During and post the end of the financial crisis, the trend in the pharmaceutical industry to use third parties in the clinical development cycle has increased, as the pressure on boards to reduce costs continues to mount.
The advantages for big pharmaceutical companies to use specialist clinical research organisations (aka 'CROs') are clear, particularly those companies who are operating in emerging markets where there is a bigger pool of trial recruits and trial expenditure is lower than in developed economies.
While pharmaceutical companies face a wide range of risks including financial stability, data management, personnel turnover and reputational risks, the concern with the use of CROs has always been the number of risks in the practices themselves that may be overlooked. Clearly, some of these could have calamitous consequences if not properly managed, albeit from an arm's length position.
Regulatory risks such as the introduction of the stringent Bribery Act also add an additional burden to corporates, including pharmaceutical companies. The Act creates bribery offences covering the bribery of public officials and making commercial organisations criminally liable for the actions of third parties.
Therefore, pharmaceutical companies need to know what they are paying their CROs and what the CRO is paying third parties on their behalf. While the law is not specific to the pharmaceutical industry, drug companies are more vulnerable to violations because of the intricate nature of the relationships between the pharmaceutical company, the CRO and other industry figures in the supply chain such as doctors, nurses and lab technicians.
In addition, there may also be a lack of visibility around costs in contracts which can lead to frequent cases of misreporting.
Clinical trial costs are one of the largest costs to a pharmaceutical company and therefore apart from regulations, the importance of ensuring that a company is paying the right amount to their CRO given what is often a complex, lengthy and shifting contractual position as trials progress is also an important risk that needs to be managed.
We have seen that contract obligations are not always considered at the start of the relationship between the Pharma Company and CROs, and the frequency of misreporting may lead to companies trying to recover significant cash and cost savings at a later date.
The original clinical trial budget may often be revised as a result of numerous changes in order requests. However, internally the effect of the revised budget is often not monitored against actual invoices received. This makes it very difficult to challenge the validity of the CRO invoice when the financial position is internally unclear.
Pharmaceutical companies should conduct a regular financial audit of their CRO contract, not just to manage disputes, but also to identify and clarify ambiguities and impose a self-policing policy on CROs so that they can answer questions such as "do you know what the current agreed financial budget position for the trial is?"
Other important issues to consider include questions around whether they are paying for 'pass through costs' that contractually they do not have to pay where the cost was incurred after the contractual time frame, say four months from occurrence.
An example of how important this is is shown by the fact that in one case we investigated, nearly £1 million costs had been invoiced and paid even though the costs were incurred a long time ago and were time barred by the contract. This also demonstrates the importance of those responsible for the management of the CRO relationship within the pharmaceutical company knowing and enforcing the obligations within the contract.
In addition, the question of whether the investigator floats paid in advance have been deducted from the actual costs incurred before being invoiced to the pharmaceutical company is particularly important. In a number of reviews we have identified approximately £3 million advance payments made to CROs which have not been deducted from future invoices and without an audit it is unlikely the clients systems would have picked this up.
These are only a few questions that those managing the financial aspects of the CRO relationship within the pharmaceutical company should know the answer to. Other questions which they should be able to answer also include:
So what are some of the key steps that pharma companies need to consider when considering how best to manage their CRO relationship?
It is clear that there is an increased need to demonstrate governance over third party spends and increasing the bottom line has never been more important to pharmaceutical companies. With a range of risk factors building up to apply increased pressure on them, the argument for getting to know both their CROs and their associates much better appears to be more important than ever before.
*A version of this article first appeared in the Pharma Times
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.