Steps for Drawing a Contract Manufacturing Agreement
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Steps for Drawing a Contract Manufacturing Agreement

By Manufacturing Technology Insights | Thursday, October 31, 2019

Entering a contract manufacturing agreement is the trend; however, it is an arduous process with needs attention to detail.

Fremont, CA: Medical device manufacturing is a meticulous process, which increases the cost of manufacturing. Consequently, manufacturers outsourcing certain operations, including product manufacturing, packaging, and distribution to a third party is trending for Original Equipment Manufacturers (OEMs). Medical device OEMs are abolishing the factories and equipment and hiring Contract Manufacturing Organizations (CMOs) as their new operational partners. With a higher demand for CMOs, medical device OEMs must form collaborations with each other. For a successful collaboration to take place, both parties have to negotiate issues such as control, profits, research and development, and finally, the termination.

As a part of the agreement, the ownership of the intellectual property is to be clearly stated. In collaborations, the proportion to the contribution made toward the invention decides the ownership rights. However, the technology field or level of expertise can also divide it. Moreover, special consideration should be given to the parties who bring pre-existing intellectual property.  Medical device OEMs should ensure the protection of their intellectual property.

The agreement should cover each party’s contribution and their compensation for their efforts. Based on the common terms, the payment structure is decided, such as upfront payments, milestone payments, or running royalties. Along with the payment, the contract manufacturing agreement should mention that the CMOs assist in product and process documentation and plant inspection, as OEMs need the assistance of contract manufacturers throughout the regulatory approval process. 

In case the agreement is challenged, the medical device OEM should ensure that its interests are protected. Thus, an indemnification provision clause should be included in all agreements with CMOs. Due to unforeseen circumstances, if CMOs are unable to supply the requested quantity in a reasonable timeframe, the agreement should clearly mention that the OEMs have the right to find a backup supplier. The assignment clause should not be overlooked as well. The automatic signing of the agreement without consent may lead to parties working with competitors they did not initially intend to. Thus, an assignment clause should be signed.

Regardless of the success of the collaboration, manufacturing agreements have to end. Agreeing to an orderly termination before entering the partnership is critical. The termination clause should include the time of completion of collaboration, what happens to patents or intellectual property in the events of the termination, and the conditions of termination. The ownership, control of the design, molds, and manufacturing documentation upon termination should be addressed in the agreement.

Finally, the confidentiality clause should be addressed in the agreement. Before revealing any confidential information, both parties should execute a written confidentiality agreement that stops sharing confidential information with any third parties. In case both do not form a separate confidentiality agreement parties, sufficient confidentiality provisions should be included in the agreement. Contract manufacturing is driving innovation and cost-savings in the medical device industry; however, both the parties should take the proper measures.

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