bioentrepreneurship: life science business models

Life Science Business Models

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Agenda:

The State of Pharma industry

Brief History of Biotech Industry

Pharma/Biotech Models

Diagnostics Models

Medical Device Models

Convergence Examples

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Generations of Drug Discovery

Source: Burrill & Company, Life Sciences: A Changing Prescription

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Stringent drug development funnel

QuickTime™ and aTIFF (Uncompressed) decompressor

are needed to see this picture.

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Risks and Uncertainty of R&D

Source: 2001 Nature Publishing Group biotech.nature.com

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Pharma’s Blockbuster focus

LMITED EXTENSIVECost Controls(pricing, access,

volume)

“Wasteland” High genetics penetration Very limited unmet need Weak pricing/limited

access

“Market at Risk”

Significant genetics available

Limited unmet need Pricing and access at

risk

“Attractive Growth Potential” Limited genetics in mid-

term Significant unmet need Pricing likely to hold

Oncology

HCV

Alzheimer’s

Immunology/RA

HIV

Depression

Neuropathic PainCOPD

Diabetes

High CholesterolHypertension

Nociceptive PainAnti-ulcer

Asthma

Anti-infectives (outpatient)

Unmet Need

LOW

HIGH

United States Japan UK

Germany

Canada

Italy

France

Spain

Russia

India

China

Total 2005 Sales by Geo ($B) 252 16 19 32 14 20 30 15 5 6 12

*Source BCG Analysis

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Blockbuster Model: Issues

Pharma industry has been based on the blockbuster making it one of the most profitable industries and enabling large R&D spends.

Approx 80% of growth of the Pharma industry came from ~ 8 drugs in the last 10 years.

However the impact of the recall of Vioxx is an example of how something like this can dramatically decrease revenues coupled with the impact of lawsuits.

Growing concern that going forward healthcare will only pay for 1-2 drugs in each class.

Severe reduction in revenues in coming years as most blockbusters are coming off patent and replaced by generics ( $82B loss in revenue in 2007 alone)

Pharma currently suffering from innovation “dry spell”: few blockbusters in pipeline

Costs of development and difficulty to bring drug to market increasing

Large pharma in cost cutting mode ( out sourcing as much as possible)

Discussion model needs to be completely reviewed (e.g personalized medicine) Future drugs will be based on smaller markets and more targeted therapies in hopes to

protect themselves from damaging effects of recalls.

There is a shift away from blockbusters. Only 33 of the top 200 drugs are of blockbuster status.

This will call for more stream lined approach to R&D with a focus on fewer disease areas and more strategic partnerships.

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Pharma R&D goes “off balance sheet”

Pharma has increasingly been seeing its R&D spending going up but its R&D productivity dropping ( i.e fewer drugs coming out of pipeline)

Pharma R&D spend starting to take a toll on its earnings

More and more R&D investment but no new sales!

As public companies, pharma values are determined by a multiple of their earnings.

The higher the earnings, the better the value!

Pharma therefore increasingly motivated to do “off balance sheet” R&D

Shift the risk of R&D to biotech

Have VC cover the cost

Cherry pick what they want when they want it….

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Agenda:




Diagnostics Models



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Brief (…very brief) History of Biotechnology Industry

Originally based on recombinant DNA technology to make human proteins rInsulin, EPO, tPA, G-CSF, HGH

Started in San Francisco (Genentech ‘76) and Boston (Biogen ‘78). Today these areas still have the largest biotech clusters. Today’s top biotech companies were the early pioneers and rival large

pharmas as FIPCOs Genentech, Amgen, Biogen Idec, Genzyme, Chiron (now Novartis)

High risk - High reward with long development cycle (10 years+)

Pharma didn’t have skills to do biotech and feared FDA approval, so mainly watched to see what biotech could do for them… Roche was an exception and bought 56% of Genentech in 1990

Biotech tools began to help pharma drug discovery and development seeing the start of the biotech boom ( 1980s) and muddying of boundaries between the biotech and pharma worlds

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Biotech Today

Regulatory approval for biologics challenging, but have seen slightly higher approval rates than NCEs recently.

Biologics drugs still largely protected from generics, but being challenged hard…

Biotech responsible for both research platforms for pharma as well as drugs development on its own.

Pharma increasingly buying up biotechs large ( Merck and Sirna, AZ and MedImmune for $1B plus) and small ( Pfizer and Coley for $164M) in order to fill both pipeline and bolster research platforms needs…

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Agenda:




Diagnostics Models



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No one model….

The biotech industry is not really characterized by specific business models; and neither is there one single model for success.

Enormous diversity and innovation driven makes predicting future development difficult.

Biotech “flexibility” is a strength that has helped them survive In years of crisis, companies have managed to reorient themselves, change

their business model or even switch market.

Regardless of model, common themes exist: Strong IP

Regulatory Strategy

Commercial relevance

TALENT!!!

VCs often invest in jockey rather than horse

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Value Chain and Business Models

RESEARCH PRE CLINICAL

CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING

A business model typically consists of three components:

Value proposition: the benefit that clients and partners might have from doing business with a certain company

Value chain structure: describes the value creation chain and the different steps involved, i.e. the path from the idea and concept to the final product or service.

Revenue generation model: how revenue is generated. This means that future revenues of the company determine the value of the business model and its sustainability.

Sales of own drugs

Co-marketing

Royalties from drugs you developed but sold by others

Services

SALES/ MKT’ING/ DIST’ION

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Fully Integrated Pharma Company (FIPCo)

Value Proposition: The experts in bringing drugs from bench to market.


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING


Value Chain: Have strengths in at every level of the development chain.

Revenue Generation Model: Out license first few compounds to gain revenues then selectively bring to

market certain compounds

Usually in indication and geographies with manageable distribution

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Fully Integrated Pharma Company (FIPCo)

Rare for newer biotech today except in some niche areas ( ex Gilead)

Today FIPCo biotech are original players.

Very challenging for start-up Timeline to build expertise and

capacity too long

Large existing biotech FIPCos suffering same challenges as large pharma ( i.e dry pipeline, reduced innovation, increased cost of development)


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING


Skills Needed

Financing

Biotech: Amgen, Genentech, Biogen Idec,

Valera >Indevus ( urology and endocrinology)

Examples

Need skills across the value chain, although increasingly much is being outsourced.

Deep pockets to run expensive Phase III clinical trials, and extensive sales and marketing operations.

VCs would probably find time to ROI too long…

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Virtually Integrated Pharma Company (VIPCo)

Value Proposition: The experts in bringing drugs to the global market through greater operational

flexibility Rent…. Don’t own!


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING


Value Chain: Strong but very lean management team that outsources most if not all aspects drug development, manufacturing and distribution

Revenue Generation Model: Own IP and clinically develop drug to point that pharma interested in

buying it or sell drug themselves

Lean Management

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Research Model

Value Proposition: Able to discovery and develop drugs faster, most often in a niche

expertise


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING


Value Chain: Usually take drugs to pre-clinical or phase I

Revenue Generation Model: License out IP for milestone payments for development , and royalties

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Research Model

The basic model coming out of academia

Cost subsidized by Govm’t grants

Can be hard to get to Pre Clin package together

Easy to find yourself in the “valley of death”

Single compound or discovery pipeline

You need to be best in class in research

Business development


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING

Skills Needed

VCs don’t “love” it

High Risk/ Low return

Licensing at earliest valuation

Need to be earth shatteringly new to get attention

Financing

Neuraxon

Affinium…

Trillium

Ellipsis Neurochem

Examples


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Platform Model

Value Proposition: 1st Generation: Offering pharma access to research tools that they don’t have

expertise in. Requires limited capitalization and potential for quick revenues

2nd Generation: Hybrid offering services and has own proprietary development program


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING


Value Chain: Most platforms were in drug discovery and early development

Genomics, high throughput screening, combinatorial chemistry

Revenue Generation Model: 1st generation platforms: fee for service with modest retained rights and royalty

interests

2nd generation: started to drive own product development off of their own platform ( i.e potential out licensing of compounds for milestones and royalties) in addition to fee for service

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Platform Model

Limited capitalization but limited capital requirements

Products/services generate near-term revenues

Need multiple alliances to validate platform “Pick & shovel" - selling picks and shovels

to gold diggers After initial wave of interest (no pharma

wanted to miss the next big thing)… sales growth decreased technology became largely commoditized addressable market was smaller than

anticipated

Those companies that rigidly adhered to the fee-for-service model usually failed (e.g. Cadus)

The companies that were enduring successes created proprietary development programs

Deep Science expertise. Usually affiliated with academia

Strong management, strong IP estates, strong balance sheet and ability to adapt


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING

DISTRIBUTION

Skills Needed

Platforms making slight comeback

VCs will only invest if they consider platform defensible

Need own development program

Financing probably more tranched…

Financing

Genomics - Celera, HGS, Millennium

Antibodies - Cambridge Antibody, PDL

ExamplesCombinatorial chemistry - Cadus, ArQule

RNAi: Sirna, Analym

1st G

en.

2nd G

en.

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No Research Development Only ( NRDO)

Value Proposition: Pick up the innovation past the high risk stage of development and have

focus to bring it to market


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING


Value Chain: Phase I to market but often out-license to large pharma for Phase III clinical trials

Revenue Generation Model: Licensing and royalties

Co-promotion and direct sales ( usually in niche market)

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No Research Development Only (NRDO)

In-license technology developed elsewhere

Usually narrow their development to Phase II and Phase III, past the risky research and early clinical stage

Focus on developing products then sell to large pharma

Often focus on therapeutic indication ( e.g. Cardiac) or distribution channel ( e.g. hospital needs) often given them better focus and speed than large pharma

Often develop drugs for smaller indications and markets than of usual interest to large pharma

Strong in-licensing and deal making skills

Good networks in industry

Product development, the ability to identify what the product attributes need to be, where it fits into pharma’s pipeline

Development skills ( can outsource)

Been there, done that CEO


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING

DISTRIBUTION

Skills Needed

Considered the “risk reduced” model today

Very attractive to VC

Financing

Transition Therapeutics

Cadence Therapeutics

Innovive Pharmaceuticals

Examples

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Re-indication/Recovery

Value Proposition: Finding new therapeutic uses for advanced compounds, particularly

compounds which are very advanced but failed due to poor efficacy in the originally targeted disease. Recover lost assets

Finding new indications for drugs whose composition of matter patent has expired/about to expire


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING


Value Chain: Usually Phase II or pre-clin if doing a re-indication.

Revenue Generation Model: Platform: Fee for service

GeneLogic: Earn success-based payments upon achievement of certain development milestones. Additionally, in the event that a partner returns a drug to the commercial market, the Company is entitled to earn royalties on sales.

Drug Dev Co: Sales or Licensing fees and royalties

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Re-indication/Recovery

In-license technology that has failed late stage for reason’s other than tox

Find new/better indication and jump into Phase II testing

Reduce development time to 2-3 yrs instead of 7-10 from discovery

Considered one of pharma’s solutions to its innovation struggles

Strong due diligence skills: dealing with known failed drugs

Strong in-licensing and deal making skills

Good networks in industry

Product development, the ability to identify what the product attributes need to be, where it fits into pharma’s pipeline


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING

DISTRIBUTION

Skills Needed

Wall Street seem to like it but VCs appear to be uncertain…

Financing

Gene Logic

Aspreva

Melior

Examples

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Combination Drugs

Value Proposition: Derive new value by combining 2 known drugs ( usually generics) for new

indication


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING


Value Chain: Phase I for dosing if using 2 approved drugs

Revenue Generation Model: Sell back to large pharma

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Combination Drugs

Reduce generic competition, revitalize established brands, fill gaps in product pipelines, and enhance patient compliance

Lower regulatory risk but high financial reward because the resulting product comes with new patents that protect it from generic competition

Easiest when using 2 known approved drugs. Risk increases if using 1 known and 1 unknown. Risk very high if 2 unknown…

However formulating combination drugs not as easy as thought

Playing a big role in HiV, CV and other chronic diseases

Strong formulation and manufacturing skills

Strong BD

Stellar reputation of CEO


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING

DISTRIBUTION

Skills Needed

VC not too keen… CPC or TSX-v

Financing

Pharmas

Generics

Examples

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Drug Delivery

Value Proposition: Assist in delivering drugs to system

Existing drugs in novel ways

New difficult drugs ( i.e protein, RNA,


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING


Value Chain: Depends on novelty of drug delivery mechanism and drug being delivered

Revenue Generation Model: License technology to pharma and collect royalty on sales

Sell drug delivery combo directly..

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Drug Delivery

Easiest when aiming to improve existing drugs. Regulatory more complicated if aiming for new drug/new delivery mechanism

Best if able to build platform delivery mechanism I.e drug delivery technology that could be applied to multiple drugs types in multiple indications

Used by big pharma to extend life cycle of soon to be off-patent drug ( eg time release formulas, injectable to oral )

Can license technology to multiple pharmas

However royalty rates often lower than expected

Chemistry

Pharmacology

Physio/Chem properties for each drug niche


CLINICAL PHASE I

CLINICAL PHASE II

CLINICAL PHASE III

MANU- FACTURING

DISTRIBUTION

Skills Needed

Don’t love it… unless solve real problem ( e.g protein, iRNA )

Royalties often low and far out on horizon, IRR often low…

Financing

Gastric Retention: Depo Med ( one a day metformin for type 2 diabetes and ciprofloxacin for urinary tract infections )

Protein Delivery: Nektar Therapeutics ( inhaled insulin)

Microspheres: Epic Therapeutics ( dry powder inhalers and injectables)

Advanced Trans Dermal delivery: Altea Therapeutics ( delivering hydrophilic drugs)

BioMaterials: pSivida ( bioSilicon for long-term controlled release of small molecules, nucleic acids/proteins)

Examples

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Agenda:




Diagnostics Models



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Value chain and revenue models

There is no clear value chain in diagnostic. Value not easily determined until it reaches market. No “mid point” element such as clinical phases for interim valuation

Makes it difficult for VC

Business challenge in that valuation is based on multiple of revenue, but early stage diagnostics have no revenues…

However time to market shorter

Several revenues models License diagnostic test to pharma

License biomarker to diagnostic manufacturers

Developed and sell diagnostic Reimbursement the biggest issue

– OHIP , Medicaid, Medicare, large insures ( getting re-imbursement code)

– Employer

– Consumer

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CLIA Model

Clinical Laboratory Improvement Act (CLIA) is only in the US

Created to help introduce novel diagnostics that weren’t FDA approved.

Tests done in large central labs that meet CLIA specification, but no FDA approval

Test validity build on research IP based on proprietary biomarker and algorithms

Good strategy way of getting product to market directly Novel technologies and smaller markets

Lab “sells” test directly to doctors/patients Requires a lot of marketing…

Threat of regulatory tightening a risk Large CLIA based companies all pursuing parallel regulatory strategies

Examples: Genomic Health

Caris Health

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Diagnostic Device

Diagnostic devices are subject to FDA approval ( 510K) Regulatory hurdles take time away from market access during patent life

Large lab based devices and Point of Care ( POC)

High turn-over in space Constant incremental changes

Higher sensitivity and selectivity

Value rarely in the “box” but in tests that can be done in “box” Machine often given away with revenue made on sales of tests that can be run on the

machine.

Razorblade model

Challenge for start-up to acquire validated biomarkers to create new tests

Examples: Abbot, Roche, Quest, Inverness etc etc…

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Theranostics: Targeted Medicine and Pharmacogenomics

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are needed to see this picture.

Tools to help researchers identify biomarkers and develop related therapeutics

Therapeutics delivered to patients with the right genotype at optimal dosages

Targeted therapies market worth $5B in 2004 and expected to reach $20B in 2014

Source: Ernst & Young

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Affymetrix GeneChip and Genentech’s Herceptin

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Agenda:




Diagnostics Models



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Risk / Return Slope

Level of risk/investment

Pot

enti

al R

etur

n

•Improvement,•Existing market,• Efficiency benefit• Class 1

•Improvement,• Existing market,• Safety benefit• Class 1 or 2

•New technology•New market,• Care benefit• Class 3

•Improvement,•New market,• Care benefit• Class 2 or 3

•Improvement,

• Existing market,

• Cost benefit

• Class 1

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Medical TechnologyMarket and Technology Matrix

Technology

New

Existin

g

Existing Market New Market

Easy to produce and demonstrate

Costly and Longer term

More costly to produce and demonstrate

More costly to produce and demonstrate

1 2

3 4

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Value CreationSimple innovation – i.e. Safety syringe

Idea

Early design

Initial test

Redesign

Clinical test

Manufacturing prototype

Make and sell

0

Need

Initial Prototype

Approval

Proof

Value

Value demonstrated

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Value CreationComplex innovation – i.e. Medical electronics

Idea

Early design

Initial test

Redesign

Clinical test

Evaluation prototype

Make and sell

0

Need

Initial Prototype

Approval

Proof

Value demonstrated

Va

lue

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Agenda:




Diagnostics Models



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Combination Devices

275 submissions to the newly created FDA Office of Combination Products (OCP) in 2005

Includes drug-device, drug-biologic, device-biologic

Drug-device combinations valued at $5.4B in 2004

Expected to reach $11.5B in 2010 $8B from drug-eluting stents

Drug eluting stents prevent restenosis

Antimicrobial coated surgical mesh thwart infection

Drug delivery devices Pulmonary, oral, pumps

Exubera, the most recently approved OCP products, is the first noninjectable insulin for treatment of Type 1 and 2 diabetes

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Angiotech’s Paclitaxel Eluting Stent

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Pfizer and Nektar’s Exubera