Managing the Three Drivers of Risk in Drug Development

Reexamining service provider roles can lead to savings and speed on the long road to registration
Mar 31, 2010

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

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

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

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

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

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

Tracing the Taxonomy of Risk

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

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

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

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

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

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

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

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

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