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 dtwibell@skysisllc.com

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.