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Contract Manufacturing Agreements for Pharmaceuticals

Posted by Sarah Laybourn on February 2, 2016 at 1:41 PM
Dollarphotoclub_37499757_1Life sciences companies comprise a sizable component of our overall client portfolio, many of which are engaged in the business of discovering and developing drug products.  As anyone familiar with this industry knows, the road to regulatory approval and commercial entry is complex, lengthy and challenging.  One critical step during the later stages of development is to establish the manufacturing process for the drug candidate.
Some companies have the infrastructure to manufacture their own drug product, whether for clinical trial or commercial application.  However, for many companies, the risk of failure in clinical trials or the regulatory approval process and the significant cost of building and maintaining the necessary internal infrastructure outweigh the benefits of in-house manufacturing.  Outsourcing the manufacture of their drug product to one or more specialized manufacturers is often an attractive alternative.
Although outsourcing drug product manufacturing offers many benefits, a drug developer that chooses to outsource must carefully consider the contractual commitment involved in such a relationship.  The negotiation of material terms in the agreement with the contract manufacturer should not be treated as an afterthought.  Drug developers should remember that it takes time to negotiate terms that are balanced, especially when the parties start with a template agreement provided by the contract manufacturer.
While the terms of contract manufacturing agreements vary widely based on the nature of the drug product itself, the following is a list of some of the more common key considerations involved with these agreements:
  1. One primary theme of a contract manufacturing agreement is “liability”.  How much liability should the contract manufacturer bear if something goes wrong?  What limits on the contract manufacturer’s liability is the drug developer willing to accept?  How much liability is the drug developer willing to take on itself?  Drug developers should work closely with experienced legal counsel to ensure that the framework of liability that runs throughout the agreement fits the drug developer’s overall risk management strategy.
  2.  If the drug developer is responsible for supplying a component of the overall drug product to the contract manufacturer, such as the active ingredient, what are the contractual protections if the contract manufacturer sustains a loss of that component? Consider that different types of losses may justify different levels of protection.
  3. Timing is crucial to drug developers, both in terms of scaling up capacity upon receipt of regulatory approval as well as ongoing timely delivery of orders. The agreement should address remedies if the contract manufacturer fails to meet an agreed-upon delivery date.
  4. Timing is usually important to the contract manufacturer as well. A contract manufacturer may try to establish penalties if the drug developer fails to meet its own delivery commitments for any components that the drug developer is obligated to supply. In addition, contract manufacturers usually establish a minimum lead-time for orders placed by the drug developer. The longer the lead-time, the less flexibility the drug developer has to respond to market trends in demand.
  5. Typically, a contract manufacturer will require the drug developer to make purchasing commitments, such as a commitment to purchase a minimum volume on a regular basis. Similar to order lead-time, this commitment should be carefully considered with a goal toward maximizing flexibility for the drug developer. For example, is there an option to cancel the purchasing commitment due to no-fault circumstances, such as failure to receive regulatory approval?
  6. A contract manufacturer may also try to limit the volume of product that can be ordered by a drug developer. The contract manufacturer may have concerns about its ability to allocate space and time among its various customers. Drug developers should be mindful of how this limit will impact its ability to respond to demand in the market and be sure that any such limit is reasonable in light of the purchasing commitments it is making to the contract manufacturer.
  7. The agreement should explicitly address all of the quality and regulatory standards to be met by the contract manufacturer. This ensures the drug developer has a strong contractual basis for rejecting a shipment that does not meet its expectations.  Non-legal stakeholders are key to establishing these criteria, which are usually technical or regulatory in nature. If any quality or regulatory standards are contained in separate quality agreements or specification addenda, ensure that the standards are consistent throughout all documents.
  8. If there will be different contract manufacturers involved in the manufacturing process, the drug developer needs to consider how the scheduling, supply and financial commitments being made to each contract manufacturer fit together.   
Within a drug developer’s organization, the process of establishing a contract manufacturing agreement for a drug product should be a collaborative one among the internal stakeholders.  This should necessarily involve a cross-disciplinary team of professionals, including those representing legal, regulatory, quality, technical, and commercial considerations.  Drug developers that engage experienced legal counsel to guide them through this challenging process will be in a solid position to negotiate a fair and balanced agreement.

Topics: Life Sciences

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