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European Pharmaceutical Contractor

Balancing Act

Ask a group of businessmen “what is partnering?” and you will get a wide variety of answers. It is defined in The Strategic Partnering Handbook as: “The development of successful, long term, strategic relationships between customers and suppliers, based on achieving best practice and sustainable competitive advantage” (1).

This description rather misses the point, containing no words that outline mutual benefit. In fact, according to this definition, partnering carries the inherent risk of only one party gaining advantage, which is exacerbated by the assumption within this portrayal of a purchaser/supplier mindset – a danger that is far from theoretical.

However, the failure of partnerships based on such a definition is commonplace across all industry sectors – including pharmaceutical – creating situations that can, and often do, lead to views like this one from the Harvard Business Review, at the height of cost control in the US automotive industry: “In my opinion, [Ford] seems to send its people to ‘hate school’ so that they learn how to hate suppliers. The company is extremely confrontational. After dealing with Ford, I decided not to buy its cars” (2).

It is also frequently, and wrongly, assumed that best practice and competitive advantage are the only reasons to partner – common they may be, but exclusive they are not. This allows the partnering definition to be shortened to one succinct sentence: a business relationship intended to create perceived benefit for all parties.

One could argue a weakness in this definition is that even the simplest of relationships are covered – but, actually, this is perfectly acceptable. In contract research at least, the vast majority of company-to-company interactions rely on effective partnering between people and businesses, be they short-term, long-term, strategic or tactical.

Cost of Collaboration


In any partnership, organisations still have to look after their own interests. There is usually some cost to the collaboration – normally the loss of choice – which has to be balanced against the gain. In short-term partnerships, negatives are typically minimal and more transactional in nature. If the partnership is strategic, the costs may be higher – but justified – if the partners see a longer-term benefit.

In contract research, collaboration can exist between suppliers or between a sponsor and supplier – the latter being the most probable industry ‘default’. Both options essentially follow these patterns:

Transactional
These collaborations involve all companies working on the same project becoming partners to avoid it running poorly. In these cases, there are no agreements beyond the award of the specific contracted project. These are also short-term, tactical partnerships and usually the most common, so it is critical that they are successful.

Preferred Provider
In this set-up, a limited list of suppliers is retained of those able to deliver a service which is considered more valuable to the purchaser – a better fit to their requirements – and, in return, the provider gets increased access to contracts.

Guaranteed Provider
This is a rare situation where a customer selects a supplier exclusively, or for a guaranteed amount of work, over a period of time. In exchange for increased commitment, a greater fit, better transparency and more predictability for the customer, the supplier gets an even larger award of work, as well as predictability of income and resource utilisation.

With supplier-supplier partnerships there is one further category:

Combined Investment

In this scenario, each partner invests people or money into creating a new service or product that, together, they can sell to purchasers; there is no buyer in the partnership. It is worth noting that these can be informal (based on goodwill) or formalised with a contractual agreement, which may or may not include financial investments.

Understanding which category a partnership fits into and why is important. It ensures each party realises the value they should be receiving, as well as helping all players to understand their roles and expected outcomes. This is especially important when partnerships are being questioned, and particularly when early termination of a project is being considered. If the day-today relationship is failing, there is a significant risk the corporate value may be downplayed – so, players need to be clear as to why the relationship was created in the first place.

Original Value Proposition


Typically, an original value proposition is used in the transactional and preferred provider categories. The original value proposition of the CRO industry was to share expensive resources across companies, whose use of such resources can vary widely and rapidly – often in an unpredictable manner. Primarily, pharma businesses used CROs in an attempt to reduce their fixed costs for clinical research associates and data managers. This was achieved by buying CROs time by the hour or day, rather than having them on a fixed contract.

This led to firms growing alongside those who employed them, so they could sell to whichever company needed them at a given time, depending on the waxing and waning of their development pipeline. Cost analysis is a little counter-intuitive here as, on a day-to-day basis, a CRO may be more expensive; reduction in expenses is only seen at the pipeline level. In the ideal situation, when a drug makes it to market, CRO costs are, initially, likely to be higher than if processes were completed in-house – but this would be balanced by the savings from products that failed during R&D, creating under-utilised fixed staff costs or high redundancy (and later re-hiring) fees.

This clearly implies that:
  • For cost reasons, termination decisions should not be taken on a project-by-project basis
  • Mirror teams in sponsors who oversee CRO activities can destroy the value of the partnership. Born out of a frustration that the CRO does not do the everyday work the same way the sponsor would, these groups generate the worst of both worlds – an outsourced team who may be more expensive day-to- day, as well as an internal team who not only double the price, but are also exactly the type of fixed assets the model is trying to avoid
Recent Developments

Original value proposition has fuelled development of the main partnerships between biopharmaceutical companies and CROs over the last three decades, and still drives most of the interactions – but, in recent years, new elements have emerged. One of them is in biopharma, as CRO symbiosis has spread in new directions, and CROs are now becoming the expert providers of certain trial types – notably, mega studies with thousands of participants and orphan indications with very rare diseases.

Furthermore, a significant number of sponsors have tiny in-house clinical development teams, being almost wholly dependent on CROs to deliver their portfolio. Perceived value is moving beyond ‘top-up resourcing’, to include expertise and infrastructure. These are the new costly elements required to undertake clinical trials that the industry would rather share through outsourcing than have to employ within each company and risk poor levels of utilisation.

Such changes fuel guaranteed or exclusive arrangements. However, these types of partnerships are still rare, as they put the original value proposition under threat. Benefit to the sponsor is clear, but the CRO has to deal with their staff becoming such an integral part of the customer that their flexibility as a workforce is diminished. If the workforce is quite large and the deal is terminated, a lot of reallocation will be necessary. Buying ultra-specialised services can have the same result, as no expertise lies with the sponsor. For the supplier, flexibility is not the problem – they offer the same service to everyone, so staff can easily move – but the reliance on a few customers can lead to huge termination risks. In both situations, the solution is to balance the termination risk of a single project against its value to the supplier.

Changing Focus

The transactional and preferred provider categories of partnerships are also changing. CROs are becoming more exploratory and innovative to meet the quality demands of their customers; in the past, they have not been engines of invention. Traditionally, sponsors have been more experimental than CROs, but as they place more reliance on their larger partners, this has become somewhat subdued. Now, we see them figuring out ways to regain that innovation in their own operations through CROs.

Financial arrangements within partnerships are also changing, improving alignment around the cost of invention – but, ultimately, for CROs, this is a maturation of partnering behaviour, as well as one of competitive behaviour. Their mindset is altering from being outsourced services that people buy simply for access to their resources, to one of creativity – driving benefits from innovation and able to gain perceived value for their partners in speed and quality. This is reflected in changes to the combined investment partnerships.

Between Suppliers

Like all suppliers, CROs partner with each other to achieve value, usually to:
  • Get more business through access to markets (companies, geographies, end-consumers, and so on) or expertise (to grow, move into new sectors or improve the quality of work already underway, for example)
  • Create operational synergies leading to improved quality or efficiency and, in turn, creating increased profi tability
First, CROs must identify their potential partner’s needs. If this is consistent with ‘business as usual’ – increasing volume, reach or similar – then it is usually easier to recognise. If it involves a change of direction – becoming more strategic, requiring more senior ‘buy-in’, and needing greater analysis of risk, the market place, competition and industry trends, as well as an open and creative mindset from the senior managers – this will be difficult. Only once the requirements are clear will partnering be considered an option. Consequently, in pharma, successful supplier-supplier collaboration is quite rare, as both companies have to perceive a need and find a partner who can fulfil it – one that also has a requirement they can meet.

CRO Expansion

Using the same historical perspective we used earlier, it is evident that partnering drove the primary development of the CRO industry – the needs were not hard to identify and there were lots of mutual benefits to be had. As CROs grew in the early years, they were mostly national in nature, before developing partnerships to expand their geographical scope and, after that, their service capacity – providing more and more of the core R&D services needed to not only run a trial, but also submit a dossier. The typical process was one of a casual partnership, moving to a contracted one and, finally, to a merger or acquisition. Contract providers in non-clinical areas – such as laboratories and discovery – also grew larger and amalgamated with clinical CROs to produce ‘full service’ suppliers. This ran out of steam as the new millennium approached, and markets became saturated and highly competitive.

However, these developments in sponsor-CRO relationships are now driving changes in suppliersupplier partnerships – in particular, between large CROs and niche supplier companies, who are the main innovators within pharma. In the past, CROs have not been focused on improving the way the trial model actually works. This has traditionally been because they are so lean financially that they cannot easily carry the cost of their own form of R&D. In fact, it tends to be small companies that innovate, and the sponsors that pick up the value, examine the product, refine the need and initiate the process transformations. CROs then buy businesses so they can offer the service once it has become more mainstream.

However, this situation is changing. Smaller niche suppliers with tools and techniques that can change the face of clinical trials already exist today, but the take-up of their services is slow. Many of these offer technology, others provide alternative aspects of the study model – such as clinical trial visits run in the patient’s home.

Previously, sponsors were at the helm of innovation – embracing the electronic data capture or interactive voice response tools that slowly redirected trial methodology over 20 years. But today, although they are still the major drivers, it seems CROs are now stepping up to the plate and trying to partner with organisations that can fundamentally change the way studies are performed. I am optimistic this will herald a new wave of improvements in our industry – but, despite positive early signs, I do not feel we are able to call this a trend yet.

Weighing Up

True strategic collaborations are rare. Those between customer and supplier are especially hard to define and manage – due to the complexity of partners having an essentially transactional relationship – but those that are short-term or tactical are also the most common today. In assessing the value that these partnerships generate, an understanding of the cost and return of resourcing through non-fixed assets must be made. Terminations and the creation of mirror teams can be poor decisions when these factors are not taken into account.

Partnering is now moving from a traditional ‘top-up’ resource model of outsourcing, to one guided by CROs demonstrating attractive expertise and infrastructure, and/or suppliers wanting 100% outsourcing – which is driving the need for novelty in the industry, and reigniting supplier-supplier partnerships between CROs and innovation companies.

Partnerships between suppliers are easier to structure as they are designed to help both players sell to a third-party customer. However, they have the potential to be rare as they require an alignment of factors, such as strategic analysis and review, perceived value on both sides and a shared mindset of senior managers. Where they are likely to work in the present sector is in the developing areas of innovation adoption by large CROs, as they begin competing on more quality and cost-effectiveness than ever before.

References

1. Lendrum T, The Strategic Partnering Handbook: A Practical Guide for Managers, McGraw-Hill, 1997
2. Senior Executive, Supplier to Ford, October 2002


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Dr Graham Wylie is Chief Executive Officer of the Medical Research Network (MRN), and is responsible for both company strategy and differentiation. With a BSc in Pharmacology, an MBBS from St Bartholomew’s College, London, and over 21 years’ experience in pharma – including fi rms such as Pfizer, PAREXEL and Healthcare at Home – he has successfully grown MRN from a two person start-up, to a business with an annual turnover of several million. In 2014, Graham was named as one of the most influential leaders in the industry, after appearing in the PharmaVOICE 100.
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