Preferred-provider relationships are the "new new thing" in the contract services industry, even though they have been around for almost five years now. The largest clinical CROs are focused almost exclusively on gaining and implementing preferred-provider relationships with the global bio/pharmaceutical companies. Josef von Rickenbach, CEO of PAREXEL International, recently described the trend toward these strategic sourcing relationships for clinical research services as "a once-in-a-lifetime industry transformation" of the bio/pharma industry.
The interest in strategic sourcing relationships is part of a total rethinking of the traditional R&D paradigm at global bio/pharma companies. The traditional model was built on a vertically integrated organization, usually housed on remote campuses that conducted all phases of discovery and development. That organization was meant to generate a large number of development candidates, often referred to as "shots on goal," and required a tolerance for high failure rates to produce a few commercially successful drugs.The traditional R&D model was possible because of the spectacular profits generated by blockbuster drugs, but as those blockbusters have gone off patent, global bio/pharma companies have been forced to discard it. For one thing, global bio/pharma companies found that those isolated organizations were not effective at identifying promising new products. Following the lead of other high-tech industries, companies realized that innovation could come from anywhere. They have, therefore, begun moving their discovery operations to centers of medical research, such as in San Francisco and Boston, where they can interact with academic researchers and small bio/pharma companies to identify and acquire the most promising new technologies and candidates.
Global bio/pharma companies also have had to abandon the traditional model because of its, largely, fixed costs. With the revenues and profits from blockbuster drugs eroding, global bio/pharma companies can no longer afford to maintain such costly infrastructure. Reducing costs by reducing fixed overhead and making expenses as variable as possible have become major objectives.
This is where the strategic sourcing arrangements have become central to R&D strategies. Preferred-provider arrangements are enabling global bio/pharma companies to realize cost savings across a number of fronts:
Preferred-provider arrangements have enabled bio/pharma companies to reduce their fixed operating costs by transferring staff and facilities to their preferred providers.
They have made operating costs more variable by letting companies buy just the services they need when they need them.
They have leveraged the operating efficiencies and economies of scale of the large CROs, which generally have better operating skills than the bio/pharma companies themselves.
They have taken advantage of the CRO's expertise and investment in information technology. Information technology has become the differentiating capability in clinical research by enabling companies to collect clinical-research data more quickly and accurately from all over the globe.
They have given bio/pharma companies access to patients worldwide, including countries such as China and India, thereby enabling companies to complete studies more quickly and at lower cost.
They have reduced contract and vendor management costs because there are fewer vendors to manage and audit and because vendors and clients can establish processes that facilitate their cooperation.
Most of the major preferred-provider relationships involving global bio/pharma companies were announced in 2010 and 2011, so the past two years have been crucial periods of implementation. What has been impressive so far is the success that CROs seem to be having in making these arrangements work. The deals are remarkably complex, involving the transfer of dozens of trials, hundreds of staff, and sometimes, entire facilities from the bio/pharma company to the CRO. Typically, the transfers are staged to ensure that the process is orderly, and studies are not seriously delayed during the hand-off. Despite the complexity, there have been no reports of serious problems in the transfers, and CROs have not reported major unexpected costs or delays resulting from the hand-offs. The smooth transition is in part thanks to the governance structures that have been established to oversee these preferred-provider relationships, typically involving senior management from both sides of the relationships to ensure that the participants are aligned strategically and operationally, and potential problems are tackled quickly.