Multiple investigative sites have been unable to collect payment from CRO PRA International for recent work they conducted on a phase IIb/III trial for Logical Therapeutics, a Waltham, Mass.-based biotechnology company developing a non-steroidal anti-inflammatory drug (NSAID), according to several independent sources.

Several sites said last week they were told by PRA to call Logical to try to obtain their money, but Logical is not responding to calls. Calls by CenterWatch to both Logical and PRA on the matter were not returned.

Last spring, Logical began enrollment in a study comparing the cumulative rate of gastric ulcers in osteoarthritis patients aged 45 to 80 after 12 weeks of treatment with its drug candidate, LT-NS001 (naproxen etemesil), versus naproxen. In an April 2010 press release, the company said it hoped to wrap up enrollment of 534 patients in the U.S. and the U.K. by the fourth quarter of 2010. The company called it the NATURE (Naproxen etemesil for Arthritis Treatment and Ulcer Reduction Evaluation) study.

In May 2010, Logical closed a $16.9 million series C financing round with SV Life Sciences leading a group that included Burrill, Novo and Novitas Capital. The company had raised a $30 million Series B round, also led by SV Life Sciences, in 2007. Other investors participating in that financing round included Burrill, Novo, Sigvion Capital and PA Early Stage Partners. PA Early Stage Partners had also provided early-stage seed funding for the company in 2006.

Since May 2009, Logical’s CEO has been Peter Lankau, previously president and CEO of Endo Pharmaceuticals. Logical was developing LT-NS001 under an exclusive license from Medinox.

This type of situation is becoming more common for sites, according to Christine Pierre, president of 10-site network RxTrials. “As the evolution of R&D has shifted from exclusively big pharma to medium and small companies, the risk to sites has grown,” she said. “In recent years, sponsors began to not pay their bills to sites, and the amount of money sites have to write off is getting larger every year.”

Pierre, who surveys investigative sites annually prior to the Site Solutions Summit, has seen an increase in bad debt reported. In 2007, 15% of sites said they had to write off bad debt from a sponsor; by 2009, that had climbed to 21%. Those debts ranged from $3,000 to $151,000. “These are sites that average $1.6 million in revenue per year, with a 15% to 20% profit margin. They can’t afford this kind of write off,” said Pierre.

Fortunately, this in not an everyday occurrence for CROs, said Neal McCarthy, managing director of Fairmount Partners, an investment banking firm that focuses on the CRO space.

“I am pleased to say that despite the economy, bad debt is still fairly rare in the CRO business,” said McCarthy. “Although many biotech companies don’t reach the promised land, they typically pay their CRO and investigator bills. Typically, CROs don’t let their clients get too far behind in their payments.”

That’s partially because the data, even for trials that aren’t performing as planned, are still valuable to the sponsor. “Most CROs use the data as collateral and won’t release them if the sponsor isn’t paying the bills,” he said. “For the sponsors, this is number one on the list of bills to pay.”

When a drug developer starts to stumble, sites often can’t see it coming. Most sponsors and CROs pay sites on a quarterly basis, and those payments are often delayed, said Pierre. With lags as long as six months between services rendered and payments made, a lot can go wrong with a sponsor’s books, much of which is shielded from sites.

“Unlike a credit card company that sees a customer falling behind month by month, we at the site level don’t get those kinds of snapshots of a sponsor’s financial picture,” said Pierre. “We have no idea if the company that owes us money is in slow decline or has run out of capital.” In 2008, RxTrials saw this first-hand, when a sponsor owed $165,000 for work completed on a study and suddenly stopped making payments. “They said, ‘We don’t have the money. We’ll give you 10 cents on the dollar,’” Pierre said.

And working for a CRO that has contracted with a sponsor doesn’t reduce site risk, since most contracts stipulate that sites will be paid by the CRO once the CRO is paid by the sponsor. The CRO assumes no risk.

McCarthy said usually a sponsor will contract directly with sites, even when a CRO is involved, and creates a direct-payment relationship. But sometimes a sponsor will have the CRO act as its agent to collect contracts and disburse payment to sites, which appears to be the arrangement between PRA and Logical.

“In either scenario, most CROs are careful to avoid the financial responsibility for paying the investigators,” said McCarthy. “Whenever possible, CROs won’t front investigator payments; they wait until they receive the money from the sponsor before doling it out. That way, if the sponsor doesn’t make the payments as promised, the CRO doesn’t get stuck holding the bag.”

--Suz Redfearn