Written by Myung Soo Kim, PhD, Research Analyst, Kineticos

The pharmaceutical industry has seen a move towards the Virtual Pharma model, with more and more companies outsourcing various parts of the drug development process, including pre-clinical and clinical development, manufacturing, distribution, and even sales and marketing. However, there are not many, if any, completely Virtual pharmaceutical companies, and I doubt that there will be.

It’s my belief that eventually, instead of a completely Virtual Pharma model, most drug companies will move to a Hybrid Virtual Pharma model where they outsource or partner with other drug companies who have core competencies that they do not possess, allowing them to focus on their own core competencies. For example, a small drug company A, or perhaps an academic institution, may focus on drug discovery and in vitro pre-clinical, while their partner, drug company B, focuses on pre-clinical animal models and Phase I/II PoC, and together, they license out their asset to drug company C, most likely one of the big pharma companies, who finishes up the clinical development and commercializes the drug (and may or may not outsource manufacturing, etc.).

This Hybrid Virtual Pharma model is becoming more and more necessary given the increasing difficulty of getting a drug approved by the FDA. There are no more “low-hanging fruit” drugs that can be discovered easily, like those found during the 20th century. Instead, Medicinal Chemists work diligently to create NMEs through rational design, a laborious and still-inefficient process that is not sustainable in the Traditional Pharma model.

Big Pharma will no longer be able afford to take a drug from discovery to commercialization – the costs are increasingly astronomical, and the risk incurred is simply too great. The potential sales from successfully developed drugs are increasingly less likely to outweigh the costs of drug development, given the relatively short exclusivity period, and there has been significant pushback against rising drug prices. Instead, Big Pharma can reduce their risk and costs by focusing on their core competencies (clinical development, commercialization, medical affairs, etc.) and acquire relatively de-risked assets from less mature drug companies.

As the pharmaceutical industry has shifted towards the Hybrid/Virtual Pharma model, we have seen an increase in the number of smaller biotech/pharma startups, as expected. However, we have not yet seen a corresponding increase in the involvement of academic centers in the drug development process. In my opinion, academia will soon begin to play a larger role in the pharmaceutical industry and fit into their own unique niche as a part of the Virtual Pharma model. Instead of starting from scratch and developing novel promising compounds from drug discovery and early pre-clinical development, companies may find it more lucrative and efficient to simply license and acquire relatively de-risked assets from academia. Doing so may be a much cheaper and less risky alternative to performing their own in-house drug discovery processes as much of the associated costs are offset by government funds paid to the academic centers to fund their research.

Furthermore, such assets can most likely be acquired from academia relatively cheaply, compared to acquiring an asset from another drug company, allowing companies to obtain a large number of assets without spending an exorbitant sum of money. Thus, they can decrease their overall risk while diversifying their pipeline and increasing their potential opportunities/sales as well.

In order for this to occur, the traditionally small and currently not-well-developed Tech Transfer Offices (TTOs) at academic centers must grow and evolve to meet the needs of the industry.   Medium- to small- sized companies that have already been spun out of academia may find it easiest to take the first step due to their pre-existing connections with their respective universities. However, large(r) pharmaceutical companies have a capital advantage and may be first to explore this opportunity, I would anticipate these companies acquiring multiple assets from different academic centers, increasing the probability of acquiring a successful one.

Regardless, I think that TTOs will begin to play an increasingly important role in the pharmaceutical industry, and there may be a small window of opportunity now that will not last long for companies to adopt this model and obtain a large number of assets at a significantly cheaper price than they will be able to in a few years time, after TTOs realize their value and begin to increase the price for licensing their assets. Those in the industry may find it prudent to begin making connections with TTOs now, before the rest of the industry follows the same path.

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Myung Soo Kim, Ph.D., Research Analyst, is currently responsible for supporting the delivery of customized management consulting solutions to clients across the life science ecosystem. Additionally, Dr. Kim is the lead author on several Kineticos research reports.

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