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Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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April 7, 2014

Outsourcing Everything

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Posted by Derek

Here's an article in Drug Discovery Today on "virtual pharmaceutical companies", and people who've been around the industry for some years must be stifling yawns already. That idea has been around a long time. The authors here defined a "VPC" as one that has a small managerial core, and outsources almost everything else:

The goal of a VPC is to reach fast proof of concept (PoC) at modest cost, which is enabled by the lack of expensive corporate infrastructure to be used for the project and by foregoing activities, such as synthesis optimization, which are unnecessary for the demonstration of PoC. . .The term ‘virtual’ refers to the business model of such a company based on the managerial core, which coordinates all activities with external providers, and on the lack of internal production or development facilities, rather than to the usage of the internet or electronic communication. Any service provider available on the market can be chosen for a project, because almost no internal investments in fixed assets are made.

And by necessity, such a company lives only to make deals with a bigger (non-virtual) company, one that can actually do the clinical trials, manufacturing, regulatory, sales and so on. There's another necessity - such a company has to get pretty nice chemical matter pretty quickly, it seems to me, in order to have something to develop. The longer you go digging through different chemical series and funny-looking SAR, all while doing it with outsourced chemistry and biology, the worse off you're going to be. If things are straightforward, it could work - but when things are straightforward, a lot of stuff can work. The point of having your own scientists (well, one big point) is for them to be able to react in real time to data and make their own decisions on where to go next. The better outsourcing people can do some of that, too, but their costs are not that big a savings, for that very reason. And it's never going to be as nimble as having your own researchers in-house. (If your own people aren't any more nimble than lower-priced contract workers, you have a different problem).

The people actually doing the managing have to be rather competent, too:

All these points suggest that the know-how and abilities of the members of the core management team are central to the success of a VPC, because they are the only ones with the full in-depth knowledge concerning the project. The managers must have strong industrial and academic networks, be decisive and unafraid to pull the plug on unpromising projects. They further need extensive expertise in drug development and clinical trial conduction, proven leadership and project management skills, entrepreneurial spirit and proficiency in handling suppliers. Of course, the crucial dependency on the skills of every single team member leaves little room for mistakes or incompetency, and the survival of a VPC might be endangered if one of its core members resigns unexpectedly

I think that the authors wanted to say "incompetence" rather than "incompetency" up there, but I believe that they're all native German speakers, so no problem. If that had come from some US-based consultants, I would have put it down to the same mental habit that makes people say "utilized" instead of "used". But the point is a good one: the smaller the organization, the less room there is to hide. A really large company can hol (and indeed, tends to accumulate) plenty of people who need the cover.

The paper goes on to detail several different ways that a VPC can work with a larger company. One of the ones I'm most curious about is the example furnished by Chorus and Eli Lilly. Chorus was founded from within Lilly as a do-everything-by-outsourcing team, and over the yeras, Lilly's made a number of glowing statements about how well they've worked out. I have, of course, no inside knowledge on the subject, but at the same time, many other large companies seem to have passed on the opportunity to do the same thing.

I continue to see the "VPC" model as a real option, but only in special situations. When there's a leg up on the chemistry and/or biology (a program abandoned by a larger company for business reasons, an older compound repurposed), then I think it can work. But trying it completely from the ground up seems problematic to me, but that could be because I've always worked in companies with in-house research. And it's true that even the stuff that's going on right down the hall doesn't work out all that often. One response to that is to say "Well, then, why not do the same thing more cheaply?" But another response is "If the odds are bad with your own people under your own roof, what are they when you contract everything out?"

Comments (28) + TrackBacks (0) | Category: Business and Markets | Drug Development


1. Henry's cat on April 7, 2014 8:02 AM writes...

I think it's great that when our glorious industry has finally packed it in and there's no-one left here to discover drugs that companies like this may be able to pay someone else to turn the lights off on their way out.

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2. john d on April 7, 2014 8:47 AM writes...

Boeing and the 787 Dreamliner - perils of thoughtless outsourcing

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3. anon on April 7, 2014 8:49 AM writes...

How about outsourcing upper management? I'm pretty sure most of the workers at Pfizer wish that they could do that.

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4. Hap on April 7, 2014 9:02 AM writes...

@3: You can't oursource upper management - who else could possibly manage to spend so much money with so little to show for it (at least not without expensive training)? Such contributions to the plutocracyXXXXXXXXXXeconomy are completely irreplaceable.

Outsourcing things has a place and a time (when you don't have an internal ability that you need for a short time, or when the cost of getting it in the long term is much less than the costs of developing it yourself) but it doesn't seem like any of the thought needed to see when it's appropriate is ever done. Instead, it seems like people in charge view it as an ATM to liquidate company value without actually having to return it to stockholders.

Considering previous discussions on pharma management's lack of need to make rational decisions on who to fire and who to keep, perhaps outsourcing them would be a good idea. It's unlikely that outsourced management could do worse, and it doesn't seem like there is any worry about IP - if they steal the keys to pharma management, they'll be out of business in no time at all, unless they also get the keys to finding and fooling their investors.

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5. anon the II on April 7, 2014 9:09 AM writes...

This model is based almost entirely on stocking your cheap little VPC with people who grew up in the big pharma and biotech and were exposed to all the intricacies of drug R&D over their careers. All the management in these companies have many years of experience. This is, at best, a stop-gap model. The supply of competent people to run these VPC's has been nearly turned off.

I suspect Lilly stocked Chorus with soon to be former Lilly people and a take it or leave it offer.

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6. Wavefunction on April 7, 2014 9:30 AM writes...

Another interesting VPC is Nimbus Discovery which does computational drug discovery. It has a small team of medicinal chemists, modelers and biologists who get all the wet lab work done elsewhere. Interestingly, each project is a potential LLC which can be spun off if successful. The company is led by a capable leadership team and has shown some promise in advancing two programs (IRAK4 and ACC).

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7. fluorogrol on April 7, 2014 10:35 AM writes...

+1 on the abuse of 'utilized'.

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8. emjeff on April 7, 2014 10:43 AM writes...

"The point of having your own scientists (well, one big point) is for them to be able to react in real time to data and make their own decisions on where to go next. The better outsourcing people can do some of that, too, but their costs are not that big a savings, for that very reason. And it's never going to be as nimble as having your own researchers in-house."

This is the central issue around out-sourcing. In general, you do not pay CRO's to think, they are production. if you want them to think, then you are not going to save any money, because you are essentially hiring them as full-time employees, with the CRO's surcharge on top of salaries, etc.
You can only save big cash if your project goes completely according to plan, or you are willing to extend your timelines to allow for time for your contract people to react. Neither of these options is appealing...

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9. HTSguy on April 7, 2014 11:10 AM writes...

In my experience (led a partially outsourced project where the CRO did the thinking for the work they did), it's difficult to get the incentives of the payer (VPC?) and the CRO doing the work aligned. The CRO wants to be paid as much as possible, while the payer wants the project to move quickly and efficiently. Writing good contracts helps, but in research you are likely to end up in unanticipated situations. Or has someone solved this?

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10. patentgeek on April 7, 2014 11:45 AM writes...

VPCs based on reviving abandoned (for non-science reasons) big pharma projects can be viable. I helped start one a few years ago and it took 1 year and 10 compounds proposed by me (and prepared and tested by CROs) to identify a patentable clinical candidate. The place was sold to an ex-US pharma after 3 years.

The model noted by Wavefunction (Numbus et al) is getting some tryout. My current employer started a wholly-owned subsidiary to be fast and aggressive in the cancer genomics space. It's a sort of hybrid between a VPC and a traditional startup: there are labs and standing staff (chemists, biologists, project managers), but much of the analog synthesis and in vivo testing (and some in vitro) is done by CROs and academic collaborators. It seems to be working well so far.

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11. Justin on April 7, 2014 12:14 PM writes...

It can work, given that you have special people on board with great communication skills. One company I'm familiar with had the synthesis & testing done by CROs in China. With a 12 hour time difference it worked out well for them - they got a report every morning on that days work in China and could make plans accordingly for the next days work. They are still in operation and doing relatively well, i.e. still in business. Not sure if they still operate that way though.

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12. CMCguy on April 7, 2014 12:41 PM writes...

I think you are correct Derek that VPCs can be workable is the circumstance align properly (can I argue for possible utility?). For the most part the D aspects of R&D are much more amenable to such a model where activity often typically easier to define and implement plus the CMO and CRO networks in various areas are mature enough to be effective. Having good Clinical leadership is probably crucial to eventually success but solid Regulatory, Quality and CMC coverage can make or break a project. Can not forget good Marketing and BD as even VPC requires resources to provide funding. Per #3 and #4 I believe VPCs do largely outsource upper management since most require functional expertise that has to be directly active in development and supervision of project tasks which is "beneath" the role of most execs these days. While there may be 1 or 2 members with greater overall responsibilities each individual is typically a stakeholder and likely share or split duties. I do wonder if industry is losing the competencies in many disciplines because of outsourcing where VPCs may no longer be viable simply due to the fact no one adequately trained beyond narrowly focused duties so few understand the bigger picture and connections required.

In terms of the R this is substantially tougher since have greater risk and uncertainty involved. As #10 suggests need a definite reasonable starting point, such as abandoned Pharma projects, that can quickly exploit and push forward. Too bad many times it has seemed Pharma's can overvalue such inactive projects then make deal prohibitive to acquire rights and then the VPC has to fight perception that "if it was any good then the Pharma would be doing it themselves". Maybe if trend in Academia does learn how to do actual drug discovery there could be worthwhile candidates to apply VPC although not sure will be there for a number of years and anticipate will remain a rare event.

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13. Hap on April 7, 2014 1:05 PM writes...

I think I was hoping that big pharma could outsource its management.

With VPC, I could see that small companies with a limited area of competency might rather keep going as a vendor rather than spending lots of time on the uncertain business of making drugs, and so there'd be lots of places for VPCs to get labor. On the other hand, aren't VPC's sort of smaller versions of Pfizer's model - the people who do the grunt work and the people who design the molecules and the syntheses are separated? Doesn't that assume that there isn't much knowledge that someone on the ground gets about a target or a project that the people managing the project don't have?

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14. Doug Steinman on April 7, 2014 2:17 PM writes...

To me, outsourcing everything means a total lack of personal investment in anything. Is the CRO going to provide the best result or just a result? Is the potency of the final compound going to be the best or will it only be good enough to satisfy the terms of the contract? Will the side effect and specificity profiles be optimum or merely good enough? I fail to see how this could possibly be a workable model for cost-effective pharmaceutical research. Perhaps it could work reasonably well for drug development but I'm not sure about that either. I think this is a total load of MBA-derived crap.

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15. Cellbio on April 7, 2014 2:23 PM writes...

Having been in Small companies for the last 5-6 years, I have seen virtual companies fail because of CRO failure, fail to save time or money because of different CRO priorities and commitment, and be more successful with a VPC 'taper' model. Once early advances are made, then work is brought in-house with more justification for the hire.

Also, this only works in well trodden areas. CRO's deliver, mostly, what is in the catalog. So yes, if you've got a me-too or even novel mechanism in well studied settings where the CROs routinely run models, no need to re-invent the wheel. The further you get to innovation, the less they can help. Try costing and resources new assay development at a CRO. Really tough.

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16. Anonymous on April 7, 2014 5:00 PM writes...

Can they outsource the job of the last man who turns off the light?

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17. Anonymous on April 7, 2014 5:07 PM writes...

"But the point is a good one: the smaller the organization, the less room there is to hide. A really large company can hol (and indeed, tends to accumulate) plenty of people who need the cover."

So the solution is to outsource to a large CRO where those same people hide?

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18. Anonymous on April 7, 2014 5:10 PM writes...

The real benefit of outsourcing, besides flexible capacity and expertise, only when you need it, is that the costs are fully transparent. Not so with all the hidden internal costs within a large pharma company.

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19. Rick Blaine on April 7, 2014 8:52 PM writes...

@#6. Call me when you have a viable IRAK4 inhibitor. I'll be waiting by the phone. Good luck.

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20. supplement joe on April 8, 2014 1:47 AM writes...

A VPC works best when the target is narrowly defined and the route to get there is dead nuts simple. We have such a micro-project. We know the API works and is well tolerated in the real world. The CMC is our biggest cost but is only a marginal issue because we will not go beyond proof of principle and that keeps costs way low. If we don't find a buyer at IIa we are out $500K. We have another company that throws off that kind of cash each year. If we crack up, fine, we don't buy yet another basement full of survival gear next year. I think we are unusual, very much so, perhaps. Most VPC's are one trick acts, combining generics and so, start way ahead from scratch. They follow well worn pathways, spend little and end up with not much but it does ring the cash register. Which might get them enough to go for something more worthwhile next time around. Or they keep cadging. VPC projects have a canned hustle about them. I know of one that calls itself GTFM. The abbreviation is right off the used car dealer's salesmen morning warmup. Take a guess?

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21. Cellbio on April 8, 2014 8:59 AM writes...

GTFM-Get the effing money?

How do you get to PhIIa with 500K? IND already filed?

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22. supplement joe on April 8, 2014 10:21 AM writes...

Botanical topical, pre-IND already, filing later this year. Tox is minimal, 25 patients for efficacy.

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23. Rospar on April 9, 2014 2:13 AM writes...

Where does outsourcing everything lead? Having to pay $27.95 for content more suitable to a blog!


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24. David on April 9, 2014 4:49 PM writes...

That is where Merck is heading, virtually all manufacturing is outsourced, Research is being outsourced.

There was an article from The Onion which was titled Merck lays off its last employee (for those who don't know the onion is a satire publication)

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25. Dr Jimbo on April 10, 2014 5:55 AM writes...

@Cellbio #15
Disclosure: I work at a small CRO that does new assay development for clinical trials.
I would say that larger CROs offer what's in the catalog, but smaller ones are more flexible and open to one-off or customised requests. But the costs will be higher - you can't do custom work at price of a routine job.
Is that a reasonable assessment?

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26. Cellbio on April 10, 2014 9:30 AM writes...

Dr. Jimbo,

That is indeed my experience. In one case, a small CRO had a guy that totally got what we were after, having come from pharma. The work could have been done, and likely done well, and as you say, with higher costs.

While this is totally reasonable, some folks hold the view that outsourcing is always cheaper and quicker than internal work, so the final budget and timeline for the custom work failed to meet those 'ideals' of being virtual.

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27. Anonymous on April 11, 2014 11:09 PM writes...

@#19 Rick Blaine: unfortunately you didn't leave a phone number... but if you're serious, the Nimbus Iris C-Corp is not hard to get in touch with.

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28. Jay Bradner on April 13, 2014 10:49 PM writes...

My laboratory at the Farber has had a positive experience with the project-focused company model. As an academic scientist, I value the strategic alignment around research strategy and mission. We have worked with HealthCare Ventures on two projects over the last five years - soft-drug HDAC inhibition for early-stage CTCL (SHAPE) and BET bromodomain inhibition as cancer therapy (Tenhsa). Both compounds transitioned to well-designed Phase I studies, leveraging the expertise and pragmatism of the HCV team. I logged in to comment after reading this excerpt from the piece: "extensive expertise in drug development and clinical trial conduction, proven leadership and project management skills, entrepreneurial spirit and proficiency in handling suppliers". A fitting description of the experience to-date.

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