Bridging “the Valley of Death” A New Model for Partnership in Pharmaceutical Research & Early Development

1. A View from Big Pharma Massachusetts Biotechnology Council April 17, 2009 Bridging “the Valley of Death” A New Model for Partnership in Pharmaceutical Research & Early Development Ted Torphy, Ph.D. CSO & Head External Research & Early Development Johnson & Johnson Pharmaceutical R&D, L.L.C.

2. 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

3. 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

4. Productivity of the Pharmaceutical Industry 50 60 R&D Expenditures Approvals 50 40 40 30 NMEs and Biologics Approved 30 R&D Spending (US$ Billions) 20 20 10 10 1995 2000 2005 Sources: FDA/CDER, PhRMA, PricewaterhouseCoopers Note: R&D spending from non-PhRMA companies not available

5. Venture Capital? Biotech? Pharma

6. 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

7. 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

8. 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

9. 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

10. 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 The Open Innovation Mindset1 Closed Innovation Open Innovation 1 Adapted from Open Innovation, by Henry Chesbrough Harvard Business School Press, 2006

11. “The Valley of Death”A Major Impediment to Commercializing Innovation from Academia Full Development Basic Research Clinic Innovator Preclinical R&D Proof of Concept Research Phase 1 Commercialization Funding Gap

12. R&D Risk ProfileThe Basis for the Valley of Death 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 1.0 FDA Review Phase III Phase IIb Cumulative Probability of Success1 0.5 Phase IIa Pre- Clinical Phase I Lead Optimization2 0 8 9 10 11 12 1 2 3 4 5 6 7 Years 1 CMR benchmarks used to calculate risk-adjusted values at various stages 2 Internal estimate

13. eRED Operating ModelBridging the Valley of Death Innovation Sources Funding Sources External R&D Entities Private Equity Academia Government Biotech eRED Philanthropy COSAT / JJDC / BD J&J REDs Academia • Assemble a portfolio of external product opportunities • Syndicate with external funding sources • Retain pre-defined product rights • Provide guidance and expertise to portfolio companies Accelerators Public Incubators

14. eRED Process PhI PhIIa / PoC eRED Transfer Source Seed Monitor External R&D Entities / Venture Partners  Develop Lead Optimization FDA Review Pre- Clinical Phase IIa Phase IIb Research Phase I Phase III IND / FIH  Acquire J&J R&D 8 9 10 11 12 1 2 3 4 5 6 7 0 Years 7

15. External R&D with Venture Investors Acme Venture Development Fund JJDC 20% Other LPs 80% Management Team One C-Corp per project 1 2 3 4 5 6 7 … • 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

16. 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

17. 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

18. Re-engineering Pharmaceutical R&D “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

19. Johnson & Johnson Pharmaceuticals External Research & Early Development Bridging “the Valley of Death” A New Model for Partnership in Pharmaceutical Research & Early Development Massachusetts Biotechnology Council April 17, 2009