Contract Manufacturing Agreement, Principle To Principle And Loan License Agreements Under Drug Laws – Product Liability & Safety

Historically pharmaceutical companies turned to contract
manufacturers for achieving efficiencies in cost, capacity and
time-to-market, or to obtain specific expertise not available
in-house. However, the increment in outsourcing of manufacture is
driven, at least in part, by the fact that contract manufacturers
have increasingly developed innovative proprietary processes and
implemented technology that may well surpass that available at the
pharmaceutical client’s own facilities. Moreover, nowadays few
pharmaceuticals are made in dedicated plants and key intermediates
and active compounds can be made in general-purpose plants.

Types of Contract Manufacturing: 
Pharmaceutical companies outsource a wide-range of
manufacturing-related activities, including active ingredient
manufacturing, formulation, stability testing, manufacturing of
chemical intermediaries,  primary and secondary
packaging,  labelling, clinical trial supplies, etc.

Product Liability under Contract Manufacturing:
The law relating to product liability in the EU is based on Council
Directive 85/374 concerning liability for defective products
(Product Liability Directive). In the USA, actions in medicinal
product liability cases are mainly brought in tort under state law
(negligence, strict liability and a breach of warranty claims). In
India, under Section 2(34) of the Consumer Protection Act 2019
“product liability” means the responsibility of a product
manufacturer or product seller of any product or service, to
compensate for any harm caused to a consumer by such defective
product manufactured or sold or by a deficiency in services
relating thereto.

The most common defendants in product liability actions are the
manufacturer and other pharmaceutical companies that market or
otherwise promote the product.

Contract Manufacturing under Drug Laws

The Drugs and Cosmetics Act 1940
(“Act”) and the Drugs and Cosmetics
Rules 1945 (“Rules”) do not provide
any express provision on contract manufacturing arrangement. The
Act and the Rule are silent on contract manufacturing arrangement
with respect to quality, effectiveness and regulatory
compliance.

Third Party Manufacturing or Principle to Principle
(P2P) and Loan License Agreements

In India, P2P and Loan License Agreements are very popular
manufacturing arrangements. P2P manufacturing agreements are
entered in by marketing companies with manufacturing companies for
product specification with the manufacture’s technical
know-how under a specific brand or trademark of a marketing
company. The product is manufactured under license in Form 25 and
28 of the Rules issued from State Food & Drug Administration.
The marketing company sells and distributes the products under a
wholesale license issued in specific Form 20 -21 from the state
FDA. Under P2P agreements, so far marketing company is not
responsible for the quality and regulatory compliance of drugs
except under the Drug Price Control Order
(“DPCO” ) wherein price of the drugs
is declared by NPPA and licensing conditions of the wholesale
license.

However, the legal position of the P2P agreement is not correct
in terms of liability for quality and regulatory compliance of
drugs.

As far as third party manufacturing agreements are concerned,
there is no such arrangement in Drugs  & Cosmetics Rules,
1945. There are only 3 ways of manufacturing drugs as per
Rules:

1. Own Manufacturing Licence




2. Repacking Licence




3. Loan Licence- When anyone wishes to avail oneself of the
   manufacturing facilities owned by a licensee, one is granted a Loan
   Licence (25A or 28A)

It was held in Glaxo Smithkline Vs State of
Bihar¹ that standard & label claims of the
product cannot be dictated by a marketing company at its sweet will
but must be in accordance with the standard set out in the Second
Schedule of Drugs & Cosmetics Act 1940 and labelling Rules 96
& 97 of Drugs and Cosmetics Rules, 1945 respectively.

It was further held that Glaxo as a wholesaler can not infringe
the “Labelling process” which comes within the ambit of
“Manufacture” as per Section 3(f) of Drugs &
Cosmetics Act,1940 and concerns manufacturer only not a wholesaler.
Therefore, if they wish to print the logo and name of their company
on the labels of drugs, they should either manufacture in their own
licenced factory or they should get their products manufactured in
other licensees ‟s factory under Loan Licence and not under
third party manufacturing agreement.

Getting their products manufactured under third party
manufacturing agreement will free them from those legal obligations
and responsibilities. All those legal obligations and
responsibilities lie on the shoulders of the licenced manufacturer.
For the above reasons, Glaxo Smithkline Pharmaceuticals Limited
probably resorted to the unfair practice of third party
manufacturing.

It was further held that it was evident beyond doubt that the
drugs had been manufactured violating the provision of loan
licences -Rule 75A and were labelled by violating labelling Rules
96 & 97 of the Rules and logo & name of the intended
purchaser (Glaxo Smithkline pharmaceuticals limited – as a
wholesaler), as they feature on the labels of drugs & carton of
drugs attract the provision of misbranded drug – Section
17(b) & 17 (c) of the Act.

The petition u/s 482 of Cr.PC was quashed by the Patna High
Court and directed for trial at the magistrate court. Later, SLP
filed by GSK also got dismissed by the Supreme Court. The matter is
currently pending at magistrate court in Patna.

In order to curb the practice of pharma companies indulging in
third party P2P, the Central Government has amended Rule 2 of the
Drugs and Cosmetics Rules, 1945 including the term
‘marketer’ under clause (ea).

The term “Marketer” means a person who as an agent
or in any other capacity adopts any drug manufactured by another
manufacturer under an agreement for marketing of such drug by
labeling or affixing his name on the label of the drug with a view
for its sale and distribution.

Further, Rule 84D has been inserted which provides an agreement
for marketing. This rule makes it mandatory for every marketing
company to enter into an agreement for the marketing of the drug.
Rule 84 E has been inserted to define the responsibility of the
marketer. This equates the responsibility of marketer with a
manufacturer for the quality of drugs and regulatory
compliance.

Further, a sub-clause clause (xiii) in clause (1) Rule 96 has
been inserted regarding the labelling requirement of drugs by
marketer. This means that showing the name of the marketer of the
drug and its address if the drug is contained in an ampoule or a
similar small container, shall be enough.

Loan License Agreement

The term loan licences as mentioned in Rule 75A of Drugs &
Cosmetics Rules 1945 reads as under – “For the
purpose of this rule a loan licence means a licence which a
licensing authority may issue to an applicant who does not have his
own arrangements for manufacture but who intends to avail himself
of the manufacturing facilities owned by another licensee in Form
28.”

When a company gets its products manufactured in another
licensee’s factory under a Loan Licence, it has certain legal
obligations and responsibilities as prescribed under Rule 76, 76A
& 78A of Drugs & Cosmetics Rules, 1945.

A loan license manufacturing agreement is entered by a company
that is the marketing authorization holder of a drug duly licensed
to manufacture and market.  Rule 75A and Form 28 of the Drugs
and Cosmetics Rules, 1945 provide this arrangement. Under a loan
license agreement, product specification know-how and its trademark
are transferred to a manufacturing company to use manufacturing
facilities and its staff. The drug is manufactured under the
supervision of a company that has got a Loan License under Form 28.
The quality, efficacy and safety are responsibilities of the Loan
license holder. The product label clearly describes the product
manufactured by the name of loan licensee with the place where the
product is manufactured by the licensee manufacturing company.

Conclusion

In the light of the provisions under the Drugs and Cosmetics
Act, 1940 and Rules 1945 and its amendment of 2020 with effect from
1st March 2021 and the Consumer Protection Act 2019, it is clear
that the central government and the drug regulators are keen on
fixing responsibilities of a marketing company under a contract
manufacturing arrangement in terms of quality, efficacy, safety and
product liabilities.

Footnotes

1 M/S Glaxo Smithkline vs State Of Bihar & Anr 
2011 CrLJ 2553

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