The Preferred-Provider Model

Published on: 
Pharmaceutical Technology, Pharmaceutical Technology-02-01-2011, Volume 2011 Supplement, Issue 2

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

This article is part of a special issue on Preferred Providers.

The simplest definition of a "preferred provider" is a vendor that has achieved priority status in the award of contracts by a bio/pharmaceutical company. Beyond the simple definition, however, the designation as a preferred provider can confer a broad range of roles and opportunities, depending on how the practice is implemented by the designating company. The practice extends well beyond contract services to many of the items that bio/pharmaceutical companies purchase, such as laboratory consumables and office supplies. Further, how preferred-provider status is achieved varies from company to company. Global bio/pharmaceutical companies usually have a formal and rigorous process for conferring preferred status on a vendor. At small and mid-size bio/pharmaceutical companies, preferred providers are not usually designated in a formal process, but earn that status in the minds of decision-makers based on their performance in a series of increasingly complex assignments.


The preferred-provider model has evolved in response to the growing complexity of outsourced drug-development programs, especially in clinical research. In the early days of contract research, when outsourcing was primarily a tactic to supplement in-house resources, it was typical for the bio/pharmaceutical companies to contract separately for each and every clinical study that was outsourced. In fact, it was quite common to contract the separate elements of a trial (e.g., data management, site monitoring, medical writing) to different contract research organizations (CROs). This practice resulted in outsourcing programs that were complex and costly to administer, and gave CROs the upper hand in pricing.


The first efforts at establishing preferred-provider relationships were aimed at reducing that complexity and giving bio/pharmaceutical companies more pricing leverage. Sourcing managers realized that by prequalifying a small number of vendors and negotiating price schedules with them, they could reduce the administrative burden in setting up and managing CRO relationships, while at the same time establishing more favorable pricing. In return for their participation, the CROs were led to believe they would gain a greater share of the available business.

Unfortunately, these early efforts at preferred-provider relationships delivered fewer benefits than expected for both bio/pharmaceutical companies and CROs. The problem was that these early arrangements lacked "teeth" (i.e., study directors were often not required to use a designated preferred provider when sourcing a study). As a result, the bio/pharmaceutical company didn't get the savings it expected and the CROs didn't get the incremental business they thought they would receive in exchange for better pricing. Not surprisingly, CROs became skeptical that efforts to gain preferred-provider status were worthwhile.

In recent years, the crusade launched by bio/pharmaceutical companies to rein in costs has finally made the preferred-provider designation meaningful. In most global bio/pharmaceutical companies today, just two or three preferred providers are getting as much as 80% of the available contract clinical-research work, with most of the remaining opportunities going to CROs with specialty capabilities.

The nature of the opportunities being offered to preferred providers is changing as well. Rather than contracting work on a project-by-project basis, more global bio/pharmaceutical companies are following the "functional service provider" model, in which CROs are being handed responsibilities for a specific activity across a broad range of trials. For instance, Lilly, which has wholeheartedly endorsed the functional service provider model, has given responsibility for specific services in specific geographic areas to its preferred providers (see Table I).

Table I: Lilly's strategic sourcing relationships.

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.

What about CMC?

While the preferred-provider model now dominates much of the clinical research outsourcing activity among the global bio/pharmaceutical companies, it has made much less progress in formulation, process development, and manufacturing. This reflects a variety of historical and technical characteristics of CMC activities.

The historical factor in the lower penetration of the preferred-provider model in the CMC areas is that there is much less outsourcing experience there than in clinical research. While as much as 35–50% of clinical-research expenditures at global bio/pharmaceutical companies are outsourced today, outsourcing of CMC activities is probably less than 20%. Outsourcing of CMC activities has always lagged clinical research by at least five years. There are several reasons for that slower pace of outsourcing.

For one, CMC development requires a broader range of scientific and technical competencies than clinical research. Whether it is API process development or dose formulation, the set of tools and technologies that are potentially needed is vast, and the cost of investing in necessary staff expertise and equipment is prohibitive. It is unlikely that any single contract-service provider will have the complete range of capabilities needed to serve the needs of a global bio/pharmaceutical company with a diversified pipeline.

A second factor has been the fact that CMC is much more involved in creating, or at least working with, the intellectual property that bio/pharmaceutical companies are so keen to protect. Clients will often split up activities among multiple suppliers to avoid exposing the complete IP portfolio to any one vendor, and will keep critical activities in-house, e.g., final stage synthesis of small molecule APIs,

A third factor has been the fact that CMC development usually involves research and development facilities and manufacturing sites in which bio/pharmaceutical companies have made heavy investment for equipment and infrastructure. Those facilities are expensive to operate, and there is strong incentive to keep them as fully utilized as possible. Companies are often more likely to move projects and products among captive facilities than they are to outsource them to a contract development manufacturing organization (CDMO) or contract manufacturing organization (CMO).

Nevertheless, the outsourcing of CMC activities appears to be growing, particularly in areas requiring specialized expertise. For instance, most global bio/pharmaceutical companies outsource most of their clinical-packaging activities, which require specialized capabilities in package design and logistics, and where requirements tend to fluctuate widely through the year. Analytical chemistry is another area where there is considerable outsourcing, especially for specialized testing and stability storage. The preferred-provider model is well established in those service areas.

Where things are heading

As preferred-provider relationships evolve, they are moving in the direction of tighter cooperation between the bio/pharmaceutical company and the service provider across a broader array of responsibilities. For instance, deals announced by Covance (with Lilly and sanofi-aventis) and Aptuit (with GlaxoSmithKline) in recent years have involved taking on activities that span discovery, preclinical toxicology, CMC development, and clinical research (see Table II).

Table II: Preferred-provider organization (PPO) agreements.

Another step in this evolution is likely to involve service providers taking on an entire activity, effectively supplanting the bio/pharmaceutical company's in-house capabilities. Recent examples include Fisher Clinical's takeover of clinical-packaging operations at Lilly, and Lonza's takeover of the development, clinical and launch manufacture of Novartis's biologics pipeline.

The power of the preferred-provider model ultimately lies in its demand that the bio/pharmaceutical company and service provider work together more closely, share information more readily, and ultimately share responsibility for outcomes. As the client and provider get more comfortable working together, the preferred-provider model will continue to play a crucial role in restructuring the bio/pharmaceutical business model.

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