Cut Your Outsourcing Risks

Toll processing relationships, with respect to chemicals, active pharmaceutical ingredients and finished drug products, are ubiquitous in the pharmaceutical manufacturing industry. Historically, large pharma companies turned to toll processing after commercial drug product introduction, typically when manufacturing tasks had become routine. More recently, however, this paradigm has shifted to include even small pharmaceutical companies.

Although toll processing relationships now are pervasive in the pharmaceutical industry, resources dealing with the operational, safety, contractual, legal, regulatory and other aspects of these transactions are quite limited. Indeed, with respect to pharmaceutical contract manufacturing relationships, even the U.S. Food and Drug Administration's (FDA) 2001 Guidance for Industry Q7A Good Manufacturing Practice Guidance for Active Pharmaceutical Ingredients (which grew out of the 1996 discussion draft "Guidance for Industry Manufacture, Processing or Holding of Active Pharmaceutical Ingredients" and the 1997 "Draft Internationally Harmonized Guide for Active Pharmaceutical Ingredients Good Manufacturing Practice") provides only that:

All contract manufacturers ... should comply with the Good Manufacturing Practices (GMP) defined in this guidance.
Companies should evaluate any contractors ... to ensure GMP compliance of the specific operations occurring at the contractor sites.
A written and approved contract or formal agreement between a company and its contractors should be made available defining in detail the GMP responsibilities, including the quality measures of each party.
A contract should permit a company to audit its contractor's facilities for compliance with GMP.
Where subcontracting is allowed, a contractor should not pass to a third party any of the work entrusted to it under the contract without the company's prior evaluation and approval of the arrangements.
Manufacturing and laboratory records should be kept at the site where the activity occurs and be readily available.
Changes in the process, equipment, test methods, specifications or other contractual requirements should not be made unless the contract giver is informed and approves the changes.

The pharmaceutical industry was provided with no guidance, however, to help it implement this guidance.

The Center for Chemical Process Safety (CCPS) of the American Institute of Chemical Engineers (AIChE) has issued "Guidelines for Process Safety in Outsourced Manufacturing Operations," which will clearly be helpful in this effort. AIChE has a 30-year history of involvement with process safety for chemical processing plants. The CCPS, a directorate of AIChE, was established in 1985 following Union Carbide's Bhopal incident to develop and disseminate technical information to help prevent major accidents.

What to expect

The new guidelines describe techniques to assist the chemical processing and pharmaceutical industries in applying process safety concepts to toll processing relationships. CCPS issued the guidelines because recent incidents have shown the exchange of process technology and product safety information can be a major factor in contract manufacturing success. They are designed to improve the quality of tollers' production and packaging of contracted materials, as well to enhance the areas of safety, industrial hygiene, catastrophic incident prevention and off-site/on-site environmental responsibility. Although not directed specifically to pharmaceutical tolling, the guidelines are directly applicable to pharmaceutical activities.

The guidelines address basic issues involved in the toll processing decision, including the primary reasons for tolling such as equipment availability, process expertise, costs, logistical issues and environmental and product development concerns. They also cover the advantages and disadvantages of tolling and the nature of the toll processing arrangement.

Among the most useful aspects of the guidelines are the definitions of the scope of tolling activities and the terminology used in this area. An explicit definition of tolling as a process used "to provide manufacturing services for a fee by a contractor (the toller), to a company issuing (letting) the contracts for those services" is provided. The guidelines point out that tolling services can include reaction processes, formulations, lending, mixing and size reduction, separation, agglomeration, packaging/repackaging and other combinations of these activities.

Of perhaps equal significance, product involvement not constituting a tolling relationship also is identified and defined. For example, the guidelines note that handling or storage of the product such as warehousing, bulk storage or distribution through a terminal where no processing occurs would not in itself constitute tolling, but could be incidental to other tolling activities. For examples of two very different views on the part of the courts with respect to the strict liability obligations of parties purchasing toll processing services, compare Kalumetals Inc. v. Hitachi Magnetics Corp., 21 F. Supp. 2d 510 (W.D. Pa., 1998) with In re Napp Technologies, No. L-4233-95 (Bergen Cty. Superior Ct., July 14, 2000). The former court imposed strict liability in a tolling relationship, while the latter court refused to impose such liability on the purchaser of tolling services.

Significantly, the guidelines focus on how toll processing relationships should be handled. They address the joint responsibility of all parties involved in the tolling process to achieve safe and environmentally responsible performance. To achieve this goal, the guidelines address the details of the toller selection process, contractual considerations, unique aspects of start-up activities, operating concerns, and closure and audit considerations.

In each of these areas, special tolling-related considerations are addressed. These include the process for locating and evaluating toll processing partners; the crucial importance of the technology transfer package and techniques for ensuring the comprehensive preparation of these critical materials; contractual consideration; audit procedures; environmental considerations; management of change discussions; and process hazard evaluation techniques. Among the most valuable aspects of these discussions are explicit model contracts and appendices, including audit and health and safety forms designed to facilitate evaluation of prospective audit partners and ensure appropriate performance evaluations.

Given the small number of resources available to deal with toll processing concerns, these guidelines are a significant advance on the existing status of toll processing-related materials. Few materials have even commented on, let alone become the definitive resource for, those looking for guidance related to toll processing activities.

What's missing

The guidelines are not without their shortcomings. Experience has shown that toll processing activities sometimes lead to catastrophic environmental and operational consequences. Clearly, at least some of the parties involved in these activities failed to live up to the obligations imposed on them under these guidelines.

The guidelines, however, fail to explain which toll processing parties are primarily responsible for particular activities and, therefore, are more appropriately sanctioned for failure to live up to these responsibilities. In essence, the guidelines set out a "plague on all your houses" norm for operational failures associated with toll processing activities. They acknowledge the planning, disclosure and operational obligations of all toll processing parties, but do not prioritize those obligations as between the parties involved. Whenever a toll processing operation results in an operational, environmental or societal failure, the guidelines provide extensive support for the proposition that each of the parties involved bears a significant measure of responsibility for that failure. What they do not do, however, is prioritize those responsibilities in such a way as to clearly express who bears primary or exclusive responsibility for any failure that could have occurred.

This could be understandable and even laudable from the perspective of protecting society from the dangers of botched tolling operations. It is far from clear, however, how avoiding the imposition of primary responsibility on one party or the other ultimately will be beneficial for toll processing participants or for this essential business structure itself.

Protect yourself

Indeed, it appears that the guidelines will ensure the relative obligations of the parties to each other will be set in the contractual documents. In that regard, it remains true that toll processing participants must ensure those contracts, at a minimum:

Establish the task to be performed.
Establish the technology and operating methods to be used.
Consider the use of industry standards to define the operational requirements.
Establish the commercial requirements: product supply, risk of loss, price, delivery, force majeure, liquidated damages, etc.
Establish the nature and scope of product and process-related disclosures.
Establish exclusivity/noncompetition expectations.
Establish confidentiality/nonuse expectations.
Establish product and process quality control requirements.
Establish the health and safety and regulatory expectations--including new drug application and drug master file implications of process changes.
Address reciprocal training obligations.
Deal with the indemnity, insurance and risk of loss issues, including additional insured provisions.
Identify waste generation, recycling and disposal obligations.

Dore is a partner with the law firm of Lowenstein Sandler PC in Rosland, N.J. He has handled a number of cases involving toll processing issues and has written extensively in this area. He is also an adjunct professor of law at Rutgers Law School and can be reached at [email protected].