Risk Sharing in Drug Development

1. Risk Sharing inDrug Development Richard Malcolm, Ph.D. CEO, Acurian September 15, 2011 | BIOCOM

2. 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

3. 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

4. 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

5. Types of Risk Sharing None Partial Complete Total

6. 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

7. None: Time & Materials RISK Buyer Seller Buyer pays for all fees regardless of results • Time (people) • Project manager $/hour • Web developer $/hour • Creative director $/hour • Materials (things) • TV production $/commercial • TV airtime $/station/market • Call center $/call • Printing & postage $/letter

8. RISK Partial: Non-Pass Through Buyer Seller Buyer pays for some costs based upon results Buyer pays for all pass through costs • Time (people) • Project manager $/hour • Web developer Results-based • Creative director Results-based • Materials (things) • TV production $/commercial • TV airtime $/station/market • Call center $/call • Printing & postage $/letter

9. RISK Complete: Non-Pass Through Buyer Seller Vendor compensated for staff only upon delivery of results Buyer pays for all pass through costs Buyer pays for all pass through costs • Time (people) • Project manager Results-based • Web developer Results-based • Creative director Results-based • Materials (things) • TV production $/commercial • TV airtime $/station/market • Call center $/call • Printing & postage $/letter

10. Total: Price Per Unit RISK Buyer Seller Buyer pays no fees, only for units produced based on pre-negotiated unit price • Time (people) • Project manager Results-based • Web developer Results-based • Creative director Results-based • Materials (things) • TV production Results-based • TV airtime Results-based • Call center Results-based • Printing & postage Results-based

11. 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

12. None: Costing Example • Time (people) • Project manager $200/hour x 100 hours = $20,000 • Web developer $90/hour x 100 hours = $9,000 • Creative director $150/hour x 100 hours = $15,000 • TOTAL FOR TIME = $44,000 • Materials (things) • TV production $15,000/commercial = $15,000 • TV airtime $40,000/week x 6 weeks = $240,000 • Call center $15/call x 600 calls = $9,000 • Printing & postage $1.75/letter x 100,000 letters = $175,000 • TOTAL FOR MATERIALS = $439,000 Vendor projects that these costs will result in 100 randomized patients

13. 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

14. Partial: Costing Example • Time (people) • Project manager $200/hour x 100 hours = $20,000 • Web developer $90/hour x 100 hours = Tied to results • Creative director $150/hour x 100 hours = Tied to results • TOTAL = $20,000 + $24,000 if commitments are met • Materials (things) • TV production $15,000/commercial = $15,000 • TV airtime $40,000/week x 6 weeks = $240,000 • Call center $15/call x 600 calls = $9,000 • Printing & postage $1.75/letter x 100,000 letters = $175,000 • TOTAL FOR MATERIALS = $439,000 Vendor projects that these costs will result in 100 randomized patients

15. 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

16. Complete: Costing Example • Time (people) • Project manager $200/hour x 100 hours = Tied to results • Web developer $90/hour x 100 hours = Tied to results • Creative director $150/hour x 100 hours = Tied to results • TOTAL FOR TIME = $44,000 in staff fees tied to results • Materials (things) • TV production $15,000/commercial = $15,000 • TV airtime $40,000/week x 6 weeks = $240,000 • Call center $15/call x 600 calls = $9,000 • Printing & postage $1.75/letter x 100,000 letters = $175,000 • TOTAL FOR MATERIALS = $439,000 Vendor projects that these costs will result in 100 randomized patients

17. 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

18. Total: Costing Example • Time (people) • Project manager $200/hour x 100 hours = $20,000 • Web developer $90/hour x 100 hours = $9,000 • Creative director $150/hour x 100 hours = $15,000 • TOTAL FOR TIME = $44,000 • Materials (things) • TV production $15,000/commercial = $15,000 • TV airtime $40,000/week x 6 weeks = $240,000 • Call center $15/call x 600 calls = $9,000 • Printing & postage $1.75/letter x 100,000 letters = $175,000 • TOTAL FOR MATERIALS = $439,000 Vendor projects that these costs will result in 100 randomized patients - payment is tied to projected outcome rather than any activity.

19. 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.

20. Comparison of Each Risk Share *Assuming full budget spent

21. 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

22. 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?)

23. Changes in Pricing Assumptions Protocol amendment Drug availability Number of active sites Early termination of contract

24. The “All Patients” Trick Vendor #1 Vendor #2 Cost of Recruitment ÷ Total Patients in the Study Cost of Recruitment ÷ Total Patients Required to Fill Gap $600,000 ÷ 1,000 = $600/patient But 70% of the 1,000 patients will come from sites,so the total cost of recruitment is not grounded inassessing actual work required to add 300 external patients. $1,000,000 ÷ 300 = $3,333/patient While on paper the per patient price looksunfavorable, it is a realistic assessment to fill the 30% enrollment gap and prevents against change orders. • 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:

25. The “Risk Share” Trick Partial Risk Share Total Risk Share $500,000 for 200 patients. $2,500 per patient prediction. But unrealistic predictions with no performancepricing means cost per patient Can be substantially more. $1,000,000 for 200 patients. $5,000 per patient contract. While on paper the per patient price isdouble the other vendor, it is a contractually fixed price based enrollment feasibility. • 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)

26. 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

27. Thank you.