September 15, 2009 (Vol. 29, No. 16)
Strategy Allows Advances To Be Driven by Scientific Data Rather than Firm’s Prospects
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.
Building on the preferred provider relationship, pharmaceutical and biotechnology companies have explored, with limited success, the idea of risk-sharing. This concept has ranged from CROs agreeing to reduce or defer compensation in exchange for equity, to profit-sharing deals, to direct investment in a sponsor company.
While appealing to financial folks, since everyone has an interest, properly constructing deals that are fair has been challenging. Sponsors are reluctant to give away part of their later success, while vendors are wary of programs failing and being left with little to no actual compensation.
When the risk-sharing development model is viewed in the context of how many drugs are successfully brought to market, it is no surprise that such a strategy is better suited for sponsor-sponsor rather than sponsor-vendor relationships.
The Virtual Model
An interesting development over the past 10 years has been the evolution of how programs and products are described. For example, a molecule is no longer just a drug candidate but also an asset, a milestone is a value inflection point, and a product pipeline is a portfolio. These terms were once limited to financial descriptions. Now, however, they are used in development situations to facilitate new ways of looking at product advancement.
When a strategic plan involves developing an asset that currently has been evaluated in preclinical efficacy models to proof of concept, it is much easier to describe the challenges, risks, and potential exit. The challenges may include conducting GLP toxicology studies, filing an IND, and conducting a Phase I study, while the risks are primarily related to the animal testing and preliminary safety results in humans. The exit can be considered as a decision to move to Phase II in the context of new funding, a partnership, or an outright sale of the asset.
If a company can focus on a particular asset, i.e., a drug candidate at a particular phase, it will be able to more specifically define the skills needed for development as well as how long they are required and thereby more accurately gauge costs. It stands to reason that the owner of the asset would not hire a senior toxicologist with 10 technicians to run an animal lab, a vp of regulatory affairs with three employees to write an IND, and a CMO with five clinical professionals if at a successful exit, all those people would become expendable.
If the exit is something other than developing into a fully integrated development company, it makes little business sense to hire full-time personnel. It would be difficult to predict the level of involvement needed from the new hires within these specific areas while also ensuring sufficient bandwidth to deal with inevitable challenges of a development program. Yet many companies make this mistake and unnecessarily hire specialty expertise or bring them in too early, resulting in a loss of time and money.
If this asset were paired with several other assets in a similar stage of development, it is easy to see how a virtual team could be constructed with experts who do not require full-time employment but can be dedicated to the firm for some period of time. It becomes easier to make decisions on each asset based on data rather than tied into the context of a company’s survival or long-term stability.
It is easy to imagine how a virtual team constructed around this concept could improve program efficiency and considerably reduce development costs. Such gains in efficiency could lead to more sophisticated financial models with which to manage risk across product portfolios while helping promising therapies reach patients more quickly.
Greg Dombal ([email protected]) is vp of regulatory and clinical affairs and Lauren Sherman is manager, strategic marketing and development at Halloran Consulting Group. Web: hallorancg.com.