Strategy
- What are the current and anticipated products?
- Are any of these anticipated products in-licensed, with the potential baggage of existing sub-contractors or a “sale with supply” condition on the license?
- Are there any current products which are candidates for disposal or discontinuation?
- What capabilities will be needed to make and support the proposed product portfolio?
- Which products, in the ideal world, should a Contract Giver company make and what should it get others to make on its behalf?
- What are the expected benefits of any outsourcing decision?
- What are the intellectual property (IP) implications, both immediate and long term, of an outsourcing decision?
- What are the potential quality, technical, regulatory, supply, IP, and cost issues likely to be associated with outsourcing selected products?
- What, on the basis of this risk analysis, is likely to be achievable, while meeting the quality, compliance, and supply requirements at an economically beneficial cost and timescale?
Contract Giver’s Agreed Wish List—Based on Defined Strategy
- Full definition of capabilities needed—manufacturing, QA, regulatory, and technical
- Parameters of cost and timescale within which transfer must be achieved—this typically takes 1-2 years, depending on complexity
- Term of the contract arrangement
- Flexibility for future amendment to contract—e.g., volumes, range of products, term
3rd-Party Selection
- Who has the required capabilities?
- Of those who have the capability, do we have experience— positive or otherwise—which would favor or disqualify specific contractors? In particular, can we leverage existing commercial, technical, and quality relationships with any of our established satisfactory contractors who may have the capacity/capability/inclination to take on additional work?
- Of those who have the capabilities and whom we might choose to use, who is interested in doing business?
- Can we identify a preferred contractor with whom to open serious negotiations?
Deal Negotiation
- Clarity from strategy on desired extent of capabilities required and the duration of the proposed relationship
- Clarity on the basis of the relationship—if “marriage” is equated to the commitment of partnership, then partnership is rarely on offer from either partner. “Amicable cohabitation” is a closer metaphor for what typically is intended by both parties.
- Reconciling the Contract Giver’s wish list with the potential contract acceptor’s offer list—is an acceptable middle ground possible?
The Contract
- Precise definition of what is provided covering manufacture, quality, regulatory/compliance, supply, and cost issues
- Ownership of, and rights to use or assign, IP during the life of the deal and after the relationship ends—both the initial IP brought by either party to the deal and IP developed during deal life
- Good Manufacturing Practice (GMP) standards and the overall governing law against which achievement or otherwise of the contract terms will be decided
- Rights of termination for both parties for failure to supply, failure to take contracted volumes, failure to achieve the required standards of quality/compliance, and takeover or insolvency of either party
- Definition of GMP obligations to support product in market through life beyond the term of supply
- Communication—who, what, when—particularly for change, deviation, or product incidents
Reasons for Outsourcing
The pharmaceutical supply chain starts with supply of active ingredients or components and continues through various stages of dose form manufacture, packaging, and testing before the goods are transported to a distribution center. Some key factors now challenge the traditional model of a pharmaceutical company conducting a large proportion of activities in-house. Ensuring security of supply, the need for specialist capabilities, in-licensing, product lifecycle management, market access, and cost optimization are just a few of these factors. Supply strategies increasingly include the concept that the most cost-effective supply chain may involve third parties. Involvement of third parties is also not limited to manufacturing and packaging. Product development, specialized processing, such as radiation sterilization, testing, and logistics, are examples of supply chain elements that have increasingly become candidates for third-party outsourcing. While this article focuses on examples from manufacturing, similar principles govern a wide range of outsourced activities.
Supply Chain Complexity and Control of 3rd Parties
Introducing external third-party links in your supply chain inevitably increases complexity, with communications now having to pass back and forth outside the Contract Giver’s own systems, possibly in the process having to navigate time-zone, cultural, and language barriers. Complexity increases the chances for confusion with associated risks to security of supply, quality, and compliance. The potential patient safety and reputational risks from added complexity will need to be identified and a judgement will need to be made as to whether the level of management needed to manage the risks, to a standard acceptable to patients and regulators, is possible and cost effective.
One specific complexity risk of accepting the concept of third parties in the supply chain is the question, “How do you control the third party?” Accepting third parties in the supply chain also involves explicit acceptance of the reality that, although the Contract Giver retains accountability for the acts or omissions of the third party, control has been surrendered to the third party, since only they have the direct access to, and executive authority over, the contracted activity. The Contract Giver is limited to monitoring and influence; hence the criticality of selecting the right third party who can be trusted to operate in ways compatible with the Contract Giver’s standards and regulatory commitments.
Regulatory authorities are increasingly sensitive to the potential supply, patient safety, and compliance issues inherent in complex supply chains. There is an increasing tendency to focus on evidence that suitable control and management oversight systems exist and on evidence that the systems are consistently applied. Regulatory sanctions (including blocking supply and/or financial penalties on the Contract Giver) are a real possibility of failure to achieve, and to be able to demonstrate consistent achievement of, the required level of control.
Strategy
Outsourcing is best conducted as part of an overall “make or buy” strategy analysis of the optimum supply chain for a specific product, rather than as a purely tactical response to an immediate need. Strategy development logically starts with a review of the current and anticipated future supply chains necessary to support the potential Contract Giver’s intended product and market portfolios. This review will highlight changes to the current capabilities needed to support the intended future state, raising the question of what is the best theoretical balance of “make vs buy” to optimize the supply chain to support the proposed future state. This optimum is typically a mix of in house activities supported by third-party contractors.
It is rare for the theoretical optimum to be free from constraints. Pharmaceutical law differs from country to country with, for example, very different rules on what product types can be manufactured in the same facility. Although some of these restrictions owe more to the “law of unintended consequences” in the wording of specific legislation, rather than any objective patient safety issues, the reality is that until legislation changes, “compliance” has precedence over “science” in determining the acceptability of a supplier. Ultimately, the change of supplier will require regulatory approval, possibly in multiple markets, and therefore third-party selection needs to consider the combined impact of all target market’s individual regulations.
If, for example, it is difficult or impossible to sell product in a particular market unless manufacture is conducted in that market, working with a suitable third party located in that country may be necessary. While your ideal may be to manufacture in house, specialized pharmaceutical facilities are expensive to build and operate to current GMP standards. If your requirement is for small volumes needing specialist capability, the optimum solution may be to work with a third party whose expertise is in supplying such capability. In-licensing deals for specific regions also often come with “supply from existing source” obligations, introducing third parties into your supply chain as part of the deal.
The outcome of the strategy review should be a vision of an achievable supply chain for the planned future portfolio. Quantification of the expected benefits is important, but equally critical where third parties are concerned is quantification of the costs and timescales of the necessary relationship setup, technical transfer, validation, and reregistration involved in moving pharmaceutical products. These costs are up-front, are usually significant, and the extent and timing of delivery of expected benefit must finance these costs if use of a third party is to be viable. The ongoing management costs of a third-party relationship also need to be considered as part of the Total Acquisition Cost as they can add significantly to the headline unit cost.
Contract Giver's Agreed Wish List—Based on Defined Stragegy
The potential Contract Giver’s strategy process should also deliver a list of requirements and risks needing management. This list will include the type and location of third-party services needed, the proposed duration of utilization of a third party, the benefits expected, and the timescale for delivery of these benefits. Part of the requirements statement will include the technical transfer, quality, and regulatory implications of moving supply chain elements to the third party. The potential risks of increased complexity should be quantified and there should be clarity on options for how these risks will be effectively managed to ensure security of supply, patient safety, and compliance with regulatory expectations.
3rd-Party Selection
With the strategy “wish list” for technical capability, capacity, and location of third-party suppliers in place, identification of potential candidates can begin. Existing third-party supplier’s strengths and weaknesses are well known and when approaching a new outsourcing decision, there is a danger of focusing on occasional weaknesses rather than acknowledging routine successes. The idea that “there is always something better than what we have at the moment” is seductive, but not always the way to get optimum benefit. It is easy to underestimate the cost and time of setting up new relationships whose outcome is 1-2 years will be more based on hope rather than on hard experience.
Assuming an existing third party has the necessary capability and capacity plus the willingness to take further business, the optimum solution is often to attempt to leverage existing commercial, technical, and quality relationships to extend the volume of business at a favorable cost and if there are any current issues, using this potential increased business to negotiate improvements. Care is needed in some countries, however, with the proportion of a third party’s total business your products will represent. In some jurisdictions, if your work becomes a business-critical proportion of the third party’s revenue, the Contract Giver acquires obligations to maintain this revenue such that it can be difficult and very expensive to exit the third party.
If a new third party is proposed, significant due diligence is required to assess that any potential candidates are financially stable businesses, capable of delivering the specified services to the required timescales and cost, while maintaining the required technical, quality, and compliance standards. While the commercial assessment is good business practice, it should also be noted that a formal audit assessment and approval of GMP and compliance standards in a third party is an explicit requirement of many countries’ regulations.
Deal Negotiation
Having identified a potentially suitable third party, deal negotiation can commence. Deal negotiation is best done by people for whom this is a routine activity, as negotiation is an art which has to be learned and the art improves with practice.
Although commercial people typically lead the process, it is vital that they consult with and act upon the advice of technical, quality, and regulatory staff familiar with the setup of third-party relationships. The ideal, where the Contract Giver organization is large enough to support dedicated staff, is that the activity is done by teams containing the necessary commercial, logistic, technical, and quality/regulatory staff who have expert knowledge of their own area combined with an understanding of the impact of their decisions on the needs of other functions within the team.
The strategy should have defined an ideal set of commercial, technical, and quality outcomes which any contract should deliver and these form the opening position for negotiations. It is also vital to identify what deviations, if any, are acceptable from the ideal position as failure to achieve identified minimum positions is a potential deal breaker.
The service package can range from the third party providing simple processing of materials supplied by the Contract Giver, through to the third party providing a complete turnkey package of process development, materials acquisition, manufacture, testing registration, etc. It is therefore vital that the Contract Giver and the third party understand precisely what is in, and what is not in, the package of expectations and commitments involved in a specific deal, both during the initial setup and even moreso for the long-term operation of the contract.
One potential barrier to clarity of expectations and commitments is the frequent use of the euphemism “partnership” to describe the relationship with an implication that “between partners, the detail, and associated cost, can be amicably agreed later.” “Partnership” also has implied connotations of sharing risks as well as benefits and of both partners being prepared to compromise their own immediate interests, as necessary, to the benefit of the other party. By that definition, in 15 years of working in this area, I cannot identify an example of having worked on a “partnership.” What is almost always on offer is a defined (sometimes very high) degree of cooperation between two parties where this is mutually beneficial, but with very clear limits on the extent to which either party is expected to subordinate their interests to the benefit of the other party.
Intellectual property (IP) is financially potentially one of the most important product or process related assets. This includes IP initially existing and new IP that may be created during the lifetime of the relationship. Since many third-party arrangements have a finite life, IP rights both during the life of the relationship and the consequences for IP of the end of the relationship require detailed consideration. If, for instance, a contract giver is proposing to place valuable IP in the hands of a third party, the reputation of that third party for respecting IP rights and the reputation of the country in which the third party is located for timely and effective enforcement of IP rights are likely to be a critical selection criterion.
If the Contract Giver is contemplating an in-licensing deal, it is vital to clearly understand the IP rights which will be acquired, their transferability, and their status in terms of continued Contract Giver use of IP when the agreement terminates, both through lapse at the end of an agreed term and where takeover or insolvency of the partner alters the agreed term.
The Contract
The understandings reached at the end of deal negotiation of what comprises the agreed package of services need to be translated into a contract. In drawing up this contract, it needs to be remembered that its terms will often need to be interpreted, several years later, by people not party to the original negotiations. For that reason, implied understandings between individuals negotiating the deal should be avoided as these individuals may no longer be around to deliver such understandings several years later.
Those drafting contracts need to be aware of potential “lost in translation” issues inherent in all human communication. Even between two people speaking the same language and sharing a common cultural approach, there is considerable scope for a disconnect between “the commitment a Contract Giver believed a set of words defined and a different commitment that a third party understood the same words to represent.” The chances for such confusion over the meaning of words are greatly magnified when the contract has to be drafted in, what for one of the parties, is a second language. The potential confusion may also be compounded by, for instance, the third party having cultural inhibitions about telling the Contract Giver directly that they are not making their wishes clear or that what they are asking for isn’t reasonable. Finally, the contract will typically need to specify a “Governing Law” (a named set of national regulations under which the contract terms will be interpreted in case of dispute) and regulations differ from country to country, potentially adding to the complexity of the interpretation of individual contract terms and the extent and timeliness of any enforcement of the terms. These complexities reinforce the argument for entrusting contract negotiation to people skilled in the art who are aware of the applicable laws, who are skilled in communication, and who are experienced in detecting from such things as body language or voice tone potential conflicts between “what is overtly said” and the possibly different reality that “the way it is said” may imply.
Where possible, terms should be explicit. Where there is a predictable potential issue, but it is not possible to define a single option for resolution as, for example, in how a disagreement is to be resolved, there should a defined process, often involving escalation through management layers, by which resolution will be managed, possibly with agreed arbitration as a backstop provision. The risks of failing to manage dispute resolution by such an escalation process should not be underestimated. Attempting to enforce the contract via litigation under the Governing Law is the “nuclear option” implying a catastrophic breakdown of trust and cooperation between the two parties which calls into question the viability of the relationship. Aside from the cost, time, and uncertainty of relying on a legal process, such a breakdown of trust and cooperation also poses a significant risk to supply security, patient safety, and compliance, with these risks likely to attract detailed scrutiny and potential challenges by GMP regulators.
Agreed processes for the management of change in scope of the service package should be defined in all but the simplest contracts. From a supply perspective, these would typically include the consequences for costs and investment obligations of both parties to manage changes in volumes or the markets supplied from that originally agreed. The Quality Agreement is, due to frequent changes in standards and regulations, possibly the element of the contract which is unlikely to remain in its original form for the life of a contract even if the services provided remain the same. This is a compelling argument for the Quality Agreement to be a standalone section whose terms can, by mutual agreement, be varied without opening up the main agreement where change is required for compliance, rather than for a change of scope of the content of the Quality Services package.
Though each contract is unique, there are significant advantages in basing the first draft of each contract on agreed-upon templates which set out the agreed-upon text for different key elements of the contract including, but not limited to, commercial terms, delivery and logistics, IP ownership, communication routes, quality, and regulatory compliance. This helps avoid conflict between the different sections of a contract, ensuring that key terms are defined in detail only once with other sections, as necessary, cross referencing to this single key term definition.
The contractual definition of quality and compliance matters is sometimes mistakenly considered an “add-on” which can be sorted out once the commercial contract terms are signed. For matters affecting quality safety and compliance, contractual definition of effective arrangements to manage these matters is an explicit legal requirement in many jurisdictions. The quality and compliance matters are typically dealt with in a specific annex to the main contract commonly called a Quality Agreement. What might mistakenly be considered in the main contract purely commercial matters such as right to terminate for unacceptable quality issues, access to records, audit rights, etc., also critically affect the ability to deliver the quality and compliance outcomes required by legislation. Quality should therefore be consulted in the drafting of the commercial part of the contract and will take the lead in drafting the Quality Agreement.
Like politics, contract negotiation is “the art of the possible.” It is unusual for either party to the negotiation to get everything they ideally wanted, nor to have it described in the exact wording they would originally have proposed. This is where the experience, previously mentioned, is vital, in that it enables people to differentiate the substance of what must be achieved from the form in which that substance is presented. Experience also aids assessment of deal breakers—those items which if not agreed to prevent achievement of an acceptable contract.
Beyond the Contract
Winston Churchill’s famous quote, “This is not the end. It is not even the beginning of the end. But it is the end of the beginning,” aptly sums up the situation at the end of negotiation of a mutually acceptable contract. To move from contract to the start of routine delivery of the contracted service often involves a 1-2 year process of technical transfer, validation, registration, pre-approval regulatory inspection, and management of the continuity of supply during transition to the new location. The chances of successful management of the transition, and of the new service proving successful in the long term, are greatly increased if it is put in place by an experienced team working to a strategic brief which identifies the requirements and issues which must be consistently managed to agreed standards over the life of the agreement.
There is an increasing need for those responsible for implementation of pharmaceutical supply chains to manage the complexities of the involvement of third parties. The capability of potential Contract Givers to consistently manage such complexity in a way that ensures patient safety and security of supply is, rightly, the subject of increasing regulatory scrutiny. Effective management of the complexities of including third parties in a supply chain has therefore become a core competence required by the Contract Giver staff in the supply, logistics, technical, quality, and compliance functions involved in the management of supply chains.
Acknowledgment
The author would like to acknowledge Editorial Advisory Board member Joseph Swaroop Mathen, Ph.D., for his helpful review and suggestions.
Peter Murray is a former Quality Director at GSK, with 45 years’ experience of management of Primary and Secondary Pharmaceutical Manufacture, whose experience is concentrated in the areas of development and consistent implementation of effective strategies for Quality Assurance and GMP compliance management. From 1990 onwards, this experience has involved a high proportion of international work as part of GSK’s corporate quality oversight group, with an emphasis on 3rd Party Contract Manufacturer management.