wh lecture asg 10-11-11

Upload: asgakn8335

Post on 05-Apr-2018

215 views

Category:

Documents


0 download

TRANSCRIPT

  • 7/31/2019 WH Lecture ASG 10-11-11

    1/95

    Graduate study in

    Wireless Health

    Value Chain and Business Models

    Alex Gerwer

    Principal PartnerAKN

  • 7/31/2019 WH Lecture ASG 10-11-11

    2/95

    2011 Case Western Reserve University

    2

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    3/95

    2011 Case Western Reserve University

    3

    Agenda: Introduction

    The State of the Pharma industryBrief History of Biotech Industry

    Pharma/Biotech Models

    Diagnostics Models

    Medical Device Models

    Convergence Examples

    The Impact of Healthcare Reform

  • 7/31/2019 WH Lecture ASG 10-11-11

    4/95

    2011 Case Western Reserve University

    4

    Michael Porters Value Chain

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

  • 7/31/2019 WH Lecture ASG 10-11-11

    5/95

    2011 Case Western Reserve University

    5

    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. .

  • 7/31/2019 WH Lecture ASG 10-11-11

    6/95

    2011 Case Western Reserve University

    6

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    7/95

    2011 Case Western Reserve University

    7

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    8/95

    2011 Case Western Reserve University

    8

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    9/95

    2011 Case Western Reserve University

    9

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    10/95

    2011 Case Western Reserve University

    10

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    11/95

    2011 Case Western Reserve University

    11

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    12/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    13/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    14/95

    2011 Case Western Reserve University

    14

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    15/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    16/95

    2011 Case Western Reserve University

    18

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    17/95

    2011 Case Western Reserve University

    19

    Sustaining Innovation: A Unique

    Innovation Model for a Unique Industry

    Source: Ernst and Young

  • 7/31/2019 WH Lecture ASG 10-11-11

    18/95

    2011 Case Western Reserve University

    23

    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

    Source: Ernst and Young

  • 7/31/2019 WH Lecture ASG 10-11-11

    19/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    20/95

    2011 Case Western Reserve University

    31

    Growth From Diversification:

    Geographic Diversification

    Latesttechnology andfeatures

    Fewer featuresEfficacy at

    attractive pricepoint

    Mature-marketproduct

    Emerging-marketproduct

    Whittle-down innovation

    Trickle-up innovation

    Source: Ernst and Young

  • 7/31/2019 WH Lecture ASG 10-11-11

    21/95

    2011 Case Western Reserve University

    32

    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

    Source: Ernst and Young

  • 7/31/2019 WH Lecture ASG 10-11-11

    22/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    23/95

    2011 Case Western Reserve University

    36

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    24/95

    2011 Case Western Reserve University

    40

    Commercialization Brings it All Together

  • 7/31/2019 WH Lecture ASG 10-11-11

    25/95

    2011 Case Western Reserve University

    41

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    26/95

    2011 Case Western Reserve University

    42

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    27/95

    2011 Case Western Reserve University

    43

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    28/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    29/95

    2011 Case Western Reserve University

    45

    Agenda:

    Introduction

    The State of Pharma industry

    Brief History of Biotech Industry

    Pharma/Biotech Models

    Diagnostics Models

    Medical Device Models

    Convergence Examples

    The Impact of Healthcare Reform

  • 7/31/2019 WH Lecture ASG 10-11-11

    30/95

    2011 Case Western Reserve University

    47

    The Road to FDA Approval

  • 7/31/2019 WH Lecture ASG 10-11-11

    31/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    32/95

    2011 Case Western Reserve University

    49

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    33/95

    2011 Case Western Reserve University

    50

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    34/95

    2011 Case Western Reserve University

    51

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    35/95

    2011 Case Western Reserve University52

    Agenda:

    Introduction

    The State of Pharma industry

    Brief History of Biotech Industry

    Pharma/Biotech Models

    Diagnostics Models

    Medical Device Models

    Convergence Examples

    The Impact of Healthcare Reform

  • 7/31/2019 WH Lecture ASG 10-11-11

    36/95

    2011 Case Western Reserve University53

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    37/95

    2011 Case Western Reserve University54

    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.

  • 7/31/2019 WH Lecture ASG 10-11-11

    38/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    39/95

    2011 Case Western Reserve University

    56

    Agenda:

    Introduction

    The State of Pharma industry

    Brief History of Biotech Industry

    Pharma/Biotech Models

    Diagnostics ModelsMedical Device Models

    Convergence Examples

    The Impact of Healthcare Reform

  • 7/31/2019 WH Lecture ASG 10-11-11

    40/95

    2011 Case Western Reserve University

    57

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    41/95

    2011 Case Western Reserve University

    58

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    42/95

    2011 Case Western Reserve University

    59

    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

    SALES/MKTING/DISTION

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    43/95

    2011 Case Western Reserve University

    60

    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

    SALES/MKTING/DISTION

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    44/95

    2011 Case Western Reserve University

    74

    Pharma 1.0 to Pharma 2.0: The

    Progression in 2008

    Source: Ernst and Young

  • 7/31/2019 WH Lecture ASG 10-11-11

    45/95

    2011 Case Western Reserve University

    75

    Parma 2.0: Four Strategic Pillars

    Source: Ernst and Young

    Pharma 2 0 to Pharma 3 0 From Dr gs

  • 7/31/2019 WH Lecture ASG 10-11-11

    46/95

    2011 Case Western Reserve University

    80

    Pharma 2.0 to Pharma 3.0: From Drugs

    to Healthy Outcomes in 2011

    Source: Ernst and Young

    Pharma 3 0: Health Outcomes as

  • 7/31/2019 WH Lecture ASG 10-11-11

    47/95

    2011 Case Western Reserve University

    81

    Pharma 3.0: Health Outcomes as

    Currency for Health Care Systems

    Source: Ernst and Young

    Pharma 3 0: The Health Outcomes

  • 7/31/2019 WH Lecture ASG 10-11-11

    48/95

    2011 Case Western Reserve University

    82

    Pharma 3.0: The Health Outcomes

    Ecosystem

    Source: Ernst and Young

  • 7/31/2019 WH Lecture ASG 10-11-11

    49/95

    2011 Case Western Reserve University

    83

    Pharma 3.0: eHealth

    Pharma 3 0: Delivering on Health

  • 7/31/2019 WH Lecture ASG 10-11-11

    50/95

    2011 Case Western Reserve University

    84

    Pharma 3.0: Delivering on Health

    Outcomes

    Source: Ernst and Young

    Pharma 3 0: Challenges and Readiness

  • 7/31/2019 WH Lecture ASG 10-11-11

    51/95

    2011 Case Western Reserve University

    85

    Pharma 3.0: Challenges and Readiness

    for Executing Non-Traditional Alliances

    Source: Ernst and Young; Progressions Survey, 2009

  • 7/31/2019 WH Lecture ASG 10-11-11

    52/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    53/95

    2011 Case Western Reserve University

    87

    Agenda:

    Introduction

    The State of Pharma industry

    Brief History of Biotech Industry

    Pharma/Biotech Models

    Diagnostics ModelsMedical Device Models

    Convergence Examples

    The Impact of Healthcare Reform

    V l h i d d l

  • 7/31/2019 WH Lecture ASG 10-11-11

    54/95

    2011 Case Western Reserve University

    88

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    55/95

    2011 Case Western Reserve University

    89

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    56/95

    2011 Case Western Reserve University

    90

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    57/95

    2011 Case Western Reserve University

    91

    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:

  • 7/31/2019 WH Lecture ASG 10-11-11

    58/95

    2011 Case Western Reserve University

    93

    Agenda:

    Introduction

    The State of Pharma industry

    Brief History of Biotech Industry

    Pharma/Biotech Models

    Diagnostics ModelsMedical Device Models

    Convergence Examples

    The Impact of Healthcare Reform

    The Device Industrys Felix Culpa

  • 7/31/2019 WH Lecture ASG 10-11-11

    59/95

    2011 Case Western Reserve University

    94

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    60/95

    2011 Case Western Reserve University

    95

    p

    Charts

    Source: Compustat; Boston Consulting Group ValueScience Center

    The New Device Model

  • 7/31/2019 WH Lecture ASG 10-11-11

    61/95

    2011 Case Western Reserve University

    96

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    62/95

    2011 Case Western Reserve University

    97

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    63/95

    2011 Case Western Reserve University

    98

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    64/95

    2011 Case Western Reserve University

    99

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    65/95

    2011 Case Western Reserve University

    100

    2007

    Source: National Venture Capital Association; July, 2010

    But With the Boom Came Problems

  • 7/31/2019 WH Lecture ASG 10-11-11

    66/95

    2011 Case Western Reserve University

    101

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    67/95

    2011 Case Western Reserve University

    102

    Segment (At the end of 2009)

    Source: Ernst and Young

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

  • 7/31/2019 WH Lecture ASG 10-11-11

    68/95

    2011 Case Western Reserve University

    103

    Medtech Companies (At the end of 2009)

    Source: Ernst and Young

    Risk / Return Slope

  • 7/31/2019 WH Lecture ASG 10-11-11

    69/95

    2011 Case Western Reserve University

    116

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    70/95

    2011 Case Western Reserve University

    117

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

    Harvard Business School Press,.

    Incremental Versus DisruptiveTechnology

  • 7/31/2019 WH Lecture ASG 10-11-11

    71/95

    2011 Case Western Reserve University

    118

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    72/95

    2011 Case Western Reserve University

    119

    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?

  • 7/31/2019 WH Lecture ASG 10-11-11

    73/95

    2011 Case Western Reserve University

    120

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    74/95

    2011 Case Western Reserve University

    121

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    75/95

    2011 Case Western Reserve University

    122

    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?

  • 7/31/2019 WH Lecture ASG 10-11-11

    76/95

    2011 Case Western Reserve University

    123

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    77/95

    2011 Case Western Reserve University

    124

    Medtech

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

    Source: Acuitive Medical Ventures Research; Aug., 2010

    Time to Liquidity is Increasing

  • 7/31/2019 WH Lecture ASG 10-11-11

    78/95

    2011 Case Western Reserve University

    125

  • 7/31/2019 WH Lecture ASG 10-11-11

    79/95

    FDA Clearance Decisions Take LongerEven Though Total Submissions Has

  • 7/31/2019 WH Lecture ASG 10-11-11

    80/95

    2011 Case Western Reserve University

    127

    Declined

    Source: FDA Data

    Widely Divergent Cash Curves forDifferent Devices Requiring 510(k)

  • 7/31/2019 WH Lecture ASG 10-11-11

    81/95

    2011 Case Western Reserve University

    128

    Approval

    Source: Boston Consulting Group

    Critical Issues Involving Medical Devices

  • 7/31/2019 WH Lecture ASG 10-11-11

    82/95

    2011 Case Western Reserve University

    129

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    83/95

    2011 Case Western Reserve University

    130

    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?

  • 7/31/2019 WH Lecture ASG 10-11-11

    84/95

    2011 Case Western Reserve University

    131

    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?

  • 7/31/2019 WH Lecture ASG 10-11-11

    85/95

    2011 Case Western Reserve University

    132

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    86/95

    2011 Case Western Reserve University

    133

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    87/95

  • 7/31/2019 WH Lecture ASG 10-11-11

    88/95

    Combination Devices

  • 7/31/2019 WH Lecture ASG 10-11-11

    89/95

    2011 Case Western Reserve University

    136

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    90/95

    Pfizer and Nektars Exubera

  • 7/31/2019 WH Lecture ASG 10-11-11

    91/95

    2011 Case Western Reserve University

    138

    Agenda:

  • 7/31/2019 WH Lecture ASG 10-11-11

    92/95

    2011 Case Western Reserve University

    139

    Introduction

    The State of Pharma industry

    Brief History of Biotech Industry

    Pharma/Biotech Models

    Diagnostics ModelsMedical Device Models

    Convergence Examples

    The Impact of Healthcare Reform

    Healthcare Reform Is Taxing the DeviceInnovation Model

  • 7/31/2019 WH Lecture ASG 10-11-11

    93/95

    2011 Case Western Reserve University

    140

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    94/95

    2011 Case Western Reserve University

    141

    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

  • 7/31/2019 WH Lecture ASG 10-11-11

    95/95

    2011 Case Western Reserve University

    142