Innovio’s Fate Rests on a Contractor: Client-Contractor Relationship 101
[Thursday, June 11, 2020]

This week Innovio Pharmaceuticals and its manufacturing vendor, VGXI, got into a public disagreement regarding the terms of their contract which is a primer on vendor management for any company working with vendors in mission critical roles. Innovio would like to move commercial production of the most promising product in its portfolio to new vendors and needs the methods used by its current vendor, who refused to share them. Innovio insists the vendor is in breach of contract while VGXI insists it did no such thing and continues to be the vendor. VGXI has been the vendor of choice for Innovio for more than 12 years but all that changed this year. Till Dec 2019, Innovio had mixed success in its development programs for multiple DNA vaccines. The company has not commercialized any product in its 40 plus years of existence, although it has several programs in Phase 2 and one in Phase 3 clinical trials. However, earlier this year, Innovio hit some good fortune when it announced that it has a potent vaccine for COVID-19 and was able to start a clinical trial in less than 3 months thanks to its long history with other DNA vaccines.  Within days of the announcement, Innovio’s value quadrupled, it started courting public attention and making big plans. It is obvious that VGXI wanted to be in this bandwagon with Innovio. The first investigational material for the first clinical trial was manufactured by VGXI, as probably was most of the material for Innovio’s previous clinical trials. In more than 12 years of working history, VGXI might have developed new methods for Innovio and, like most vendors, it probably controls the intellectual property around those methods. And this is not an uncommon situation. With Innovio’s turning fortunes, it would not be hard to imagine VGXI’s ambitions as an important player in this venture. While it may seem unfair that a vendor wants to capitalize on its contract but in this case, the vendor is a critical component. It is not known if Innovio made any informal promises to the vendor, but it would not be surprising if it did. Companies often promise long-term loyalty to vendors to elicit better contracts. While those promises are hard to enforce without written agreements, but they can be practically enforced by the vendor by non-cooperating the way VGXI is allegedly doing with Innovio. Ideally, Innovio could have internalized manufacturing over the years but it likely made business sense to continue using the contractor for cost and convenience. And likely it makes business sense now to dump the vendor for better deals at other places. But the vendor can make it hard if not impossible. DNA vaccines can probably be manufactured at other locations but as Innovio is finding out, moving to a new vendor takes time, which Innovio does not have. With more than 100 vaccines being tested, the ones that developed first will likely rule the market. Innovio cannot afford to lose the race and for that it might need to make a deal with the vendor it is trying to get rid of. It will need to come back to the table and try to make it work for the vendor. It cannot afford a long-protracted court case. VGXI also needs to make a deal soon to make it a win-win. Or both parties lose.