How to Enable Greater Budget Forecasting

10th December 2018 (Last Updated November 30th, 2018 10:21)

Ken Olovich, R.Ph., MBA, Sourcing and Financial Director of Chorus, Eli Lilly, explains a model of budget transparency with CROs to enable better budget forecasting

How to Enable Greater Budget Forecasting

It is often said there are two types of budget forecasting, lucky and wrong. The art of true forecasting is having the ability to explain why what you said would happen, didn’t. Regardless of size, accurate forecasting is vital for all pharmaceutical companies. Forecasts that are too low or do not allow for contingencies will yield efforts at funding projects that truly cannot be afforded, which will in turn lead to cutting projects and personnel later. Forecasts that overestimate the cost of projects and investments, will lead to other attractive projects and investments being turned away that could have been funded.

The other peril that comes from consistently overestimating is a loss of confidence in your forecasts as those that depend on your forecasts will build in a “sandbag” factor discount into your models. Larger pharma companies plan year to year and even quarter to quarter. Even a forecast that accurately estimates the total cost of a three-year project, may lead to budget problems if it does not accurately estimate the costs in each of the three years. For smaller pharma and biotech companies, they may fund programs on tranches of investment to the next milestone, but this approach also mandates accurate forecasts of spend from milestone to milestone. So it is clear, companies and investors are counting on accurate forecasts.

The Forecasting Process

In the pharmaceutical industry, the average error bar around clinical trial forecasts are about 11-16 percent based on phase, but 20 percent of all trials exceed this range1. When asked how confident pharma companies are in their forecasts, only about 20 percent report a high level of confidence but another 70 percent report being “somewhat confident.” However, a lot of effort is poured into the forecasting process and only 16 percent of companies report being able to do an accurate trial forecast in under one week1. Most pharmaceutical companies rely on spreadsheet-based models to predict trial costs, although many do subscribe to commercially available products as well. The issues with any model is the amount of information available about the trial and the needed accuracy. A forecast made 12 months ahead of trial start date is fine as long as a sufficient error bar can be tolerated.

For accurate forecasts, clinical operations must review the trial specifications as preparation for the request for proposal (RFP) that will eventually be sent to the CROs. A forecast or proposal made without a near final protocol, especially inclusion and exclusion criteria, will most certainly lead to actual versus forecast variation. Each exclusion criteria takes a bite out of the pie of otherwise qualified patients. Consider the scenario of a 20-site, 250-patient trial with an expected enrollment rate of 0.83 patients per site per month. Fixing all other factors, if the actual exclusion criteria lowered the enrollment rate to 0.59 patients per site per month, a sponsor would have to add eight sites or six months to maintain the original timeline and such change orders can easily lead to that 11-16 percent budget variance mentioned above. It is therefore imperative that clinical trial operations review and perhaps even formally approve RFPs before they go out to the CROs.

Accurate Forecasts More Important Than Ever

Most sponsors require CROs bid into predefined pricing templates, whereas some sponsors demand CROs prepare a forecast of work done and spend as part of the proposal. This is a missed opportunity to engage the CRO in helping the sponsor forecast trial costs. Such a tool developed and maintained by the selected CRO during the trial, can help the sponsor track progress towards yearly spend targets or smaller companies toward funding tranches. CROs that produce and maintain ongoing trial forecasts, help their clients match work done to date against spend ensuring neither are outpacing each other.

Additionally, such CRO-produced trial forecasts help their clients expect spikes in clinical trial spend without surprise. It is extremely frustrating to sponsors to get surprises in clinical trial expenditures and the transparency from a shared forecast will go a long way to improve that transparency and partnership. Events like “catch-up invoices” for work done several months or even a year ago can create havoc on clinical budgets for sponsors and really should never happen. With a shared forecast, sponsors will know when invoices are expected and when they are late, the sponsor will be enabled to prompt the CRO for them and will be able to accrue for them in their annual budgeting process.

As cost pressure continue to rise, accurate clinical trial forecasts are more important than ever. Surprise costs and unexpected invoices lead to trade-off discussions that perhaps could have been avoided. A shared, accurate, and well-maintained (monthly) clinical trial forecast is an excellent chance for CROs and Sponsor Operations and Procurement to all work in harmony. CROs who help their clients do this well will be favored and will appear as good trustworthy partners and good stewards of their sponsor’s invested funds.