In drug development, the “valley of death” is the period when the research funding is running out and venture funding has yet to materialize. In the years ahead, it may also be the place where the drug development dinosaurs get stuck and die. The dinosaurs will be any company that fails to make use of the new model of distributed partnering—the virtually integrated company (VIPCO).

 

Big Pharma is learning to spin off pieces of their operations, without having to own them or control them, while retaining access to the pieces that they need. At the same time, biotech companies and other young healthcare innovation companies have been coalescing around distinct components of the drug development process. They create new capabilities and often make them available for rent. So now, for the startup or smaller company, just as with Big Pharma, you don’t have to raise capital to build these capabilities—you just have to rent what you need.

 

The forces that drove both biotech and pharma, coming from opposite directions, to the same virtual destination, have been taking shape for decades. When I first entered in this business more than 40 years ago, fully integrated pharmaceutical companies (FIPCOs) did their own discovery and their own development and delivered products to market. The research and development culture within these companies was quasi-academic. Managers provided general oversight and reviewed promising discoveries, but the prevailing philosophy was to provide scientific freedom to pursue innovation.

 

By the late 1970s, the MBA, the spreadsheet, and higher valuations on publicly traded companies on Wall Street had led to greater pressure on CEOs to deliver higher returns. “Management by objective” replaced “follow the interesting questions” as the directive, and pharma companies established matrix teams to match scientists with personnel from marketing, operations, and regulatory affairs.

 

During this same period, the revolution in genetic engineering gave rise to something called “the biotech company,” and a new industry was born. Biotech entrepreneurs pursued innovation without access to any specific market, while over at pharma companies, science by committee began to favor incremental improvements of existing products to compete in current, well-defined markets.

 

In 1980, passage of the Bayh-Dole Act reinforced the entrepreneurial mindset among academic scientists. This legislation meant that universities and their faculty members could stake patent claims on inventions resulting from research funded by federal dollars. Many academic research institutions began to focus on technology transfer and translational medicine. The U.S. National Institutes of Health (NIH) lent a hand by often attaching a translational component to government research grants.

 

In gaining access to this newly emboldened academic talent, biotech had a clear advantage. If you were a Nobel laureate at Stanford and Pfizer came along and said, “Come work with us,” you might say, “I have a pretty cushy job here. I get to do what I want to do, and I don’t really want to be an employee of Pfizer.” But the next day, a venture capitalist might walk in and say, “I’m going to build a company around you. And by the way, you’ll have founder’s stock.” You’d be much more likely to come back with, “Sounds good.”

 

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.