risk sharing in drug development richard malcolm, ph.d. ceo, acurian september 15, 2011 | biocom

Risk Sharing inDrug Development

Richard Malcolm, Ph.D.CEO, Acurian

September 15, 2011 | BIOCOM

Risk Sharing Defined

• A method in which the cost of the consequences of a risk is distributed among several participants (e.g. syndication)

• Business management method whereby the financial consequences of a risk are distributed among both vendor and client

2

Objectives of Risk Sharing

• Ensure all parties have an aligned interest to the ultimate success of a venture– Shared accountability

• Put the vendor(s) “in the boat” with the sponsor

3

General Background

• First appeared in centralized patient recruitment in the 1990s

• Soon disappeared due to declining demand • Made a comeback in past several years • Increasingly common requirement in patient

recruitment & retention contracts • Applicable to virtually any drug development service,

not just patient recruitment

4

Types of Risk Sharing

• None• Partial• Complete• Total

5

Patient Recruitment Example

• Phase IIb study of drug X in generalized anxiety disorder

• Recruitment vendors receive RFP from drug company to provide recruitment/enrollment services

• Services requested include mix of radio/TV ads, internet recruiting & direct mail

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None: Time & Materials

• Time (people)– Project manager $/hour– Web developer $/hour– Creative director $/hour

• Materials (things)– TV production $/commercial– TV airtime $/station/market– Call center $/call– Printing & postage $/letter

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Buyer pays for all fees

regardless of results

Buyer pays for all fees

regardless of results

RISK

Buyer Seller

Partial: Non-Pass Through

• Time (people)– Project manager $/hour– Web developer Results-based– Creative director Results-based

• Materials (things)– TV production $/commercial– TV airtime $/station/market– Call center $/call– Printing & postage $/letter

8

Buyer pays for all pass

through costs

Buyer pays for all pass

through costs

Buyer pays for some costs based upon

results

Buyer pays for some costs based upon

results

RISK

Buyer Seller

Complete: Non-Pass Through

• Time (people)– Project manager Results-based– Web developer Results-based– Creative director Results-based

• Materials (things)– TV production $/commercial– TV airtime $/station/market– Call center $/call– Printing & postage $/letter

9

Buyer pays for all pass

through costs

Buyer pays for all pass

through costs

Vendor compensated for staff only upon delivery

of results

Vendor compensated for staff only upon delivery

of results

Buyer pays for all pass

through costs

Buyer pays for all pass

through costs

RISK

Buyer Seller

Total: Price Per Unit

• Time (people)– Project manager Results-based – Web developer Results-based – Creative director Results-based

• Materials (things)– TV production Results-based – TV airtime Results-based – Call center Results-based – Printing & postage Results-based

10

Buyer pays no fees, only for

units produced

based on pre-negotiated unit price

Buyer pays no fees, only for

units produced

based on pre-negotiated unit price

RISK

Buyer Seller

Payment Markers (Units)

• For this metric to be successful, it must: represent a reasonable level of vendor performance be considered as a fair assessment of performance (by sponsor &

vendor alike)

• Key patient recruitment agreement metrics: pre-screened referral screened referral randomized subject

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None: Costing Example • Time (people)

– Project manager $200/hour x 100 hours = $20,000 – Web developer $90/hour x 100 hours = $9,000– Creative director $150/hour x 100 hours = $15,000

TOTAL FOR TIME = $44,000

• Materials (things)– TV production $15,000/commercial = $15,000– TV airtime $40,000/week x 6 weeks = $240,000– Call center $15/call x 600 calls = $9,000– Printing & postage $1.75/letter x 100,000 letters = $175,000

TOTAL FOR MATERIALS = $439,000

Vendor projects that these costs will result in 100 randomized patients

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So….No Risk Share Means:TOTAL FOR TIME = $44,000+ TOTAL FOR MATERIALS = $439,000 = $483,000 paid regardless of vendor results

Vendor has no fees tied to results. Buyer bears 100% of the risk.

Cost per patient depends on vendor’s performance against $483,000. For example:

100 patients randomized Sponsor pays $4,830/patient50 patients randomized Sponsor pays $9,660/patient10 patients randomized Sponsor pays $48,300/patient

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Partial: Costing Example • Time (people)

– Project manager $200/hour x 100 hours = $20,000 – Web developer $90/hour x 100 hours = Tied to results– Creative director $150/hour x 100 hours = Tied to results

TOTAL = $20,000 + $24,000 if commitments are met

• Materials (things)– TV production $15,000/commercial = $15,000– TV airtime $40,000/week x 6 weeks = $240,000– Call center $15/call x 600 calls = $9,000– Printing & postage $1.75/letter x 100,000 letters = $175,000

TOTAL FOR MATERIALS = $439,000 Vendor projects that these costs will result in 100 randomized patients

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So….Partial Risk Share Means:TOTAL FOR TIME = $20,000 + $24,000 if 100 rands delivered+ TOTAL FOR MATERIALS = $439,000 = $459,000 paid even if vendor fails / $483,000 if vendor succeeds

Vendor has only $24,000 tied to results. Buyer bears 95% of the risk.

Cost per patient depends on vendor’s performance against $459,000. Vendor receives +$24,000 upon delivery of 100 rands. For example:

100 patients randomized Sponsor pays $4,830/patient50 patients randomized Sponsor pays $9,060/patient10 patients randomized Sponsor pays $45,300/patient

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Complete: Costing Example • Time (people)

– Project manager $200/hour x 100 hours = Tied to results– Web developer $90/hour x 100 hours = Tied to results– Creative director $150/hour x 100 hours = Tied to results

TOTAL FOR TIME = $44,000 in staff fees tied to results

• Materials (things)– TV production $15,000/commercial = $15,000– TV airtime $40,000/week x 6 weeks = $240,000– Call center $15/call x 600 calls = $9,000– Printing & postage $1.75/letter x 100,000 letters = $175,000

TOTAL FOR MATERIALS = $439,000

Vendor projects that these costs will result in 100 randomized patients

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So….Complete Share Means:TOTAL FOR TIME = $0 fixed. $44,000 tied to delivery of 100 rnads+ TOTAL FOR MATERIALS = $439,000 = $439,000 paid even if vendor fails / $483,000 if vendor succeeds

Vendor has only $44,000 Results-based. Buyer bears 90% of the risk.

Cost per patient depends on vendor’s performance against $439,000. Vendor receives +$44,000 upon delivery of 100 rands. For example:

100 patients randomized Sponsor pays $4,830/patient10 patients randomized Sponsor pays $43,900/patient

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Total: Costing Example • Time (people)

– Project manager $200/hour x 100 hours = $20,000 – Web developer $90/hour x 100 hours = $9,000– Creative director $150/hour x 100 hours = $15,000

TOTAL FOR TIME = $44,000

• Materials (things)– TV production $15,000/commercial = $15,000– TV airtime $40,000/week x 6 weeks = $240,000– Call center $15/call x 600 calls = $9,000– Printing & postage $1.75/letter x 100,000 letters = $175,000

TOTAL FOR MATERIALS = $439,000

Vendor projects that these costs will result in 100 randomized patients - payment is tied to projected outcome rather than any activity.

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So….Total Risk Share Means:TOTAL FOR TIME = $44,000+ TOTAL FOR MATERIALS = $439,000 = $483,000

$483,000 / 100 randomizations = $4,830 per patient

Buyer pays a fixed $4,830 for 1-100 patients. No other fees may be invoiced.

Invoicing occurs only on randomization.

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Comparison of Each Risk Share

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Risk to Vendor Price Type Minimum Cost Per Patient* (100 patients)

Maximum Cost Per Patient *

(1 patient)

None(T&M)

0% Variable $4,830 $483,000

Partial 5% Variable $4,830 $459,000

Complete 10% Variable $4,830 $439,000

Total 100% Fixed $4,830 $4,830

*Assuming full budget spent

Penalties & Incentives

• Risk-share contracts can also contain special performance provisions that govern budget variance

• Carrot: Vendor has monetary incentive to out perform contract terms

• Stick: Vendor has monetary punishment if it underperforms contract terms

• Risk is generally tilted toward the vendor as the monetary penalties are harder to absorb

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Milestones or Units?

• Will achieving the payment markers constitute success?

• Is there a time requirement (e.g. Do patients need to be enrolled in a specific time?)

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Changes in Pricing Assumptions

• Protocol amendment• Drug availability • Number of active sites • Early termination of contract

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• Vendor bid strategy is to make per patient price appear lower, but consider how each bidder ascertains their per patient price in a 1,000-person study:

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The “All Patients” Trick

• Two specialty recruitment vendors bidding against each other• One vendor uses a partial risk share, the other uses a total risk share• The partial risk share budget is based on a prediction while the total risk share is a contract that

is governed by the vendor meeting performance metrics (randomized patients)

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The “Risk Share” Trick

Conclusions

• Risk sharing can be beneficial to both sponsors & vendors• Terms, conditions & units need to be well thought out • Patient enrollment contracts should consider both vendor

costs & pass-through (to be apples-to-apples)• Consideration should be given to impact of changes in

conditions or terms• Results-based pricing greatly improves outcomes for sponsors

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Thank you.