WH Lecture ASG 10-11-11

Graduate study in Wireless Health
Value Chain and Business Models
Alex Gerwer Principal Partner AKN
Agenda:
Introduction The State of Pharma industry Brief History of Biotech Industry Pharma/Biotech Models Diagnostics Models Medical Device Models Convergence Examples The Impact of Healthcare Reform
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2011 Case Western Reserve University
Agenda:
Introduction The State of the Pharma industry Brief History of Biotech Industry Pharma/Biotech Models Diagnostics Models Medical Device Models Convergence Examples The Impact of Healthcare Reform
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Michael Porters Value Chain
Source: Porter, Michael E. Competitive Strategy. New York: Free Press, 1980.
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Objectives of a Value Chain

Optimizing the overall activities of firms working together to create bundles of goods and services Managing and coordinating the whole chain from raw material suppliers to end customers, rather than focusing on maximizing the interests of one player Developing highly competitive chains and positive outcomes for all firms involved Establishing a portfolio approach to working with suppliers and customers; that is, deciding which players to work with most closely and establishing the processes and information technology (IT) infrastructure to support the relationships
Source: Blackwell, Gordon. Pharmaceutical Distribution: The Supply Chain. Westborough, Massachusetts: D&MD Reports, 2000. .
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Essential Components of a Value Chain

Dedicated asset investments in ones supply chain partners in order to increase productivity.
Dedicated managers and account representatives who accumulate substantial understanding and know-how through longstanding relationships with trading partners. The development of capital investments tailored and customized to a specific trading partner.
Effective management of knowledge and knowledge flows among trading partners.

Requires sharing of information (both explicit and tacit knowledge) rather than secrecy. Suppliers provide input to product development and process improvement initiatives.
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Essential Components of a Value Chain

Trust among trading partners.
Selection of suppliers based on their capabilities and track record for performance (rather than competitive bidding) and previous contracting relationships. Establishment of long-term contracts. Stability of employment of managers involved in contracting. Extensive two-way communication. Financial investments in one another. Evaluation of the relationship on a broader scale than just unit price of inputs.
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Healthcare Value Chain
What is lacking, however, is a coordinated effort among these parties, widespread strategic alliance formation, knowledge sharing, inter-firm trust, and competing value chains oriented to delivering the greatest customer value at lowest total cost.
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The Healthcare Value Chain is Flawed

Products are often ordered by workers on the front line of health care delivery
Purchasing is thus not an organizational competence, let alone a core competence, but rather the domain of non-businesspeople Products are ordered in a way that maximizes their availability when needed, rather than minimizes the costs of holding inventory Product demand is thus based heavily on the clinical preference of physicians rooted in their medical training, not on any formal costbenefit analysis or budgetary constraint.
Providers typically have nonprofit ownership

Professional training in procurement and logistics has never been a hallmark among providers, given the prominent role of clinicians and their preferences for branded items. Since a heavy portion of provider revenues flow from federal and state governments, some believe providers have developed a welfare mentality rather than a strong profit-and-loss mindset.
Despite all of the consolidation, it is still a fragmented industry with no real leadership at any stage. Providers have historically made their technological investments in patient care rather than information systems and infrastructure.
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How the Healthcare Value Chain is Impacted by a Lack of Information

Information on the value or cost added at each link is severely lacking. The lack of information on product value/cost among producers makes meaningful knowledge sharing is impossible. Multiple links may perform duplicative functions or wasteful, nonvalue adding functions due to either the lack of information or the reluctance to share information. The supply chain acts more to push products down the chain rather than pull them from the customer, due to the lack of information at the provider level at the point of consumption.
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What is Needs to be Addressed To Realize a Functional Healthcare Value Chain

Paper shuffling (manual requisitions and purchase orders, paper-based pricing information) Lengthy product ordering and delivery cycle times Multiple product handling activities Excessive inventory carrying costs Lack of information sharing among trading partners Little information on product location Little information on product utilization Operational (rather than customer) focus Pressure from managed care organizations to cut short-term costs Lack of trust between trading partners Lack of complete implementation of electronic commerce
EHCR. Efficient Healthcare Consumer Response: Improving the Efficiency of the Healthcare Supply Chain. Chicago: American Society for Healthcare Materials Management, 1996.
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Healthcare Adheres More Closely to Porters Five Forces Framework
Source: Day George S. Market Driven Strategy: Process for Creating Value. New York: Free Press, 1990.
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Forces Shaping the Biomedical Industry

The need for specialized human capital A formidable regulatory approval process High sunk costs A complex financing structure Science risks A range of ethical and political issues
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Segments of the Biomedical Industry

The biomedical industry is composed of four primary segments, long regarded separate and distinct, but which in the 21st Century should be considered as fundamentally convergent and increasingly interrelated. The pharmaceutical segment is the industrys mainstay and is composed of large, fully integrated, global players. The biotechnology segment is an upstart, having emerged commercially only 30 years ago, but is increasingly the engine of innovation in biomedicine. The medical device segment is much older than biotech, but is composed of many fewer players, and owing to the nature of its products, exemplifies the life-saving power of convergence: a marriage of engineering know-how and biomedical science. The diagnostics segment has grown up along mainstream pharmaceuticals, and has acquired a new dynamism and centrality since the advent of the genomics revolution.
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A Confluence of Trends
Comparative effectiveness US 510(k) reforms research Regulatory Slowdown in Consolidation IOM opaqueness product of purchasing list approvals Sunshine at hospitals IPOs all but disappear Act M&A buyers Slower growth Device tax in US want in mature has high burden commercialized markets for emerging products companies Electronic Lower Hospita health P/E Health care Capital ls under records ratios reform measures crunch strain adoption enacted Pricing pressures Regulatory Rapid growth reforms in many Safety opportunities in markets concerns grab emerging markets Risk aversion 17 limelight
is Creating Three Fundamental Challenges

Comparative effectiveness US 510(k) reforms research Regulatory Slowdown in Consolidation IO opaqueness product of purchasing M approvals at hospitals IPOs all but disappear Sunshine list Act M&A buyers Slower growth Device tax in US Delivering want in mature high burden Sustaining hasfor emerging value Fueling commercialized markets Electronic products innovation growth Lowe and companies health Capital Hospita r P/E Health care records outcomes crunch ls under ratios reform measures adoption strain enacted Pricing pressures Regulatory Rapid growth reforms in many Safety opportunities in markets concerns grab emerging markets Risk aversion limelight 18
Sustaining Innovation: A Unique Innovation Model for a Unique Industry
Source: Ernst and Young

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Delivering Values and Outcomes: Increased Scrutiny is Coming to Medtech

Hospitals consolidating purchasing decisions
Fewer
medtech suppliers in each product category Demonstrating superiority to competition is critical
Comparative effectiveness research Possible changes to FDA clearance process
Medtech
products clearly being targeted (IOM list)
Increased focus on comparative effectiveness and health outcomes
More
products subject to PMA instead of 510(k) Higher bar to bring products to market
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Biomedical Companies Grow in 3 Stages
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Growth From Diversification: Geographic Diversification

Whittle-down innovation
Mature-market product Emerging-market product Fewer features Efficacy at attractive price point
Latest technology and features
Trickle-up innovation
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Growth From Diversification: Offer Diversification

1 Sharing supply chain benefits 2 Efficient clinical operations Leading with outcomes Managing device benefits Partnering for shared market success
Reduce inventory holding/management costs across supply chain, sharing gains with hospitals and payers Customer needs addressed: Just in time supply, reduced total cost of care, supply chain visibility
Support hospitals and ASCs in improving the efficiency of their procedures in the OR and beyond Customer needs addressed: Increased number of procedures / revenue, decreasing total cost of care
Collaborate with practitioners to develop an end-to-end solution for the care of patients, emphasizing prevention, quality patient outcomes (documented with data), and recovery Customer needs addressed: Focus on outcomes, right device for right patient, holistic care solutions Lead the industry in taking an active approach to managing spending in conjunction with hospitals and payers Customer needs addressed: Improved alignment with payers, cost savings, working capital benefit, total cost of care
Develop go-to-market campaigns in partnership with hospitals Customer needs addressed: Share of voice/ market awareness
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Commericalization: The Product Lifecycle in Lifesciences (as Elsewhere)
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No Price Too High for Extending Life

Public response to industry innovations follows a steep indifference curve. This means that affluent consumers are willing to pay higher prices (p) for incremental increases in quality (q). Put another way, the explosive demand for innovative biomedical products is essentially independent of pricing, and is driven instead mainly by demographics. Indifference to cost for incremental improvements in outcome may not be feasible in the long run for all health products, but it does suggest high future consumer demand among affluent populations for predictive, preventive and personalized medicine products and treatments.
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Commercialization Brings it All Together
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Commercialization in the Lifesciences Industry is Distinctive

Biomedical products navigate through a complex value chain of institutional interests and issues before finding commercial success.
Characteristic of the industrys products is the fact that end-users or customers (patients) do not directly pay for products they use, nor do those who provide the product (doctors and hospitals) The ultimate payers -- insurers and governments -- interact with industry participants, and will do so increasingly owing to the current cost crisis in U.S. healthcare. Personalized medicine solutions the next great wave of industry innovations -- potentially provide a way out of the crisis.
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Lifescience Business Models are Constantly Evolving

The pharmaceutical and medical device sectors have operated with fairly consistent business models. Biotechnology models have been evolving constantly, as companies search for the best way to capture the most value from their innovations. Companies have experimented to compete in different spaces within the value chain, from producers of research and tools to full vertical integration. Because innovation is at a premium in the industry, intellectual property right protection is key for the growth of all industry segments and tends to define the revenue life cycle of their products.
In pharma and biotech, patent expirations and generics cause portfolio erosions. Biologics -- a product of the biotech industry -- have been protected so far from this threat and enjoy extended revenue cycles. This trend will continue at least for the next few years.
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Business Models for Different Lifescience Sectors are Distinct

Supply Biotechnology
Highly differentiated, few competitors. Specialty model
Demand
Customer is typically clinician, but often with strong patient advocacy
Pharmaceuticals
Blockbuster model is traditional; Orphan models emerging. Generics are increasing;
Customer is typically the clinician, though increasing pressure from DTC.
Medical Devices
Differentiation varies across medical specialties. Signs that even in most mature technology markets, commoditization is beginning to occur
Customer has traditionally been clinical customer. Increasing emergence of economic customer
Capital Equipment
Large capital purchase, occasional software upgrades, consulting. Long product lifecycles
Customer is typically CFO, CIO. Increasing value in integrating solutions

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Overview of Presentation
Key Takeaway 1:
Supply Chain
Production and Delivery of Healthcare Technologies is Complex and Involves Many Stakeholders
Key Takeaway 2:
Traditional Business Models
Business Models for Medical Devices, Pharmaceuticals, Biotech, and Capital Equipment Are Distinct
Key Takeaway 3:
Healthcare Reform
Healthcare Reform Has Important Impact on Innovation
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Agenda:
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The Road to FDA Approval
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Risks and Uncertainty of R&D
Source: 2001 Nature Publishing Group biotech.nature.com
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Pharmas Blockbuster focus

HIGH Oncology HCV Alzheimers Immunology/RA HIV Depression Neuropathic Pain Unmet Need COPD Diabetes High Cholesterol Hypertension Nociceptive Pain Anti-ulcer Asthma LOW Anti-infectives (outpatient)
Attractive Growth Potential

Limited genetics in mid-term Significant unmet need Pricing likely to hold
Market at Risk
Significant genetics available Limited unmet need Pricing and access at risk
Wasteland
High genetics penetration Very limited unmet need Weak pricing/limited access
German y Canada
Total 2005 Sales by Geo ($B) LMITED
252
16
19
32 14
20
30
France
Italy
United States
Japan
UK
15 5 6 12
Cost Controls (pricing, access, volume)
EXTENSIVE
Source: Boston Consulting Group

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Spain Russia India China
Blockbuster Model: Issues

Pharma industry has been based on the blockbuster model, making it one of the most profitable industries and enabling large R&D spends. Approx 80% of growth of the Pharma industry came from ~ 8 drugs in the last 10 years.
However the impact of the recall of Vioxx is an example of how something like this can dramatically decrease revenues coupled with the impact of lawsuits. Growing concern that going forward healthcare will only pay for 1-2 drugs in each class. Severe reduction in revenues in coming years as most blockbusters are coming off patent and replaced by generics ( $82B loss in revenue in 2007 alone)
Pharma currently suffering from innovation dry spell: few blockbusters in pipeline Costs of development and difficulty to bring drug to market increasing Large pharma in cost cutting mode (out sourcing as much as possible) Discussion model needs to be completely reviewed (e.g personalized medicine)
Future drugs will be based on smaller markets and more targeted therapies in hopes to protect themselves from damaging effects of recalls. There is a shift away from blockbusters. Only 33 of the top 200 drugs are of blockbuster status. This will call for more stream lined approach to R&D with a focus on fewer disease areas and more strategic partnerships.
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Pharma R&D goes off balance sheet

Pharma has increasingly been seeing its R&D spending going up but its R&D productivity dropping ( i.e fewer drugs coming out of pipeline) Pharma R&D spend starting to take a toll on its earnings
More and more R&D investment but no new sales!
As public companies, pharma values are determined by a multiple of their earnings.

The higher the earnings, the better the value!
Pharma therefore increasingly motivated to do off balance sheet R&D

Shift the risk of R&D to biotech Have VC cover the cost Cherry pick what they want when they want it.
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Agenda:
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Brief (very brief) History of Biotechnology Industry

Originally based on recombinant DNA technology to make human proteins
rInsulin, EPO, tPA, G-CSF, HGH
Started in San Francisco (Genentech 76) and Boston (Biogen 78). Today these areas still have the largest biotech clusters.
Todays top biotech companies were the early pioneers and rival large pharmas as FIPCOs
Genentech, Amgen, Biogen Idec, Genzyme, Chiron (now Novartis)
High risk - High reward with long development cycle (10 years+) Pharma didnt have skills to do biotech and feared FDA approval, so mainly watched to see what biotech could do for them
Roche was an exception and bought 56% of Genentech in 1990
Biotech tools began to help pharma drug discovery and development seeing the start of the biotech boom ( 1980s) and muddying of boundaries between the biotech and pharma worlds
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Characteristics of Biotechnology
Biotechnology has been and will continue to be a fundamentally entrepreneurial industry.
Since its origins in the development of recombinant DNA technology in the late 1970s, biotechnology has generated and commercialized a wealth of innovations emerging from basic scientific research conducted in leading research universities.
Biotechnology has shifted the paradigm by which innovation and knowledge are created.
Innovation in the sector emerges at the intersection of research disciplines and private/public institutions. It is characterized by its duality, simultaneously making contributions to both basic and applied research. Traditional disciplinary and institutional lines are blurred. This loose structure has unleashed enormous productivity and creativity, and increasingly has become a model for other biomedical segments.
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Biotech Today
Regulatory approval for biologics challenging, but have seen slightly higher approval rates than NCEs recently. Biologics drugs still largely protected from generics, but being challenged hard Biotech responsible for both research platforms for pharma as well as drugs development on its own. Pharma increasingly buying up biotechs large ( Merck and Sirna, AZ and MedImmune for $1B plus) and small ( Pfizer and Coley for $164M) in order to fill both pipeline and bolster research platforms needs
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Agenda:
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Pharma 1.0: A Variety of Models for Bringing Blockbuster Drugs to Market

The biotech industry is not really characterized by specific business models; and neither is there one single model for success. Enormous diversity and innovation driven makes predicting future development difficult. Biotech flexibility is a strength that has helped them survive
In years of crisis, companies have managed to reorient themselves, change their business model or even switch market.
Regardless of model, common themes exist:

Strong IP Regulatory Strategy Commercial relevance TALENT!!!
VCs often invest in jockey rather than horse
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Pharma 1.0: Value Chain and Business Models

RESEARCH PRE CLINICAL CLINICAL PHASE I CLINICAL PHASE II CLINICAL PHASE III MANUFACTURING SALES/ MKTING/ DISTION
A business model typically consists of three components: Value proposition: the benefit that clients and partners might have from doing business with a certain company Value chain structure: describes the value creation chain and the different steps involved, i.e. the path from the idea and concept to the final product or service. Revenue generation model: how revenue is generated. This means that future revenues of the company determine the value of the business model and its sustainability.
Sales of own drugs
Co-marketing
Royalties from drugs you developed but sold by others Services

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Pharma 1.0: Fully Integrated Pharma Company (FIPCo)

Value Proposition:
The experts in bringing drugs from bench to market.
Value Chain:
Have strengths in at every level of the development chain.
Revenue Generation Model:

Out license first few compounds to gain revenues then selectively bring to market certain compounds Usually in indication and geographies with manageable distribution
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Pharma 1.0: Fully Integrated Pharma Company (FIPCo)

Rare for newer biotech today except in some niche areas ( ex Gilead)
Today FIPCo biotech are original players.
Skills Needed
Need skills across the value chain, although increasingly much is being outsourced. Deep pockets to run expensive Phase III clinical trials, and extensive sales and marketing operations.
Very challenging for start-up

Timeline to build expertise and capacity too long
Large existing biotech FIPCos suffering same challenges as large pharma ( i.e dry pipeline, reduced innovation, increased cost of development)
Financing
VCs would probably find time to ROI too long
Examples
Biotech: Amgen, Genentech, Biogen Idec, Valera >Indevus ( urology and endocrinology)
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Pharma 1.0 to Pharma 2.0: The Progression in 2008

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Parma 2.0: Four Strategic Pillars

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Pharma 2.0 to Pharma 3.0: From Drugs to Healthy Outcomes in 2011

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Pharma 3.0: Health Outcomes as Currency for Health Care Systems

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Pharma 3.0: The Health Outcomes Ecosystem

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Pharma 3.0: eHealth
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Pharma 3.0: Delivering on Health Outcomes

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Pharma 3.0: Challenges and Readiness for Executing Non-Traditional Alliances
Source: Ernst and Young; Progressions Survey, 2009

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Pharma 3.0: Guiding Principals

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Agenda:
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Value chain and revenue models

There is no clear value chain in diagnostic. Value not easily determined until it reaches market.
No mid point element such as clinical phases for interim valuation Makes it difficult for VC Business challenge in that valuation is based on multiple of revenue, but early stage diagnostics have no revenues However time to market shorter
Several revenues models

License diagnostic test to pharma License biomarker to diagnostic manufacturers Developed and sell diagnostic
Reimbursement the biggest issue OHIP , Medicaid, Medicare, large insures ( getting reimbursement code) Employer Consumer
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CLIA Model
Clinical Laboratory Improvement Act (CLIA) is only in the US Created to help introduce novel diagnostics that werent FDA approved. Tests done in large central labs that meet CLIA specification, but no FDA approval Test validity build on research
IP based on proprietary biomarker and algorithms
Good strategy way of getting product to market directly

Novel technologies and smaller markets Lab sells test directly to doctors/patients
Requires a lot of marketing
Threat of regulatory tightening a risk

Large CLIA based companies all pursuing parallel regulatory strategies
Examples:
Genomic Health Caris Health
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Diagnostic Device
Diagnostic devices are subject to FDA approval ( 510K)
Regulatory hurdles take time away from market access during patent life Large lab based devices and Point of Care ( POC)
High turn-over in space

Constant incremental changes Higher sensitivity and selectivity
Value rarely in the box but in tests that can be done in box
Machine
often given away with revenue made on sales of tests that can be run on the machine.
Razorblade model
Challenge for start-up to acquire validated biomarkers to create new tests
Examples:
Abbot, Roche, Quest, Inverness etc etc
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Theranostics: Targeted Medicine and Pharmacogenomics
Tools to help researchers identify biomarkers and develop related therapeutics Therapeutics delivered to patients with the right genotype at optimal dosages Targeted therapies market worth $5B in 2004 and expected to reach $20B in 2014
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Agenda:
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The Device Industrys Felix Culpa

A decade ago, the device industry was in crisis Public investors flee as newly public companies stumble; venture money dries up But big companies, facing growth problems, ride to the rescue By the mid to late 1990s, several companies had begun to transform themselves using M&A as the vehicle A new business model emerges, with the industry split into two camps
Small start-ups that drive industry innovation Big companies that dominate marketing and distribution channels
New model is straightforward: small companies advance to a certain stage and then sell
Investors come back, prizing the specific characteristics of the industry
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Medical Devices Top the Value Creation Charts
Source: Compustat; Boston Consulting Group ValueScience Center

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The New Device Model

Devices rebound was built on a model that posits
Quick, predictable technology development, based on efficient financing and development model
The role of physicians in development is key Relatively straightforward regulatory path and quick commercialization A technology boom Few constraints on product adoption Physicians largely drive product selection Price increases/reimbursement relatively easy, even for incremental advances Successful device advances are incremental, with more new products in shorter time frame
Two-thirds of typical device companys revenues come from products launched in the previous two years
Big companies who face increasing challenges to grow become active acquirers, rendering irrelevant the lack of interest by public investors Predictable exits for small companies to one of a handful of big companies, who turn to M&A to drive business
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The Device Industry: Key Issues

Growth has slowed dramatically Regulatory turmoil and health care reform Physician/company relationships and COI Economic crisis of 2008 dampens ventures enthusiasm Big Device has lots of cash, but M&A dynamic shifts
Is Big Pharma a buyer?
A new innovation model?
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Medical Device Stakeholders

Payers have become more influential in the marketplace and increasingly are focused on drug and medical device pricing, appropriate drug and medical device utilization and the quality and costs of healthcare.
Source: Covidien, Annual Report 2007, p. 7, www.investor.covidien.com
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Universe of Companies
Definition US and European-headquartered public and venture-backed companies that primarily design and manufacture medical technology equipment and supplies Excludes service providers such as distributors, CROs or CMOs 5 product groups Research and other equipment 16 disease categories
Imaging
Non-imaging diagnostics
Therapeutic devices
Other
Aesthetics Cardiovascular/vascular Dental ENT Gastrointestinal Hematology/renal Multiple Neurology Non-disease-specific Oncology Ophthalmic Orthopedic Respiratory Urology/pelvic Women's health Wound care
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VC Investment Soared From 2002 to 2007
Source: National Venture Capital Association; July, 2010

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But With the Boom Came Problems

Even before the current economic downturn, veteran investors began to worry about device investing trends Venture investments in devices grew dramatically 2005-2007
From $2.2 B in 2005 to $2.9 B in 2006 to $4.1 B in 2007, with another record in the first quarter of 2008 Veteran investors worry about a frothy market and ripple effect as more money pushes up valuations both early and late
Pre-crash, valuations soared, while time to exit lengthened

Even as exit valuations, particularly on M&A remain relatively constant
Too many VCs new to devices

And with no historical perspective on device investing
Too many dollars

Record numbers and investors willing/needing to put more money to work
Too many companies competing in the same clinical spaces

Spine, once hot, has something like 150 venture backed start-ups
Too many deals that need to get done Too few exits
As IPO window closes and Big Buyers become less aggressive
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US Public and VC-Backed Companies by Segment (At the end of 2009)

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Leading US Regions by Number of Medtech Companies (At the end of 2009)

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Risk / Return Slope

Improvement, New market, Care benefit Class 2 or 3 New technology New market, Care benefit Class 3
Potential Return
Improvement, Existing market, Improvement, Efficiency benefit Existing market, Class 1 Cost benefit Class 1
Improvement, Existing market, Safety benefit Class 1 or 2
Level of risk/investment
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The Cash Curve
Source: Payback: Andrew JP and Sirkin HL. 2007. Reaping the Rewards of Innovation. Harvard Business School Press,.
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Incremental Versus Disruptive Technology

The industrys business model is predicated on quick and predictable technology development
Device industry: small R, big D; continuous, if incremental innovation
The incremental nature of technology advances continues to reward companies

First mover advantage means almost nothing in medical devices
E.g. Cordis in stents In cardiovascular, DES creates the first real device blockbuster, but theres plenty of opportunity elsewhere
CHF, percutaneous valves, even IC tools like smaller stents and CTOs And even BMS are making a comeback
In orthopedics, spine is hot and artificial discs show tremendous pressures

But theres also room for new materials and incremental advances
CR Bards interesting confession

Post-angioplasty: the value of stability
The anti-Pharma pitch to investors

Incremental advances, predictable development, clear exit path, no blockbusters
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Medical Technology
Market and Technology Matrix
More costly to produce and demonstrate Costly and Longer term
New
Technology
1
Easy to produce and demonstrate
2
More costly to produce and demonstrate
3
Existing Market
4
New Market
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What is Disruptive Device Technology?

Drug-device convergence Nanotechnology Theranostics Neurostimulation Robotics Ultra minimally-invasive surgery
From maximally invasive to minimally-invasive to non-invasive, even using natural orifices
Regenerative medicine and tissue engineering Cell and gene therapy Human/electronic interface, such as artificial retina Electraceuticalsbeyond neurostimulation Advanced imaging Telemedicine Bioinformatics/biotech/medtech
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Value Creation
Simple Innovation i.e. Safety Syringe
Need Idea Approval Early design Initial Prototype Initial test Redesig n Manufacturing prototype Clinical test Proof
Value demonstrated
Make and sell
Value
0
121
Value Creation
Complex Innovation i.e. Medical Electronics
Need Idea Early design Initial Prototype Initial test Redesig n Evaluation prototype Clinical test
Proof Approval
Value demonstrated
Make and sell
Value
0
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Is it Time for a New Innovation Model?

The industrys challenge: device companies are beginning to outpace both customers and regulators in their ability to embrace new technology
And paying for these advances also becomes a challenge
Advances in computerization, miniaturization, and biotech/biomaterials are bringing dramatic change Adoption rates could slow as physicians wrestle with new techniques, approaches
Robotics, biologics confront the skeptics Living with disruption, dislocation, discomfort
Adoption issues always loom large in devices and, subtly, these innovations rest on a very different model for new technology adoption, particularly in surgery Product companies will increasingly lead, not follow, customers in developing new products
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Top Line Growth Declining for Big Medtech

ABT, JNJ, COV, SYK, BSX, STJ, MDT
Source: Acuitive Medical Ventures Research; Aug., 2010

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Time to Liquidity is Increasing
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Critical Issues Involving Medical Devices

Uncertainty at the FDA
Possible changes in the 510(k) process Whistleblowers charges may result in management changes
Even more than Reform, 510(k) has become the hot button issue this year Health Care Reforms Target Medical Devices
Uncertainty over Reform even greater since elections, but concerns remain A tax on Medical Devices
Comparative Effectiveness on the Horizon

Device industry meet AHRQ $1.1 billion in stimulus package for CE research Key issue: differentiate drugs from devices Clinical effectiveness, not cost effectiveness
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FDA Clearance Decisions Take Longer Even Though Total Submissions Has Declined
Source: FDA Data
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Widely Divergent Cash Curves for Different Devices Requiring 510(k) Approval
Source: Boston Consulting Group

128

Evidence-based medicine bites back Safety issues such as Late Stent Thrombosis threatens to undermine DES opportunity Clinical trials becoming larger, more complex, while costs become greater and more burdensome for start-ups Even EBM advocates worry about a crisis of confidence in drawing conclusions Driving away from certainty Physician/product company relationships come under scrutiny
DOJ investigations, public scrutiny drive a wedge After targeting orthopedics industry, CV is next as CRF becomes the focus of Senate investigation
The bulls-eye on Rx embraces Devices as well

In sales and marketing, new rules with AdvaMed guidelines
But should big and small companies play by the same rules? Most companies insist things theyve been behaving all along
But some surgeons see opportunism to deny their fair share in product gains At risk: physician role in product development
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M&A under pressure
Even when/if IPO window opens, M&A remains presumed exit, with most deals under $150MM In cardiovascular, J&J/Guidant/BSC deal sent shock waves through the industrybut key issue is deal-appetite, not competitive landscape For the most part, big companies step back, concerned about dilution, risk, and the impact of smaller deals MDT/Abbott are doing deals, but who else? BSCs change of heart: What are companies worth? Big Device has cash, but no one wants to bargainhunt; valuations remain a sticking point As Big Device retrenches or takes a rest, the industry looks to a new generation of acquirors: Hologic/Cytyc, Edwards, St. Jude, Inverness, Integra, One caveat: companies are smaller, more narrowly focused Is Big Pharma a buyer?
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Is the Medical Device Industry Model Broken?

Devices rebound was built on a model that posited
Quick, predictable technology development, often based on physician collaboration Relatively straightforward regulatory path and quick commercialization Predictable exits to one of a handful of big companies
The new reality is

Physician collaboration is under assault because of COI concerns New pressures on prices and reimbursement and a diminished role for physicians in product selection Evidence-based medicine raises more questions than it answers, leading to longer, more expensive trials The need for a next generation of acquirers to step up A device model built on convergence of devices and other technologies, such as biotech or computers, introducing new skill sets and an element of serendipity in product development Are we entering an era of reverse innovation?
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Have We Gotten to Reverse Innovation in the Medical Device Industry?

Innovation in medical devices has historically focused on outcomes and improved clinical care
Expensive, with little price sensitivity
Advances in technology and materials pushes the envelope more and more HC reform, broadly conceived, calls for a new kind of innovation
Focused on cost savings, greater efficiency Will we trade better care for lower cost? What role for device companies in this effort?
A model borrowed from emerging markets

In China, India, consumer pay makes cost a driver in product selection
Will good enough will have to be good enough?

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Example: GE Disrupts Itself

In Harvard Business Review, GE describes a new model of technology dispersion
Reverse Innovation Rather than sell Emerging Countries products from Developed Nations, they reverse the process Will products designed for China sell in the US?
Key to the premise: Emerging Country economies wont develop along Western lines, but just the opposite
With far smaller per capita incomes, developing countries are more than happy with high-tech solutions that deliver decent performance at an ultra-low cost a 50% solution at a 15% price.
Designed for new global realities, Reverse Innovation has implications for an era of US health reform
GE figures it will need to increase by 50% the number of low-priced products it sells to address cost issues of reform initiative
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The New Rules of the Road

Demonstrate value proactively
Identify
Collaborate
Increase
products most at risk and consider conducting own CER Define appropriate value measures & build processes to capture key data Increase product attractiveness through new pricing models or offering different combo features
reliance on strategic alliances some with non-traditional partners Develop specialized functional capabilities and skill sets
Innovate innovation
Whittle-down
Preserve the ecosystem

Emerging
innovation Trickle-up innovation Pick your size innovation
medtechs must creatively search for alternative funding options With emerging companies struggling, large firms could invest in undervalued assets via venture arms or incubators
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Agenda:
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Combination Devices
275 submissions to the newly created FDA Office of Combination Products (OCP) in 2005 Includes drug-device, drug-biologic, devicebiologic Drug-device combinations valued at $5.4B in 2004 Expected to reach $11.5B in 2010
$8B from drug-eluting stents
Drug eluting stents prevent restenosis Antimicrobial coated surgical mesh thwart infection Drug delivery devices
Pulmonary, oral, pumps Exubera, the most recently approved OCP products, is the first noninjectable insulin for treatment of Type 1 and 2 diabetes
136
Angiotechs Paclitaxel Eluting Stent
137
Pfizer and Nektars Exubera
138
Agenda:
139
Healthcare Reform Is Taxing the Device Innovation Model
Device tax highlights
Device companies concern

Innovative & complex products are already in use by patients
Overall target amount to collect - $20 billion (2.3% excise duty)
Reason: Product companies benefit due to the addition of 32million people to insurance rolls
Ex: Product demand did not change in Massachusetts
140
Healthcare Reform May Have Important Consequences For Innovation Models

The process and content of innovation may change in meaningful ways
Process of Innovation
Some of the most innovative early stage companies will be crippled Small to mid size companies will be hardest hit EPS will be reduced by over 10% in 2013 Impact on early stage companies that generate revenue but are not profitable Companies tend to handle costs by reducing R&D spending and eliminating jobs (short term profitability) Fewer M&A will reduce the numbers of exits for device start ups
Content of Innovation
The areas of innovation may not be the ones that actually advance the care of the patient Money will follow opportunities where risks are lower Venture Capitalists will prefer tax favored area Fewer companies being financed & created will slow the overall rate of innovation
141
Thank You
142

WH Lecture ASG 10-11-11

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Graduate study in Wireless Health

Value Chain and Business Models

Alex Gerwer Principal Partner AKN

Michael Porters Value Chain

Objectives of a Value Chain

Essential Components of a Value Chain

Effective management of knowledge and knowledge flows among trading partners.

Essential Components of a Value Chain

Healthcare Value Chain

The Healthcare Value Chain is Flawed

Providers typically have nonprofit ownership

How the Healthcare Value Chain is Impacted by a Lack of Information

What is Needs to be Addressed To Realize a Functional Healthcare Value Chain

Healthcare Adheres More Closely to Porters Five Forces Framework

Forces Shaping the Biomedical Industry

Segments of the Biomedical Industry

is Creating Three Fundamental Challenges

Sustaining Innovation: A Unique Innovation Model for a Unique Industry

Source: Ernst and Young

Delivering Values and Outcomes: Increased Scrutiny is Coming to Medtech

medtech suppliers in each product category Demonstrating superiority to competition is critical

Comparative effectiveness research Possible changes to FDA clearance process

products clearly being targeted (IOM list)

Increased focus on comparative effectiveness and health outcomes

Biomedical Companies Grow in 3 Stages

Growth From Diversification: Geographic Diversification

Latest technology and features

2011 Case Western Reserve University

Growth From Diversification: Offer Diversification

Source: Ernst and Young

2011 Case Western Reserve University

Commericalization: The Product Lifecycle in Lifesciences (as Elsewhere)

No Price Too High for Extending Life

Commercialization Brings it All Together

Commercialization in the Lifesciences Industry is Distinctive

Lifescience Business Models are Constantly Evolving

Business Models for Different Lifescience Sectors are Distinct

Blockbuster model is traditional; Orphan models emerging. Generics are increasing;

Customer is typically the clinician, though increasing pressure from DTC.

Customer is typically CFO, CIO. Increasing value in integrating solutions

Healthcare Reform Has Important Impact on Innovation

The Road to FDA Approval

Risks and Uncertainty of R&D

Source: 2001 Nature Publishing Group biotech.nature.com

2011 Case Western Reserve University

Pharmas Blockbuster focus

Attractive Growth Potential

Total 2005 Sales by Geo ($B) LMITED

Cost Controls (pricing, access, volume)

Source: Boston Consulting Group

Spain Russia India China

Blockbuster Model: Issues

Pharma R&D goes off balance sheet

As public companies, pharma values are determined by a multiple of their earnings.

Pharma therefore increasingly motivated to do off balance sheet R&D

Brief (very brief) History of Biotechnology Industry

Pharma 1.0: A Variety of Models for Bringing Blockbuster Drugs to Market

Regardless of model, common themes exist:

Pharma 1.0: Value Chain and Business Models

Royalties from drugs you developed but sold by others Services

Pharma 1.0: Fully Integrated Pharma Company (FIPCo)

Revenue Generation Model:

Pharma 1.0: Fully Integrated Pharma Company (FIPCo)

Very challenging for start-up