Research, Reports and Articles
Virtual Companies and the Pharmaceutical Industry
Ingrid Fernandes
Apr 6, 2021
- Strategy
- Virtual Pharma
Research, Reports and Articles
Virtual Companies and the Pharmaceutical Industry
Ingrid Fernandes
Apr 6, 2021
- Strategy
- Virtual Pharma
The benefits of a Virtual Company
As mentioned in our first article, the Covid-19 pandemic has created a historic shift in working habits and business structures. However, the Virtual Company approach is not an output from the pandemic as the Pharmaceutical Industry has strongly favored this business structure since the 1980s [1] as an effective way of creating breadth and scalability in an overly complex, competitive, and costly setting. From discovery to clinical development, production and commercialization, pharma companies have adopted the virtual or semi-virtual approach by contracting out most of their activities to maximize research outputs and minimize financial risks [2]. As a result, contract services are growing and becoming strategic, targeted, and planned among life science companies, allowing a transfer of non-core activities to partners in order to focus on marketing and medical strategies, competitive advantages, distribution networks, future growth, and imperative issues for survival [3].
“By outsourcing non-core activities, we reduce the footprint of the organization allowing our scientists to focus on doing science rather than addressing HR issues and writing performance reviews” said the Chief Business Officer at Nimbus Therapeutics, a biotechnology company headquartered in Cambridge, Massachusetts [4]. Whilst the reasons to become virtual may be many, adopting this approach “gives a virtual start-up the ability to compete with global pharmaceutical companies at a fraction of the cost” [5], as revealed by David Grainger, a UK virtual biotech co-founder. In addition, even though minimizing R&D costs may have been the initial reason behind outsourcing, replacing non-essential business infrastructure with short-term contracts also gives flexibility to a company [2]. As a result, Virtual Pharmaceutical Companies (VPCs)can reallocate resources quickly but at a measured rate in response to project roadblocks, new therapeutic needs, scientific advances, and extend their reach into niche markets [2].
Pharma and Outsourcing
According to David Widley, equity analyst at Jefferies consulting, big pharma outsources approximately 45% of their processes. In contrast, small and medium-sized companies contract out up to 70%, while emerging biotech start-ups typically outsource up to 90% [6]. As a result, the life science outsourcing market, particularly CMOs and CROs, continued to blossom in the past few years and is expected to reach USD 91.4 billion by 2028, according to a new report by Grand View Research, Inc [3]. Common services outsourced by this industry are Regulatory Compliance, Quality Management Consulting, Clinical Trials, Auditing & Assessment, Regulatory Writing & Publishing, Product Design and Development, Product Testing and Validation, Training and Education, Medical Writing, Manufacturing, and other administrative or scientific processes [3].
Consequentially, a global outsourcing industry is now in place to provide biotechnology companies access to every imaginable R&D capability; massive pharma layoffs have boosted accessibility to a wider talent pool; contractors in lower-cost countries such as China and India offer higher quality services; and communication tools, such as videocalls, have made cross-border collaboration possible [4]. Nimbus, for example, has recruited global experts around certain target biologies to lead key aspects of the company’s programs. These people are tasked with organizing resources outside the company to generate the required datasets and meet aggressive timelines. The company’s fixed costs are around 15%, while the rest is allocated to contractors. This approach is nimble and flexible, allowing scientists to think about science rather than organizational matters [4].
Celgene is another example of a biotech company (their inception was principally as a virtual) who strategically utilizes partnerships to enhance its processes. By outsourcing manufacturing, Celgene can focus on its primary goal of innovating breakthrough therapies while still optimizing its production costs [7]. This approach enabled Celgene to shift risks and increase scalability since (1) if demand increases, capacity can be expanded by leveraging other contractors; (2) if demand decreases, variable costs to contractors move directionally to other important areas; and (3) fluctuation in input prices are assumed by the contractor. On top of that, (4) the contract manufacturers also bear the responsibility and costs of improving their manufacturing processes [7].
In some instances, companies might adopt the virtual business model to boost commercialization. “I was tasked with building a commercial organization from scratch and needed flexible options based on financial execution and timing” [9] stated Michael Adatto, senior VP, sales and manager care at Horizon Pharma. “The virtual model allowed me to focus on hiring best-in-breed vendors and not worry about creating overhead” [9]. The ability to call on and call off when demand necessitates remains a cornerstone of the thinking in a VPC.
The Challenges
Of course, the adoption of such a virtual method as an alternative to the traditional business model brings its challenges. Some common downsides are related not just to the level of trust a company must have in the chosen partnership, but also in the difference in corporate culture, the alignment between all the communication channels and activities, risk of disruption to product development, technology and technical problems, among other issues [2]. Consequently, national and international regulatory bodies are doubling down on biopharma to ensure the quality of drug development and manufacturing at their contract facilities [8].
Today, there are many service providers with accumulated years of experience strongly staffed with former bio and pharma scientists, managers and executives. Whether via self-oversight, or by processes in place to work effectively with even the most complex sponsors, these service organizations can in fact ensure the highest standards of quality and drug safety [8].
It has been widely accepted that the Outsourcing Industry and the rise of CROs has enabled virtual business models of drug delivery and discovery to fully rely on third party services without the need of an in-house lab or a “brick-and-mortar” infrastructure to function [8]. Perhaps it is safe to say that the coronavirus pandemic and its wave of virtual work is here to confirm that the VPC can indeed be manageable, efficient, and most likely are here to stay.
In our final article we will further explore how VPCs approach commercializing their assets and why there really is an alternative to out licensing.