term Sheet framework, this would be subject to the de minimis threshold ($150,000 per claim), the aggregate deductible basket ($750,000), and the overall indemnification cap at 200% of total payments received by Penterra.
A question for your consideration is whether MFN breach should be carved out from the indemnification cap, similar to the carve-outs contemplated for fraud, willful misconduct, and IP infringement. There is a reasonable argument for doing so — a sustained, deliberate pricing strategy below the MFN floor could cause significant reference pricing damage to Penterra in its retained territories, and the adjustment payment mechanism alone may not fully compensate for that harm. That said, I expect Jonathan Firth's team will push back firmly on any additional carve-outs from the cap. I would welcome your view on how aggressively to position this in the initial draft.
**7. Open Drafting Questions**
I would appreciate your direction on the following before I finalize the initial draft:
(a) **Government-mandated pricing carve-out.** Should we include an express carve-out for government-mandated pricing reductions in Territory countries (e.g., China NRDL inclusion pricing, Japan NHI price revisions), or maintain the MFN floor as absolute? Leland Cho indicated Penterra prefers no carve-out, but this will almost certainly be a significant negotiation point with Meridian, particularly given the NMPA/PMDA regulatory regimes and government reimbursement frameworks across the Territory. We may want to consider a limited safe harbor as a fallback position.
(b) **Reference price timing.** Should the reference price be determined as of the first day of the applicable quarter (forward-looking, providing Meridian with advance visibility) or the last day (backward-looking, reflecting the most current pricing data)? There are trade-offs either way — a forward-looking approach gives Meridian certainty for its pricing decisions during the quarter, while a backward-looking approach ensures the reference price reflects the most recent competitive dynamics.
(c) **Cure period.** If Meridian's pricing falls below the MFN floor in a given quarter, should Meridian have the opportunity to cure by adjusting pricing before the adjustment payment obligation accrues, or should the adjustment be automatic? A cure mechanism would soften the provision but could incentivize quarter-end pricing manipulation.
(d) **MFN breach as termination trigger.** Should MFN breach constitute an express termination trigger (i.e., a material breach giving rise to termination rights after notice and cure), or should the adjustment payment mechanism be the exclusive remedy? I am inclined to recommend the latter — making the financial adjustment the exclusive remedy preserves the deal relationship and avoids the risk that Penterra's termination right becomes a disproportionate lever. However, we may want to reserve termination rights for repeated or egregious MFN violations (e.g., breach in three or more consecutive quarters).
(e) **Joint Steering Committee authority.** Please confirm that the Joint Steering Committee (three representatives from each party, meeting quarterly) should not have authority to modify the MFN methodology. I recommend that any MFN changes require a formal written amendment to the License Agreement. The Term Sheet gives Meridian a tie-breaking vote on Territory-specific commercialization matters, but I believe this should be expressly excluded from MFN-related decisions — otherwise Meridian could unilaterally modify the pricing floor through the JSC mechanism.
**8. Next Steps**
Subject to your direction on the open questions above, I will incorporate your guidance into the initial draft of the License Agreement, targeting circulation to Lam, Cheung & Firth by the week of August 28, 2023. I also plan to prepare a standalone Schedule F (MFN Pricing Methodology) as an annex to the License Agreement, setting forth the detailed calculation methodology, reference price definitions, and quarterly reconciliation process.
I would suggest scheduling a call with Anita Fremont and Leland Cho to align on the open questions before we finalize the draft — particularly the government-mandated pricing carve-out issue, which has both legal and commercial dimensions.
Finally, I want to flag that Sylvia Hartwell (Tax) should review the MFN adjustment payment characterization for withholding tax implications. Payments routed through Meridian Pharma (Shanghai) Co., Ltd. are subject to 10% PRC withholding tax, and an MFN adjustment characterized as additional royalty income may receive different tax treatment than a pricing true-up under the U.S.–PRC tax treaty. I will reach out to Sylvia once we have your direction on the characterization question, unless you would prefer to loop her in earlier.
Happy to discuss any of the foregoing at your convenience. I am available tomorrow morning or Thursday afternoon if you would like to walk through these points before I proceed with the draft.
Best regards,
Peter Vassiliev Associate Calderwood & Harkness LLP 600 Lexington Avenue, 30th Floor New York, NY 10022 T: (212) 555-4738 pvassiliev@calderwoodharkness.com
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