Quality Agreements: Part II, How to Write Good Ones

Quality agreements between drug companies and the contract manufacturing organizations (CMOs) they employ have been the subject of controversy and FDA scrutiny for many years, prompting the drafting and release of FDA guidance on that topic in 2016. Warning letters and other regulatory actions have resulted from the lack of a quality agreement where one should be in place or poorly written ones that do not ensure the parties have appropriately delineated responsibilities to ensure compliance with good manufacturing practice (GMP) regulations.

[Related: Download a FREE comparison report of two of the leading CDMOs, including 483 observations and primary citations.]

In Part I of this two-part series, Jerry Chapman covered remarks by Alan Minsk, Partner and Leader, Food and Drug Practice team, Arnall Golden Gregory (AGG), at the virtual International GMP Conference in March, on the content of quality agreements, their importance, and the FDA guidance. 

In Part Two, further insights are provided on:

• Developing a quality agreement
• Incorporating the basic sections from the FDA guidance
• Oversight and involvement
• Impact of the EU privacy regulations
• Practical issues
• The importance of using common language
• Involvement by rank-and-file QA and regulatory affairs personnel
• Recommendations made by his firm resulting from work with clients on quality agreements

Developing a Quality Agreement

Per FDA, quality departments at both the sponsor and the vendor should be heavily involved in developing the quality agreement. To accomplish this, it is important to develop a working relationship with the vendor’s QA group. Frequent communication is needed. The agreements should be flexible to be functional and practical, but also detailed to ensure regulatory compliance.

Minsk emphasized that the agreement should not be so detailed and burdensome that the company is destined to fail. “It needs to meet FDA requirements. But if you overdo it, beyond what FDA has said, and you fail to live up to it and FDA inspects, then you violate your own SOPs, and you did not need to. You did more so than you needed to. You tied your own hands. But it must be sufficiently detailed so that you can ensure regulatory responsibility. It cannot be so vague that it gives no direction.”

What is the relationship between the quality agreement and other agreements? FDA has said they need to be separate or at least severable. The quality agreement governs one aspect of the process of getting the product to market. It is focused on the quality element of the product. It is something FDA can review. It establishes communication mechanisms among the RA and QA groups.

By contrast, the supply agreement is more focused on the manufacturing and supplier agreements or components and of the product. It focuses on some business terms such as pricing, delivery, warranties, intellectual property rights, limitation of liability, confidentiality, indemnification, remedies, termination, conflict resolution, choice of law of venue, Force Majeure—the Acts of God provision—amendments, waivers, and assignment. It is typically not as much of a concern to the FDA. It is relatively static because those are fixed.

FDA Quality Agreement Expectations

Regarding basic FDA expectations in a quality agreement, it is important to use clear language to define key quality roles and responsibilities, establish communication expectations and provide key points of contacts for both parties.

Specify what products or services the contract facility will provide the application holder, whether that is in the contract itself or as an appendix. Establish who has the final approval for various activities. “I cannot stress that enough. I see that come up more than I think I should, frankly, where there is just ambiguity,” Minsk commented.

“I am not going to provide a template agreement. But here are the basic ideas that you would have, and when you go back and look at your own quality agreement, maybe you can use this as a checklist of sorts (Figure 1).

Oversight and Involvement

Oversight involvement is extremely important to FDA. The application holder must oversee and be involved.

Risk management is frequently used to determine the level of oversight and involvement of the contracting party in each step. For example:

• The nature of the product and whether changes could have potential adverse effects on patients, exposing the manufacturer to regulatory and liability risks
• The importance of the step in the overall production of the product, and how it could affect safety and efficacy
• The potential effect that changes could have on the product’s regulatory status—it could make it an unapproved new product or misbranded or adulterated

Minimize Inconsistencies and Conflicts

It is important to minimize the inconsistencies and conflicts between the commercial agreement—that is the supply or manufacturing agreement—and the quality agreement. If there is a commercial agreement in place, the quality agreement should expressly provide that it is subject to the legal terms and conditions that are contained in the commercial agreement.

For example, the remedies for a breach of the quality agreement are governed by the appropriate sections or section of the commercial agreement.

…the agreement should not be so detailed and burdensome that the company is destined to fail…

In addition, the quality agreement would contain an order of precedence clause, indicating that in the event of a conflict between the commercial agreement and the quality agreement the terms of the commercial agreement shall control unless expressly provided otherwise. This is another reason to make sure that there is collaboration and coordination between the appropriate groups within the company’s departments—QA, RA, legal, commercial—so that there are not expected surprises.

Consider whether the termination in the commercial agreement should expressly provide that a material breach of the quality agreement constitutes material breach in the commercial agreement. Of course, what constitutes a “material breach” of any contract is a facts and circumstances determination unless specifically defined in the contract.

Keep an Eye on Privacy

Privacy is something the QA/RA person would likely not be focused on. It might be something that the company commercial lawyer, contract lawyer, or in-house counsel needs to be aware of.

“Just be mindful of it,” Minsk cautioned. “Quality agreements often involve significant data, including data from outside the United States. The European Union General Data Protection Regulation or GDPR took full effect on May 25, 2018.”

GDPR is the “next generation” of the EU Data Protection law. It affects not only organizations in Europe, but perhaps organizations outside the European Union that process personal data from the European Union, including data generated pursuant to quality agreements. So, unlike many privacy laws in the United States, which are sectoral, the GDPR is an omnibus statute that applies to all industries. Penalties can be significant.

Data controls and data processes have a host of new and enhanced obligations under the GDPR. One such obligation is what is referred to as “data protection by design and default.”

When applications, services, and products that involve the processing of personal data are being designed, developed, selected, and used, it is necessary to account for the right to data protection in such offerings. Processing activities should be designed and implemented with appropriate technical and organizational safeguards necessary to protect the rights of data subjects and comply with GDPR.

Regarding basic FDA expectations in a quality agreement, it is important to use clear language

Factors considered for privacy safeguards include: the state of the art; the cost of implementation; the nature, scope, context, and purposes of processing; and the likelihood and risk of harm posed by the processing.

“There is a lot more to this,” the AGG attorney explained. “It may or may not apply to your specific quality agreement. But it is something that you need to at least think about and talk about within your organization. Could the quality agreement that you are dealing with affect privacy? And if so, have you considered that for your quality agreement?”

Roles and Responsibilities

There must be a clear delineation of roles and responsibilities, likely taking the form of a matrix. Make sure it is reviewed by the appropriate internal people. Clearly indicate which party has the final say. Indicate if there is a right to review and/or approve even if the other party is responsible. Include complete contact information for expedited notices and responses.

Make sure rights are specified and the agreement reflects expectations of the parties regarding visits, inspections, audits, etc.

“How do you unwind this if things are not working out and they impact on other things?” Minsk asked. “You have an agreement here, but maybe you have other projects going on. Are all agreements intertwined, or can this be separated? And if you want to get out of this agreement, does this have a bearing on other agreements? Is this going to have a waterfall ripple effect?”

Consider the survival of provisions after the termination to comply with regulatory requirements. In other words, “are you in the middle of something that you cannot get out of? Will this have regulatory implications?”

While not discussed here in detail, other things to just keep in mind include:

• Guarantee for Force Majeure
• Severability
• Waivers
• Headings
• Governing law

These are things that would typically be found in a supply agreement.

Consider how to address amendments to the quality agreement in the context of other related commercial agreements. Amendments to the quality agreement should be discussed with in-house counsel or outside counsel to gauge how that could affect the commercial agreement.

Practical Issues

Before entering a deal, Minsk recommended conducting due diligence of the potential partner to ensure FDA compliance, financial stability, and ability to perform the job.

While much of the compliance information is publicly available, for example, Establishment Inspection Reports, FD-483s, and warning letters that you can get through the Freedom of Information Act, “that may take months, if not years, to get.”

It is advisable and easier to ask the potential partner at the outset. Presumably, they will want to comply with this request to expedite the transaction. If there is something that they consider to be proprietary, they can redact it if they consider it to be confidential.

You also could have them enter a confidentiality agreement. They can redact it if they consider it to be confidential, or maybe they can summarize the issues. But remember, this is a potential partner. “If you are having difficulty now, and this is the honeymoon stage or the courting stage, just imagine what it is going to be like if you do enter into an agreement, and times get tough later,” Minsk cautioned.

“At the end of the day, verifiable trust of the other party will make or break a relationship. So, it is better to know as much as you can in the beginning. If a potential partner is not willing to share a little bit of information without a good reason, you may want to consider moving on to the next potential partners.”

Use Common Language

Regarding terminology used in quality agreements, Minsk advised where FDA has defined terms, use them. FDA wrote the terms. They wrote and defined recalls, adverse drug experiences, etc. This is what FDA expects. It is a mutual language that should be used. It takes it out of the lawyers’ hands.

Companies make mistakes when they try to be too creative and summarize these terms rather than merely incorporating them verbatim, Minsk reported.

“Not only should one use defined terms to be included in the contract in the event that FDA reviews it, having a common language reduces the risk of ambiguity and different interpretations,” he explained.

Strive for Mutual Understanding

It is recommended to include a provision in the agreement that if you are the application holder you should be made aware as soon as possible—tied to a specific period of time—if the contract manufacturer is under investigation or being inspected by FDA. If the application holder’s product is at issue, the company should be involved in the resolution of the FDA issue, Minsk said.

He provided the following rationale for being involved. “It is your product. It could affect product approval. It could affect product manufacture. It could affect product shipment. ‘I am sure you are a nice person. I am sure you will resolve it. But it is my product. Even if my product is not an issue, I think I still have a right to know because of the possible potential delays and deviations in the product manufacturing. Even if it is not my product, you have FDA in your facility and you are probably not focused on my product right now.’” Thus, include permission that you can audit the other party to ensure compliance.

Companies make mistakes when they try to be too creative and summarize these terms rather than merely incorporating them verbatim, Minsk reported

Clearly define who is responsible for handling FDA-related issues, such as GMP regulations, out-of-specification investigations, complaint handling, corrective actions, and recalls. Ultimately the application holder is responsible. Be sure that the applicant is given sufficient notice of particular problems if there are FDA-reporting obligations, such as complaints or corrective actions.

Get Involved

“Do not be shy. Get involved,” he recommended. “You need to raise your hand if you hear about supply agreements or some sort of business agreement that could affect your area of QA/RA. Not everyone in your company is aware of or knowledgeable about being compliant. That is not a shock. A QA person may not be aware of commercial terms. It is your area as a QA person to know RA/QA FDA compliance. That is why they hired you.”

The quality agreement should specifically define what functions the contract manufacturer will perform and what is accepted. The application holder should not allow the contract manufacturer to subcontract out responsibilities without giving and obtaining prior written consent from the application holder. 

Define what changes, if any, the contract manufacturer can make and where the manufacturer or applicant must provide written approval before the change is made. Can the contract manufacturer make product changes or modifications? Can the contract manufacturer make changes in SOPs or replace equipment? What are routine non-major changes that might not require prior FDA notice or approval? Include specific change control language.

It is your area as a QA person to know RA/QA FDA compliance. That is why they hired you.

Certain changes might trigger regulatory examination of the applicant. It might require amendments or supplements. It could result in adulteration, misbranding, or unapproved new drug issues. Changes could have potential adverse effects on patients, exposing the manufacturer to regulatory or liability risks.

Who Owns the Problem?

Consider who pays for what and who handles what if a problem arises—for example, test batches during validation stages, recall costs, indemnification, or insurance. It is helpful if the quality unit knows who is handling what, because the company quality unit often is frustrated when they do not know why the contractor is not responding the way they want. The supply agreement might be driving them to do otherwise.

Consider remedies of the parties in the event of a breach of a quality agreement. These may be better left to the commercial agreement or maybe insert a provision in the quality agreement that points to it.

AGG Observations

While working with clients on quality agreement-related matters, Minsk’s law firm, AGG has made observations leading to the following conclusions and recommendations:

• FDA allows quality agreements and, in fact, these agreements may be useful. However, they do not allow companies selling their products to abdicate discriminatory obligations. One cannot pass the buck. FDA has issued warning letters to companies about that. So, you just cannot simply delegate.
• Companies should prepare quality agreements, but they must also have quality systems in place to ensure manufactured and distributed products are FDA-compliant. Companies should audit and monitor contractors and suppliers for compliance and keep an eye on privacy and compliance obligations.
• An agreement without follow-up and proper execution is merely a piece of paper. To paraphrase the classic Seinfeld line, “anyone can enter a quality agreement. It is the hold (or the execution) that is most important. Don’t you have my reservation? I am sorry. We gave away your reservation. I do not understand. You know what a reservation is? Yes, we know what a reservation is. Well, if you know what a reservation is, you would have my car. Anyone can take a reservation, it is the hold.”
• Companies should review their existing quality agreements to make sure they comply with the guidance. Consider revisions as appropriate. Conduct periodic reviews of the agreements to make sure they are current and relevant. Quality unit representatives should be actively and proactively engaged in drafting quality agreements along with counsel and the division of responsibilities and activities.
• Presumably, both parties want to work together and negotiate a good thing. Be flexible. But where appropriate, be sufficiently detailed in subject and content.
• A quality agreement is an operational document, so do not make it so burdensome the company cannot operate or inadvertently impose obligations beyond what is required.
• Share information in an open and timely manner. Proactive planning is needed. Conduct periodic reviews of agreements to make sure they are current and relevant. It may be that every so often— maybe every 18 months or 24 months—a review is needed of what is working and what is not. Learn from past experiences.
• Mutual recognition and appreciation of your partner is important. Consider pre-qualifying more than one contract manufacturer so that you are not out of luck if the primary contract manufacturer encounters problems—for example, FDA compliance issues or weather-related disruptions.

[Editor’s Note: Read Part I here for more information on the regulatory framework for quality agreements.]

Resource Link

FDA 2016 Guidance for Industry: Contract Manufacturing Arrangements for Drugs: Quality Agreements

[Related: Download a FREE comparison report of two of the leading CDMOs, including 483 observations and primary citations.]