The scientific community accepted that there was a two-headed god here—both the pure science route (with a Nobel Prize at the end of the rainbow) and the entrepreneurial route, which meant economic participation in the ultimate value of your work. This mindset enabled small companies to assemble a critical mass around specific problems. It wasn’t as if the big companies did not have the wallet or the good people, it’s just that the small companies were able to build capabilities more efficiently and more effectively. Those small companies then had to look for resources that would help them along, which also helped encourage the development of the VIPCO model.

 

But as investors learned how much time and money it takes to bring a new drug to market, venture financing moved upstream to later-stage deals. And early-stage investors worried more about being diluted when large institutional VC firms invest in later financing rounds. So as the risks became too high for any single company to manage the entire drug-development process, the
resources declined.

 

For Big Pharma, the challenges increased as patents expired—distribution (as well as reimbursement) became more complicated, the pace of discovery slowed, and the price of drug development increased. They began to trim down their operations and dis-integrate their operations.

 

So from both sides, pharma and biotech, the membranes surrounding the organisms burst, and all the organelles began to float free, ready to serve as platforms to be refined by independent players and capabilities to be utilized on a freestanding basis. Other forces pushing the move toward virtual integration included lower-cost manufacturing operations in Asia and Eastern Europe, clinical development organizations and their growth, and the rise of research organizations including the biotech industry.

 

“Definition” companies work on proof-of-concept activities. These startups have no intention of becoming fully integrated biotech companies or engaging in development or marketing activities. Instead, from day one, the goal is to develop a definition and tech-transfer package that Big Pharma will buy in order to finish the expensive clinical-testing phases, and eventually market. Not only does this flip the biotech model on its head, but it also creates an exit strategy, giving an important incentive for venture groups to invest in early-stage innovation rather than to focus exclusively on late-stage deals.

 

Contract research organizations (CROs) provide needed clinical services (sometimes including pre-clinical development) that reduce personnel costs, concentrate specialized skills, conserve capital, and mitigate risk—particularly critical objectives for venture-backed operations.

 

Big Pharma continues to hold the advantage in late-stage clinical trials, product marketing, and distribution. Their global reach brings with it access to investigator sites and to the tens of thousands of patients needed, not only for Phase II and III clinical trials, but also for ongoing drug-drug interaction and other monitoring studies after a drug is launched. Plus, Big Pharma has the experience necessary to navigate reimbursement issues as well as the global distribution capability for bringing new products to market. And, finally, Big Pharma has the financial ability to survive the unforeseen.

 

On the other hand, whereas a Lilly or a Roche or a Pfizer might do one cancer trial or one cardiovascular trial, CROs like Quintiles, PPDs, and Parexcel could do many. So, for efficiencies at one level—access to patients, knowledge, skills—other elements of virtual integration offer a leg up.

With the rate of new drug discovery slowing to a crawl, and in a world increasingly driven by personalized, predictive, and preventive medicine, you can do better renting than owning. Virtual integration allows you to utilize exactly what you need, when you need it, and no more. You don’t have to buy the whole gallon of milk just to get the one cup that you need.

 

The companies that grow and prosper in the future, whether coming from pharma, biotech, or a new pool of money, will be those that make effective use of virtual integration. VIPCOs are the new model; FIPCOs are out. They will be the dinosaurs left behind.