The Preferred-Provider Model - Pharmaceutical Technology

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PharmTech

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PharmTech Europe

The Preferred-Provider Model
The designation of preferred partners has become integral to the outsourcing process. Read this and other preferred organization articles in this special issue.


Pharmaceutical Technology
Volume 35, pp. s6-s10

Array of benefits

With the enforcement of the preferred-provider designation, global bio/pharmaceutical companies expect to reap several benefits.

Lower prices. Most bio/pharmaceutical companies expect CROs to offer lower pricing for services in exchange for the preferred-provider designation. This expectation is based on the assumption that the CRO will have a more certain revenue stream with substantially less sales expense as a result of the preferred-provider designation. They also assume that the costs of maintaining the relationship will be less as the companies will be working together more closely and over a longer period of time.

At many bio/pharmaceutical companies, the pricing benefit is furthered by running a competitive auction process, with participation limited to the preferred providers. This is especially true among mid-size companies, where the volume of activity may not lend itself to the functional service provider model, and for development-scale API and dose projects.

Administrative cost savings. Bio/pharmaceutical companies conduct a prequalification process before designating preferred providers, and generally designate CROs with which they have extensive previous experience. As a result, they are realizing savings from not having to vet vendor qualifications every time a new study needs to be contracted. Further, by concentrating the business in a few CROs, they are saving ongoing costs arising from vendor audits, contract negotiation (preferred providers work under a master agreement that dictates the business and quality terms governing the relationship), and contract management.

Time savings. The designation of preferred providers enables bio/pharmaceutical companies to shorten the time required to award a contract by eliminating the bidder-qualification process for each project and limiting bidding to a smaller number of participants. The functional service provider model shortens the timeframe even more by eliminating the contract-award process altogether. The time savings are especially valued in the current industry environment, where time and cost savings are highly valued.

Continuous improvement. Because they make for closer and longer-term relationships, preferred-provider arrangements offer excellent opportunities for clients and CROs to work together to improve study designs and squeeze time and costs out of clinical-research activities. In fact, most bio/pharmaceutical companies expect CROs to seek out these process-improvement opportunities, and the ability to find them enables CROs to get back some of the profit margin they give up by charging lower prices in exchange for the preferred-provider designation.

Driving changes in the provider segment

The embrace of the preferred-provider designation among global bio/pharmaceutical companies is driving major changes in the strategies of CROs and the structure of the CRO industry. Its impact is being felt in three key areas, as outlined below.

Broadening geographic scope and capabilities. As clinical trials have become more global, the ability of a CRO to manage trial activities in many countries at one time has become a key differentiator. This capacity has sparked a flood of new office and laboratory openings, and acquisitions of small regional CROs, all geared to filling gaps in CRO coverage. The principal focus of these activities has been in the emerging markets, including China, India, Eastern Europe, and Latin America.

Operational excellence. The ability to manage global networks, deliver on time, and reduce costs has put a premium on the operating skills and capabilities of the CROs. The global bio/pharmaceutical companies favor preferred-providers that have established a track record of reliable or exceptional performance over a period of years. Preferred-provider status is dependent on achieving objectives and is monitored using a broad range of metrics. As result, CROs continue to invest in information technology, operate Six Sigma and other continuous-performance methodologies, and recruit operating executives from companies like GE with strong reputations for operational excellence.

Industry consolidation. The growth of preferred-provider programs is creating winners and losers in the CRO industry, and threatening the long-term prospects of many small and mid-size CROs. According to PharmSource estimates, the six largest CROs now account for 50% of total clinical CRO revenues, and the trend is toward greater consolidation. The largest CROs are winning because they have the broadest capabilities and geographic coverage, and are the most stable financially. Another group doing well is the small specialty CROs that offer special therapeutic or technical expertise. The biggest challenges are being faced by the mid-size CROs, which lack the broad scope of the biggest CROs and specialty capabilities of the niche CROs.


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