Clinical Trial Growing Pains: Compliance Challenges and Solutions for Development-Stage Biotechs

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In the U.S., development-stage biotech companies find themselves facing challenging clinical trial scenarios involving payments to investigators, study sites, and physician employees and consultants advising on trial design. This Sidley Update discusses key compliance tips to address several common issues faced by U.S. development-stage biotech companies designing or executing clinical trials. Questions about poorly structured arrangements or incomplete records often arise in buyer due diligence or can become the subject of compliance hotline complaints. However, if structured properly, it is possible to skillfully manage the compliance aspects of such arrangements while also laying the groundwork for a strong and effective healthcare compliance program.

 

The Federal Anti-Kickback Statute (AKS) is a criminal law that generally prohibits individuals or entities from knowingly and willfully offering or providing anything of value to induce a person to purchase or order items or services for which payments may be made by federal healthcare programs such as Medicare and Medicaid. Violators of the AKS may face significant criminal and civil penalties as well as potential exclusion from federal healthcare programs. The AKS can also serve as the basis for a civil False Claims Act claim, which can lead to additional civil fines and penalties.

 

Development-stage companies are squarely subject to the AKS if Medicare or other federal healthcare programs cover routine or other costs related to any of their clinical trials, as is commonly the case, even if the company has no commercialized products. From an AKS standpoint, the key to compliance is early recognition that arrangements between trial sponsors and physician employees or consultants, investigators, and sites involve the provision of direct payment or other items of value by the sponsor to the other party, and thus — to reduce risk — should be structured as fair market value arrangements and meet other AKS regulatory safe harbor conditions.

 

In addition, as described below, Food and Drug Administration (FDA) regulations require reporting of many financial matters involving investigators of certain clinical trials.

 

Accordingly, questions about payments to physicians and study sites often arise in the due diligence process when the sponsor company is under consideration for purchase. Buyers commonly focus on investigator and study site documentation, including whether the payments are fair market value, documented in a written agreement, meet the other AKS regulatory conditions, and are appropriately tracked. Buyers also commonly seek to understand whether physician employees, consultants, or investigators have any other financial interest in the company that could have the appearance of impacting study results (e.g., equity, stock options, or other paid arrangements such as medical monitoring or consulting).

Common compliance challenges facing development stage companies in clinical trials include whether to grant physician equity ownership; determining fair market value for payments to physician consultants, investigators, and sites; whether to make honoraria payments to investigators for conference presentations; determining the appropriateness of study acceleration payments; methods for disposing of reusable or capital equipment used in the study; and tracking and disclosure of financial interests of investigators.

 

 

Often short on cash and competing for the attention of key physician researchers, development-growth sponsors sometimes offer equity compensation to physician consultants or full- or part-time employees in the form of stock or stock options. These physicians commonly continue to maintain their medical practices while advising the company in its trial design and key execution issues such as investigator recruitment and patient enrollment.  

 

While federal law does not explicitly prohibit these types of compensation arrangements, they can present risks under the AKS because the potential upside in value of such equity could be significant, in excess of what the investigator would have received in cash under the arrangement, and could create the perception of bias in the study results. 

 

To manage these risks, sponsors may consider implementing a variety of safeguards, including by

 

It is common throughout the industry for sponsors to rely on contract research organizations (CROs) to set fair market value for payments to trial investigators. In many cases, CROs use proprietary software that relies on retrospective data across specialties to determine an average fair market value across specialties or within a general specialty. However, these methodologies are sometimes inadequate for high-demand specialties or subspecialties where there is a shortage of physicians available to conduct clinical research.

 

In cases where a sponsor is having difficulty recruiting physicians to become investigators, a variety of methods may be available to determine and substantiate fair market value. A common method for determining fair market value is to retain an independent, third-party valuation expert to substantiate the fair market value fee for payments to trial investigators and to document the methodology for determining fair market value contemporaneously with execution of the relevant clinical trial agreement (CTA). Benchmarking and information on shortages in the specialty can be used to support payment methodologies as well.

 

Of course, the specific facts and circumstances regarding the demand on the specialty will be critical to understanding whether an increase in historical fair market value rates is warranted. This is also a reminder for development-stage companies to give attention to investigator retention and research budget provisions in the CRO agreement, including that ultimate discretion should belong to the sponsor as to FMV where the sponsor disagrees with the results of the proprietary investigator budgeting software. 

 

On occasion, a sponsor’s clinical team may request that an investigator present data at a scientific meeting or conference. In some cases, the sponsor may offer, or an investigator may request, compensation in the form of an honorarium for speaking at the meeting or conference, in addition to reimbursement for expenses. In providing honoraria to trial investigators who present at scientific meetings or conferences, sponsors may consider implementing a variety of safeguards, including (i) ensuring that any payment made to a trial investigator is consistent with fair market value paid to physician speakers and (ii) ensuring that the payment is aligned with informed consent and other forms shared with the trial’s Institutional Review Board.

 

 

As most sponsors are well aware, it is common for there to be delays in study startup. Often these delays are caused by issues in the contracting process between sponsors and sites, including negotiations over key sticking points such as budgets, data protection terms, confidentiality, indemnification requirements, ownership of IP, and the sponsor’s scope of subject injury responsibility.

 

To help mitigate these delays, some sponsors may make payments to the site to fund resources that will help accelerate study startup such as IT costs and patient enrollment. However, if not structured appropriately, such payments could be viewed as an improper inducement to incentivize the site to enroll federal healthcare program patients as quickly as possible, which could raise fraud and abuse risk as well as data integrity concerns.

 

To mitigate these risks, sponsors should ensure that

 

At the conclusion of a study, the question can arise whether the sponsor must retrieve any reusable or capital equipment or whether the site may keep it. Unfortunately, the CTA between the study sponsor and the site is often silent on this matter, leaving open the question of whether the equipment has value and whether the site must pay for the depreciated value if the sponsor or the site wish for the site to keep the equipment.

 

In disposing of study equipment, sponsors should keep in mind that items provided for free, especially expensive items such as capital equipment, can raise particular concern under the AKS even when provided under a legitimate CTA.  

 

To reduce potential AKS risk in these scenarios, sponsors may consider the following:

 

Development-stage companies must also report to FDA information about certain financial arrangements with investigators. This applies to every investigator involved in a study that will be used to establish that a product is effective or a study in which a single investigator makes a significant contribution to the demonstration of safety. For such an investigator, the sponsor must report any compensation affected by the outcome of clinical studies, any significant equity interest in the sponsor of a covered study, any proprietary interest in the tested product, and any payments received by the sponsor that have a monetary value of more than $25,000.

 

FDA uses this information, in conjunction with information about the design and purpose of a study, as well as information obtained through on-site inspections to assess the reliability of the study’s results.

 

To facilitate such reporting, a trial sponsor must exercise due diligence to collect information about these financial arrangements from every investigator involved in applicable trials and must maintain this information for certain periods of time. This does not necessarily mean that a sponsor must have an elaborate system to collect and track financial information. But a sponsor must have a reasonable process in place. Various methods are available to achieve this, such as requiring investigators to complete a standard questionnaire at the time the trial begins and to provide updates as relevant changes occur.

 

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The issues above are several among many that can arise for development-stage companies conducting their first pivotal trials. To manage potentially serious AKS risk, make appropriate financial disclosures to the FDA, and reduce scrutiny during buyer due diligence, sponsors should give careful advance consideration during this important period to all matters involving payments to physicians or study sites.