Flexible access to Resources , geographical and therapeutic area expertise, shared drug development risks, significant cost and time savings — the multiple benefits of partnering with CROs are well known in the biopharma industry. This is evident through the ever-increasing proportion of clinical research conducted through these partnerships. More than 80% of biopharma sponsors are expected to engage in some form of strategic partnership within the next five years.1
Despite the clear advantages and resulting rapid growth in sponsor-CRO alliances, opportunities for partnership are still underutilized. One reason for this is a long-established industry resistance to process change:
“Change in how companies innovate has been slow because there is a great amount of entropy in the ideology of what the industry must do with research programs. . . . [M]any executives remain unwilling or unable to conceive of innovation strategies that do not rely for the most part on internal R&D efforts, which has been the de facto model for at least 60 years.”
– Economist Intelligence Unit2
Aside from general inertia, resistance to formation of outsourcing partnerships may be due to their poor track record. After all, in the wider industry, almost half of all partnerships fail.3 A number of factors, including cultural differences, can be blamed for some of these failures. However, partnership breakdown is just as commonly caused by weak relationship commitment, due as much to the type of relationship as the companies involved. Therefore the choice of partnership type can be as important to a successful outcome as the choice of partner.
Figure 1: Step-levels in partnership evolution
Partnership types – From Tactical to Alliance
The earliest partnership models were typically transactional, whereby sponsors employed a CRO on a per-project basis, mostly to help boost resource power. Such partnerships are generally appropriate for short-term, one-off projects, where price is often the dominant factor in CRO choice. This is because their requirement for CRO tactical negotiations and bidding delays each individual project kick-off. Neither the sponsor nor the CRO realizes efficiencies or long-term benefits, making this the least efficient type of partnership.
Of a longer term than transactional, preferred partnerships require fulfilment of preconditions and prequalification of the partner CRO. Contracting a preferred partner will therefore take longer than a purely transactional partner, however preferred provider status can benefit both parties by generating a more secure workflow stream or limited competition for the CRO, and a pre-negotiated and assured standard of output, discounts or other concessions for the sponsor.
Partnering relationships make up the middle ground between purely transactional cooperation and complete integration into the sponsor company. These relationships become more strategic than tactical; risks and milestones are shared between sponsor and CRO and programs are instigated to ensure mutual development and performance improvement.
Functional service provider (FSP) partnerships fall under this category; they package together similar repetitive tasks/functions across an entire clinical development program to achieve synergistic efficiencies.
Alliance partnerships allow the CRO to have an even more vested interest in the sponsor company, because drug development risk is shared in return for a stake in anticipated profits. Business objectives must therefore be aligned, and highly stringent due diligence must be undertaken. The benefit to the sponsor is at the business level rather than the individual study level. For example, a global full-service CRO can identify where potential future challenges may lie in the sponsor product’s clinical development and suggest innovative solutions to these challenges before they even arise. However, a limited number of sponsor-CRO relationships are suitable to progress to alliance status.
Integration partnerships are highly transformational, whereby the CRO and sponsor undergo a merger and/or acquisition deal to become a fully integrated company. This is the strongest type of partnership and requires full integration in order to succeed.
Alliance Partnership Models
In recent belt-tightening years, the biopharma industry has become more reliant on the benefits CROs provide. Such reliance has led to evolution of more traditional transactional and tactical methods of CRO-sponsor partnering into more strategic FSP and longer-term alliance-type partnerships.
Figure 2: Overview of alliance partnership models
Risk-Sharing “Bonus-Malus” Arrangements
A series of milestone-based bonuses and penalties are agreed upon jointly by the CRO and sponsor that reward superior performance and penalize poor performance. If the contract is structured correctly, sponsor change orders also can be reduced or eliminated. However, such arrangements generally focus on individual study-level incentives and efficiencies rather than a long-term strategic relationship.
The chosen CRO is awarded responsibility to develop a single compound, and is incentivized to exceed performance metrics. Ideally, backup projects with alternative compounds are in place to ensure the CRO helps the sponsor “quickly kill” the compound if necessary. The sponsor benefits from resource cost savings and the continuity that a single-source vendor relationship provides throughout late-stage development.
The CRO assumes management and execution of a specific function for the sponsor, such as data management or monitoring. The relationship usually extends across a portion of the portfolio or the entire portfolio, and may include transfer of staff from the sponsor organization to the CRO.
As well as providing a predictable revenue stream and a base for relationship expansion, functional management alliances enable CROs to apply their processes to all contracted activities for the sponsor. This provides the sponsor with resourcing cost savings, efficiency cost savings based on the increased efficiency of CRO activity, and also improved relationship transparency through regular measurement and reporting.
Therapeutic Area Management
Often following a successful period of compound or functional management, the CRO may be awarded development of all compounds in a therapeutic area. In addition to operational performance incentives, which may have been agreed in earlier stages of the relationship, the CRO is incentivized based on the overall performance of the molecules in the therapeutic area itself. The CRO and sponsor therefore share both in the benefits of molecule success and also in the risks of molecule failure.
This set-up can greatly enhance the CRO’s reputation in the specific therapeutic area, and also enables the CRO to start sharing more directly in the sponsor’s success. In return, the sponsor benefits from the efficiencies and quality improvements obtained by outsourcing to one provider, while making resourcing and additional cost savings based on CRO efficiencies. As with functional management, the sponsor also benefits from an improved relationship visibility as a result of regular measurement and reporting.
Business Process Outsourcing
Possibly the most complex but also the most valuable of all alliance models, business process outsourcing relationships involve execution by the CRO of all development activities, in partnership with sponsor management teams. The risks of failure and rewards of successful development and commercialization are shared more evenly between the CRO and sponsor.
These integrated business partnerships enable CROs to fully implement their processes and realize their efficiencies across the sponsor’s entire portfolio. The CRO is provided with a predictable revenue stream together with potentially significant ongoing revenues when commercialization is successful. They also benefit from positioning to partners as a leader in the movement of late stage development.
Alongside the benefits to CROs, business process outsourcing alliances enable sponsors to focus on their core competencies, as well as allowing them to benefit from the significant efficiencies and quality improvements that can be gained by outsourcing to one provider.
Financial Partnership Models
Each of the aforementioned partnership and alliance types can have varying complimentary financial partnership models. The choice of these should depend both on the type of alliance used and also on the scope of the partnership. Selecting the correct financial model is important in setting appropriate incentives and securities in order for each type of alliance to achieve its optimum potential.
Fee for Service
This is the most basic financial model, and is usually employed at the transactional partnership level. Payments are made for discrete CRO services, based on cost of service provision plus a mark-up. Due to the open competition at the start of each transactional partnership, pricing is market-determined.
Figure 3: Evolution of financial models from tactical to strategic level partnerships
Margin at Risk
Payments are made for discrete services; however, the CRO sets pricing at its marginal cost of fielding the service, foregoing their standard margin in return for remuneration more directly linked to milestone patient payments.
Margin/Cost at Risk
The CRO risks a proportion — of varying scale, up to the whole amount — of the cost base in order to secure a greater share in the upside via milestone payments or product royalties.
Product for Services/Cash
The CRO provides services at cost or gratis in exchange for equity in the product or corporate entity.
“Lift and Shift”
This type of financial model is essentially an infrastructure deal in which the sponsor company typically transfers FTEs or fixed assets to the CRO in return for commitment to business development work.
Virtual Pharma Development Organization
Often underpinned by an equity stake in the corporate entity, the sponsor shares intellectual property in a given therapeutic area and a split of equity on the product with the CRO in return for development capabilities.
Making the Next Step: Evolving From Tactical to Strategic
Sponsor-CRO relationships typically start as tactical partnerships, a prudent arrangement when there is no track record of success and trust between the parties. However, where a relationship is working at a tactical level or there is a track record of mutual success and trust, it often becomes beneficial to both parties to evolve to a more strategic alliance.
Roadblocks to Alliance Evolution
Care must be taken to ensure specific pre-requisites are fulfilled before relationship evolution is considered. Both the CRO and sponsor require an economic incentive to evolve the relationship. For example, the sponsor should have a growing, somewhat predictable pipeline. There should be alignment between the sponsor and CRO on therapeutic areas of focus, and both parties must have sufficient provision of resources and tools to manage a complex relationship.
Assuming the bedrock of the alliance is appropriate to foster evolution from a tactical level to a strategic partnership, both the CRO and sponsor will face many challenges to ensure the partnership evolves efficiently and its benefits are fully realized.
Evolutionary Challenges for CROs and Sponsors
Strategic partnerships require CRO willingness to take on real accountability and true risk, together with the ability to drive efficiencies into the business and drive up margins. Staff retention needs to be managed over long-term engagements, and care needs to be taken to strike an appropriate balance between the need for increased governance and the ramp-up costs associated with implementing it. The sponsor’s portfolio predictability and corresponding CRO resource planning must be carefully managed to ensure that the CRO’s dependency on the sponsor company is not overly unbalanced and the CRO can maintain stability by keeping an appropriate level of focus on all of its customers.
Meanwhile, the traditional biopharma sponsor’s resistance to change can pose a significant challenge to evolution into a healthy strategic partnership, and needs to be managed both internally and with the CRO through use of appropriate tools and governance. The sponsor organization must be willing to invest upfront to ensure the right people are in place to manage the relationship; previously good do-ers at the tactical level don’t necessarily make good oversee-ers at the strategic level. Expectations around the complexity of implementation need to be realistic; it is easier to evolve a pre-existing relationship over time than to force partnership transformation overnight. At the same time, care must be taken to manage exits or transitions from existing suppliers, and also to recognize that it is difficult to devolve back from a strategic to a tactical-level partnership.
Survival of the Fittest
Not all sponsor-CRO relationships are appropriate to advance to a broader partnership and strategic alliance, and many inappropriate pairings fail. If the right foundations are in place for partnership evolution to take place — common objectives are shared, there are advantages to both parties, and senior management demonstrates unwavering commitment from — then the rewards are plentiful. A successful strategic alliance is a source of differentiation for both sponsor and CRO. Most importantly, it allows both sides to focus on their core competencies, accelerating the speed and streamlining the efficiency with which better medicines are brought to patients.
- Taylor N Outsourcing-pharma.com April 2011 (available at: www.outsourcing-pharma.com/Clinical-Development/Strategic-deals-to-drive-market-share-gains-for-big-CROs, accessed April 2012)
- Kielstra P Economist Intelligence Unit July 2011 (available at: www.managementthinking.eiu.com/innovation-imperative-biopharma.html, accessed April 2012)
- Kaplan R et al. Harvard Business Review January 2010 (available at: hbr.org/2010/01/managing-alliances-with-the-balanced-scorecard/ar/1, accessed April 2012)
Andrew Townshend is Vice President, Alliance Development at INC Research, a global full-service CRO. Ian Lauf, MBA, is Global Sourcing Manager, Medical & Clinical Trial Central Services at Boehringer Ingelheim Pharmaceuticals, Inc. Visit www.incresearch.com and www.boehringer-ingelheim.co.uk for more information.