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Bridging “the Valley of Death”A New Model for Partnership in Pharmaceutical
Research & Early Development
Massachusetts Biotechnology Council April 17, 2009
Ted Torphy, Ph.D.CSO & Head
External Research & Early DevelopmentJohnson & Johnson Pharmaceutical R&D, L.L.C.
A View from Big Pharma
Spiraling R&D costs coupled with decreased productivity
Demand for safety and post-marketing surveillance
Expectation of personalized medicine Reimbursement driven by medical and
economic outcomes Proliferation and redistribution of
healthcare outcomes information
Five Trends Are Transforming Our Industry
Spiraling R&D costs coupled with decreased productivity
Demand for safety and post-marketing surveillance
Expectation of personalized medicine Reimbursement driven by medical and
economic outcomes Proliferation and redistribution of
healthcare outcomes information
Five Trends Are Transforming Our Industry
Productivity of the Pharmaceutical Industry
10
20
30
40
50 60
40
30
20
10
1995 2000 2005
50
NM
Es
an
d B
iolo
gic
s A
pp
rov
edR
&D
Sp
en
din
g (U
S$ B
illion
s)
R&D Expenditures
Approvals
Sources: FDA/CDER, PhRMA, PricewaterhouseCoopers
Note: R&D spending from non-PhRMA companies not available
Pharmaceutical R&DThe Macro-environment – A View from Big Pharma
We need products, not companies
Increasingly, biotechs are the major source of new products– Creating ever larger Big Pharma R&D organizations through mergers and acquisitions has
failed to increase productivity and spur innovation– In recent years, over half of new product approvals were for compounds derived from
biotech companies
The traditional venture capital model is stressed:– The credit crisis has hampered the ability to raise large new funds– The IPO market is miserable, making M&A the primary exit strategy for biotech companies– Building new companies is not a capital efficient way of generating products– Many VCs are moving away from early-stage investments– There is a huge funding gap for early-stage opportunities, which leaves them them
languishing in the “valley of death”
Without a new business model, the industry will not supply an adequate number of innovative new products to drive growth and increase shareholder value
The Opportunity
In partnership, the pharmaceutical industry, academia, biotech and the venture capital community can create a new model of R&D that will accelerate and expand the introduction of innovative medicines
Academia and biotech are leading sources of innovative assets, many of which are under-valued and under-resourced
New approaches to venture capital seek to create value by investing in early stage opportunities
Elements of the discovery and early development process are becoming a commodity
J&J’s External Research & Early Development (eRED) Organization
To improve pharmaceutical R&D productivity, J&J has launched a new organization, called External Research & Early Development (eRED), with a business model that emphasizes:– Open Innovation– Lean infrastructure– Flexibility– External partnering– Financial risk and reward sharing– Rapid decision making– Sustainable pipeline of strategic options
eRED Mission
In partnership with external innovators and investors, build and manage a diverse portfolio of early-stage product opportunities
Employ the principles of Open Innovation to create enduring partnerships to identify early-stage innovative product opportunities
Link these opportunities with external management expertise and capital
Institute innovative financial risk-sharing strategies with external investors to support the development of products to value-creating milestones
Retain options to acquire these opportunities under financial terms that are attractive to both J&J and our partners
We must discover, develop, manufacture and distribute innovations ourselves in a vertically integrated model
The requisite expertise in R&D must exist inside of our company
If we invent and fund everything internally we will win
We must control and conceal our innovation processes, technologies and tools, so that our competitors don't profit from our ideas
Enormous value can be unlocked from external R&D and innovation networks
Pharmaceutical R&D has become far too complex for us to employ all the expertise needed
Creating a better business model for partnered innovation can trump internal invention
We will profit from others' use of our innovations and knowledge, and we will leverage others' IP whenever it advances our own business model
Closed Innovation Open Innovation
The Open Innovation Mindset1
1 Adapted from Open Innovation, by Henry Chesbrough Harvard Business School Press, 2006
“The Valley of Death” A Major Impediment to Commercializing Innovation from Academia
Proof of Concept
ResearchFull
DevelopmentCommercializatio
nPreclinical R&D
Funding Gap
Phase 1
Basic Research
Clinic
Innovator
R&D Risk ProfileThe Basis for the Valley of Death
Years
Cu
mu
lati
ve P
rob
ab
ility
of
Su
cce
ss1
1 CMR benchmarks used to calculate risk-adjusted values at various stages
2 Internal estimate
1 2 3 4 5 6 7 8 9 10 11
1.0
0.5
012
LeadOptimization2
Phase III
Pre-Clinical
Phase I
Phase IIa
Phase IIb
FDAReview
35-40% of R&D investment is made in advancing products through Ph IIa
Until clinical proof of concept is demonstrated, the probability of success is low
eRED Operating ModelBridging the Valley of Death
Academia
Accelerators
Biotech
eRED
Innovation Sources
J&J REDs
Private Equity
Government
Philanthropy
Funding Sources
Academia
Public Incubators
External R&D Entities
• Assemble a portfolio of external product opportunities
• Syndicate with external funding sources
• Retain pre-defined product rights• Provide guidance and expertise
to portfolio companies
COSAT / JJDC / BD
eRED Process
1 2 3 4 5 6 7Years
8 9 10 11 12
IND / FIH PhIIa / PoCPhI
External R&D Entities / Venture Partners
LeadOptimization
Phase IIIPre-Clinical
Phase IFDA
ReviewResearch
0
J&J R&D
Source
Seed
Monitor
Transfer
eRED
Develop
Acquire
7
Phase IIa
Phase IIb
External R&D with Venture Investors
1:4 risk sharing through external LP vehicle
Focused, incentivized management team oversees product development with a focus on rapid, capital efficient achievement of milestones
eRED consultants provide guidance on development program and access to J&J expertise and and preferred providers through non-controlling Joint Development Committee participation
J&J retains hard right to own a limited number of assets at predetermined milestone(s) under pre-agreed terms
1One C-Corp per project 2 3 4 5 6 7 …
JJDC 20% Other LPs 80%
Acme Venture Development Fund
Management Team
Benefits to Academic Partners
Progress opportunities that would otherwise languish in “the valley of death”
Access to external funding vehicles to advance product development through key value-creating milestones
Attractive financial incentives for innovators and universities
Opportunity for faculty to be involved directly in drug discovery and development
Commitment from a dedicated J&J team
Benefits to Venture Partners
Assets monetized at early stage of the R&D process
Flexible partnership structures Attractive returns with a mid-term horizon Availability of J&J expertise and CRO
networks Commitment from a dedicated J&J team Pre-identified and motivated exit partner
“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”
Charles Darwin (1809-1882)
Illustration from The World Is Flat, Thomas L. Friedman, Farrar, Straus & Giroux, publisher
Re-engineering Pharmaceutical R&D