Life Science Business Models

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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 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 Slide 4

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 Stringent drug development funnel

ﾪQuickTime and a
TIFF (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

Oncology
HIGH
HCV
Alzheimer’s “Attractive Growth Potential”
Immunology/RA  Limited genetics in mid-term
 Significant unmet need
HIV
 Pricing likely to hold
Depression
Neuropathic Pain
Unmet
COPD
Diabetes “Market at Risk”
Need
High Cholesterol  Significant genetics available
Hypertension  Limited unmet need
 Pricing and access at risk
Nociceptive Pain “Wasteland”
Anti-ulcer  High genetics penetration
Asthma  Very limited unmet need
 Weak pricing/limited access
Anti-infectives
LOW
(outpatient)
United States Japan UK

Russia
India
France

Spain
Italy
y
Canada

China
German
Total 2005 Sales by Geo ($B) 252 16 19 32 14 20 30 15 5 6 12
Cost Controls
LMITED EXTENSIVE
(pricing, access, volume)

*Source BCG Analysis Slide 7

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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:

 The State of Pharma industry

 Brief History of Biotech Industry
 Pharma/Biotech Models
 Diagnostics Models
 Medical Device Models
 Convergence Examples

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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:

 The State of Pharma industry

 Brief History of Biotech Industry
 Pharma/Biotech Models
 Diagnostics Models
 Medical Device Models
 Convergence Examples

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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

SALES/
PRE CLINICAL CLINICAL CLINICAL MANU-
RESEARCH MKT’ING/
CLINICAL PHASE I PHASE II PHASE III FACTURING
DIST’ION

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 Slide 15

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 Fully Integrated Pharma Company (FIPCo)

SALES/
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CLINICAL PHASE I PHASE II PHASE III FACTURING
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Value Proposition:
 The experts in bringing drugs from bench to market.

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)

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Skills Needed
 Rare for newer biotech today except in
some niche areas ( ex Gilead)  Need skills across the value chain, although
 Today FIPCo biotech are original players. increasingly much is being outsourced.
 Very challenging for start-up  Deep pockets to run expensive Phase III clinical
 Timeline to build expertise and capacity too trials, and extensive sales and marketing
long
operations.
 Large existing biotech FIPCos suffering
same challenges as large pharma ( i.e dry
pipeline, reduced innovation, increased cost Financing
of development)
 VCs would probably find time to ROI too long…

Examples
 Biotech: Amgen, Genentech, Biogen Idec,
 Valera >Indevus ( urology and endocrinology)
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 Virtually Integrated Pharma Company
(VIPCo)

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DIST’ION

Lean Management

Value Proposition:
 The experts in bringing drugs to the global market through greater operational flexibility
 Rent…. Don’t own!

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

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 Research Model

SALES/
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RESEARCH MKT’ING/
CLINICAL PHASE I PHASE II PHASE III FACTURING
DIST’ION

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

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

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DIST’ION

 The basic model coming out of academia Skills Needed

 Cost subsidized by Govm’t grants  You need to be best in class in research
 Can be hard to get to Pre Clin package  Business development
together
 Easy to find yourself in the “valley of Financing
death”  VCs don’t “love” it
 Single compound or discovery pipeline  High Risk/ Low return
 Licensing at earliest valuation
 Need to be earth shatteringly new to get attention

Examples
 Neuraxon
 Affinium…
 Trillium
 Ellipsis Neurochem Slide 20

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 Platform Model

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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

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

PRE CLINICAL CLINICAL CLINICAL MANU-

RESEARCH DISTRIBUTION
CLINICAL PHASE I PHASE II PHASE III FACTURING

e n. Limited capitalization but limited capital Skills Needed

st G requirements
 Deep Science expertise. Usually affiliated with
1  Products/services generate near-term revenues
academia
 Need multiple alliances to validate platform
 “Pick & shovel" - selling picks and shovels to gold
 Strong management, strong IP estates, strong
diggers balance sheet and ability to adapt
 After initial wave of interest (no pharma wanted to
miss the next big thing)… Financing
 sales growth decreased
 technology became largely commoditized  Platforms making slight comeback

en
.  addressable market was smaller than anticipated  VCs will only invest if they consider platform
defensible
nd
G Those companies that rigidly adhered to the fee-
2 for-service model usually failed (e.g. Cadus)  Need own development program
 The companies that were enduring successes
created proprietary development programs  Financing probably more tranched…

Examples
Combinatorial chemistry - Cadus, ArQule
Genomics - Celera, HGS, Millennium
RNAi: Sirna, Analym
Antibodies - Cambridge Antibody, PDL
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 No Research Development Only ( NRDO)

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PRE CLINICAL CLINICAL CLINICAL MANU-
RESEARCH MKT’ING/
CLINICAL PHASE I PHASE II PHASE III FACTURING
DIST’ION

Value Proposition:
 Pick up the innovation past the high risk stage of development and have focus to bring it
to market

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)

PRE CLINICAL CLINICAL CLINICAL MANU-

RESEARCH DISTRIBUTION
CLINICAL PHASE I PHASE II PHASE III FACTURING

Skills Needed
 In-license technology developed elsewhere
 Strong in-licensing and deal making skills
 Usually narrow their development to Phase
II and Phase III, past the risky research  Good networks in industry
and early clinical stage  Product development, the ability to identify what the
 Focus on developing products then sell to product attributes need to be, where it fits into pharma’s
large pharma pipeline
 Often focus on therapeutic indication ( e.g.  Development skills ( can outsource)
Cardiac) or distribution channel ( e.g.
hospital needs) often given them better  Been there, done that CEO
focus and speed than large pharma
Financing
 Often develop drugs for smaller indications
and markets than of usual interest to large  Considered the “risk reduced” model today
pharma
 Very attractive to VC
Examples
 Transition Therapeutics
 Cadence Therapeutics
 Innovive Pharmaceuticals
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 Re-indication/Recovery

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DIST’ION

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

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

PRE CLINICAL CLINICAL CLINICAL MANU-

RESEARCH DISTRIBUTION
CLINICAL PHASE I PHASE II PHASE III FACTURING

Skills Needed
 In-license technology that has failed late  Strong due diligence skills: dealing with known
stage for reason’s other than tox failed drugs
 Find new/better indication and jump into  Strong in-licensing and deal making skills
Phase II testing
 Good networks in industry
 Reduce development time to 2-3 yrs
instead of 7-10 from discovery  Product development, the ability to identify what
 Considered one of pharma’s solutions to its the product attributes need to be, where it fits into
innovation struggles pharma’s pipeline
Financing
 Wall Street seem to like it but VCs appear to be
uncertain…
Examples
 Gene Logic
 Aspreva
 Melior
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 Combination Drugs

SALES/
PRE CLINICAL CLINICAL CLINICAL MANU-
RESEARCH MKT’ING/
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Value Proposition:
 Derive new value by combining 2 known drugs ( usually generics) for new indication

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

PRE CLINICAL CLINICAL CLINICAL MANU-

RESEARCH DISTRIBUTION
CLINICAL PHASE I PHASE II PHASE III FACTURING

 Reduce generic competition, revitalize established Skills Needed

brands, fill gaps in product pipelines, and enhance  Strong formulation and manufacturing skills
patient compliance
 Lower regulatory risk but high financial reward  Strong BD
because the resulting product comes with new
patents that protect it from generic competition  Stellar reputation of CEO
 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 Financing
 Playing a big role in HiV, CV and other chronic
diseases VC not too keen… CPC or TSX-v

Examples
 Pharmas
 Generics

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 Drug Delivery

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RESEARCH MKT’ING/
CLINICAL PHASE I PHASE II PHASE III FACTURING
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Value Proposition:
 Assist in delivering drugs to system
 Existing drugs in novel ways
 New difficult drugs ( i.e protein, RNA,

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

PRE CLINICAL CLINICAL CLINICAL MANU-

RESEARCH DISTRIBUTION
CLINICAL PHASE I PHASE II PHASE III FACTURING

 Easiest when aiming to improve existing drugs. Skills Needed

Regulatory more complicated if aiming for new
drug/new delivery mechanism
 Chemistry
 Best if able to build platform delivery mechanism  Pharmacology
I.e drug delivery technology that could be applied
to multiple drugs types in multiple indications  Physio/Chem properties for each drug niche
 Used by big pharma to extend life cycle of soon to Financing
be off-patent drug ( eg time release formulas,
injectable to oral )  Don’t love it… unless solve real problem ( e.g
 Can license technology to multiple pharmas protein, iRNA )
 However royalty rates often lower than expected  Royalties often low and far out on horizon, IRR
often low…
Examples
 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) Slide 30

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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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 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

ﾪQuickTime and a
TIFF (Uncompressed) decompressor
are needed to see this picture.

Source: Ernst & Young

 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

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 Affymetrix GeneChip and Genentech’s
Herceptin

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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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 Risk / Return Slope

•New technology
•New market,
•Improvement,
• Care benefit
•New market,
• Class 3
• Care benefit
•Improvement,
• Class 2 or 3
Potential Return

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

Level of risk/investment Slide 38

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 Medical Technology
Market and Technology Matrix

More costly to Costly and

Longer term
New

produce and
demonstrate

1 2
Technology

Easy to produce More costly to

Existing

and demonstrate produce and

demonstrate

3 4
Existing Market New Market
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 Value Creation
Simple innovation – i.e. Safety syringe

Need Proof

Idea
Approval
Early design

Initial Prototype

Initial test

Redesign

Manufacturing prototype

Clinical test

Value demonstrated Make and sell

Value

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 Value Creation
Complex innovation – i.e. Medical electronics

Need
Proof
Idea
Approval
Early design

Initial Prototype

Initial test

Redesign

Evaluation prototype

Clinical test

Value demonstrated Make and sell

Value

0
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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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 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

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