Navigating Contract Manufacturing Agreements: Tips And Pitfalls For Pharma And Biopharma Companies

By Robert Paradiso, partner, Lowenstein Sandler LLP

The manufacture of pharmaceutical and biologic products requires an enormous amount of funding and logistics in order to ramp up and maintain production. If a company seeks to keep the manufacturing in-house, it will need to adequately address requirements such as real estate, facilities, and human resources, as well as meeting quality assurance and all legal and regulatory requirements. Failure to meet any one of these factors could result in being unable to meet commercial demand and preventing these products from being available to alleviate human disease and disorders. In addition, if any of these logistical factors are not effectively managed, the return on investment may be negatively affected and have adverse ramifications for the business and its investors.

In order to address these concerns, many life sciences companies outsource their production to third-party contract manufacturers that specialize in product production, compliance, and regulatory matters. In theory, this outsourcing will allow sponsor companies to focus on other important commercial functions, such as new product development and marketing. However, to achieve this balance, due diligence must be performed when choosing the correct contract manufacturer and assuring they meet all legal and product requirements throughout all stages of the process. To achieve these goals, it is critical that a proper manufacturing agreement be negotiated to define the relationship between all parties, allocate risks, and ensure all requirements are met with regard to legal, product specification, and intellectual property matters.

These manufacturing and licensing agreements are critical to the success of life sciences products, and each agreement must be tailored to the specific requirements of each product. For example, there are distinct issues related to the contract manufacture of small molecule therapeutics and biologic agents. Regardless of the underlying products, there are several elements to outsourcing the manufacturing of life sciences products that need to be considered when entering into contract manufacturing agreements.

Scope of Work

Defining the stages of production and associated parameters must be carefully considered when entering into a contract manufacturing agreement. Various stages include active pharmaceutical ingredient manufacture (API), formulation and dosage forms, clinical batches, scaled-up commercial batches, packaging, and labeling. The specific responsibilities and requirements for each task must be clearly defined. Even if everything is perfectly accounted for, if the quantity of the deliverable is not accurately captured in the agreement, the result can be a shortage or surplus, each of which has its own negative consequences.

Quality Control

Quality control involves the systematic analysis and testing of products at various stages in production to ensure that the product meets quality requirements. This is critical for making sure the final product is safe, efficacious, and can be produced in a consistent and reproducible manner.

Regulatory Compliance

Contract manufacturers must adhere to all regulatory requirements, including GMP, a set of regulations regarding quality manufacturing processes. These regulations cover facility hygiene, employee training, and documentation. Failure to meet these requirements can result in penalties and fines, product recalls, facility shutdown, legal action, and reputational damage. This underscores the importance of regulatory compliance in both the selection of a contract manufacturer and the negotiation of a strong agreement.

Intellectual Property (IP)

It is critical that a contract manufacturing agreement govern ownership rights and protection of all intellectual property, including patents, trademarks, trade secrets, and copyrights, at all stages in the manufacturing process. Key considerations include clear demarcations of ownership of newly developed IP under the agreement, the background IP owned by each party prior to the agreement, and the protection of trade secrets, data, and confidential information.   

Supply Chain

Outsourced manufacturing, just like any manufacturing program, must be in a position to deal with supply chain issues such as availability of raw materials, distribution and transportation delays, storage and handling, and force majeure occurrences. Any supply chain issue may have an impact on the ability to provide sufficient commercial supplies and thus need to be addressed in an agreement.

Risk Allocation

Reliance on a contract manufacturer raises the question of who is responsible for losses and liabilities associated with the various phases of the project. Financial risks, such as cost overruns, product liability, and unforeseen disruptions to the project such as weather and pandemics, must be clearly defined and allocated between the parties.

Loss of Control

By its definition, contract manufacturing results in at least some loss of control. This can lead to quality control issues, timeline delays, and loss in efficiency. Loss of control must be mitigated by the agreement and allow for the ability to obtain key performance indicators (KPIs) and make appropriately timed inspections. Loss of control also can result in ethical concerns, such as unfair labor practices and irresponsible material sourcing by the contract manufacturer. The agreement in place must ensure that there is a minimum level of transparency to reduce issues related to loss of control.

Transition And Termination

What happens if the contract manufacturer is unable to continue operation at full capacity or is operating at diminished capacity? What happens if the contract manufacturer terminates the agreement, with or without cause? These scenarios can have a deep negative impact on the overall financial health of the company and the ability to commercialize important pharmaceutical and biologic products. The agreement should include the ability of the sponsor company to use alternative manufacturers that can step in and swiftly take over production. In many circumstances, a company will concurrently use two contract manufacturers for the same product in order to minimize disruption in the event that one is unable to fulfill their contractual obligations.  

In addition to the above general guidance on entering into contract manufacturing agreements, there are specific nuances that need to be addressed through the agreement, depending on the modality of the drug product.

Small Molecules

Although not always the case, small molecule drugs typically have a straightforward chemical structure and can be manufactured using standard synthetic processes. Given their relative simplicity as compared to biologic products, small molecule drugs are more susceptible to reverse engineering. Accordingly, there should be a robust section in the agreement on IP with respect to capturing new inventions and enforcing existing patents against competitors. The contract should also include comprehensive procedures and protocols with respect to confidential information and trade secrets.

Biologic Products

Biologics such as monoclonal antibodies and recombinant proteins are highly complex molecules. These drug products typically have increased variability in the final product based on small, sometimes unintentional changes in the manufacturing process (sometimes referred to as “process drift”). As a small, incremental modification in the process could result in a change in purity or even the final molecular structure of the final product, measures should be taken in the agreement to assure that the company has final control and provides authorization for any change in the manufacturing process, regardless of how minimal the change may appear to the contract manufacturer.

Personalized Cell And Gene Therapy

This therapeutic category relies upon the manipulation of a patient’s own cells or the cells of a donor, thus presenting patient confidentiality issues due to the nature of the genetic information and other health data generated. These concerns should be addressed in the agreement, as well as responsibilities and best practices with respect to chain of identity and chain of custody protocols.

Conclusion

When a decision is made to outsource manufacturing, the selection of a suitable contract manufacturer and the subsequent negotiation of a comprehensive agreement is critical to the success of a life sciences company. In order to ensure that expectations are met and exceeded with this process, several practical steps should be considered:

• Have cross-functional teams review and provide feedback on the contract manufacturing agreement. Personnel with expertise in areas such as regulatory, legal, compliance, supply chain, and technology matters should all be engaged in the drafting and negotiation process.
• Comprehensive due diligence must be performed on the contract manufacturer’s experience, facilities, personnel, and financial health. Site visits and review of historical documentation may provide important insights
• Given the complexity of the manufacturing process and the layers of additional responsibilities, a focus on clear, unambiguous terms can provide clear demarcations of responsibility between the parties with minimal disruption due to disagreements or unawareness.
• Delegation of internal responsibility for oversight and establishing governance structures such as joint steering committees can help monitor performance, address issues in a timely manner, and increase overall communication.
• Incorporating flexibility into the agreement will help with modifications to the scope of work and processing functions in areas such as scale-up, new formulations, and expansion into new markets.

Contract manufacturing agreements are among the most important contracts in the life sciences industry. By understanding the unique requirements of all aspects of a drug product, companies can form strong and mutually beneficial partnerships with contract manufacturers to ensure long-term success in the life sciences sector.

About The Author:

Robert Paradiso, partner and chair of Lowenstein Sandler’s Life Sciences & Chemical Patent Practice, counsels clients on the discovery, design, and protection of many successful therapeutic and diagnostic products with important commercial and humanitarian benefits. As a registered pharmacist, Paradiso is able to speak the same language as the researchers, executives, and investors with whom he interacts daily. He is particularly adept at analyzing complex issues and effectively crafting, communicating, and implementing solutions that achieve his clients' goals — whether for raising capital, closing a transaction, or obtaining a bet-the-company patent.