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New Business Models forBreakthrough Growth

The Next-GenerationPharmaceutical Value Chain An Arthur D. Little Industry Forum

About Arthur D. Little

Arthur D. Little is one of the worlds premier consultingfirms, with offices and laboratories in 30 countries aroundthe world. We use innovation to help leading organizationsachieve rapid growth and breakthrough results. Arthur D.Little offers an unparalleled breadth of expertise in creatingstrategy, developing innovative technologies, managingorganization to create lasting value, and helping companiesimplement e-business strategies to transform themselves inthe new economy.

For information on Arthur D. Littles Healthcarepractice, please contact:

Louise Firth

Vice PresidentArthur D. Little, Inc.Acorn ParkCambridge, MA 02140-2390Telephone (617) 498-5937Fax (617) 498-7260E-mail firth.l@adlittle.com

The Next-Generation Pharmaceutical Value ChainAn Arthur D. Little Industry Forum

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Innovation and technologies with the power to disrupt marketsand traditional patterns of competition are changing the faceof healthcare. The winners in the future will be those companiesthat invent new business models to achieve breakthrough growthfor healthcare products.

Arthur D. Little invited a group of leaders from biotechnologyand pharmaceutical companies to gather in New York to explore"New Business Models for Breakthrough Growth: The Next-Generation Pharmaceutical Value Chain." Two days of workingtogether produced thoughtful answers to questions like these:Can pharmaceutical companies make the technology shiftnecessary to maintain their competitive positions? Will biotechand emerging pharmaceutical companies remain independentand become new leaders in healthcare markets? Can trulycollaborative alliances create win-win situations for thepartners?

We value the insights of our industry colleagues who areachieving competitive advantage through new business modelsand alliance strategies. We thank them for their time and goodcounsel and we look forward to a continuing dialogue.

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Jan A. Buck

Director, Global Healthcare PracticeArthur D. Little, Inc.

Craig Carlson

Director, Corporate DevelopmentArthur D. Little, Inc.

Richard H. Douglas

Senior Vice President,Corporate DevelopmentGenzyme Corporation

Louise Firth

Vice President and Director,Global Healthcare PracticeArthur D. Little, Inc.

David J. Gury

Chairman, President, andChief Executive OfficerNabi

David P. Holveck

Company Group ChairmanCentocor, Inc.

Pamela McNamara

Vice President and Managing DirectorGlobal Healthcare PracticeArthur D. Little, Inc.

Jay B. Pieper

Vice President, Corporate Developmentand Treasury AffairsPartners HealthCare Systems, Inc.

Richard F. Pops

Chief Executive OfficerAlkermes, Inc.

Kevin Rakin

President and Chief Financial OfficerGenaissance Pharmaceuticals, Inc.

Barry Ross

Chief Executive Officer andScientific DirectorAffymax Research Institute

Vicki L. Sato

PresidentVertex Pharmaceuticals, Inc.

Victor W. Schmitt

President, Venture ManagementBaxter Healthcare Corporation

Mark Skaletsky

President and Chief Executive OfficerGelTex Pharmaceuticals, Inc.

James R. Utaski

Partner, Whitestone Capital LLCPresident (Retired), Johnson & JohnsonDevelopment Corporation

Joel Yanowitz

Vice PresidentArthur D. Little, Inc.

Ron Zwanziger

Founder, Chairman, andChief Executive OfficerInverness Medical Technology, Inc.

The Participants

Mastering ChangeThe Power of Innovation

Innovation and technologies with the power to disruptmarkets and traditional patterns of competition are changingthe healthcare industry. New therapies, next-generation drugdiscovery tools, and the unfolding promise of genomics haveattracted enormous investments in biotech companies.Meanwhile, most large pharmaceutical companies, facedwith patent expirations and R&D organizations unable toprovide enough new products to sustain growth, are facingsingle-digit growth rates over the next five years. Here is thereality of todays industry:

The biotech companies need deep pockets and big-company market know-how to help with late-phasedevelopment and bring new products to market.

The large pharmaceutical companies need innovativeproducts to create a clear path to sustainable growth.

If mergers between the big and small, the old and new,arent always the answerand frequently they are not, whatis? What new business models have the greatest power todrive growth and create step-change improvements in valuecreation?

Companies able to exploit these new technologiesfrominnovation through product development and commercial-izationwill grow more rapidly and displace the leaders. Ithappened before and it is happening again. The keys to suc-cess include understanding the potential of revolutionaryversus evolutionary technologies and knowing how to cap-ture the value of that innovation, at the research level and allthe way through an organization to strategy and operations.The winners will be those companies that use this knowledgeto invent new business models to achieve breakthroughgrowth for healthcare products.

Such were the observations of decision-makers from biotechfirms, pharmaceutical companies, and healthcare providerorganizations who met for two days with Arthur D. Little(ADL) health industry specialists at the companysInnovation for Value Creation Forum in New York City.

The Next-Generation Pharmaceutical Value ChainAn Arthur D. Little Industry Forum

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Winners willinvent

new business models

to achieve breakthrough

growth for healthcare

products.

The Changing Face of Healthcare

The economics have changed.

While the Forum participants approached the chal-lenge of disruptive changes in their industry from wherethey satbiotech, big pharma, or medical devicestheyagreed that the fundamental healthcare economics thatdrive the traditional business model for the pharmaceuticalindustry are changing. Vicki Sato, President of VertexPharmaceuticals, explained: All the value-added economicsof pharma have traditionally come at the end of the valuechain, because the odds have been so bad that a compound

will actually make it. Companies get discounted allthe way through, until they make it to the end,because nobody believes theyre actually going tomake it to the end. If technology can have a signifi-cant impact on the R&D process earlier on, is itpossible to build a business model in which thepoint of profitability, if not shifting sharply, canat least move further from that end point?

In fact, can companies actually grow at a rate andpace that allows them to capture value from gen-

uine technological innovation as well as genuine productdevelopment and commercialization? A major part of theproblem is big pharmas inability to bring new technologiesand new therapies to market at the rate and quality thatshareholders have come to expect from them. This, saidPam McNamara, is one of the seismic shifts under way inthe industry. McNamara, who hosted the Forum, is aVice President and Managing Director of ADLs GlobalHealthcare Practice. Innovation and productivity problemsin research and development, as well as the growing com-plexity of drug research, have created these challenges. Arewe looking at a future of more blockbusters, or a future ofmore personalized medicine made possible by advances ingenomics? Another problem is big pharmas ability to screenwhats coming, whats attractivetheir ability to capturepotential value.

To capture value, companies must not only recognize thepotential of a new technology or innovation, but also createthe organizational screens to capture it. As Victor Schmitt,

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Vicki Sato

Vertex Pharmaceuticals

President of Venture Management at Baxter HealthcareCorporation, noted: Almost by definition, a disruptivetechnology will fail to get picked up by all ofthe traditional screens that a company uses toevaluate where to invest. We are really tryingto understand how you figure out what to dowith the most innovative technologies, theones we typically call disruptive. Its not aneasy problem.

This has been particularly true of geneticvariation. It was first viewed as an innovationthat would not play a significant role. Peoplethought it would make markets smaller, as each newdiscovery would be tailored to specific groups or individu-als, said Kevin Rakin, President and CFO at GenaissancePharmaceuticals. Now it is seen as the very future ofmedicinethe ultimate in disruptive innovations.

Disruptive technologies transform markets.

The history of business is replete with examples of manage-ment that made gradual, evolutionary changes to sustaintheir companiesonly to lose the war to more disruptive,revolutionary technology. Witness the DEC mini-computervs. the PC, integrated steel makers vs. mini-mills, and RCAand others vs. the Sony transistor radio. Trulydisruptive technology changes the fundamen-tal value networks in an industry and brings innimble new players. Witness what is happen-ing in the healthcare industry.

Advances in mapping and sequencing thehuman genome, along with continuing break-throughs in proteomics and cell biology, arehaving a revolutionary impact on healthcare.These innovations have given us a greaterunderstanding of disease and medical conditionsand howwe might treat or prevent those conditions. They have alsoturned the healthcare industry on its head. By definition,said Joel Yanowitz, the Forum moderator, disrupti