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Graduate study in

Wireless Health

Value Chain and Business Models

Alex Gerwer

Principal PartnerAKN

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2011 Case Western Reserve University

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Agenda: Introduction

The State of Pharma industryBrief History of Biotech Industry

Pharma/Biotech Models

Diagnostics Models

Medical Device Models

Convergence Examples

The Impact of Healthcare Reform

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Agenda: Introduction

The State of the Pharma industryBrief History of Biotech Industry


Diagnostics Models




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Michael Porters Value Chain

Source: Porter, Michael E. Competitive Strategy. New York: Free Press, 1980.

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Objectives of a Value Chain Optimizing the overall activities of firms working

together to create bundles of goods and services

Managing and coordinating the whole chain fromraw material suppliers to end customers, ratherthan focusing on maximizing the interests of oneplayer

Developing highly competitive chains and positiveoutcomes for all firms involved

Establishing a portfolio approach to working withsuppliers and customers; that is, deciding which

players to work with most closely and establishingthe processes and information technology (IT)infrastructure to support the relationships

Source: Blackwell, Gordon. Pharmaceutical Distribution: The Supply Chain.

Westborough, Massachusetts: D&MD Reports, 2000. .

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Essential Components of a Value Chain Dedicated asset investments in ones supply

chain partners in order to increaseproductivity.

Dedicated managers and account representativeswho accumulate substantial understanding andknow-how through longstanding relationships withtrading partners.

The development of capital investments tailored andcustomized to a specific trading partner.

Effective management of knowledge andknowledge flows among trading partners.

Requires sharing of information (both explicit andtacit knowledge) rather than secrecy.

Suppliers provide input to product development andprocess improvement initiatives.

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Essential Components of a Value Chain

Trust among trading partners.

Selection of suppliers based on their capabilities and

track record for performance (rather than competitivebidding) and previous contracting relationships.

Establishment of long-term contracts.

Stability of employment of managers involved in

contracting.

Extensive two-way communication.

Financial investments in one another.

Evaluation of the relationship on a broader scalethan just unit price of inputs.

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Healthcare Value Chain

What is lacking, however, is a coordinated effort among theseparties, widespread strategic alliance formation, knowledgesharing, inter-firm trust, and competing value chains oriented todelivering the greatest customer value at lowest total cost.

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The Healthcare Value Chain is Flawed

Products are often ordered by workers on the front line ofhealth care delivery Purchasing is thus not an organizational competence, let alone a core

competence, but rather the domain of non-businesspeople

Products are ordered in a way that maximizes their availability whenneeded, rather than minimizes the costs of holding inventory

Product demand is thus based heavily on the clinical preference ofphysicians rooted in their medical training, not on any formal cost-benefit analysis or budgetary constraint.

Providers typically have nonprofit ownership

Professional training in procurement and logistics has never been ahallmark among providers, given the prominent role of clinicians andtheir preferences for branded items.

Since a heavy portion of provider revenues flow from federal and stategovernments, some believe providers have developed a welfarementality rather than a strong profit-and-loss mindset.

Despite all of the consolidation, it is still a fragmentedindustry with no real leadership at any stage.

Providers have historically made their technologicalinvestments in patient care rather than information systemsand infrastructure.

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How the Healthcare Value Chain is

Impacted by a Lack of Information Information on the value or cost added at each

link is severely lacking.

The lack of information on product value/costamong producers makes meaningfulknowledge sharing is impossible.

Multiple links may perform duplicative

functions or wasteful, nonvalue addingfunctions due to either the lack of informationor the reluctance to share information.

The supply chain acts more to push productsdown the chain rather than pull them from thecustomer, due to the lack of information at theprovider level at the point of consumption.

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What is Needs to be Addressed ToRealize a Functional Healthcare ValueChain

Paper shuffling (manual requisitions and purchase orders,paper-based pricing information)

Lengthy product ordering and delivery cycle times Multiple product handling activities

Excessive inventory carrying costs

Lack of information sharing among trading partners

Little information on product location

Little information on product utilization

Operational (rather than customer) focus

Pressure from managed care organizations to cut short-termcosts

Lack of trust between trading partners Lack of complete implementation of electronic commerce

EHCR. Efficient Healthcare Consumer Response: Improving the Efficiency of the

Healthcare Supply Chain. Chicago: American Society for Healthcare Materials

Management, 1996.

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Segments of the Biomedical Industry

The biomedical industry is composed of four primarysegments, long regarded separate and distinct, but which inthe 21st Century should be considered as fundamentally

convergent and increasingly interrelated. The pharmaceutical segment is the industrys mainstay and

is composed of large, fully integrated, global players.

The biotechnology segment is an upstart, having emergedcommercially only 30 years ago, but is increasingly the

engine of innovation in biomedicine. The medical device segment is much older than biotech, but

is composed of many fewer players, and owing to the natureof its products, exemplifies the life-saving power ofconvergence: a marriage of engineering know-how andbiomedical science.

The diagnostics segment has grown up along mainstreampharmaceuticals, and has acquired a new dynamism andcentrality since the advent of the genomics revolution.

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is Creating Three Fundamental

ChallengesUS 510(k) reforms

Pricing pressures

Slowdown inproduct

approvals

Regulatoryopaqueness

Capitalcrunch

IPOs all but disappear

Regulatoryreforms in manymarkets

Device tax in UShas high burden

for emergingcompanies

Comparative effectivenessresearch

Hospitals understrain

Safetyconcerns grab

limelight

Slower growthin mature

markets

M&A buyerswant

commercializedproducts

Risk aversion

SunshineAct

Health carereform measures

enacted

Consolidationof purchasingat hospitals

Rapid growthopportunities in

emerging markets

Electronichealth

recordsadoption

Lower P/Eratios

IO

Mlist

Sustaininginnovation

Delivering

valueandoutcomes

Fuelinggrowth

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Sustaining Innovation: A Unique

Innovation Model for a Unique Industry

Source: Ernst and Young

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Delivering Values and Outcomes:Increased Scrutiny is Coming toMedtech

Hospitalsconsolidating

purchasingdecisions

Fewer medtech suppliersin each product category

Demonstrating superiorityto competition is critical

Comparative

effectivenessresearch

Medtech products clearlybeing targeted (IOM list)

Possible

changes toFDAclearanceprocess

More products subject toPMA instead of 510(k)

Higher bar to bringproducts to market

Increased focuson comparative

effectivenessand healthoutcomes


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Growth From Diversification:

Geographic Diversification

Latesttechnology andfeatures

Fewer featuresEfficacy at

attractive pricepoint

Mature-marketproduct

Emerging-marketproduct

Whittle-down innovation

Trickle-up innovation


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Growth From Diversification:

Offer Diversification Reduce inventory holding/management costs across supply chain,

sharing gains with hospitals and payers

Customer needs addressed: Just in time supply, reduced total cost ofcare, supply chain visibility

Support hospitals and ASCs in improving the efficiency of theirprocedures in the OR and beyond

Customer needs addressed: Increased number of procedures /revenue, decreasing total cost of care

Collaborate with practitioners to develop an end-to-end solution for thecare of patients, emphasizing prevention, quality patient outcomes

(documented with data), and recovery Customer needs addressed: Focus on outcomes, right device for right

patient, holistic care solutions

Lead the industry in taking an active approach to managing spending in

conjunction with hospitals and payers

Customer needs addressed: Improved alignment with payers, costsavings, working capital benefit, total cost of care

Sharing supplychain benefits

Efficient clinicaloperations

Leading withoutcomes

Managing device

benefits

Partnering forshared market

success

Develop go-to-market campaigns in partnership with hospitals

Customer needs addressed: Share of voice/ market awareness

1

2

3

4

5


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No Price Too High for Extending Life

Public response to industryinnovations follows a steepindifference curve. This means thataffluent consumers are willing to

pay higher prices (p) forincremental increases in quality(q). Put another way, the explosivedemand for innovative biomedicalproducts is essentially independentof pricing, and is driven insteadmainly by demographics.

Indifference to cost for incrementalimprovements in outcome may notbe feasible in the long run for allhealth products, but it does suggesthigh future consumer demandamong affluent populations for

predictive, preventive andpersonalized medicine products andtreatments.

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Commercialization Brings it All Together

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Commercialization in the Lifesciences

Industry is Distinctive Biomedical products navigate through a

complex value chain of institutional interests

and issues before finding commercial success. Characteristic of the industrys products is the fact that

end-users or customers (patients) do not directly pay forproducts they use, nor do those who provide the product(doctors and hospitals)

The ultimate payers -- insurers and governments -- interactwith industry participants, and will do so increasinglyowing to the current cost crisis in U.S. healthcare.

Personalized medicine solutions the next great wave of

industry innovations -- potentially provide a way out of thecrisis.

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Lifescience Business Models are

Constantly Evolving The pharmaceutical and medical device sectors have

operated with fairly consistent business models.

Biotechnology models have been evolving constantly,

as companies search for the best way to capture themost value from their innovations.

Companies have experimented to compete in differentspaces within the value chain, from producers ofresearch and tools to full vertical integration.

Because innovation is at a premium in the industry,intellectual property right protection is key for thegrowth of all industry segments and tends to define therevenue life cycle of their products. In pharma and biotech, patent expirations and generics cause

portfolio erosions.

Biologics -- a product of the biotech industry -- have beenprotected so far from this threat and enjoy extended revenuecycles. This trend will continue at least for the next few years.

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Customer is typically clinician, but often

with strong patient advocacy

Customer is typically the clinician,

though increasing pressure from

DTC.

Customer has traditionally been clinical

customer. Increasing emergence of

economic customer

Customer is typically CFO, CIO.

Increasing value in integrating

solutions

Demand

Highly differentiated, few competitors.

Specialty model

Blockbuster model is traditional;

Orphan models emerging.

Generics are increasing;

Differentiation varies across medical

specialties. Signs that even in most

mature technology markets,

commoditization is beginning to

occur

Large capital purchase, occasional

software upgrades, consulting. Long

product lifecycles

Supply

Biotechnology

Pharmaceuticals

Medical Devices

Capital

Equipment

Business Models for Different

Lifescience Sectors are Distinct

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Agenda:

Introduction

The State of Pharma industry

Brief History of Biotech Industry


Diagnostics Models




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The Road to FDA Approval

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Pharmas Blockbuster focus

LMITED EXTENSIVECost Controls

(pricing, access, volume)

Wasteland

High genetics penetration

Very limited unmet need

Weak pricing/limited access

Market at Risk

Significant genetics available

Limited unmet need

Pricing and access at risk

Attractive Growth Potential

Limited genetics in mid-term

Significant unmet need

Pricing likely to hold

Oncology

HCV

Alzheimers

Immunology/RA

HIVDepression

Neuropathic Pain

COPD

Diabetes

High Cholesterol

Hypertension

Nociceptive Pain

Anti-ulcer

Asthma

Anti-infectives(outpatient)

UnmetNeed

LOW

HIGH

United States Japan UK

G

erman y

C

anada

Italy

France

Spain

Russia

India

China

Total 2005 Sales by Geo ($B) 252 16 19 32 14 20 30 15 5 6 12

Source: Boston Consulting Group

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Blockbuster Model: Issues

Pharma industry has been based on the blockbuster model, making it one ofthe most profitable industries and enabling large R&D spends.

Approx 80% of growth of the Pharma industry came from ~ 8 drugs in the last10 years.

However the impact of the recall of Vioxx is an example of how something like this candramatically 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 andreplaced by generics ( $82B loss in revenue in 2007 alone)

Pharma currently suffering from innovation dry spell: few blockbusters inpipeline

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 personalizedmedicine) 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 andmore strategic partnerships.

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Pharma R&D goes off balance sheet

Pharma has increasingly been seeing its R&Dspending going up but its R&D productivitydropping ( i.e fewer drugs coming out of pipeline)

Pharma R&D spend starting to take a toll on itsearnings More and more R&D investment but no new sales!

As public companies, pharma values aredetermined by a multiple of their earnings. The higher the earnings, the better the value!

Pharma therefore increasingly motivated to do offbalance 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:

Introduction




Diagnostics Models




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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 biotechclusters. Todays 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 (10years+)

Pharma didnt have skills to do biotech and feared FDAapproval, so mainly watched to see what biotech could dofor them Roche was an exception and bought 56% of Genentech in 1990

Biotech tools began to help pharma drug discovery anddevelopment seeing the start of the biotech boom ( 1980s)and muddying of boundaries between the biotech andpharma worlds

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Characteristics of Biotechnology

Biotechnology has been and will continue to be afundamentally entrepreneurial industry. Since its origins in the development of recombinant DNA

technology in the late 1970s, biotechnology has generated and

commercialized a wealth of innovations emerging from basicscientific research conducted in leading research universities.

Biotechnology has shifted the paradigm by whichinnovation and knowledge are created. Innovation in the sector emerges at the intersection of

research disciplines and private/public institutions. It is characterized by its duality, simultaneously making

contributions to both basic and applied research.

Traditional disciplinary and institutional lines are blurred.

This loose structure has unleashed enormous productivityand creativity, and increasingly has become a model for otherbiomedical segments.

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Agenda:

Introduction




Diagnostics ModelsMedical Device Models



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Pharma 1.0: A Variety of Models for

Bringing Blockbuster Drugs to Market The biotech industry is not really characterized by

specific business models; and neither is there onesingle model for success.

Enormous diversity and innovation driven makespredicting future development difficult.

Biotech flexibility is a strength that has helpedthem survive In years of crisis, companies have managed to reorient

themselves, change their business model or evenswitch 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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Pharma 1.0: Value Chain and Business

Models

RESEARCHPRECLINICAL

CLINICALPHASE I

CLINICALPHASE II

CLINICALPHASE III

MANU-FACTURING

A business model typically consists of three components:

Value proposition: the benefit that clients and partnersmight 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 ideaand concept to the final product or service.

Revenue generation model: how revenue is generated. Thismeans that future revenues of the company determine thevalue of the business model and its sustainability.

Sales of own drugs Co-marketing

Royalties from drugs you developed but sold by others

Services

SALES/MKTING/DISTION

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Pharma 1.0: Fully Integrated Pharma

Company (FIPCo)

Value Proposition:

The experts in bringing drugs from bench to market.

RESEARCHPRECLINICAL

CLINICALPHASE I

CLINICALPHASE II

CLINICALPHASE III

MANU-FACTURING


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

Ph 1 0 F ll I d Ph

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Pharma 1.0: Fully Integrated Pharma

Company (FIPCo)

Rare for newer biotech today except insome niche areas ( ex Gilead)

Today FIPCo biotech are original players.

Very challenging for start-up

Timeline to build expertise and capacity toolong

Large existing biotech FIPCos sufferingsame challenges as large pharma ( i.e drypipeline, reduced innovation, increasedcost of development)

RESEARCHPRECLINICAL

CLINICALPHASE I

CLINICALPHASE II

CLINICALPHASE III

MANU-FACTURING


Skills Needed

Financing

Biotech: Amgen, Genentech, Biogen Idec,

Valera >Indevus ( urology and endocrinology)

Examples

Need skills across the value chain, althoughincreasingly much is being outsourced.

Deep pockets to run expensive Phase IIIclinical trials, and extensive sales and

marketing operations.

VCs would probably find time to ROI too long

Ph 1 0 t Ph 2 0 Th

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Pharma 1.0 to Pharma 2.0: The

Progression in 2008


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Parma 2.0: Four Strategic Pillars


Pharma 2 0 to Pharma 3 0 From Dr gs

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Pharma 2.0 to Pharma 3.0: From Drugs

to Healthy Outcomes in 2011


Pharma 3 0: Health Outcomes as

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Pharma 3.0: Health Outcomes as

Currency for Health Care Systems


Pharma 3 0: The Health Outcomes

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Pharma 3.0: The Health Outcomes

Ecosystem


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Pharma 3.0: eHealth

Pharma 3 0: Delivering on Health

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Pharma 3.0: Delivering on Health

Outcomes


Pharma 3 0: Challenges and Readiness

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Pharma 3.0: Challenges and Readiness

for Executing Non-Traditional Alliances

Source: Ernst and Young; Progressions Survey, 2009

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Agenda:

Introduction







V l h i d d l

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Value chain and revenue models

There is no clear value chain in diagnostic. Valuenot 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 norevenues

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

CLIA M d l

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CLIA Model

Clinical Laboratory Improvement Act (CLIA) is only in the US

Created to help introduce novel diagnostics that werent FDAapproved.

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

Di ti D i

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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

Theranostics: Targeted Medicine and

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Theranostics: Targeted Medicine and

Pharmacogenomics

Tools to help researchers identify biomarkers anddevelop related therapeutics

Therapeutics delivered to patients with the right

genotype at optimal dosagesTargeted therapies market worth $5B in 2004 and

expected to reach $20B in 2014

Agenda:

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Agenda:

Introduction







The Device Industrys Felix Culpa

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The Device Industry s Felix Culpa

A decade ago, the device industry was in crisis

Public investors flee as newly public companies stumble;venture money dries up

But big companies, facing growth problems, ride to therescue

By the mid to late 1990s, several companies had begun totransform themselves using M&A as the vehicle

A new business model emerges, with the industry split intotwo camps

Small start-ups that drive industry innovation

Big companies that dominate marketing and distribution channels

New model is straightforward: small companies advance toa certain stage and then sell

Investors come back, prizing the specific characteristics of theindustry

Medical Devices Top the Value Creation

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p

Charts

Source: Compustat; Boston Consulting Group ValueScience Center

The New Device Model

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The New Device Model Devices rebound was built on a model that posits

Quick, predictable technology development, based on efficient financing anddevelopment model

The role of physicians in development is key

Relatively straightforward regulatory path and quick

commercialization A technology boom

Few constraints on product adoption

Physicians largely drive product selection

Price increases/reimbursement relatively easy, even for

incremental advances Successful device advances are incremental, with more new

products in shorter time frame Two-thirds of typical device companys revenues come from products launched

in the previous two years

Big companies who face increasing challenges to grow becomeactive acquirers, rendering irrelevant the lack of interest by publicinvestors

Predictable exits for small companies to one of a handful of bigcompanies, who turn to M&A to drive business

The Device Industry: Key Issues

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The Device Industry: Key Issues

Growth has slowed dramatically

Regulatory turmoil and health care reform

Physician/company relationships and COI

Economic crisis of 2008 dampens venturesenthusiasm

Big Device has lots of cash, but M&A dynamicshifts

Is Big Pharma a buyer?

A new innovation model?

Medical Device Stakeholders

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Medical Device Stakeholders

Payers havebecome moreinfluential in the

marketplace andincreasingly arefocused on drug and

medical devicepricing, appropriatedrug and medicaldevice utilization andthe quality and costsof healthcare.

Source: Covidien, Annual Report 2007, p. 7, www.investor.covidien.com

Universe of Companies

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Universe of Companies

Research and other equipment

Imaging

Non-imaging diagnostics

Therapeutic devices

Other

US and European-headquartered public and venture-backed companies that primarily design andmanufacture medical technology equipment and supplies

Excludes service providers such as distributors, CROs or CMOs

Definition

5 product groups 16 disease categories

AestheticsCardiovascular/vascular

DentalENT

GastrointestinalHematology/renal

MultipleNeurology

Non-disease-specificOncology

OphthalmicOrthopedic

RespiratoryUrology/pelvic

Women's healthWound care

VC Investment Soared From 2002 to

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2007

Source: National Venture Capital Association; July, 2010

But With the Boom Came Problems

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But With the Boom Came Problems

Even before the current economic downturn, veteran investorsbegan to worry about device investing trends

Venture investments in devices grew dramatically 2005-2007 From $2.2 B in 2005 to $2.9 B in 2006 to $4.1 B in 2007, with another record

in the first quarter of 2008

Veteran investors worry about a frothy market and ripple effect as moremoney pushes up valuations both early and late

Pre-crash, valuations soared, while time to exit lengthened Even as exit valuations, particularly on M&A remain relatively constant

Too many VCs new to devices

And with no historical perspective on device investing Too many dollars

Record numbers and investors willing/needing to put more money to work

Too many companies competing in the same clinical spaces Spine, once hot, has something like 150 venture backed start-ups

Too many deals that need to get done Too few exits

As IPO window closes and Big Buyers become less aggressive

US Public and VC-Backed Companies by

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Segment (At the end of 2009)


Leading US Regions by Number ofM dt h C i (At th d f 2009)

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Medtech Companies (At the end of 2009)


Risk / Return Slope

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p

Level of risk/investment

Poten

tialReturn

Improvement,

Existing market,

Efficiency benefit Class 1

Improvement,

Existing market,

Safety benefit

Class 1 or 2

New technology

New market,

Care benefit

Class 3

Improvement,

New market,

Care benefit Class 2 or 3

Improvement,

Existing market,

Cost benefit

Class 1

The Cash Curve

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Source: Payback: Andrew JP and Sirkin HL. 2007. Reaping the Rewards of Innovation.

Harvard Business School Press,.

Incremental Versus DisruptiveTechnology

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Technology

The industrys business model is predicated on quick andpredictable technology development Device industry: small R, big D; continuous, if incremental innovation

The incremental nature of technology advances continues to

reward companies First mover advantage means almost nothing in medical devices

E.g. Cordis in stents

In cardiovascular, DES creates the first real device blockbuster,but theres plenty of opportunity elsewhere

CHF, percutaneous valves, even IC tools like smaller stents and CTOs And even BMS are making a comeback

In orthopedics, spine is hot and artificial discs show tremendouspressures But theres also room for new materials and incremental advances

CR Bards interesting confession Post-angioplasty: the value of stability

The anti-Pharma pitch to investors Incremental advances, predictable development, clear exit path, no blockbusters

Medical Technology

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Market and Technology Matrix

Tec

hnology

New

Existing Market New Market

Easy to produceand demonstrate

Costly andLonger term

More costly toproduce anddemonstrate

More costly toproduce anddemonstrate

1 2

3 4

What is Disruptive Device Technology?

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Drug-device convergence

Nanotechnology

Theranostics

Neurostimulation Robotics

Ultra minimally-invasive surgery From maximally invasive to minimally-invasive to non-invasive, even using

natural orifices

Regenerative medicine and tissue engineering

Cell and gene therapy

Human/electronic interface, such as artificial retina

Electraceuticalsbeyond neurostimulation

Advanced imaging

Telemedicine Bioinformatics/biotech/medtech

Value CreationSimple Innovation i e Safety Syringe

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Simple Innovation i.e. Safety Syringe

Idea

Earlydesign

Initial test

Redesign

Clinicaltest

Manufacturingprototype

Make andsell

0

Need

Initial

Prototype

Approval

Proof

Value

Value demonstrated

Value CreationComplex Innovation i.e. Medical Electronics

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C p a a s

Idea

Earlydesign

Initial test

Redesign

Clinicaltest

Evaluation prototype

Make andsell

0

Need

Initial

Prototype

Approval

Proof

Value demonstrated

Value

Is it Time for a New Innovation Model?

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The industrys challenge: device companies are beginningto outpace both customers and regulators in their ability toembrace new technology And paying for these advances also becomes a challenge

Advances in computerization, miniaturization, andbiotech/biomaterials are bringing dramatic change

Adoption rates could slow as physicians wrestle with newtechniques, approaches Robotics, biologics confront the skeptics

Living with disruption, dislocation, discomfort

Adoption issues always loom large in devices and, subtly,these innovations rest on a very different model for newtechnology adoption, particularly in surgery

Product companies will increasingly lead, not follow,customers in developing new products

Top Line Growth Declining for BigMedtech

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Medtech

ABT, JNJ, COV, SYK, BSX, STJ, MDT

Source: Acuitive Medical Ventures Research; Aug., 2010

Time to Liquidity is Increasing

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FDA Clearance Decisions Take LongerEven Though Total Submissions Has

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Declined

Source: FDA Data

Widely Divergent Cash Curves forDifferent Devices Requiring 510(k)

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Approval

Source: Boston Consulting Group

Critical Issues Involving Medical Devices

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Evidence-based medicine bites back

Safety issues such as Late Stent Thrombosis threatens to undermineDES opportunity

Clinical trials becoming larger, more complex, while costs become

greater and more burdensome for start-ups Even EBM advocates worry about a crisis of confidence in drawing

conclusions

Driving away from certainty

Physician/product company relationships come under scrutiny

DOJ investigations, public scrutiny drive a wedge After targeting orthopedics industry, CV is next as CRF becomes the focus of Senate

investigation

The bulls-eye on Rx embraces Devices as well

In sales and marketing, new rules with AdvaMed guidelines

But should big and small companies play by the same rules?

Most companies insist things theyve been behaving all along

But some surgeons see opportunism to deny their fair share in product gains

At risk: physician role in product development

Critical Issues Involving Medical Devices

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M&A under pressure

Even when/if IPO window opens, M&A remains presumed exit, with most dealsunder $150MM

In cardiovascular, J&J/Guidant/BSC deal sent shock waves through theindustrybut key issue is deal-appetite, not competitive landscape

For the most part, big companies step back, concerned about dilution, risk, andthe impact of smaller deals

MDT/Abbott are doing deals, but who else?

BSCs change of heart:

What are companies worth? Big Device has cash, but no one wants to bargain-hunt; valuations remain a sticking point

As Big Device retrenches or takes a rest, the industry looks to a new generationof acquirors: Hologic/Cytyc, Edwards, St. Jude, Inverness, Integra,

One caveat: companies are smaller, more narrowly focused

Is Big Pharma a buyer?

Is the Medical Device Industry ModelBroken?

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Devices rebound was built on a model that posited

Quick, predictable technology development, often based on physiciancollaboration

Relatively straightforward regulatory path and quick commercialization

Predictable exits to one of a handful of big companies

The new reality is

Physician collaboration is under assault because of COI concerns

New pressures on prices and reimbursement and a diminished role for physiciansin product selection

Evidence-based medicine raises more questions than it answers, leading tolonger, more expensive trials

The need for a next generation of acquirers to step up

A device model built on convergence of devices and other technologies, such asbiotech or computers, introducing new skill sets and an element of serendipity in

product development Are we entering an era of reverse innovation?

Have We Gotten to Reverse Innovation inthe Medical Device Industry?

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Innovation in medical devices has historically focused onoutcomes and improved clinical care

Expensive, with little price sensitivity

Advances in technology and materials pushes the envelopemore and more

HC reform, broadly conceived, calls for a new kind ofinnovation

Focused on cost savings, greater efficiency

Will we trade better care for lower cost?

What role for device companies in this effort?

A model borrowed from emerging markets

In China, India, consumer pay makes cost a driver in product selection

Will good enough will have to be good enough?

Example: GE Disrupts Itself

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In Harvard Business Review, GE describes a new model oftechnology dispersion

Reverse Innovation

Rather than sell Emerging Countries products from Developed Nations,they reverse the process

Will products designed for China sell in the US?

Key to the premise: Emerging Country economies wontdevelop along Western lines, but just the opposite

With far smaller per capita incomes, developing countries are morethan happy with high-tech solutions that deliver decent performance atan ultra-low cost a 50% solution at a 15% price.

Designed for new global realities, Reverse Innovation hasimplications for an era of US health reform

GE figures it will need to increase by 50% the number of low-pricedproducts it sells to address cost issues of reform initiative

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Combination Devices

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275 submissions to the newly created FDA Officeof 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 thwartinfection Drug delivery devices

Pulmonary, oral, pumps Exubera, the most recently approved OCP products, is

the first noninjectable insulin for treatment of Type 1and 2 diabetes

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Pfizer and Nektars Exubera

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Agenda:

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Introduction







Healthcare Reform Is Taxing the DeviceInnovation Model

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Device tax

highlights

Overall target amountto collect - $20 billion

(2.3% excise duty)

Reason: Product

companies benefitdue to the addition of32million people to

insurance rolls

Device

companies

concern

Innovative & complexproducts are already in

use by patients

Ex: Product demanddid not change inMassachusetts

Healthcare Reform May Have Important ConsequencesFor Innovation ModelsThe process and content of innovation may change in meaningful ways

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Some of the most innovative early stage

companies will be crippled

Small to mid size companies will be

hardest hit EPS will be reduced by

over 10% in 2013

Impact on early stage companies that

generate revenue but are not

profitable

Companies tend to handle costs by

reducingR&D spending and

eliminating jobs (short term

profitability)

Fewer M&A will reduce the numbers

of exits for device start ups

Process of Innovation

The areas of innovation may not be the ones

that actually advance the care of the

patient

Money will follow opportunities

where risks are lower Venture

Capitalists will prefer tax favored

area

Fewer companies being financed &created will slow the overall rate of

innovation

Content of Innovation

Thank You

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