LS 102: Trends in Healthcare

1. LS 102: Trends in Healthcare February 2nd, 2006 12-1 PM D310

2. Overview • Healthcare in the USA today • Medicare Reform Act • Regulatory Framework • Clinical trial process • Traditional “Big” Pharma • Structural trends • Therapeutic Licensing • NRDO model • Medical Devices

3. Healthcare in the US today • Healthcare spending growing • Per capita • As % of GDP • Medical inflation has outpaced overall inflation • In 2001, $1.2 trillion spent on personal healthcare services

4. Medicare Reform Act • Since Medicare's creation, the role of prescription drugs significantly increased. As new and expensive drugs have come into use, patients, particularly seniors, for whom Medicare was designed, have found prescriptions harder to afford. • The Medicare Prescription Drug, Improvement, and Modernization Act, is meant to address this problem. • Highly complex structure

5. Medicare Reform Act - Highlights • Subsidy for large employers to discourage them from eliminating private prescription coverage to retired workers (a key AARP goal); • Prohibits the Federal government from negotiating discounts with drug companies (unlike the practice in most other countries); • Prevents the government from establishing a formulary (preferred drug list), though does not prevent private providers such as HMO’s from doing so. • Adds pretax Health savings account for working age people

6. Medicare Reform Act - Winners • Winners: • Drug companies: more public money available for drugs (>$800 billion over 10 yrs) • Private managed care providers: incentives for managed care to provide competition to the program and possible part privatization of Medicare

7. Medicare Reform Act – Potential Losers • Possible losers: • Taxpayers/budget deficit • Effect of medicare’s model formulary? Adherence is voluntary, but will affect private payor’s policy. • Payors want less categories with broader scope, e.g. anti-inflammatory • Drug co’s want more categories with narrower scope, e.g. Cox 2 and NSAID • Less “spread” for doctor administered drugs. Expect closer scrutiny for prices of drugs for treatments of cancer, dialysis and pulmonary conditions

8. Regulatory Oversight: Major Markets • United States • Food and Drug Administration (FDA) • Several divisions • European Union • CE (Conformité Européene) Marking • Categorized by directives • European Agency for the Evaluation of Medicinal Products (EMEA) • Japan • Pharmaceutical and Medical Device Agency (PMDA)

9. United States - FDA

10. Commonly Used Terms • Indication: Specific treatment or diagnosis • NDA: New Drug Application • BLA: Biologic Licensing Application • IND: Investigational New Drug • PMA: Pre-market Approval • 510(k): Typical device approval route • AKA Pre-market Notification • CFR: Code of Federal Regulations • Title 21 covers Food and Drugs

11. Research & Development Overview

12. Clinical Trials: Success Rates • Roughly 10% of Phase I drugs reach the market (small molecules) • 30% of Phase II • 50% of Phase III • Business Development determines when/if to license drug candidates • Weigh risk/reward

13. Will Big Pharma Business Model Survive? Source: IBM Life Sciences Solutions

14. Will Big Pharma Business Model Survive? Blockbusters Brings Value to Big Pharma! Source: McKinsey

15. Will Big Pharma Business Model Survive? • But • Safety related drug withdrawals are on the rise. • Vioxx aftermath?

16. Will Big Pharma Business Model Survive? • Big pharma Pipeline is drying up • 17 new drugs approved in 2002 vs. 53 in 1996 • Most were “me too” drugs • Many are looking at in-licensing and M&A as alternative source of growth • # of Pharma-Biotech alliances: 502 425 450 411 384 373 400 350 300 229 228 224 250 180 200 165 150 117 100 69 50 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: BioWorld Financial Watch, American Health Consultants, BioCentury

17. Will Big Pharma Business Model Survive? • In 1980-1990’s, big pharma broadened scope, entering many therapeutic areas, and increasing global presence • In 1990’s-present, blockbuster and US market drives growth • In the past 5 yrs, companies are refocusing their business to just a few “core therapeutic area franchises” • Example: • BMS: Oncology • Lilly: neuroscience; endocrine disorders; cancer; infectious diseases; cardiovascular diseases • Amgen: Oncology, Rheumatology and Dermatology • Reason: Leverage synergies between products in portfolio. • Mostly in development, sales and marketing (Sales force, whom to sell to, etc.) • Products in the pipeline outside the “core” area likely to be out-licensed or sold

18. Will Big Pharma Business Model Survive? • Potential outcome: traditional “big pharma companies” become more focused on launching and marketing products, while “outsourcing” R&D, especially discovery, to smaller biotech • Shifting the risk of early stage project to smaller biotech. • More and more companies are setting up VC arms, a trend started by Lilly • Exploit higher R&D productivity at biotech • Leverage big pharma’s production capacity, marketing capabilities and global reach

19. Therapeutic Licensing Overview • Upfront payment (Cash or equity purchase) • Milestone Payments • Initiation of clinical trials (and/or subsequent trials) • Filing of NDA, Acceptance of NDA, FDA Approval • Royalties • ~ < 5% for Preclinical Candidate or Program • ~ 5%-10% for a Phase I compound • ~ 10%-20% for a Phase II compound • ~ 50-50 Partnerships for Phase III compounds • Shared P&L where each partner receives 50% of Profits

20. Case Study: Neurocrine (NBIX) • Groundbreaking relationship with Pfizer • Indiplon program: New Treatment for Insomnia • Ambien 2004E revenues ~$1.5B (7-10 day Prescription) • 2002 (Phase III) strategic alliance • $100mm upfront payment • $300mm in milestones tied to FDA Approval • 26%-30% royalty on profits • PFE pays for Sales force to co-promote Zoloft (quid) • PFE to handle GP; NBIX to handle Psychiatry • PFE pays for all further development • Upon Approval: PFE grants $175mm short-term credit facility • NDA Filed 4Q05, expected to launch in 2006

21. The NRDO Business Model • Pharmas are primarily focused on $1B Products • Creates an opportunity for a new business model • NRDO = No Research Development Only • License clinical stage drugs from Pharma/Biotech companies • Companies shed non-core assets • Too small an opportunity to pursue for some companies • No in-house research is performed, so time to market significantly decreased • NRDO companies are attracting a growing percentage of venture capital

22. NRDO Case Study: Eyetech (EYET) • Macugen for macular degeneration • Leading cause of blindness in the US • Eyetech in-licensed the Phase I Compound from Gilead (GILD) – 4/00 • $7mm upfront • $25mm in milestones • 833k warrants exercisable at $6 • Pfizer licensed from Eyetech during Phase III - 12/02 • $100mm upfront • $195mm milestones • Eyetech to co-promote in US • Eyetech was acquired by OSI in 2005 for $935mm

23. NRDO Case Study: Jazz Pharmaceuticals • Jazz founded by the senior management team of Alza in 2004 • Alza sold to JNJ for $12B in 2000 • March 2004 – raised $250mm in a Series B round • Led by KKR • The company in-licensed several former Alza compounds • Shelved by JNJ • In-licensed several other compounds • Acquired Orphan Medical in 2005 for $123mm

24. Medical Devices - Overview • Encompasses a broad range of products • Definition: device used to diagnose or treat a medical condition • Diagnostic devices • Therapeutic devices

25. Class I Class II Class III Device Classes • Governed by CFR Title 21 • Class I • Subject primarily to General Controls • Class II • Special Controls – labeling, performance testing, post-market surveillance • Generally require 510(k) • Class III • Require PMA or 510(k)

26. 510(k) 90 day approval cycle “substantial equivalence” to existing approved product In-vitro testing is often adequate PMA Usually about 1 year – can take much longer Need clinical data; similar to NDA Device approval pathways

27. Trends in Medical Devices – Convergence • Convergence with pharmaceutical delivery • Combination therapy; targeted delivery • Ex. Guidant Xcience – Drug-eluting stent • Convergence with information delivery systems • Ex. Roche Diagnostic’s diabetes management solutions • Convergence with biologics • Ex. WHO studies ongoing in Mexico/India to deliver vaccines via aerosol

28. Summary • Continued projected growth in healthcare • Strongly structured regulatory environment • Restructuring of industry models • Increasing specialization • Convergence in therapeutic solutions • Pharmaceuticals, biologics, devices, information