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The Reality of Virtual Pharmaceutical Companies

The Reality of Virtual Pharmaceutical Companies

By Dr Stephen Naylor and Dr Kirkwood A. Pritchard Jr

We discuss the oxymoronic proposition of a Virtual Pharmaceutical Company (VPC) and the typical adopted business model, as well as provide examples of such companies currently trying to undertake this adventurous task.

The vagaries and complexities of bringing a therapeutic drug to market through the Drug Discovery and Development (DDD) process are well known and described.

Any company that undertakes such a time-consuming, financially-burdensome, risk-laden task must have access to a myriad of experienced and professional help. The depth and breadth of expertise required includes broad business knowledge, accounting, legal, intellectual property tactics and strategy, scientific discovery, animal models, toxicology, specific disease-domain understanding, regulatory, clinical trials, manufacturing, marketing, sales and distribution skills. Thus, the demands of a modern pharmaceutical company are taxing, and require a cornucopia of employees, as found in medium-to-large pharmaceutical companies.

It would appear counterintuitive that a Virtual Pharmaceutical Company (VPC) could succeed in carrying out such a daunting set of inter-connected responsibilities. The current VPC model requires a small number of experienced core management/advisors/board members to run the company and execute on the production of a therapeutic drug in a specific disease indication. This is achieved by developing an efficient and delineated strategic out-sourcing and partnering plan. Most, if not all, of the major business operations associated with the DDD process need to be considered.

How much does it cost to bring a therapeutic drug to market? The oft-cited capitalised cost is quoted at $2.87 Billion (1)! However, a subsequent study has claimed that “...this analysis lacks transparency and independent replication”, and is a gross overestimation (2). Prasad and Mailankody analysed US Securities and Exchange Commission filings for 10 cancer drugs, and determined the median capitalised cost (7%) of developing a cancer drug was $757 million. Another study by Paul and colleagues estimated that the capitalised cost (11%) was $1.78 billion.

This latter composite figure consisted of ~38% for discovery (target discovery through lead optimisation), ~8% was required for preclinical studies and ~51% was due to all Phase I-III clinical trials (3). These significant Drug Discovery and Development (DDD) costs necessitate that each large pharmaceutical company must launch two to three New Molecular Entities/New Therapeutic Biologics (NMEs/NTBs) per year to “...achieve their growth objectives based on product innovation” (4). Yet in 2018 only three companies, Pfizer (four NMEs approved by FDA) AstraZeneca (two NMEs) and Eli Lilly (two NMEs), accomplished such a goal (5).

In order to achieve approval rates of two to three NMEs/NTBs per annum, large pharmaceutical companies require an army of skilled and expensive personnel. The top 12 global pharmaceutical companies alone employ a total of ~890,000 employees worldwide (see Table 1).

Table 1 Personnel and R&D spending versus productivity

The three companies that successfully launched two to three NMEs/NTBs in 2018 – Pfizer, AstraZeneca and Eli Lilly – possess significantly different workforce personnel of ~90,200, ~61,000 and ~38,700 individuals respectively. In addition these ‘successful’ companies were ranked fourth (Pfizer), fifth (Eli Lilly) and 10th (AstraZeneca) in our Productivity Index evaluation (Table 1). The PI is predicated on workforce size, R&D spending and annual revenues and is calculated as follows: PI = {[Revenues/Personnel] x – [Revenue/R&D Spend]}/106). Further perusal of Table 1 reveals that there does not appear to be a clear correlation between productivity and the number of personnel, nor the dollar amount spent on R&D by individual pharmaceutical companies.

A lack of clarity continues to permeate large pharmaceutical companies in their quest for improved productivity. It is also clear that increasing personnel or R&D spending does not appear to provide a facile solution to productivity. Last year pharmaceutical companies had a record 59 NMEs/NTBs approved by the FDA. However, small-sized pharmaceutical companies led this effort. Large-pharmaceutical companies only contributed 32% of the FDA approved NMEs/NTBs in 2018 (5).

The flexibility and nimbleness of smaller companies compared to their larger, slower-moving counterparts allows for dexterity of thinking and a willingness to rapidly adapt and adopt new approaches. This has encouraged large pharmaceutical companies to rely more on smaller companies to fill the former’s pipelines through licensing or acquisition deals.

In turn, this has fuelled the growth of small pharmaceutical company formation and development. However, the depth and breadth of expertise required for small pharmaceutical companies to undertake DDD is daunting. The company must possess capabilities that include basic small business knowledge, accounting, legal, intellectual property tactics and strategy, scientific discovery, animal models, toxicology, specific disease domain understanding, regulatory, clinical trials, manufacturing, marketing, sales and distribution skills as a temporal function of corporate development.

In order to avoid the necessity of ballooning personnel ranks and significant overhead, a number of small pharmaceutical companies are exploring and developing the Virtual Pharmaceutical Company (VPC) model. This counterintuitive model is described and discussed below.

Overview: Virtual Pharmaceutical Companies

The advent of the VPC was due to the efforts of numerous institutions including both large and small pharmaceutical companies. A number of early stage start-up companies in the biotechnology/ biopharmaceutical boom of the 1970-90s era went through some form of VPC process. Genentech Inc was a virtual company from its inception in 1976 through 1978, until one of the founders, Herbert Boyer, established an in-house wet laboratory capability (6). During the evolution of the VPC model it was perceived that companies involved in DDD could exist on a spectrum consisting of fully-integrated entities at one end and virtual entities at the other end.

It was not until 1996 that the pharmaceutical company Hoffman- La Roche actually created a purpose-built VPC named Protodigm. The company employed only nine people and it was estimated that they decreased both development times and costs by approximately 25% compared to fully-integrated pharmaceutical companies (7). Another pioneer in the inchoate VPC sector was Vanguard Medica (later known as Vernalis), which was one of the first companies to describe itself as a ‘Virtual pharmaceutical development’ company in 2003 (7).

There was an additional impetus for the development of the VPC model. These efforts arose from a myriad of emerging global orphan disease initiatives8. The World Health Organization in 2000 facilitated the creation of public-private partnerships to develop therapies for orphan diseases. The NIH (USA), the Global Fund and the Gates Foundation indirectly aided these efforts.

In addition, the advent of the internet/www and access to open-source, readily-accessible databases all fuelled the endeavours of individuals/small groups to become involved in the search for new therapeutic drugs (8). Even with all of this uncoordinated, but substantive, effort as recently as 2014, VPCs had only been ‘described anecdotally’ (9).

This is somewhat surprising since a reported survey in the UK claimed that more than 40% of all UK DDD companies in 2009 were virtual entities (10). In addition a more rigorous 2013 study indicated that more than 50% of biotechnology companies in Australia were VPC-like corporate entities (7). This all indicates that historically there has been a quiet, but considerable, effort in the development of the VPC sector. However, there has been limited written recognition of its existence, as well as a clear description of the advantages and disadvantages of the model are somewhat lacking.

Definition of a VPC

Most of us are familiar with the concept of ‘Virtual Reality’ as embodied by the simulated and immersive environments of software-driven games. However, as a blurring extension of this concept, PricewaterhouseCoopers (PwC) published a report describing the use of a computer-based virtual R&D process (11).

All of these descriptors should not be confused with a Virtual Company, which is somewhat less well defined and understood. In general, it refers to a company that does not possess the standard ‘bricks and mortar’ infrastructure of a conventional company. In addition, the description also encompasses the process of how a company is managed and the type of business model adopted to facilitate growth and evolution. Such companies work on the principle that most operational tasks can be outsourced to third party providers, while the project management and strategic business execution are retained within the parent company (7).

The momentum for this type of approach is to create efficiencies of decision-making and simple lines of communication. The corollary is that this leads to a reduction in overhead costs, product development times and risk. For such an approach to be effective the in-house team has to be experienced and possess a number of core management and expertise skill-sets.

A VPC is defined as a company that outsources most of, if not all of, its essential tasks associated with the DDD process that includes such efforts as discovery research, preclinical evaluation and clinical development. The information and knowledge base is maintained within the company and held by management and advisors. Thus there is no in-house laboratory work undertaken by the VPC. A VPC consists of a small, experienced management and advisory core team. The initial goal is to expedite the proof-of-concept (PoC) for a drug candidate in a specific disease indication at modest cost.

The term ‘Virtual’ in this context refers to the company’s business model predicated on outsourcing services and reliance on electronic facilitated communication by the management/advisory team. The latter’s role is to co-ordinate all activities with external providers. The choice of service providers is critical for the VPC, but requires almost no internal investment in fixed assets (6-10). The VPC model is at the other end of the spectrum from a vertically-integrated pharmaceutical company such as those large pharmaceutical companies listed in Table 1.

VPC business model

VDDI Pharmaceuticals is a VPC based in Tennessee, USA (see Examples of VPCs).

The company model comprises:

a) a limited core group of employees responsible for strategic management, regulatory strategy and financial control
b) outsourcing all non-core business functions
c) electronic data capture and data submission to regulatory authorities

The company claims that adoption of such a model “can reduce total drug development programme costs by at least 25% and development times by up to 50%” (12). All VPCs are obviously seeking to control costs, reduce product development times and also mitigate risk in their scientific, clinical and business endeavours. The question is how to achieve such goals utilising the VPC model?

Powell and Schroder have argued that this requires a paradigm shift in thinking and the VPC management team should consider themselves as ‘orchestrators’ of the process (13). This intricate network of virtual partnerships is predicated primarily on managing information flow and relationships not products. This requires strict attention and focus on collaborations, risk management and transparent information flow (13).

The role of management in a VPC model is a critical component of success for such companies. The layers of bureaucracy typical of large pharmaceutical companies have been stripped away. This facilitates a freedom to operate associated with efficient decision-making and has resulted in an emerging popularity of VPCs. The business model is relatively straightforward in which the VPC employs a limited number of personnel (typically <10), and outsources almost all of its operations to third party providers.

The core management team consists of experienced personnel who are responsible for managing specific functions of the company outsourced to expert third party providers. Limiting the number of employees can reduce cost and improve time efficiencies. In addition, staffing can be adjusted on a contract-by-contract basis from a much wider talent pool compared to a conventional company. VPCs tend to focus on one area of the pharmaceutical’s lifecycle such as early stage R&D, clinical development or commercial operations.

This allows such organisations to succeed with small, efficient management teams who provide critical attention to fiscal discipline. In turn this facilitates innovative, timely solutions to critical problems that larger companies often allow to balloon into exorbitant and lengthy endeavours. This “virtual model permits small groups to efficiently and economically authorise and oversee development of many drugs in facilities outside a company” (14).

The VPC model adopted by any one company will vary as a function of management experience and goals. We capture the essential VPC model components that may be required in the DDD process, as a function of time, for a VPC to bring a drug candidate to market (see Figure 1).

Figure 1 Representation of the growth of a VPC as a function of time and corporate development

Most VPCs elect to focus on one portion of the pharmaceutical lifecycle, depending on the perceived business opportunity. However, Myung Soo Kim (Kineticos Life Sciences) has argued that a Hybrid VPC (hVPC) model is most likely to emerge in the near future (15). In this model, the primary VPC will outsource or partner with other drug companies who have differential core competencies.

For example, Kim opines that “a small drug company A, or perhaps an academic institution, may focus on drug discovery and in vitro pre-clinical, while their partner, drug company B, focuses on pre-clinical animal models and Phase I/II proof-of-concept, and together they license out their asset to drug company C, most likely one of the large pharma companies, who finishes up the clinical development and commercialises the drug” (15).

VPC model advantages and disadvantages

The primary advantages of the VPC model are that it affords a decrease in costs (overhead and infrastructure) and reduces time required for product development, as well as efficient decision-making and communication processes. It has been argued that this model enables entrepreneurs with limited access to capital to form a company for the development of their novel drug candidate compounds (4). In addition, extensive outsourcing allows VPCs to maintain and focus on core scientific and disease indication competencies, developing and managing IP portfolios and co-ordinating their service provider relationships.

Nevertheless, the VPC model also has difficulties associated with its implementation and maintenance. The dependence on independent, third-party service providers represents a significant problem area for VPC management. If a critical-path service provider fails to deliver on its statement-of-work terms, or suffers its own financial distress event, then the progress of the VPC drug candidate is put in jeopardy. In addition, reduced security and confidentiality are also a concern, since proprietary information has to be shared with the service provider to ensure execution of the task. This has the potential of imperilling IP filings and strategy.

This is summarised in Table 2 and highlights the significant positive attributes associated with the VPC model, but also indicates that adoption of such a model can come with considerable risk.

Table 2 VPC model: advantages and disadvantages

One particular complexity associated with the VPC model that has not received much attention is the ‘pass through mistake by a service provider’ (Table 2). As an example, in 2012 the Food and Drug Administration Safety and Innovation Act (FDASIA) inserted a simple statement into Section 501(a)(2)(B) of the Food, Drug and Cosmetic Act that expanded the meaning of current good manufacturing practice (cGMP) to include “the implementation of oversight and controls over the manufacture of drugs to ensure quality, including managing the risk of and establishing the safety of raw materials, materials used in the manufacturing of drugs, and finished drug products” (16).

The change in law challenged VPCs to improve oversight over QA/QC of manufacturing even though the virtual company had no direct role in the process. Thus the VPC was beholden to the service provider for adherence with the new guidelines but without the ability of directly influencing the process. This example serves as a caveat to potential problems associated with the VPC model in which the service provider can pass through problems to the virtual company. The latter has limited capacity to control or influence the situation, but can be directly responsible for the legal consequences, but is reliant solely on the service provider (17).

VPC management team

Most of the limited analysis of the VPC business model contains a common exhortation that the know-how and abilities of VPC core management team are critical to the success of the company’s endeavours. The competence of the management team must contain extensive industrial and academic networks. Individuals must possess professional portfolio, plus project and alliance management skills. They must have expertise in risk management and financial valuation strategies. Licensing and administrative skill sets are of vital necessity.

The obvious but necessary communication and motivational skills to manage third party service providers are also required for a VPC to execute successfully on this business model. The critical interdependence of skill-sets between every single team member is a final metric that must be constantly monitored and evaluated since “the survival of a VPC might be endangered if any one team member does not fulfill his/her management obligations” (18).

The importance of an outstanding management team also pays a determinant role in the analysis of a VPC by investors such as the venture capital community (19). Investors appreciate the VPC model since the risk and potential reward is clearly defined in such a unique proposition. Costs are kept down, and minimising time to product development, efficiencies of decision-making and communication are all appealing facets of the VPC model. However, without an able and talented management team to execute on such important matters, the company is just a virtual set of ideas, which is a consideration that always plays a critical role in attracting investment funding.

Examples: Virtual pharmaceutical companies

The VPC model is much more suited to start-up, emerging and small pharmaceutical companies. However, there is a participatory history of large pharmaceutical companies being involved in shaping the development of the emerging VPC sector. Indeed some, such as Bernard Munos (formerly Eli Lilly), have argued that large pharmaceutical companies have pioneered such an approach and have been transitioning to a VPC model since the late 1990s (8). Even discovery, the last bastion of large pharmaceutical company in-house effort, has been outsourced to a myriad of academic groups and smaller pharmaceutical companies.

Large pharmaceutical companies

Vertex Pharmaceuticals is now a fully-integrated pharmaceutical company. But in 1989, when Joshua Boger founded the company, a VPC-like model was adopted and some of these practices continue today. During that evolution the company has successfully launched three commercially available drugs, namely Symdeko, Kalydeco and Orkambi, all therapies for various forms of cystic fibrosis (20). Furthermore, Munos has articulated that Lilly also was an originator of the VCP approach.

In 2000 eLilly was launched in an attempt to harness the potential of internet capability in drug R&D. This led to the development of initiatives such as InnoCentive, Collaborative Drug Discovery and Chorus (8). In the latter case, a small team was established to expedite projects from candidate selection to proof-of-concept data for Lilly’s Phase III pipeline (18). Since its creation in 2002, Chorus has supported 72 global development programmes (57 Lilly and 15 non-Lilly), some of which have progressed to Phase III and as marketed products.

Chorus has been able to run its operation with 25% of its budget as fixed overhead costs and 75% of the financial resources allocated to the external costs of the drug projects. Overall Lilly’s concept of virtual R&D met its original goals since the average success rate in Phase II improved significantly (54% Chorus versus 29% traditional Lilly) and its productivity increased by a factor of 3-10 compared with Lilly’s traditional clinical development model (18).

Small virtual pharmaceutical companies

The dynamics associated with small pharmaceutical companies have changed dramatically over the past decade. It has been argued that the vertical integrated pharmaceutical model is finished. The future lies with VPCs and the world of virtual partnerships (13). As we describe in Figure 1, the VPC is at the core of a myriad of virtual partnerships, and Powell and Schroder have described the management team of a VPC as the “Orchestrators” of this process, predicated on the three pillars of collaboration, risk management and information transparency (13).

Debiopharm exemplifies a spectacular example of the successful application of such a model. The company was founded in 1979 and has operated a virtual R&D model in drug development and in-licensing of potential drug candidates with the aim of partnering for sales and marketing expertise. It has one of the highest revenue rates earned per employee across pharmaceutical companies with an estimated value of $2.3 million/employee. This metric is in stark contrast to that of large pharmaceutical companies that are in the range of $300-500,000/employee18 (see Table 1).

Other examples of VPC companies are discussed below and include:

1) Success: Puma Biotechnology was founded in 2010 and adopted a VPC model to identify and inlicense drug candidates already in clinical development. In 2011 it licensed three HER-2 compounds from Pfizer, sprinting to a successful IPO and raising $138 million. One of the licensed compounds, Neratinib, was approved by the USA FDA in July 2017, the European EMA in September 2018 and the Australian TGA in March 2019 for the treatment of Her-2(+) breast cancer. The current market cap of the company is around $550 million. NovoCardia was another VPC-like company that in-licensed drug candidates. The company was founded in 2001 and procured a late-stage drug candidate, KW-3902, for treatment of congestive heart failure. Merck acquired the company in 2007 for $350 million, but caveat emptor; the drug candidate failed to meet its Phase III clinical trial endpoints in 2009 and was abandoned, but the original founders and investors of NovoCardia had clearly realised success.

2) In progress: Tioga Pharmaceuticals was founded in 2005 and is based in San Diego. The company has raised ~$57 million, and has just two employees, including the founder Stuart Collinson (Chairman and CEO). Currently its sole drug candidate, Asimadoline, is in Phase II clinical trials for the treatment of pruritus associated with atopic dermatitis. Collinson was recently quoted as saying “I think we’ve taken this to an art form with the degree of virtualisation that we’ve incorporated into this particular company.”21

3) Uncertain: VDDI Pharmaceuticals is based in Tennessee, USA. It was founded in 1999 by Stephen Porter and has seven employees. It has raised $3 million in equity financing and $8 million from the US DoD. It describes its business opportunity as an “in-licensing and out-sourcing model”. The disease areas of focus include infectious and cardiovascular disease as well as oncology. It is unclear as to the degree of success that this company has experienced since there are no reports on its website of successful drug candidates being put through their in-licensing, outsourcing process. However, the company website is replete with extremely useful information and insight on the VPC model12.

4) Beginnings: ReNeuroGen LLC was founded in late 2016 and is based in Milwaukee Wisconsin. The company is currently funded by NIH grants and has three employees. It includes the two authors of this article, Stephen Naylor (CEO) and Kirkwood Pritchard (CSO), as well as Billy Day, who is leading the R&D efforts of the company. The company also has a number of business, scientific and clinical advisors (specific disease domain expertise). One of the primary strategic partners in its evolving VPC model is the Medical College of Wisconsin. The ReNeuroGen team has developed a novel model associated with a number of disease indications that can all be treated with a peptide library of candidates effective against the enzyme target myeloperoxidase and other key enzymes associated with neuroinflammation. The company has R&D programmes in ischaemic stroke, relapsing remitting multiple sclerosis, stroke associated with sickle cell disease, traumatic brain injury/chronic traumatic encephalopathy and neurological disorders associated with bronchopulmonary dysplasia.

Conclusions

The advent of the internet/worldwide web spawned a myriad of well-known virtual operational companies such as the behemoths Amazon and eBay. The concept of a virtual company is now well-recognised by the general public and has come to epitomise an entity that does not operate through the ‘bricks and mortar’ model. In the case of the VPC, the definition and operational model are more clouded with uncertainty.

There is unequivocal evidence that the VPC model continues to gather momentum. However, the opportunities afforded by such a model have not been clearly defined. As an example, when Francis Collins became Director of the NIH (USA), one of his primary objectives was to provide a framework where academic individuals and institutions could become more involved in the DDD process. While he may not have had the VPC concept in mind, the VPC/hVPC model clearly facilitates such an initiative.

Finally, the descriptor of VPC has found some acceptance in the biotech/pharmaceutical sector. This is in spite of the misunderstanding of what constitutes a VPC and the choice of nomenclature for describing the VPC. It may be worthwhile to consider whether Network Pharmaceutical Company (NPC) is a more suitable descriptor than VPC. Nevertheless, whether it is VPC or NPC, the model is here to stay. DDW

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This article originally featured in our Summer 2019 Issue

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Dr Stephen Naylor is a Co-Founder, CEO and Board Chairman of ReNeuroGen LLC, a virtual pharmaceutical company developing systems pharmacology therapies for the treatment of neurological diseases. He is the Founder, Chairman and CEO of MaiHealth Inc, a systems/network biology level diagnostics company in the health/wellness and precision medicine sector. In addition he is also a Co- Founder and Board Adviser of iMetabolic Biopharma Corporation. He was also the Founder, CEO and Chairman of Predictive Physiology & Medicine (PPM) Inc, one of the world’s first personalised medicine companies. He serves as an Advisory Board Member of CureHunter Inc, a computational biology drug discovery company, and as a business adviser to the not-for-profit Cures Within Reach. In the past he has held professorial chairs in the departments of Biochemistry & Molecular Biology; Pharmacology; Clinical Pharmacology and Biomedical Engineering, all at Mayo Clinic in Rochester, MN, USA. He holds a PhD from the University of Cambridge (UK) and undertook a NIH-funded fellowship at MIT located in the ‘other’ Cambridge, USA. Address correspondence to him at snaylor@rngen.com.

Dr Kirkwood A. Pritchard Jr is a Co-Founder, CSO and Board Director of ReNeuroGen LLC, a virtual pharmaceutical company developing systems pharmacology therapies for the treatment of neurological diseases. He is also a Co-Founder and Board Director of HDL-Dx, a diagnostics company developing an assay to determine functionality of HDL. In addition, he is a tenured Research Professor in the Division of Pediatric Surgery, Department of Surgery, at the Medical College of Wisconsin (Milwaukee, Wisconsin, USA). He has broad and diverse translational research interests in a number of disease indications including, stroke, multiple sclerosis, traumatic brain injury, chronic traumatic encephalopathy, sickle cell disease and bronchopulmonary dysplasia in premature babies. He holds a PhD from Ohio State University (Columbus, Ohio, USA), and undertook a postdoctoral fellowship at Albert Einstein College of Medicine (New York, NY, USA).

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