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Reinnovation and reinvention
MBC Finance Committee“The Evolution of the Biotech Business Model”Gautam Jaggi, Ernst & Young
October 24, 2008
Beyond Borders2
Is a pattern emerging?
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal… is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥ ►
£
R&D
►
??? ? ?►re-in
Beyond Borders3
Reinvention
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal… is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥ ►
£
R&D
►
??? ? ?►
The drug industry is being reinvented by three sweeping trends:
►R&D productivity►Personalized medicine
►Globalization
re-inre-in
Beyond Borders4
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
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal…is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥►
£
R&D
►
??? ? ?►
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal…is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥►
£
R&D
►
??? ? ???? ? ?
►
The first driver of reinvention:R&D productivity
Beyond Borders6
Big companies need sustainable solutions
Buying pipeline assets
►High prices lower upside potential
►Limited reserves of cash
Cutting costs
►Short-term gains
Boosting EPS►Short-term gains►Limited reserves of cash
Companies need
sustainable solutions to fix the real problem:low R&D
productivity
Source: Ernst & Young
Beyond Borders7
The inertia of size
Small companies Conduct and performance Large companies Conduct and performance
Stru
cture
► Small ► Individuals have more control over outcomes
► Large ► Poor sense of ownership
► Flexible ► Encourages creativity and collegiality
► Rigid ► Centralized, bureaucratic processes
► Risk-aversion over time
► Cash-starved ► Driven to raise capital► Lean operations,
sometimes cut corners
► Strong cash flow ► Not as “hungry” or driven to succeed
Incen
tives
► Stock-based compensation is a strong incentive
► Direct financial tie to performance
► Stock-based compensation is not meaningful
► Less tied to outcomes► Less passion
► 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
Beyond Borders8
Emulating biotech
Creating small, autonomous R&D units
Emulate
Large monolithic big pharma company
Preserving entities after acquisitions
Adopting networked structures
Pay-for-performance tied to small-team milestones
culture
of
small
biotech
companiesSource: Ernst & Young
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal…is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥►
£
R&D
►
??? ? ?►
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal…is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥►
£
R&D
►
??? ? ???? ? ?
►
The second driver of reinvention:Personalized medicine
Beyond Borders10
Personalized medicine: why now?
Safety concerns
►Targeted approaches►Less misdiagnosis,
fewer adverse events
Pricing pressures
►Smaller clinical trials►Cheaper drug development
R&D productivity
►More efficient identification and development of drug targets
Move from efficacy to efficiency
in drug development
and healthcare
delivery
Source: Ernst & Young
Beyond Borders11
Challenge 1: end of the blockbuster model
Old model New model
►Large clinical trials►Pharma’s 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
Beyond Borders12
Challenge 2: making the numbers work
Source: Ernst & Young
►Targeted therapeutics for more efficient treatment of disease
►More efficient drug development with smaller, cheaper clinical trials
Rx
►Diagnostics for more efficient:
►Prediction►Diagnosis►Dosing►Monitoring
►Lower healthcare costs from new efficiencies
Dx 3x
►Incentives and metrics to support the economics and ROI for investors:
►Better pricing for diagnostics
►Reimbursement based on value
►Measures across healthcare system
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal…is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥►
£
R&D
►
??? ? ?►
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal…is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥►
£
R&D
►
??? ? ???? ? ?
►
The third driver of reinvention:Globalization
Beyond Borders14
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
?
Beyond Borders15
Globalization:the challenge of the next billion consumers
Source: Ernst & Young and International Finance Corporation (IFC)
US$20,000
US$3,000
“The unserved base”US$30b market
US$65b by 20174b patients
6b patients by 2017
1b patients
1.5 bpatients
Mature markets withslow growth potential
Per-capita income thresholds: Market size/potential:
“The next billion”Emerging markets with
high growth potential
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal…is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥►
£
R&D
►
??? ? ?►
Big pharma companies announce layoffs, restructuringsStock buybacksSafety concerns take bite out of product sales
Velcade gives NICE an unprecedented money-back guarantee
FDA NME approvals fall to lowest level in
over 25 years more pricing
pressuresemerging
Product safety incidents in the
rising China market
Product safety incidents in the
rising China market
Big pharma’s search for pipeline productivity propels a booming deal environment
Biotech companies retain more
rights in deals
The mega deal…is back
π?
8%
Government negotiation of drug prices under MMA returns to public policy debate
Government negotiation of drug prices under MMA returns to public policy debate
FIPNETs
Creative deal structures
►
►
►
►
►►M&A R
EMS
FDAAA ►
$►
€►
¥►
£
R&D
►
??? ? ???? ? ?
►
The shape of the future: changing business models
Beyond Borders17
Changing business models
Personalized medicine changes the nature of competition
Source: Ernst & Young
Present state
Beyond Borders18
Changing business models
Personalized medicine changes the nature of competition
Source: Ernst & Young
Future state
Beyond Borders19
Changing business models
Personalized medicine redistributes value in the value chain
Source: Ernst & Young
Research
Research
Early development
Early developmentLate development
Late developmentManufacturing
Manufacturing
Sales and marketing
Sales and marketing
0%
20%
40%
60%
80%
100%
Current state Future state - personalized medicine
Value accrues to innovation
Beyond Borders20
Big pharma’s challenge: maximize the portfolio
Objectives Constraints
Supplement pipeline, more shots on goal
► Increasingly expensive in competitive dealspace
► Impact on current earnings
Boost R&D 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
Beyond Borders21
Biotech’s 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 M&A exit ► Collaborations fill funding gap in constrained public capital markets but encumber assets
Accelerate pipeline development ► Increasing cost of drug development
Beyond Borders22
The need for new models
R&D
Source: Ernst & Young
Operations
Capital formation & efficiency
Deals
Pharma
►Take on more core risk►Boost productivity
Biotech
►Remain innovative
►Adapt to smaller scale►Variabilize fixed costs►Tap networks
►Value chain specialization / non-FIPCO models
►Efficient allocation & deployment of capital
►Access capital with less dilution
►Portfolio approach►Manage risk
►Retain control & rights►Higher share of value
Beyond Borders23
Opportunities for companies
Biotechs gaining
more bargaining
power
More flexibility
Greater share of value
produced
Source: Ernst & Young
Pharma’s imperative to fix R&D product-
ivity
Greater rights retention
Minimize P&L impact of
investments
Creative deals
Accept more risk to increase
potential upside
Acquire culture, not just
pipeline
Biotech Pharma
Beyond Borders24
Models of the future
Source: Ernst & Young
►Leaner FIPCOs: less infrastructure required
►Value-chain specialization
►Becoming FIPCOs less imperative with higher royalties, co-promotion rights
Biotech
►Some successfully reinvent R&D
►New Models: ►More risk
accepting in R&D
►Leaner sales►More networked
Pharma 1 Pharma 2
►For those that don’t succeed at reinvention:
►Core strengths are lower-margin
►Competition from emerging markets
►De facto CROs or CMOs?
Panel discussion
Moderator: Robert BuderiXconomy.com
Kevin J. BittermanPolaris Ventures
Dr. Eric ElenkoPureTech Ventures
Gautam JaggiErnst & Young
Mark KesselSymphony Capital