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European Pharmaceutical Contractor

Risk Analysis

Big changes are afoot in the world of pharmaceuticals, and it is about time. For too long, it has dealt with sky high costs and long periods of time spent developing and bringing new drugs to market. This has caused the industry to take a long hard look at how it goes about its business, and how much time and money is spent on running certain functions and departments.

There has been talk for some time now about a shifting business model among many of the companies in the sector. It seems that the days of huge spends on internal R&D are going to be a thing of the past, with many big companies actively seeking to outsource the research functions of their business. If this approach becomes as widespread as is planned, it will result in significant market transformation. Large-scale outsourcing of these functions could see considerable opportunities open up for small- and medium-sized companies which are willing and able to take on this type of work.

However, these opportunities do come with risks. Understanding these risks and acting to mitigate them will ensure that relationships remain efficient, productive and symbiotic.

Market Context

While it is well-known that it takes a long time and a lot of money to bring a new drug to market, many people do not appreciate just how much of both are required to achieve this feat.

Recent research by Forbes magazine suggests that US pharmaceutical companies are spending a total of $5 billion per new medicine brought to market. While this figure applies to large companies working on dozens of the new products at any one time – most of which will fail – even for smaller producers, the estimated cost of bringing something to the point where it can be sold is $350 million. The reality is that that 95 per cent of experimental medicines are anticipated to fail in late-stage clinical trials, when much of the money and time has already been expended.

On average, it is estimated by industry figures that it costs between £800 million and £1 billion to bring a new drug to market, with the process itself typically taking between seven and ten years.

Shifting Model

While the costs of bringing an individual product to market are coming down, it is incredible to think – and significant for the industry as a whole – that since 1950 the number of new drugs approved per billion US dollars spent on R&D has halved almost every nine years. This means that vast sums of money are being poured into products which will never see the light of day. It is unsurprising then that pharma companies have been looking for alternative ways of structuring their businesses in order to shed some of these costs and wasted labour.

All of this points to the fact that the current norm is an unsustainable model, and one that is ripe for change. Among the many developments that are being enacted by the industry’s key decisionmakers, R&D outsourcing sticks out as the potential game changer.

Pharma companies have long been adopters of outsourcing in its various guises. The industry was quick to harness the benefits of this more efficient business structure, taking costly assets off the books to realise greater efficiencies and synergies, both in terms of financials and capabilities. They were early in the adoption of IT and business process outsourcing, so it is perhaps no surprise that the current market trajectory is the natural extension of this model.

This emerging trend, as it has been widely noted, has been the outsourcing of R&D functions to contract research organisations (CROs) and an increasing pool of generic companies which have the ability to research new products. In Scotland, for example, this has been one of the many reasons behind the growth of life sciences, which employed 17,300 people in 2012 – an increase of 18.5 per cent on 2011’s figure. Additionally, the country, which has been keen to champion the sector, has seen R&D business expenditure rise to £689 million.

This shift, as widely reported, is already having some positive impact on small- and medium-sized research organisations, yet this has left the debate a little lopsided. While the benefits are manifesting in the form of reduced costs and an increasingly collaborative approach to development, such arrangements do come with their risks, much of which are passed down the line to the companies involved with the funding. The risks are varied and can range wildly in scope and severity, whether in the form of litigation, loss of income, failure to achieve research targets, or damage caused to laboratories and equipment.

Understanding how these can impact small- and medium-sized research companies looking to take advantage of this shifting business model is integral to their success.

Company Protection

That being said, for every risk there is a form of mitigation. There are a number of preventative and protective measures research companies of varying sizes can consider before entering any form of agreement with a partner.

The first line of defence is undoubtedly the terms of the research contract itself. Initially at least, businesses should be looking to negotiate protection in this form as early as possible. Many insurers offer advice on these documents, in addition to lawyers, as part of a contract review service. Nevertheless, companies will still be exposed to some form of risk, regardless of how airtight a contract might be.

Of course, in what will typically be a ‘David and Goliath’ scenario, many smaller firms may find they have little, if any, power to negotiate the terms of a contract with a larger company. In which case, having a broad form of insurance protection becomes even more important.

Small- and medium-sized research companies can now access the full range of pharmaceutical covers, including cover for disputes arising from problems with research contracts, which had in the past only been available to the largest enterprises. They do, however, need to know what policies are available and what they entail, to benefit from this protection.

Insurance Policies

Firstly, from a more general perspective, ‘all risks’ cover is available, along with protection against any loss of revenue or contracted research income if, for example, a company fails to achieve a milestone or agreed goal. This will protect contractors against the costs of reinstating speculative or contract R&D work after a fire, breakdown of equipment or contamination incident, which can be huge in terms of time, additional expenditure and materials. Once reinstated, there is likely to have been a loss of income or additional expenditure which should also be considered.

Secondly, companies can often find themselves fighting for their ideas. On this front, cover is available for legal costs to pursue infringers under intellectual property (IP) litigation policies. These have advanced tremendously over the past few years and, on the other side of the equation, can also include cover to defend your business against allegations of infringement.

In a similar vein, going to court because of IP infringements can lead to serious delays in the work being carried out. Equally, contractual disputes or obligations with the contracting organisation can have a similar effect, and IP business interruption insurance is now available to cover any loss in revenue sustained while a company is fighting or defending this type of action.

Liability Cover

Additionally, clinical trials are unavoidable during drug or therapeutics development. Specialist clinical trials insurance provides ‘no fault’ compensation for injuries sustained by participants. The policy provides a fixed level of compensation and should extend to cover all parties involved in running the trial, including the sponsor, ethics committee, medical professionals and the CRO (but not the contract manufacturer, which retains its own product liability risk).

All businesses need to take into consideration claims arising from problems with the delivery of their products and services. Liability cover is a staple of the insurance industry, but life sciences, biotech and pharma companies benefit from a particularly broad form of cover. These policies can provide protection for pure financial losses, as well as claims for injury and damage. They can also go beyond traditional ‘negligence-based’ policy triggers, by including cover for claims that arise from allegations of breaches of the written or implied terms of any contract.

Mitigating Myriad Risk

As R&D outsourcing gathers more pace, it becomes increasingly important that businesses providing research functions understand the risks they are undertaking, how these might affect their businesses and how they can be mitigated. The alternative could be losses in revenue and significant additional costs, which may prove fatal.

These kind of occurrences happen when you least expect them. However, a holistic approach to cover, making sure all bases are covered, helps to not only mitigate the risk of this happening, but also provide businesses with the breathing space required to conduct their research.

The benefits of this emerging model will be realised by those who are best prepared to harness the opportunities that will undoubtedly become available. Making sure they are adequately protected for the new collaborative relationships which are set to become the industry norm will be a critical part of any successful strategy.

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Euan McKenzie is an Insurance Broker at Central Insurance, a member of the Scottish Life Sciences Association, with 27 years’ experience. He provides insurance and related contractual advice to clients in the technology and research sectors. Euan’s main areas of expertise are in liability associated with contracts, products, professional services/consultancy and IP. He is also Education Secretary of Aberdeen CII.
Euan McKenzie
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