Improving R&D Productivity with Activity Based Costing

October 24, 2017 Lawrence Maisel

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Today’s prevailing wisdom is that R&D costs are on the rise while ROI on those investments are down. The Tufts Center for the Study of Drug Development puts the total costs of new drug around $2.7B (in 2017 dollars) while another study1 highlights the fact that the ROI on R&D investment has fallen to 3.7% which is the lowest figure in the past six years. As such, the pharmaceutical industry’s focus on improving productivity is a critical issue.

This debate over R&D cost and productivity declines should incent R&D executives to ascertain the true cost for their company’s R&D efforts and more importantly, whether these costs and their related time to develop/obtain regulatory approval can be better managed. As the old adage goes: “You cannot manage what you cannot measure.”

Over the last 14 years, we have been working with leading pharmaceutical companies to understand, analyze, and better manage their R&D investments which impact ROI and time to market. These efforts have helped us develop a specific methodology which helps pharmaceutical companies:

  • Determine true activity costs to run a trial (e.g. by site, therapeutic area, phase, or country);
  • Estimate protocol costs (e.g. by site, therapeutic area, phase, # of patients, and # of visits);
  • Negotiate more effectively with CRO’s using comparison analysis among CRO proposals;
  • Identify high cost areas and measure the true results of the improvements efforts; and
  • Develop a scorecard to track key performance indicators such as cost per patient, cost per site, or cost per visits.

By focusing on these key components, we have continually been able to help biopharmaceutical and biotech companies identity specific opportunities to dramatically reduce costs, improve productivity, and accelerate cycle times.

Our work with the executive leadership at a Global Pharmaceutical Company’s R&D division highlights the power of this approach. This leadership team was faced with two critical challenges. The first was how to gain deeper insights into their actual operational costs for their global drug development efforts. The second challenge was that without a full view of the costs of running global clinical trials they were unable to model cost implications such as:

  • Identifying the financial benefits of continuous process improvement activities;
  • Understanding true cost implications when decisions such as adding a new study are made, and;
  • Analyzing cost in different regions for same Therapeutic Area by trial phase and NGO as part of contracted CRO program.

Our team worked with the client for several months to help understand and address their core challenges. Our program initiated with the deep assessment phase, which included interviews with dozens of process stakeholders, led us to gain full transparency into their clinical process while mapping costs back to each activity which helped unearth specific areas for potential improvement. Our team worked with internal stakeholders to understand and fully understand each activity and the subsequent costs of each activity. This enabled us to build an end-to-end Activity Based Costing map of the process which was critical in helping the client:

  • Understand the full cost ofeach study based on numerous perspectives including:
  • Regional costs / study
  • Activity / process / phase cost per study
  • Cost per protocol or phase by region
  • Cost per therapeutic area / clinical program by region
  • Identify high-cost activities which could be streamlined or eliminated to drive cost savings without impacting studies’ quality
  • Create a governance approach to capture and regularly analyze the data to identify opportunities to continually optimize their clinical processes

Ultimately, this program provided the R&D Division a true financial view on how the applications of resources within a given study are used and where study cost and operating processes effectiveness and efficiencies can be targeted and achieved. These insights were critical in helping the client improve their portfolio decisions, vendor selection process, and optimize their improvement initiatives to drive maximum cost savings while not impacting the quality and success of clinical programs.

To learn more about how YourEncore can help improve your R&D productivity, contact Kyle Chaffee (kyle.chaffee@yourencore.com).

1. January 4, 2017 Pharmaceutical Journal

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