The Virtual Company

By Willem van Leeuwen of QMR Technology

The biopharmaceutical industry is depending increasingly on outsourcing services. The advantages of outsourcing have proven them self in a diverse range of industries and can be a driver for improving both financial as well as operating performance.

“An extreme form of outsourcing can be seen within the virtual company”
-Willem van Leeuwen, QMR Technology

The biopharmaceutical industry is depending increasingly on outsourcing services. The advantages of outsourcing have proven them self in a diverse range of industries and can be a driver for improving both financial as well as operating performance. Outsourcing offers access to specialists that have the skills, technology, processes and scale to perform tasks as well or better than a company could do by itself. An extreme form of outsourcing can be seen within the virtual company. The virtual company is a company that has outsourced all or nearly all of its business processes to Contract Research Organizations (CROs) and/or Contract Manufacturing Organizations (CMOs) and the primary role of the company is to monitor and manage the outsourced activities.

One of the companies that have been successful in deploying the virtual company business model is Provectus Pharmaceuticals Inc. Provectus, a Tennessee based development stage pharmaceutical company specializes in oncology and dermatology therapies that are safer, less invasive and more economical than conventional therapies. The company has recently obtained approval to begin phase 2 clinical testing of its lead product, PV-10 for the treatment of Stage III and IV metastatic melanoma, the most aggressive and deadly form of skin cancer. Clinical trials are currently conducted at three locations: two in Australia and one in the United States. Complementing their suite of proprietary drugs, Provectus has developed a number of intellectual properties and technologies in the areas of imaging, medical devices and biotechnology.

I spoke with Provectus CFO, Peter Culpepper at the conference “Perspectives in Melanoma XII” that took place in The Hague on the 2nd of October and asked Peter about his experience with the virtual company business model.

What were the main considerations for choosing the virtual company model?
Provectus was founded by Ph.D.s that did not have access to enough capital to fund a large corporation, so the virtual model was necessary to minimize cash burn. Our company is attempting to treat cancer and serious skin diseases in ways that the mainstream medical community does not readily understand so it was necessary to again start small with the virtual model since it was not possible to raise large sums of money from the more established investment banks and venture capital groups.

What is the business strategy of your company?
Provectus is a company of inventors and entrepreneurs rather than a Company of marketers and business development executives. As such, our company does not intend to commercialize our drug product candidates as they are expected to be validated via FDA clinical trials as has been the case thus far. Rather, we will likely partner with much larger pharmaceutical and/or biotech companies that have sales and distribution capabilities. Therefore, since we are not planning to commercialize out drug product candidates there is no need to develop a large corporate overhead which is why the virtual model is appropriate.

How has outsourcing effectively been implemented within your business processes?
We have two drug product candidates that address two large therapeutic areas; namely, oncology and dermatology. Both drug product candidates are remarkably straightforward to develop without adding corporate overhead since both candidates are based on a pre-approved FDA compound for diagnostic purposes. Since the primary requirement for developing drug product candidates is the treating of human subjects in clinical trials under the aegis of the FDA, it is very appropriate to outsource the management of the clinical trials to investigators and clinical research organizations that are experts in the field. This is very much an accepted practice in the life sciences industry and enables us to be successful with the virtual model.

What is the most important aspect of the virtual company as seen from your perspective as a CFO?
The publicly traded development stage life science Company in today’s financial world needs to be very flexible in its use of cash. The best way to be flexible with cash is to have as few fixed expenses as possible. The virtual model is ideal for limiting fixed expenses since it minimizes overhead.

Can you give us some observations based on Provectus' experience with the development of its business based on outsourcing?
Provectus has been most effective with its outsourcing of services when it has leveraged long term business relationships. Since outsourcing is so critical for the virtual Company model to be successful, it is imperative that the outsourced relationships be very effective. In order for the outsourced relationships to be effective, the business relationship between the virtual model Company and the CRO, CMO, etc., needs to be very strong. It has been the experience of Provectus that the relationship of its Company personnel to its outsourced service entities is based on professionalism, trust, experience, and most likely requires a higher cost per hour for service than an employee would cost. But, the flexibility and broader scope of services that the outsourced service entity brings more than offsets any cost savings that correspondent employees would provide.

How do you manage remote manufacturing and clinical trial sites?
Provectus has experienced that a high degree of oversight of remote location CRO, CMO, and outsourced service entities in general is very helpful. Oftentimes, the high degree of oversight requires daily telephone and e-mail interaction, as well as monthly site visits. Of course, working with professionals enables the outsourced services component of the virtual company model to be successful. But, being physically with the outsourced service entity professionals enables communication and the business relationship to be as effective as possible, let alone daily/weekly communication via e-mail and telephone.

Conclusion
When properly managed, the advantages of the virtual company are obvious. The virtual company model enables a company to operate without a lot of corporate overhead and let the scientific management focus on the company’s core competencies instead of having to deal with managerial issues like human resources, sales and marketing. Instead, the strategy of the virtual company will pursue to make use of the professional and seasoned sales and marketing organizations of established pharmaceutical companies through a strategic partnership, a merger or an acquisition.

The current situation on the financial markets is not favourable for building a fully integrated company or anything that comes even close to it. Where a couple of years ago a company could gather 15 to 20 million through an IPO nowadays the company would get 5 to 8 million which might prove just enough to advance a drug candidate through one or two phases of the drug development chain after which a new financing round will be necessary. Contract manufacturing strategies are a considerable option but require substantial initial investments in GMP facilities in order to make service provision to other companies possible. From a financial point of view the virtual company model provides a solid base for short term value creation and return on investment as return on investment for investors could be realised as soon as positive results are reported from clinical trials phase 2 or 3. These phases generally provide important valuation milestones which will serve as the basis for a merger or acquisition by a big pharma or biotechnology company.

A significant part of mergers and acquisitions fail to generate the projected value because of issues related to the integration of the two separate companies, think of issues like organization culture, business processes and management. As a virtual company can be relatively easy integrated within the buying company this could be very appealing to a big pharma or biotech company that wants to extend its pipeline.

Biographies:

Peter Culpepper has spent 20 years in the financial field working for a wide range of companies and industries in the U.S. and abroad, especially high-growth startups. His experience with for-profit companies ranges from private start-ups to publicly traded, global conglomerates. He also has worked with large non-profits and a national CPA accounting firm. He is licensed as a Certified Public Accountant in Maryland and Tennessee. Culpepper holds a master’s of business administration (MBA) in finance from the University of Maryland.

Willem van Leeuwen is Managing Director of QMR Technology, a Dutch consulting company delivering world renowned Oracle business solutions for small and medium enterprises pertaining to the life sciences industry. His experience portfolio includes numerous implementations of the ERP system Oracle E-Business Suite and the Oracle Life Sciences Applications for Clinical Data Management, Adverse Event Reporting and Clinical Trial Management.

Contact details:
QMR Technology B.V.
Willem van Leeuwen
Managing Director
Oxfordlaan 70
6229 EV Maastricht
The Netherlands
T: +31 (0) 43 388 58 78
M: +31 (0) 6 464 24 161
E: info@qmr.nl
www.qmr.nl