The second installation in our series on contract management research published by MBA students from my online Contract Management class is by Julia Condit, and focuses on the challenges of managing contracts in the pharmaceutical industry. As pharmaceutical companies go through the process of clinical trials, managing relationships is fraught with risk, and Julie does a great job of exploring how to manage risks through improved contract management.
There is no more appropriate category of contract to discuss in terms of risk management than that in an industry that is already very high risk: pharmaceutical development. Drug discovery and development is a phenomenally arduous, expensive process that rarely results in a successful product launch. An aspect of drug development that has risen in popularity is having a contract research organization (CRO) conduct the clinical trials rather than the pharmaceutical or biotech company conducting them in house. The outsourcing allows the sponsor pharma or biotech company to save money and resources while reaping the benefits of a CRO’s expertise in conducting efficient clinical trials. However, hiring a contractor for clinical development comes with plenty of risks for both the sponsor and the CRO.
The main goal of a sponsor pharmaceutical company is to complete all phases of clinical development as quickly as possible in order to submit a New Drug Application (NDA) to the FDA, receive approval for the new drug, and launch their new product before any competitors release similar products. Pharma companies are able to save time and money by outsourcing to the experts, but this outsourcing comes with several risks.
The first of these risks is the potential failure of the CRO to produce clinical data that is of acceptable quality to the FDA (Baguley 2016). The rejection of an NDA by the FDA due to poor quality data results in a massive amount of rework for the CRO, which adds more time and expense for the sponsor company. The additional time and cost to redo some or all aspects of the clinical research for a specific drug also delay the product launch, which can result in missing the first to market opportunity and potential loss of sales. The idea of a possible delay in commercialization and its accompanying financial losses puts pressure on the sponsor’s contract managers to select a CRO that is most likely to meet the sponsor’s expectations and include explicit expectations of the agreed upon time frame and data quality standards in the contract. To further mitigate the risk, these contracts will frequently include a liability clause detailing financial consequences for the CRO if they should have to repeat unsatisfactory work. A similar risk for the sponsor is the missing of study milestones by the CRO. Any delays on the CRO’s end will also result in the same consequences for the sponsor and the anticipated drug launch. Contract managers and project managers from both entities will work to lay out a clear scope and timeline in the contract and push the project along when possible delays are spotted on the horizon.
Although it is extremely unlikely, outsourcing any stage of drug development to a contracting organization carries the risk of intellectual property exposure (Baguley 2016). Leakage of IP could mean huge losses for the company. It is important for the sponsor to include clear two-way confidentiality agreements and state full ownership of all IP generated during the course of the project in contracts with CROs. Sponsors will often add a financial penalty for a CRO’s violation of the confidentiality agreement as well. However, it is just as important for sponsors to carefully choose CROs they trust to properly handle their IP, which highlights the advantages of building a lasting relationship with a short list of CROs with proven track records (Lowman 2012).
Another unlikely risk for the sponsor that carries disastrous potential consequences is outsourcing clinical trials, knowingly or unknowingly, to a CRO that does not comply with the US Foreign Corrupt Practices Act (1977) while conducting trials internationally (von Rickenbach 2011). If the FDA were to find evidence of illegal practices or bribery in a CRO’s global clinical trials, the sponsor company could also face federal penalties on top of having their drug’s development come to a sudden halt. Mitigation of such a risk can be done by contractually requiring the CRO to comply with the sponsor company’s FCPA and anti-bribery policy, as well as contractually requiring that the CRO provide training to their employees about compliance. The sponsor company can reserve the right to audit the CRO for FCPA compliance and should not hesitate to exercise that right. The contract should then logically allow for the sponsor to terminate the agreement if the CRO violates these terms.
It is not unexpected that a contract business relationship comes with a host of financial risks for the both parties. As the study moves along, it can often change scope or require additional, unforeseen activities that require the CRO to request changes to the budget (Baguley 2016). If the sponsor approves these budget changes, they now must pay fees they did not originally plan for. If the sponsor does not approve the budget changes, the CRO may be forced to fund the work themselves. Studies can also require large investments on the front end by the CRO, so delayed or nonpayment of fees can become very problematic. Mitigation of such risks begins with the type of contract the parties sign. With a fixed-price contract, a CRO is unmotivated to request change orders as it is very unlikely they will be approved. These contracts are typically favorable to the sponsor but less appealing to the contractor. Unit-price contracts are much more appealing to the CRO as they allow the CRO to charge a set fee for each deliverable. The CRO’s ability to have more control over managing the risk of change orders is favorable to the CRO, while also providing the appeal to the sponsor of assumed transparency in the CRO’s pricing. A third, less common option is risk-sharing contracts. Under this pricing structure, the sponsor awards the CRO an equity stake in their company or a small percentage of the product’s sales in addition to a partial payment for the CRO’s services. This transforms the CRO into both a service provider and a product business, then resulting in the CRO now becoming a competitor to some of its other clients. Although appealing in some ways, it is a higher risk style of contract for the CRO and requires a larger initial investment by the CRO to fund the study, so it is not a frequently used contract type.
The next step in managing the risks associated with unexpected study costs is laying out a detailed statement of work. The overall project scope and budget should be noted, along with the specific services the CRO is to provide and the timeline for these services (Baguley 2016). The CRO’s deliverables are often divided up into milestones. The established standard for conducting quality trials with the fewest unexpected costs as possible places a heavy emphasis on good communication between the sponsor and the CRO (Henderson 2013). Communication is important throughout the project, but particularly vital in the planning stages. The two parties should have a frank and open dialogue regarding study budget and possible issues that then continues into the project to efficiently address potential problems on the horizon. The efficiency is maximized with a stable partner infrastructure built over time with a CRO that the sponsor works well with and has used repeatedly. To minimize the CRO’s financial risk, the contract should also include a payment from the sponsor up front to avoid having the CRO use their own cash to begin funding the project (Baguley 2016).
As many clinical trials are conducted globally, the sponsor and the CRO must stay aware of exchange rates. The fluctuation of exchange rates makes international payments unpredictable and can end up favoring one party over the other. A predetermined exchange rate for each country of operation should be agreed to by both parties prior to signing any contract for a global project (Baguley 2016).
One of the greatest risks that a contract research organization faces is the potential for study cancellation. Study cancellation is rare but not impossible. A study can be terminated for unexpected safety or efficacy issues related to the product that are uncovered during the trials (Baguley 2016). A competing product launch can also impact the future of a study drug and if the outlook is bleak enough, the sponsor may choose to terminate the clinical trials and scrap the product. Regulatory changes can have an impact as well. Changes to government regulations in any of the major areas of operation that impact either the study itself or the prospects of the product can be damaging enough that the sponsor must cancel the study. A CRO can protect itself as well as possible by ensuring that a study termination is required to follow a clear procedure, typically including a 90-day notice for properly winding down the study.
Before the details of the contract are negotiated, the CRO must first win the sponsor’s business. The pharmaceutical development industry is growing quickly and becoming more competitive than ever. CROs are under increased pressure to provide more innovative services to stay competitive and win contracts. Some have added data analytics systems or new project management technologies to their portfolios (Hack et al. 2017). Others have made acquisitions to fill in the gaps in their offerings so that they are able to provide a full range of services to their customers and ideally keep those customers long term.
The elephant risk in the room that the sponsor and CRO both share is the potential for damages caused by the study drug. This is very rare but can involve expensive court battles or multimillion-dollar settlements. The contract’s liability section will typically contain clauses regarding damages done to study subjects by the drug (Baguley 2016). The CRO’s contract manager will ensure that the pharmaceutical company is bound to indemnify for unlimited costs associated with settlement, including legal costs, and that the CRO and all other sub-contractors are not liable for any third-party claims.
The key to cost effective risk mitigation for pharmaceutical companies and contract research organizations is the cultivation of stable, long-term relationships. Pharmaceutical companies can save huge sums of money on having to research potential vendors’ successfully completed trials, data quality, compliance to FDA and FCPA regulations, involvement in former lawsuits, etc. by having a short list of pre-approved vendors (Baguley 2016). Since pharmaceutical companies and CROs both tend to specialize in certain therapeutic areas, the sponsor companies will sometimes find a CRO they like who occupies the same therapeutic areas and has a refined expertise in conducting those clinical trials. The CRO reaps the benefits of repeat business and reduced competition while the pharmaceutical company experiences the time and cost savings of familiarity with the CRO’s pricing structure, communication methods, and quality standards. Some CROs have enjoyed moving to a fixed price contract type with their long-term partners (von Rickenbach 2011). Under these contracts, the CRO has the freedom to use their therapeutic expertise to best decide how to accomplish the study goals with the fixed sum and the sponsor is happy to pay the CRO a fair price for clinical trials they know will be conducted efficiently. The relationship also builds stronger trust between the two parties over time, giving the pharmaceutical company increased confidence placing their precious and confidential intellectual property into another entity’s hands. The synergistic effects of the relationship are realized when the sponsor and vendor are able to keep an open dialogue about the CRO’s performance and use shared key performance indicators (Jones and Minor 2010). An increase in familiarity with each other’s operations leads to better communication and therefore higher quality data with fewer unexpected costs.
Contract research in the high-risk industry of pharmaceutical development naturally comes with a host of risks for the pharmaceutical/biotech company and the contract research organization. There are ways for each party to manage these risks when negotiating the project contract. However, the practice of forming a long-lasting strategic partnership between a sponsor and a CRO pays dividends in risk mitigation.
- Baguley, Jane, Jane E. Winters, and Pharmaceutical Contract Management Groupages. Outsourcing Clinical Development: Strategies for Working with CROs and Other Partners. Routledge, Abingdon, Oxon, 2016, doi:10.4324/9781315599250.
- Henderson, Lisa. “The State of CRO and Sponsor Relationships.”Applied Clinical Trials, vol. 22, no. 10, 2013, pp. 26-29.
- Lowman, M., et al. “Innovation Risks of Outsourcing in Pharmaceutical New Product Development.” Technovation, vol. 32, no. 2, 2012, pp. 99-109.
- Hack, Volker, and Denise Sackner. “The Changing Role of the CRO: Impact on Project Management: As More Strategic Partnerships Emerge, Demands on CROs have Intensified–Resulting in the Need for Next-Level Competencies for Project Managers.” Applied Clinical Trials, vol. 26, no. 6, 2017, pp. 43.
- Jones, Janet, and Michael Minor. “New, Strategic Outsourcing Models to Meet Changing Clinical Development Needs.” Perspectives in Clinical Research, vol. 1, no. 2, 2010, pp. 76-79.
- von Rickenbach, Josef. “Strategic Partnerships Evolve: Greater Product Value and Innovation Accomplished with Sponsor-Service Relationships.(Partnerships in Clinical Trials).” Applied Clinical Trials, vol. 20, no. 3, 2011, pp. S16.