Functional versus Full-Service Outsourcing Models - Pharmaceutical Technology

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Functional versus Full-Service Outsourcing Models
Preferred models for clinical and nonclinical services move in opposite directions.


Pharmaceutical Technology


Functional outsourcing

Functional outsourcing has been the rule rather than the exception in nonclinical outsourcing. The reason has little to do with the cost and performance advantages being pursued in clinical research, however.

Instead, the predominance of the functional model in nonclinical development reflects the fact that the component disciplines of nonclinical development have very different and specific technical and operation bases and require expensive specialized capital infrastructure. (Clinical research requires very little capital investment, and its human resource requirements can be met with job-specific training in most cases.) Nonclinical services companies have traditionally been unwilling or unable to make the capital investments and assemble the expertise necessary to offer a full-service nonclinical offering. An early effort to assemble a full-service nonclinical offering, Oread, flamed out more than five years ago because it couldn't support the cost of maintaining so many capital- and technology-intensive capabilities.

One-stop shopping

The return of the one-stop-shop model in recent years reflects two major trends in the pharmaceutical industry. The first is the renewed support for early-stage companies developing new drug candidates and their focus on getting to proof-of-concept (positive results at Phase IIA) as quickly as possible. Venture-backed early-stage companies account for over 50% of the new drug candidates in early development (preclinical through Phase IIA), and their development programs are geared toward achieving proof-of-concept as quickly and cheaply as possible. Most of these companies lack the facilities and breadth of scientific and development know-how to manage a program to proof-of-concept, let alone to commercialization. The full-service nonclinical CROs are promising these early-stage companies a quick and cost-effective route to proof-of-concept by providing a turnkey offering with complete nonclinical capabilities and project-management skills to tie it all together.

The second trend is the interest of private equity investors in the pharmaceutical services market. The nonclinical contract services business is highly fragmented and presents many acquisition opportunities for private equity investors looking to build a large CRO operation by buying up a number of smaller operations. The full-service CRO presents a logical model around which to build an acquisition strategy.

Segmentation

As the pharmaceutical service industry continues to mature, we will see many variations of the basic full-service and functional models. Early-stage and virtual companies will tend toward the full-service model for both clinical and nonclinical services. That's because they need the regulatory and project-management expertise embedded in the full-service model along with the basic technical disciplines.

Large pharmaceutical companies are likely to use a hybrid approach, mixing and matching the models as appropriate to meet their objectives of greater flexibility and lower costs. In clinical research, data management, clinical supplies logistics, and central laboratory services will be sourced largely on the functional model, but study management and monitoring services could be provided by full-service CROs with expertise built around specific therapeutic areas. In the nonclinical area, services that are closely linked, (e.g., formulation and clinical supplies manufacturing, may be sourced on a full-service basis) but we expect functional capabilities to count more heavily in nonclinical sourcing arrangements.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905,
http://www.pharmsource.com.


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