Good afternoon, my name is Catherine Godrecka-Bareau. And I'm going to discuss with you, today, Business Models & Portfolio Management in the Pharmaceutical Industry. First, to give you a quick background about myself. I have an MBA and an advanced degree in finance. I did a variety of things in the industry. I started my career in startups, helping others to raise money to fund R&D. Then I moved to the industry, and I worked for Galderma in many roles, including in licensing and R&D portfolio management, as, also, the US controller of the skin cancer business, and later of the OTC business. Next, I moved to Nestle Health Science, where I helped to build the company through internal pipeline, and licensing and company acquisitions. And since 2015, I have been with Merck Serono as director of strategy and portfolio management for biocenters. What I would like you to take back from this lecture is a helicopter view of the money flow in the pharma industry. First, you need to understand the basic business models in the pharma industry. As we will see in the first part, pipeline is key to creating value. And you need to ensure your pipeline is well-nourished. But how do you get a full pipeline? Well, this is the subject of part 2. We will review the three key strategies to refuel the pipeline. So once we have a full pipeline, what often happens is that you may not have enough money to fund all the projects. And then you need to prioritize compounds. So the subject of part 3 is to cover methodologies to prioritize compounds in a portfolio. Let's start with the top 3 business models. So first, the innovator business model. Innovator is all about new chemical entities and new biological entities. It usually involves very high R&D investments. One specificity of this model is that the revenue from the compound usually only occurs during the patent's life. Top innovator players include Roche, Novartis, Sanofi, Pfizer, J&J, Merck, and AbbVie. The second business model is the generic business model. After the innovator's patents have expired, the generic company can make a copy. The drug is usually significantly cheaper than the innovator's version, why? Because there is no need to redo all the clinical data. And usually, the generic comes with a price discount in the range of 10% to 95%. Top generic players includes Teva, Sandoz, Mylan, Allergan, and Sun Pharma. And third, the OTC model. So the drug is also a generic, but with a very safe product profile, and the patient can obtain the drug without a prescription. So here, direct-to-consumer communication is key. And top players are Proctor and Gamble, GSK, and J&J. So before we preview, in detail, each of these top 3 business models, you could ask me, why only spend our time on these top 3? I know many other players in the pharma industry who make money in a different way. And you would be right, but my point is that all of the business models actually gravitate around the top 3. So for example, in research, startups and university incubators work on novel compounds, usually was the hope that big pharma will license the rights. And all along the other steps, big pharma is often outsourcing to external partners some of the non-core activities around development, clinical trials, and production. So for example, big pharma is outsourcing development to contract research organizations. They outsource clinical trials to service firms, such as Quintiles. And they also outsource part of their production to third parties, like contract manufacturing organizations like Lonza. So as you can see, all these external parties actually just complement the internal resources and capabilities of big pharma. So it's really key to understand the business models of big pharma. So now it's time to deep dive into the top 3 business models, and let's start with the innovator business model. The strategy of the innovator is innovation based. One key feature is that sales are limited by the patent's life. Hence, there is a need to constantly refuel the pipeline. Once the generic player comes in, you may well lose 90% of your sales in less than a year. So let's see how this model translates into the revenue cycle. So on this graph, what you see is, in blue, positive cash flows, which is revenue. And in red, you see the negative cash flows, which is investment. So first, you need to massively invest in R&D. It usually takes ten years, or over ten years to complete your development, and it costs around $1 billion. And on top of that, your probability of success is pretty low. On average, it's 5% for a new chemical entity. However, if you make it to market, you hope for high return. So usually, when we talk about the blockbuster drug, we talk about sales above $1 billion. So you enjoy these big, fat sales until your patents expire, at which point, any generic company may enter the market with a cheap copy of your drug and take up to 90% of the sales in six months. So let's look at a real-life example. Here we're looking at Lipitor, which was, at one point in time, the world's best selling drug. What you see here is a nice linear sales curve, up to $12 billion at peak. Starting in 2006, some competition hit Lipitor, but sales still remained at an impressive $10 billion mark. And then things started to get sour. Patents expired, generics came in, and Lipitor lost $8 billion of sales in less than a year. The conclusion from the Lipitor case is that LOE is a key business point for an innovator product. So managing LOE events is key. So next, how do you manage LOE events? Well, pipeline is key. To sustain yourselves, you need to have the next candidate ready to fill any sales gap. There are tactical ways of managing LOE events, and there are fundamental ways of managing LOE events. So first, tactical ways. This includes, for example, life cycle managements. So you can shift the patient to a new formulation or a new device. For example, Rituxan, which is a drug for leukemia, it started as an IV form. And in 2014, Roche introduced the form, with the benefit to reduce the administration time from four hours to five minutes. So second, fundamental ways of managing LOE events. So here, I'm referring to new drugs fundamentally superior to what is currently on the market. So an interesting story here is, once again, about Roche, and about its new drug, Gazyva, being superior to Rituxan. And hence, also superior to any imminent generic competition. So I see here a legitimate story about imminent generic competition being a stimulus to innovation. So now that you have a good feeling about what the innovator business model is about, it's time to move the second business model, the generic business model.
