The virtual biotech business model has been around for at least 25 years and is a very attractive one. By keeping your fixed costs to a minimum, and by outsourcing, you can access expertise rapidly, control your costs, and respond quickly to the ups and downs of drug development. This month’s Business Commentary looks at the emergence of contract outsource service providers, and discusses the issues raised from the viewpoints of both the virtual biotech and the service provider: the protection of biotech IP and know-how, the possibility of provider switching, risk and reward sharing between the two parties in drug discovery and development process, and alternative financing models.

The virtual biotech business model has been around for at least 25 years and is a very attractive one. By keeping your fixed costs to a minimum, and by outsourcing, you can access expertise rapidly, control your costs, and respond quickly to the ups and downs of drug development. Of course, the virtual model is dependent on an appropriate number of quality outsource service providers. In the 1970s a number of contract manufacturing organisations (CMOs) had already been established. In the 1980s the emergence of other providers, such as contract research organisations (CROs), proliferated and, by the 1990s, specialist CMOs such as Celltech Biologics, as well as drug discovery/platform technology service companies, had emerged. In the same period, contract sales organisations (CSOs) emerged and were being increasingly used by pharmaceutical companies. Today, all companies can outsource any part of their pharmaceutical value chain, but virtual companies are in the position of being able to access all stages of the pharmaceutical value chain. Can it really be that simple? The virtual biotech business model has been around for at least 25 years and is a very attractive one. By keeping your fixed costs to a minimum, and by outsourcing, you can access expertise rapidly, control your costs, and respond quickly to the ups and downs of drug development. Well, there are several issues, two of which are of major importance. First, there is the handling of intellectual property rights. It is vital that any outsourcing agreement covers this aspect appropriately, and the agreement cannot just cover patents – know-how is a key component, and how can that be protected when the virtual biotech outsources? Second, there is the biotech’s ability to switch to alternative services. Service providers increasingly want to move away from their fee-for-service model and want to share in the risks and the rewards of drug development. This change actually helps the virtual biotech model. It provides a means for the virtual biotech company to take its development products forward through risk sharing and also allows such businesses to take their products to a more advanced stage. A few years ago, Quintiles, a large CRO, decided to participate in the risk sharing of its clients’ drug development programmes by creating NovaQuest – and NovaQuest now co-invests alongside venture capital funds to back companies and their product pipelines. So what does all this mean? Clearly, it means that there are greater choices for virtual companies in collaborations for drug discovery and development. And there is greater sharing of risk and a greater number of alternative financing models for biotechs, which can only be good for our industry. -Fintan Walton, Chief Executive Officer, PharmaVentures Ltd.