Managing the Three Drivers of Risk in Drug Development

As the pharmaceutical industry seeks to transform drug development, there is a growing consensus that traditional cost-cutting and productivity-enhancement methods have largely run their course. There are, however, an array of new business tools and platforms that can help companies leverage their assets more effectively in managing the three principal sources of risk that currently interact to push drug development costs higher. These are:

» Portfolio risk The uncertainty related to accurately assessing a candidate drug's clinical utility and value

» Operational risk The logistical and management challenges involved in delivering robust clinical information about a candidate drug to the right sources, in a timely manner

» Resource risk Exposures arising from imbalances between the fixed-cost base that supports operations and the requirement to deliver clinical results that are useful and relevant to regulatory decision-makers.

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Industry has little choice but to adjust to this segmentation of risk. New development models can help redefine the boundaries within the traditional pharmaceutical business model, and answer the key question of what a pharma company must own to gain competitive advantage, and what portfolio, operational, and resource risks can be hedged through risk-based partnerships.

Through changes that involve more structured access to resources, better deployment of capital as well as development of new monitoring and evaluation systems, companies will find they can shed the bureaucratic, large-scale, fully integrated business model and move to a nimbler, more modular way of leveraging resources to increase the value of their clinical programs and assets.

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Tracing the Taxonomy of Risk

Any risk-based transaction involves evaluating both the upside and the downside variance associated with expected outcomes. Exhibit I illustrates the major challenges and potential solutions for each of the three types of development risk—portfolio, operational, and resource.

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Portfolio risk is the threat to moving assets through proof-of-concept and large Phase III studies, and on to the market in time to address imminent "patent cliffs." Current constraints—including P&L pressure, cuts in development funding, and increasing regulatory and reimbursement expectations coming from the payer community —are yielding more late-stage failures and forcing companies to respond by concentrating risk in a limited number of development programs.

Increasingly, companies are mitigating this risk by building networks of allies with access to both capital and risk-based services. This approach stretches development budgets and releases the latent value in the portfolio without increasing exposure to failure. It provides more "shots on goal" through better focus and shared deployment of resources.

Attempts to mitigate operational risk have traditionally centered around outsourcing isolated elements of the clinical development value chain, such as data management and site startup. This parceled approach has often led to higher costs, a dilution of accountability, and massive inefficiencies throughout the process. Over time, this has institutionalized a risk–reward imbalance between partners that can undermine trust and create a disincentive to "manage out" an unacceptably high variance in operational outcomes.

In spite of the industry's greater focus on planning and budgeting for clinical trials, median time frames and sharp variations in clinical development costs remain unnecessarily high. When pharma was a high-margin business, these variations—a latent exemplar of organizational inefficiency—went largely unaddressed. But they are no longer possible to ignore, as the cost and operational unpredictably of trials are incompatible with today's less profitable business model.

Several recent case studies show that limited control over operational risk significantly impacts clinical trial time lines, costs, and management overhead. Addressing this element of risk is therefore a key element in transforming the clinical development model to reduce time lines and cost variability—and to recapture time-based competitive advantage.

Resource risk arises from the misalignment between fixed, supply-side resources—including large, fully integrated business functions—and highly variable demand-side market fluctuations. Industry leaders are realizing the importance of using fewer fixed assets, and transforming fixed costs into variable costs. This involves moving specific parts of the business to a more differentiated base where clear lines of responsibility serves as a way to manage market volatility.

One emerging trend is for pharma leaders to build networks of allied organizations to absorb and integrate potential non-core functions, such as data management and sales forces. By transforming fixed costs in this manner, companies will find that they can limit exposure to redundant cost risks and respond rapidly in an environment in which change is a constant factor.

Although not insubstantial, direct cost savings from addressing operational risk are small when set against indirect reductions in overhead, recaptured opportunity cost and time based competitive advantage in reaching the market faster. Increased speed to market can yield overall savings of more than $1 billion, for a mid-size development portfolio—not a trivial sum.

Root of the Problem: One-Off Outsourcing

To understand the root causes of operational risk, Quintiles Consulting conducted interviews with cross-functional development teams at several companies. The survey found that respondents were outsourcing clinical development tasks in piecemeal fashion. The companies awarded tactical responsibilities in the clinical development value chain (such as data management or monitoring) to a range of vendors through a procurement process designed to minimize the cost of each step. After that, sponsors tended to recognize and pay for value based on completed "inputs" to the development process, such as the number of monitor visits or number of sites initiated.

In several companies, the outsourcing process has evolved to cope with the disparate needs of different functions, geographies, therapeutic areas, and external service providers. In these cases, there is no longer a single way of doing business. Case studies show that many pharma organizations are structured to actively encourage up to 100 percent management overhead on outsourced trials, with functions and roles being duplicated depending on the composition of the various internal and external teams.

Analysis shows that much of the behavior that drives this inefficiency is caused by a perceived risk–reward imbalance in these relationships, which reinforces a lack of trust and consequently leads to a high burden of internal oversight. This vicious cycle can institutionalize and perpetuate inefficiencies for the contracting company.

The Solution: Better Focus on Outcomes

Industry is exploring new approaches that reengineer the risk–reward imbalance through better alignment of incentives, that encourage a focus on outcomes-based metrics. These are more effective vehicles for delivery due to three factors: First, they increase the accountability of the service provider for solving operational problems, rather than simply taking direction from the sponsor; second, they encourage a deeper exploration of design and operational feasibility between the service provider and the sponsor prior to starting the trial; and third, they rebalance the risk inequity by imposing real penalties for late delivery of agreed outcomes.

Under outcomes-based pricing and management models, service providers promise discrete outcomes in the form of agreed-upon units of measurement (such as a randomized patient), with minimal sponsor oversight. This "risk trade" transaction model radically changes pricing, moving away from costs based on a unit activity (such as a visit) and associated change orders, and toward a price to adopt the risk of guaranteeing an outcome (such as providing an FDA-auditable data set by a specific date).

Partnerships to Control Risk Exposures

As part of the "risk trade" transaction, service providers must agree on a more equitable level of control over the design and execution of a trial, sufficient to keep the risk to an acceptable level for both parties. This usually involves a greater degree of integration in planning and design activities such as feasibility and site selection.

As yet, no Big Pharma company has solved the problem of owning the entire risk in the value chain by working in alliance with service providers in that chain. Recently, however, several companies have launched transformation initiatives, some involving relatively radical departures like outcomes guarantees. While most of these initiatives are still in the pilot stage or apply only to a small part of the business, their rationale is already clear:

» To transform the rules of the game for drug development in order to unlock the latent value in the portfolio within fixed or shrinking budgets and development organizations

» To determine the optimal unit of outsourced work, who is responsible and accountable for delivering it, and what degree of autonomy/oversight is required to balance efficiency, control and risk. If the ultimate deliverable is an agreed outcome at a specific time, the new operating principles shift variable price inputs to the trial to fixed price outcomes, thereby redefining the answers to these questions.

» To mitigate the inherent risks in outcomes-based models. In order to do this, the traditional role of the sponsor and service provider will need to be explored. Changes will likely cover variables such as site selection, start-up/close-out timeliness, monitoring efficiency, and execution flexibility. Contracts will likely be based on the time value of outcomes.

Insights from the successes and failures of these pilot projects will lead to refinement of new operating models and usher in a new paradigm for drug development. In an era of constant change, those organizations that can nimbly manage the three dimensions of development risk (portfolio, operational and resource) will emerge as winners. The key question facing development leadership teams is how to rebalance risk to meet this challenge and ensure a project's viability and competitiveness.

Adrian McKemey is a Managing Director with Quintiles Consulting and leads the Product Development and Commercialization Practice. Badhri Srinivasan leads the Enterprise Transformation Unit, an organization dedicated to mining the experiences accumulated over 10,000 clinical trials. Peter Payne leads efforts on assessing, mitigating and pricing asset and clinical development risk to support risk sharing initiatives at the portfolio, operational and resource level.