Outsourcing Virtually Everything: Making the Semi-Virtual Model Work

How an extreme outsourcing structure can continue to produce results over the long term
Apr 02, 2007

Renting rather than owning can lead to a sense of insecurity. Those of us who have rented apartments or leased cars know the sense of impermanence, and lack of control, that comes with it. Business outsourcing is often just as unpredictable and the lack of control can be equally insecure. The good news is that as business models in biopharm evolve, companies that are at the extreme edge of outsourcing are showing remarkable success without ever owning a brick, and are accessing and controlling employees and resources far beyond the reach of what they would be able to acquire themselves.

Business models involving high degrees of outsourcing have been evolving rapidly in the biopharm space. During the nineties, the biopharmaceutical industry responded to business pressures through the fully integrated pharma company (FIPCO) structure. However, it became apparent that large integration, infrastructure, and coordination costs are associated with having functions housed in one company, and the FIPCOs found themselves to be inflexible—unable to adapt to the emergence of new technologies. The pendulum quickly swung the other way and many adopted a network structure, shifting the biopharm value chain as companies leveraged partnerships, alliances, and outsourcing. Soon outsourcing drug discovery and development became the new pathway to optimize resources and accelerate the development process. Partnering with a surging number of CROs, CMOs, CSOs, and other niche providers, biopharm companies in 2007 will have an estimated spend of more than $7 billion on international clinical trial outsourcing alone.

Doing a Lot with Only a Little

During the time period of shifting models and uncertainty, one very small company kept a laser focus on its virtual model and thrived. Endo Pharmaceuticals, Inc. of Chadds Ford, PA, is a semi-virtual CNS and supportive care oncology therapeutics company that in-licenses products (as the substitute for the "R" function in its R&D). The company always stayed close to its core tenet. That tenet was never to operate or own something that could be performed just as well by someone else. Following that mantra enabled this company to grow in 10 short years from approximately $80 million in sales and $300 million in enterprise value, as of its birth in a management buy-out in 1997, to $909 million in net sales and over $4 billion in market value (at year-end 2006). All this while, Endo did not stray from its outsourcing model, maintaining only a small core group of employees responsible for strategic alliance management, regulatory strategy, clinical supervision, and financial control.

Outsourcing all noncore business functions, including manufacturing, clinical drug development, and distribution, Endo Pharmaceuticals now boasts of annual commercial revenues per non-field sales employee exceeding $2 million. Its core corporate employees work and operate out of a leased corporate office complex that the landlord has expanded, building by building, as the company has prospered.

Today, 100% of the company revenue is alliance-dependent. John Buckingham, Endo's senior VP of alliance management, elaborating on the semi-virtual model says, "Companies that pursue a business alliance model are better suited to address current biopharm market opportunities because of the flexibility that it affords. The alliance model is not just for companies that have no options, and many biopharm executives wrongly perceive alliances in that way. The notion that when a company is small, it is making significant compromises by partnering, or that a company should get into partnerships only to survive, could not be further from the truth."

Endo firmly believes that alliances are not a desperate last option, but rather a great first option and a good model to follow, no matter what the company's size or stage of development is. It's the exact opposite approach taken in the fully integrated pharma company model, or what others have called the smokestack mentality of wanting to have absolute control over everything, from discovery to distribution. Buckingham goes on to describe the Endo approach, "We are going to go out there and partner with the best people and the best companies in the industry. We will pay for access to expertise and resources as they are needed, but we will not pay for them when we do not need them. While we have core competencies in business strategy, product development, finance, legal affairs, and commercialization, outside of our full-time sales force, the only significant infrastructure that Endo has developed is an infrastructure for accessing external technology, which is second to none."

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