Magazine Article | December 7, 2011

The Virtual Pharmaceutical Manufacturing Company: Building Effective Commercial And Government Contracting Operations

Source: Life Science Leader

By Chris Cobourn and Dean Erhardt

Unlike large pharmaceutical manufacturers that handle the majority of operations in-house, many small and emerging pharmaceutical and biotechnology companies are now adopting a “virtual model” to support their day-to-day commercial operations. Due to the expense, infrastructure requirements, and increasing regulatory risk of building commercial and government compliance programs from the ground up, these companies rely on third-party vendors to support their commercialization, contracting, government program operations, and compliance functions, to name a few. Specialized, best-in-class vendors have emerged to provide the “three legs to the stool,” which consist of logistics (distribution), reimbursement (market access), and back office support, allowing pharma and biotech companies to focus their resources on developing and marketing new products.

According to a large database provider, there are 6,700 pharmaceutical and biotech companies in the United States, and 60% of these organizations have fewer than 25 employees. With the virtual model, the manufacturer gets the best of both worlds: staff augmentation with experienced staff offering expertise, relationships, and insights in commercial and government operations, and systems and automations, without the staffing and systems footprint of the traditional software model.

Manufacturers have several pressing commercialization needs, including the need to gain market access, while also developing a robust corporate compliance program. In addition, they must maintain compliance with applicable government programs, including Medicare, Medicaid, Veterans Affairs (VA), and the Public Health Service (PHS) or the 340B program, while also meeting federal and state reporting requirements. In the past, many small companies had the feeling that they were under the government’s radar; however, this is no longer the case. In today’s regulatory environment, a solid compliance program is critical to the long-term sustainability of an organization.

In the past few years, vendors that provide service-based approaches to commercialization and compliance have worked together so often that the virtual model can be considered seamless and integrated. Where coordinating interactions with multiple vendors used to increase a manufacturer’s risk, there is now a familiar, organized approach. Manufacturers like to know there are experts in each key area of commercialization to lead them through the process. By utilizing a virtual model that includes the “three legs to the stool,” manufacturers have experienced resources to help plan and orchestrate their commercialization.

Commercialization processes, specifically related to ensuring the ability to distribute product, collect cash, and get product reimbursed, are as diverse as there are types of product in the market. Hiring the right expertise across 3PL (third-party logistics), distribution (e.g. wholesale, specialty pharmacy, oncology), and payer access (commercial and public payers) is expensive and time-consuming. The ability for a small manufacturer to have the right experts to guide the development of necessary infrastructure and to understand the timing of key events can drive commercial acceptance from the various trading partners and save the manufacturer significant expense of time and manpower. Having experts who can expeditiously accomplish major commercial setup is crucial during the early commercialization stage where conserving cash flow is paramount. Many aspects of commercial structure go unnoticed until there is a problem. Issues like 3PL setup, state licensing, wholesaler agreement, and payer acceptance are crucial in the overall success of any product, but perhaps even more important for virtual organizations.

“I was tasked with building a commercial organization from scratch and needed flexible options based on financial execution and timing,” said Michael Adatto, senior VP, sales and managed care at Horizon Pharma, Inc. “The virtual model allowed me to focus on hiring best-in-breed vendors and not worry about creating overhead in places where the services were needed to ramp up activities and taper off as we are in marketplace. Through this model, I can help make sure that Horizon gains the insight into changing government regulations and best practices to successfully develop and maintain a compliance program.”

The key components of a virtual model are summarized in the following categories:

Strategy And Commercial Relationships
The first component in developing a commercialization model is to understand the requirements of the product and to develop the strategy relative to the distribution model. The right strategy will ensure the manufacturer has the product in the right place at the right time and will enable the manufacturer to minimize future issues such as out-of-stock problems or higher-than-anticipated returns.

When starting to evaluate the distribution model and understand the channel requirements, start with the end user in mind. In this case, the end user needs to encompass both how a patient will access the product as well as how (and whom) will reimburse for the product.

  • Where will the patient access the drug (retail, hospital, clinic/office, mail order, specialty pharmacy, specialty distributor, etc.)?
  • What will be the route of administration?
  • Who will pay for the drug (physician, patient, third party, government)?
  • What type of education materials are needed and for whom?
  • Reimbursement support required?
  • Injection/infusion training required?
  • Patient mobility issues?


Logistics And Distribution
Many emerging pharmaceutical companies rely on 3PL companies to function as their customer service and shipping. The 3PL is effectively the face of the manufacturer to the manufacturer’s trading partners. In addition, manufacturers continue to look for efficiencies in the supply chain. Smaller population products typically will not need open access models. Limited and exclusive distribution models have gained increasing acceptance, particularly when also having REMS requirements. Alternative regionalized distribution solutions have also become more popular. When looking at various distribution options, the manufacturer must understand that different distribution models will have a direct impact on key issues, such as state licensing requirements and potential reimbursement issues. Understanding the impact of these decisions and how to select the right partners that can provide the right services under the auspices of Fair Market Value contract pricing is imperative to the success of a virtual manufacturer.

Back Office Support And Government Program Participation
Once the product is on the market, the manufacturer must have the operational support for contract operations, group purchasing organization (GPO) contract management, chargeback processing, class-of-trade management, and managed care rebate processing. They also must have the support for their government contracting operations, which primarily includes their statutory pricing calculators under the Medicaid, VA, Medicare Part B (ASP), and public health service programs, and the complexities of claims management for Medicaid, Tricare, and the Medicare Part D Coverage Gap.

Infrastructure Timeline
One area where virtual manufacturers sometimes struggle is in understanding the timelines required to appropriately set up the required infrastructure. Manufacturers should have a distribution channel and third-party payer or benefits provider strategy “gut check” starting approximately 24 months prior to anticipated approval. This timeline ensures that manufacturers have adequate time to account for issues like 3PL, state licensing, wholesaler contracting, and retail stocking models. As some commercial activities are sequential, getting in front of timelines is crucial to commercial readiness.

As previously mentioned, government program compliance and commercial compliance are critical factors in successful commercialization. The government market can, and should, be viewed in two ways. First, VA and CDC reports show it to be an ever-growing market segment with nearly 40% of Americans accessing pharmaceutical benefits through a government-funded program. Second, the compliance requirements and risks for pharmaceutical manufacturers who participate in Medicaid, VA, PHS (Public Health Service), Medicare, and Tricare are high, regardless of the size or company type. As government programs grow and as federal and state budgets supporting the programs grow, scrutiny on the programs also grows. With a continued fiscal crisis at the federal and state level, enforcement agencies place increased focus on program integrity and using audit and investigative activity to recoup monies from pharmaceutical manufacturers under the False Claims Act. According to Office of Inspector General (OIG) semiannual reports, the OIG recouped over $7B from pharmaceutical manufacturers over the past five years. Under the Deficit Reduction Act of 2005, the OIG was given the mandate and the budget to perform proactive audits. Additionally, the OIG published guidance in 2003 outlining their commercial compliance oversight requirements for pharmaceutical manufacturers. Multiple states have incorporated these requirements into their state transparency reporting requirements. In addition, under the Patient Protection and Affordable Care Act (PPACA), the federal government is instituting aggregate spend and transparency reporting requirements.

Start-up and emerging pharmaceutical manufacturers have embraced the virtual model as an efficient and cost-effective way to develop and commercialize products, focusing on product development and leveraging various service providers to support commercialization through sales and marketing, logistics, reimbursement, and back office support. Various best-of-breed vendors have worked collaboratively over the past five years to successfully integrate services into a seamless model. This provides value to the manufacturer, as they know that the model has been fine-tuned over time and that service providers can develop a clear and specific timeline of activities, integrate their services, and provide excellence in service delivery with contractual relationships, customer service, and operational support, while also ensuring that the manufacturers maintain a high level of compliance with government requirements.

About The Authors
Chris Cobourn is senior VP of Commercial Compliance, Compliance Implementation Services. Cobourn works closely with pharmaceutical manufacturers in areas related to government programs management, including policy review, methodology development, policy documentation, and systems implementation.

Dean Erhardt is principal of strategic distribution and product support initiatives for D2 Pharma Consulting. Dean offers more than 20 years of strategic marketing and management experience with expertise in development of pharmaceutical support programs, pharmaceutical and consumer product distribution, and specialty pharmaceutical product management.