Detailed quality agreements becoming vital part of contract manufacturing deals

Trust, transparency, traceability—these three Ts have been dominating the conversation in the dietary supplement industry in recent years, especially after the advent of the New York Attorney General affair more than a year ago. The pervasiveness of contract manufacturing in this industry complicates that question; what do you say publicly about contract manufacturer’s practices when the natural tendency has been to regard these arrangements as proprietary information?

Old ways of doing business​

The dietary supplement industry has perhaps been somewhat backward in this regard, said attorney Rakesh Amin, a partner in the Chicago-based law firm Amin Talati & Upadhye. Detailed contractual arrangements that include specific quality agreements have been common for many years in the drug industry, driven both by regulation and by the enormous potential liability in that sector.  These detailed agreements are still making their way into the contract manufacturing game in dietary supplements.

“The major issue is that contract manufacturers back in the day  generally preferred handshake deals as opposed to written contractual arrangements,  but they have become more and more willing to do it.  Back six or seven years ago, if there was a quality issue, the contract manufacturer would stutter and say, that was not my responsibility.  It left a lot open to interpretation and left the brand holder exposed.  In the end all of this is just cut and paste from the drug industry,” ​Amin told NutraIngredients-USA.

Attorney Justin Prochnow, a partner in the firm Greenberg Traurig puts it this way: The era of the handshake deal is over.  Like any business contract, specifying who has agreed to do what is best done when the sun is shining, not when the ship is headed for the rocks.

“The time to do that is when everyone is happy and ready to work together and looking forward to it, not when people are pointing fingers at each other,”​ he said.

Basic business practices​

Prochnow and Talati agree on some of the basic aspects of a contract manufacturing agreement. The important point that drives all such considerations is the notion that friendship and respect does not automatically translate into a contract that is fair to both sides. Key terms of the agreement between the parties must be clearly and accurately spelled out.  “I’ll deliver your products on time and I’ll do a good job,”​ doesn’t cut it.  For example, who is financially responsible for leftover raw materials or finished product inventory after a contract is terminated? What are the payment provisions—30 days after receipt, or some other time period? How will recalls be handled?

Other key aspects include addressing indemnification responsibilities.  Class action lawsuits are becoming ever more prevalent;  who is on the hook for these should they occur? Also, IP protection needs to be written into the contract as well as clear stipulations about how a contract can be terminated.

“It’s amazing some of the things I see missing from contracts. For instance, some things as basic as having a time period for inspection to decide whether to accept delivery (or not) of the finished goods. You have to have some provision, like 10 days, in which to accept delivery,”​ Prochnow said.

Separate quality agreement​

Many of these considerations are good business practices that are common to many industries.  What has developed in the dietary supplement industry since the advent of GMP rules that first started to take effect in 2008 and finished rolling out in 2010 is the addition of a detailed quality agreement, a subsidiary document to the contract manufacturing agreement itself.  Prior to that, quality and compliance was often tossed off with a single clause or paragraph, something to the effect that the contract manufacturer agrees to deliver goods that are compliant with all relevant regulations.

The detailed quality agreement would include what kind of certifications the manufacturer agrees to have in place and keep current. Such an agreement would have specific sections on what kind of documentation will be kept, who will keep it, and how it can be accessed in the case of an inspection. It would also include what kind of testing will be done and at what frequency, and who is responsible for conducting these tests. And will even delve down into a level of detail that would include the attributes of each product in question.

“We started pushing quality agreements years ago. They lay out quality in a lot more detail than a simple FDA clause.  A good quality agreement will incorporate the product specification right into the contract,” ​Amin said.

“Some of these things are just too big to address in a standard contract manufacturing agreement,” ​Prochnow said. “There is a continuing interest in this area; I talked to three people just this week about contract manufacturing agreements. What I tell people is if your contract manufacturer is unwilling to execute a detailed quality agreement, maybe you should be looking for another company to work with.”​

Prochnow said that while having such agreements in place is not as yet a matter of law—in other words, a fully legal and compliant dietary supplement can be put on the market without them—they are becoming something that inspectors expect and look for.  Having an quality agreement in place provides a level of comfort to an inspector.

“One of the first questions FDA inspectors ask is do you have a quality agreement with your contract manufacturer,”​ Prochnow said.

Quality as differentiator​

Some contract manufacturers are making their enthusiasm for quality agreements a point of differentiation. For example, Gemini Pharmaceuticals, which is based on Long Island and has a history in both drug and dietary supplement manufacture, runs a quality seminar of sorts for its brand holder clients.

“We realized that the days of having proprietary information and using that as a shield against a look into your practices is kind of obsolete,” ​said Gemini CEO Mike Finamore. 

“Not only are our clients given insight into what we do, we offer for members of their quality teams to come to Gemini to be trained into Gemini’s SOPs. We train them so that they can easily interpret what a batch record for their product says, and so they understand our certifications,” ​he said.

Brand holder as responsible party​

At the end of the day, FDA has made it clear where the ultimate responsibility for the finished product lies, with the brand holder. However detailed these agreements become that won’t change.  But a good agreement can help spread some of that risk, and savvy contract manufacturers, are waking up to the fact that meeting that need in the market just makes good business sense.

“They have got to be made unafraid to pay a little bit more for the quality they are getting,”​ Finamore said.

“You live and die with your brand. Ultimately the brand is always going to be responsible. But everyone along the chain can be made responsible, too,”​ Amin said.

“I wouldn’t leave my kids with a babysitter unless I had done due diligence on that person. A contract manufacturing arrangement is no different,”​ he said.