Risk Sharing in
Drug Development
Richard Malcolm, Ph.D.
CEO, Acurian
September 15, 2011 | BIOCOM
Risk Sharing Defined
• A method in which the cost of the
consequences of a risk is distributed among
several participants (e.g. syndication)
• Business management method whereby the
financial consequences of a risk are
distributed among both vendor and client
2
Objectives of Risk Sharing
• Ensure all parties have an aligned interest to
the ultimate success of a venture
– Shared accountability
• Put the vendor(s) “in the boat” with the
sponsor
3
General Background
• First appeared in centralized patient recruitment in
the 1990s
• Soon disappeared due to declining demand
• Made a comeback in past several years
• Increasingly common requirement in patient
recruitment & retention contracts
• Applicable to virtually any drug development service,
not just patient recruitment
4
Types of Risk Sharing
•
•
•
•
None
Partial
Complete
Total
5
Patient Recruitment Example
• Phase IIb study of drug X in generalized anxiety
disorder
• Recruitment vendors receive RFP from drug company
to provide recruitment/enrollment services
• Services requested include mix of radio/TV ads,
internet recruiting & direct mail
6
None: Time & Materials
RISK
Buyer
Seller
• Time (people)
– Project manager
– Web developer
– Creative director
$/hour
$/hour
$/hour
• Materials (things)
–
–
–
–
TV production
TV airtime
Call center
Printing & postage
$/commercial
$/station/market
$/call
$/letter
7
Buyer pays for
all fees
regardless of
results
RISK
Partial: Non-Pass Through
Buyer
Seller
• Time (people)
– Project manager
– Web developer
– Creative director
$/hour
Results-based
Results-based
Buyer pays for
some costs
based upon
results
• Materials (things)
–
–
–
–
TV production
TV airtime
Call center
Printing & postage
$/commercial
$/station/market
$/call
$/letter
8
Buyer pays for
all pass
through costs
RISK
Complete: Non-Pass Through
Buyer
Seller
• Time (people)
– Project manager
– Web developer
– Creative director
Results-based
Results-based
Results-based
Vendor
compensated
for staff only
upon delivery
of results
• Materials (things)
–
–
–
–
TV production
TV airtime
Call center
Printing & postage
$/commercial
$/station/market
$/call
$/letter
9
Buyer pays for
all pass
through costs
RISK
Total: Price Per Unit
Buyer
Seller
• Time (people)
– Project manager
– Web developer
– Creative director
Results-based
Results-based
Results-based
• Materials (things)
–
–
–
–
TV production
TV airtime
Call center
Printing & postage
Results-based
Results-based
Results-based
Results-based
10
Buyer pays no
fees, only for
units
produced
based on prenegotiated
unit price
Payment Markers (Units)
• For this metric to be successful, it must:
 represent a reasonable level of vendor performance
 be considered as a fair assessment of performance (by sponsor &
vendor alike)
• Key patient recruitment agreement metrics:
 pre-screened referral
 screened referral
 randomized subject
11
None: Costing Example
• Time (people)
– Project manager
– Web developer
– Creative director
$200/hour x 100 hours = $20,000
$90/hour x 100 hours = $9,000
$150/hour x 100 hours = $15,000
TOTAL FOR TIME = $44,000
• Materials (things)
–
–
–
–
TV production
TV airtime
Call center
Printing & postage
$15,000/commercial = $15,000
$40,000/week x 6 weeks = $240,000
$15/call x 600 calls = $9,000
$1.75/letter x 100,000 letters = $175,000
TOTAL FOR MATERIALS = $439,000
Vendor projects that these costs will result in 100 randomized patients
12
So….No Risk Share Means:
TOTAL FOR TIME = $44,000
+
TOTAL FOR MATERIALS = $439,000
= $483,000 paid regardless of vendor results
Vendor has no fees tied to results. Buyer bears 100% of the risk.
Cost per patient depends on vendor’s performance against $483,000.
For example:
100 patients randomized Sponsor pays $4,830/patient
50 patients randomized Sponsor pays $9,660/patient
10 patients randomized Sponsor pays $48,300/patient
13
Partial: Costing Example
• Time (people)
– Project manager
– Web developer
– Creative director
$200/hour x 100 hours = $20,000
$90/hour x 100 hours = Tied to results
$150/hour x 100 hours = Tied to results
TOTAL = $20,000 + $24,000 if commitments are met
• Materials (things)
–
–
–
–
TV production
TV airtime
Call center
Printing & postage
$15,000/commercial = $15,000
$40,000/week x 6 weeks = $240,000
$15/call x 600 calls = $9,000
$1.75/letter x 100,000 letters = $175,000
TOTAL FOR MATERIALS = $439,000
Vendor projects that these costs will result in 100 randomized patients
14
So….Partial Risk Share Means:
TOTAL FOR TIME = $20,000 + $24,000 if 100 rands delivered
+
TOTAL FOR MATERIALS = $439,000
= $459,000 paid even if vendor fails / $483,000 if vendor succeeds
Vendor has only $24,000 tied to results. Buyer bears 95% of the risk.
Cost per patient depends on vendor’s performance against $459,000.
Vendor receives +$24,000 upon delivery of 100 rands. For example:
100 patients randomized Sponsor pays $4,830/patient
50 patients randomized Sponsor pays $9,060/patient
10 patients randomized Sponsor pays $45,300/patient
15
Complete: Costing Example
• Time (people)
– Project manager
– Web developer
– Creative director
$200/hour x 100 hours = Tied to results
$90/hour x 100 hours = Tied to results
$150/hour x 100 hours = Tied to results
TOTAL FOR TIME = $44,000 in staff fees tied to
results
• Materials (things)
–
–
–
–
TV production
TV airtime
Call center
Printing & postage
$15,000/commercial = $15,000
$40,000/week x 6 weeks = $240,000
$15/call x 600 calls = $9,000
$1.75/letter x 100,000 letters = $175,000
TOTAL FOR MATERIALS = $439,000
Vendor projects that these costs will result in 100 randomized patients
16
So….Complete Share Means:
TOTAL FOR TIME = $0 fixed. $44,000 tied to delivery of 100 rnads
+
TOTAL FOR MATERIALS = $439,000
= $439,000 paid even if vendor fails / $483,000 if vendor succeeds
Vendor has only $44,000 Results-based. Buyer bears 90% of the risk.
Cost per patient depends on vendor’s performance against $439,000.
Vendor receives +$44,000 upon delivery of 100 rands. For example:
100 patients randomized Sponsor pays $4,830/patient
10 patients randomized Sponsor pays $43,900/patient
17
Total: Costing Example
• Time (people)
– Project manager
– Web developer
– Creative director
$200/hour x 100 hours = $20,000
$90/hour x 100 hours = $9,000
$150/hour x 100 hours = $15,000
TOTAL FOR TIME = $44,000
• Materials (things)
–
–
–
–
TV production
TV airtime
Call center
Printing & postage
$15,000/commercial = $15,000
$40,000/week x 6 weeks = $240,000
$15/call x 600 calls = $9,000
$1.75/letter x 100,000 letters = $175,000
TOTAL FOR MATERIALS = $439,000
Vendor projects that these costs will result in 100 randomized patients payment is tied to projected outcome rather than any activity.
18
So….Total Risk Share Means:
TOTAL FOR TIME = $44,000
+
TOTAL FOR MATERIALS = $439,000
= $483,000
$483,000 / 100 randomizations = $4,830 per patient
Buyer pays a fixed $4,830 for 1-100 patients.
No other fees may be invoiced.
Invoicing occurs only on randomization.
19
Comparison of Each Risk Share
Risk to Vendor
Price Type
Minimum Cost Maximum Cost
Per Patient*
Per Patient *
(100 patients)
(1 patient)
None
(T&M)
0%
Variable
$4,830
$483,000
Partial
5%
Variable
$4,830
$459,000
Complete
10%
Variable
$4,830
$439,000
Total
100%
Fixed
$4,830
$4,830
*Assuming full budget spent
20
Penalties & Incentives
• Risk-share contracts can also contain special
performance provisions that govern budget variance
• Carrot: Vendor has monetary incentive to out
perform contract terms
• Stick: Vendor has monetary punishment if it
underperforms contract terms
• Risk is generally tilted toward the vendor as the
monetary penalties are harder to absorb
21
Milestones or Units?
• Will achieving the payment markers constitute
success?
• Is there a time requirement (e.g. Do patients
need to be enrolled in a specific time?)
22
Changes in Pricing Assumptions
•
•
•
•
Protocol amendment
Drug availability
Number of active sites
Early termination of contract
23
The “All Patients” Trick
• Vendor bid strategy is to make per patient price appear lower, but consider
how each bidder ascertains their per patient price in a 1,000-person
study:
24
The “Risk Share” Trick
• Two specialty recruitment vendors bidding against each other
• One vendor uses a partial risk share, the other uses a total risk share
• The partial risk share budget is based on a prediction while the total risk share is a contract that
is governed by the vendor meeting performance metrics (randomized patients)
25
Conclusions
• Risk sharing can be beneficial to both sponsors & vendors
• Terms, conditions & units need to be well thought out
• Patient enrollment contracts should consider both vendor
costs & pass-through (to be apples-to-apples)
• Consideration should be given to impact of changes in
conditions or terms
• Results-based pricing greatly improves outcomes for sponsors
26
Thank you.