The Impact of

Innovation on R&D

Operations

Neil Patel PharmD.

Director, Pharmaceutical R&D

Operations

PricewaterhouseCoopers

PwC

2

Point of View

Can innovation be balanced against risk and

return on investment?

The industry must become more innovative…….

Through scientific advancement and rethinking

R&D Operations risk and ROI can be balanced.

Innovation

Homeopathic

treatments

ASA

Antibiotics

Statins

ACEi

Tre

atm

en

t In

no

va

tio

n

Disease Understanding

mAbs

PPAR

Rest assured we have been

innovative

Defining Innovation

Incremental Innovation

• New formulations of existing compounds

• New indications or claims

• New Isomers

Innovation

• Identifying new unmet medical need

• Molecular vs. cellular treatment

• New delivery mechanism

Is the progression of 1qd Fosamax to 1weekly to

1monthly Boniva considered innovative?

Why Innovate?

• Develop treatments superior in efficacy and/or

safety to generics or gold standard

– To remain competitive

– To ensure price premium

• To treat the under served patient populations

• Incremental innovation is being challenged in

the courts

• Enhance the reputation of the industry and/or

company

The Impact of Reputation

34%

25%

25%

18%

16%

14%

13%

13%

10%

7%

7%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Reputation

Market

Credit

Regulatory

Business/Strategic

Operational

IT/Technology

Business

Continuity

Liquidity

Governance

Political

34%

25%

25%

18%

16%

14%

13%

13%

10%

7%

7%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Reputation

Market

Credit

Regulatory

Business/Strategic

Operational

IT/Technology

Business

Continuity

Liquidity

Governance

Political

Reputation risk ranks top in posing greatest

potential threat to an organization’s overall

market value

Source: PricewaterhouseCoopers / Economist

Intelligence Unit Survey, June-July 2004

The publics perception of the industry……

Agreement that Drug Companies make Drug Development

Decisions Based on Unmet Medical Need

55%

71%

91%

0%

20%

40%

60%

80%

100%

Consumers Stakeholders Industry

Source: PwC HRI Survey, December 2005

Can innovation be balanced against

risk and ROI?

Costs

Risks

Scientific

InnovationR&D

Operations

• Move towards large

molecules

• Increased Use of

surrogate markers

• Integrating diagnostics

with treatments

• Focus on specific TA’s i.e.,

Onc, CNS

• Changes in processes

• Changes in organization

structure

• Creating transparency in risk

and costs

• Integrating the R&D network

Risk and Cost

• New targets will increase risk dramatically

• A move into untreated disease states will increase risk dramatically

• Cost avoidance becomes increasingly critical with higher risk projects/areas

• Tradeoff decisions between incremental innovation and true innovation will require robust POS, cost, and value data

"The more novel the compound, the higher the failure rate, the longer

the development time, the longer the FDA takes to review and the more

likely they are to reject it” (Robert Ruffolo, Pink Sheet Oct. 2005)

Rethinking R&D Operations

Changes in processes

Changes in organization

structure

Creating transparency

in risk & cost

Integrating the internal

& external R&D network

Postlaunch review

Go toFiling

Go to Phase III

Proof of Concept

Pre-clinical CandidateSelection

First inHuman

Go to Launch

LaunchDiscovery FilePhase IIIPhase IIPhaseI

Preclinical LCM

Changes in processes

Changes in organization structure

Creating transparency in risk & cost

Partners

Suppliers

Project Teams

Decision Makers

Functional Areas

Geographies

R&D Portfolio

Addressing Organization and Process

• Create a tighter link between discovery, early development and late stage development

• Leverage the vast amount of data to inform a “leaner” process for development

• Challenge the traditional process of sequential testing

• Redesign Project team structures to enforce an integrated process and org. structure

• Geography should not create inefficiencies or diverging objectives

• Account and design for increased reliance on partners and suppliers

Key design principles should guide the change in both

organization and process;

GSK Case Study

Commercialization

Genetics

Research

Discovery

Research

Preclinical

Development

Worldwide

Development

Biopharmaceuticals

Research Development

Microbials, Muskuloskeletal &

Proliferative Diseases

Centers of Excellence

for Drug Discovery

Metabolic & Viral diseases

Cardiovascular & Urogenital

Neurology & Gastrointestinal

Psychiatry

Respiratory & Inflammatory

Datamonitor, GlaxoSmithKline R&D meeting Dec 2003

“By radically redesigning our R&D organization we are tackling the

problem of R&D productivity that currently plagues the industry”(Jean-Pierre Garnier, CEO, GlaxoSmithKline, 2003)

Forces accountability and

integration from

discovery up to PoC

Designed bottleneck at

PoC to ensure increased

success

Takes geography out of

the picture with respect to

inefficiencies

Leverages size of the R&D

organization

Transparency in Risk & Cost

Do we have the budget and internal resources to conduct the programs in our pipeline?

What programs will bring the most value to the organization? How do we value our

products and technologies?

What is our budget and/or value risk of pursuing 3 backups vs. 2 vs. 1?

Should we in-license or out-license a program? What are the associate costs and/or

value? What will be the impact on current projects?

How do we allocate / re-allocate budget and resources to meet our strategic objectives?

If we modify one program, what effect does that have on other programs in the portfolio?

If we modify budget/resources to a program, how will it affect the program timeline?

Do we have defined and realistic project plans? How well are we executing on those

plans?

How accurate are our planning/forecasting assumptions? How well do they predict

actuals?

Creating Transparency in Risk &

Cost• “One Set of Numbers” allows all stakeholders access to a

single source of approved and planned activities• Data Transparency promotes global optimization• Activity-Based Costing and Resourcing supports large-

scale standardized parametric estimation• Portfolio Visualization empowers better management

decisions• Development Chain Management leverages that the

drug/biotech development and approval process follows a defined, repeatable pathway

• Capacity Management provides organizational visibility to bottlenecked resources and functions

• Pipeline Throughput Metrics place emphasis on product output per unit of capacity

• Integrated Data-Driven Analysis reduces politics and enables informed, objective decisions

• Resource Flexibility acknowledges that certain skill sets are re-deployable to maximize throughput

• Variance Analysis compares plan to actual and enables continuous improvement and increases accountability

• Risk Management allows management to balance product development time, cost and attrition (i.e. lead vs. back-up strategy, early termination of compounds)

• Pipeline Utilization identifies gaps and facilitates the rebalancing of priorities, products, and licensing decisions

• Organizational Alignment / Goal Deployment keeps all levels focused on the Why and How of the business

• Standardized Project Plans and Multilevel Planning allow integrated decisions at portfolio, product, and task level

Portfolio Management

Defines Strategic Positions and

Defines Priorities Among

Portfolio Products

Integrated

Operations

and Business

Planning

Integrated

Operations

and Business

Planning

Matching Cost and Revenue With

Project Activities

Evaluating Risk vs. Reward

Financial Management

Matches Demand With

Resource Capacity

Resource Management

Creates Demand With

Project Activities

Project Management

Portfolio Management

Defines Strategic Positions and

Defines Priorities Among

Portfolio Products

Portfolio Management

Defines Strategic Positions and

Defines Priorities Among

Portfolio Products

Integrated

Operations

and Business

Planning

Integrated

Operations

and Business

Planning

Matching Cost and Revenue With

Project Activities

Evaluating Risk vs. Reward

Financial Management

Matching Cost and Revenue With

Project Activities

Evaluating Risk vs. Reward

Financial Management

Matches Demand With

Resource Capacity

Resource Management

Matches Demand With

Resource Capacity

Resource Management

Creates Demand With

Project Activities

Project Management

Creates Demand With

Project Activities

Project Management

Managing Costs via Data Driven

Decisions

2

New FTE Growth Budget and Clinical Grants Budget by Priority in 2004

52

42

3026

16 14 11 9 6 50 0

32

24

23

19

1818

13

75

3

1 0

20

20

19

13

1312

6

0

00

0

47

58

104

86

73

44

30

16

117

1 0 00

20

40

60

80

100

120

Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04

Time (Month)

Rem

ain

ing

Bu

dg

et

($M

M)

Highest Normal A Normal B Total

Time phased view of remaining funds assuming studies start per plan(assumes dollars and capacity are committed one month prior to FPI)

Option to defer Priority C study starts

expires. Jul-04 vs. May-04

P. 6

Scenario Summary – A spectrum of options

Scenario 2:Scenario 2:$ 0 Additional

10 Studies Deferred

Scenario 3:Scenario 3:$ 7.5 MM Additional

8 Studies Deferred

Scenario 4:Scenario 4:$ 15 MM Additional

3 Studies Deferred

Scenario 1:Scenario 1:$ 30 MM Additional

0 Studies Deferred

REFERENCE:

$32MM

2004

resources

required for

New Project

• GERD Study #5• GERD Study #5• GERD Study #5Not

Prioritized

• SAR DRF Study

• Smoking Cessation

• SAR DRF Study

• UI Co-Admin Probe

• Ph IIA Asthma Study

• Ph IIA Smoking Cessation

• SAR DRF Study

• UI Co-Admin Probe

• Smoking Cessation

Priority B

•PDEIV Ph II COPD• MAW Study

• PDEIV Ph II COPD

• Cancer Pain

• Acute LBP

Priority A

Scenario 4Scenario 3Scenario 2Priority

Deferred

Studies:

Ability to see impact of today’s

decisions on future opportunities

Create a range of options for

consideration based on data

Integrating the R&D network

• Establish an operating model to enable;

– Integration of CRO’s, CMO’s, etc.

– Streamlined decisions for alliances & partnerships

– Entry and integration into emerging markets

• Enable transparency and understanding for

portfolio risk and costs internally as well as

externally

Key design principles which should guide the integration of

the overall R&D network;

To think about going forward…..

• AZ & Merck have stated a strategy to obtain innovation via licensing

• GSK have redesign it’s organization and have a stated strategy of licensing to obtain innovation

• BMS have stated a strategy to focus on LCM as a growth driver for incremental innovation

• Shire have stated a strategy of licensing compounds and paying a premium for low risk projects

• Novartis have stated a strategy to focus on the generics market as a growth driver

Who will win the hearts of investors in the next 10 years innovators, incremental innovators, or non-innovators?