The Pharma Industry's New Economic Model

By Mike Webb

It takes roughly 10 years and $1 billion to bring a new drug to market, but perhaps more importantly, it also appears that the probability of discovering a new drug is a lot lower than was once thought. Meanwhile, companies are facing increased pressure to speed up product development in an intensely competitive market. No longer do pharmaceutical companies, from start-ups to multibillion dollar companies, have the luxury of long-time horizons or access to seemingly unlimited capital. Clearly, pharmaceutical and biotech companies need to take more shots on goal while simultaneously reducing the cost per shot taken.

In order to be successful, pharmaceutical companies are beginning to adopt a new economic model: They are abandoning the decades-old, fully integrated pharmaceutical company (FIPCo) model and becoming science and technology integrators. In their new role as integrators, they are being forced to find the essence of where they create value. It’s all about their core expertise to design a phase 2 and phase 3 clinical trial program that will produce the data to increase the value of a kilo of white powder from $1,000 to $1,000,000. Everything else is a largely superfluous, noncore activity.

While at first this might sound like a negative trend for the pharmaceutical industry, it will actually fuel innovation: more shots, cheaper shots.

Outsourcing and virtualizing noncore activities is under way at most major pharmaceutical companies. Use of contract organizations for manufacturing and clinical trials has accelerated. Several companies have spun out major components of their operations to service providers. In the end, many large pharma companies may have only 50% of their original workforce levels, but will be performing twice the volume of work. Outsourcing will convert many formerly sacred activities within pharma to variable costs, dramatically increasing efficiency by leveraging vendors’ scale economies and best practices in areas such as IT, manufacturing, and clinical and regulatory operations.

The key management challenges for science and technology integrator companies are how to manage massively parallel collaboration and how to stay at the leading edge of innovation. Staying at the leading edge requires hiring the best and the brightest and working with the top collaborators, partners, and suppliers. Keeping all these bright minds productive requires extensive networking, sharing of data, and perhaps most importantly, providing ready access to the accumulated knowledge of the organization. Siloed, inaccessible data prevents this new industry model from being implemented. Managing extensive collaborations and providing access to the organization’s accumulated knowledge has set a new bar for the performance of informatics infrastructure and solutions providers.

Solutions providers are stepping up to meet the challenges facing their customers. New software solutions are necessary that offer:

• out-of-the-box peak performance without costly customization
• improved workflow design that increases the client’s efficiency by capitalizing on the solutions provider’s experience with multiple customers
• automatic updates of industry data such as regulatory mandates to relieve internal staff of burdensome and error-prone tracking
• Software-as-a-Service (SaaS) implementations to eliminate capital outlays and convert system costs from fixed to variable.

Although a wrenching change, many industries have gone through this evolution, notably aerospace and technology, and emerged much more efficient and focused on the specific element of the value-added chain where they make a critical contribution.

Mike Webb is executive chairman at Virtify Inc., which provides enterprise content compliance solutions to life sciences companies. He has more than 25 years of experience in the healthcare and life sciences industry.