LIBRARY OF THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY Dewey ALFRED P. SLOAN SCHOOL OF MANAGEMENT R&D SYSTEMS DYNAMICS IN FEDERALLY REGULATED INDUSTRIES Jack W. Blanchard February 1973 * #^6- 73 MASSACHUSETTS INSTITUTE OF TECHNOLOGY 50 MEMORIAL DRIVE CAMBRIDGE, MASSACHUSETTS 02139 ' MASS. INST. TECH. NOV 261973 DEWEY LIBRARY R&D SYSTEMS DYNAMICS IN FEDERALLY REGULATED INDUSTRIES Jack W. Blanchard February 1973 #^6-73 Research was conducted while the author was a Research Affiliate at the Alfred P. Sloan School of Managenaent, MIT, from 1971 to 1972. He is presently with the Special Projects Staff, Office of Research, Environmental Protection Agency, "Washington, DC 20460 JAr^ M. I. 1. 28 1974 LIbrtARIES 1-A ABSTRACT Historical examples of the deleterious effects of hazardous drugs were described. They were shown to lead to federal legislation controlling R&D in the pharmaceutical industry. Safety evaluation R&D extensively utilizes standardized toxicological methodology. Because of this, independent contract research laboratories have been able to provide professional services in standardized toxicology to the pharmaceutical industry. A case interview study employing prepared questionnaire forms was conducted, R&D managers in both the pharmaceutical companies and the independent contract research laboratories were interviewed in order to compare the management of standardized toxicological methodology as it applies to safety evaluation. The results form the basis as summarized in of standardized toxicological studies for determining the safety of drugs. These data, Food and Drug Administration order to determine product compliance with federal law. A model the interrelationship between the FDA, the pharmaceutical com- petition form, are evaluated by the in of pany, the independent contract research laboratory and the consumer, was presented as existing through information feedback systems based on safety evaluation R&D. This model was used to explain past R&D efforts associated with cause and effect relationships involving product safety associated with drugs. The management R&D involving product compliance is shown It serves to introduce a new factor of uncertainty associated with R&D, which is unique to industries whose products are regulated by federal law. of for the first time in this study. (,71j543 1-B Congressional control in the food and drug industry began in 1906, with the enactment of the Federal Food and Drugs Act. commerce federal precedence in regulating states and between the of these US and foreign countries. It established materials among This Act was the first to establish federal authority in the protection of the public health from the illicit, In 1938, it harmful or injurious effects Congress repealed the of foods and drugs. Federal Food and Drugs Act when proved inadequate in protecting public health. spread outbreak of deaths in the US was found purported drug, the Elixir of Sulfanilimide (1). to During 1937, a widebe attributable The Act was then replaced by the Federal Food, Drug and Cosmetic Act of 1938. effect of this new^ legislation was to outline specific in providing for the protection of the consumer from adulterated and In the case of the Act specifically stated that no drug could be introduced into interstate commerce cation summarizing its that drug. The federal controls misbranded foods, drugs, drug devices and cosmetics. new drugs, to a without the manufacturer submitting an appli- R&D program which established the safety of In addition, information about its physical and chemical characteristics, manufacturing processes, labeling and a sample of the drug as well, was required by the provisions of the Act. The Federal Food, Drug and Cosmetic Act was amended in sub- sequent years to provide for additional regulatory control over foods and color additives. These amendments ments specifically addressed 1961, R&D in the repeal of the old require- substances and their end-use. however, another episode occurred involving drugs similar which resulted 1938. to these instituted additional In to that Federal Food and Drugs Act in In this case, the tragic events involving the use of thalidomide by expectant mothers resulted in a world-wide outbreak of phocomelia in the neonatal population (2). Instead of repeal, however, the Federal Food Drug and Cosmetic Act was amended in 1962 in order to prevent the re-occurrence of the thalidomide episode involving other drugs. It directed that pharnnaceutical companies, not only establish safety, but effectiveness and reliability of the drug as well. ment provided In addition, the for the standardization of drug nannes, amend- control on adver- tisements, factory inspection and effective control over state laws and finally, registration of drug manufacturing establishments and patent In essence, federal regulatory control information of drugs. tended over the entire range of R&D was ex- and marketing activities of the drug industry. The relationship between industry is, the regulatory The legal therefore, both legal and scientific. Food and Drugs Act for the Federal of 1906, Federal Food, Drug and Cosmetic Act regulate interstate to agency and the pharmaceutical commerce. and replacement, the was Congressional authority of 1938, The its justification failure to protect public health by simple legislation resulted in the detailed imposition of specific scientific met by pharmaceutical requirements as a part of the companies prior commercialization of their products. to the law which had Regulatory control over drugs process of petitioning. companies and in overall order to This interaction takes place between pharmaceutical comprised R&D program of two separate application, or the IND. IND for more extensive animal petition, volunteers. This petition process. it sequences which correspond The criteria. R&D programs the Basically, the carried out by the pharmaceutical connpany meet federal regulatory the basic introductory new drug maintained through the procedural Food and Drug Administration (FDA). the petition process is to the is be to If and the is first step known as FDA summarizes the investigational approves and registers allows interstate shipment of the experimental drug is the studies and for clinical research using second sequence of the R&D program At this time the candidate drug is not human in the available for -3- Once for sale. summarized NDA is the clinical in a research has been completed, the data are new drug application petition, approved by the FDA, the drug commerce. interstate FDA gational new drug mits) Clinical pharmacology (Phases Clinical trials (Phase to) New drug application to the Commercialization I Investi- (which per- and (leads II) (which results III) FDA the outlined below: is (w^hich results in) application to the If Safety evaluation (leads to) in experimental animals NDA. then allowed to be sold via is The procedural process New drug development or the in) (which permits) of the drug. New drug development and safety evaluation research in experi- mental animals rely extensively on toxicology. The applicability of toxicology to safety evaluation R&JD has been substantiated over the years by several significant publications. published by the technical staff of the FDA described in that publication had been in The most influential in 1959 (3). common use was The methods by Toxicologists prior to 1959, however. Toxicology is the scientific discipline toxic characteristics of chemicals. devoted The degree study of the to the of toxicity is directly related to the dose of the chemical given, the duration of its exposure, the route of its administration and the species of chemical tion is R&D, A Toxicology investigated. is the animal essence in which the of safety evalua- since the reciprocal of toxicity is safety. series of publications by Weil and the of the National Academy Food Protection Committee of Sciences contributed information concerning the effectiveness of toxicological nnethods in the safety evaluation of chemicals (4, 5, 6), They dealt with substantially similar those published in 1959 by the FDA. Weil suggested methods as that in feeding -4- some streamlining studies using rats, of long term studies (two years) could be made, based on predictions utilizing the results of short The National Academy (single exposure and three months) studies. of Sciences found that on the basis of 10 term years experience, short term and long term toxicological studies proved to be excellent indices in establishing the safety of drugs, economic poisons, food chemicals and cosmetics. The most important impact of these publications was their stan- dardization of toxicological methodology in safety evaluation Regardless of the chemical, R&D. whether drug, food additive, economic poison or cosmetic, the safe toxicological methods are employed in The extensive use determining their safety. of toxicology in the safety of chemicals was broadly incorporated Drug and Cosmetic Act to specifically Federal Food, provide data necessary for establishing the safety of chennicals the Act the case of pharmaceutical companies, into the determining was responsible safety evaluation for. In R&D programs are, therefore, based extensively on toxicological methodology. Because evaluation their of the of toxicological methodology in safety R&D, independent contract research laboratories have developed own expertise in this type of services widespread use to R&D in providing these services to activity. manufacturers of They have been able many manufacturers engaged to provide their different chemicals. Their existence has provided manufacturers of drugs, food additives, economic poisons and cosmetics greater flexibility in the management of their safety evaluation R&D programs. The financial commitment cology is difficult to analyze. tion use. program depends on In addition, of pharmaceutical companies in toxi- The extensiveness of the safety evalua- the candidate drug chemical and its intended expenditures assigned to the development of a parti- cular drug are often not available, since the length of the R&D program generally extends from R&D Total 3 to 5 years prior NDA to approval by the FDA. costs are sometimes available, however, for a drug or a This category of drugs. is not due to the intransigence of pharmaceutical companies, but simply because their accounting procedures are based on total R&D budgets, rather than costs of individual studies in various sequences in the R&D program. This is due to the fact that pharma- ceutical companies maintain stable research facilities and personnel. In such cases, the number of individual studies performed and candi- date drug chemicals investigated each year varies. The come latest conaplete financial data available for the from the Pharmaceutical Manufacturers Association (PMA), their trade organization. billion, They indicate $557 million were allocated characterization shows that $44. safety and toxicology. that is drug industry R&D 9 that in 1969, to total R&D on sales of $6. 2Z5 in the US (7). Further million were spent on in-house animal expenditures assigned to contract research, research done in independent contract research laboratories, amoun- ted to $9. 7 million. Since most of the contract research is in animal safety and toxicology, these expenditures represented an extensive financial commitment in safety evaluation R&D in 1969. Unfortunately, the no longer includes these figures in their annual statistical financial data for the pharmaceutical industry. however, that in 1971, R&D R&D methodology, and pharmaceutical industry. The basis establishment of safety. tries regulated by federal law, in the of They have estimated, (8). has been shown, therefore, that the basis of safety evaluation is toxicological is the summary there would be approxinnately $7. 592 billion in sales with $681 naillion allocated to It PMA form of toxicological porting a grow^ing number of it is extensively financed by the compliance with federal law Because of its importance to services in safety evaluation those indus- R&D, generally methodology, have formed the basis of sup- of independent contract research laboratories. The Problem The extensive financial commitment required safety evaluation R&D programs maintain connplex to by pharmaceutical companies has re- sulted in their development of two separate research capabilities. combine to offer them financial and technical advantages. These Basically, in-house research facilities are most commonplace, and are relied on by many companies. However, depending on the company, the use of independent contract research laboratories as an adjunct, or replace- ment has become a necessity. of in-house capabilities The independent contract research laboratories have developed their expertise to simul- taneously serve clients in other industries which also require safety evaluation R&D in order to commercialize their products. The presence, therefore, involved in safety evaluation of two separate R&D, interview study in this field of facilities, both offers a unique opportunity for a case R&D these research facilities reveals research A nnanagenaent. many close inspection of similarities as well as some unique differences. Similarities exist between both facilities in the scientific aspect of safety evaluation R&D. These are due to the standardized toxicological studies on which the concept of safety is based. of Therefore, regardless whether the studies are performed in the pharmaceutical conapany research laboratory, or in the independent contract research laboratory, they will require almost identical protocols. Differences exist in the financial aspect of safety evaluation tween both facilities. The financial support laboratory is budgetary. of the is That is, research company income derived from product of the is R&D be- pharmaceutical research funded as a certain percent sales. The research facility maintained regardless of the number of toxicological studies, or number of candidate drug chemicals. The financial support of the independent contract research laboratory, however, is based on the services it performs for its clients. Its income is derived strictly from professional ser- vices either to the private sector, or to governmental agencies. research maintained by the independent contract research labora- facility tory is a direct function of the income it provides, and The its size is it garners through the services directly related to this income. Managerial techniques will be investigated as they exist within: A) different pharmaceutical research laboratories, B) different inde- pendent contract research laboratories, and C) between pharmaceutical company, and independent contract, research laboratories. The applicability formance in the of these relationships relative to: A) past per- pharmaceutical industry, and B) effect of federal regu- latory controls involving R&D requirements on product safety with respect to drugs, will be discussed. managerial R&D skills unique to R&D In addition, the development of nnanagement associated with federally regulated industries will be presented. Materials and Methods Directors of Safety were interviewed. Evaluation R&D of four pharmaceutical companies Pharmaceutical companies were selected which main- tained annual worldwide sales in excess of $100 million. relatively snaall annual budget for contract research. designated Company A and Company B. operate a These have been The remaining two operate a These have been desig- relatively large annual budget for contract research. nated Two Company C and Company D. Research Directors were interviewed. different. of four independent contract The organizational structure One was independently owned and the original owner and founder. in preclinical toxicology to It still of research laboratories each laboratory was under the direction of had been organized to pharmaceutical companies in provide services 1961, when these subsequently becanne an integral requirement of the new drug amendments to the Federal Food, Drug and Cosmetic Act in 1962. For purposes of -8identification, are it Firm has been labelled The remaining three firms I. all subsidiaries of large organizations. have left after taking their equity. The original entrepreneurs Professional managers are presently- administering these firms. Firm laboratory in which there no interaction between the management of the is II is an international contract research laboratory and the parent orgainzation. Firm III is a national independent contract research laboratory, which is a subsidiary of an international professional service organization. There is no influence from the parent organization in the management of the research laboratory. offered by Firm III, parent organization. however, do contribute Firm IV is a national to the total Services services of the independent contract research laboratory which has recently been acquired and reorganized. been in operation during the ments by the FDA in 1962, development of more It had stringent safety require- and had moved into the area of providing ser- vices in preclinical toxicology at that time. The management of Firm had previously been under stringent control by their former owners. new ownership, however, All interviews it is IV Under operating with a greater degree of autonomy. were conducted personally. A standardized question- naire form was used for the survey of the Directors of Safety Evaluation R&D at the larly, pharmaceutical companies, and appears in Appendix a standardized questionnaire form was used Simi- for the survey of the Directors of the independent contract research laboratories. naire form appears in Appendix I. Their question- II. Results I. Pharmaceutical Companies: A. Position. Experience and Educational Backg round There were study. All five professionals were Directors Corresponds to who participated of Safety Evaluation. (2)'^ in the case interview Their responsibilities question number in the questionnaire form. involved the management of laboratory aninaal toxicology Their experience in safety evaluation R&D ranged from and they had authored numerous publications. and pathology. 10 to 20 years, There was one MD, one DSc, one PhD, and two DVM's. Organizational Design of the Research Facility B. In all cases, the Director exercised immediate control over the toxi- The design cology and pathology sections of the research facility. facility generally reflected the (3 ) of the R&dD requirements in support of the company Since all companies interviewed produce a wide variety of pro- products. ducts, only personnel and facilities managed by the Directors sidered as influencing operating policy in safety evaluation were con- R&D. In the case of Company C, their total complement was 40 staff members, of w^hom were professionals. 7 40 personnel, of C. whom 4 Company In the case of D, there w^ere were professionals. Product Mix of the Company (4) All companies produce ethical drugs. In addition, they market other products requiring standardized toxicological studies for safety evaluation research as required by either the Federal Food, Drug and Cosnaetic Act, or the Federal Insecticide, Fungicide and Rodenticide Act. D. Percent Utilization There was Two panies. of the Research Facility a complete utilization of the of the research companies had increased their nnands of increased safety evaluation in addition to safety evaluation R&D (B,D). R&D, was an (5) facility at all staff to meet com- the de- Methods development, active part of their research programs. E. Resource Allocation and the Use of Outside Research (6, 7, 8) All Directors utilize the services of independent contract research laboratories. The extent of their policy of the company. research facilities utilization depends on the operating In the case of the companies that use outside minimally (A, B), the Directors have convinced their -10- management that safety evaluation R&D done internally results in much greater control over the conduct of the research progrann, and consequently the data, although the overall costs are higher. For those com- panies that utilize independent contract research laboratories (C,D), top managment has decided of the and personnel. they best serve the needs Any research exceeding Company contracted out. their capacity is then D, on the other hand, has incorporated contract research directly into the company's R&D program in a specific area, Their reasoning in maintaining this policy that of chronic feeding studies. is that moment For example, Company C maintains limited research company. facilities that for the forecasting the frequency of chronic feeding studies is difficult, and considering their fluctuation over the years, they have delegated this type of research to outside laboratories. Given the general operating policy of the companies interviewed, research that is contracted out is done so at the discretion of the Directors, with the concurrence of their management. into account in electing to use outside all companies. research facilities are similar for They are: L To compensate for internal fluctuations in work-load, company 2. To assist 3. To provide technical expertise lacking within 4. To provide additional work space for the The selection process is The considerations taken similar for all in meeting time requirement deadlines, company, the company. of independent contract conapanies. the research laboratories First and foremost, technical competence and personal knowledge of the professional in charge of the research be contracted out is of utnnost importance. research is also considered. positive factor (C). to Secondly, the cost of the Only one company listed proximity as a Another had at one time considered this important in their selection process, but because of cost differentials among inde- pendent contract research laboratories, they could no longer afford to rely -li- on this factor (D). Similar advantages in using independent contract research labora- were voiced by tories bility in all Directors. They provided resource managing their own research programs, through flexi- the use of space, facilities and expertise not available internally at a cost that is attractive to thenn to get the job done. F . Ev aluation of Independent Contract Research Laboratories (9, 10, 11 ) All Directors evaluated independent contract research laboratories favorably only if the laboratories advertised they could do. had the expertise to do the job they They would not use contract research labora- tories in which they doubted their conapetence. Similarly, they had re- servations about utilizing laboratories about which they knew^ very or had no experience thennselves in the research which was to littel, be con- tracted out. Companies with a small contract research budget evaluated them on the basis of the competence the laboratory in of the scientists, which they worked. regarded versatility more advantageous in providing a to In rather than on the basis of terms of the laboratory, they wide variety of services as much them than merely their ability to do routine stand- ardized toxicological research. Companies which maintained a large contract research budget evalua- ted independent contract research laboratories on their ability to perform comparable studies, and subsequently selected them on the basis of scheduling and cost. Their selection process included provisions for recognizing their specialty within a particular regarded the laboratory to perform as field. In addition, they a functioning unit within their own research program, adnninistrative compatability, as quite innportant. Continuation of the present policy toward the use of independent contract research laboratories will each category. remain the same for one company from The remainder are contemplating a change. The company operating on a small contract research budget is increasing their use of -12the research laboratories company (B). As of the of the foreign moment based they are minimally used for teratology, reproduction and chronic feeding studies. continues to work affiliates within the If the present arrangement out well, they will consider their use as an alter- native to the use of independent contract research laboratories. remaining company with the large contract research budget process of re-evaluating their present policy (D). The is in the This has been brought about due to their dissatisfaction in the maintenance of comnaunication links with independent contract research laboratories during long term This has resulted in a lack of managerial control over feeding studies. the peripheral aspects of contract research. G. Evalu atio n of Regulat ory Ag encie s The FDA was evaluated on technical and administrative criteria. FDA was judged as fair in lines for the FDA are unclear, The autonomously. (IZ, 13) The lack able scientific decisions technical areas. Overall operating guide- since each division is managed somewhat of an impartial referee in resolving question- was regarded as discouraging. In politically FDA tends not to do a good job. The the FDA are sometimes not practical, emotional clinnates the demands for additional data by or feasible, because of their unfamiliarity with the technical subtleties involved with safety evaluation R&D. The companies regard research guidelines as generally reasonable, however, they are reserving judgement on mutagenic guidelines until they Time become finalized. restrictions imposed by the FDA which are initiated when re- quirements are published in the Federal Register are a real source of concern. This is especially true with regard to questions of format to be used in submitting data in support of compliance requests. The com- panies are hard pressed to cope with this type of requirement, since becomes an administrative task, rather than an R&D it requirement invol- ving the establishment of the safety of the candidate drug chemical. -13- Company B regards management as the effect of FDA policy on long a function of the division within the term research FDA. The Cardio- pulmonary and Renal Drug Division was cited as not having approved any NDA's since 1966. Most of the companies have sonae NDA's which have not received approval after a period of up to 100 naonths. This, NDA however, was not the general characteristic of the status of their programs. The evaluation of the Environmental Protection Agency (EPA), was prinnarily limited to those companies maintaining an pesticides (B,C,D). R&D program in Basically, the problems were attributed to organi- zational difficulties -within the EPA in their managing compliance acti- vities. Company D has experienced in which three different professionals have handled their a six all difficulties while dealing with the month period, a lack made of coordination was petition. quite apparent Although the differences were not major, they have before connpliance will be granted. Within when they different technical decisions following their review of the petition. EPA to same be met In the opinion of the company, this indi- cated a definite lack of overall operating policy in pesticides registration. The EPA, implement general operating in their estimation, has yet to guidelines for manufacturers to follow in pesticides registration procedures. RkD (14, 15, 16) Research guidelines promulgated by the FDA have considerably increased R&D activity in the drug industry. In addition, FDA technical H. Effect of Regulatory Controls on criteria are becoming more difficult with which to comply. ._ They are asking for longer duration studies, increased sophistication in cross- over experiments in clinical studies investigating wash-out times for drugs. to the These studies, as w^ell increase in total cost of The increasing dennands as bioavailability requirements, have added R&D of the in new drug development. FDA in R&D requirements will dras- -14tically affect the present As of the moment, composition of the pharnnaceutical industry. takes on the average of it approval from the FDA. of ethical drugs, it years Very few small drug companies afford this type of delay and source of their income. 5 to 6 still to obtain w^ill NDA be able to rely on ethical drug sales as a major As they diversify a'way from the manufacturing will leave only the larger The regulatory effects on R&D companies in safety evaluation As from the National have not yet been Institute for Occupational Safety and Health (NIOSH) noticed by the companies interviewed. in the field. to the effects of the National Center for Toxicological Research (NCTR), the pharmaceutical industry as represented by the companies interviewed or not it will have any impact. In order to is not meet able to evaluate whether demands the of regulatory controls from these, and other federal agencies, such as the Division of Biologies Standards, or the Department of Transportation, most of the companies have reorganized and expanded their corporate regulatory They serve affairs departments. to coordinate the activity of submitting safety evaluation data to the proper regulatory agency in order to nneet the diversified I. demands of the various regulatory agencies. Evaluation of the Pha rmaceutical Manufacturers Association PMA Technically, the serves as an excellent exchange of scientific information between medium members industry through working committees of scientists. ness of the PMA, however, of statements of Prior to their difficulties arise when in of the promoting the pharmaceutical In judging the effectiveit comes to the release, they are reviewed by non-technical committees and PMA. The complex review process results in either extensive delay, or failure to issue the statement. generally why the PMA is ineffective as the representational for the drug industry. J. issuance methodology resulting from these working committees. other corporate committees within the is (17) R&D Trends in the Pharmaceutical Industry (18, 19) This spokesman -15- FDA ments directives influence R&D nnanagement through their require- for sophisticated research in safety evaluation studies. the effect of colors on the safety of drug formulations, availability, and the question of the safety of saccharin have resulted the amount Bio- of clinical There research degree of regulatory control that is is in increasing an overall increase in the being exerted on the pharmaceutical industry in terms of safety evaluation research required for their products. The trend R&D management in search capabilities. of R&D is to increase flexibility of their re- Some companies are evaluating the incorporation laboratories of their foreign based affiliates. tinue to rely on independent contract research laboratories research services not routinely done internally. term studies depends on the company and v/ill to con- provide Their use for long their satisfaction with the adnninistrative arrangements involved with their II. Others management. Independent Contract Research Laboratories: A. Position, Experience and Educational There were study. All B ackground (2, 3) five individuals that participated in the case interview had PhD degrees. All of them were, or had been, closely associated with the management of safety evaluation R&D. an average of 9 laboratories. Tw^o had an average of Three had years experience in independent contract research 3 years experience, following 12 years of prior experience in the pharmaceutical industry. professionals were members of scientific organizations, All of the and had authored numerous technical publications, B. Organizational Design of the Firm I is owned and managed by mately 100 personnel, of w^hom of three operating divisions. 7 Firm its (4 ) founder. It employs approxi- hold doctoral degrees. Firnn II It is comprised underwent reorganization following acquisition and employs approximately 80 personnel, of whona 7 hold doctoral degrees. It is comprised of four operating divisions. Firmlll -16- did not undergo reorganization following acquisition by a larger pany. level professionals, all of It is whom retained a staff of 30 personnel, of It whom 4 are doctoral are engaged in biological research. Firm connprised of four operating divisions. IV underwent exten- sive reorganization following acquisition, and currently mately 350 personnel, with a professional level degrees. C. It is comprised of the employs approxi- staff of 33 holding doctoral of 5 operating divisions. Products Evaluated and Distr ibution Each com- of Services firms interviewed has the capacity (5, 6, 7) to test any of the products regulated by the Federal Food, Drug and Cosmetic Act. The distribution of their services, therefore, is dependent on their success in garnering research contracts in a particular Their services field. Two primarily involve the use of laboratory animals. of the firms inter- viewed, for example, are substantially involved in providing services in preclinical pharmacology a minor source (I, of inconne. IV). Screening studies, however, represent Analytical and clinical chemistry, as well as microbiology studies are not consistent producers firms, however, Firm II offered by the firms interviewed. volume of their services while They provide services income among the derives substantial income in microbiology. Domestic animal studies do not form the of a major portion of the services All firms are attempting to increase expanding into new areas of expertise. to clients in safety evaluation federal laws other than the Federal Food, R&D relative to Drug and Cosmetic Act, such as the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA), and the Federal Hazardous Substances Act (FHSA). service client accounts in D. R&D management One firm has begun to (III). Resource Allocation and Decision Making in Maintaining ServiceViabili ty (8,9,10) Resources are committed needs of the client to establish in satisfying services to meet anticipated regulatory criteria. Internal financial -17- requirements are greatest for direct labor costs. from government contracts allocating income cating income from private sector accounts as the introduction of new services. These are offset by- for salaries, while allo- other categories, such to All firms are expanding their services in an attempt to offset fluctuations in the business of contract New research. if services are initiated and project proposals issued only the expertise is available within the firm. of non-salaried work in order All firms utilize overtime employees, part-time help and subcontracting excess work-load relative to handle to the of pathology capacity of the firm. Cli ent Contact and its Relationship to E. Firm (11, 12, 13, 14, 15, 16, 17, Performance in response Performance of the 18 ) defined as the amount of sales derived from services is to client contact. All services provided by these firms in toxicological nnethodology to the private sector clients are of specific duration, ranging from 2 weeks up to 2 years. When dealing with the federal governnnent, however, research services tend to be open-ended. Only professional contact is staff members preferred by all are involved in client contact. firms, and is Personal usually done on a one-to-one basis Special units are assigned to garner govern- with private sector clients. ment contracts and generally are not involved with private sector The contact. is ratio of private sector to client government contract accounts dependent on the operating policy of the independent contract research laboratory. Firms II Firms I and III do not have any government contract accounts. and IV do have government contracts. Most firms allocate income from government contract accounts toward operating expenses. from private sector accounts The two sources of is to the w^hat the market v/ill bear. income are utilized by the independent contract research laboratory in order to maintain important determined by Income firm is its business viability. By far the most income derived from private sector accounts. -18- The incidence Once study. client contact is high prior to the initiation of any the study is initiated, however, The longer tion. of the study, the it more frequent is dependent on its dura- Private the contact. sector clients from large companies are generally technically oriented whereas, clients from smaller companies are administratively oriented. Client contact is generally not shifted during the study. Its indication of from one professional to another Without client contact, there are no sales or services. performance of the firm is absolute. The success of the client contact resulting in sales is directly dependent on the professional competence contact of the individual representing the firm. was directly responsible to its acquisition. for A decreased accounts Since income of the firnn is lack of client of Firm IV prior derived from sales of its services, the profitability of all firms interviewed indicates that they are all positive F. performers. Evaluation of Technical, Adnninistrative and Financial Per- formance (19,20, 21, 22, 23 ) All firms interview^ed used similar evaluation procedures. performance w^as measured internally by management Technical of the scientific aspects of the study, and externally by the evaluation of the report by the client. Generally the professional staff member on the basis of his contact with the client, was survey. In cases in responsible for the study, charge of the technical where studies are repetitious, technical surveys are no Administrative performance was measured internally by the longer done. report preparation process, in addition to the cost of the study^ and exter- nally by client satisfaction associated with the issuance of the final report. Weekly records of the progress of in-house studies completion are kept by two of the firms kept at Firm I {11,1V). at various stages of Weekly surveys are not for repetitive studies, but are kept for new^ studies. Costs are assigned to studies on the basis of the professional and administrative time charged to them. In addition, material costs are additional charges. -19- Management committee meetings are held the firms have experienced of the managerial difficulties due managennent from the laboratory. culties in the internal management Firm of the firnn separation of the laboratory management. II has encountered because of the physical Although the Directors of each of the firm, on technical, administrative and financial matters Management diffi- is difficult Without the closeness of naanagement caused by the international structure tain. of separation to the laboratory meet quarterly, communication between them during the remainder of the year. Two periodically. coordination of policy is difficult to main- skilled in safety evaluation RfcD and familiar with federal regulatory criteria absolutely essential is if the firms are to achieve positive financial performance. Prior the to its acquisition, former management of Firm IV was unfamiliar with the research requirements of the Federal Food, Drug and Cosmetic Act. laboratory. such that it In addition, they The result was that they were physically separated from mismanaged the firm badly enough resulted in a negative financial performance during entire period of control. Conversely, since acquisition, ment at the Firm IV has maintained a positive financial performance. Firm I the vidth its manage- laboratory and professionals skilled in safety evaluation R&iD, has been profitable over the past a profitable posture. Firm III 5 years. Firm has alw^ays been profitable. II has assumed Firm since IV, acquisition, has been operating profitably. Internally, all firms used the profit and loss statement as the overall measure of the firm's technical, administrative and financial performance. Externally, comparisons with each other on competitive bidding was used to evaluate their technical, G. administrative and financial performance. Evaluation of Client s and Competitor's Research Facilities (24, 25 ) In the pharmaceutical industry, there is a negative correlation be- tween sales and R&D competence, and a positive correlation between -20- good company management and The experience of Firm R&D management according to Firna I. has been that the larger the company, the II better staffed and equipped its research laboratory. Evaluation of the competitor's research facilities marily on the results of competitive bidding. is based pri- Client feedback on criticism of competitors capabilities was used as a basis of evaluating the competitors of Firm It II. was the opinion of Firm that all of III their competitors v/ere good businessmen, and given the fact that all were competent professionals, their ability to maintain client contact resulted the success of the firm. III. H. Evaluatio n of Regulatory Agencies (26) The FDA was On judged as having a realistic operating policy by the other hand, ting policy of Firm IV expressed reservations about FDA, and rated it as unrealistic, along with ness to make decisions and characterized the supervision of personnel. however, than it Firnn III FDA its Firm the opera- unwilling- as ineffective in its had the opposite opinion of the EPA, expressed for the FDA. They had experienced consi- derable difficulty in pesticide registration when representing their clients. This manifested itself in extensive delay by the EPA in meeting own its guidelines for time limits in responding to petition registration applicants. In addition, EPA had behalf of their clients. personnel at the opinion of Firm R&D lost data submitted to them by Firm also been experienced by Firm III. IV, personnel in pesticide registration at the inexperienced, and this results in a lack of decision-making. that effective I. on Inconsistent rulings on the part of different EPA had firms agreed that there III is ineffective management is In the EPA are Both supervision of personnel and non-existent in pesticides registration. Factors in the Success of the Firm (27) The primary factors in the success of independent contract research laboratories were similar for each firm interviewed. Competence of -21- was paramount. the professional staff bilities in R&D were also mentioned. Facilities and full service capa- Strong marketing with comitant client contact were also cited. cited by two of the firms interviewed J. Business Trends in Proximity its con- to the clients was (I, II). Contract Research (28, 29) Preclinical as well as clinical research on an individual candidate drug chennical could be done entirely within the independent contract research laboratory according to Firm I. In the opinion of Firm IV, however, independent contract research laboratories could replace only toxicological research for pharmaceutical companies, while for agricultural chemical companies, they could replace their toxicological, pharmacological, quality control, metabolism and chemical stability research capabilities. Business trends in the field of independent contract research are directly related to government regulatory criteria. w^ould be no business. teria in terms Forecasting trends of providing the appropriate panied by the ability of the firna expected demand. to There appears of impending regulatory cri- R&D services must be accom- comnnit resources in order to meet the to be a conscious effort on the part of the firms interviewed toward offering a broad than relying on a particular specialization. number spectrum Also, the number of services, In theopinion of firnns in existence today will diminish, consolidation. Without them, there ofFirm 11, rather the either by attrition or of federal contracts will begin to increase, in contrast to past years. Discussion Regardless of whether they worked for pharmaceutical companies or independent contract research laboratories, the professionals interviewed w^ere highly educated and had extensive experience in safety evaluation In addition, R&D. they were active in their individual field of expertise, as evi- denced by their publication records. -22- Organizational differences between pharmaceutical, and inde- pendent contract research laboratories reflected their business operating policies. minates The research in both the IND and effort of the NDA, the pharmaceutical company cul- The function of the Director of Safety Evaluation is the integration of the data derived from the research under his direction into the petition required for the FDA approval. Since research programs undertaken by the pharmaceutical companies in safety evaluation R&D use of standardized toxicological involve the independent contract research laboratories have developed the studies, expertise to perform these services for a fee. Whether or not they are subsidiaries, or independently owned, their organizational design reflected how they best accomplished contract research The personnel of in toxicology. pharmaceutical companies maintaining a large contract research budget and independent contract research laboratories showed some similarity individuals in the total 7 number and 13%, with an average of in the of 9. percentage of professional level R&D 5%. personnel. This ranged between In the case of pharmaceutical panies, this applied to their toxicology and pathology departmert In the case of independent contract applied to their total work force. and should not be extrapolated s com- only. research laboratories, however, this These data are based on a small sample, to the industry as a whole. Pharmaceutical companies with a small contract research budget maintained a large pool of R&D personnel in order to accomplish all of their research objectives. The business relationship between pharmaceutical companies and independent contract research laboratories is based on products which require safety evaluation R&D, as regulated by the Federal Food, Drug and Cosmetic Act. The relationship between the independent contract research laboratories and large pharmaceutical companies between professionals both competent R&D. in toxicology is maintained and safety evaluation Smaller pharmaceutical companies have professionals representing -23their scientific staff which tend to be less familiar -with the technical aspects of safety evaluation R&D, and nnore administratively oriented. They are generally much more concerned with the financial aspects of contract research. In general, independent contract research laboratories receive overflow research in excess of the research capacity of large companies. Medium companies may or may not have the technical expertise, and they're usually looking at the financial area critically in w^hich contract research offers them expertise they may not be able internally into their own facilities. to incorporate Small company clients don't have the technical expertise and usually look at the financial areas very critically. For small companies, contract research offers them what they themselves don't have, a research laboratory. The independent contract research laboratory provides professional services in toxicological methodology. of either individual studies, Its income or research projects. cological studies are of short is derived on the basis The majority term duration, usually 6 of toxi- months or less, while a few are intermediate and long term in length, ranging from 18 months to two years. Generally, private sector clients utilize their services in this manner. Research projects, on the other hand, are com- binations of short, intermediate and long term toxicological usually performed for government contracts. of Regardless studies, of the source income, independent contract research laboratories maintain operating objectives which are directly related to the duration of the studies, or the projects they perform, since these are their only source of income. Pharmaceutical companies maintain an R&D capacity consistent with their business operating policy, as reflected in the tw^o categories outlined in this study. They are specialists in ethical drug R&D, and through various combinations of their internal research capacity and the use of independent contract research, they are able to maintain their R&D progranns -24in order to meet federal regulatory criteria pertaining to their products. Independent contract research laboratories have the capacity any product manufactured by the pharmaceutical industry. strengths in special areas of research. bility of servicing other industries Some have In addition, they have the capa- whose products are regulated by other federal laws which also require safety evaluation Pharmaceutical companies interviewed research studies that exceed the capacity R&D programs. in this study contract out of their use of independent contract research laboratories to the fluctuation in their w^ork to test research is Their facility. generally in response load or to time requirements. Similarly, independent contract research laboratories subcontract out research in order to compensate for fluctuations requirennents. in work load, or to meet time There are differences between the two relationships that pharmaceutical companies contract out research vide expertise lacking within the company, and 2) in order to: 1) in pro- provide additional work space within the research facility. tories, on the other hand, generally contract out only pathology work Independent contract research labora- which exceeds the work load capacity of their facilities. Evaluation of independent contract research laboratories by pharmaceutical companies revealed subtle differences which corresponded to the extent of their use by the company. Companies which maintained either a small or a large budget for contract research regarded personal knowledge of the individual scientist and technical versatility of the inde- pendent contract research laboratory as important factors. In addition, how^ever, those companies w^hich maintained a large budget for contract research, regarded technical expertise on comparable studies by different independent contract research laboratories, knowledge of the specialty of various firms and their ability to accomodate administratively, as high priority factors. In the evaluation of pharmaceutical companies by the independent con- -25tract research laboratories, there lation bet'ween was no indication of a positive company sales and competent research. They did correnote, however, that there was a positive correlation between good company management and competent research management. Internal review of their performance by the independent contract research laboratory was based on maintaining close control over the technical and administrative variables by the firm. however, -was based on financial performance. Its overall success, Relative to private sector accounts, this was intinnately associated with client contact and its close relationship to client satisfaction. All firms recognized and reacted to the importance of personal client contact and client feedback in its relationship to profitability with accounts. regard Government contracts tended to private sector client to beinrpersonal and not as dependent on client contact for renewal. The evaluation of the FDA by pharmaceutical companies and indepen- dent contract research laboratories reflected the degree of influence exerted by the Agency upon each. the FDA at many The pharmaceutical companies evaluated different levels of its operation, reflecting the close relationship between the Agency and the companies. The FDA was judged fair in technical areas, although the lack of overall control on technical judgments within the FDA occasion, the FDA resulted in unclear operating objectives. had requested data which tended to be either unreason- able to the objectives of the petition, or not technically practical. was thought to be due either to a On This lack of sufficient familiarity with the re- search procedures, or the imposition of politically emotional constraints upon the FDA. The separation ceutical companies of administrative requests from technical controls, upon the pharnna- w^as difficult to deal with, especially -with reference to time limitations and data format presentation. There was a split in the evaluation of the FDA by the independent contract research laboratories, between what was stated as "realistic" and "unrealistic -26- operating policies. Their evaluation, however, was confined only this descriptive term, the pharmaceutical and was not specific. Agreement existed between companies and the independent contract research laboratories, however, on the indecisiveness of the note was made to of the total FDA. NDA approvals by the the FDA since 1966. absence of monary and Renal Drug Division of Particular There was general agreement between the Cardiopul- pharmaceutical companies and the independent contract research laboratories concerning the existence of ineffective management in pesticides registration at the organizational difficulties attributed to the EPA have absence of an overall operating policy in this area. EPA. The resulted in an Inconsistency in technical judgments by different personnel were experienced by both the pharmaceutical companies and the independent contract research laboratories. As regulatory controls over R&D by the cost. in The demand the FDA have increased, so has for longer duration studies, greater sophistication research methods, have forced the pharmaceutical industry their research capability, to increase which has increased their operating costs. The larger conapanies have been able to meet the regulatory criteria of the FDA much more easily than the smaller companies. of the interviewees representing the It w^as the opinion pharmaceutical companies that increas- ing regulatory requirements in the industry would force smaller companies to diversify taining their away from ethical drug manufacture. commitment to ethical Those companies main- drug production are also affected by other federal law^s, and consequently other regulatory agencies. to meet the diversified regulatory requirements, In order pharmaceutical com- panies have, in general, begun to reorganize and expand their corporate regulatory affairs departments. None of the independent contract research laboratories regard knowledge of regulatory requirements as a saleable service, but rather an entre into obtaining client accounts in toxicology. -27- The success of independent contract meet related to their ability to of the research laboratories the increasing demands is directly- R&D for services pharmaceutical industry resulting from the imposition of federal Their technical competence and professional exper- regulatory controls. coupled with their research facilities, strong marketing through client tise, contact, and proximity to the pharmaceutical companies, have all been innportant factors in their success. The degree tory is made by of profit inversely proportional to the time span associated and directly proportional ting objectives, on a per study basis; that margin the greater is, of profit. to the risk. which is opera- Objectives based Objectives based on research projects; a lower Income derived from toxicological studies requires effort v/ith their dealing with private sector clients, bring government contracts, bring that is, dealing with research labora- the independent contract margin a constant highly dependent on personal contact. Once of profit. marketing the studies are completed, income ceases, which then initiates the marketing effort. Income derived from research projects requires approach. a different marketing Projects last for a longer period of time, generally on an annual basis. Garnering government contracts does not require a high degree of personal contact, but rather involves written proposals which are submitted appropriate government granting agency for approval to the and funding. The increasing degree a greater response in sequently generating laboratories. As a flexibility of the R&D of federal regulatory result, there have expanded their use requirements imposes activities by the pharmaceutical industry, more business research R&D for the independent contract research appears to facilities in both. of foreign sub- be a trend toward a greater Pharmaceutical companies based research affiliates. Independent contract research laboratories have expanded their capabilities in the drug area to include clinical, as well as preclinical research. Without the -28- presence of federal regulatory requirements involving product safety, there would not be as large an effort in try, R&D by the pharnnaceutical indus- and similarly, there would be fewer independent contract research laboratories in business. Sumnriary and Conclusions The main product petition, of the pharmaceutical research laboratory which summarizes for the company data on a candidate drug chemical. It is all the available used FDA appropriate federal law. This subsequently leads of the from which compliance to obtain commercialization to research laboratory, therefore, their budget is derived. is managing the R&D Its objectives phase, over which The based on product sales, are long ternn in that they are oriented toward product compliance research. not only w^ith the thus generating sales revenues for the company. of the product, income order research provide evidence of to safety and efficacy to the in is the This includes has direct control, but it also managing the compliance phase. The interrelationship between the pharmaceutical and the independent contract research laboratory only is this due to the fact that the interaction is research laboratory is quite dynannic. Not based on toxicological studies of specific duration, but also because there are a number of inde- pendent contract research laboratories that are competing with each other to provide sim.ilar services to the pharmaceutical industry whose demands are directly influenced by the FDA. Long term operating objectives involve in mastering new toxicological methods. research guidelines issued by the the product safety tories is R&D make decisions process. in the development These are directly related FDA which become to incorporated into Independent contract research labora- commiting resources such developed at just the right nnoment tage over their competitors. of expertise in order that the expertise to majxinnize the advan- Similarly, pharmaceutical research labora- -29- commit resources tories compliance purposes extent, vide in developing new toxicological methods for in safety evaluation R&D. They may rely to however, on independent contract research laboratories them with some to pro- the expertise in this area, either initially or permanently, depending on the operating policy of the pharmaceutical company. Methods development by independent contract research laboratories in anticipation of new federal regulatory ceutical industry may internally. It required. If operation. tained, it If criteria be described as either depends on the professional low^, skills, imposed on the pharmaor high risk operations equipment and capital these factors are already available, then the professional skills, is it Regardless of the a high risk venture externally, since developed and marketed at precisely the right moment. there w^ill a low risk equipment and capital nnust be ob- represents a high risk cperation. required, however, it is Too resources it must be early, and be a lack of demand, too late and the competition will have already become too great to regain the investment costs within an accept- able period of time. Safety evaluation R&D in the federally regulated pharmaceutical in- dustry as described in this report operates as a network of information feedback systems. tems operating These ment. There exists three distinct information feedback sys- in the research model selected for this case interview study. illustrate the influence of extra -organizational factors on R&D manage- Basically, the desired goal of the independent contract research laboratory is to provide research services in toxicological methodology The goal for a profit. of the pharmaceutical company is to achieve pro- duct compliance through toxicological methodology and clinical studies, subsequently leading to commercialization and sales income. of the FDA ducts under system". is consumer protection from its jurisdiction. The goal the deleterious effects of pro- All of these goals exist in a "steady state -30- Information feedback systems applied previously reported by Forrester ment was in R&D first Its (8, 9). described by Roberts to (10). management have been application to R&D manage- Information feedback systems interrelate the existence of multiple factors affecting research goals relative to time. ment within This study It allows for a greater flexibility of manage- the organization for is the first management more effective decision making which describes these systems applied to activities. R&D in a federally regulated industry operating at the extraorgani- zational level. The first two levels of information feedback systems exist at the company-contract research laboratory tory agency level. They are operative level, in the petition preparation product registration processes respectively. negative feedback loop mechanisms. and the company-regula- They are both The third level first and order of information feedback system exists between the pharmaceutical company and the combination of both the consumer and regulatory agency. This system operates in both a first order and second order negative feedback loop. It is activated only following the failure of the first order negative feed- back loops associated with the systems, which are intended product prior to two levels of information feedback first to establish the safety commercialization. and efficacy of the In essence, the third level operates as a back-up system. The driving force that existing of the first level of information feedback system, between the pharmaceutical research laboratory and the independent contract research laboratory, is the dynamic interaction involving toxicological methodology on a per-study basis. The indepen- dent contract research laboratory has a supply of toxicologists, and the facilities necessary to provide services in toxicology. these services, as reported in this study, on the basis to initiate the study quickly (time), expertise, and in It provides of: cost, ability some cases proximity 31. to the client. The pharmaceutical research laboratory selects The dia- contract research laboratory on the basis of these factors. gram the that follows outlines the first order negative feedback loop charact- eristics of this interrelationship, -which is called the Studies Dynamics Model. System Since these standardized toxicological studies are and the fact that the independent contract research of specific duration, many laboratory serves mics Model operates Studies System clients simultaneously, the Studies System Dyna- at a rapid rate. Dynamics Model Supply of toxicologists and available facilities at the independent contract research laboratory Influences o rder L....... rate of the c:lient j ^ Information as to; cost, time, expertise and proximity to client, in addition to toxicological data X^<\ Level of standardized toxi- ^. cological studies performed for the pharmaceutical from company (client) studies. The driving force that existing company's of the second level of information feedback system, between the pharmaceutical company and the FDA, R&D is the objectives in obtaining compliance with federal law for their candidate drug chemicals. The pharmaceutical company has a supply of toxicologists, as well as the facilities required to carry out the necessary research program. The Director of Safety Evaluation is sible for defining the toxicological characteristics, the associated with their candidate drug chennical. respon- degree of safety, The data generated on pre- liminary, or screening studies are used to design a sequence of more com- -32- The end product plex toxicological studies. a detailed report, the IND petition, date drug chemical, and the NDA of the summarizing petition, research program is the safety of the candi- summarizing its efficacy. The pharmaceutical company requests compliance with federal law through the jurisdiction of the FDA The diagram on the basis of the petition. illustrated below outlines the first order negative feedback loop characteristic of this interrelationship, Dynamics Model. Because which is called the Petition of the extensiveness of the and the time requirements of the review process System research program, of the petitions employed by the FDA, the Petition System Dynamics Model does not operate at as rapid a rate as the Studies System Petition Dynamics Model. System Dynamics Model Supply of toxicologists, and <^.^ available facilities at the phar maceutical company's research laboratory 5- Influences acceptance or the rejection of the petitions (IND, NDA) •>l>3 ^ Information as to the safety and efficacy of the candidate drug chemical The occurrence Summary 1^1... of standardized toxicological study data in petition form (IND, NDA) for the FDA of either unanticipated deleterious effects of the drug on the consumer, or subsequent research data indicating potential harmful effects of the drug following its commercialization, ving force of the third level of information feedback system. between the pharmaceutical company, the consumer and the is the It dri- operates FDA. If either one or both of these factors occur, first and second order negative -33- They operate feedback loops are activated. first initially affects the sale of the commercialization the facturer. drug in two sequences. The while the second affects itself, subsequent drugs, irrespective of the manu- of all The diagram illustrated below includes characteristics of the interrelationships between the pharmaceutical company, the consumer and the FDA. Model. Its It is Coisumer Protection System Dynamics called the sequence involves the delay of drug sales rate. It The complexity, however, requires an explanation. (la), and operates also involves the requirement of additional The tively establish drug safety (la), R&D first sequence, first at a rapid data to defini- parts la and lb, operates at generally the same rate as the Petition System Dynamics Model. ments all The second sequence (2a), represents the altered R&D require- for all products in the original drug category, and subsequently drugs under the jurisdiction of the FDA. rate than that seen in the Petition It operates at a System Dynamics Model. much slower It includes development of new toxicological methodology, which results the issuance of new^ research guidelines by the FDA. quently incorporated into safety evaluation R&D in the These are then subse- requirements for the registration of all new^ candidate drug chemicals. Consumer Protection System Dynamics Model C^ Manufacture r^l„„,^„„, C^ oi Drug A & All manufactu rers of C ^ Drug Additional safety evaluation R&D re quirements for Drug Drug i A Inventory A m (*) I Altered safety evalu- Regulatory in sales| Consumer h'''"""^^"''""'''"""'"^ catego ationR&D requiremeit; for Drug A category Agenc icy ^^i^"-"-—-^ Delay A Unanticipated deleterious effects (Z'a) I -34- These information feedback systems serve evaluation R&D steady state. It pharmaceutical industry exists in a dynamic in the operates between the independent contract research laboratory, the pharmaceutical company, the tration and the consumer. report, the to illustrate that safety- On Food and Drug Adminis- the basis of the data presented in this diagram illustrated below simultaneously summarizes these interactions. Steady-State System Dynamics of Safety Evaluation R£;:D in the Pharmaceutical Industry 1 Stud ies I f" data JiND &.NDAi ^ Independent Contract Pharmaceutical Research Laboratory Company ^ j Safety Eval- / / j"^* / [ '"luationR&D I requirements I. data I -A II ,>, . Safety Evaluation R&D .requirenaents | I **"•! * III Unanticipated!. hazards | I I: II: III: Studies System Dynamics Model Petition System Dynamics Model Consumer Protection System Dynamics Model These systems dynamics models can be used organizational interactions involving Using R&D R&D in the to describe past extra- pharmaceutical industry. expenditures, number of participating pharmaceutical panies and number of new drugs introduced since 1949, Graph prepared. in Appendix A The data were obtained from sources 13 and 14, I com- has been and tabulated III. close inspection of Graph I ; i---'' reveals that the level of the introduction -35. ' ' o o o Number Number o of Participating of New Companies Single Chemical Entities o 00 o urt O t3 O a ,-X. . ''I Too * o d« o •H X U1 < CO in 05 < o in in o u M o 3 o go nl Q o O O o in —o o —oT" o IM o o (sj-EXXOp JO SUOT^XT"') ssjn^ipuadx^ CP?'a Ajjsnpui X'biox —— —oT" o -36o£ new drugs has generally paralleled the nunnber of participating In 1961, however, a sharp decrease in the intro- drug companies. duction of new drugs occurred a year before a similar decrease in participating drug companies be made with Model. The the aid of the was noted. An explanation initiating event in this case was the thalidomide episode and been introduced to the Federal The thalidomide episode triggered Food, Drug and Cosmetic Act. la may Consumer Protection Systems Dynanaics and the resultant Kefauver -Harris Drug Amendment sequences for this Since thalidomide -containing drugs had not yet lb. in the US, they were prevented from comnaercializa- In light of the deleterious effects initiated by thalidomide, new^ tion. drugs w^hich contained thalidomide, but had not yet received IND or NDA approvals were delayed by the FDA, pending the development of toxicological methodology designed to determine their mutagenic potential. Subsequently, sequence 2a was initiated, whereby these new toxicological nnethods requiring FDA The approval. decline in the number which point levelled it were required final for all candidate drug chemicals outcome of participating off. of these actions was a drug companies until 1965, at The stabilization of the introduction of new^ drugs occurred in 1963. Sinnultaneously, R&D expenditures since 1963 have increased con- siderably. Although the drug companies were becoming more diligent in obtaining IND and more. NDA approvals, the process was costing them much Their reliance on the services of independent contract research laboratories, to the extent of 9. 7 million dollars in 1969, indicated that pharmaceutical companies utilized their services in order increasing costs of their R&D programs. The reliance to offset the of two of the in- dependent contract research laboratories on income derived from preclinical toxicology, and the attempts of the other two in garnering in this area, work clearly indicates their financial relationship with the phar- -37- maceutical industry. The Studies System Dynamics Model illus- trates this interaction. As the costs of R&D programs R&D increased following additional requirements instituted by the Kefauver-Harris amendment, fev/er pharmaceutical companies elected This resulted in the introduction of fewer new drugs. ment. data presented in Appendix number of participating from 1962 to 1971 it III show that the 10 y ear annual companies from 1952 A declined to 65. to 1961 was average 113, to 1971, interestingly, however, the final result of participating from 1952 From to 1961. of these annual differences. was 1962 Most that the difference between drug companies and the number of new^ drugs much introduced annually, was the period 1952 to new drugs were introduced annually. how^ever, only 18 number while From an average of 43 new drugs w^ere introduced annually. 1961, The similar decrease in the introduc- new drugs occurred during these same periods. tion of the new drug develop- to participate in less from 1962 The data What in than that seen in to 1971, Appendix this indicates, show III is the averages an increase in the efficiency of the participating pharmaceutical companies in gaining FDA approvals of their new drug applications (NDA's). System Dynamics Model illustrates the development of this interaction, Mansfield has reported that degrees of uncertainty field, is is The Petition (12). R&D management operates in various Research management, according to Mans- characterized by uncertainty, while development management characterized by less uncertainty. The influence of federal regulatory criteria involving the determination of product safety and efficacy prior to commercialization, interposes another criteria on not previously reported, that of product compliance action of to FDA in approving, management. The NDA petition serves with R&D management or rejecting the IND or increase the degree of uncertainty associated in the federally regulated R&D management pharmaceutical industry. The decision-making - process of the FDA 38- relative to IND's and between the completion the time span comnnercialization. NDA's of the results in expanding RfcD program and product R&D management This compliance factor in is unique to industries whose products are regulated by federal law and administered by federal regulatory agencies. The emphasis imposed on the management cological methodology was characterized by of standardized toxi- the employer. The inde- pendent contract research laboratory manager was interested in how efficiently he could income perform the study and report its results, w^as directly related to his product, the final report. not only with many since He deals different pharmaceutical companies, but also com- panies in other industries whose products are regulated by federal law. The pharmaceutical company manager, on the other hand, was concerned not only with are applied managing his safety evaluation program, but how to the of these petitions IND and NDA petition, its results and further, the disposition by the FDA. In conclusion, therefore, this working paper identifies the key ad- ministrative and economic factors in the pharmaceutical industry. It R&D management associated with develops the verbal theory of cause and effect interaction, and a description of the decision making policies volved with safety evaluation the independent contract of negative R&D between the pharmaceutical company, research laboratory and the FDA. information feedback systems in time has been described. in- Its application to R&D The behavior managennent relative to other industries whose pro- ducts are regulated by federal law based on consumer protection appears highly probable, and the to clarify this mechanism described complex relationship. in this paper should serve -39- Appendix I Pharmaceutical Company Questionnaire Name Position a. b. c. d. e. Education Length of employment with the company Length of time in present position Experience in the company prior to your present position Experience prior to joining the company Organizational data of the research facility under your direction a. Laboratory animal toxicology 1. Professionals 2. Staff 3. Facilities Percent of internal R&D expenditures in Domestic animal toxicology 4. b. 1. Professionals 2. Staff 3. Facilities Percent of internal R&D expenditures in Analytical chemistry and organic synthesis 4. c. 1. d. Staff 3. Facilities 4. Percent of internal Industrial hygiene . 2. Staff 3. Facilities Percent of internal Othe r What is the product a. Foods b. Food additives 1. 2. c. d. e. f. Indirect Direct Ethical Over-the-counter Drug devices Cosmetics Economic poisons 2. area R&D expenditures in this area R&D expenditures in this area nnix of your connpany? Drugs 1. this Professionals 4. e area Professionals 2. 1. this .40- g. 5. Other What is the percent utilization of the laboratory over the past 12 months? R&D a. Total b. Animal toxicology Domestic animal toxicology Analytical chemistry and organic synthesis c. d. e. Industrial f. 6. Other Has your laboratory ever used independent contract research laboratories? a. Yes 1. b. 7. hygiene Hov/ frequently? 2. How many? 3. For what type of research? No 1. Why? 2. Is this standard operating policy? How do the foUovinLng factors influence your decisions regarding resource allocations relative to the use of independent contract research laboratories? a. Within the company 1. 2. 3. 4. 5. 6. Top management Middle management Current work-load of the laboratory Technical capability of the staff Physical capability of the laboratory Technical feasability of the project Financial allocation of R&D funds Within the independent contract research laboratory 7. b. 1. 2. 3. 4. 5. 8. a. feel that the use of independent contract research laboratories advantageous? Yes 1. 2. 3. b. capability Administrative capability Technical capability Location Financial costs Do you is Technically Administratively Financially No 1. 9. Manage rial Why? What is your evaluation of independent contract research laboratories? a. Compared to your own laboratory b. Compared to one another -41- Technically Financially Administratively 1. 2. 3. 10. 11. 12. On the basis of your experiences, could you comment on whether the use of independent contract research laboratories could, or could not replace any segment of R&D under your direction? Will your present use of independent contract research laboratories continue as future policy for the company? What a. b. 13. is your evaluation of the Food and Drug Administration? Technically Administratively (with reference to registration procedures) What a. b. your evaluation of the Environmental Protection Agency? Technically Administratively with reference to registration procedures for is ( econonnic poisons) 14. What is the company? 15. Do you EPA 16. effect of FDA policy on long term R&D management in your anticipate similar FDA-like regulatory activity emanating from to affect your company and industry in the future? and NIOSH Has your company begun to assemble the internal capabilities to handle regulatory activities originating from these regulatory agencies? 17. What the a. b. is your evaluation of your trade organization in its interaction with FDA? As a representative organization As a representative organization your industry of the regulatory aspects of your of the scientific aspects of industry 18. 19- Will internal R&D activity as continue in the future? Do you form? feel that R&D it is presently constituted in your company activity in your industry will continue in its present -42- Appendix II Independent Contract Research Laboratory Questionnaire 1. 2. Name Position a. b. c. d. Length of employnaent with the firm Length of time in present position Experience in the firm prior to your present position Experience prior to joining the firm 3. Professional activities a. Educational experience b. What professional society memberships do you hold? 1. Have you attended their annual meetings? 2. Have you presented papers at these meetings? c. How many trade organization memberships does the firna hold? 1. Have you attended their annual meetings? 2. Have you presented papers at these meetings? d. How many publications have you authored? 1. As a member of the firm 2. Prior to joining the firm 4. What organizational data and history of the firm? independently owned? Is it a subsidiary? 1. How long has the firm been a subsidiary? 2. Have there been management changes within the firm following acquisition? is the a. Is it b. a. Yes 1. Top nnanagement 2. 3. Project management Technical staff No Have these changes inaproved firm performance? b. 3. a. b. 5. With private sector clients With government contracts What are the products a. Foods b. Food additives 1. 2. c. Indirect Direct Drugs 1. Ethical Over-the-counter Drug devices 2. d. that the firm evaluates? -43e. f. g. 6. Cosmetics Economic poisons Other How have the services provided by the firna been distributed over the past year? a. Laboratory animal toxicology 1. Exploratory 2. Screening 4. Safety Efficacy 5. Metabolism 6. Other 3. b. Domestic animal toxicology 1. 2. 3. 4. c. e. 5. Metabolism Other Analytical chemistry 1. Food additives 3. Drugs Economic poisons 4. Other Clinical chemistry Industrial hygiene 1. f. 7. Safety Efficacy 6. 2. d. Exploratory Screening Environmental exposure a. Air pollution b. Water pollution 2. Occupational exposure Other Has the use of services provided by the firm for the past year typified previous yearly trends? a. b. c. Ye s No Has there been any reason behind a shift to the present distribution of services? 1. Internal a. b. 2. 8. How Development of new methods Procurement of new personnel External a. New ventures taken by your clients b. Regulatory activities dictating a change do the following factors influence your decisions regarding resource -44allocations? a. Top management Within the firm if independently owned Within the parent organization if a subsidiary Technical feasability of the project Technical capability of the laboratory and staff Financial allocation of funds Regulatory climate Current work-load of the laboratory Current status of the business viability of the firm 1. 2. b. c. d. e. f. g. 9. How a. b. c. d. 10. do the following factors affect your decision-making activities? Expanding an existing service Decreasing an existing service Eliminating an existing service Initiating a new service How do the following factors influence the project proposals initiated by the firnn? a. Existance of a need for technical services offered by the firnn b. Technical expertise of the professional staff c. Technical feasability of the project d. Viability of the commitment of the project to the firm 11. What is the level of professional staff effort involved with governmental client contact? a. b. What is the total number of professionals involved? Has this number increased, decreased or remained constant over the past year? 12. What is the level of professional staff effort involved with private sector client contact? a. b. What is the total number of professionals involved? Has this number increased, decreased or remained constant over the past year? 13. Once a contract has been received, what has been the level of client contact during the period of the study? a. Sequence 1. Before receiving the request for proposal (RFP) 2. Before receiving the contract 3. During the study period 4. Following the issuance of the final report 5. Average during acute studies 6. Average during subacute studies 7. Average during chronic studies b. Has client contact shifted from one level of professional to another following the receipt of the contract? -45- 1. 2. 14. Within the laboratory Within the client's laboratory Can any correlation be made as to the technical, or managerial level of the professional involved in client contact relative to the nunaber of contracts? 15. Are your 16. Does your client contacts technical or administrative personnel? client contact policy change as to whether they are technically or administratively oriented? On 17. your experiences, do you feel that clients with technical backgrounds utilize your services more effectively that clients with administrative backgrounds? 18. Have you been able to determine if there is a positive correlation between client contact and client satisfaction? 19. Do you perform the basis of the foUov/ing evaluation procedures involving the service firm provides? Administrative survey 1. Date the sample as received 2. Date the initiation of the study 3. Date the termination of the study 4. Date the issuance of the final report Technical survey 1. Do you monitor the following items regarding the conduct of the study? that the a. b. a. b. 2. Do you a. b. 20. b. c. d. e. f. g. 22. omission conamission raionitor the following Errors Errors of of items regarding the final reports? omission comnaission often do you review your internal evaluation precedures? Once a month Once every other month Once every quarter Once every other quarter Once a year For all client accounts? Prior to client contacts? Have these procedures aided your management of the Have these quality control procedures improved to 23. of of How a. 21. Errors Errors firm? the services offered your clients? What are the procedures used in evaluating the firna's technical and -46- financial performances? a. Internally 1. Total number of clients 2. 3. 4. 5. Amount of repeat business Total amount of contract work Cash flow Number of staff over a fixed period of time Size of the facility over a fixed period of time b. Externally 1. Performance in competetive bidding on identical projects 2. Performance in services offered in areas serviced by competetors 3. Client feed-back on the firm's performance 6. Market survey of competetors What was the profit picture of the firm for the past 5 years? What were the primary factors, in your opinion, responsible for this performance? 4. c. d. 24. b. Direct costs 3. Indirect costs is your evaluation of independent contract research laboratories? Relative to the firm Relative to each other What a. b. c. d. e. 26. Billings 2. What a. 25. 1. your evaluation of industrial research laboratories? In toxicological research In areas similar to what your firm offers in services Clients with large research facilities Clients with medium research facilities Clients with small research facilities is What is your evaluation of the regulatory agencies? a. Food and Drug Administration Technical 2. Administrative (registration) Environmental Protection Agency 1. Technical 2. Administrative (registration) 1. b. 27. What have been 28. On the primary factors responsible for R&D a. 29. firm? comment on whether the use research laboratories could, or could not replace the basis of your experiences, could you of independent contract b. the success of the capabilities in: Industrial research laboratories Governmental research laboratories Have you been able to observe any trends in the business of independent contract research laboratories over the past year? -47- Appendix Totallndustry Number of New Number of Difference be- R&DExpendi- tween Companies and NewSingle Chemical Entities tures. Year 1949 III * {naillion$) Single Chemi- Participating cal Entities Companies Introduced Surveyed -48- References 1. Elixir of Sulfanilamide-Massengill: J. 2. Mellin, J. 3. Amer. Med. Assoc. I, II, III, & VII; IV, V, VI, 109:1531-1539(1937). G.W. & M. Katzenstein, The saga of thalidomide. New Eng. Med. 267:1184-1193; 1238-1244(1962). Food and Drug Administration, Appraisal of the Safety of Ch emicals Foods, Drugs and Cosmetics Association of Food and Drug in ; Officials, U.S., Austin, Texas, 107 pp. 1959. 4. Weil, C.S., M.D. Woodside, J.R. Bernard, andC.P. Carpenter, Relationship between single-peroral, one-week, and ninety day rat feeding studies, Tox, App. Pharm. 14:426-431(1969). 5. Weil, C.S. and D.D. McCoUister, Relationship between short- and longterm feeding studies in designing an effective toxicity test. Agri. Food Chem. 11:486-491(1963). 6. Food Protection Committee, Food and Nutrition Board, Evaluating the Safety of Food Chemicals, NAS-NRC publication. National Academy of Sciences, Washington, D. C." (in press). 7. Standard & Poor's Industry Surveys: Drugs, Medical Care and Cosmetics, Basic Analysis page D14, June 18, 1970. ; 8. Standard & Poor's Industry Surveys; Health Care, Drugs and Cosmetics, Basic Analysis page H23, June 24, 1971. ; 9. 10. Forrester, J.W., Industrial Dynamics. ; The MIT Press, Cambridge, 1971. Forrester, J.W., Principles of Systems, Wright-Allen Press, Inc., 2nd Preliminary Edition, Cambridge, 1971. 11. Roberts, E.B., The Dynamics of Research and Development Row Inc., New York, 1964, 12. Mansfield, E. The Economics of Technological Change, Co. & Inc., New York, pp. 77-80, 1968. W.W. Norton 13. Standard & Poor's Industry Surveys (Drugs); 1949 through 1971. 14. , , Harper & Hearings on Drug Safety, Part I; Before a subcommittee of the committee of government operations; House of Representatives, 88th Congress, 2nd Session; March 24, 25; April 8, June 3, 1964. ; V V Date Due APR. 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