Reinnovation and reinvention

1
Reinnovation and reinvention

• MBC Finance Committee
• The Evolution of the Biotech Business Model
• Gautam Jaggi, Ernst Young
• October 24, 2008

2
Is a pattern emerging?
Big pharma companies announce layoffs,
restructurings
Stock buybacks
Velcade gives NICE an unprecedented money-back
guarantee
?
Safety concerns take bite out of product sales
FDA NME approvals fall to lowest level in over 25
years
Creative deal structures
?
RD
?
more pricing pressures emerging
? ? ?
FIPNETs
FDAAA
p?
REMS
MA
?
?
The mega deal is back
Biotech companies retain more rights in deals
8
?
?
Big pharmas search for pipeline productivity
propels a booming deal environment
?
?
3
Reinvention
The drug industry is being reinvented by three
sweeping trends
Big pharma companies announce layoffs,
restructurings
Stock buybacks
Velcade gives NICE an unprecedented money-back
guarantee
?
Safety concerns take bite out of product sales
FDA NME approvals fall to lowest level in over 25
years
Creative deal structures
?
RD
?
more pricing pressures emerging
? ? ?
FIPNETs
FDAAA
p?
REMS
MA
?
?
The mega deal is back
Biotech companies retain more rights in deals
8
?
?
Big pharmas search for pipeline productivity
propels a booming deal environment
?Personalized medicine
?RD productivity
?
?Globalization
?
4
These drivers will fundamentally change the
business of drug development

• Approaches to research and development
• Business models
• The value chain
• Deal structures
• Balance of power between biotech and big pharma
• Partnerships between western companies and
  companies in emerging markets

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Big companies need sustainable solutions
Buying pipeline assets

• High prices ?lower upside potential
• Limited reserves of cash

Companies need sustainable solutions to fix the
real problem low RD productivity
Cutting costs

• Short-term gains

Boosting EPS

• Short-term gains
• Limited reserves of cash

Source Ernst Young
7
The inertia of size
Small companies Conduct and performance Large companies Conduct and performance
Structure Small Individuals have more control over outcomes Large Poor sense of ownership
Structure Flexible Encourages creativity and collegiality Rigid Centralized, bureaucratic processes Risk-aversion over time
Structure Cash-starved Driven to raise capital Lean operations, sometimes cut corners Strong cash flow Not as hungry or driven to succeed
Incentives Stock-based compensation is a strong incentive Direct financial tie to performance Stock-based compensation is not meaningful Less tied to outcomes Less passion
Incentives Private investors with longer horizons Less focused on short-term financial performance Public investors demanding quarterly results More sensitive to short-term impact of long-term decisions
Structure and incentives drive conduct and
performance
Source Ernst Young
8
Emulating biotech
Creating small, autonomous RD units
Emulate
Large monolithic big pharma company
culture
Preserving entities after acquisitions
of
small
Adopting networked structures
biotech
Pay-for-performance tied to small-team milestones
companies
Source Ernst Young
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Personalized medicine why now?
Safety concerns

• Targeted approaches
• Less misdiagnosis, fewer adverse events

Move from efficacy to efficiency in drug
development and healthcare delivery
Pricing pressures

• Smaller clinical trials
• Cheaper drug development

RD productivity

• More efficient identification and development of
  drug targets

Source Ernst Young
11
Challenge 1 end of the blockbuster model
Old model New model
Large clinical trials Pharmas Phase III abilities a key strength Smaller trials for targeted drugs Scale less relevant
Large-scale manufacturing for high volumes of blockbuster drugs Smaller volumes, but more complex manufacturing
DTC advertising, armies of sales reps for poorly-differentiated drugs Drugs better differentiated, compete on merits Scale less relevant in sales
Reimbursement based on efficacy Pay-for-performance requires greater allocation of resources to demonstrate value
Source Ernst Young
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Challenge 2 making the numbers work
Source Ernst Young
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Drivers and limitations
Driver Short-term play Long-term play
Outsourcing clinical trials and manufacturing Cost cutting for western companies Sources of revenue for emerging market companies Limited window as cost advantages get eroded Emerging market companies looking to develop innovative pipelines Goals become more competitive, less complementary
Selling drugs to rapidly-growing emerging markets Tremendous opportunity as emerging middle classes, rising prosperity create markets that can afford western drugs
?
Source Ernst Young
15
Globalizationthe challenge of the next billion
consumers
Per-capita income thresholds
Market size/potential
1.5 b patients
Mature markets with slow growth potential
US20,000
The next billion Emerging markets with high
growth potential
1b patients
US3,000
The unserved base US30b market US65b by 2017
4b patients 6b patients by 2017
Source Ernst Young and International Finance
Corporation (IFC)
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Changing business models
Personalized medicine changes the nature of
competition
Present state
Source Ernst Young
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Changing business models
Personalized medicine changes the nature of
competition
Future state
Source Ernst Young
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Changing business models
Personalized medicine redistributes value in the
value chain
Value accrues to innovation
100
Sales and marketing
80
Manufacturing
60
Late development
40
Early development
20
Research
0
Current state
Future state - personalized medicine
Source Ernst Young
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Big pharmas challenge maximize the portfolio
Objectives Constraints
Supplement pipeline, more shots on goal Increasingly expensive in competitive dealspace Impact on current earnings
Boost RD productivity Structures and incentives often not aligned innovation and speed Difficult to acquire and maintain culture
Mature product strategy invest to protect the base to harvest? Capital-constrained environment More focus on developing new products
Variabilize costs / reduce infrastructure More risk and complexity dealing with third parties Change in culture to be more external
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Biotechs challenge survive and retain options
Objectives Constraints
Access capital Constrained public capital markets More selective VCs Less liquid equity in small caps
Retain downstream rights and ability to forward integrate Bargaining leverage Adds costs, risk and complexity
Stay flexible for MA exit Collaborations fill funding gap in constrained public capital markets but encumber assets
Accelerate pipeline development Increasing cost of drug development
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The need for new models
Pharma
Biotech
RD

• Take on more core risk
• Boost productivity

• Remain innovative

Operations

• Adapt to smaller scale
• Variabilize fixed costs
• Tap networks

• Value chain specialization / non-FIPCO models

Capital formation efficiency

• Efficient allocation deployment of capital

• Access capital with less dilution

Deals

• Portfolio approach
• Manage risk

• Retain control rights
• Higher share of value

Source Ernst Young
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Opportunities for companies
Biotech
Pharma
Biotechs gaining more bargaining power
More flexibility
Pharmas imperative to fix RD product-ivity
Minimize PL impact of investments
Creative deals
Greater rights retention
Accept more risk to increase potential upside
Greater share of value produced
Acquire culture, not just pipeline
Source Ernst Young
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Models of the future
Source Ernst Young
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Panel discussion
Moderator Robert Buderi Xconomy.com Kevin J.
Bitterman Polaris Ventures Dr. Eric
Elenko PureTech Ventures Gautam Jaggi Ernst
Young Mark Kessel Symphony Capital