Addressing CRO Consolidation Risks: How to Protect Clinical Trials

Contract Research Organization (CRO) consolidation has become a constant force in the life sciences market. This shifting environment has made protecting clinical trial success and anticipating and planning for CRO consolidation risks critical for pharmaceutical and medical device companies when negotiating agreements.

Working with high-performing CROs, with deep industry and therapeutic area expertise, is essential to pharmaceutical and medical device companies on the path to commercialization. The best value-based and customer-oriented CROs are also highly valued as targets for strategic acquirers, but this adds risk to the process and disrupts clinical trials. Protecting these interests is about anticipating and planning for CRO consolidation risks when negotiating agreements.

CRO consolidation is a trend that has been ongoing in recent years and has accelerated during the pandemic due to greater access to capital. When combined CROs focus their efforts on larger enterprises, small and mid-sized companies with relatively smaller pipelines often find themselves at the bottom of the priority list and with less leverage during contract negotiations.

By understanding some of the top concepts that should be built into CRO agreements up front, and knowing what can be renegotiated ahead of time, pharmaceutical and medical device companies can get ahead of these risks. If a CRO is acquired or otherwise consolidates, these concepts help to ensure a better transition and avoid substantial disruption, secure priority with the new or combined organization, and ultimately protect the success of current and future clinical trials.

Securing Personnel Terms in CRO Agreements: Negotiating Key Team Players and Core Functions

Key personnel terms are among the most important concepts that should be built into any CRO agreement. Like many other industries, customers often hire people, not companies at-large. Experienced and highly skilled personnel are essential. After intensive rounds of bid solicitation and due diligence, clinical trial sponsors are often able to not only find the most well-suited CRO to be working with, but they can identify a specific team within such CRO that is the best fit for the specific clinical trial being conducted. However, it’s not just critical to get the ideal team in place — it’s essential to keep them there. This is especially true when anticipating CRO consolidation.

Growth of the CRO or the team’s reputation can put this critical point of continuity at risk as either the team or the organization itself may get snapped up by larger players. Negotiating key team players and functions that cannot be reallocated at the unilateral decision of the CRO – even in the case of a merger or acquisition – protects a sponsor’s trial and its timelines and ensures the hand-picked CRO team remains in place despite other potential disruptions.

These provisions may take many shapes and are often heavily negotiated. While CROs may initially push back on “locking in” personnel, through negotiation a sponsor can typically get a CRO to agree to maintain certain key roles — such as the lead project manager, lead data manager, clinical team lead, medical monitor(s), and lead biostatistician for the entire duration of the trial, subject to exclusions if there is personnel turnover or necessary re-allocation outside of the CRO’s control (e.g., employment resignation or termination, parental leave, etc.). Both the scope of personnel and the exceptions are the most prevalent points of negotiation friction. The consequence of the CRO violating this provision is often a set percentage of the CRO’s fees or a set amount to be credited or paid to the sponsor as liquidated damages.

Keeping Trial Timelines on Track Using Incentives and Cost, Risk Sharing

Risk and cost sharing are another key component of a successful relationship with CROs. CROs often won’t advertise that they offer cost sharing, and risk tolerance among CROs varies to a certain degree, but negotiation is always possible with reasonable commercial terms to meet core timelines. When a merger or acquisition happens, these targets can be a risk, but if the CRO (and its successor) have skin in the game, a trial sponsor can reduce this risk.

From a contract perspective, including penalty/bonus programs keeps the CRO team accountable regardless of larger organizational changes. This has a natural consequence of securing relative priority for the sponsor’s clinical trial(s) if the CRO is acquired, because the acquiring company remains focused on protecting its profit margin on the award (since profitability and efficiencies were likely the primary drivers behind the acquisition in the first place).

Creating clear, measurable, delivery milestones, tied to key stages and objectives of the clinical trial, is an essential step in protecting trial success. For instance, ensuring that clinical trial sites are timely qualified, or that “First Patient In” or “First Patient Dosed” occurs on-time, are critical to avoiding delays that can have significant negative consequences for the trial sponsor, including budget increases, delayed regulatory approval, cancellation fees for previously secured manufacturing slots, and the triggering of milestone payments to a licensor or collaborator. Any or all of these results can also impact the sponsor’s financing opportunities, and for a public company, its stock price.

There are numerous ways to arrange these terms to ensure short- and long-term performance and keep teams engaged:

• Penalties: Straightforward approach that invokes financial penalties when key timelines or milestones are missed.
• Bonuses: Conversely, if CROs meet or beat agreed upon timeframes, they have the opportunity to earn significant bonuses.
• Earn Back: These terms ensure that if one milestone is missed, all is not lost. It gives the CRO the opportunity to make up lost time and earn back some or all of any triggered penalties. This can also be structured as an up-front, bottom-line discount to the total budget for the clinical trial, which the CRO can earn through meeting or exceeding performance incentive criteria in both the timeliness and quality of its performance.

Managing Strategic Change Management and Cost Control

Outsourcing your clinical trials to a CRO should not mean that you relinquish control over your budget. As most CROs operate on a fee-for-service basis, and clinical trials are often dynamic, changes in scope or timelines are seemingly an inevitable reality in drug and device development.

Among other things, this can create three challenges. It can add undue administrative burden on your team, distract from the paramount focus of running and overseeing the trial itself, and quickly balloon the expected cost of the trial well beyond the forecasted budget. This reality is only amplified if a CRO is acquired or acquires another entity for the reasons set forth above. As a result, clinical teams find themselves in a never-ending cycle of change order negotiations during the trial’s lifecycle.

Accordingly, it’s very important to set clear parameters in the contract defining the following terms to anticipate risks that may occur with CRO consolidation:

• When a change can be requested by either party and the process for presenting, evaluating, and agreeing upon a change.
• A monetary threshold for change orders to limit amendments to material changes only.
• If circumstances permit, an aggregate monetary cap on the total potential increase to the original work order budget, with the CRO assuming the cost for anything in excess of such cap.

Further, sponsors often include a reserve budget in the original work order (usually no more than 10% of the original fees budgeted), so the CRO can apply those funds to initial scope increases and/or changes without the need for a change order. This cuts down the initial administrative burden of the inevitable scope change cycles.

Positioning Assignment Notice and Termination Assistance with CROs

A clinical trial sponsor may also seek to require its CRO to provide formal written notice before transferring its rights and obligations to an acquirer. In this case, the CRO will essentially be forced to proactively engage with the sponsor regarding the nature and extent of known or expected changes arising from the transaction.

A clinical trial sponsor may also seek a specific termination right tied to any acquisition/assignment to a third party, which triggers specific financial assistance to transition the clinical trial back to the sponsor or an alternative CRO selected by the sponsor. This will come with its own set of challenges and disruptions, but it may be the best long-term option for the trial/program. It is important to note, though, that the acquiring organization assumes the ‘legacy’ contract with the original CRO “as is,” which reinforces the importance of including the three above elements to ensure the new entity is bound by the same terms strategically negotiated by the clinical trial sponsor.

By understanding the key concepts that should be built into agreements up front, and knowing what can be negotiated ahead of time, pharmaceutical and medical device companies can get ahead of these risks if their CRO consolidates to ensure agreements are upheld and the success of current and future clinical trials are protected. While this is not an exhaustive list of all issues and strategies for mitigating them, these are some of the most common themes and pain points when a CRO undergoes a strategic acquisition.

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Ryan Ivey is an attorney at Koenig, Oelsner, Taylor, Schoenfeld & Gaddis PC (KO), a Colorado-based law firm helps life science companies nationwide with specialized commercial contracts. Ryan focuses on complex commercial transactions in life sciences, supply chain, and technology. He previously served as in-house counsel for multiple companies, ranging from emerging biotechnology start-ups to a global contract research organization. Ryan leverages these diverse experiences for the benefit of his clients in achieving their business objectives in creative, practical, and efficient ways.