So, who wants to take the plunge and become the long-anticipated first Virtual Drug Company? That is, which of the major players in the industry will finally admit that clinical development, regulatory affairs, and (above all) marketing are its strengths, while discovering new drugs . . . well, perhaps not. Many people can name one or more companies that fit this description pretty well already, and Pfizer (let’s name names) is surely at the top of the list. People have been talking for years about this idea as the natural end result of outsourcing. But is anyone actually going to do it?

I have to doubt it, for several reasons. One of them is purely financial, and since the whole drive behind this idea is purely financial, I’m sure that the numbers have been run several times. The first question is, are there enough drug candidates out there to be licensed? It’s not much fun being a whale if there’s not enough krill to eat, you know. If you can’t bring in a steady stream of reasonable licensing opportunities, you risk having your whole development apparatus come down around you. And if you’ve already decided that you’re not going to develop anything of your own, well, there’s not much to fall back on, is there?

I’m really not sure if there are enough deals out there to be made, not enough, at any rate, to keep a large company going just by making them. Remember, everyone else is interested in those nice clinical candidates from the smaller companies, too. It’s not like the bidding isn’t already fierce, given the general state of pipelines around the industry. Look at the deals that companies like Pfizer, GSK, Novartis, Lilly and others do already, and you have to wonder if you want to make competing in that arena your primary business model.

If you still want to, there’s another factor to consider: if a large company does go this route, it’ll change the licensing landscape. It will not do so to the advantage of the buyers, though. If everyone knows that Company X is completely dependent on inlicensing, the price for good drug candidates will naturally rise – after all, demand has picked up. And in the same way that real estate agent buyers can smell a distress sale, I think that the other players in the industry will be able to smell out a distress buy.

Exacerbating that problem is the way an inlicensing company will have many of its cards out on the table. Thanks to the SEC’s Regulation FD, it’s necessarily going to do most of its deals out in the open, with press releases for all. Everyone else will know what the company has versus what it needs, most of all its potential licensing partners. There will be none of this, “Well, we do have an internal program against this target, but we’d like to see what you’ve got. . .” stuff. So any company that’s considering this move had better not rely solely on historical pricing to work out its cost estimates, because I think those figures will quickly become outdated, an effect that makes the whole concept that much less attractive.

Not that it was all that attractive to begin with, as far as I’m concerned. There’s an unpalatable air of defeat about the whole thing. That’s why another reason I don’t see this happening soon is psychological, rather than just financial. Making the move to a virtual research organization will be a huge event for the research side of the industry, and not, I fear, in a good way. Think about it – it would be an admission, by a major drug company, that it doesn’t think that it can make enough money by spending its own cash on its own research ideas with its own scientists. People already make nasty comments of this sort whenever a big inlicensing deal goes through (a recent example is GSK’s deal to buy Sirtris). Imagine the effect of ditching the labs completely. Of course, this would be sold as if it were the completely opposite situation. Press releases would no doubt describe the move as the next phase in corporate evolution, a transition to an efficient, hyper-modern structure that does away with all that messy old-school research. It’s Pharma 2.0!

Sure it is. The problem with the sleek “Brave New Pharma” stuff is that the drug candidates have to come from somewhere, and if there’s a way to get them without doing messy research, I sure haven’t heard about it. It’s like the way that a fully plug-in electric car moves the emissions problem from the tailpipe to the nearest power plant, rather than making it disappear. A development-and-marketing company hasn’t gotten rid of research; it’s just admitting that other people can do it better, for reasons it would probably rather not think about right now.

Let’s think about it ourselves, though. Is it just bad luck that Pfizer – random example! – has had such an awful time over the years getting its own compounds to market? I have to think that the company’s sheer size must be a factor – well, that along with regular seismic disruptions from all those acquisitions. Size helps with things like sales forces, but in research it’s a well-mixed blessing: decisions get harder to make as the numbers of managers increase, and at the same time, the impact of any one decision goes down. Hey, it’s a big company, there are a lot of projects, and if one doesn’t make it, well, another one will, right? If research productivity really does scale negatively with size, at least above a certain limit, then perhaps we all owe Pfizer for having gone out and discovering the upper bound for us. It was an expensive job, but someone had to do it.

What about the other end of the scale? It may well be that smaller companies are better at taking wild flyers on new ideas – after all, they’re often betting their future on one good one. They stay more focused, and are willing to do all kinds of wild things to keep a program alive, since that can be the only thing keeping the company alive. And it may well be that this research style is what we need more of, nerve-wracking though it is for the people involved. Does that mean – like it or not – that we’re inexorably heading toward the two-tier world of small research shops and big development ones?

Probably not, because that prediction doesn’t take into account the mobility within the industry. Not all small companies are content to stay small and outlicense their best compounds. A lot of them have to do this at first, but there will always be the temptation to move to a higher level and hold on to as much of the revenue as possible. The investors will, in fact, probably insist on that happening at the first opportunity, and who can blame them? Companies that make the leap become the middle-sized players in the industry – large enough to try to develop their own drugs, but not large enough to go around buying up everyone else’s. Here’s hoping the process continues.

Derek B. Lowe has been employed since 1989 in pharmaceutical drug discovery in several therapeutic areas. His blog, In the Pipeline, is an awfully good read.