Beyond Borders by liaoqinmei

VIEWS: 4 PAGES: 25

									Reinnovation and reinvention
MBC Finance Committee
“The Evolution of the Biotech Business Model”
Gautam Jaggi, Ernst & Young
October 24, 2008
Is a pattern emerging?

Big pharma companies announce layoffs, restructurings
Stock buybacks ► Velcade gives NICE an unprecedented
Safety concerns take bite out of money-back guarantee




    re-in
product sales FDA NME approvals         Product safety
Creative deal ►fall to lowest level in  incidents in the
structures R ? ? ? ? over 25 years rising China market
      ►
 $         &?             more pricing                 F
►          D                pressures    F
                 π?                                    I
 €     M&A                   emerging   D      R       P
►                           ►        ►  A      E
       The                                             N
 ¥               Biotech companies      A      M       E
►      mega       8%       retain more
       deal…                            A      S       T
 £                      rights in deals                s
       is back                           ►      ►
Big pharma’s search for pipeline productivity propels a
booming deal environment ► Government negotiation of
► drug prices under MMA returns to public policy debate

2              Beyond Borders
Reinvention

BigThe drug industry is being reinvented
    pharma companies announce layoffs, restructurings
Stock buybacks ► Velcade gives NICE an unprecedented
           by three sweeping trends:
Safety concerns take bite out of money-back guarantee




    re-in
product sales FDA NME approvals           Product safety
Creative deal ►fall to lowest level in    incidents in the
structures R ? ? ? ? over 25 years rising China market
      ►
 $         &?             more pricing                   F
►          D                pressures      F
                 π?                                      I
 €     M&A                   emerging     D      R       P
►                           ►        ►    A      E
       The                                               N
 ¥               Biotech companies        A      M       E
►      mega       8%       retain more
       deal…                              A      S       T
 £                      rights in deals                  s
       is back                             ►      ►
Big pharma’s search for pipeline productivity propels a
                              ►Personalized medicine
  ►R&D productivity
booming deal environment ► Government negotiation of
                              ►Globalization
► drug prices under MMA returns to public policy debate

3               Beyond Borders
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




4                   Beyond Borders
ig pharma companies announce layoffs, restruc
tock buybacks ►Velcade gives NICE an unprece
afety concerns take bite out of money-back gu
roduct sales FDA NME approvals         Product
reative deal ►fall to lowest level in  incidents
 ructures R ? ? ? ? over 25 years rising China
     ►
          &?             more pricing
    The first driver of reinvention: F
          D                pressures
                π?
    R&D productivity emerging          D      R
      M&A
                           ►        ►  A      E
      The       Biotech companies
      mega                             A      M
                 8%       retain more         S
      deal…                            A
      is back          rights in deals  ►      ►
 g pharma’s search for pipeline productivity pr
ooming deal environment ► Government negoti
drug prices under MMA returns to public policy
Big companies need sustainable solutions


                                ► High prices lower
         Buying
                                  upside potential
         pipeline
                                ► Limited reserves of
          assets                                        Companies
                                  cash
                                                             need
                                                        sustainable
          Cutting                                       solutions to
                                ► Short-term   gains
           costs                                         fix the real
                                                          problem:
                                                          low R&D
                                ► Short-term gains      productivity
        Boosting
                                ► Limited reserves of
          EPS
                                  cash

    Source: Ernst & Young


6                           Beyond Borders
The inertia of size

                 Small companies         Conduct and performance       Large companies         Conduct and performance

                 ►   Small               ►   Individuals have more     ►   Large               ►   Poor sense of
                                             control over outcomes                                 ownership
    Structure




                 ►   Flexible            ►   Encourages creativity     ►   Rigid               ►   Centralized,
                                             and collegiality                                      bureaucratic processes
                                                                                               ►   Risk-aversion over time
                 ►   Cash-starved        ►   Driven to raise capital   ►   Strong cash flow    ►   Not as “hungry” or
                                         ►   Lean operations,                                      driven to succeed
                                             sometimes cut corners
    Incentives




                 ►   Stock-based         ►   Direct financial tie to   ►   Stock-based         ►   Less tied to outcomes
                     compensation is a       performance                   compensation is     ►   Less passion
                     strong incentive                                      not meaningful
                 ►   Private investors   ►   Less focused on short-    ►   Public investors    ►   More sensitive to short-
                     with longer             term financial                demanding               term impact of long-
                     horizons                performance                   quarterly results       term decisions




                         Structure and incentives drive conduct and performance

      Source: Ernst & Young


7                                        Beyond Borders
Emulating biotech

                                   Creating small,
                                   autonomous R&D
                                                          Emulate
                                   units
                                                          culture
                                   Preserving entities
       Large                       after acquisitions       of
    monolithic
    big pharma
                                   Adopting networked      small
     company
                                   structures
                                                          biotech
                                   Pay-for-performance
                                   tied to small-team
                                   milestones
                                                         companies
    Source: Ernst & Young


8                           Beyond Borders
ig pharma companies announce layoffs, restruc
tock buybacks ►Velcade gives NICE an unprece
afety concerns take bite out of money-back gu
roduct sales FDA NME approvals            Product
reative deal ►fall to lowest level in     incidents
 ructures R ? ? ? ? over 25 years rising China
     ►
          &?             more pricing
                            of reinvention:
    The second driver pressures
          D                                F
                π?
    Personalized medicine   emerging      D      R
      M&A
                           ►        ►     A      E
      The       Biotech companies
      mega                                A      M
                 8%       retain more            S
      deal…                               A
      is back          rights in deals     ►      ►
 g pharma’s search for pipeline productivity pr
ooming deal environment ► Government negoti
drug prices under MMA returns to public policy
Personalized medicine: why now?


                                 ► Targeted approaches
          Safety
                                 ► Less misdiagnosis,
         concerns
                                   fewer adverse events      Move from
                                                             efficacy to
                                                             efficiency
                                 ► Smallerclinical trials
         Pricing                                               in drug
                                 ► Cheaper drug
        pressures                                           development
                                   development
                                                                 and
                                                             healthcare
                                 ► More   efficient
                                                              delivery
          R&D                       identification and
       productivity                 development of drug
                                    targets
     Source: Ernst & Young


10                           Beyond Borders
Challenge 1: end of the blockbuster model


     Old model                                   New model
     ► Large clinical trials                     ► Smaller trials for targeted drugs
     ► Pharma’s Phase III abilities a key        ► Scale less relevant
       strength
     ► Large-scalemanufacturing for                      volumes, but more complex
                                                 ► Smaller
       high volumes of blockbuster                manufacturing
       drugs
     ► DTC  advertising, armies of sales         ► Drugs  better differentiated, compete
       reps for poorly-differentiated              on merits
       drugs                                     ► Scale less relevant in sales

     ► Reimbursement         based on efficacy   ► Pay-for-performance  requires greater
                                                  allocation of resources to
                                                  demonstrate value
     Source: Ernst & Young




11                            Beyond Borders
Challenge 2: making the numbers work

                    Rx                        Dx                   3x


                                                          ► Incentivesand
     ► Targeted                      ► Diagnostics  for    metrics to support
       therapeutics for                more efficient:     the economics and
       more efficient                   ► Prediction       ROI for investors:
       treatment of                     ► Diagnosis         ► Better pricing for
       disease                          ► Dosing              diagnostics
     ► More efficient drug              ► Monitoring        ► Reimbursement
       development with              ► Lower healthcare       based on value
       smaller, cheaper                costs from new       ► Measures across
       clinical trials                 efficiencies           healthcare
                                                              system



     Source: Ernst & Young


12                           Beyond Borders
ig pharma companies announce layoffs, restruc
tock buybacks ►Velcade gives NICE an unprece
afety concerns take bite out of money-back gu
roduct sales FDA NME approvals           Product
reative deal ►fall to lowest level in    incidents
 ructures R ? ? ? ? over 25 years rising China
     ►
          &?             more pricing
                            reinvention: F
    The third driver of pressures
          D
                π?
    Globalization           emerging     D      R
      M&A
                           ►        ►    A      E
      The       Biotech companies
      mega                               A      M
                 8%       retain more           S
      deal…                              A
      is back          rights in deals    ►      ►
 g pharma’s search for pipeline productivity pr
ooming deal environment ► Government negoti
drug prices under MMA returns to public policy
Drivers and limitations

      Driver                              Short-term play           Long-term play
      Outsourcing clinical         ► Cost cutting for western   ► Emerging  market
      trials and                     companies                    companies looking to
      manufacturing                ► Sources of revenue for       develop innovative
                                     emerging market              pipelines
                                     companies                  ► Goals become more
                                   ► Limited window as cost       competitive, less
                                     advantages get eroded        complementary
      Selling drugs to                                          ► Tremendous
      rapidly-growing                                            opportunity as
      emerging markets                                           emerging middle
                                                ?                classes, rising
                                                                 prosperity create
                                                                 markets that can
                                                                 afford western drugs
     Source: Ernst & Young




14                           Beyond Borders
Globalization:
the challenge of the next billion consumers
Per-capita income thresholds:                                              Market size/potential:


                                                       1.5 b                Mature markets with
                                                      patients             slow growth potential
US$20,000
                                                                               “The next billion”
                                                   1b patients            Emerging markets with
                                                                           high growth potential
US$3,000
                                                                            “The unserved base”
                                              4b patients                         US$30b market
                                          6b patients by 2017                    US$65b by 2017




      Source: Ernst & Young and International Finance Corporation (IFC)

15                                Beyond Borders
ig pharma companies announce layoffs, restruc
tock buybacks ►Velcade gives NICE an unprece
afety concerns take bite out of money-back gu
roduct sales FDA NME approvals         Product
reative deal ►fall to lowest level in  incidents
 ructures R ? ? ? ? over 25 years rising China
     ►
          &?             more pricing
    The shape of the future:
          D                pressures    F
                π?
    changing businessemergingmodels    D      R
      M&A
                           ►        ►  A      E
      The       Biotech companies
      mega                             A      M
                 8%       retain more         S
      deal…                            A
      is back          rights in deals  ►      ►
 g pharma’s search for pipeline productivity pr
ooming deal environment ► Government negoti
drug prices under MMA returns to public policy
Changing business models

     Personalized medicine changes the nature of competition

                                              Present state




     Source: Ernst & Young



17                           Beyond Borders
Changing business models

     Personalized medicine changes the nature of competition

                                              Future state




     Source: Ernst & Young



18                           Beyond Borders
Changing business models

     Personalized medicine redistributes value in the value chain

 100%
                                                            Sales and marketing
               Sales and marketing
     80%
                                                               Manufacturing


     60%           Manufacturing                             Late development
                                                                                               Value
                                                                                            accrues to
                 Late development                            Early development
     40%                                                                                    innovation

                 Early development
     20%
                                                                 Research
                      Research

      0%
                   Current state                     Future state - personalized medicine
     Source: Ernst & Young




19                                  Beyond Borders
Big pharma’s challenge:
maximize the portfolio
     Objectives                             Constraints
     Supplement pipeline, more shots on     ►   Increasingly expensive in
     goal                                       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     ► Capital-constrainedenvironment
     protect the base to harvest?           ► More focus on developing new
                                              products
     Variabilize costs / reduce             ► More  risk and complexity dealing
     infrastructure                           with third parties
                                            ► Change in culture to be more
                                              external



20                         Beyond Borders
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   ► Bargainingleverage
     to forward integrate                   ► 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




21                         Beyond Borders
The need for new models

                                         Pharma                     Biotech


                             ► Takeon more core risk
              R&D                                        ► Remain   innovative
                             ► Boost productivity



                             ► Adapt to smaller scale    ► Valuechain
         Operations          ► Variabilize fixed costs    specialization
                             ► Tap networks               / non-FIPCO models

          Capital
                                     allocation &
                             ► Efficient                 ► Access  capital with
        formation &
                              deployment of capital       less dilution
         efficiency

                                       approach
                             ► Portfolio                 ► Retain control & rights
              Deals
                             ► Manage risk               ► Higher share of value

     Source: Ernst & Young


22                            Beyond Borders
Opportunities for companies

                             Biotech                                Pharma

                                                                 Minimize
                                  More                          P&L impact
                               flexibility                          of
                                                               investments

      Biotechs                                                 Accept more      Pharma’s
      gaining                   Greater                           risk to      imperative
                                                    Creative
        more                     rights                          increase      to fix R&D
     bargaining                retention             deals      potential       product-
       power                                                      upside           ivity

                                Greater
                                                                  Acquire
                                share of
                                                                culture, not
                                 value
                                                               just pipeline
                               produced
     Source: Ernst & Young


23                                 Beyond Borders
Models of the future

              Biotech                         Pharma 1          Pharma 2


     ► Leaner  FIPCOs:                                      ► For those that don’t
       less infrastructure           ► Some  successfully    succeed at
       required                        reinvent R&D          reinvention:
     ► Value-chain                   ► New Models:            ► Core strengths
       specialization                   ► More risk             are lower-margin
     ► Becoming FIPCOs                    accepting in        ► Competition
       less imperative                    R&D                   from emerging
       with higher                      ► Leaner sales          markets
       royalties, co-                   ► More networked      ► De facto CROs
       promotion rights                                         or CMOs?



     Source: Ernst & Young


24                           Beyond Borders
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

								
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