How the EU negotiated a bad deal with AstraZeneca
Negotiating complex agreements in a hurry can be a challenge, especially when the clock is ticking and the outcome is critical.
My working life is spent helping executives from some of the world's best-known companies become better negotiators. Two decades in the pharmaceutical industry, negotiating contracts and resolving disputes on behalf of manufacturers, means that I also know a thing or two about pharmaceutical supply contracts.
I was therefore sufficiently intrigued - and, admittedly, sad enough - to read in full the Covid vaccine supply agreement between AstraZeneca and the European Commission, following the decision of the EU to make this document public.
The document itself and the catalogue of PR gaffes that followed present a number of learning opportunities for the EU and for procurement professionals more broadly, both in terms of the negotiation tactics deployed and in better understanding the life sciences industry. In this article, I'd like to share the three main mistakes that the EU made and what they can teach anybody who needs to negotiate professionally.
1. A lower price does not always constitute a win
Back in the summer, the UK government was heavily criticised by sections of the media for not participating in the EU-wide Covid vaccine procurement exercise, which was still an option for the UK during the Brexit transition period. The same critics became even more vitriolic when it emerged that the EU had used their greater buying power to secure a lower price than the UK, albeit signing off on the deal in August rather than May.
Whilst we do not know the exact content of the UK-AstraZeneca contract, it has been reported that a condition of accepting a higher price was that the UK would get to reserve the first 100 million vaccine doses produced in UK manufacturing facilities.
Quantifying that, the UK are reportedly paying £3 per dose versus the £1.59 secured by the EU. For 100 million doses, this would amount to a £141 million premium versus what the UK National Health Service would have paid by joining the EU collaborative procurement exercise.
Although significant in normal times, £141 million is chump change in the context of the £46 billion the UK spent on furlough schemes in 2020 alone.
And what of the implications for 2021? At the time of writing, the UK has vaccinated 20% of its population versus <5% for most EU nations.
As EU negotiators observe rapid vaccination programs in the UK and Israel likely enabling a faster reignition of normal economic activity, they may well reflect on what might have been had they moved with greater speed and valued security of supply over pricing and liability terms.
2. Negotiating pharmaceutical supply is different to commodities procurement
During my time in life sciences and more recently as a negotiation trainer, I have often encountered procurement professionals who were high performers in FMCG but subsequently struggled when transitioning to pharmaceuticals and medical devices.
The errors made often involve a simple misunderstanding of the power balance.
I once had a table-banging Procurement Director forcefully state that he could, "easily move all of our spend elsewhere" and that he wanted to "leverage dynamic pricing tension" (answers on a postcard please) to ensure that his healthcare provider got the best possible deal from my employer. This type of power signalling can be effective in negotiating a better price - albeit whilst spending some emotional capital - provided that the signals are objectively accurate and supply constraint is not an issue.
I happily allowed his discounts to expire and let him learn for himself that alternate sourcing of speciality pharma was either not possible or would generate significant pushback from his clinical and technical colleagues who appreciated the broader value of my company's products and the hidden transition costs that would not have been apparent to their "hard-nosed negotiator" in procurement.
Two weeks later, we re-contracted at improved terms and I felt a measure of sympathy for my counterparty. You just don't get these issues when you are buying tins of beans!
Like many FMCG buyers, the European Commission have expertise in negotiating from a position of power, representing the interests of 400 million citizens in trade negotiations with smaller players. However, negotiating with a supplier who holds more negotiating power than you requires creativity, a recognition of value beyond linear variables (like price) and deft skill in trading the right concessions at the right time.
In short, the flat-track bully approach just won't cut it. This is a negotiation training gap that needs addressing in many procurement teams and certainly in the European Commission if they want to negotiate better deals with vaccines manufacturers in future.
3. Tone matters
Or, put another way, don't be a dick!
I have yet to encounter a contract where the agreed terms clearly and unambiguously describe the rights and remedies of all parties in the event of a dispute. This was certainly the case in the EU-AstraZeneca contract, with it's delightfully vague provision that AZ would make "best efforts" to supply vaccine doses to an estimated schedule.
Given this legal ambiguity, it is very hard to see what the EU hoped to achieve with the threatening public statements that they made towards AstraZeneca when the company notified them of production delays. As an aside, production delays are very common in pharmaceuticals with recombinant (DNA and RNA based) products such as the Covid vaccine being a particular challenge. Again, it isn't like making tins of beans.
The publication of the contract was in itself a curious negotiating tactic as the content itself supported the AstraZeneca position, notwithstanding legal wrangling around what "best efforts" actually constituted.
The content also set out in black and white that AstraZeneca were supplying the EU with vaccine on a not-for-profit basis.
Consider that for a minute through the lens of AstraZeneca.
You are providing an amazing product that the counterparty desperately needs, you have agreed to do this for no profit and now the counterparty is publicly threatening litigation following not-unexpected production delays.
How likely would you be to divert doses from your UK plants to the EU in this scenario, given the power balance in the negotiation and having been threatened in this way?
Persuasion and negotiation are different skill sets and skilled negotiators know when to persuade and when to negotiate. Choosing your tone - not being led by emotion or events - is a critical skill and the EU's behaviour got them no nearer to a negotiated solution, though it undoubtedly damaged their relationship with a partner whose products they will still need in the future.
Would you like to learn more about negotiation power, negotiation skills and how to become a better negotiator? Come and visit us at Negotiation Training | Brass Tacks | United Kingdom (negotiationtraininguk.co.uk).