Concepts like asset management, capital efficiency, value creation, and virtual development seem to dominate the planning and execution of drug development programs today. Given the challenging financial environment, containing costs and maximizing the value of each development dollar is critical to assuring that the industry continues to pursue promising new technologies and therapies.
Executives and project teams are constantly pushed to create value in each therapy or product. Despite our best efforts, however, as an industry the cost of discovering drugs, developing new therapies, and conducting clinical trials continues to soar.
Where does that leave us? Perhaps the time has come to re-examine the concept of virtual development and what that really means. Despite the industry’s grounding in science and its need for precision, we are loose with our business terms. For example, if an executive says, “We are running this program on a virtual model,” there might be several sets of criteria that define exactly what constitutes virtual.
Typically in a virtual model, a company hires a select number of internal staff and then contracts the rest of the work to vendors. Most pharmaceutical and biotech companies operate under some level of outsourcing, though, so there needs to be some specifics for where to draw the line between a virtual model and a lean yet traditional outsourcing model.
The Sponsor-Vendor Relationship
Pharmaceutical companies and their service providers have a symbiotic relationship. Project leaders and development teams are adept at utilizing contract research organizations (CROs) to expand capabilities by both discipline and geography.
The ability to dial effort and spending up or down is often pivotal to financing and partnering activities. Most organizations are willing to pay modest premiums to contract workers or CROs to maintain flexibility, keep a low burn rate, or staff a program quickly.
This relationship benefits not only sponsor companies but also contract staff because of the variety and flexibility that comes from working on multiple projects with multiple companies. Thus, it is easy to see how this type of arrangement, despite its origin as a fee-for-service model, is a win-win for all parties.
Regardless of the benefits described above, the business relationship is one of sponsor-vendor. One party pays the bills and has a responsibility to shareholders in meeting financial and development milestones, while the other party is responsible for fulfilling contractual obligations.
The Preferred-Provider Arrangement
The natural evolution of this sponsor-vendor relationship was the advent of the preferred-provider model. Sponsors receive a modest discount on services, and the vendor has priority status in landing new business from them without having to go through a lengthy and costly proposal or bidding process.
For this relationship to be beneficial, it is important that the contractor understand how the sponsor operates and what the sponsor’s goals are. As a preferred provider, the vendor is under less pressure to solicit new work and in theory, is incentivized to help ensure the sponsor’s success. This is, in fact, closer to a virtual development model, but is still a fee-for-service relationship.