Business Models That Biotech Companies Employ

A. M. Pappas & Associates

Francis J. Meyer, PhD

Vice President, Enterprise Development

KFBS Biotech Speakers Series

November 25, 2002

Francis J. Meyer, PhDVice President, Enterprise Development

• PhD, Pharmacology, University of Maryland Medical School

• Senior Management of 2 medical product companies• Associate Dean for Technology Licensing, Johns

Hopkins University School of Medicine, 10 years• Associate Vice Provost for Technology Development,

University of North Carolina-Chapel Hill, 5½ years• A. M. Pappas & Associates, 2 years

– Life Science Venture Capital Fund Management & Advisory Services

Presentation Outline

• Mission of biotechnology companies• Biotech business models with examples • Linking financial models with business

models• Regulatory or ethical concerns that

could alter the business model• How does a technology itself influence

the business model

Mission of Biotechnology Companies

• Varies

• Focus on Human Health Companies

• Using a platform to develop drugs

Designing Drugs

Target Compounds Leads

Leads to Drugs

Leads Evaluation Drug

Drug Development - A High Risk Undertaking

Time 10-15 years from discovery to market; patent life 20 years

Cost $700 million + (includes costs of failures)

Success 1 approval/ 5000 cmpds screened; 1 approval /5 cmpds entering clinical trials

Return 3 in 10 approved drugs recover development costs

Clinical TrialsDiscovery/Preclinical

Testing Phase I Phase II Phase III FDA Phase IV

Years 6.5 1.5 2 3.5 1.5

Test Population

Laboratory and animal

studies

20 to 100 healthy

volunteers

100 to 500 patient

volunteers

1,000 to 5,000 patient

volunteers

Review process/approval

Additional post-

marketing testing

required by FDA

Purpose

Assess safety,

biological activity and formulations

File IN

D at F

DA

Determine safety and

dosage

Evaluate effectiveness, look for side

effects

Confirm effectiveness,

monitor adverse

reactions from long-term use

File N

DA

at FD

A

Success Rate

5,000 compounds screened; 250 enter

preclinical

5 enter clinical testing1

approved

Life Science Development Cycle

Discovery Development

Lead Optimization

Preclinical Development

Human Trials

FDA

FDA

Genomics

Proteomics

System Pathways

Cell Biology

Target Validation

Assay Development

Expression

Sequencing

Screening

Target ID

SynthesisLead

IDCompounds

Natural Extracts

HTS

BIOLOGY

PATIENT MANAGEMENT

DIAGNOSTICSTHERAPEUTICS

COMMERCIALIZATION

CHEMISTRY

Business Models for Human Health Biotech Companies

• Product Companies

• Subscription Companies

• Service Companies

Product Companies

• Product Company– Develop products through clinical trial

stage

• initial products partner with pharma

• later products sell and market directly

– Examples: Inspire, Panacos, Signase

Subscription Companies

• Subscription company– Develop genomics databases – Pharma subscribes to databases– Subscription fees – No downstream royalties– Examples: Millennium

Pharmaceuticals, Inc., Incyte Genomics, Inc., Celera Genomics Corp., GeneLogic

Changed Model

• Most subscription companies have become fully integrated pharma or research companies

• Wall Street less value for subscription-only companies

• Examples: Human Genome Sciences, Inc., Millennium Pharmaceuticals, Inc., Incyte Genomics, Inc., Celera Genomics Corp.

Service Model

• Product is service

• Full range of services to support pharmaceutical companies ideal

• Technology know-how strong

• IP less important

Service Model

• Contract Research Organization (CRO)• Full range of services to support pharma

– Preclinical– Clinical– Regulatory– Post marketing– Production/Manufacturing– Specialty Testing

• Staff, know how, databases are the assets• Examples: Quintiles, Piedmont Research

Service Model

• Chemistry Service Companies – Chemical Libraries, Scaffolds,Synthesis – Staff, Know How, Databases, Libraries, IP, Robotics are the

Assets– Examples: Albany Molecular Research, Aurora Biosciences,

Tripos, Synexis Chemistry & Automation

• Smart Screening Companies– Development and Use of Proprietary Models ( animals &

others)– Staff, Know How, Databases, Models, IP, Robotics are the

Assets– Example, EnVivo

Tool Companies

• Product companies that sell tools, not as a service, but as a product

• Example: Chip companies such as Affymetrix, Aclara, Caliper

Development Companies

• Development companies (Devco model)– In-license compound, take it through

Phase II or III clinical trial– Out-license to big pharma

• Downstream royalties

• Example: Pozen Pharmaceutical, Inc., DevCo Pharmaceuticals, Inc.,

Bioinformatics Companies

• Service & software company

• Variation under subscription

• Many to categorize

• Examples: Bioinformatics Group, Incellico, Divisions of IBM, SAS

Linking Financial Models with Business Models

• Business model independent of source of capital funding

• Example: AlphaVax, Inc.– NCBC– SBIR– Foundation– Venture Capital

• There is a point when co.may not want venture capital money

• Very early stage

Regulatory or Ethical Concerns That Could Alter Business Model

• Drugs

• Diagnostics

• Medical Devices

• Research Reagents/Tools

• Stem Cell Research– Geron & Univ. of Wisconsin

How Does the Technology Itself Influence the Business Model?

• Platform technology

• Products

• Services

• Databases / Tools

Critical Factors in Start-Up

• Management Team

• Business Model

• Technology

A Company for Today

• Profile:– Post Genomic– Rapidly Identify & Validate Disease-

Causing Cancer Genes– High-Throughput Functional Cloning– Developing Data, Tools and Therapeutics– Treat Based on Individual Disease Profiles

A Business Model for Today

• Profile:– Combination of Subscription, Tools &

Products– Logical Evolution of Income Producers

Over Time– Strategic Partners from Day One– Several Sources of Cash & Conserve

Today’s Fund Raising Climate

• Cash is Very Hard to Get

• Only the BEST are Obtaining Funding– BEST Management– BEST Business Model– BEST Technology– BEST Products– BEST Markets

Conclusions• Constant change will continue

– Biz models change to adapt to science change

– Genomics, functional genomics, bioinformatics, proteomics, etc.

• Which model is best?????– “ Morphing”

• Management team• First 8 years of genomics will pale

compared to next 25

A. M. Pappas & Associates

If interested in additional information contact:

Fran Meyer at 919-998-3314 or fmeyer@ampappas.com

Pappas Ventures I Portfolio• Aclara BioSciences (Nasdaq: ACLA) (Mountain View, CA)

• Arena Pharmaceuticals (Nasdaq: ARNA) (San Diego, CA)

• ArgoMed (Cary, NC)

• Bio-Informatics Group (Cary, NC)

• EBM Solutions (Nashville, TN)

• Elitra Pharmaceuticals (San Diego, CA)

• Nereus Pharmaceuticals (San Diego, CA)

• Panacos Pharmaceuticals (Gaithersburg, MD)

• Reprogenesis (acquired by Curis) (Nasdaq: CRIS) (Cambridge, MA)

• Signase (Houston, TX)

• Variagenics (Nasdaq: VGNX) (Cambridge, MA)

• X-Ceptor Therapeutics (San Diego, CA)

Pappas Ventures I PortfolioAclara Biosciences biochip company developing microfluidic lab-on-a-chip technology with applications for genetic analysis, high throughput drug screening and clinical diagnostics

Arena Pharmaceuticalsbiopharmaceutical company that has developed a technology to accelerate the development of lead compounds targeting G-protein coupled receptors

ArgoMedcompany developing a proprietary, water-induced thermotherapy device and technique to address the non-surgical treatment of benign prostatic hyperplasia (BPH)

Pappas Ventures I PortfolioBio-Informatics Group company developing an innovative, proprietary 3-D biochip to enhance the capacity, efficiency, accuracy and automation of gene screening; NC State University

EBM Solutionshealthcare information company that provides evidence-based disease treatment protocols via the Web to physicians and patients; Duke, Emory, Mt. Sinai NYU, OHSU, Vanderbilt and Washington University

Elitra Pharmaceuticalsantimicrobial functional genomics company focused on the identification, development and commercialization of novel antimicrobial compounds that target essential gene products of pathogenic organisms

Pappas Ventures I PortfolioNereus Pharmaceuticals drug discovery and development company focusing on marine environments as a source of small-molecule compounds for the treatment of inflammation, cancer, and infectious diseases; Scripps Institution of Oceanography

Panacos Pharmaceuticalsdrug discovery and development company focusing on novel antiviral compounds targeting the treatment of HIV, RSV and hepatitis; University of North Carolina at Chapel Hill

Reprogenesis (now Curis)company developing in vivo tissue augmentation/ repair products; MIT and Harvard

Pappas Ventures I PortfolioSignase cancer therapeutics company developing novel, small molecule inhibitors of a critical cell replication pathway to inhibit tumor growth; M. D. Anderson Cancer Center

Variagenicspharmacogenomics company with proprietary gene variance detection technology anticipated to streamline drug development

X-Ceptor Therapeuticsbiopharmaceutical company focused on research in the field of orphan nuclear receptors; Salk Institute, Baylor College of Medicine, UT Southwestern and Ligand Pharmaceuticals

Pappas Ventures II Portfolio• Calyx Therapeutics Inc. (Hayward, CA)

• Cognetix, Inc. (Salt Lake City, UT)

• Dynogen Pharmaceuticals, Inc. (Boston, MA / RTP, NC)

• Incellico, Inc. (Durham, NC)

• NuVasive, Inc. (San Diego, CA)

• Peninsula Pharmaceuticals Inc. (Fremont, CA)

• Plexxikon, Inc. (Berkeley, CA)

• Sensys Medical, Inc. (Chandler, AZ)

• Syntonix Pharmaceuticals, Inc. (Waltham, MA)

Pappas Ventures II PortfolioCalyx Therapeutics pharmaceutical company focusing on oral therapies for diabetes and inflammatory diseases utilizing natural plan extracts with demonstrated clinical activity in humans

Cognetix biopharmaceutical company developing peptide therapeutics for the treatment of epilepsy, pain and anesthesia; University of Utah

Dynogen Pharmaceuticalsneuroscience-based drug discovery and development company targeting novel therapies for genitourinary and gastrointestinal disorders

Pappas Ventures II PortfolioIncellicobioinformatics company developing proprietary solutions that will significantly streamline biological and genomic data mining and processing

NuVasivemedical device company that has developed a minimally invasive system for spine surgery

Peninsula Pharmaceuticalspharmaceutical development company focused on in-licensing and developing clinical stage pharmaceutical products.

Pappas Ventures II PortfolioPlexxikondrug discovery company that utilizes a structural proteomics approach to discover novel pharmaceuticals

Sensys Medicaldeveloper of non-invasive technology for blood glucose monitoring

Syntonixbiopharmaceutical company focused on the discovery and development of innovative drug delivery technologies for improved administration of protein drugs and vaccines; Harvard Medical School