Biotechnology Innovation: Doing More With LessManaging Innovation in the Life Sciences AS410_728_81_SP11 The Johns Hopkins University

Instructors: Ed Addison Lawrence Husick

Creative Commons Licensed - Noncommercial with Attribution

Preface As has been our practice in our Managing Innovation classes at Johns Hopkins University, we have asked our students to collaborate in innovative ways to write a book that they then distribute at no charge to interested readers. This term, our large class took diverse and fascinating paths toward a discussion of the ways in which innovation on a shoestring (meaning low cost, rather than cheap) may change life sciences organizations and their products.

We hope that you will gain insight from their excellent work.

Lawrence Husick Ed Addison April 28, 2011

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Biotechnology Innovation: Doing More With LessTable of Contents Chapter 1: Doing More with Less: Front-loading Research and Development in Biotechnology Ritu Rajan! Chapter 2: How Americas Innovator Drug Firms are Rediscovering Innovation David C. Mitchell! 4 15

Chapter 3: An Adaptive Innovation Management Theory and Framework for Life Science Ventures Jordan Bauman! 25 Chapter 4: Innovative Emerging Market Strategies Kimberly Lapointe! 42 Chapter 5: Business Incubators for Biotech Justin Moretto! Chapter 6: Angels and Alliances Karen Sturm! Chapter 7: An Overview of Biotech industry in Israel Nabil Lally! 47 53 60

Chapter 8: Collaboration for Innovation: The Developing World Akanksha Sharma! 68 Chapter 9: The Effects of FDA Regulation on Biotech Innovation Sophia C. Finn! 75 Chapter 10: Evidence-Based Medicine and the Physicians Role in Biotechnology Luis Aponte,MD! 85

Chapter 11: Biotechnologies Role in Endoscopic Surgery David Locke! 1 9 Chapter 12: Dr. Robot How Value Innovation Revolutionized the Medical World Adam Crego! 96 Chapter 13: Yam Good Management Charles Ferguson! 107

Chapter 14: Innovating Towards a U.S. Health-Information Economy What Will Success Look Like? Laura White! 113

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Chapter 1: Doing More with Less: Front-loading Research and Development in Biotechnology Ritu Rajan Abstract As capital ows are becoming far more constrained, a key driver of survival for biotechnology companies is their ability to operate more efciently. Given the capitalintensive nature of drug development, lowering drug R&D costs by utilizing methods that improve the success rate could enable a more efcient use of capital and increase return on investment. Biotechnology tools, such as genomics, provide the opportunity to enhance the R&D process through heavy front-end investments and, thereby, optimize the probability of success. Human Genome Sciences (HGS), discovered in 1992, is an example of a company that chose to front-load its development costs by using a model that allows projects to fail fast. The companys mission began as identifying and sequencing large portions of the human genome and later evolved into utilizing this information to tackle disease areas and commercialize drug products. This case explains not only how HGS was able to win FDA approval for the rst commercially-promising result of the human genome project and build an innovative gene target-based pipeline, but also the importance of a rapid problem-solving approach, which leverages advanced technologies and methods to increase the overall rate at which development problems are identied and solved, while lowering overall development time and costs.

Driving Survival Efciency has become a general mantra in todays business world, with a critical need to boost output per unit of input for corporations around the globe. The biotechnology industry is no exception. Such companies involved in developing biologics (for example, therapeutic proteins, vaccines, gene therapy, and metabolic enzymes [1]) that target a variety of human diseases rely on a key input (funding, typically from venture capitalists) in order to deliver a key output (product innovation). Without available capital, sustenance becomes challenging, and the generation of novel products, infrequent.

The need to nd ways to improve the efciency of the R&D process is even more enforced by the high costs and numerous risks of developing new drugs. These have, in fact, been rapidly increasing over the years for a number of reasons.

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1. First, over the last decades, drug manufacturers have developed and commercialized blockbuster drugsthat is, treatments that generate over $1 billion in annual revenuefor common conditions, including anti-depressants, lipid regulators, statins, and beta blockers. For example, in the U.S. alone, more than 200 million prescriptions for statins are written each year [2]. However, many branded drugs that are currently being developed are aimed at more mechanistically complex and less understood conditions, likely reducing the probability of ultimate success. 2. Regulators are much more conservative in evaluating drug development programs and safety. Consequently, there is a high need to structure larger and longer clinical trials enrolling several thousand patients to measure time to clinical outcomes rather than utilizing surrogate clinical endpoints [3]. 3. Payers have shifted to using more rigorous pharmacoeconomics-based analyses of treatment alternatives, rather than focusing on the drugs ability to address a particular condition. Overall effect on healthcare resource utilization and patientreported outcomes are important for drug developers to fully characterize and include in their value proposition. Increased cost pressures and greater payer inuence have also led to a need to discount even branded medications or otherwise risk being excluded from formularies or large proportions of the approved patient population [3].

As shown in the below gure, the failure rate in drug development is enormous. In the U.S., less than 1% of compounds used in pre-clinical studies and only 10-20% of compounds in clinical trials are eventually approved by the FDA.

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Even with optimal nancing, the priority remains for most biotechnology companies to operate restrictively, keeping resources under tight control and carefully selecting compounds that are moved forward. For example, as of December 2008, over 44% of U.S. companies had less than a year of cash on hand [4]. However, still standing and, moreover, thriving a year later was Human Genome Sciences (HGS), a company that was able to raise billions through both private and public funding in a challenging economic environment as a result of a highly promising pipeline and an efcient R&D process. The Discovery of Human Genome Sciences (HGS) HGS was founded in 1992 by William A. Haseltine, with the help of the late Wallace H. Steinberg (former board member), with the primary objective of discovering and developing proprietary rights to several novel genes that would ultimately help with the commercialization of therapeutic agents targeting these genes in areas such as therapeutic proteins, gene therapy, antimicrobial agents, antisense drugs, metabolic enzymes, vaccines and diagnostics [5]. In 1993, the companys stated intention was to identify proteins which characterize a disease and give insight into its progressions; rapidly sequence human and other genes; apply for patent protection at each stage of the development process; establish collaborative arrangements with corporate partners [5].

HGS demonstrated strength in its speed of information processing and the direct implication of quick development and market access. Its 600 libraries containing

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descriptions of 95% of genes found in normal human tissue and bioinformatics systems in place to process, analyze, store, and retrieve information enabled the company to, within just a few years, generate over one million partial gene sequences, which corresponded to what the company believed were the most expressed genes in the human body [5]. Simultaneously, the company had identied and fully sequenced several hundred genes and had expressed and puried over a hundred potential therapeutic proteins, while evaluating six candidates in pre-clinical trials (shown below).

Pre-clinical Therapeutic Protein Candidates (HGS Annual Report, 1996) Keratinocyte growth Novel human protein that selectively stimulates the growth of skin and mucosal factor-2 epithelial cells; may be useful for the treatment of skin wounds and ulcers and may also prevent chemotherapy-induced damage to the lining of the mouth and intestine Myeloid progenitor Two novel human proteins that reversibly suppress the growth of bone marrow inhibitory factors 1 precursor cells; may be used to protect the bone marrow from damage during and 2 chemotherapy Monocyte colony Novel human protein that prevents the differentiation of monocytes to inhibitory factor macrophages; may be useful for the treatment of macrophage-mediated autoimmune diseases such as rheumatoid arthritis and lupus Monocyte attractant Novel human protein that attracts white cells to sites of tissue injury; may be protein useful for speeding the repair and preventing the infection of open skin wounds Fibroblast growth Novel human protein that protects motor neurons from destruction caused by factor-10 experimental trauma; these experimental models have been used to identify agents which may have use in preventing or treating neurodegenerative diseases

As of February 1997, HGS had led patent applications for more than 190,000 expressed sequence tags that represented over 1,000,000 partial gene sequences and had been granted ve U.S. patents covering full-length gene sequences [6]. Shortly thereafter, realizing the nite nature of the gene sequencing process, HGS modied its goal from focusing primarily on rapidly sequencing the human genome to using broader product opportunities presented by its genomic database to progress recombinant therapeutic protein candidates through the development phases and seek to commercialize products not only by leveraging its strong partnerships but also by building internal capabilities [5].

The HGS Mission HGS recognized a need to build product development and commercial capabilities in order to best exploit its gene research. The construction of a drug manufacturing facility, which began in mid-1997, to meet this goal represented a critical step in HGS history and openly declared the companys planned transition from drug discovery to7

development and commercialization [7]. While most biotechnology companies rely heavily on partners for their resources and capabilities, exactly three of the approximately 1,300 to 1,400 companies (Amgen, Genzyme, and Biogen) at the time had been able to get a product to market under their own label and stay independent, according Bill Tobin, then CEO of Biogen, Inc. (now Biogen Idec) [5].

HGS ability to rapidly process information for quick discoveries lay in its development of user-friendly bioinformatics systems, which allowed its scientists to quickly survey and compare the genetic composition of human organs, tissues, and cells. Indeed, the true potential of such a technology lies in the companys ability to realize the potential commercial value and develop commercially feasible and patentable products based on the information attained. While very few gene-based products had been developed and commercialized, HGS exhibited the ability to utilize the heavy early-stage investment to improve the probability of success at later stages of development, at which it is shown to be more expensive to fail.

In July of 1999, HGS announced its discovery of a novel immune stimulant that may be relevant to the treatment of infectious diseases and immune deciency disorders. The full characterization of this protein, a B-lymphocyte stimulator (BLyS), represented the successful application of HGS gene sequencing technology and high throughput screening technique to test the biological function and medical applicability of identied proteins [8]. The companys efforts were viewed as a validation of a novel approach to drug discovery.

In March of 2011, HGS Benlysta (belumimab) was the rst new drug to treat lupus, a relatively common autoimmune disorder, in 56 years, according to FDA records, to win approval from the FDA panel, which voted 13-2 in favor of the drug [9]. The drug was the rst in a new class called BLyS-specic inhibitors, which block the binding of BLyS to its receptors on B cells, thereby inhibiting their survival and reducing their differentiation into immunoglobulin-producing plasma cells. While lupus is a particularly challenging disease for the pharmaceutical industry, with at least seven drugs in the last several years having suffered setbacks in clinical trials, HGS drug, the rst from the companys pipeline to enter the market, gives previously frustrated physicians and patients hope and also encourages other companies to pursue treatments for the disease.

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Some patients have relatively mild forms of lupus that can be controlled with current treatments, including over-the-counter NSAIDS such as ibuprofen; others, however, experience devastating side effects from current treatments, and still others suffer from life-threatening lupus, a risk of major organ failure, such as severe kidney or brain damage [10]. Corticosteroids remain the only real option in these patients, even though substantial doses for extended periods results in very high risk of series side effects. There is hope that many of these patients will benet from Benlysta and that the drugs effect on bringing the disease under better control may also allow for lower doses of steroids, based on clinical trials in which patients were, on average, able to reduce the doses of the prednisone they were taking [11]. The drug was also shown to improve side effects of the disease in over 40% of patients studied.

Benlysta is currently marketed as a human monoclonal antibody and is to be administered intravenously to patients with mild to moderate disease. The drug is approved for use in several hundred thousand prevalent Americans with the condition, and annual global sales are estimated to reach $3 billion by 2015 [12]. Benlysta is known to be used signicantly off label in less severe forms of the disease, as well as will later be developed and likely approved for mechanistically similar conditions, including rheumatoid arthritis and other autoimmune diseases. In addition to seeking label expansion for this drug, HGS also has a strong pipeline consisting of innovative products stemming from the gene sequencing technology for the treatment of cancer, ulcerative colitis, coronary heart disease, and diabetes mellitus. The company currently has over 1,000 full-time employees and a market cap over $5 billion [13].

Failing Early and Often Due to the economic demands on pharmaceutical companies, R&D departments are more and more requiring ways to generate revenues quickly. This necessitates a careful balance that focuses on commercial opportunities and simultaneously allows laboratory scientists to maintain their sense of patience and creativity. HGS has been able to strike this balance in a way that allows the innate creativity of its research employees to thrive. The advance resulting from identifying the sequences of human genes, and the subsequent ood of patents, allows HGS scientists to freely target proteins for a broad range of therapeutic areas, while understanding and tackling development opportunities that make economic sense. This patent reservoir presents scientists with a certain freedom to operate and promotes a fail early and often culture due to less pressure to immediately succeed, which more prevalently exists in companies without similar IP safety nets.

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HGS approach to intensifying its early-stage research and development costs, or frontloading its efforts, is a model that understands the reality that drug development costs increase exponentially during later stages of development. As such, this methodology allows the companys researchers to fail fast and identify early on the candidates that are most likely to succeed, thus increasing the success rate and return on investment. Stefan Thomke, Assistant Professor at Harvard Business School, has clearly appreciated and explained such a practice of front-loading development, showing the devastating consequences of projects that fail late in the game [14]. He calls the HGStype approach rapid problem-solving, which leverages advanced technologies and methods to increase the overall rate at which development problems are identied and solved, particularly in the early phases of product development. In addition to nancial resources, he advises that companies need to also consider the value of time for product development, especially in the drug development industry, in which each months delay in experimentation shaves a month off commercial sales during its critical patent life.

While creating information as early as possible seems to be an obvious way of creating cost-savings, development practices often include ramping up resources slowly as projects unfold, with problem-solving activities and the generation of information also following in parallel. As a result, problem-identication and solving, along with nancial capital, are end-loaded rather than front-loaded. The benet of a shift to the latter approach (depicted in the gure below) is signicantly shorter total development time and cost.

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Biotechnology companies have traditionally relied on three principal sources of funding: venture capitalists, public investors, and pharma companies through alliances. However, raising money from each of these sources is becoming more and more difcult [4].

1. Companies looking to raise venture capital face the need to meet higher standards. Investors are having to retain capital to sustain their existing portfolios and are, thus, becoming more selective in choosing new projects. There is a trend towards a smaller share of total funding being allocated to starting new companies. 2. IPO investors are also more selective and are seeking opportunities where development has progressed to a later stage, where there exists a lower risk and probability of failure. Even in these instances of companies looking to raise public equity for the rst time off of positive Phase 3 data, recent deals have priced below the companies and bankers expectations. 3. While big pharmaceutical companies are becoming more interested in biotechs for their pipeline and early R&D support, the recent efforts of pharmaceutical11

companies to spin off certain therapeutic categories to focus on selective areas where capabilities exist has reduced the number of potential biotech buyers. Big Pharma is also looking instead to fellow pharmaceutical companies to take advantage of synergies and economies of scale and scope, therefore distracted by mega-mergers.

As a result of these challenges, including increased costs and risks of drug development over the years, biotech companies need to determine the most costeffective way to move forward with available resources. Beyond broadening their search for capital, companies need to deploy the capital that they have efciently, prioritizing technologically advanced, front-loaded R&D programs that diverge from tradition synthesis methods and carry higher success rates.

Concluding Remarks HGS was able to successfully, after completing two pivotal Phase 3 trials, win approval for and commercialize the rst ever genomics-derived drug. The approval was a noteworthy milestone that marked the twentieth anniversary of initiating the global human genome project. While twenty years may seem long to some, the company is now provided with access to several hundred fully sequenced targets and remains in an excellent position to capitalize on the results and fuel its pipeline with promising candidates. As a result, development time and costs for the companys overall portfolio in the long term are bound to fall superior to industry standards. In addition, drawing from history, twenty-year periods seem to be the time needed for breakthroughs to be developed from novel technologies [15]. As an example, Watson and Crick discovered the structure of DNA in 1953, but it was only twenty years later when articles by Stanley Cohen et al. giving rise to the recombinant DNA technology were published. It took another sixteen years, in fact, to launch the rst biotech therapies, such as recombinant erythropoietin (EPO). In addition, in 1975, monoclonal antibodies were discovered, but only in 1997, twenty-two years later, was the rst humanized monoclonal antibody (daclizumab) produced.

With the recent emergence of new technologies, such as high throughput screening and genomic sequencing, concentrating research efforts to the front end of the process, or front-loading, decreases costs, shortens development time, and frees up resources to be more innovative in the marketplace. While the HGS case is one such example, many such stories exist that highlight the effectiveness and unique benets offered by this development strategy.12

References

1. Mehta, Shreefal S. Commercializing Successful Biomedical Technologies. Cambridge: Cambridge University Press, 2008. 2. Inhibition of Triggered Activities in Pulmonary Veins: Do Statins Have a Direct and Clinically Relevant Antiarrhythmic Effect? Yuan, Gan-Xin Yan and Ziyi. 2011, J Am Coll Cardiol, pp. 57:994-995. 3. Michael Steiner, David H. Bugen, et al. The Continuing Evolution of the Pharmaceutical Industry: Career Challenges and Opportunities. s.l.: Regent Atlantic Capital, LLC, 2007. 4. Jaggi, Glen T. Glovannetti and Gautam. Beyond Borders Global Biotechnology Report. s.l.: Ernst and Young, 2010. 5. [Online] http://www-personal.umich.edu/~afuah/cases/case5.html. 6. Human Genome Sciences, Inc. 10-K Report. [Online] 1996. http://sec.gov/Archives/ edgar/data/901219/0001005150-97-000224.txt. 7. [Online] http://articles.baltimoresun.com/1997-06-04/business/ 1997155053_1_genome-proteins-biotechnology. 8. BLyS: Member of the Tumor Necrosis Factor Family and B Lymphocyte Stimulator. Paul A. Moore, Ornella Belvedere, et al. s.l.: Science, 2009, Vols. 285 (5425): 260-263. 9. News: Human Genome Sciences, Inc. [Online] http://www.hgsi.com/latest/humangenome-sciences-and-glaxosmithkline-announce-fda-approval-of-benlysta-belimumabfor-treatment-of-systemic-lupus-erythema.html. 10. LifeExtension. [Online] http://www.lef.org/protocols/immune_connective_joint/ lupus_01.htm. 11. [Online] http://www.lef.org/protocols/immune_connective_joint/lupus_01.htm. 12. News: Human Genome Sciences, Inc. [Online] http://www.hgsi.com/latest/humangenome-sciences-reports-progress-toward-sustainable-revenues-and-announces-2011goals-at-jpmorgan-healthcare-confe-4.html. 13. Human Genome Sciences: Yahoo! Finance. [Online] http://nance.yahoo.com/q? s=HGSI. 14. The Effect of "Front-Loading" Problem-Solving on Product Development Performance. Fujimoto, Stefan Thomke and Takahiro. s.l.: J Prod Innov Manag, 2000, Vols. 17: 128-142.13

15. [Online] http://www.geigercount.com/report-the-rst-genomics-drug.

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Chapter 2: How Americas Innovator Drug Firms are Rediscovering Innovation David C. Mitchell Executive Summary

Innovation in Americas Big Pharma companies was once the envy of the world. During the World War II era, and continuing for several decades thereafter, rapid-re launches of innovative pharmaceuticals became the norm. We won The Second World War, and it appeared we would win the war on the maladies of mankind as well: life-threatening infections, cardiovascular disease, diabetes, hypertension, childhood diseases, mental illness, and perhaps even cancer. The public came to believe that the innovative, research-based pharmaceutical industry, in partnership with government and universities, would eventually nd a cure for every aliment. FDA even called the products of these rms innovator drugs (1). In recent years, however, Big Pharma has lost its mojo. Despite ever increasing expenditures on research, increasingly impressive laboratory facilities and cutting-edge science, the number of new drug approvals each year has lagged (2). Importantly, however, the page may be turning. Big Pharma appears to be rediscovering the magic of innovation in its own backyard. A new chapter for Big Pharma is beginning. To survive - and thrive again - the tried and true, decades-old, development model is morphing into a something that works in 2011. The old model is being replaced by a simpler, less-is-more approach to innovation. This is the same approach that has been used by biotech for many years. The author provides a snapshot of two Innovator companies that are in the midst of rediscovering innovation by building relationships with entrepreneurial biotechs, learning from them, and reorganizing their operations into a leaner biotech model. Whether the end-result proves transformative for Big Pharma, or something more akin to the General Motors Saturn experience, time will tell (3).

Key Denitions

Big Pharma. The top 20 large pharmaceutical companies (e.g., J&J, Pzer, Roche, Glaxo Smith Kline), primarily focused on small molecule traditional drug development activity (4).

Biotech. Generally small, entrepreneurial rms focused on drug development methodologies that utilize bioprocess engineering to develop new drugs (5). Most credit the genesis of the biotech age with the founding of Genentech in 1976 by Herb Boyer15

and Bob Swanson. In recent years, however, the term has been used to describe any startup developing new drugs (small molecule or bioprocess-engineered). For the purposes of this paper, the second denition is utilized.

Disruptive Innovation. An innovation that disrupts an existing market, term coined by Clayton M. Christensen.

Sustaining Innovation. An innovation that does not have an effect on existing markets.

Introduction In the 2001 management book, Good to Great, author James Collins wrote about The Stockdale Paradox. To be great, companies must confront the brutal truth of the situation, yet at the same time, never give up hope. This principle is particularly germane to Big Pharma ten years later. The industry is at a crossroads. Either continue with the old processes of innovation which no longer seem to work very well, or try new approaches to organization and/or process with the twin goals of increasing innovation and lowering costs. In this chapter, the author reviews two old-line American pharmaceutical companies that are either attempting new approaches to innovation or are at a place where dynamic change appears inevitable: Lilly and Pzer.

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Case Study: Eli Lilly and Company (Lilly) Example of Sustaining Innovation in Business Model

Figure 1: Report Card for Lilly - LLY, 10-year Chart

With sales of 23.08 Billion and a market cap of 39.92 Billion (6), Lilly is one of the better known American pharmaceutical companies and is an appropriate representative of Big Pharma. Eli Lilly and Company was founded in 1876 by Eli Lilly, a Civil War veteran and a pharmaceutical chemist. Headquartered in Indianapolis, it is one of the former big-four Midwestern pharmaceutical companies (Abbott, Lilly, Parke-Davis, and Upjohn). Only Lilly and Abbott remain as independent rms today. Parke-Davis had been the oldest and largest American pharmaceutical rm, but it was acquired in 1970 by WarnerLambert which in turn was acquired by Pzer in 2000 (7). Beginning in 1943, Lilly was the rst to mass produce penicillin. Today, the rm is the worlds largest distributor of central nervous system (CNS) prescription drugs (8). Yet, as Figure 1 suggests, the rm has been a poor investment for Longs over the past decade.

Representative Lilly brands are CIALIS (developed by ICOS), CYMBALTA, GEMZAR, methadone (originally developed in Nazi-Germany), PROZAC, and BYETTA (developed by Amylin). CIALIS and BYETTA are of particular interest here, both having been primarily developed by small biotech rms. Lilly ultimately acquired ICOS, a small Seattle-based rm and the developer of CIALIS. Amylin, the developer of BYETTA, and Lilly continue working collaboratively on BYETTA and other product candidates intended for the diabetes market. Recent news has not been positive (9).

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Recent press releases from the rm include commentary on an apparently innovative approach to drug development (10) and also the continuing desire to remain independent (11):

Eli Lilly's resistance to any form of merger comes despite the fact that a series of patent lapses, stiff competition from generic drugmakers and regulatory setbacks are all set to hit its sales in coming months and years. "We feel that (with) our current size, with the sizeable investment in research and development, we have the way to generate new medicines we need to replace the medicines that we are losing, that are coming off patent in the next several years." Many analysts expect Eli Lilly's earnings to fall steadily from this year through to 2014 as it loses patent protection on many of its best-selling drugs. For instance, the U.S. patent on its biggest product, the $5 billion-ayear Zyprexa schizophrenia treatment, lapses in October.

New Drug Development Model vs the Tried-and-True

Lilly is rediscovering the keys to successful innovation by mimicking what has worked well in biotech for several decades. Utilizing biotechs lean virtual model, Lilly is reaching decisions on drug development 12 months earlier and at half the cost of the older model of drug development it traditionally used (10). Lilly is committed to researching, developing and acquiring innovative new medicines to improve outcomes for individual patients. Achieving this goal requires implementing new strategies to speed the delivery of new medicines to patients. Two examples of Lilly's unique approach are participation in the Mirror Portfolio and Lilly's Chorus drug development groups. A key element in executing the Mirror Portfolio is the establishment of investment funds. Lilly has committed to invest up to 20 percent of the capital for these funds, or a total commitment of up to $150 million. In addition to nancial resources, Lilly will offer to outlicense molecules to these funds. For its investments of time and capital, Lilly will receive preferential access to molecules managed by the funds. Lilly retains the rights to purchase all molecules licensed from Lilly via the Mirror Portfolio, as well as to evaluate and acquire a limited number of externally sourced compounds, all at fair market value. Established in 2002, Chorus is a small, multidisciplinary drug development group within Lilly which conducts early-stage development work using a virtual model. The Chorus18

group focuses on designing and efciently executing lean and highly focused development plans that progress compounds from candidate selection to clinical proofof-concept in human clinical trials. Using this approach, Chorus has been able to reach decisions about 12 months earlier and at about half the cost of the current industry model. To date, Chorus has delivered data on 17 molecules, six of which resulted in positive proof-of-concept clinical data. Due in part to its successful track record and the increased demand for capacity related to the Mirror Portfolio opportunities, Lilly has "cloned" the original Chorus (now known as Chorus Premier) with the establishment of Chorus Resonance in Indianapolis, Chorus Europe in the United Kingdom and Vanthys, a joint venture in India. Lilly will make these drug development groups available to the funds as a fee-for-service offering, although other alternative drug development organizations may be used. Lilly's establishment of the Mirror Portfolio supports our innovation strategy which consists of three key componentsmolecule uniqueness, speed and cost efciencies which together are the cornerstone of our research and development philosophy," said Jan M. Lundberg, Ph.D., executive vice president of science and technology, Eli Lilly and Company, and president, Lilly Research Laboratories. "Seeing the Mirror Portfolio now in action with the entry of these rst molecules gives us great condence in our ability to leverage innovation beyond our walls in order to deliver truly breakthrough medicines for the patients who are waiting." In many ways, Lillys new approach to innovation is similar to the Skunk Works (12) and 15% (13) innovation programs of Lockheed and 3M, respectively. All three approaches require doing things outside the norm, cutting through corporate bureaucracy, and removing impediments so innovators are freed to innovate.

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Case Study: Pzer Disruptive Innovation in Business Model Coming?

Figure 2: Report Card for Pzer - PFE 10-year Chart With sales of 67.81 Billion and a market cap of 162.62 Billion, Pzer currently ranks as #2 in worldwide sales on the list of top-12 pharmaceutical rms, behind J&J (14). Pzer was founded as a ne chemicals business in Brooklyn, NY, in 1849. Like Lilly, Pzer was involved with the Second World War effort to mass produce penicillin. During the 1980s and 1990s Pzers reputation and fortune was built on innovation and worldclass research which saw the launch of multiple blockbuster drugs: ZOLOFT, LIPITOR, NORVASC, ZITHROMAX, ARICEPT, DIFLUCAN, and VIAGRA. More recently, however, the rm has been known for acquisitions of Warner-Lambert, Pharmacia, SUGEN, King Pharma, and Wyeth (15) and less for the discovery and development of innovative pharmaceuticals.

During the past decade, M&A came to be viewed as the VIAGRA for Big Pharma growth. Today, Pzer is the most noteworthy, but many other rms have followed the same path. GLAXO became GlaxoWellcome after merging with Burroughs Wellcome and later became Glaxo Smith Kline after a merger with Smith Kline Beecham. Merck acquired Schering-Plough, and Roche acquired Genentech. How can we measure the success of these activities? If an appropriate Report Card is the 10-year stock chart, M&A growth has fallen way short as a method to grow Pzer relative to the previous organic growth that came through product innovation. In fact, recent news from Wall Street suggests Pzers Board and many shareholders question the M&A results and are beginning to expect signicant divestiture of assets so the Company can once again focus on the product innovation that made it great in the past (16). One analyst predicts20

up to 40% of the company may be divested (17). Another way to measure success is the number of blockbuster drugs being developed internally. In Pzers case, the last blockbuster to come from the Companys Groton R&D operation was Viagra in 1998 (18).

An Approaching Disruptive Innovation in Business Model

Over the past decade, Pzer has relied heavily on licensing deals, rather than its own internal labs, to ll its pipeline. The company'slabs haven't produced a major blockbuster since introducing Viagra in 1998, even though Pzeris one of the biggest R&D spenders in the entire pharmaceutical industry.

But look for that to change over the next few years,Pzer research Chief Mikael Dolsten said at the Morgan Stanley Global Healthcare Conference in New York. Dolsten came to Pzer when the Pharma giant acquired Wyeth last year, and took over sole possession of the top research spot after Martin Mackay left earlier this year. According to Reuters, Dolsten noted that Pzer's current pipeline is full of experimental drugs discovered atthe company'sown labs, including drugs for arthritis, Alzheimer's disease and stroke prevention. We're building a coherent organization, allowing a diversity of approaches for success,said Dolsten, who alsonoted the company is taking a greater interest in biotech. He added that Pzercould boost its R&D output by focusing more on external partnerships with biotech companies and research institutions, and by being exible about the company's level of R&D spending. (18).

Of particular interest are the underlined comments above. Pzer is clearly looking to biotech for a new innovation model. With the acquisition of Wyeth, Pzer gained a sizeable biologics portfolio (e.g., arthritis treatment ENBREL and human growth hormone GENOTROPIN). Additionally, Pzer has become quite vocal about biosimilars, essentially biologic generics, apparently planning to move in that direction as well (19).

The author believes the likely Pzer of the future will be a leaner business model, more focused on biologics innovation than on small molecule development. Large-scale M&A has run its course, at least for now. To increase the rate of return for investors, product and process innovation remains the key. There will be signicant divestiture of various protable - but stale - pieces of the current business. There will be increased21

expenditures in biotech but with accompanying decreases in expenditures in small molecule development. Headcount reductions will continue but thats another story altogether.

As the author was completing this chapter, new publications appeared to validate the authors predictions regarding the future of Pzer. The Company sold its CAPSUGEL business for $2.375 billion in cash to Kohlberg Kravis Roberts & Co L.P. (KKR). CAPSUGEL, the world leader in hard capsules and an innovator in drug-delivery systems, generated approximately $750 million in revenue and manufactured more than 180 billion hard capsules in 2010 (20). And Pzer closed its Sandwich, UK, Research operation (21):

Pzer announced the closing of its R&D center in Sandwich, United Kingdom. Once the diamond of their drug development, the facility covered 80 acres, employed 2,400, and was known as the home of Viagra. This announcement is probably the most noticeable reection of the R&D paradigm shift taking place in big pharma. The switch is on for pharmaceutical companies to move from the antiquated industrialized model of inhouse drug discovery to more of a satellite outsourced approach. The popular phrase for outsourcing drug discovery nowadays is virtual.

This is not a new concept, though. G. Steven Burrill advocated a virtual drug discovery model in the early 1990s during the last nuclear winter for biotech funding. With the economy still languishing and the acquisition of venture capital at a premium, the concept of operating virtually has become quite appealing. Add the reality of the pending patent cliff and R&D spending surpassing $60 billion annually (without producing any appreciable results), and it is easy to see why virtual drug discovery is not only appealing, but necessary. Virtual pharmaceutical/biotech companies are knowledge-based organizations. They typically consist of a core management team, often including a CEO, CFO, legal counsel, and a host of business development and project management specialists. These companies contract out nearly all of the services they need for drug discovery, development, manufacturing, and marketing. In this way, a virtual company can reduce its xed costs to around 25%. A standard pharmaceutical company typically has a xed cost basis of around 75%. To venture capitalists, companies with lower variable costs are appealing since they reduce risk, provide for a better chance of recouping the VCs investment, and allow for a short time to exit. The virtual R&D drug development model allows for a high degree of exibility in being able to respond rapidly to threats and22

opportunities. In addition, it allows for a small group of individuals to work on a larger number of projects simultaneously.

Conclusion

In 2011, Big Pharma is at a crossroads. Some old-line companies are choosing to continue with an increasingly unsustainable business model, while others are morphing into leaner and more dynamic rms that are characterized as innovative once again. Both Lilly and Pzer have long and noteworthy histories, and both nd themselves reassessing their previous strategies and setting new pathways to innovation. In many ways, they are confront(ing) the brutal truth of the situation, and charging into the future while doing their best to shape it.

References

1. Generic Drugs: Questions and Answers, Food and Drug Administration, 12JAN-2010. 2. Costs and Returns for New Drug Development, Joseph A. DiMasi, Ph.D., Tufts Center for the Study of Drug Development, 20-OCT-2006 Presentation to FTC Roundtable. 3. GM to Wind Down Saturn Brand after Penske Halts Talks, Bloomberg, 2009. 4. Big Pharma, Wikipedia, 25-MAR-2011. 5. Biotech, Wikipedia, 25-MAR-2011. 6. LLY, Eli Lilly and Company, MSN Money, 27-MAR-2011. 7. Parke-Davis, Wikipedia, 27-MAR-2011. 8. Eli Lilly and Company, various publications. 9. Amylin, Alkermes sink on diabetes drug study, Market Pulse, 3-MAR-2011. 10. Lilly Marks Major Milestone for Mirror Portfolio with Agreements by Independent Fund to License First Two Investigational Medicines, Life Science Leader, 16FEB-2011. 11. Eli Lilly very much opposed to merger: CEO, Reuters, 19-MAR-2011. 12. Skunk Works, Lockheed Martin Corporation

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13. 15%, 3M Company. 14. List of pharmaceutical companies, Wikipedia, 27-MAR-2011. 15. Pzer, Wikipedia, 29-MAR-2011. 16. Pzer reviewing possible divestitures, REUTERS, 18-MAR-2011. 17. Pzer could divest 40% of company, analyst says, FORBES, 16-MAR-2011. 18. Pzer: pipeline will redeem underperforming labs, FierceBiotech, 14-SEP-2010. 19. Pzers biosimilars strategy, Generics and Biosimilars Initiative, 22-JAN-2010. 20. Pzer Inc.(PFE) Selling CAPSUGEL to KKR for $2.38 Billion, Could Set Stage for Other Divestitures, BUSINESS WIRE, 4-APR-2011. 21. Virtual Drug Discovery: The New Paradigm, LIFE SCIENCE LEADER, APR-2011.

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Chapter 3: An Adaptive Innovation Management Theory and Framework for Life Science Ventures Jordan Bauman Life science innovation requires signicant and diverse capital. These demands include organizational/structural capital (facilities, equipment, ofce space, etc.), human capital (management teams, scientists, technicians, analysts, engineers, etc.), nancial capital (venture investments, salaries, operational overhead, etc.), relational capital (value networks, working collaborations, tech transfer, etc.), intellectual capital (patents, trade secrets, trademarks, etc.), and so forth. The barrier to entry for life science entrepreneurs is very high compared to other areas of innovation. Successful business plans map out the capital requirements necessary to achieve the intended innovation outcome. When marketing your business plan to outside investors in order to create an environment that supports innovation, business plan models that predict the most efcient utilization of resources will be more attractive than models that are overly conservative and demand more capital.

This strategy has in inherent aw. When competing business plans seek out support for innovation, the plan that achieves the desired outcome with lower capital requirements will usually garner more support than a plan that requires greater levels of capital. However, these plans that are attractive are also more risky due to the unpredictable nature of life science innovation. Many life science ventures fail because the business plan underestimated the capital requirements and are unable to adapt to the innovation unpredictability while other life science ventures never get off the ground because they are unattractive to the investment market. Therefore, it is critical to life science innovators to be able to analyze inputs using a systematic approach to risk mitigation and change management. A framework that accurately gauges what the additional capital requirements are and efciently evaluates the various scenarios that could be implemented to satisfy the input requirements would help life science innovators determine which course of action will be the most efcient utilization of resources and capital. A framework that also alerts the system and potentially predicts when capital reaches a critical level is also an important feature to prevent life science ventures from succumbing to harsh economic conditions.

Markets demand a particular performance over time.

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This performance follows an S-shaped curve with varying degrees of inection. The most efcient innovators provide products or services that are slightly ahead of this Scurve. Competitors that fail to meet the minimum performance demanded are at higher risk for losing market share while competitors that greatly exceed market demanded performance may not be utilizing resources efciently.

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This same approach to innovation from a macro perspective can be implemented by new life science ventures to evaluate increasing capital demanded over time. Every good business plan needs to evaluate the various capital requirements that are necessary to achieve a desired objective. In doing so, developing a value to represent a particular capital requirement category is essential to understanding and gauging future inputs in terms of that predetermined value. This is a key step necessary to establish a baseline. For example, everything that is minimally required to achieve a particular outcome as it relates to human capital should be clearly dened and then assigned a single variable that represents this minimum requirement. After all capital requirements and capital variables are dened, the next step is to dene the capital that you have acquired in order to satisfy the minimum capital requirements. These values will be the same variables as dened in the capital requirement analysis and scaled according to the magnitude at which the capital acquired surpasses the capital required. The next step is to determine the minimum capital threshold level that bests ts the particular goals of the venture. Some ventures may be more risk adverse (higher thresholds) than others. Lastly, a risk prole can be developed which is the difference between capital acquired and capital required minus the predetermined capital threshold.

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1. Business Plan Analysis

Capital Requirements = Organizational/Structural (CO) + Human (CH) + Financial (CF) + Relational (CR) + (CX) $ Creq = CreqO + CreqH + CreqF + CreqR + CreqX

$ Creq = CreqO + CreqH + CreqF + CreqR + + CreqX [normalized to single baseline value] $ $ Capital Acquired = Organizational/Structural (CO) + Human (CH) + Financial (CF) + Relational (CR) + (CX) Cacq = CacqO + CacqH + CacqF + CacqR + + CacqX [values determined in context of Creq and scaled] $ $ # Capital Thresholds (Cthresh) = CthreshO + CthreshH + CthreshF + CthreshR + + CthreshX $ $ #!

example: 1O + 1H + 1F + 1R + X

example: 3O + 4H + 4F + 3R + X

example: 0.5O + 1H + 1F + 0.5R

Capital Difference = Cacq Creq example: 2O + 3H + 3F + 2R

$ # $ Risk Prole (RP) = Cacq Creq Cthresh example: 1.5O + 2H + 2F + 1.5R

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The above is an ideal scenario in which the capital required for a particular venture is accurately predicted and the outcome is achieved with efcient utilization of resources. In reality, this is not usually the case. Business plans can grossly overestimate capital requirements and others can underestimate these requirements leading to failure.

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Successful ventures are able to implement change management that results in a shift in capital acquired or a shift in capital requirements.

In the above example, a life science venture realizes they underestimated the capital required to achieve a particular outcome. In response to this underestimation, the venture acquires more capital in order to satisfy this capital requirement (shift from CA0 to CA1). Depending on the requirement, the type of capital acquired can be any combination of the variables described in the business plan analysis.

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An alternative strategy for life science ventures experiencing an increase in capital required in a particular matter critical to achieving the successful outcome is to decrease the capital required in other noncritical areas of the venture. This may consist of selling off assets, cutting salaries or personnel, and other strategies for cutting down on the burn rate. However, these adaptive models sometimes fail to account for the effects of implementation. Change management that aims to acquire more capital will have an inherent capital requirement associated with it. Secondly, change that aims to cut capital requirements will have an inherent degradation of capital acquired.

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In this example, a life science venture is facing a change in capital requirements. The strategy is to hire two more professionals and seek additional funding. These outcomes will increase the overall capital acquired for the venture. However, the act of hiring the professionals and their associated salaries will have capital requirements. In addition, the time and effort spent seeking out additional funding can also be quantied. This positive incremental shift in capital required resulting from the plan to increase capital acquired is represented as CRimplementation.

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In this example, a life science venture responds to increasing capital requirements by selling of a nonessential segment of the venture and removing two positions. The decrease in capital required results from freeing up the operational costs that were being used to maintain the particular segment as well as the savings from the salaries for the two positions. However, the life science venture is giving up whatever benet that particular segment provided to the venture as well as the expertise and productivity of the individuals who represented the two positions that were removed. This negative incremental shift in capital acquired resulting from the plan to decrease capital required is represented as CAimplementation.

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A successful framework that recognizes these implementation effects will be better equipped to understand the requirements for dealing with unanticipated inputs. Anticipated inputs are inputs to the system that the business plan predicted. They can be achieved or satised using the established capital structure described in the original business plan analysis. Unanticipated inputs are inputs that cannot be satised with the current capital that has been established. It is critical to analyze these unanticipated inputs using the same baseline variable established previously. By doing so, you can determine whether or not the resolution of this unanticipated input will result in an unacceptable risk prole.

2. Unanticipated Input Analysis

$ $ $ $ $ $

Input: CreqO + CreqH + CreqF + CreqR + CreqX example: 0.2O + 0.5H + 1.5F + 0.1R Impact Analysis Is RP Input > Cthresh example: 1.3O + 1.5H + 0.5F + 1.4R Impact will result in unacceptable Risk Prole

If an unacceptable risk prole results, it is critical to evaluate the capabilities of the venture in reestablishing an acceptable risk prole. Strategies that seek greater shifts in capital will inherently have greater implementation effects. It is important for any strategy that requires signicant changes in capital to not underestimate the implementation requirements so that the net result of the overall strategy is still capable of restoring an acceptable risk prole

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Each major unit represents a single unit in terms of the established baseline variables. The axis relationships can be customized according to the pertinent capital relationships that exist in any given venture.

After evaluating the input in terms of capital shifts, it is important to combine these capital shifts into a cohesive scenario. Different types of shifts can be combined into different scenarios according to the specic capabilities and strategies that are available for any given venture. It is important for management to go through each scenario to better understand which solution is in the best interest of the venture.

3. Change Management*

# $

Scenario1: CacqO + CacqH + CacqF + CacqR + CacqX example: 0.2O + 0.2H + 2.5F + 1R

Predicted Implementation Requirement for Scenario1: CreqO + CreqH + CreqF + CreqR + CreqX # # $ Scenario2: CreqO + CreqH + CreqF + CreqR + CreqX # example: -0.25O + -0.5H + -1F + -0.25R example: 0.05O + 0.05H + 0.75F + 0.25R

Predicted Implementation Requirement for Scenario1: CacqO + CacqH + CacqF + CacqR + CacqX # # example: -0.05O + -0.25H + -0.25F + -.05R

* Change Management Strategies can implement changes to Cacq and/or Creq

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After evaluating each scenario, management can than choose which scenario or combination of scenarios are the most efcient solution to satisfying the unanticipated input and restoring an acceptable risk prole.

4. Updated Business Plan Analysis**

$

Scenario1

Creq = CreqO + CreqO + CreqH + CreqH + CreqF + CreqF + CreqR + CreqR CreqX + CreqX # example: 1.25O + 1.55H + 3.25F + 1.35R

Cacq = CacqO + CacqO + CacqH + CacqH + CacqF + CacqF + CacqR + CacqR CacqX + CacqX $ $38

example: 3.2O + 4.2H + 6.5F + 4R

New Risk Prole: Cacq Creq Cthresh $ $ $ Scenario2 Creq = CreqO + CreqO + CreqH + CreqH + CreqF + CreqF + CreqR + CreqR CreqX + CreqX $ example: 0.95O + 1H + 1.5F + 0.85R example: 1.45O + 1.65H + 2.25F + 1.65R acceptable Risk Prole established

Cacq = CacqO + CacqO + CacqH + CacqH + CacqF + CacqF + CacqR + CacqR CacqX + CacqX # $ New Risk Prole: Cacq Creq Cthresh $ $ example: 1.5O + 1.75H + 1.25F + 1.15R acceptable Risk Prole established example: 2.95O + 3.75H + 3.75F + 2.95R

** Analyze impact of changes to Cacq and/or Creq

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5. Implement and Monitor Change Strategy

Management needs to monitor progression of the strategy making sure all assumptions about capital shifts and the implementation requirements were accurately depicted within the framework. If management underestimated or overestimated the shift requirements and/or the requirements for implementation, then they can use the same framework above in order to adjust the strategy to more accurately reect the demands of the market.

6. Analyze Next Unanticipated Input

The goal of this framework is to provide a systematic approach for analyzing capital requirements in an innovative environment in which capital is scarce, a reality commonly associated with life science ventures. It also provides a change management strategy for ventures that can adapt to unanticipated inputs. By establishing change through acquiring more capital or cutting nonessential components

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and reducing the capital requirements, ventures may have a higher probability of surviving the unpredictable economic environment associated with these high risk innovation markets. Over time, the number of drastic unanticipated inputs will decrease as your venture and particular capital structure become more aligned with the demands of the market the venture is operating in.

References

Clayton Christensen - The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press, 1997. Peter Schwartz - The Art of the Long View (Doubleday, 1991) Paul Nunes - Jumping the S-Curve: How to Beat the Growth Cycle, Get on Top, and Stay There. Harvard Business School Press, 2011.

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Chapter 4: Innovative Emerging Market Strategies Kimberly Lapointe Introduction Early in 2010, Deloitte published the report: The Future of the Life Sciences industries: Aftermath of the Global Recession. In the report 281 industry executives weigh in on what they see as the legacy left by the historic nancial hardships of 2008 and 2009 on the life sciences industry going forward. The report presents a seeming paradox in regard to the view of R&D and innovation in the midst of economic hardship. While a signicant portion, 43% of industry executives agree that a robust R&D pipeline is critical to long term health of the company, the report also reects that the realities of lost revenue lead to deep cuts to R&D budgets and resources. Its not unreasonable to be drawn to a duck and cover mentality in the face of an unprecedented siege on traditional biotechnology funding sources. The companies, however, that are emerging the strongest are the ones that found a way to innovate and expand both sales and products with less. Surviving difcult times in the midst of cutting R&D forces requires exibility in all areas of a company. One way that companies will seek to sustain their bottom lines is to craft a business plan that addresses emerging markets. Emerging markets is a classication that refers to economies experiencing a period of rapid growth and industrialization, making reaching the customer base more realistic. The largest of these economies are Brazil, Russia, India and China, often termed BRIC Nations. By now the staggering statistics on the explosive growth these markets will experience in the coming decade are familiar to most in the biotechnology industry. 35% of the respondents to the Deloitte study said, in fact, that emerging markets would be the most protable geographic area for life sciences in the coming years. Growing economies combined with increased exposures to Western diseases combine to create tremendous opportunity for companies facing drug patent cliffs.

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If only it were as as simple as bringing products to 50% of the worlds population and watching the revenues build. Authors Tarun Khanna and Krishna Palepu in, Winning in Emerging Markets, A Road Map for Strategy and Execution, describe what they term institutional voids. These institutional voids represent all of the logistical challenges in manufacture, storage, sales and marketing of existing biotechnology products in emerging markets. (2) Everything from quality control of materials sources, to the skill level of technicians, to how do the results get recorded? These institutional voids may have previously been enough to scare off companies from investing heavily into emerging markets, but these markets could become the true winners in the economic downturn as desperate times force reasonable measures. Such reasonable measures will surely be in the form of partnerships with a growing base of competent biotechnology talent and infrastructure in emerging markets. Sales in emerging markets are not new to the pharmaceutical industry at large. Sano Aventis and Pzer are two notable major companies that have long tapped emerging markets in the traditional manner that is, selling existing drug generics into these countries. Seizing the ultimate in low hanging fruit from an R&D standpoint, Pharma has made a concerted effort to go aggressively into emerging markets with both OTC and prescription drug sales. By customizing the local offering with localized pricing, Sano has successfully become an integrated pharmaceutical company with leading sales in Brazil, Russia, and India. (3)

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There is another mode of addressing these markets, though, that is worth giving some thought and that might be more applicable to members of the Biotech industry who dont have a shelf full of ready-made cheaper versions of their products in the form of generics. What if instead of selling existing products, base model devices are designed with emerging markets in mind? What is even more compelling is when those same inferior devices nd a market here at home. GE has managed to leverage this model in a manner that has rightfully grabbed the attention of the industry. In their successes, there might just be lessons applicable to the average biotechnology company who without a doubt can no longer afford to ignore emerging markets. GE: Lessons Leading to Self Disruption GE healthcare started the move into emerging markets as early as the late 90s with purely the intention to move the existing gold standard products into those markets. To do so was an expensive and arduous task. Most of the imaging products held and manufactured by GE are comprised of purchased parts from external vendors, so most of the early resources went into adequate supply chain management. (2) It was quickly apparent that local relationships and sources were the key to keeping costs low and maybe more importantly, solidifying the trust in a GE brand in emerging markets. Still it was a long term play. One of the earliest relationships GE formed in India was with Bharat Electronics Ltd. GE sent technical and quality teams to Bharat and spent years training executives and technicians on the quality standards GE needed to produce the end product. The relationship over time grew and proved to be surprisingly symbiotic. While GE gained the quality demanded, with signicantly lower wage and transport costs, the local company gained credibility in the world market and was able to attract both work and nancing as a result. (2)

For the better part of the next decade this strategy, widely regarded in the industry as glocalization worked fairly well. (4) GE added more and more successful supply chain and manufacturing partnerships in the rest of the major emerging markets. What could not have been predicted by anyone though is the rapid pace at which emerging markets have grown in terms of infrastructure, education, and economy. Aided by radical innovations in information technologies, education access and a willingness among businesses to embrace a global economy, lead to the birth of BRIC nations as not merely markets existing in a void waiting to be tapped into, but rather legitimate incubators of innovation in their own right. In the rst decade in emerging markets, GE was able to essentially sell technologies that were much more than the consumers really needed, because any solution was better than no solution. The number of customers who could afford the solution was low, but the ones who could, had no choice but to over buy. Then, something changed.44

Increasingly GE was facing legitimate threat of competition from an emerging biotechnology industry that was homegrown and in tune to the true local needs. Out of this reality was born an attempt at reverse innovation, the process of innovating products in the developing world rst and then moving that product into submarkets in the developed world. The term was coined rst by GE executive, Jeffrey Immelt, and Dartmouth professors Vijay Govindarajan and Chris Trible, and is quickly becoming integrated into the biotechnology industry vernacular. (4) The well known example of a reverse innovation from GE is the $1,000.00 handheld electrocardiogram device designed manufactured and sold to serve the needs or rural India. At that lower price tag and higher portability it is more accessible and more versatile for the challenges encountered by clinicians in India. It turns out though, that there are similar budget and logistics constraints in poorer population areas of rural and urban America. The $1,000.00 electrocardiogram also lls an unmet need of clinics, mobile health outreach services, and fee for service urgent cares popping up everywhere in the U.S. If legislation requiring broader healthcare coverage at lower costs continues to hold, these price sensitive markets in the United States will only grow. GE showed this was not an isolated success by applying the same strategy to their line of portable ultrasound machines and committing to innovate a cheaper version for China. In the end there is a set of lessons for other companies that emerge from the success of GE at integrating into emerging markets. The rst is that partnerships are absolutely critical. Not only to overcome supply and logistical challenges, but also to establish brand trust and relationships that help embed products into the cultural norm of these markets. GE has demonstrated that while cost cutting overall, these relationships will cost money and manpower capital to maintain. One executive noted, The only concern I have is we educate these people and teach them how to do sophisticated algorithms that do CT reconstruction to take electronic signals into an image in some way that I dont want to lose them. If they walk across the street and join a competitor who might be newyou lose that. In these new kinds of facilities we put up, well take our best engineers and put a lot of handcuffs on them, in the sense of stock options and earnings and different things so theyre not easily stolen. (5) The second lesson, cited by Harvard Business Review article on the subject, is that GE learned that innovation for developing world markets must happen almost entirely in the developing world. GE has found through its reverse innovation practices that the western world cannot design a product tailored to the needs of emerging markets, they will always want to add more features than are needed or desired. (4) GE has as a result placed a dozen teams in China and India who operate entirely locally and report to a management structure based there. GEs CEO Jeff Immelt is now widely reported

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to make multiple trips to China and India each year and each time meets with CEOs of local companies both partnered and not partnered with GE. It is the practice of quite literally touching in with an arm of the company that is effectively integrated into the local business practices. As the biotechnology industry and the world economy at large emerge from a historic economic downturn into a time that is, at best, uncertain, there is no one cure all strategy for staying aoat. Still, the data collected by Deloitte shows us that the priorities of the companies are to drive innovation forward while at the same time cutting R&D costs. GEs reverse innovation shows one example of a way to reconcile the paradox. If the R&D scientists at diagnostic and device biotechnology rms can set aside their drive for bells and whistles perfection, they may nd a market waiting to embrace their products. It is often said that less is more. In this case the greater take home message is that less isenough.

References:

(1) Deloitte Industries Report: The future of the life sciences industries: Aftermath ofthe global recession, 2010.(2) Khanna, Winning in Emerging Markets, A Roadmap to Success, Harvard

Business Press, 2010(3) www.sano-aventis.com/investors/events/corporate/2009/090702-emerging-

markets.asp(4) Immelt, Govindarajan, Trimble, How GE is Disrupting Itself, Harvard Business

Review, October 2009.(5) Joe Hogan, Joe Hogan, President and CEO GE Healthcare, Video 9-708-801

(Boston Harvard Business School Publishing, 2007)

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Chapter 5: Business Incubators for Biotech Justin Moretto Business incubators have been around for over half a century in one form or another, but the last decade has seen an interesting tailoring of the concept to meet the specic demands of the biotechnology sector. The basic principle behind the business incubator remains the same in the biotech incubator, which is to provide infrastructure for burgeoning startups without requiring capital investment. The case for the biotech incubator is a complex one, with differences between public and private incubators and a sometimes tenuous balance between the interests of the benefactor and the beneciary. Each side has something to offer and something to gain from the relationship, and the potential exists for one or both sides to exploit the relationship beyond its limits. To begin, let us consider a few of the different types of biotech incubators, and the purpose they serve. The Public Incubator This incubator is generally a collaborative venture where a university leads the way but private industry offers nancial support. The University of Floridas Sid Martin Biotech Incubator is a good example of a public incubator. The mission of this particular incubator is: To foster the development of new commercial ventures related to University of Florida research in all areas broadly relating to the molecular life sciences including medicine, agriculture, and the chemical and environmental sciences and to benet the University of Florida both academically and economically by providing tangible assets and services to viable startup companies.

Which is to say, it aims to foster the commercial development of promising biotechnologies. In this case the university has built as campus-like research park that offers a variety of amenities required by successful biotech companies, but which require heavy capital investments in order to incorporate into a facility. The startups have access to autoclaves, steam generators, animal care staff and other necessary but often cost-prohibitive functions, with infrastructure initially put into place by the university and supported by the collective momentum of the incubating companies. While material infrastructure is critical for scientic progress to take place, this incubator seeks to move beyond its university roots and into the realm of protable business. Here is where the immaterial infrastructure becomes invaluable. Offering access to accredited personnel, such as AAALAC certied animal care staff, adds both human capital and credence to the organizations. In the case of the Sid Martin Incubator, the designers wanted to offer more guidance to these early-stage bioscience47

companies, so they developed a suite of business development services. By offering access to experienced attorneys, accountants and investors, Sid Martin is fostering relationships that can take companies years to develop. In addition to this indirect education, the facility promotes direct business training and educational programs, which emphasizes the business component as a balance to the science. It should be noted that in this case, the terms public and private are not related to the ownership of the backers of the incubators (publicly vs. privately held) but rather, designate who in particular is the chief operator. Public usually refers to an integrated network of academic and industry interests, but often academic inuences can dominate the agenda. Private incubators are generally owned and run entirely by a single corporation, though academic ties are still crucial. The public incubator is an excellent place for the commercial evolution of a university lab, provided the scientists have good relations with the incubator staff. A collegiate feel, encouraged through campus styling and culture, can help ease the transition and encourage interaction between companies. This type of incubator can be a great t for many, but there are options for companies who feel more comfortable a bit further removed from the academic setting. The Private Incubator $ La Jolla, an outlying community in the San Diego metro area, is home to Johnson & Johnsons take on the private biotech incubator. They offer 25,000 square feet of well-equipped research space as well as targeted nancial support. The site became available in this capacity as a result of a repurposing campaign that made the facility capable of housing up to 17 individual companies. Much like the public incubator, emerging biotech companies must apply for the highly sought-after space. Because this facility is managed by Johnson & Johnson, the company are able to set certain rules which promote the success of their own business goals. This approach is common in the private incubator; for instance, J&J applicants must t into a set of predened therapeutic areas the parent company has identied as its core competencies. For J&J, that means 14 categories ranging from cardiology to oncology. This particular regulation on the focus of applicants aims to maximize the likelihood of success and support for new ventures. $ Narrowing the applicant pool to those ventures that share therapeutic interests allows J&J to stock the pond with novel approaches to familiar problems. A company like Johnson & Johnson has built considerable corporate infrastructure to promote its success in select therapeutic areas. Efciency dictates that they leverage their existing corporate machinery for outside ventures as well, rather than starting from scratch each time a good idea comes along. Alignment, or strategic t, serves as the rst selection criteria as well as an ongoing lter in subsequent selection steps. The necessity arises

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from the need to sift through mountains of complicated data in order to determine the potential marketability of each companys position. Those who sift through this information would not be effective in areas outside their historical experience. By limiting applicants to 14 established categories from J&Js portfolio & pipeline, the company ensures that newly incubating ventures are properly staffed with personnel who will grasp the startup companys aims and be able to scrutinize and digest the information presented. A Bargain, but for Whom? $ Structuring a biotech incubator, whether public or private, requires concessions but who should make them, and to what degree, can be difcult to determine. Each participant in these relationships should add value to the partnership, and each understandably expects to receive some value in return. Lets consider what each side brings to the table, and what each side may hope to take away. $ Consider a hypothetical group of scientists and business people who have come together to form a business, Nu Corporation, based on a single discovery which they believe to be a future blockbuster. In this situation, NuCorps portfolio is disproportionately weighted with intellectual capital. In addition to the discovery which they expect to propel them to a place of industry leadership, they have added value in the skilled employees who will make up the company. Human capital is potentially, as it can never be guaranteed to remain with the company. This volatility is moderated in a number of traditional ways: nancial incentives, job security, educational opportunities and meaningful projects that garner a sense of ownership in employees. NuCorp has the opportunity to leverage this feeling of personal investment in a powerful way and convert human capital into physical capital with an efciency that large corporations rarely achieve. However, leaning too heavily on a single support (e.g., loyalty) can be disastrous if that support is lost. This risk adds to pressure to generate immediate cash ow. Like many young companies, NuCorp has startup capital, but these funds are not without end, and there are expectations to produce results with the funds that have been allocated. When income is xed and running the business requires a certain level of infrastructure, the only solution is to seek more value for every dollar spent. Enter the biotech incubator. $ NuCorp is the perfect candidate for an incubator. Since the company formed as a commercialization of an academic discovery, it has plentiful intellectual capital, but lacks physical capital, such as appropriate facilities. Which model should NuCorp choose? The decision between a public and a private incubator can be as much circumstantial as it is the product of pragmatic deliberation. As an extension of a university lab, a public incubator born from a university initiative and multiple corporate collaborations may be a logical choice, given the relational access to key decision

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makers. In the event that there are relational road blocks, or a lack of university incubator space or desired facilities, the private incubator exists as an option. Public and private incubators will offer many of the same amenities in varying degrees, but the expectations may differ signicantly. For this example, we will assume that NuCorp chose the private incubator in the absence of a university afliated option. $ Once NuCorp has demonstrated the legitimacy of their venture and the large company independently backing this incubator has acknowledged NuCorps value, an agreement must be reached. The most common agreement involves discounted lab space along with business development services aimed to keep young companies healthy and foster accelerated growth. In return for this investment of resources, the large company may reserve the right to license future products, opt into a stake in the company or purchase the company outright. In our hypothetical example, NuCorp could offering potential future earnings in exchange for the infrastructure required to make the company protable. By occupying subsidized space in preexisting facilities, NuCorp will have avoided a massive capital expenditure giving it the freedom to utilize its capital reserves to continue pursuing the original venture. The simple act of entering well equipped lab space is a monumental event for a young company, and doing so through a subsidized lease rather than building from the ground up can be likened to reducing the activation energy of a spontaneous event. In this case, the activation energy is the capital requirement and the event is entering the scientic arena in a meaningful way. $ In addition to the tangible benets received by the startup, there are a host of experience-based benets that come in the form of business counseling to incubated rms. These business development services can include access to investors, attorneys and accountants, as well as educational and promotional opportunities. The networks associated with successful businesses are not a commodity that can be bought and sold, but young companies like NuCorp can jump ahead years in the market through these collaborative networking opportunities. Templates for Success $ The potential exists for great value to be generated by these arrangements. For the larger partner, the most obvious source is the value that comes out of a marketable product, but with the greatest potential prots comes the greatest risk. There are other sources of value generation that are somewhat unique to the incubator model and have much lower risk. The example of the La Jolla, California facility owned by Johnson & Johnson shows how a company can maintain unused facilities during a time of contraction. Without knowing all the costs associated with the building, it is difcult to assess the return the company sees solely from lease income, but there is no doubt that this situation is preferable to holding an empty property that retains all the associated taxes and fees.

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$ The greatest benet to a company like J&J in this type of relationship is the ability to prot from disruptive innovation. Even with a history of innovative thinking, J&J has evolved into a slow lumbering hulk; a fate shared by many corporations as they move into the largest market capitalization bands. Massive infrastructure, shifts in cultural momentum and the resulting inexibility makes these corporations prime targets for the undermining effects of disruptive innovation. The internal challenges faced by these companies when approaching innovation can be disabling and lead to stagnation. This does not mean that the companies do not innovate internally, but the biotech incubator does for them exactly what the name implies; it gives a hospitable place for something to grow in an otherwise inhospitable environment for new ventures. The danger in incorporating a startup too early is that you risk killing the goose that laid the golden egg and then letting the golden egg fall into obscurity. Corporate culture is a large driving force for innovation, and the freedom that is often felt in a young company can be crushed by the massive weight of the new engulng environment. This conformity can rob the acquiring company of all the value beyond the initial intellectual property. Conversely, an incubator allows the startup to operate with its own corporate structure and maintain its innovative culture with the added benet of increased resources through patronage of the larger corporation. This paradigm allows a company like J&J to have access to novel ideas within the context of a large market cap business. Pzer recently partnered with one of its incubated companies, Tacere Therapeutics, to pursue an expressed RNAi drug indicated for Hepatitis C. This shows a level of faith in RNAi therapeutics that the large pharmaceutical companies have been hesitant to express, in large part due to delivery challenges. By allowing a company with a promising therapeutic idea to work out delivery challenges independently, they maintained an efcient innovation model. Tacere settled on vector delivery for their triple region short hairpin RNA. This RNAi partnership was a rst for big pharma, but has been modeled by many companies who see the potential of RNAi therapeutics and want to be early adopters, but recognize that challenges (and associated R&D risks) still remain. Conclusion Both public and private incubators ll a void in the biotech industry which has broadened as companies grew larger and research interests expanded. They create a relationship between the startup and the large market cap company, allowing capital equilibrium to be reached in a more efcient manner. Intellectual capital is given a hospitable environment to thrive and mature, along with decreased overhead cost and sustained cultural momentum. In a best case scenario, both sides prot much more than they would alone because each party is gaining what it lacks, without compromising their nature. The phenomenon of the biotech incubator will inevitably

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evolve as the market demands, but it will remain an important part of the bioscience industry until a more efcient means of innovation replaces it.

Sources Barrett, Amy. April 17, 2006. J&J: Reinventing How It Invents. Bloomburg Businessweek. Biogen Idec. December, 2009. Case Study: Neostasis. http://www.biogenidec.com/partnership_bi3.aspx?ID=5822 Bluedorn, John. 2002. Macroeconomic Theory. http://johnbluedorn.squarespace.com/storage/teachingles/ human_capital_solow_mrw.pdf Christensen, Clayton. 2003. The Innovator's Dilemma. Graves, Brad. Big Pharma Co. Floats Trial Balloon for Bio Incubator. April 5, 2010. The SanDiego Business Journal. Romer, David. Advanced Macroeconomics. p9-17 Mankiw, N G; Romer, D; Weil, D N. A Contribution to the Empirics of Economic Growth. The Quarterly Journal of Economics. Vol. 107, No. 2. (May, 1992), pp. 407-437. Meihong Chen, Quan Du, Hong-Yan Zhang, Claes Wahlestedt, and Zicai Liang. 2005. Vector-based siRNA delivery strategies for high-throughput screening of novel target genes. Journal of RNAi and Gene Silencing, 1(1), 5-11. Morrison, Chris. Ed. 2007. The State Of RNA Interference Therapeutics: Delivery Is Everything. Pharmaceutical Approvals Monthly, Volume 12, Number 10, 3-7. Sid Martin Biotechnology Incubator. 2009. Inside the Sid Martin Biotechnology Incubator. http://www.biotech.u.org/pubs/smbi_brochure09web.pdf.

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Chapter 6: Angels and Alliances Karen Sturm Abstract " Biotechnology companies require large investments of capital in ventures that are characterized by scientic complexity, regulatory uncertainty and long development times. While this is a high growth sector, moving a promising research discovery to market is a complex, costly and challenging undertaking. It is essential that companies rapidly innovate and effectively manage R&D in order to create value through the development of strong pipelines leading to solid intellectual property portfolios. This case is an example of how one start-up, Stemina Biomarker Discovery, acquired capital and formed strategic alliances whiles simultaneously developing a strong pipeline and solid intellectual property portfolio.

Introduction One of the major problems in drug discovery today is that scientists invent medicines to treat people, but they have to use animal or tumor cells to do it. Nine out of ten drugs studied in humans turn out not to work or to be too toxic. The current animal tests and models, upon which pharmaceutical companies, the Environmental Protection Agency, and the Food and Drug Administration base their developmental toxicity guidelines and standards, only work 50 percent of the time. Conversely, a candidate that is eliminated because it is toxic to rodents although not to humans, results in the loss of a potentially benecial drug. One solution may be to use human embryonic stem (hES) cells to test drugs for safety and efcacy.

$ The road to personalized medicine depends on the development of biomarker assays that can reliablywith ultrahigh sensitivity and specicityidentify what is going on in the patients system. Better biomarkers are needed to improve diagnosis, guide molecularly targeted therapy and monitor activity and therapeutic response across a wide spectrum of diseases. The use of biomarkers in BioPharma R&D and diagnostics will enable more precise, predictive and preventive clinical care.

$ Biomarker-enabled R&D is evolving into a new discipline with a strong patient focus. In the imaging eld, biomarkers are increasingly being used non-invasively to assess patients localized disease progression and response to drug candidates.

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Biomarkers can help determine whether the drug reaches the target, whether it affects biological activity and, if it does, whether that effect leads to the desired clinical outcome.

$ From a commercial perspective, biomarkers offer a faster alternative to the conventional drug development approach, and the promise of safer drugs, in greater numbers, with quicker approval times. The attrition rate for drugs in clinical development is high. Many failures occur late in clinical trials after massive amounts of capital have been expended. This is mainly due to the inability to predict a drug candidates performance early and with a large degree of certainty. Because biomarkers can predict drug efcacy more quickly than conventional clinical endpoints, they hold the potential to substantially accelerate product development in certain disease areas. And because they help identify earlier those candidates that are likely to fail, they reduce drug development costs, giving life to the concept of fail early, fail cheap. The FDA estimates that just a 10% improvement in the ability to predict drug failures before clinical trials could save US$100 million in development costs per drug.

Stemina Biomarker Discoverys cell based assays arise from the strategic convergence of two cutting edge technologies: hES and metabolomics. The companys technical foundation is a metabolomics platform that screens human embryonic stem cells for the discovery of biomarkers to predict the toxicity of candidate drug molecules. Metabolomics is the systematic study of the unique chemical ngerprints that specic cellular processes leave behind, the study of their small-molecule metabolite proles. The advantage of metabolomics, which uses mass spectrometry to identify small molecules that are differentially secreted across multiple samples, is that it can identify biomarkers for toxicity that can then be developed into diagnostic tests. The stem cellbased approach enables the company to identify biomarkers of response in a fully human system without having to dose a human.

The companys focus on metabolomics biomarkers sets it apart from potential competitors, and the rm is hoping to retain its unique position in the marketplace via IP protection. Although initially offering drug-screening contract services, the real value of the company is not just in the service model, but also in the development of a robust set of biomarkers in a particular area of interest.

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History Elizabeth Donley met Gabriela Cezar when she served as the director of WiCell, the stem-cell subsidiary of Wisconsin Alumni Research Foundation (WARF). She was intrigued by Cezars research platform at the University of Wisconsin-Madison, and the two talked briey about starting a company. In 2006 shortly after Wisconsin Governor Jim Doyle announced his stem cell research initiative, Donley typed up a business plan and called Cezar. Having left Pzer to study stem cells at the University of Wisconsin, Cezar knew there was an opportunity to improve drug safety predictions, realized there was a gap in the knowledge, and believed that the gap called for innovation.

On November 1, 2007, Stemina opened its state-of-the-art facilities for hES cell culture and mass spectrometry in the UW Research Park in Madison, Wisconsin. The company is focused on the discovery, development and commercialization of molecular biomarkers to improve drug safety and human health.

Products and Research Steminas rst commercial launch, called devTOXTM, is a developmental toxicity screen which uses undifferentiated hES cells to screen pharmaceutical agents for teratogenicity. The method uses mass spectrometry to analyze small molecules secreted by hES cells and hES-derived cells including heart and neural cells, in response to drugs, other compounds, injury or disease. In blinded studies of chemicals whose effects on developing human embryo are known, the assay has been able to model human developmental toxicity with about 90 percent accuracy and is the only system to provide denitive human biomarkers re