The Virtual Pharmaceutical Company: A New Pathway to Market?

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In our modern biopharmaceutical industry, the maxim “bigger is always better” no longer applies. The industry’s modest virtual model persists in its popularity, emerging as a contemporary method of workplace efficiency. With an absence of manufacturing, virtual biopharmaceutical companies have found themselves unburdened by the multiple layers of bureaucracy that often plague large companies. With such freedom, they have operated much more efficiently in terms of time, resources, product specialization, and finances. As a result, virtual biopharmaceutical companies are growing in popularity because they strive to keep costs low and increase research output.

The Virtual Company Model
Virtual biopharmaceutical companies follow a model in which they employ few people (e.g., <50) and outsource most operations case by case from third-party organizations. Most start-up biopharmaceutical companies begin with a virtual model to ensure their success in competing with formidable, well-established industry giants. Large and renowned biopharmaceutical companies conduct most if not all of their operations (e.g., research, development, and management) within their own organizations. However, by using a virtual model, smaller biopharmaceutical companies can specialize in a specific discipline and outsource other required work (1).

Staffing: Hiring few full-time employees helps virtual companies to bolster their cost and time efficiencies. Not limited only to those already on the company payroll, they can choose from the widest available talent pool to match talent acquisition with specific project needs. Staffing can be adjusted contract by contract, which allows specialized talent to be recruited and multidisciplinary teams to be assembled. Recruitment reaches into other segments of the population, including academia, technology, and international organizations, thus closing the barriers of time and distance and allowing for innovative entrepreneurial ideas. Most virtual companies are headed up by former executives who rose through the ranks at big pharmaceutical companies and bring a wealth of knowledge. Other virtual companies originate from highly experienced former employees stifled by rigid corporate culture (1).

A virtual company’s small staff generally consists of a core management team. For example, a commercial biopharmaceutical company typically requires functional groups such as sales and marketing, finance, commercial operations, regulatory affairs, medical affairs, manufacturing, quality assurance, legal, customer service, and a leader such as a chief executive officer. In a virtual equivalent, each function would be managed by an experienced individual, with the actual functionality outsourced.

Operations: In addition to following a lean management structure, virtual businesses succeed by stripping down to their essential elements and outsourcing to third-party services for just about everything else. With smaller offices, overhead costs are kept low, affording a competitive advantage. Laboratory work is contracted out, as are medical clinics for trials. Intellectual property attorneys and project managers are employed based on specific project needs. No high-overhead departments (e.g., human resources and accounting) are required because such functions can be readily outsourced.

Once removed from the corporate structure, a broad range of homegrown and international expertise becomes accessible and can be accessed when needed. That helps a virtual company speed up development and extend its reach into niche markets. Development strategies can be explored, and myriad uncharted paths can be taken when employees are unencumbered by an out-of-date maze of multileveled managers, approvals, and meetings.

Virtual companies tend to focus on one area of a biopharmaceutical’s lifecycle (e.g., early stage research and development, clinical development, or commercial operations). This specific focus allows such organizations to succeed with lean management teams. With a sharp eye on fiscal discipline, small companies can focus on innovating timely solutions to critical problems that larger companies often allow to balloon into exorbitant and lengthy endeavors (2).

Surging Popularity
Accompanying a shift in the composition of biopharmacetical companies, the mindset of investors has altered as well. In what used to be a company-driven industry, the interests of investors revolved solely around the companies themselves. But now, with so many virtual companies arising, investors focus more on projects presented by companies rather than the organizations themselves (3).

Before 2000 — when virtual companies scarcely existed and costs for production remained relatively low for research, development, production and manufacturing of a drug — companies operated as a single machine to follow through with mass development of several products at a huge cost. An exorbitant increase in the cost of supervising and following through with a single drug from start to finish (calculated in the billions of dollars) is one reason that the 21st century brought on the rise of virtual companies (2). The virtual model permits small groups to efficiently and economically authorize and oversee development of many drugs in facilities outside a company.

The many advantages that accompany the virtual pharmaceutical model elucidate its sudden rise in popularity. Because virtual companies pay only for designated services required at particular times, cost benefits of a compartmentalized system prove advantageous. If, for example, laboratory work is required for only the first five months of a year, contracting out the job would be more profitable than paying expenses for full-time employees and labor.

Reduced overhead costs for virtual companies provide another financial gain. A smaller business reduces labor, rent, and insurance costs. For unestablished companies starting out with too little funding to institute and support a traditional biopharmaceutical company, this auspicious quality is especially helpful (4). And with just a few employees, work can be easily delegated to different people specializing in and overseeing a particular aspect of a virtual company. That minimizes time for a proposition to travel throughout different company levels and for a timely decision to be reached (5).

Moreover, the comradery and enthusiasm fostered in a virtual company’s environment further stimulate employees’ excitement for work, often leading to greater innovation. As a result, staff members are more likely to possess a passion for their jobs and strive to accomplish individual goals as well as those of a company.

Challenges: With few employees, however dedicated they may be, very minimal support exists for a virtual company’s projects. As a result, such companies must rely on third-party contractors for critical aspects of their operations. Outsourced companies must work for a profit as well, thus heightening overall cost per unit for a virtual company. And employees of outsourced companies might not possess the incentives to complete a project proficiently and on schedule for a virtual company (6). For example, a virtual manufacturing company must rely on contract manufacturing organizations (CMOs) to produce biopharmaceuticals, but a virtual company cannot oversee a CMO. Therefore, if and when the CMO makes unmonitored mistakes, those errors percolate through to the virtual company. That can result in errors that could critically affect product quality and the company’s ability to release a product to market.

Keeping Growth in Mind
Having become firmly entrenched in the industry, the virtual company model is increasing in prevalence. Yet this rise in popularity yields some questions: How virtual is an “ideal” virtual company? At what point do the disadvantages of a higher cost per unit and fewer employees outweigh the many benefits of outsourcing parts of a company’s undertaking? Maintaining a core workforce has its benefits, but once a company incorporates more job positions and employees, the vital question is whether that company is in fact truly virtual anymore, and whether a transition from a virtual model to the traditional business model would be more profitable (1).

References
1 Hunter J. Validus Virtual Pharmaceutical Information. Personal interview. 13 January 2016.

2 Collier D. Virtual R&D: Drug Development in the New Millennium. Forbes 16 June 2010; www.forbes.com/sites/velocity/2010/06/16/virtual-rd-drug-development-in-the-new-millenium/v#8cbb438535b9.

3 Forster SP, et al. Virtual Pharmaceutical Companies: Collaborating Flexibly in Pharmaceutical Development. Drug Discov. Today 19 (3) 2014: 348–355.

4 Whalen J. Virtual Biotechs: No Lab Space, Few Employees. WSJ 4 June 2014; www.wsj.com/articles/virtual-biotechs-no-lab-space-few-employees- 1401816867.

5 Nordrum A. Biotechs Increasingly Favor Leaner “Virtual Startup” Model Amid Public Outcry Over High Drug Prices. Intl. Bus. Times 10 November 2015; www.ibtimes.com/biotechs-increasingly-favor-leaner-virtual-startup-model-amid-public-outcry-over-high-2177434.

6 Philippidis A. Virtual Companies’ Benefits, and Costs, All Too Real. Gen. Engr. Biotech. News 13 September 2012.

Corresponding author Leslie Gladstone Restaino, Esq. is general counsel at Validus Pharmaceuticals LLC; 119 Cherry Hill Road, Suite 310, Parsippany, NJ 07054; 1-973-265-2777, x112; fax 1-973-265-2770; [email protected]; www.validuspharma.com. Phoebe Seltzer is a student at Ridge High School in Basking Ridge, NJ.