Tim Dietlin06.01.10
Clinical Delivery Alliances
A new outsourcing model to decrease R&D costs
According to the industry organization Pharmaceutical Research and Manufacturers of America (PhRMA), the average cost of drug development now stands at about $1.2 billion per drug. But the reality may be even worse. Some industry experts have suggested that removing companies with abnormally high success rates, like Genentech Inc. (now part of Roche AG), brings the per-drug average closer to $3 billion.
Everyone in the industry knows that figure is unsustainable.
In the wake of the recent economic crisis, drug companies need to strengthen profit margins, but they face mounting pressures on top line revenues. Patients and governments are growing more sensitive to drug pricing. Competition from lower-priced generic drugs has skyrocketed, with such drugs accounting for 58% of prescriptions in 2008, up from 42% in 2000. At the same time, advances in genomics and biomarkers are ushering in a new era of personalized medicine, which will replace the old blockbuster model with drugs targeted to smaller patient populations.
With so much pressure on the top line, it is clear that the bottom line will have to give. But while decreasing the cost of drug development has the potential to generate significant bottom line impact, it is easier said than done.
If anything, the deck seems stacked against the drug industry in this endeavor. The “low-hanging fruit” has been picked, leaving companies to tackle ever more complex diseases. The rise of biologics has led to an increase in manufacturing costs. A risk-averse FDA has heightened safety standards. And the majority of drug companies face front-end costs — sometimes significant — as they in-license their products, large pharmaceutical firms from biotechnology companies, and biotech companies from academia.
There is progress being made. Biotech companies and large pharma firms alike are decreasing their development costs with sophisticated outsourced virtual business models that rely heavily on CROs. Even so, the current project-based CRO model is inefficient and leaves significant bottom-line savings on the table.
Traditional CRO Relationships
CROs emerged in the 1980s, beginning when pharmaceutical companies partnered with universities to gain access to the computing power required to process data from complex clinical trials. Early CROs offered computing resources and the ability to tap into other specialized services on an as-needed basis. Their focus was not cost savings but resource augmentation.
In the mid-1990s, as an explosion of new drugs entered the clinic and pharmaceutical firms faced headcount shortages, CROs began offering full-service outsourcing solutions. Some were global in scale, and many focused on shepherding sponsors through the drug approval process. Concepts like efficiency and cost-savings took center stage. By early 2000, some CROs had taken these principles to the next level by introducing volume discounts, but most CRO-sponsor relationships were still negotiated on a per-project basis — a trend that continues today.
Project-based outsourcing can be inefficient on many levels. Each new project must go through the time-intensive request for proposal (RFP) process, and each time a new CRO is selected, both the CRO team and sponsor team must spend time familiarizing themselves with each other and with the project. A lack of comfort with a new CRO can also tempt sponsors to micromanage the project, which requires almost as much time and resources as if the sponsor had performed the trial in-house.
Furthermore, the project-based model does not align the incentives for the CRO with those of the sponsor. For example, CROs are traditionally paid per site visit and are thus incentivized to increase these visits, which can slow down the clinical trial process in direct opposition to the sponsor’s goals.
In addition to its financial inefficiency, the project-based model can result in inconsistent quality. Quality standards and expertise that vary among CROs make it difficult to compare data across trials.
From Vendor to Partner
As the CRO industry approaches its 30-year anniversary, some organizations are looking for new business models that can improve efficiency and long-term value creation. Rather than functioning as a vendor for a single trial, some CROs are forming clinical delivery alliances that are structured around multi-year partnerships with sponsors, deals in which both parties assume risk and realize rewards, creating value at the corporate level rather than just at the clinical trial level.
These new alliance partnership business models are still emerging, but several have already proven effective in the field.
For example, some large pharmaceutical companies have instituted functional management partnerships, in which a CRO assumes the management and execution of a specific function, like data management or site contracting, across a large portion — if not all — of the company. This may involve shifting certain pharma employees under the CRO with management from a joint oversight committee.
Another business model that appears to work well is a risk-sharing model in which the pharma company scopes all projects on a fixed-fee basis and the CRO receives a bonus if study timelines are met or fee reductions if they are missed.
There are also various scenarios in which a CRO might manage one or two lead compounds through multiple clinical trials, all compounds within a given therapeutic area, or even all compounds within a pipeline. Such arrangements provide not only efficiency-based cost-savings, but also continuity across trials.
Furthermore, since the CRO is contracted to support multiple programs, the project team becomes uniquely incentivized to help the sponsor discover a successful compound or appropriately terminate an unsuccessful compound, as early in the process as possible, to avoid unnecessary effort and cost expenditures. This type of commitment is not inherently incentivized in a traditional sponsor-CRO relationship, in which termination of a program means termination of the CRO’s income.
Regardless of what specific form the clinical alliance partnership takes, its cornerstone should be shared incentives.
CROs should be compensated based on when the sponsor receives value rather than based on workload, such as the number of site visits. Examples of appropriate key milestones or key performance indicators include agreed-upon testing protocols, patient enrollment milestones, locked databases or delivery of final data sets. An important component of this approach is putting the performance metrics into place: the customer pays more if the CRO meets them, less if the CRO does not. Risk sharing provides an incentive to accelerate project schedules yet maintain a high degree of quality.
Clinical Alliance Benefits
A primary benefit of a clinical delivery alliance is the ability to decrease R&D costs. This is accomplished through multiple mechanisms, including:
Yet there are other benefits to alliance partnerships as well. These include:
Partnering Tips
Not all clinical projects are appropriate for alliance partnership business models. Indeed, some trials lend themselves to the standard project-based model. But for sponsors seeking the cost-savings, efficiencies and quality control of a longer-term CRO relationship, bear the following tips in mind when evaluating potential CRO partners:
With these guidelines in mind, sponsors should be able to select a CRO that is capable of thinking strategically and executing a long-term plan over the entire clinical continuum for a given product, for several products in a given indication, or even for a whole pipeline. This long-term partnership incentivizes both the CRO and the sponsor to complete the scope of work efficiently, effectively and to a high level of quality. While these relationships are relatively new to the drug development industry and are thus still evolving, they appear to provide benefits in quality, consistency, efficiency, and the bottom line — far beyond what’s possible in a tactical outsourcing relationship.
Tim Dietlin is vice president of Alliance Development for INC Research Inc. He can be reached at tdietlin@incresearch.com.
A new outsourcing model to decrease R&D costs
According to the industry organization Pharmaceutical Research and Manufacturers of America (PhRMA), the average cost of drug development now stands at about $1.2 billion per drug. But the reality may be even worse. Some industry experts have suggested that removing companies with abnormally high success rates, like Genentech Inc. (now part of Roche AG), brings the per-drug average closer to $3 billion.
Everyone in the industry knows that figure is unsustainable.
In the wake of the recent economic crisis, drug companies need to strengthen profit margins, but they face mounting pressures on top line revenues. Patients and governments are growing more sensitive to drug pricing. Competition from lower-priced generic drugs has skyrocketed, with such drugs accounting for 58% of prescriptions in 2008, up from 42% in 2000. At the same time, advances in genomics and biomarkers are ushering in a new era of personalized medicine, which will replace the old blockbuster model with drugs targeted to smaller patient populations.
With so much pressure on the top line, it is clear that the bottom line will have to give. But while decreasing the cost of drug development has the potential to generate significant bottom line impact, it is easier said than done.
If anything, the deck seems stacked against the drug industry in this endeavor. The “low-hanging fruit” has been picked, leaving companies to tackle ever more complex diseases. The rise of biologics has led to an increase in manufacturing costs. A risk-averse FDA has heightened safety standards. And the majority of drug companies face front-end costs — sometimes significant — as they in-license their products, large pharmaceutical firms from biotechnology companies, and biotech companies from academia.
There is progress being made. Biotech companies and large pharma firms alike are decreasing their development costs with sophisticated outsourced virtual business models that rely heavily on CROs. Even so, the current project-based CRO model is inefficient and leaves significant bottom-line savings on the table.
Traditional CRO Relationships
CROs emerged in the 1980s, beginning when pharmaceutical companies partnered with universities to gain access to the computing power required to process data from complex clinical trials. Early CROs offered computing resources and the ability to tap into other specialized services on an as-needed basis. Their focus was not cost savings but resource augmentation.
In the mid-1990s, as an explosion of new drugs entered the clinic and pharmaceutical firms faced headcount shortages, CROs began offering full-service outsourcing solutions. Some were global in scale, and many focused on shepherding sponsors through the drug approval process. Concepts like efficiency and cost-savings took center stage. By early 2000, some CROs had taken these principles to the next level by introducing volume discounts, but most CRO-sponsor relationships were still negotiated on a per-project basis — a trend that continues today.
Project-based outsourcing can be inefficient on many levels. Each new project must go through the time-intensive request for proposal (RFP) process, and each time a new CRO is selected, both the CRO team and sponsor team must spend time familiarizing themselves with each other and with the project. A lack of comfort with a new CRO can also tempt sponsors to micromanage the project, which requires almost as much time and resources as if the sponsor had performed the trial in-house.
Furthermore, the project-based model does not align the incentives for the CRO with those of the sponsor. For example, CROs are traditionally paid per site visit and are thus incentivized to increase these visits, which can slow down the clinical trial process in direct opposition to the sponsor’s goals.
In addition to its financial inefficiency, the project-based model can result in inconsistent quality. Quality standards and expertise that vary among CROs make it difficult to compare data across trials.
From Vendor to Partner
As the CRO industry approaches its 30-year anniversary, some organizations are looking for new business models that can improve efficiency and long-term value creation. Rather than functioning as a vendor for a single trial, some CROs are forming clinical delivery alliances that are structured around multi-year partnerships with sponsors, deals in which both parties assume risk and realize rewards, creating value at the corporate level rather than just at the clinical trial level.
These new alliance partnership business models are still emerging, but several have already proven effective in the field.
For example, some large pharmaceutical companies have instituted functional management partnerships, in which a CRO assumes the management and execution of a specific function, like data management or site contracting, across a large portion — if not all — of the company. This may involve shifting certain pharma employees under the CRO with management from a joint oversight committee.
Another business model that appears to work well is a risk-sharing model in which the pharma company scopes all projects on a fixed-fee basis and the CRO receives a bonus if study timelines are met or fee reductions if they are missed.
There are also various scenarios in which a CRO might manage one or two lead compounds through multiple clinical trials, all compounds within a given therapeutic area, or even all compounds within a pipeline. Such arrangements provide not only efficiency-based cost-savings, but also continuity across trials.
Furthermore, since the CRO is contracted to support multiple programs, the project team becomes uniquely incentivized to help the sponsor discover a successful compound or appropriately terminate an unsuccessful compound, as early in the process as possible, to avoid unnecessary effort and cost expenditures. This type of commitment is not inherently incentivized in a traditional sponsor-CRO relationship, in which termination of a program means termination of the CRO’s income.
Regardless of what specific form the clinical alliance partnership takes, its cornerstone should be shared incentives.
CROs should be compensated based on when the sponsor receives value rather than based on workload, such as the number of site visits. Examples of appropriate key milestones or key performance indicators include agreed-upon testing protocols, patient enrollment milestones, locked databases or delivery of final data sets. An important component of this approach is putting the performance metrics into place: the customer pays more if the CRO meets them, less if the CRO does not. Risk sharing provides an incentive to accelerate project schedules yet maintain a high degree of quality.
Making Alliances Functional
As with all novel business models, the proof for clinical delivery alliances lies in the results. One successful case study observed involved a large pharmaceutical company that found its internal site activation functions were inefficient in terms of speed, quality and cost. These functions included site contract management, regulatory document collection and electronic trial master file processing. The sponsor sought to leverage outsourcing in these areas, as they were not core competencies of its clinical development business. As a result of developing a long-term functional alliance with a CRO, the sponsor company realized significant improvements on speed, quality and cost of site activation. Specifically:
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Clinical Alliance Benefits
A primary benefit of a clinical delivery alliance is the ability to decrease R&D costs. This is accomplished through multiple mechanisms, including:
- Leveraging the CRO’s economies of scale across several programs
- Avoiding project-based startup costs as well as those associated with bidding
- Shortening the trial timeline by eliminating the bidding process and thus decreasing total trial costs and realizing profits sooner
- Decreasing costs associated with vendor management as only one CRO must be managed, and a high comfort level driven by a long-term relationship should decrease micromanagement
- Minimizing delays thanks to the availability of a dedicated CRO team that can plan ahead based on its deeper understanding of the sponsor’s pipeline
- More efficient clinical trial conduct ensured by incentivizing the CRO using performance-based pay schedules
Yet there are other benefits to alliance partnerships as well. These include:
- Ensuring consistent quality by staffing trials with dedicated teams that have relevant, on-point therapeutic experience. When a CRO understands the drug developer’s long-term needs, it can allocate resources accordingly. If an alliance includes both a compound for diabetes and one for cardiology, the CRO can have both its endocrinology and cardiovascular teams queued up for quick trial starts. This level of resource commitment — at both the study management and functional levels — ensures that the CRO team is knowledgeable about the sponsor’s programs, culture, preferences and other variables.
- A joint steering committee comprised of senior members from the CRO team and from the customer’s team that ensures not just operational but strategic excellence.
- Increased quality driven by utilizing a transparent and repeatable process across each project in the alliance.
- Consistent and customized reporting that ensures transparency, identifies risk and supports problem resolution.
- An increased ability to meet timelines by utilizing trusted project and alliance management tools.
- Simplified vendor management that eliminates the need to manage multiple CROs.
Partnering Tips
Not all clinical projects are appropriate for alliance partnership business models. Indeed, some trials lend themselves to the standard project-based model. But for sponsors seeking the cost-savings, efficiencies and quality control of a longer-term CRO relationship, bear the following tips in mind when evaluating potential CRO partners:
- Make sure the CRO utilizes a standardized process for managing its drug development obligations. This contributes to expedited clinical trial schedules and ensures quality.
- Seek an alliance partner willing to be creative and flexible with the terms of the business relationship. Partners with rigid business terms do not usually translate into long-term, profitable partnerships. Alliance partnerships are an emerging, evolving business strategy, and your partner must be able to evolve with this new landscape.
- Choose a partner whose senior executives demonstrate a consistent and unwavering level of involvement in the alliance. This ensures that your critical investments get the attention and oversight they deserve.
- Make sure the CRO has experience executing successful clinical delivery alliances. Do not introduce unnecessary risk by using a CRO new to clinical delivery alliances. Demand case studies.
- Confirm the CRO has both the operations and governance staff to manage your projects. This will prevent delays due to staffing.
- Ensure the CRO has the appropriate technologies to enable teams to operate virtually. This delivers consistency that translates into higher quality, lower costs and faster time-to-market.
- Make sure that your chosen partner has the expertise to manage many complex trials in parallel. You should avoid CROs that do not utilize a balanced scorecard of the entire relationship, projects and expected outcomes.
- Verify that the CRO staffs clinical delivery alliances with personnel who have ongoing therapeutic experience. This provides you the benefit of the team’s combined expertise in that area of research.
- Choose an alliance partner that has broad geographical coverage and local teams. This provides the flexibility and regulatory expertise to complete current and future projects anywhere in the world.
- Seek a partner with a transparent management philosophy. The partner should have a well-tested and easy-to-understand strategy for managing the overall clinical delivery alliance.
- Find a CRO that is willing to work with you to create incentives that share risk and motivate both parties to drive to achieve the highest quality outcome.
With these guidelines in mind, sponsors should be able to select a CRO that is capable of thinking strategically and executing a long-term plan over the entire clinical continuum for a given product, for several products in a given indication, or even for a whole pipeline. This long-term partnership incentivizes both the CRO and the sponsor to complete the scope of work efficiently, effectively and to a high level of quality. While these relationships are relatively new to the drug development industry and are thus still evolving, they appear to provide benefits in quality, consistency, efficiency, and the bottom line — far beyond what’s possible in a tactical outsourcing relationship.
Tim Dietlin is vice president of Alliance Development for INC Research Inc. He can be reached at tdietlin@incresearch.com.