2012 perspective, published March 21st 2012

Gearing up life sciences innovation to todays economic twist

G. Theze Msc. MBA
The previous dramatic pharmas trouble to struggle with was the difficulty to rejuvenate products pipelines (patent cliff and innovation gap). Now, current economic downturn is forcing countries to contain health care expenditures. This new trend consists in a new challenge that life sciences innovation companies have to adapt to. The objective of this work using lean modeling methods is to identify dawning responses to this new situation. Impact of change Seven cases have been analyzed. Each is defined by pipeline profile of 20 projects (from preclinical to phase III clinical project) with external factors as price, trial cost, attrition rate and market drop-out rate. Cases simulation is performed on a 20 years basis (cf modeling method). These cases represent several drug development strategies and have been analyzed with previous economic model (1990s) and current model (2012). Results : when we look at this exploratory results (figure 1), life science innovation model stays attractive. Noticeable issue for biotech is phase II pipeline size regarding current attrition rates. In fact with 7 phases II projects the company has great probability to put a product on the market, inversely smaller biotech firms chances are limited to phase II pipeline size. The Pharma, Biotech and Mee-too models are heavily affected by new government policies as shown by the slide movement from upper left corner to bottom right corner. It is especially true for the Mee-too model of drug development which seems jeopardized by new measures (comparative trials which lead to huge clinical trials, price rebate, and generic competition). Findings : To preclude value erosion innovative companies will continue to have cost containment strategies (access to university basic research, CROs, shared protocol) Me-too development needs new statistical methodology to be attractive again or will shift to life cycle management (me-too development in princeps drug near indications) Personalized medicine seems a robust model of development despite some limits [1] furthermore monoclonal antibody strategy has a high success rate with still today an investment barriers (cost of phase III) preventing biosimilars entry. Statitec is delivering clinical study methodology, health economics and trial conduct with an extensive experience in oncology, immunotherapeutics and epidemiology.

Figure 1 : Cases mapping by Internal Return Rate (%, EBITDA computed as net benefit cash flows) and time to break-event (debt=0, expressed in years).

Oncology drug development is very effective nowadays because trials are beginning in phase II precluding healthy volunteers trials. In addition oncology product approval rate is stable. The oncology personalized medicine seems robust as it really cuts the cost of clinical development. With the idea that as patient will more benefit of the treatment; usual average drug turnover is expected. Biomarker diagnosis development model has been investigated as well and it appears that this approach is yielding to so much profits for oncology drug developments that pharma companies should be keen on paying the diagnosis test to patients in exchange of state treatment reimbursement.

Statitec perspective paper, March 21th 2012

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goulven.theze@statitec.com

Value based medicine Pharmaceutical companies Value based medicine is now a well understood concept [2] . It is encompassing health benefit and savings during the full cycle of care. The question towards this concept is what will be the current health actors strategies to respond to this new paradigm ? To envision this setting 4 situations have been analyzed : Government First situation : a country invests per year 30 billion in drugs and pharma industries earn 9 billion profit per year (top left corner). Second : the country applies value access strategy leading to prices drop. Investment in drugs drops 20 billon and pharma profits decrease to 6 billion (bottom left corner). Third : the country doesnt change the model the pharma industries adopt value based pricing : drugs cost is dropping whereas pharmas strategy change is not rewarded. Payoff are similar to previous strategy (top-right corner). Fourth situation : country rewards value based strategy (specific incentives : pricing, public R&D access, taxes credit) thus the country invest directly and indirectly 25 billion in drugs and pharmas earn 9 billion (bottom right corner).

Payoffs (Billion )

No change

Value based strategy

No change

-30,9

-20,6

Value based access strategy

-20,6

-25,9

As we take a look on this setting no clear coordination appears. Nevertheless if we solve this equation it is possible to find a mixed strategy equilibrium, where pharmas will play of the time the No change strategy and of the time the Value based strategy whereas government will merely play of the time the No change strategy and of the time the Value based access strategy.

Results : Building coordination between government and pharmaceutical companies is a current challenge. Reshaping incentives to converge to a win-win situation will be an important milestone to bolster value in medicine (as per Porters definition) and trigger collective intent to tackle huge public health problems. Chronic diseases increase and healthcare cost ballooning far from behind patient willingness to pay still acute unresolved issues. Nevertheless in that particular setting a mixed strategy equilibrium emerges where rate in front of different strategies could be used as a pipeline management tool : of the portfolio will be classically managed (R&D, clinical development, P&R strategy) and managed with a value based mind set (full cycle of care).

Findings : Use the policies trends to shape or fine tune innovation model Policies expectations to be included in clinical development strategy Sensitivity analyses to policies trends could be used to assess the resilience of an innovation model

Statitec perspective paper, March 21st 2012

www.statitec.com

goulven.theze@statitec.com

Modeling method [A] [1] success rate per year 0,2 0,3 0,2 0,3 NA failure rate per year 0,75 0,65 0,25 0,15 0,1

cost/year M pre-clinical project Clinical phase I Clinical phase II Clinical Phase III Market 10 2 5 150 10

duration 1 1 2 4 5

attrition 0,2 0,3 0,4 0,6 NA

Cases pre clin P1 P2 P3 Market Product expected turnover/year Market failure/year Phase III cost/year

Pharma Pharma Biotech Biotech 1990 2012 1990 2012 0 0 10 10 5 5 0 0 800M 0,1 150M 5 5 0 0 700M 0,2 150M 10 10 0 0 10 10 0 0

Me-too 1990 0 0 10 10 0

Me-too 2012 0 0 10 10 0

Onco 0 0 20 0 0

Onco personalized 0 0 20 0 0

Biomarker diagnosis 0 0 0 20 0

800M 0,1 150M

700M 0,2 150M

800M 0,1 150M

500M 0,2 200M

700M 0,2 150M

700M 0,2 100M

100M 0,3 25M

Statitec perspective paper, March 21st 2012

www.statitec.com

goulven.theze@statitec.com

Model responses: The model computes the pipeline evolution during 20 years. This evolution is monitored thanks to the 1st graph where the numbers of different projects and evolution during 20 years is represented. The second graph shows the turnover when a product is on the market. The turnover minus the cost of sales and R&D expenses permits to compute the EBITDA of the company (Earnings Before Interests, Taxes, Depreciation and Amortization). The third graph is the business model of the case with EBIDTA flows per year and sum of the EBIDTA flows during the 20 years period. These information permits to compute internal return rate (IRR) with EBITDA considered as net benefit cash flows. Time for company to meet the break-event (debt=0) is calculated as well. Both values are used to draw the map on the first page.

Statitec perspective paper, March 21st

2012

www.statitec.com

goulven.theze@statitec.com

Cases model responses

References for this work : [1] JC Davis, L Furstenthal , AA Desai, The microeconomics of personalized medicine: today's challenge and tomorrow's promise. Nat Rev Drug Discov. 2009 Apr;8(4):279-86. Epub 2009 Mar 20. [2] Michael E. Porter, Ph.D., What Is Value in Health Care? N Engl J Med 2010; 363:2477-2481December 23, 2010 Report : [A] Burril and Company Biotechnology Report, 2006

Statitec perspective paper, March 21st 2012

www.statitec.com

goulven.theze@statitec.com