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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.
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.
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."
In the model adopted by Endo, every link on the value-added chain can be open to the outside world (see Figure 1). The company determined early on that to be successful in the tough world of lower-cost marketing and sales programs in the smaller markets that are treated by narrow specialties of physicians, it would have to employ a full-time, dedicated sales force as a core capability. But in all other areas, Endo's employees would become project management specialists, managing the drug development, manufacturing, and distribution process through the use of multiple, specialized outsourcing service providers.
Figure 1. In the virtual-company model every link on the value-added chain can be open to the outside world. Adapted from Dr. Gene Slowinskis book, Reinventing Corporate Growth, 2005.
For distribution, Endo doesn't own a single warehouse or shipping pallet, or employ any customer service telephone representatives. It relies completely on UPS Supply Chain Solutions to distribute its new and existing products to market. Unfortunately for Endo, it wasn't able to just step into a smoothly running turnkey operation. In 1997, few specialized outsourcing service providers in the distribution area were equipped to grow the shipment volume of highly regulated opioid pain therapies that the company began operations with after its management buyout.
Daniel J. Carbery, an executive who came on board at Endo in its early days and who is now the senior VP of operations, stepped up to the challenge. He developed a supply chain that had incredible restrictions because of its special governmental requirements for close monitoring of narcotic drugs all along the supply chain. At the same time, Carbery had to figure out a way for Endo not to stray from its semi-virtual model. The new company needed a way to track orders, monitor outgoing shipments, and get paid for its products. It also needed real-time contact with its customers in the retail pharmacy, wholesaler, and physician market spaces. For some of its products, Endo needed a flexible storage and transportation system that could house and ship injectables in a cold chain environment. "We knew what we wanted, but there were no companies with both full-service systems and adequate flexibility available," says Carbery. "So, we worked with UPS Supply Chain Solutions to create a flexible, scalable, and highly integrated distribution system," recalls Carbery. "We couldn't afford to internalize or recreate such an operation on our own. And the reality is that we didn't want to."
Everything in a semi-virtual company is tied to flexibility—the ability to rapidly scale up and down in response to changing business circumstances. Endo's complex supply chain is designed to suit its need to retain maximum scalability in the event of serendipitous in-licensing deals, which can suddenly drop the company into new markets with new product introductions. Carbery describes his semi-fixed system arrangement with UPS that assures scalability, "You've heard of playing in the same sandbox as someone else? We rent our own 'sandbox' from UPS. It's a dedicated space where our product orders are fulfilled, products are picked, packed, and labeled, and all documents are recorded."
To make it all work, Carbery says he consciously has brought in a very different kind of operations employee group into Endo. He screened his hires to have an alliance-engaged mindset about making little differentiation between own-company employees (very few) and extended partner virtual employees (hundreds). His group speaks with UPS employees frequently and involves UPS in its preparations for new product introductions.
One success story in this semi-virtual network partnership involved expert shuffling of product in a record short time during a recent licensing deal. According to Carbery, "We have six branded products plus generics in the pipeline, and in past years have launched two on very short notice due to late stage in-license agreements. In 30 days, we not only owned the license to sell the drug, but also on the day the deal closed we had to start shipping, even though the product was still in somebody else's warehouse. Endo moved the product to its UPS-owned warehouse, conducted quality control checks, re-released it, and started shipping by 3 p.m. the same day. It's the rapid-response supply chain equivalent to buying a house and bringing your moving van along to the closing. The flexibility that our outsourcing partners give us to ramp up and down is incredible."
In mid-2005, Endo began yet another outsourcing initiative that challenged the norms of the industry. Instead of building its own clinical operations infrastructure to meet the growing demands of its development pipeline, Endo decided to move in the other direction. It defined its core capabilities as designing clinical programs and studies and interpreting the resulting data. Endo then sought a well-qualified partner to perform all the necessary implementation work to place and conduct the studies and collect the resulting data. The result was an alliance relationship with PPD, Inc., a premier CRO. This was different from the typical industry approach of establishing a CRO relationship where the CRO is simply a preferred and qualified bidder. The company's goal was to find a forward-thinking CRO as an alliance partner becoming the only provider.
Biopharm companies have many vendor relationships with CROs that seem to work, so why take it further and lock oneself into one CRO as an alliance partner? The answer is clear to any biopharm company that has used CRO services, and knows these services have almost become commoditized, limiting the relationship and the output to a one-time profit opportunity for the CRO. Roland Gerritsen van der Hoop, MD, Endo's senior VP of R&D and regulatory affairs, explains, "We were looking for an extension of Endo, with a CRO providing dedicated resources that would be more efficient in training, and more Endo-aligned. Our goal in this initiative was to reduce planning and start-up time; we knew there could be closer involvement in our in-house budget process that would yield better planning for both. Also, a CRO as partner could produce better product development and lifecycle management plans, help prepare better evaluations for new in-licensing candidates, and even connect us more quickly to potential in-licensing opportunities."
The result was the establishment of a mutually committed relationship with PPD for top-tier design and execution of clinical development programs. Although too early to tell, the relationship should at the very least soon produce some short-term benefits for Endo. Dr. Gerritsen van der Hoop continues, "For Endo this could mean no more involvement in day-to-day study activities, such as monitoring sites, compiling progress reports, or resolving queries. Instead, Endo's core development staff should potentially be freed to drive significant innovation for the company by focusing much more on interpreting data; thinking of, formulating, and programming additional in-depth analyses; improving study designs; providing input in discussion sections of reports or clinical sections of submissions; and contributing to acquiring technology for the company through due diligence assessments for in-licensing."
There have been continual challenges associated with implementing a new and innovative approach, particularly with this preferred provider arrangement. Endo is a young, high-growth company. At least 40% of its employees have been at the company for fewer than three years. Many of them come fresh from a traditional environment where the CRO is treated as a supplier, not embraced as a partner. A change of perspective is ongoing in which Endo managers are retrained to hand off responsibility to the CRO so it can use its experience and best practices, rather than dictate to the CRO exactly how the clinical trial is to be conducted. This also requires a change in perspective on the CRO's side, so that it stands firm on its charge of steering the direction of the project, and insists, like a partner but unlike a supplier, that it knows what needs to be done and will implement its own industry-leading processes. Finally, a built-in small–versus–large organization culture clash exists that must be overcome. Endo is a small company, focused on a limited number of projects, while most CROs are large organizations with a pool of talented project managers that to some degree will be constantly circulating in and out of the projects to implement the clinical activities. These and other challenges may be quite difficult in the short run, but Endo sees it as an opportunity to build trust, and learn a lot about new models of partnership in the long run.
Re-engineering the virtual outsourcing model has radically transformed Endo's product pipeline in less than 10 years, and produced a fifteen-fold increase in market value for the company since 1997. Numbers like these are the result of senior management sticking to its fundamental realization that no single firm has the resources to do everything. Endo's extreme version of semi-virtual partnering is catching its share of attention too. At the beginning of 2007, the company was recognized with an Honorable Mention award by the Association of Strategic Alliance Professionals (ASAP) Corporate Alliance Excellence Awards. Endo was cited for its role in changing the traditional model of the biopharm industry to one that is heavily reliant on effective alliance management practices at all points along the value chain. Perhaps this model shows just how an extreme outsourcing structure can continue to produce results over the long term. More importantly, it demonstrates that by not taking on layers of internal infrastructure, a company can maintain flexibility and ability to rapidly scale up and down to adapt to a changing scientific and commercial environment.
Harry Atkins is senior director of alliance management at Endo Pharmaceuticals, Inc., Chadds Ford, PA, 610.558.9800, Atkins.Harry@endo.com