Common BioPharma Business Models and Strategic Choices

Model StudiesThe following are the most common business models that have evolved over the last two decades as the industry structure has gone through significant transformation. 

Traditional Model: A company takes full ownership of the discovery, development, and commercialization (DDC) activities of the BioPharma Model. Under this model, the company possesses manufacturing capabilities to internally develop the product and retains the commercial capabilities to bring products to patients. This model has produced significant returns for investors over a long period of time and it is still delivering reasonably good returns compared to many other sectors in the economy. However, the model has been under pressure due to declining R&D productivity and increasing regulatory and payer pressures. 

Focused Model: A company tries to exploit one or two competencies (e.g., focus on just discovery or commercialization) and relies on partners for the others such as development and manufacturing of the product. Quite common for small and mid-cap companies as it is getting increasingly cost prohibitive to build the required competencies to fully execute a BioPharma Model. Sharing risks and economic benefits are an implicit aspect of structuring these partnerships.

Networked Model: A company partners with other companies or vendors to exploit expertise in each area and pursues collaborative discovery, development, and commercialization to bring products to the market. This is a variation of the traditional model, which has become the new norm in the industry, as most companies are relying on partners today to discover and develop drugs. This model allows the company to focus on core value-added areas of the BioPharma Model while relying on partners for non-core areas. For example, when a product goes into the development stage, the company takes responsibility for designing the value-based study and the corresponding protocols for undertaking clinical trials while outsourcing the execution of clinical trials to a Clinical Research Organization (CRO). Effective management of partnerships is critical to maximize the net value created under this model.

Virtual Model: A company outsources all activities to partners who have the required DDC competencies. Virtual model is slowly being adopted as it offers strategic benefits for smaller firms that are unable to develop required competencies to pursue the BioPharma Model. This model provides limited control on execution and costs can be higher in certain situations. Today, small companies can run virtual organizations as almost all services are being offered by partners or vendors. This option is attractive for small companies that face significant development and regulatory uncertainties as the product goes through clinical trials and commercialization.