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 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 7 Buyer pays for all fees regardless of results RISK Buyer Seller

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

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

Total: Price Per Unit 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 10 Buyer pays no fees, only for units produced based on pre- negotiated unit price RISK Buyer Seller

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$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 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 vendors performance against $483,000. For example: 100 patients randomizedSponsor pays $4,830/patient 50 patients randomizedSponsor pays $9,660/patient 10 patients randomizedSponsor pays $48,300/patient 13

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 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 vendors performance against $459,000. Vendor receives +$24,000 upon delivery of 100 rands. For example: 100 patients randomizedSponsor pays $4,830/patient 50 patients randomizedSponsor pays $9,060/patient 10 patients randomizedSponsor pays $45,300/patient 15

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 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 vendors performance against $439,000. Vendor receives +$44,000 upon delivery of 100 rands. For example: 100 patients randomizedSponsor pays $4,830/patient 10 patients randomizedSponsor pays $43,900/patient 17

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. 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 patients. No other fees may be invoiced. Invoicing occurs only on randomization. 19

Comparison of Each Risk Share 20 Risk to VendorPrice TypeMinimum Cost Per Patient* (100 patients) Maximum Cost Per Patient * (1 patient) None (T&M) 0%Variable$4,830$483,000 Partial5%Variable$4,830$459,000 Complete10%Variable$4,830$439,000 Total100%Fixed$4,830 *Assuming full budget spent

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

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 All Patients 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 The Risk Share Trick

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.