It is well-established that the cost of generating even a single new FDA-approved pharmaceutical is staggering. The Tufts Center for the Study of Drug Development has estimated that the average pre-tax cost of a new drug (including costs for failed drugs and other capital expenditures) tops approximately $2.5 billion. Other studies have suggested that costs are even higher. For example, Matthew Harper of Forbes Magazine estimated the R&D spending per FDA-approved drug for 100 pharmaceutical companies over a 15-year period. He suggested that the cost of R&D per drug might be as high as ~$13 billion (Abbot Laboratories, now AbbVie), although some of the major market leaders in this industry had lower expenditures, including AstraZeneca (~$9.5 billion), Pfizer (~$7.7 billion), Bayer (~$6.6 billion), and Merck (~$5.5 billion).
Given the skyrocketing R&D costs and high barriers to entry for any new drug market, business models for biopharma have changed substantially over recent decades. In the past, many biopharma business models could be generally categorized as vertical models. They tended to corner a few specific markets. Their value chains were often highly vertically integrated and owned by the same parent company, producing revenues streams at multiple levels of the value chain. This allowed companies to control most of the steps in the R&D, production, and marketing processes for a given product. One example of this type of vertical model is the fully integrated pharmaceutical company (FIPCO), which focuses on producing a few types of pharmaceutical products. In this case, the company develops and patents a new drug, taking it from discovery to development to manufacturing and, eventually, all the way to the market.
In recent years, many pharmaceutical companies have been shifting away from a bone fide FIPCO model to more horizontally integrated models. This allows them to save time and reduce costs associated with having to develop these special capabilities within their organization. At one end of this spectrum are partially integrated pharmaceutical companies, which contract out certain elements of their value chain to service firms, termed Contract Research Organizations (CROs) and Contract Manufacturing Organizations (CMOs). These contracted service firms develop key pipelines that are common in many big pharmaceutical companies’ value chains, such as “biopharmaceutical development, biologic assay development, commercialization, preclinical research, clinical research, clinical trials management, and pharmacovigilance.” On the opposite end of this spectrum, virtually integrated pharmaceutical companies (VIPCOs) have also emerged. These nimble start-up firms have few employees and they outsource nearly all of their processes to contracting organizations in order to develop and manufacture a new bioproduct.
Many other companies have established profitable niches for themselves by developing IP and then either selling it or licensing it to Big Pharma. These types of firms include 1.) platform companies, 2.) subscription companies, and 3.) product companies. Platform companies typically develop an adaptable technology (such as a diagnostic test that can be tailored for specific diseases) and then license it out or perform the service themselves. Subscription companies, which are similar to platform companies, have taken advantage of increases in the speed of computing and decreases in the costs of genomics or proteomics to specialize in producing products like software or other services (such as gene databases or other sequence analysis tools) that can be used for a recurring fee. Finally, product companies are also a dominant business model in the biopharma space. These firms discover and develop a new product (often a drug) to show it has potential clinical promise. They then sell the IP (or the entire company itself) to a Big Pharma firm, which has the needed cash reserves to advance the product to subsequent stages in clinical trials. This approach is advantageous for both parties, mitigating some of the risks to each individual partner should the drug fail during the FDA approval processes.
Interesting new permutations of these pharma business models have begun to emerge in recent years. BridgeBio Pharma is one example of a recent start-up boasting a decidedly hybrid business model as one of its key competitive advantages. It could technically be classified as a product company, but it also leverages some elements of vertical integration. Specifically, it elects to form subsidiary companies (currently numbering at least 10). These subsidiaries are each focused on different assets or disease classes around which BridgeBio Pharma hopes to develop new products to eventually sell or license to Big Pharma. However, these subsidiaries are designed to be readily dissolvable so that capital can be quickly reallocated should a given asset fail. It also partners with both academic institutions and other smaller pharmaceutical companies to speed innovation and spread out some of the risks associated with an individual asset failure.
Ultimately, it is quite likely that the skyrocketing costs of discovering, developing, and bringing to market life-saving new drugs will continue to force the evolution of more cost-effective and efficient pharmaceutical business models.