the Valley of Death - Massachusetts Biotechnology Council

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Bridging “the Valley of Death”

A New Model for Partnership in Pharmaceutical
Research & Early Development


Massachusetts Biotechnology Council
April 17, 2009

Ted Torphy, Ph.D.

CSO & Head

External Research & Early Development

Johnson & Johnson Pharmaceutical R&D, L.L.C.

A View from Big Pharma


Spiraling R&D costs coupled with
decreased productivity


Demand for safety and post
-
marketing
surveillance


Expectation of personalized medicine


Reimbursement driven by medical and
economic outcomes


Proliferation and redistribution of
healthcare outcomes information

Five Trends Are Transforming Our Industry


Spiraling R&D costs coupled with
decreased productivity


Demand for safety and post
-
marketing
surveillance


Expectation of personalized medicine


Reimbursement driven by medical and
economic outcomes


Proliferation and redistribution of
healthcare outcomes information

Five Trends Are Transforming Our Industry

Productivity of the Pharmaceutical Industry

10

20

30

40

50

60

40

30

20

10

1995

2000

2005

50

NMEs and Biologics Approved

R&D Spending (US$ Billions)

R&D Expenditures

Approvals

Sources: FDA/CDER, PhRMA, PricewaterhouseCoopers

Note: R&D spending from non
-
PhRMA companies not available

Pharma

Venture Capital?

Biotech?

Pharmaceutical R&D

The Macro
-
environment


A View from Big Pharma


We need products, not companies


Increasingly, biotechs are the major source of new products


Creating ever larger Big Pharma R&D organizations through mergers and
acquisitions has failed to increase productivity and spur innovation


In recent years, over half of new product approvals were for compounds
derived from biotech companies


The traditional venture capital model is stressed:


The credit crisis has hampered the ability to raise large new funds


The IPO market is miserable, making M&A the primary exit strategy for
biotech companies


Building new companies is not a capital efficient way of generating products


Many VCs are moving away from early
-
stage investments


There is a huge funding gap for early
-
stage opportunities, which leaves them
them languishing in the “valley of death”


Without a new business model, the industry will not supply an
adequate number of innovative new products to drive growth and
increase shareholder value

The Opportunity

In partnership, the pharmaceutical industry,
academia, biotech and the venture capital
community can create a new model of R&D that
will accelerate and expand the introduction of
innovative medicines


Academia and biotech are leading sources of
innovative assets, many of which are under
-
valued
and under
-
resourced


New approaches to venture capital seek to create
value by investing in early stage opportunities


Elements of the discovery and early development
process are becoming a commodity

J&J’s External Research & Early
Development (eRED) Organization


To improve pharmaceutical R&D productivity, J&J
has launched a new organization, called External
Research & Early Development (eRED), with a
business model that emphasizes:


Open Innovation


Lean infrastructure


Flexibility


External partnering


Financial risk and reward sharing


Rapid decision making


Sustainable pipeline of strategic options

eRED Mission

In partnership with external innovators and
investors, build and manage a diverse
portfolio of early
-
stage product opportunities



Employ the principles of Open Innovation to create
enduring partnerships to identify early
-
stage
innovative product opportunities


Link these opportunities with external management
expertise and capital


Institute innovative financial risk
-
sharing strategies
with external investors to support the development of
products to value
-
creating milestones


Retain options to acquire these opportunities under
financial terms that are attractive to both J&J and our
partners


We must discover, develop,
manufacture and distribute
innovations ourselves in a
vertically integrated model


The requisite expertise in R&D
must exist inside of our
company


If we invent and fund everything
internally we will win


We must control and conceal
our innovation processes,
technologies and tools, so that
our competitors don't profit from
our ideas


Enormous value can be unlocked
from external R&D and innovation
networks


Pharmaceutical R&D has become
far too complex for us to employ
all the expertise needed


Creating a better business model
for partnered innovation can
trump internal invention


We will profit from others' use of
our innovations and knowledge,
and we will leverage others' IP
whenever it advances our own
business model

Closed Innovation

Open Innovation

The Open Innovation Mindset
1

1

Adapted from
Open Innovation
, by Henry
Chesbrough Harvard Business School Press, 2006

“The Valley of Death”


A Major Impediment to Commercializing Innovation from Academia

Proof of
Concept

Research

Full

Development

Commercialization

Preclinical
R&D

Funding Gap

Phase 1

Basic
Research

Clinic

Innovator

R&D Risk Profile

The Basis for the Valley of Death

Years

Cumulative Probability of Success
1

1

CMR benchmarks used to calculate risk
-
adjusted values at various stages

2

Internal estimate

1

2

3

4

5

6

7

8

9

10

11

1.0

0.5

0

12

Lead

Optimization
2

Phase III

Pre
-

Clinical

Phase I

Phase
IIa

Phase IIb

FDA

Review

35
-
40% of R&D investment is
made in advancing products
through Ph IIa

Until clinical proof of concept
is demonstrated, the
probability of success is low

eRED Operating Model

Bridging the Valley of Death

Academia

Accelerators

Biotech

eRED

Innovation
Sources

J&J REDs

Private Equity

Government

Philanthropy

Funding
Sources

Academia

Public Incubators

External R&D
Entities


Assemble a portfolio of external
product opportunities


Syndicate with external funding
sources


Retain pre
-
defined product rights


Provide guidance and expertise
to portfolio companies

COSAT / JJDC / BD

eRED Process

1

2

3

4

5

6

7

Years

8

9

10

11

12

IND / FIH

PhIIa / PoC

PhI

External R&D Entities / Venture Partners

Lead

Optimization

Phase III

Pre
-

Clinical

Phase I

FDA

Review

Research

0

J&J R&D



Source



Seed



Monitor



Transfer

eRED



Develop



Acquire

7

Phase
IIa

Phase
IIb

External R&D with Venture Investors


1:4 risk sharing through external LP vehicle


Focused, incentivized management team oversees product development with a
focus on rapid, capital efficient achievement of milestones


eRED consultants provide guidance on development program and access to
J&J expertise and and preferred providers through non
-
controlling Joint
Development Committee participation


J&J retains hard right to own a limited number of assets at predetermined
milestone(s) under pre
-
agreed terms

1

One C
-
Corp
per project

2

3

4

5

6

7




JJDC 20%

Other LPs 80%

Acme Venture Development Fund


Management Team

Benefits to Academic Partners


Progress opportunities that would otherwise
languish in “the valley of death”


Access to external funding vehicles to
advance product development through key
value
-
creating milestones


Attractive financial incentives for innovators
and universities


Opportunity for faculty to be involved directly in
drug discovery and development


Commitment from a dedicated J&J team

Benefits to Venture Partners


Assets monetized at early stage of the R&D
process


Flexible partnership structures


Attractive returns with a mid
-
term horizon


Availability of J&J expertise and CRO
networks


Commitment from a dedicated J&J team


Pre
-
identified and motivated exit partner

“It is not the strongest of the
species that survives, nor the
most intelligent, but the one
most responsive to change.”

Charles Darwin
(1809
-
1882)

Illustration from The World Is Flat, Thomas L.
Friedman, Farrar, Straus & Giroux, publisher

Re
-
engineering Pharmaceutical R&D

Bridging “the Valley of Death”

A New Model for Partnership in Pharmaceutical
Research & Early Development


Johnson & Johnson Pharmaceuticals
External Research & Early Development

Massachusetts Biotechnology Council
April 17, 2009