MAJOR ASSIGNMENT

Group 6
Healthcare
consulting

Anirban Choudhary - 14
Arindam Ghosh - 17
Atharv Joshi – 18
Gunjan Yadav – 20
Introduction

3
 Early drug development involves identifying disease targets, then finding
and optimizing a drug candidate that interacts with that target
Stage

Target selection Drug

discovery
Target identification Target validation Hit identification Hit-to-lead Lead optimisation

Disease Disease Disease Disease Disease Disease

target target target target target target
Proces

Disease Disease Disease

target target target Disease
s

Disease target
target
Disease Disease Strongest disease
Strong disease Weak disease
response response Disease response
response response response

 What disease or condition  Which parts of the disease  Which molecules interact with  Of the molecules that  How can the lead molecule be
Questions

is being targeted?
 Which parts of the disease
system can be targeted to
impact the disease state or
symptoms?
system are the most the disease target? interact with the disease altered in order to:
directly associated with  Are certain molecules or target, which have the - strengthen interaction with
the disease state or molecule classes promiscuous desired effect on the disease target?
symptoms? or do they have high fidelity to disease or symptom? - increase selectivity of
the desired disease target? interaction?
- modify duration of interaction?

 Discovery of pathways  Confirmation of relevance  Identification of groups of  Selected modification of lead

Output

 Narrowing down of
associated with disease to disease therapeutic candidates that identified therapeutic candidate in order to improve
processes interact with target candidates into a short list performance
Once a drug candidate has been identified, its safety and efficacy profiles are
tested first in animal models and then in human trials
Stage

Preclinical development Clinical development

ADME* testing Toxicity testing Efficacy testing Phase I trials Phase II trials Phase III
trials
Proces
s


Questions

How does this  What is the toxicity  How effective is  What is the safety  What dose is required for  Can this efficacy be
molecule behave in the profile of this molecule efficacy of this molecule achieved in a large
animal models? profile of the molecule? molecule in in humans? in humans? and diverse population
combating pool?
the disease in animal
models?
 Characterisation of how  Testing that candidate  Testing candidate for  Safety testing (n=10-  Dose4 selection and  Large scale efficacy
candidate is absorbed, is not toxic in animals efficacy in animal 30) efficacy testing (n=25- testing (n=250+)
Output

distributed, metabolised models of disease 100)

and excreted
Some drugs also undergo Phase IV trials (also known as post-marketing
surveillance trials) that characterise their long-term safety profiles
Different archetypes based on the ultimate actions of the drug marketer

Drug launch archetypes

Isolated Transactional Collaborative

• Big biopharma in-house • Company M&A • Industry – industry

• • collaboration
Small / medium biopharma “go- Asset in-licensing / acquisition
it-alone” (through to launch) • Industry – academic
collaboration
• Industry – public research
group
5 / not-for-profit
collaboration
Isolated asset development occurs in big pharma from internal R&D
and in small / medium biopharma who choose to “go-it-alone”
Isolated Origin of asset Typical timing Recent examples
archetypes
• Big biopharma internal drug • Drug • Piqray (Novartis) – small molecule (alpelisib)
Big biopharma discovery (includes in-house discovery / targeting various oncology indications
in- house
repositioning) preclinical - drug discovery and development by Novartis
development through to launch
through to • Rinvoq (AbbVie) – 2nd generation JAK inhibitor
launch (upadacitinib) for rheumatoid arthritis
- originator is Abbott who spun out as AbbVie
and developed the product in-house

Small / • Big biopharma carve-out • Drug • Zynteglo (Bluebird bio) – gene therapy
medium • External company drug discovery / (betibeglogene autotemcel) for transfusion-
biopharma repositioning preclinical dependent β-thalassaemia
“go-it-alone” • Small / medium biopharma drug development - drug discovery and development by
discovery (inc. academic spinout off through to Bluebird bio
launch through to launch
6
early hits)
• Academic / intramural PRG • Oxbryta (Global Blood Therapeutics) – allosteric
drug discovery (inc. academic modifier (voxelotor) for sickle cell disease
spinout once lead identified) - drug discovery and development conducted in-
house by GBT through to launch
A transactional route-to-market archetype is common, with transfer
of asset ownership during R&D via company M&A or in-licensing
Transactional Origin of asset Typical timing Recent examples
archetypes
• Big pharma carve out • M&A by most • Leqvio, an RNA interference (RNAi) therapeutic (inclisiran)
Company • External company advanced asset directed to proprotein convertase subtilisin/Kexin type 9
M&A drug repositioning in 2018: (PCSK9)
• Small / medium 36% preclinical - ownership to Novartis via acquisition of The Medicines
development, Company
biopharma drug
discovery 11% Ph I, 32%
• Academic / Ph II and 21%
intramural Ph III
PRG drug
Asset in- discovery
licensing /
acquisition • Big pharma internal • In-licensing • Vitrakvi, a small molecule kinase inhibitor (larotrectinib) for
drug discovery deals by stage anti-cancer treatment, discovered by Loxo Oncology
• Big pharma carve out in 2018: 39% - Bayer in-licensed asset during Phase II development
• External company research, 21% • Copiktra, a small molecule kinase inhibitor (duvelisib) for
drug repositioning preclinical hematologic cancers, discovered and developed by Infinity
• Small / medium development Pharma
biopharma drug 12% Ph I or Ph - Verastem Oncology in-licensed asset from Infinity
discovery I / II, 10% Ph II, Pharma during Phase III, Secura Bio in-licensed and
10% Ph III, 8% commercialised after Phase III
• Academic /
filed
intramural
PRG drug
discovery
 Collaborative development between pharma, academia and not-for-
profits combines expertise/resources needed to take an asset to market
Collaborative Origin of asset Typical Recent examples
archetypes timing

Industry –
• Big pharma internal drug • DD** / • Shionogi and Roche co-development of Xofluza (baloxavir
discovery preclinical marboxil), an oral endonuclease inhibitor for influenza virus
industry collab\ • Big pharma carve out dev. • ViiV Healthcare (GSK / Shionogi / Pfizer JV) and Janssen
• External company drug through to collaboration for phase III and commercialisation of Vocabria
repositioning launch (cabotegravir), for treatment and prevention of HIV/AIDS
• Small / medium biopharma
drug
discovery
• Academic / intramural PRG drug
discovery
Industry –
academic collab • Academic / intramural PRG drug • DD / • University of Washington and Sage Therapeutics for Zulresso
discovery preclinical (brexanolone), a neuromodulator for postpartum depression
• Small / medium biopharma drug dev. • George Washington University and La Jolla Pharmaceuticals for
discovery through to Giapreza, a small molecule catecholamine-resistant hypotension
launch
Industry – PRG* /
not-for-profit • Academic / intramural PRG drug • DD / • Roche, PTC therapeutics and Spinal Muscular Atrophy Foundation
collab discovery preclinical for Evrysdi (risdiplam), an oral splice modifier in SMA
• Small / medium biopharma drug dev. • Karyopharm, Barrow Neurological Institute and National Cancer
discovery through to Institute research for Xpovio (selinexor), a first-in-class oral
launch therapy in diffuse large B-cell lymphoma and multiple myeloma
Research shows that all archetypes are used in the launch of
NMEs; the pathway to the ultimate marketer is generally complex
Development route archetype of 79 NMEs* INDICATIVE ONLY**
launched by U.S. / European companies
(2018-21) • We have conducted analysis on the route to market
Percentage
based on the drug marketer archetypes**
100 - multiple transactional and collaborative
Industry – industry agreements can occur throughout
15%
collaboration
an asset’s pathway to market
80 Industry - PRG / Collaborative
14% Charity collaboration
• Asset in licensing / acquisition and company M&A are
Industry - academic the most common archetypes seen with small / medium
6% collaboration biopharma go-it-alone and industry – industry
60 collaboration also common
Asset in-licensing
22%
/ acquisition • Data from Deloitte shows that the 12 leading biopharma
Transactional companies are increasingly reliant on M&A and asset in-
40
18% Company M&A
licensing / acquisition as a source of innovation for their
late stage pipeline
20 9% Big biopharma in house
- the four other more specialised companies studied
are increasingly relying on in-licensing
Small / medium biopharma Isolated and co- development suggesting a move towards
16%
go-it-alone partnering to access innovation
0
 Academic and public sector funders are more involved in early- stage
R&D; other investors will generally play a role at later stages
Target selection Commercialisation
Drug discovery Pre-clinical dev. Clinical dev. (Ph 1-3)

Pharma/Biotech with marketed products (revenue streams)

Public sector funders / not-for-profits

Academic institutions

Seed capital
Broadly
considered as a
Funders

continuum as Angel investors

R&D

different types of
these investors Standalone VC funds
have different
strategic focus Corporate VC funds

Public offering

Private equity and other institutional investors*

Focus of funding: High

Low
R&D Funding

3
 Private-sector R&D spend has grown at 6.1% p.a. over the last 15 years; in 2020 the
Top 15 spenders contributed more than 50% total
Rank Company R&D Spend Share of HQ country
Global Private-sector R&D spend (Billions of USD, private sector
EvaluatePharma (2005-20E) 2020) R&D spend
Billions of USD 1 11.2 5.7%
200 194
2 9.4 4.9%
CAGR
6.1% 3 9.4 4.8%
150

92
4 9.0 4.6%

5 8.8 4.5%
100

189
181
6 8.6 4.4%

169
159
149
145
138
137
136
129

7 5.9 3.0%
120
118
107

102
50
92

8 5.8 3.0%
80

9 5.8 3.0%
0
10 5.8 3.0%
06
07
08
09
10

12
13
14
15
16
17
18
19
20E
11
2005

11 5.8 12 3.0%
Player rank by R&D Spend: All Top 15 Non-top
15
12 4.7 2.4%
EvaluatePharma extracts R&D expenditure from company reports
and excludes any exceptional expenses; R&D spend of c. 1,300 13 4.4 2.3%
pharma companies are summed up to generate worldwide spend
14 4.3 2.2%

15 3.6 1.9%

Source: Evaluate Pharma (2005-20)

 Expected R&D spend by investor
type in 2022 is 327 Billion USD

Biopharma companies, particularly small developers, are likely to focus more sharply on cash conservation in the coming years, owing to
the tightening of the financing climate. Clinical trial efficiencies are also improving, with increasing digitalization of processes. If the
promised advantages arrive, this should lower R&D bills.
 V C investment is more commonly directed at companies in the same region

Distribution of investee regions split by each investor region

% of VC investment value

100
Investee Regions
2.5
9.3 6.9 ROW
20.8 APAC
80 18.4 32.6
Europe
North
60 Americ
29.1 a

89.2
40 76.5
65.0

20 43.2

0
ROW APAC Europe North America
Investor region

Source: Eikon; L.E.K. Research and Analysis

A majority of private-sector spend is from Europe/North America; growth is
significantly higher in North America than total
Global Private sector R&D spend by Region (Company HQ)* % CAGR
EvaluatePharma (2005-2020) (2005-20)
Billions of USD
Total 6.1
200 194
189 ROW 10.9
181 2
2
169 2 24 APAC 5.5
24
159 3 25
145 149 3 23
150 137 136 138 22
129 2
1 1 2 21 20 67 4.6
118 120 1 22 66
23 23 66 Europe
107 21
17 19 62
60
100 92 14 58
80 59
58 56 57
11 53
11
49 55 53
41
50 34 96 101 North America 7.3
81 89
68 75
53 58 63
39 47 54 56
35 44 45 According to clinicaltrials.gov as of
0 March 1st 2021, c.33% of clinical studies
are registered in the U.S. only, 50% in
2005 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
non-U.S. only, 5% in both U.S. and non-
U.S., and 12% not provided

Notes: * c.5% of companies per year could not be allocated to a region – the
remaining R&D spend has been allocated proportionally to the rest of global
spend
Source: EvaluatePharma; Eikon; Orbis; clinicaltrials.gov; L.E.K. research and
analysis
Cortellis Deals database to analyse deals from the last 15 years across
four main categories of profit and non-profit
Non-Profit (Examples) For-Profit (Examples)

Governmental organisations Pharmaceutical companies

Not-for-profits Biotech companies

Biotech vs. pharmaceutical company split based on Cortellis

classification; top 10 pharma from pharmaceutical companies
based on development programs analysis
 A Firm goes through various stages of development, with a translation gap that
typically needs to be filled by venture funding

Funding Angel
Friends,
investors Venture IPO, PE,
Development family & ($50- Capital merger or
Research grants
grants $500k) ($2M- acquisition
(e.g., SIBR)
funders ($5-
$50M) ($50M+)
$50k) Early stage • The translation gap captures the
VC
Firm formation ($500k- challenges of raising capital during
$2M+)
Successful R&D as a result of the high-risk
Net cash Translation gap which can deter some investors
flow
• Public investors which fund research
for social impact, angel funders, and
Return on investment for
biotech once drug is fully Unsuccessful
early stage VCs with high industry
established in the market expertise are willing to invest in early
Stage of
stage high-risk settings
venture • After preclinical development, later
development Unsuccessful
Product Revenue
stage VC increasingly invest and
Basic Preclinical dev. and early Late stage clinical
research
Drug
clinical trials trials
registration growth pharma companies may look towards
discovery and launch
M&A, as assets are backed by
High level of uncertainty and
preliminary trial data and risk
Relatively low cost but
high risk of failure imbalance of risk and reward Diminishing risk, with supportive becomes lower
clinical evidence; continued need for
investment for commercialisation
Transaction timelines

3
Research and analysis into the distribution of transaction types was
conducted and segmented due to the availability of data

Financial instruments*
Venture capital
Funding agreement
Equity Collaboration Licensing
/ grant

Equity/Equity Option Joint Venture Asset Purchase Grant Seed

M&A - Acquisition – Full Co-Development License - Basic License Research-Only Series A
M&A - Acquisition - Majority Collaboration (Shared License - Co-Marketing Series B
Stake responsibilities)
Series C
M&A - Merger License - Co-Promotion
Series D
Acquisition – Option License - Equity
License - Option to take a Further series
license
License - Supply

Venture capital is analysed

Non profit (e.g., foundations and governmental organisations) and for-profit (e.g., pharmaceutical and separately due to the availability
biotech companies) of data

Source: Cortellis; L.E.K. research and analysis

 Financial instruments analysis

Funding/grants and collaborations are used earlier in the development process, while equity deals are
more common later on (1 of 2)
Data capture: 02/2022

Total represents Estimated number of deals by instrument class by development stage*

thousands of deals (Cortellis Publicly disclosed deals, 2005-2022) [% of total deals]

13.9 2.0 3.2 1.4

2%
7% 11% 10% Equity
Collaboration
34% 22% 17% Licensing
22%
Funding
Agreement/G
rant
23% 32% 35%
39%

42% 38% 38% 21

29%

Drug discovery/ Phase 1 Clinical Phase 2 Clinical Phase 3 Clinical

Preclinical development

Source: Cortellis; L.E.K. research and analysis;

Financial instruments analysis

Funding/grants and collaborations are used earlier in the development process, whil
more common later on (2 of 2) Data capture: 02/2022

Estimated number of deals by instrument class by development stage*

(Cortellis Publicly disclosed deals, 2005-2022) [Thousands of deals]

5.8
Funding Agreement/Grant
Licensing
4.7
Collaboration
Equity

3.1

1.2 1.1
0.8 22
0.6 0.6 0.6
0.4 0.3 0.4 0.3
0.2 0.1 0.1

Drug discovery/ Phase 1 Clinical Phase 2 Clinical Phase 3 Clinical

preclinical development

Source: Cortellis; L.E.K. research and analysis;

Financial instruments analysis

As a proportion of estimated spend, equity deals increase as programs progress

through development
Data capture: 02/2021

Estimated % of spend by instrument class by development stage*

(Cortellis Publicly disclosed deals, 2005-2021) [% of spend]

21% Equity

50% Collaboration
66% 70% Licensing
55% Funding
Agreement/G
25%
rant
16%
13% 15% 19%
11%
11% 11% 7% 8%
Discovery/Preclinical Phase 1 Clinical Phase 2 Clinical Phase 3 Clinical
% of deal count
Equity 2% 7% 11% 10%
Collaboration 34% 22% 17% 22%
Licensing 23% 32% 35% 39%
Funding Ag./Grants 42% 38% 38% 29%

Source: Cortellis; L.E.K. research and analysis;

Financial instruments analysis

Drug discovery/preclinical dev. and phase 2 represent the largest share of deals;
equity and licensing deals tend to take place later
Data capture: 02/2022

Total represents Estimated number of deals by instrument class by development stage*

thousands of deals (Cortellis Publicly disclosed deals, 2005-2022) [% of total deals]

8.2 6.0 5.4 0.9

5% 5% Phase 3 Clinical
10%
9% 16%
15% Phase 2 Clinical
7% 21% Phase 1 Clinical
9% Drug discovery &
preclinical
12% 39% development

78%
71% 16%
58%
24

28%

Funding agreement/grant Collaboration License Equity

Source: Cortellis; L.E.K. research and analysis;

Financial instruments analysis

Grants, collaboration, and licenses have the largest number of deals are
in drug discovery/preclinical dev.; equity deals in Phase 2
Data capture: 02/2022

Estimated number of deals by instrument class by development stage*

(Cortellis Publicly disclosed deals, 2005-2022) [Thousands of deals]

5.8
Drug discovery &
preclinical developlemt
4.7 Phase 1 Clinical
Phase 2 Clinical
Phase 3 Clinical

3.1

Discrepancies between total

1.2 shown here and on the prior
1.1 25
slide are due to rounding
0.8 0.6
0.4 0.6 0.6
0.4 0.3 0.3
0.2 0.1 0.1

Funding agreement/grant Collaboration License Equity

Source: Cortellis; L.E.K. research and analysis;

Financial instruments analysis

As a proportion of estimated spend, later stages are more important

across all instrument classes given increased average deal value
Data capture: 02/2022

Estimated % of spend by instrument class by development stage*

(Cortellis Publicly disclosed deals, 2005-2021) [% of spend]

9% 17% Phase 3 Clinical

18%
36% Phase 2 Clinical
28% 17%
31% Phase 1 Clinical
10%
17% Drug discovery &
16% 40% preclinical development
56%
46%
36% 12%
12%
Funding agreement/grant Collaboration Licensing Equity
% of deal count*
Phase 3 clinical 5% 5% 10% 16%
Phase 2 clinical 15% 9% 21% 39%
Phase 1 clinical 9% 7% 12% 16%
Drug
discovery/preclinical 71% 78% 58% 28%
development

Source: Cortellis; L.E.K. research and analysis;

Financial instruments research

Secondary research supports the phase specific trends shown here

Licensing secondary M&A secondary research (equity)

research
% of M&A deals by development stage
% of licensing deals by development stage (2014-18) [% of total deals]
(2018) [% of total deals] Phase 3 Clinical Phase 1 Clinical
18% Phase 2 Clinical Drug discovery &
preclinical
development
12%
Phase 3 Clinical** 15%
16% 13% 14% dev. 20%
Phase 2 Clinical*
6% Phase 1 Clinical
35% 35% 36% 40%
Drug discovery & 32%
preclinical
development
13% 21% 13% 10% 11%
60%

37% 32% 38% 38% 36%

2014 15 16 17 18
Venture capital analysis

Majority of investments occur at drug discovery / preclinical

dev., particularly in the U.S., with investments dropping at Phase
III
Distribution of investments by R&D stages*
Development stage of companies at first investment

Drug discovery /
preclinical Phase I Phase II Phase III
development

European venture firms 52% 18% 24% 7%

U.S. venture firms 81% 8% 9% 3%

A detailed analysis of distribution of investments by R&D stages within

a fund are presented in section 3, Financial investor portfolio
strategy

Percentage of total investments in the region 0-20% 21-40% 41-60% 61-80% 81-100%
 Majority of deals occur in drug discovery / preclinical and phase II, with big pharma focused more later
stages of development

Stakeholder Drug discovery / Phase II Phase III

Phase I Comments
(2020E R&D spend*) preclinical dev. clinical clinical
clinical • Governments and not-for-profits
Government / provide funding to small biotech
Grants through grants, which are typically
not-for-profits used for early stage basic research
R&D Funders and annual spend

($78bn**) (i.e., before drug discovery / preclinical

dev.)
• Biopharma uses collaboration
agreements in earlier stages of
Collaboration development, typically before clinical
development
• Licenses are used by big pharma
predominantly for preclinical
Biopharma License development assets and for Phase
($194bn – II clinical development
includes in- •
Equity Corporate M&A is most common in
house late-stage assets, with big pharma
spend) (M&A) acquiring small, innovative biotech
companies ahead of conducting large
pivotal trials
• VCs usually engage in equity
VC Venture
investment in early drug discovery
investments and pre-clinical development, with
($31bn)
divestment in clinical development
Concentration of funding High Low

Source: Bio Industry analysis; Bay Bridge Bio; Deloitte; Life Science Nation; Evaluate;
L.E.K. research and analysis
115
Investors select the most suitable financial metrics at different stages of the R&D pathway

Typical investment entry Typical investment exit

eNPV
Venture investors

IRR

ROI

Comparables analysis

R&D Drug discovery /

Phase I Phase II Phase III Commercialisation
path preclinical development

Strategic assessment
developers

eNPV
Drug

30

IRR

Typical investment entry Typical investment entry

Degree of utilisation: Low High

Venture investors and drug developers use different valuation methods in
investment decision-making based on how they measure financial returns

Venture investors Drug developers

 For venture investors, ROI is often the most suitable for
fundraising and investment decision-making
 As venture investors exit investments pre-launch, they
assess investments by the value they successfully added
within the investment period in ROI multiples
- this is as opposed to the value the asset
generates throughout its life cycle, which is more
accurately presented by NPV / IRR
 ROI is also more suitable as venture investors often invest at
preclinical development stages, where eNPV values tend to be
negative; PoS values which determine risk-adjusted NPVs are
also difficult to estimate accurately
 For drug developers, eNPV is often the most suitable for
capital allocation and investment decision-making
 The majority of investment risk in pharmaceutical development
is associated with R&D failure, eNPVs are most suitable as
they reflect the risks associated with each stage of clinical
development
 eNPVs are informed by the risk adjustment of the product’s
potential revenue forecast and estimated costs
- as assets progress along the development pathway and
risk of failure lowers, risk adjusted revenues increase and
the amount of remaining R&D cost decreases
Investment requirements for each successful stage transition is the R&D
costs associated with the completed phase of development
Base-case investment requirements by stage of development
Millions of USD
200
180

150

100

Limited utility – included for illustration only

50 49
50
30

12
3 6
1
0
Target-to-hit Hit-to-lead Lead opt. Preclinical Phase I Phase II Phase III Approval
identification development

Source: Abrantes-Metz, Adams and Metz (2004); BioMedTracker (2016); Hay et al.,
(2014); Jayasundara et al., (2019); Prior L.E.K. experience; L.E.K. research,
interviews, and analysis
For each successful stage progression, the return is calculated based on
the change in NPV compared to the prior stage
Base-case risk adjusted NPV based on initial phase of asset
Millions of USD +663
1,000
920

800

600

400 Limited utility – included for illustration only +240

257
200 +35
-4 -5 +6 -1
17
0
-14 -18 -22 -16 -17

-200
Target-to-hit Hit-to-lead Lead opt. Preclinical Phase I Phase II Phase III Approval
identification

Source: Abrantes-Metz, Adams and Metz (2004); BioMedTracker (2016); Hay et al.,
(2014); Jayasundara et al., (2019); Prior L.E.K. experience; L.E.K. research,
interviews, and analysis
Early development is characterized by negative ROI; ROI increases
following initiation of clinical development in Phase I
370%

ROI per successful transition between stages of development

480% Approval

120% Phase III

Limited utility – included for illustration only

-20% Phase II

50% Phase I

Preclinical
-170%
development
ROI increases throughout clinical
-400% Lead opt. development as eNPV increases due to
the decreases in development costs
remaining and the proximity of revenues
Hit-to-lead
Negative ROI in early development is due to
Target-to-hit negative increments in eNPV, driven by large
upcoming costs of clinical trials
identification

Source: Abrantes-Metz, Adams and Metz (2004); BioMedTracker (2016); Hay et al.,
(2014); Jayasundara et al., (2019); Prior L.E.K. experience; L.E.K. research,
interviews, and analysis
Loss associated with negative outcomes can be quantified as sunk costs or
as loss of NPV

Methods for quantifying losses

Sunk R&D costs Loss of NPV

 Sunk R&D costs represent all R&D costs

 Loss of NPV represents the loss of NPV
incurred for an asset to date, including all
of the stage of development that has
earlier trial costs and the cost of the
failed
failed trial

Source: L.E.K. research and analysis

Sunk R&D costs represent the irrecoverable expenditure and increases
with each stage of development
Cumulative sunk costs associated with negative outcomes for a general asset across the development
process
Millions of USD
-1 -4
0 -16 -22
-50
-52

-100
-102

-150

-200
Phase III trials occur the largest costs as
-250 these trials are typically longer and
larger than the prior phases of
-300
development -282

-350 -331
Target-to-hit Hit-to-lead Lead opt. Preclinical Phase I Phase II Phase III Approval
identification development

Source: Abrantes-Metz, Adams and Metz (2004); BioMedTracker (2016); Hay et al.,
(2014); Jayasundara et al., (2019); Prior L.E.K. experience; L.E.K. research,
interviews, and analysis
 Loss of NPV affects assets in lead opt. and clinical development, as NPV
increases with each further stage of development
Base-case risk adjusted eNPV based on initial phase of
asset
Millions of USD
1,000
920

800 Failure to progress when NPV is positive

represents a loss of failure equivalent to the
NPV of the phase that has failed
600

400
Limited utility – included for illustration only When NPV is negative, there is no
loss of NPV for failure to progress 257
200

17
0
-14 -18 -22 -16 -17

-200
Target-to-hit Hit-to-lead Lead opt. Preclinical Phase I Phase II Phase III Approval
identification development
Loss of 0 0 0 0 -17 -257 -920
0
NPV
*

Note: *From failing Phase and not progressing

Source: Abrantes-Metz, Adams and Metz (2004); BioMedTracker (2016); Hay et al.,
(2014); Jayasundara et al., (2019); Prior L.E.K. experience; L.E.K. research, 170
interviews, and analysis
 Different transaction types are leveraged across the development
process, with equity transactions most common in Phase II
Preclinical dev. Phase I Phase II Phase III
NPV - 16 - 17 17
257
Loss of
NPV*
0 0 -17 -
257
Sunk
costs - 22 - 52 - 102 - 282 Comments – number of deals
Funding • Grants are often utilised in early pre-clinical
agreement / development to stimulate academic research in non-
grant competitive areas
• Licenses and collaborations are typically utilized in
Collaboratio pre-clinical and early-stage clinical development
n because it allows big pharma companies to access the
operating model and innovations of small biotech
License • Asset purchases can occur in clinical development, as
big pharma companies are well-placed to conduct
clinical trials
Equity
(biopharma) • Equity investments and corporate M&A activity
increases following human PoC, typically in Phase Ib
and Phase II
VC
• Venture funding uses equity investments in preclinical
investment
development and early stages of development, with
divestments typically occurring post human PoC
>60%
Percentage of deals by instrument by development class** 0-15% 16-30% 31-45% 46-60%

Notes: *From failing Phase and not progressing; **Percentage based on number of deals per
phase per instrument compared to total number of deals per instrument
Source: Abrantes-Metz, Adams and Metz (2004); BioMedTracker (2016); Hay et al., (2014);
Jayasundara et al., (2019); Prior L.E.K. experience; L.E.K. research, interviews, and analysis
 Lower value and lower risk investments typically occur earlier in the
value chain where sunk costs are low and eNPV is negative
Preclinical dev. Phase I Phase Phase III
NPV II -16 -17 17 257
Comments – concentration
Sunk costs -22 -52 -102 -282 of funding
• Government’s and not-for-profits are
not driven by financial returns so will
Government /Grants provide funding agreements and
grants to fill a gap where eNPV is
not-for-profit low / negative
• Collaboration is used to share
expertise
and risk and therefore funding is
Collaboration increasingly common in early
development stages
• Licenses are generally either used at
Biopharma
License preclinical development phases where
upcoming costs are low or after human
POC where eNPV starts to become
Equity positive
(M&A) • Corporate M&A is increasingly common
post human POC, likely driven by
increased PoS and NPV positivity

VC Venture • VCs also invest in early stages to fill

investments a
gap where NPV is low / negative
Concentration of funding High Low •
VCs do not typically invest based on
eNPV and will aim to invest in
companies with higher than average
PoS
Source: Abrantes-Metz, Adams and Metz (2004); BioMedTracker (2016); Hay et al., (2014);
Jayasundara et al., (2019); Prior L.E.K. experience; L.E.K. research, interviews, and analysis
 Investment and divestment decisions differ by funder type based on risk
appetite and internal capabilities
Base-case risk adjusted NPV at the start of the development phase, based on initial phase of asset
Millions of USD
As eNPV of assets and PoS to launch increase,
1,000 920
Big pharma may develop assets from early-stage development until failure, launch, equity investments become more attractive for
or divestment; Big pharma is less likely to acquire early-stage assets due to the big pharma, who have the required capabilities
800
risk associated with negative / low eNPV and PoS of most early-stage assets prior to continue development and commercialisation
to clinical development
600
VCs have a higher risk-appetite, resulting in investments in a portfolio of early-
400
stage opportunities. VCs also likely believe they can select assets with higher PoS 257
200
17
0
-14 -18 -22 -16 -17
-200
Starting phase Target-to-hit Hit-to-lead Lead opt. Preclinical Phase I Phase II Phase III
of asset identification development Approval
Standalone VCs typically divest investments in early clinical development
due to high costs associated with late-stage clinical development, with
sunk costs increasing significantly from Phase II onwards
f
Loss o 0
0 0 0 0 -17 -257 -920
NPV *

Sunk co sts -1 -4 -16 -22 -52 -102 -282 -331

Note: *From failing Phase and not progressing

Source: Abrantes-Metz, Adams and Metz (2004); BioMedTracker (2016); Hay et al.,
(2014); Jayasundara et al., (2019); Prior L.E.K. experience; L.E.K. research,
interviews, and analysis
In R&D funding, drug developers assess scientific basis, risk- adjusted commercial potential and the
ability to achieve funding
Scientific ‘strength’ and
synergies
• Alignment with current
strengths and supporting
therapeutic area leadership is
a key consideration for R&D
investments
Drug developer key drivers of
drug development
Commercial potential / PoS
• Commercial potential,
including risk- adjusted
revenues, can drive R&D
investments and decisions
Ability to achieve funding
• Ability to fund the required
phases of development is an
essential consideration driving
R&D decision making
For financial investors, financial returns and timings of returns are key considerations for R&D
investments

Financial investors key drivers

of R&D investment

Potential for short-to-medium Financial returns / commercial Alignment with strategic

term returns potential priorities
• Many VCs operate in 10-year • Financial returns, linked to the • Financial investors at big
cycles, resulting in a need commercial potential of the pharma companies highlight
for short-medium term opportunity, are key to investors the importance of strategic fit
returns
when considering R&D
invetsments
Big biopharma minimise risk by focusing on internal pre-clinical assets and late-stage
external opportunities
Pre-clinical development Early-stage clinical Late-stage clinical development Launch
development
Failure Failure
Big biopharma Failure
Co
Asset sale mm
erci
alis
atio
n
R&D Funders

Failure
• Big biopharma can develop assets from early pre-
clinical through to commercialisation Co
• These assets can fail at each stage of mm
development erci
• Big biopharma can extract value by divesting these alis
• Big biopharma also acquires assets entering into
assets in early development if data readout atio
late-stage development
43
suggests the asset is not efficient in core n
• Big biopharma is well placed to conduct late-stage
strategic areas, but shows promise in non-core clinical development assets
areas

External investment Internal investment

Source: L.E.K. research, interviews, and analysis

Innovative biotech can extract value at many different stages of the value chain and can
ultimately go-it-alone if possible
Pre-clinical Early-stage clinical Late-stage clinical development Launch
development development
Failure Failure
Innovative Failure
biotech Co
Asset sale / mm
license erci
alis
atio
n
R&D Funders

Innovative biotech companies include Asset sale /

privately-held VC-backed companies
license

• Small, innovative biotech companies can develop assets from early pre-clinical
development through to commercialisation
• Assets can fail at each stage of development, resulting in a loss for the
company 44
• Innovative biotech can earn a return on their investment through an asset sale
or license at each stage of development
• Companies can also continue development through to commercialisation and
launch

External investment Internal investment

Source: L.E.K. research, interviews, and analysis

VCs invest in pre-clinical or early-stage companies and earn a return on investment
when these companies IPO or are acquired
Pre-clinical development Early-stage clinical Late-stage clinical development Launch
development
Failure
Venture capital
Failure
IPO
Company
sale
R&D Funders

• VCs typically invest in early research opportunities

• These opportunities can fail in pre-clinical or early-clinical development
• VCs typically extract value by divesting the company through IPO or company sale
⁃ divestment typically occurs in early-stage clinical development, ahead of the high-
cost late-stage clinical development stages, with big pharma typically better
equipped to conduct late-stage clinical trials 45

External investment Internal investment

Public sector funders typically provide early-stage funding; funders do not necessarily
earn a return from their investment
Pre-clinical development Early-stage clinical development Late-stage clinical Launch
Public sector development
Failure
funders Failure
Company / asset
sale
Failure
Company / asset
sale
R&D Funders

• Public sector funders typically provide funding to early-stage research or early-stage

clinical development in smaller pharmaceutical companies or academic
institutions, though funding can continue into later stages of clinical
development 46
• Once assets progress to later stages of development, big pharma will engage with the
smaller pharma companies for company / asset sales or licensing
• Public sector funders to do not usually gather a return from the funding provided

External investment Internal investment

Source: L.E.K. research, interviews, and analysis

VCs and public sector funders are the main investors in early-stage external opportunities; big
biopharma are the key late-stage investors
Pre-clinical development Early-stage clinical development Late-stage clinical Launch
development
Failure Failure
Big biopharma Commercialisation
Failure
Asset sale
Failure Commercialisation
Innovative
biotech Failure Failure Failure
R&D Funders

Commercialisation
Asset sale / Asset sale /
license license

Venture capital Failure

Failure
IPO
Company
sale 47
Public sector Failure Failure
funders Company / asset
sale
Failure
Company / asset
sale
External investment Internal investment

Source: L.E.K. research, interviews, and analysis

VCs, public sector funders and innovative biotech are key funders in early-stage
development; big biopharma are the key late-stage players
Pre-clinical development Early-stage clinical development Late-stage clinical Launch
development
Commercialisation
Big biopharma
Internal funding for
internal R&D Asset sale Big biopharma
Early-stage divestment
of asset to another big Commercialisation
pharma Late-stage asset or
License /
company acquisition
collaboration
R&D Funders

Public sector Early-stage license /

funders collaboration between big
pharma and biotech Asset / company
Innovative purchase and
biotech External funding license
for internal R&D Commercialisation
48

IPO / company IPO funds flow to Direction of

VC and to company flow of funds
M&A
undergoing IPO
Venture capital
External asset

Internal asset

Source: L.E.K. research, interviews, and analysis

6. Case studies

229
The case studies show different development
archetypes are mostly combined
Drug Development Archetype
Industry / NGO
• Vertex developed in-house with financial support from Cystic Fibrosis collaboration
Kalydeco*
Foundation Biopharma in-
house
• Avexis in-licensed rights to use ReGenX’s rAAV9 vectors to develop Asset in-licensing Big pharma M&A
Zolgensma* SMA therapies; Avexis took Zolgensma through to phase III before being
acquired by Novartis Biotech go-it-alone

Small biopharma go-it-alone In-licensing

• Genmab took Darzalex through to phase I before Janssen entered a co-
Darzalex
development agreement and then in-licensed the product Industry-industry collaboration

• Children’s Hospital of Philadelphia (CHOP) took Luxturna through to

Luxturna phase III before spinning out Spark who took it through to market before Academia go-it-alone In-licensing Biotech go-it-alone
being acquired by Roche; Novartis in-licensed ex-U.S. rights
M&A

• Merck & Co. acquired Schlering-Plough and inherited Keytruda; Merck & Big pharma M&A
Keytruda
Co took Keytruda through development and to market Big pharma in-house

• Kite collaborated with National Cancer Institute for preclinical Biotech – Academia
collaboration Big pharma M&A
Yescarta development; then carved out the relevant IP and took Yescarta
through to phase II before being acquired by Gilead Biotech go-it-alone

230
 Darzalex is the first-in-class anti-CD38 biologic, first approved in the treatment of refractory multiple
myeloma
Name Darzalex (daratumumab) Preclinical
(INN) Phase I Phase II Phase III Commercialisation
development

Trial start
2008 2011 2013 2014 2015
year

Owner Genmab Genmab / Janssen Janssen

Janssen in-licenses and U.S. orphan and Janssen in-licenses

rights to develop five EMA
enters co-development breakthrough application
Owner Janssen (Johnson and agreement with therapy designation assets, including
Johnson) Genmab’s Darzalex for Darzalex using
$1.2bn Halozyme
EU orphan Therapeutics’ Enhanze FDA FDA EMA conditional EMA
Origination Small / medium biopharma designation platform application approval marketing approval approval
Route to Industry-industry
market collaboration, transactional
(in-licensing)
Year 2006 2008 2011 Aug May Jul Sep

Jun Oct Dec

Funding Big pharma internal
Feb Jul Mar

Preclinical
Nov
Phase II trial Phase
Mar III trial starts
May Jun
Genmab Phase III (POLLUX)
development announces starts Apr 2012 2013 (ALCYONE) 2013 2013 2014
data announced
studies begin preclinical (SIRIUS)
2014 2014 2015 52 2015 2016 2015
development data; 2016 2016 Phase III trial2016 Phase II 2017
Phase III trial starts results
Transactions and agreements starts phase I trial
starts (POLLUX) (CASTOR) announced Phase III (CASTOR)
data announced
Development milestones First patent submission^

Approval / designations
 Darzalex is expected to achieve $9.3b sales worldwide by 2026, driven by launch of a SubQ formulation
and possible additional indications

Darzalex historical and forecast revenue (2015-26F) ROW

Millions of USD Forecast Europe
10,000 9,344 US
8,514
7,672 19%
8,000 19%
6,733
19%
6,000 5,736 19% 28%
4,863 28%
19% 28%
4,190 28%
20%
4,000 22% 28%
2,998 28%
2,025 25% 52%
2,000 53% 53%
1,242 53% 53%
572 53% 53%
20 71% 59% 52%
0 100% 82%

Year 2015 2016 2017 2018 2019 2020 2021F 2022F 2023F 2024F 2025F 2026F

Darzalex Year Indication approved^

FDA EMA Faspro - SubQ
approval approval formulation 2016 Monotherapy for double refractory multiple myeloma
approved
SubQ phase III trial 2017 Combination with dexamethasone and lenalidomide
(COLUMBA) or bortezomib 53
initiated Halozyme received
Transactions and agreements $45m in milestone
2018 Combination with pomalidomide and dexamethasone
payments for subQ
Janssen enters collaboration trials with launch
Development milestones Genentech, Amgen and BMS for
combination therapy in multiple
Approval / designations cancer indications*