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Reinnovation and reinvention

Reinnovation and reinvention. MBC Finance Committee “ The Evolution of the Biotech Business Model” Gautam Jaggi, Ernst & Young October 24, 2008. Product safety incidents in the. ?. ?. ?. rising China market. ?. ?. Government negotiation of .

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Reinnovation and reinvention

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  1. Reinnovation and reinvention MBC Finance Committee “The Evolution of the Biotech Business Model” Gautam Jaggi, Ernst & Young October 24, 2008

  2. Product safety incidents in the ? ? ? rising China market ? ? Government negotiation of drug prices under MMA returns to public policy debate Is a pattern emerging? Big pharma companies announce layoffs, restructurings Stock buybacks Velcade gives NICE an unprecedented money-back guarantee ► Safety concerns take bite out of product sales FDA NME approvals fall to lowest level in over 25 years Creative deal structures ► R&D ► more pricing pressures emerging $ ► € ► ¥ ► £ FIPNETs FDAAA π? REMS M&A ► ► The mega deal… is back Biotech companies retain more rights in deals 8% ► ► Big pharma’s search for pipeline productivity propels a booming deal environment ► ►

  3. Product safety incidents in the ? ? ? rising China market ? ? Government negotiation of drug prices under MMA returns to public policy debate Reinvention The drug industry is being reinvented by three sweeping trends: Big pharma companies announce layoffs, restructurings Stock buybacks Velcade gives NICE an unprecedented money-back guarantee ► Safety concerns take bite out of product sales FDA NME approvals fall to lowest level in over 25 years Creative deal structures ► R&D ► more pricing pressures emerging $ ► € ► ¥ ► £ FIPNETs FDAAA π? REMS M&A ► ► The mega deal… is back Biotech companies retain more rights in deals 8% ► ► Big pharma’s search for pipeline productivity propels a booming deal environment ►Personalized medicine ►R&D productivity ► ►Globalization ►

  4. 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

  5. The first driver of reinvention: R&D productivity

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

  7. The inertia of size Structure and incentives drive conduct and performance Source: Ernst & Young

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

  9. The second driver of reinvention: Personalized medicine

  10. Personalized medicine: why now? Safety concerns • Targeted approaches • Less misdiagnosis, fewer adverse events Move from efficacy to efficiency in drug development and healthcare delivery Pricing pressures • Smaller clinical trials • Cheaper drug development R&D productivity • More efficient identification and development of drug targets Source: Ernst & Young

  11. Challenge 1: end of the blockbuster model Source: Ernst & Young

  12. Rx Dx 3x • Targeted therapeutics for more efficient treatment of disease • More efficient drug development with smaller, cheaper clinical trials • Diagnostics for more efficient: • Prediction • Diagnosis • Dosing • Monitoring • Lower healthcare costs from new efficiencies • Incentives and metrics to support the economics and ROI for investors: • Better pricing for diagnostics • Reimbursement based on value • Measures across healthcare system Challenge 2: making the numbers work Source: Ernst & Young

  13. The third driver of reinvention: Globalization

  14. Drivers and limitations ? Source: Ernst & Young

  15. Globalization:the challenge of the next billion consumers Per-capita income thresholds: Market size/potential: 1.5 b patients Mature markets with slow growth potential US$20,000 “The next billion” Emerging markets with high growth potential 1b patients US$3,000 “The unserved base” US$30b market US$65b by 2017 4b patients 6b patients by 2017 Source: Ernst & Young and International Finance Corporation (IFC)

  16. The shape of the future: changing business models

  17. Changing business models Personalized medicine changes the nature of competition Present state Source: Ernst & Young

  18. Changing business models Personalized medicine changes the nature of competition Future state Source: Ernst & Young

  19. Sales and marketing Manufacturing Late development Early development Research Changing business models Personalized medicine redistributes value in the value chain Value accrues to innovation 100% Sales and marketing 80% Manufacturing 60% Late development 40% Early development 20% Research 0% Current state Future state - personalized medicine Source: Ernst & Young

  20. Big pharma’s challenge: maximize the portfolio

  21. Biotech’s challenge: survive and retain options

  22. The need for new models Pharma Biotech R&D • Take on more core risk • Boost productivity • Remain innovative Operations • Adapt to smaller scale • Variabilize fixed costs • Tap networks • Value chain specialization / non-FIPCO models Capital formation & efficiency • Efficient allocation & deployment of capital • Access capital with less dilution Deals • Portfolio approach • Manage risk • Retain control & rights • Higher share of value Source: Ernst & Young

  23. Opportunities for companies Biotech Pharma More flexibility Creative deals Minimize P&L impact of investments Pharma’s imperative to fix R&D product-ivity Biotechs gaining more bargaining power Greater rights retention Accept more risk to increase potential upside Greater share of value produced Acquire culture, not just pipeline Source: Ernst & Young

  24. Biotech Pharma 1 Pharma 2 • Leaner FIPCOs: less infrastructure required • Value-chain specialization • Becoming FIPCOs less imperative with higher royalties, co-promotion rights • Some successfully reinvent R&D • New Models: • More risk accepting in R&D • Leaner sales • More networked • For those that don’t succeed at reinvention: • Core strengths are lower-margin • Competition from emerging markets • De facto CROs or CMOs? Models of the future Source: Ernst & Young

  25. 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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