Significant Cost Savings Can Be Achieved While Reducing Cultural Turmoil
Through a Hybrid Commercial Approach Relying on Variable Cost Resources
Pharmaceutical Company
Fixed Commercial Infrastructure vs. Variable Commercial Approach
2008-H1 2011
1
Pharmaceutical and biotech executives,
investment professionals, venture
capitalists and Boards of Directors often
ask for comparison information
depicting the costs of a traditional
approach to commercializing a
prescription pharmaceutical product
compared with the fully virtual or
hybrid models. As you can imagine,
this can be difficult due to client
confidentiality issues as well as access to
the full purview of data necessary to
draw meaningful conclusions.
That said, as the case study below
indicates, we believe that a hybrid
approach to commercialization
leveraging a strategic commercial
partner would have saved this client:
2
• $760,000 (5.4%) reduction in net employee expenses through the utilization of experienced, variable-cost experts in lieu of full-time employees while simultaneously minimizing cultural disruptions to the business
• $1,436,000 (10.1%) reduction
in net employee expenses through streamlined commercial planning and execution approach based on proprietary process model
• $1,020,000 to $1,440,000 (12%)
reduction of non-FTE related commercial expenses based on proven approach to managing partners and vendors while optimizing aligned incentives
3
Additionally, this company would have
significantly benefited from additional
focus by senior management on key
R&D, licensing and financing activities.
Note that while this company is still
operational, failure to secure FDA
approval on their lead asset has led to
significant downsizing, and the
company’s viability as a stand-alone
entity is in question.
An Expensive Lesson Case Study of a Small/Emerging Specialty Pharmaceutical Company
The case study compares a Fixed Infrastructure Approach to commercializing a prescription pharmaceutical product to a Hybrid Commercial Approach that relies on a mix of Fixed and Variable resources.
The following white paper analysis is based on a real company. The time period under review was January 2008 through June 2011. The information used in the case study comes from publicly available data where available, relying on proxy assumptions where applicable.
Dan Twibell is a Co-Founder and Managing Director for Skysis, LLC. Dan brings 18+ years of life science experience to Skysis including over 100 assignments encompassing brand management, new product planning and business development/licensing for small, mid-size and global pharmaceutical and biotech organizations. He can be contacted at [email protected]
Functional Area
Direct Comp
One Time Comp
Total Cost of FTEs
Volume of Prod Hours
Fully Loaded Cost Per Hour
General Mgmt
Pres/CEO—42
$2,520,000 $1,221,000 $3,741,000 4,844 $772
CFO—42 $1,764,000 $561,000 $2,325,000 4,844 $480
Comm Mgmt
CCO—23 $966,000 $552,000 $1,518,000 2,653 $572
SVP Comm--42
$1,418,000 $321,000 $1,739,000 4,844 $359
VP BD—26 $878,000 $163,000 $1,041,000 2,999 $347
Sr Dir Mkt—42
$1,092,000 $261,000 $1,353,000 4,844 $279
Brand Mgr—30
$563,000 $195,000 $758,000 3,460 $219
MR Mgr—40 $750,000 $200,000 $950,000 4,613 $206
Mgd Mkts Mgr--30
$563,000 $195,000 $758,000 3,460 $219
Total $10,511,000 $3,669,000 $14,180,000 36,561 *$388
Company Snapshot:
• Publicly traded specialty
pharmaceutical company focused
exclusively on a single therapeutic
category with two product candidates
in development
• Well funded organization
• Therapeutic category has tremendous
growth potential and distinct market
needs
• Non-scientific commercial
infrastructure grew extensively during
the period of analysis. Total FTEs
estimated in the analysis came from
the following functional areas:
o General Management
o Commercial Management
o Business Development &
Licensing
o New Product Planning
o Brand Management
(including Managed Markets)
o Market Research
Table 1: Case Study of Fixed Commercial Infrastructure
Approach 2008-H1 2011
• Number after functional title represents the number of Months in role • Cumulative compensation represents the time horizon each FTE was fully employed by
the company; Reference salary data comes from RECAP Database of Executive Employee Contracts and other proprietary salary reference sources; Assumes a premium above salary of 20% to cover benefits and traditional overhead
o Does not include the cost of stock grants and options o Does not include the incremental cost of office space associated with these
employees as fixed infrastructure • One time compensation includes an estimate of relocation expenses, recruiter expenses,
severance expenses and budgetary investments associated with maintaining a full internal team that would not be associated with managing a variable based team; reference points were generated from survey and/or industry contacts
• Volume of productive hours based on analysis of hours worked after deducting time for training, vacation, personal time and internal non-functional related activities
o Note: the hours listed do not necessarily translate into the required number of hours to successfully manage the commercial activities during the time period; this topic is addressed in a subsequent section of the analysis
• Fully loaded cost per hour is measured across life of employment of each individual • *$388 represents average fully loaded costs per headcount
Functional Area
Total Cost of Fixed Commercial Infrastructure
Total Cost of Hybrid Variable Commercial Infrastructure
Cumulative Commercial Costs
Fully Loaded Cost Per Hour
General Mgmt
Pres/CEO—42
$3,741,000 $0 $3,741,000 $772
CFO—42 $2,325,000 $0 $2,325,000 $480
Comm Mgmt
CCO—23 $1,518,000 $0 $1,518,000 $572
SVP Comm--42
$0 $1,284,000 $1,284,000 $265
VP BD—26 $1,041,000 $0 $1,041,000 $347
Sr Dir Mkt—42
$0 $1,090,000 $1,090,000 $225
Brand Mgr—30
$0 $727,000 $727,000 $210
MR Mgr—40 $0 $969,000 $969,000 $210
Mgd Mkts Mgr--30
$0 $727,000 $727,000 $210
Total $8,624,000 $4,796,000 $13,420,000 $367
Non Financial Advantages of Hybrid Commercialization Approach Leveraging Experienced Variable Cost Resources:
While the primary purpose of this analysis is to quantify the direct financial savings associated with a Hybrid Commercialization Approach, there are several other non-quantitative advantages that should be noted.
• Shorter time to peak sales--leveraging external expertise and incorporating diverse insights can lead to more rapidly hitting sales objectives
• Clean exit at milestone—while select companies will choose to remain independent and launch products on their own, many small/mid-size firms opt to partner with larger, established pharmaceutical companies or out-license the asset in development. This frequently leads to a reduction in headcount that has a significant negative impact on the company
• Strategic Focus—Small management teams can stay focused on R&D, partnering and financing while relying on strategic commercialization partners to plan and execute key
activities
Table 2: Comparison of Hybrid Commercialization Infrastructure
Approach 2008-H1 2011
• Total cost of fixed infrastructure refers to data in Table 1 • Total cost of variable commercial infrastructure assumes volume of productive hours in
Table 1 priced on a fee-for-service basis • Cumulative commercial costs represents the sum of the previous two columns • Fully loaded cost per hour represents the previously established fully loaded cost per hour
from Table 1 and an estimate of the fee-for-service costs associated with a variable commercial infrastructure
o Note: the hours listed do not necessarily translate into the required number of hours to successfully manage the commercial activities during the time period; this topic is addressed in a subsequent section of the analysis
• $760,000 (5.4%) savings achieved through Hybrid Commercial Model without any reduction in cumulative volume of hours required for leading commercial efforts
o Ability to increase/decrease workload as necessary utilizing variable infrastructure not quantified here but highly valuable
An expensive lesson: case study of a small/emerging specialty pharmaceutical company
Functional Area
Cumulative Hours Reduced by Proprietary Process Approach
Cumulative Reduction in Expenses
Percentage Reduction of Expenses by Proprietary Process Approach
General Mgmt
Pres/CEO 0 $0 0%
CFO 0 $0 0%
Comm Mgmt
CCO 0 $0 0%
SVP Comm (692) ($248,000) 14%
VP BD (462) ($160,000) 15%
Sr Dir Mkt (692) ($193,000) 14%
Brand Mgr (1,384) ($303,000) 40%
MR Mgr (1,845) ($380,000) 40%
Mgd Mkts Mgr (692) ($152,000) 20%
Total (5,767) ($1,436,000) 10%
Proprietary Process Savings
The previous analysis assumed a consistent volume
of hours associated with commercial activities
based on the number of FTEs working for the
company. While this presents an accurate picture
of the real world results, it doesn’t necessarily
represent the “best practice” approach to
managing the necessary commercial activities. For
illustration purposes, we have included designated
FTE roles in Table 3, but the analysis could just as
easily break activities into functional areas not tied
to specific titles.
Table 3 compares the cumulative input from the
case study client with a “proprietary process”
approach.
Table 3: Comparison of Commercial Workload: Cast Study
vs. Proprietary Process Variable Commercial Approach
2008-H1 2011
• Total hours associated with Pres/CEO, CFO and CCO roles not reduced; assumption is that best practices would not impact requirements associated with these roles
• Using Average Fully Loaded Cost per Hour x reduction of hours by functional role, cumulative savings would equate to $1,436,000 (10.1%)
Commentary on Non-FTE Related Savings Based on Applying Proprietary Process to Managing Vendors/Partners and Leveraging Best Practices
The costs associated with bringing a single or multiple assets to market are unavoidable. Commercial executives refer to these
expenses as “investments,” because without them, the potential to achieve superior results at launch are far more limited. That said,
there are established processes and approaches that can reduce the cumulative spend without negatively impacting the end results.
At Skysis, our professionals have spent decades learning how the best organizations in the world manage these activities. We have a
structured approach that has proven to reduce the cumulative level of hours associated with commercial activities (as seen
previously in this document), but in addition to this reduction in effort, we have also demonstrated the ability to decrease external
costs by an estimated 12%. These savings are achieved by managing vendors and partners in an optimal manner and ensuring that
aligned incentives have been established to benefit each party involved in the transaction.
The complexity and challenges associated with commercializing a product continue to increase while the margin for error is
becoming smaller every day. To be successful, companies need to not only understand what needs to be done, when to do it, how much to
invest but also how to most efficiently commercialize their assets.
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