Introduction

Healthcare technology companies that design, build, and sell products and services build their own technology, but they generally buy technology products and services from third-party suppliers to build their own technology. The technology that healthcare companies buy is in the form of components, assemblies of components and/or sub-assemblies and often incorporates software, including software-controlled devices. In many instances, the healthcare technology companies add their own software into the supplier’s components and assemblies, or they integrate the purchased technology into the technology they build. These arrangements are covered by agreements, key provisions of which are discussed in this article. For convenience of reference, and to focus on the contractual aspects at issue, the healthcare technology companies are referred to as “Buyers”; the suppliers as “Suppliers”; the components, assemblies, and sub-assemblies as “Products”; and “Product Development” refers to the process for moving from the initial Product specifications through the phases required to make the Product ready for manufacturing.

The Buyers often work with the Suppliers in designing, prototyping, and preparing the Products for manufacture. Doing so requires proceeding through well-designed and coordinated phases. This includes leveraging the Suppliers’ specialized machinery, facilities, and expertise used in designing and prototyping components. Contractual terms are especially important when the Buyer’s FDA-approved medical device will fall out of compliance if defective, or if working but out-of-spec, because the Supplier’s Products do not meet the requirements necessary for the Buyer’s final Product to meet applicable FDA requirements.

This article outlines the phases of Product Development necessary to build Products that meet the Buyer’s specifications and requirements and applicable regulations.

Structure of Governing Product Development Agreements and SOWs

In most cases, the Buyer and Supplier enter into a detailed Master Agreement with a series of statements of work (SOWs) to govern specific phases and tasks. Some Products may require more than one Supplier to complete different phases of Product Development. In such circumstances, the Buyer should enter into a Master Agreement with each Supplier. To simplify contract preparation and administration, the Buyer should draft the Master Agreement to make clear that some but not all phases will be performed by a specific Supplier, and that the terms applicable to all phases apply by agreement to all Suppliers.

Using a Project Management Committee

The Master Agreement establishes a “Project Management Committee” consisting of core members of the Buyer and Supplier charged with overseeing the development of all Products covered by the Master Agreement. Parties often establish subcommittees for each of the Products. This combines experience with and knowledge of a particular Product from each party, including Supplier personnel who are familiar with subcontractors that can contribute to Product Development.

It is in each party’s interest to require that the other party dedicate the services of key personnel to full or near-full-time Product Development for specific Products and require them to be involved from the initial to the final stages of Product Development. Provisions for successors should be included to cover circumstances in which the initial key person becomes unavailable.

Dispute Resolution

Successful Product Development means having a system in place for handling disputes that could arise from needing to make changes to the original project plan. The Project Management Committee should be charged with resolving these disputes. These disputes are not strictly legal disputes over the terms of the agreement but may also include disputes over how to best build and source the Supplier Products. Accordingly, if the Project Management Committee cannot resolve the dispute, the matter should be escalated to senior executives. In many cases, the dispute will be over how tasks should be changed and the order in which they should be performed. It is therefore essentially a business problem requiring a business solution, and one that may not have been covered by the original agreement. One solution is to have the executives resolve the dispute to allow Product Development to move forward; subsequently, a third-party arbitrator can decide how to allocate the additional costs (or savings) between the parties. Thereafter, the parties’ lawyers should amend the Master Agreement and the SOWs in question to reflect the resolution and make corresponding contractual changes in Product Development.

Summary of the Phases of Product Development

The common phases of Product Development are as follows:

• Defining the initial specifications and requirements for each Product and refining them into final specifications and requirements.
• Defining the deliverables to provide as part of the requirements and specifications phase.
• Creating a Product Development Plan to govern the development of the Product.
• The Design Phase.
• The Prototype Phase.
• The Tooling Phase (which includes software development).
• The Engineering Phase.
• The Manufacturing and Supply Phase.

Requirements and Specification Phase

In most cases, the Buyer will deliver proposed requirements and specifications to the Supplier on a Product-by-Product basis. These may be based on the current version of the Product which is to be converted into the Product covered by the current project and Agreement. The Supplier with Buyer approval will then refine the specifications, and as refined, they will become the “Product Specifications” for Product Development under the Agreement. This is best handled as an iterative process between the parties and their specialist team members. On the Buyer’s side, this draws on the Buyer’s technology, regulatory, and business teams. On the Supplier’s side, this draws on the engineering and product design teams to both provide technical and manufacturing expertise not available to the Buyer. This phase provides the foundation for the next phases.

Defining Deliverables

In the next phase, the parties will 1) define deliverables to be provided by the Buyer and the Supplier for each Product and their dependencies; and 2) establish acceptance criteria, acceptance testing, and acceptance procedures for the deliverables. These will generally be a governed set of procedures, but there may be specialized procedures for specific Product types. (For example, if FDA approval is relevant to the Product.) Defining the deliverables is critical to effective Product Development. The acceptance procedures should include identifying and curing defects and verifying the effectiveness of the remedy. This means the deliverable, as cured, meets the governing acceptance criteria. The governing document for this phase is an SOW.

Creating a Product Development Plan

To ensure a structured approach to Product Development, the Supplier shall propose and the Buyer will approve a detailed Product Development Plan for each Product. This plan identifies how the Supplier will design, develop, prototype, test and finalize the Product and provide other services during the course of the project. Each phase of the project should be represented in the plan, including the Design Phase, Prototype Phase, Tooling Phase, Engineering Phase, and/or Manufacturing and Supply Phase as further outlined below. The tasks for each phase and the requirements for moving to the next phases should be determined and included.

The Design Phase

During the Design Phase, the parties work to convert the initial specifications and requirements proposed by the Buyer into the final Product Specifications on a Product-by-Product basis. It is based on the results of the prior phases. The Supplier will propose the final Product Specifications to the Buyer, and the Buyer will approve them or consult with the Supplier to further refine them to develop the final Product Specifications. These include defining the performance requirements, Product features, and industrial design, as well as other Product attributes and requirements. The Supplier shall ensure that the design specifications meet all relevant regulatory requirements and industry standards, while also meeting the Buyer’s requirements for the Product. In some cases, it may be necessary to involve regulatory compliance experts from the Buyer side to enable the Buyer to sign off on the final Product Specifications.

If required by the Product Development Plan or otherwise agreed upon by the parties, the Supplier may create and deliver one or more models of the Product to the Buyer. 3D technology is often used to produce the model and finalize the Product Specifications.

If the Product will collect personal information subject to HIPAA or privacy and data protection requirements of governmental agencies or laws of specific jurisdictions, compliance requirements should be part of the Specifications. It is easier to design-in rather than retrofit regulatory compliance.

Finally, for many Products, it is important to finalize IP due diligence in this phase. This has both offensive and defensive components. From an offensive perspective, the Buyer should confirm that the Product will be covered by what the patent is intended to protect. Often the evolution of Product design or functionality takes it out of the scope of the patent. From the defensive perspective, the Buyer should conduct sufficient due diligence to conclude with a reasonable degree of certainty that the Product, including as it is manufactured, does not infringe third-party patent rights. It should be noted that the Buyer may have a license from third-party patent holders that allows the Product to be produced and sold notwithstanding any claim of infringement.

The Prototype Phase

During the Prototype Phase, the Supplier designs and creates one or more pre-Production units of the Product, packaged in Production packaging, when possible, in accordance with the Product Development Plan. The prototypes created during this phase allow the parties to further evaluate the Product Design Specifications and implement any necessary modifications. By reviewing the prototypes, the Buyer can identify any issues or areas for improvement, and as part of or in combination with the foregoing, the Supplier can make the necessary changes to refine the design before full-scale Production begins. Again, this may include changes required for regulatory compliance.

The Tooling Phase

If no further modifications are required and the Buyer accepts the prototype, the parties shall begin the Tooling Phase. In this phase, the Supplier designs or specifies the tooling, molding, dies, jigs, and other equipment, machinery, and software necessary to build the Product in accordance with the Product Development Plan. While tooling connotes physical components, in digital healthcare it also includes software development and testing.

The Engineering Phase

During the Engineering Phase, the Supplier prepares all tooling specifications, and the parties determine critical details necessary for the remainder of the project, such as:

• the cost of manufacturing the Product and agreed-upon cost to the Buyer of acquiring the Product, within the parameters set forth in the Product Development Plan; and
• the activities to undertake that incorporate the information learned in the Design Phase and Prototype Phase.

In addition to creating the tooling specifications and tooling designed to Buyer’s requirements, the Supplier will also create shipping and packing material for the Products, including all legends, notices, and labels in the locations required by applicable law, the Buyer, and the Buyer’s affiliates.

During the Engineering Phase, the Supplier may also conduct testing and validation of the manufacturing process (and software development) to ensure that it operates as expected and produces the Product to the required specifications.

The Manufacturing and Supply Phase

Once all details in the preceding phases are finalized and complete, if the Buyer wishes to engage the Supplier to provide Manufacturing and Supply Phase services, the parties will typically enter a Supply Addendum with respect to a Product prior to the Supplier commencing manufacturing or any of the other Manufacturing and Supply Phase services.

In this phase, the Supplier will manufacture the Products and again be responsible for embedding, affixing, or otherwise including all notices on or with the Products in the manner required by applicable law and by the Buyer and its affiliates, including as advised by the Buyer during the Engineering Phase. Additionally, a schedule setting forth country-specific requirements is usually included with the relevant Supply Addendum. The Supplier will also mark each unit of a Product with a unique sequential serial number, the date of manufacture, and the version or revised version of the Product, at the location(s) on the Product and in the manner set forth in the Product Development Plan.

Alternatively, the Buyer may move Product manufacture to a company that specializes in manufacturing complex medical Products after the prototyping has been completed. Similarly, the Buyer may use the services of a software company for embedded or ancillary software. Further along these lines, where the software embodies artificial intelligence, the Buyer may need to engage the services of an AI firm to work in cooperation with the other suppliers.

Subcontractors

The Buyer may permit the Supplier to use subcontractors to assist it in providing the services under the equipment development and manufacturing agreement or as required to perform specialized tasks necessary for the Product Development phases.

Buyers may require that subcontractors meet the following requirements before they are engaged by the Supplier. The subcontractors must be:

• on the Buyer’s approved list;
• approved by the Buyer and designated in the Product Development Plan; and/or
• approved by the Buyer in advance.

Subcontractors may be used to reduce costs or to obtain specialized services. When the subcontractor is not on the Buyer’s approved list, the process for subcontractor engagement must provide the Buyer sufficient time to obtain information from the Supplier and independent sources to evaluate each proposed subcontractor’s qualifications to perform the services that the Supplier proposes for such subcontractor and determine whether to grant Buyer approval. A cautionary note is that a subcontractor may be on the Buyer’s approved list for certain services but may not be approved for services required under the Product Development Plan. In such cases, the subcontractor’s suitability must be diligently reviewed and confirmed.

Supply Components of Medical Devices

The purpose of a supply agreement is to set forth the terms and conditions that will govern the Supplier’s obligations in the manufacturing and sale of units of the Products to the Buyer. In the supply agreement, the parties will agree upon the specific Products, accessories, consumables, and other goods and services involved, along with the procedures used to forecast manufacturing expectations and manage purchase orders, inventory, shipping, and Production schedules. Additionally, the parties will account for certain issues that may arise, such as any constraints to supply, unit rejection and return, and/or the handling of the Product’s end-of-life.

To ensure that all units of all Products remain in compliance with the given specifications of the Product, it is not uncommon for a Supplier to provide expert technical support to resolve a Buyer’s or customer’s questions or difficulties regarding such issues as:

• the integration of the Products into the Buyer’s system;
• the functioning of the Product or any component thereof standing alone or as incorporated into the Buyer’s system;
• a customer’s use of the Product including as integrated into the Buyer’s system;
• determining if a particular unit is defective;
• determining whether the Supplier should correct a unit at its facility, issue a replacement unit, or have the Supplier’s technical support staff instruct a field representative in making a field repair.

Multiple Supplier Projects

As noted, the Buyer may need to use different Suppliers for different phases of Product Development. A contract can be drafted so that different suppliers can be parties for different phases of Product Development.

Conclusion

Product Development succeeds when it follows a structured approach. Each of the phases above is essential in ensuring that the Buyer’s expectations are met and that the Supplier can produce a valuable, quality Product that meets regulatory requirements and industry standards. To oversee the entire Product Development process, the Project Management Committee is responsible for supervising the progress of the project and ensuring the timely development and manufacture of the Products. As such, drafting a well-defined agreement and statement of work is critical in creating a clear and specific plan for the deliverables and development of the Product.