1. Avalere Health LLC | The intersection of business strategy and public policy Introduction to the Pharmaceutical Industry Presented by Gillian Woollett, MA, D.Phil., Avalere Health LLC

2. © Avalere Health LLC Page 2 Session Objectives  Introduction and context  Overview of the players and their roles – academia, industry, regulators, consumers  The Products - drugs, biologics, devices  The make up of the industry  Conclusions

3. © Avalere Health LLC Page 3 The US is a Leading Biopharmaceutical Market but Must be Considered in a Global Context Japan 0.13 Europe 0.50 Canada 0.03 Brazil 0.19 Russia 0.14 India 1.14 China 1.13 BRIC plus others (2nd World) ROW (Largely 3 rd World) Limited health care infrastructure Australia 0.02 See products and want greater access World Population Total 6.7 US 0.31 Largely have and expect access Little knowledge and even less access ICH plus others (1st World) ICH: International Conference on Harmonisation

4. © Avalere Health LLC Page 4 The Pharmaceutical Industry’s Market  Largest commercial health sector  Global industry, consolidated players  Highly regulated industry (FDA, Patent and Trademark Office) North America EuropeAsia, Africa, Australia JapanLatin America Total Global Pharmaceutical Sales, by Region (in billions $) Source: Standard & Poor’s. Industry Surveys Healthcare: Pharmaceutics. November 25, 2010. IMS Health Inc.

5. © Avalere Health LLC Page 5 Progress in Emerging Markets Offsets Slow Growth in Developed Regions Pharmaceutical Spending Compound Annual Growth Rate (CAGR) from 2006 to 2010, By Region Developed Regions CAGR (%) Emerging Regions Global Pharmaceutical Sales (BIL $) in 2010 US310.6 EU*147.4 Japan96.5 China41.1 Tier II**48.8 Tier III***60.6 *Germany, France, Italy, Spain, and UK **Brazil, India, Russia ***Mexico, Turkey, Poland, Venezuela, Argentina, Indonesia, S. Africa, Thailand, Romania, Egypt, Ukraine, Pakistan, and Vietnam Source: Standard & Poor’s. Industry Surveys Healthcare: Pharmaceutics. December 1, 2011.

6. © Avalere Health LLC Page 6 Global versus Regional Considerations for the Development of any Medicinal Product GLOBAL REGIONAL/NATIONAL ACCESS Patients are everywhere (albeit Dx and healthcare infrastructure vary) IP varies, and getting a little better harmonized, but barely (certain global free-trade norms are emerging but limited) Healthcare systems vary (affects reimbursements and ROI, primary & secondary markets) Companies develop and manufacture for the leading markets, ideally global standards (inconsistent requirements lead to requirements for different products) Regulations are regional with some harmonization for drugs, and innovator biologics (cost of getting to market less if can use a single data set) SCIENCE Essentially global Some variation in patients Patient access is determined by regulatory approval, market viability by purchase/reimbursement system AVAILABILITY = APPROVAL & REAL COMPETITION ON PRICE

7. © Avalere Health LLC Page 7 The Standard Model of Drug Development Obsolescence Innovative drugs offer:  Improved treatment  Less side effects  New therapeutic options and thereby replace older and/less effective medications Net Progress Radical New Therapies and Iterative Improvements Generics offer:  High quality drugs for established treatments  Affordable costs and thereby free up healthcare funds for new innovative drugs Patents Expire

8. © Avalere Health LLC Page 8 Clinical Trials Discovery / Preclinical Testing File IND at FDA Phase IPhase IIPhase III File NDA/BLA at FDA FDAPhase IV Years6.51.523.51.5 Additional post- marketing testing required by FDA Test Population Laboratory and animal studies 20 to 100 healthy volunteers 100 to 500 patient volunteers 1,000 to 5,000 patient volunteers Review process / approval Purpose Asses safety, biological activity and formulations Determine safety and dosage Evaluate effectiveness, look for side effects Confirm effectiveness, monitor adverse reactions from long-term use Success Rate 5,000 compounds evaluated 5 enter trials 1 approved The Terminology of Drug Development Source: PhRMA

9. © Avalere Health LLC Page 9 The R&D Process Takes Time and Resources Source: Pharmaceutical Research and Manufacturers of America, Drug Discovery and Development: Understanding the R&D Process. http://www.phrma.org/research-development-processhttp://www.phrma.org/research-development-process

10. © Avalere Health LLC Page 10 The intersection of business strategy and public policy Overview of the Players and their Roles

11. © Avalere Health LLC Page 11 Ultimate Driver is an Identified Patient Need  Unmet medical need: »Debilitating or fatal; temporary or lifelong »Diagnosed routinely by physicians – may need specific associated diagnostics, and specialist support  Affected population of sufficient size to support the development of a commercial product (average cost of development $1.4 billion per product)  Viable payment model needs covered populations: »Government programs such as Medicare/Medicaid »Privately Insured patients, largely still through employers »Uninsured patients often have more limited access, but some medicines have PAP programs

12. © Avalere Health LLC Page 12 Source of Candidate Medicines – this step is highly technology and research dependent  The fundamental scientific research enterprise received significant Federal funding: »Academia – universities and researchers in every state »National labs, such as NIH, NAS, CDC, FDA  Industry – pharma, biotech and related innovative industries such as computation, modeling support ongoing research through ROI  Disciplines are basic research, as well as epidemiology, statistics, clinical/regulatory science, and manufacturing All contribute to the global scientific literature and the basic understanding of disease, and this generates the candidate drug target and drugs for further development as therapeutic interventions/cures

13. © Avalere Health LLC Page 13 Creation of Candidate Medicines  The ideas for a drug target/medicine must be taken, developed into a candidate that can be tested for safety and efficacy in animals, then man, and converted into a product.  This can be initiated in academia, developed in science parks and facilitated small business environments, but ultimately manufacturing requires major biopharma industry support (sponsorship and investment, or acquisition)  All sorts of relationships occur between stakeholders: »Licensing of patents, products for small or all indications between individuals, academia, biotechs, pharma »Deals limited to US and specific ex-US markets (with different licenses to different sponsors), some with specific milestone payments »Investments by angels, VCs, or outright purchase of the asset »Patient groups funding specific research targeted at their disease VC: Venture Capitals

14. © Avalere Health LLC Page 14 PhRMA Member Company and Public R&D Spending PhRMA Member Company R&D and NIH Operating Budget: 1995–2011 Source: PhRMA, NIH Office of Budget 10 PhRMA Member Companies’ R&D Expenditures Total NIH Budget *Estimated for CY 2011.

15. © Avalere Health LLC Page 15 Biopharmaceuticals are a Source of Projected Growth in US Manufacturing Jobs Projected Change in Employment from 2006 to 2018* Source: PhRMA, adapted from Bureau of Labor Statistics 3 * Selected illustrative sectors. The government projects increases in manufacturing employment in only one fifth of the sectors or subsectors it defines.

16. © Avalere Health LLC Page 16 FDA’s Evolving Policy Role Will Affect Market Access for Medical Technologies, Necessitating Strategic Refinement Quality Measurement Reimbursement Value Proposition Market Access Strategy Novel FDA Policy Initiatives  CMS/FDA parallel review  Investment in CER infrastructure  Post-market data collection & surveillance  Evidence standards harmonization  Regulation of communication FDA Regulatory Strategy  Pre-clinical/clinical trial design  Regulatory applications  Evidence submission and evaluation

17. © Avalere Health LLC Page 17 FDA’s Approval Process  FDA governs market access and product promotion »An FDA approval/license is necessary but not sufficient for product viability »Indications can be added to currently marketed products after the initial approval – expands potential market, but requires FDA review of additional data and negotiation for any label changes »Issues of off-label use, expanded access (formerly called compassionate use), progressive approval will be discussed later. All can impact date of approval and time patients can access medication »Post approval, brand/innovator/originator products gain sales through marketing. Generics, approved when patents/exclusivity has expired gain market share through competition on price.

18. © Avalere Health LLC Page 18 US Regulatory Pathways Statute New Drug Application (NDA) - 505(b)(1) and 505(b)(2) Devices: Pre-Market Authorization (PMA), 510ks U.S. Food Drug & Cosmetic Act Abbreviated NDA (505(j) or ANDA) U.S Public Health Service Act Biologic License Application (BLA) 351(a) Pathway BIOSIMILAR 351(k) (Can Be Interchangeable)

19. © Avalere Health LLC Page 19 New drugs may undergo an expedited review* process  Drugs classified as a real advance over available treatments undergo a 6 month “priority review” instead of the 10 month “standard review”  Drugs that treat a range of serious diseases and fill an unmet need may request and receive a “fast track” designation at any point during drug development  Fast track drugs are eligible for accelerated approval or rolling review  Accelerated approval uses findings that are likely to predict clinical benefit rather than direct measurements & results  Rolling review allows companies to submit completed NDA sections individually rather than the entire application all at once, allowing earlier resolution to potential problems Some Medicines Get Priority at FDA *Accelerates review but does not guarantee approval

20. © Avalere Health LLC Page 20 The intersection of business strategy and public policy The Products - Drugs, Biologics, Devices

21. © Avalere Health LLC Page 21 Source: Adis R&D Insight Database 5 Global Market: Development of Medicines by the Geographic Region Number of Compounds in Development, by Geographic Region 4, 1997–2011 Different countries also have different health priorities – dependent on demographics and disease prevalence

22. © Avalere Health LLC Page 22 In the US the Greatest Proportion of Drugs and Biologics in Development are Oncology-related Biopharmaceuticals in Development by Therapeutic Category, 2009 Source: PhRMA *Reflects number of compounds in clinical trials or under review by the FDA for approval through New Drug Application (NDA) or Biologic License Application (BLA) pathways. Medicines with multiple indications may appear in more than one category but are counted only once for total (3,091).

23. © Avalere Health LLC Page 23 While Companies Have Spent More on Research, This Has Not Led to More Drug Approvals Research and Development Spending, and New Drug Approvals (NDAs) and New Biologic License Applications (BLAs) by the U.S. FDA, 1998-2008 Number of Approved NDA and BLAs* Domestic R&D Spending (in millions) * Beginning in 2004, figures include BLAs. Sources: PhRMA, Profile 2011, Pharmauetical Industry. http://www.phrma.org/sites/default/files/159/phrma_profile_2011_final.pdfhttp://www.phrma.org/sites/default/files/159/phrma_profile_2011_final.pdf FDA, CDER Approval Times for Priority and Standard NMEs and New BLAs CY 1993 – 2008. FDA, NMEs Approved by CDER.

24. © Avalere Health LLC Page 24 Biologics are Now a Major Component of the Originator Pipeline, but Approvals Lag Behind Investments As drugs in development move through the pipeline, the expansion of the biologic drug market is expected to dramatically increase the total costs of biologics 1. FDA. “Drug and Biologic Approval Reports.” http://www.fda.gov/Drugs/DevelopmentApprovalProcess/http://www.fda.gov/Drugs/DevelopmentApprovalProcess/ HowDrugsareDevelopedandApproved/DrugandBiologicApprovalReports/default.htm 2. PhARMA. “Biotechnology Research Promises to Bolster the Future of Medicine with More Than 900 Medicines and Vaccines in Development.” 2011.

25. © Avalere Health LLC Page 25 Generic Drugs Took a While to Take Off After the Enactment of Hatch Waxman in 1984, But Now Market Penetration is Rapid But by 2008, generics accounted for 14/15 most commonly prescribed meds, and 13/15 of those most commonly used by Medicare Part D beneficiaries (seniors pharmacy benefits) http://www.phrma.org/sites/default/files/159/phrma_chart_pack.pdf Source: PhRMA

26. © Avalere Health LLC Page 26 Generic Small Molecule Drugs have Created Savings When Patents Expire  Generic medicines account for 69% of all prescriptions dispensed in the United States, and only 16% of all dollars spent on prescriptions. (source: IMS Health)  Brand sales of $228 billion compared to Generic sales of $58.5 billion (2007), and have saved consumers and the American health care system $931 billion over the last 10 years.  In 2010, generics saved $158 billion — a savings of more than $3 billion every week.  10,072 of the 12,751 drugs listed in the FDA's Orange Book have generic counterparts (source: FDA, MedAd News).FDA's Orange Book Source include http://www.gphaonline.org/about-gpha/about-generics/facts Similar hopes and expectations are being applied to biologics, which, through the chance of history, did not have an explicit regulatory pathway in the US until 23 March 2010

27. © Avalere Health LLC Page 27 Will Biosimilars Be the New Generics in the US Market?  Congress included Title VII, Biologics Price Competition and Innovation Act (BPCIA)* in the Patient Protection and Affordable Care Act because of the expectations for savings, as well as the hope for expanded access. »Using the new 351(k) pathway, applications can be for biosimilars and also for interchangeable biosimilars  Legislation was enacted 23Mar2010, and the new biosimilars pathway was available the day of enactment  While FDA has held ~21 PreIND meetings (~35 meeting requests for 11 reference products) there have as yet been no applications filed for biosimilars in the US  Draft guidances were published mid-Feb12, another FDA Public Meeting 11May12, transparent and on-going discussions; user fees negotiated and proposed (BsUFA) in parallel  Payors/ reimbursers are waiting… * Source FDA: http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/UCM216146.pdf

28. © Avalere Health LLC Page 28 Medical Devices Are Classified into One of Three Classes According to Level of Risk  Class l devices are subject to the least regulatory control »Examples include elastic bandages, examination gloves, hand-held surgical instruments  Class II devices are those for which general controls alone are insufficient to ensure their safety and effectiveness »Examples include powered wheelchairs, infusion pumps, surgical drapes  Class III devices are life-sustaining, life-supporting, and implantable devices, or new devices not substantially equivalent to legally marketed devices, that must receive premarket approval to ensure safety and effectiveness »Examples include heart valve replacements, implanted cerebellar stimulators, breast implants Intended use of a device is a significant factor in determining its classification

29. © Avalere Health LLC Page 29 Most Devices Are Regulated by the Center for Devices and Radiological Health Center for Devices and Radiological Health (CDRH) PMA 510 (K) Center for Biologics Evaluation and Research (CBER)  Blood collection devices *Until 1976, Congress had never enacted specific legislation governing the regulation of medical devices. The 1976 Medical Device Amendments (Pub.L.No. 94-295, 90 Stat. 539), vastly expanded FDA’s statutory authority over devices, creating a comprehensive regulatory scheme. Medical devices available on the market before May 28, 1976, “preamendment devices”, were permitted to remain on the market, pending FDA classification, without any FDA review. Prior to this, FDA’s authority to regulate medical devices was limited to action against adulterated or misbranded devices.  Premarket notification  Substantially equivalent to an existing, predicate device  Premarket approval application Device regulation includes more specific requirements for individual classes of products than drug regulations; as a result, it may appear more fragmented and confusing

30. © Avalere Health LLC Page 30 The intersection of business strategy and public policy The Make Up of the Industry

31. © Avalere Health LLC Page 31 US Public Biopharma Companies by Region, 2006 Region Number of Public Companies San Francisco Bay Area69 New England60 San Diego38 New Jersey28 Mid-Atlantic23 Southeast19 New York State17 Pacific Northwest15 Pennsylvania Delaware Valley 12 Los Angeles/Orange County 11 Texas11 North Carolina9 Mid-West8 Other8 Colorado6 Utah2 Source: Ernst & Young LLP Biotechnology companies are defined as those whose primary activity is to use biological processes to develop health care products, and other companies whose primary activity is to supply health biotechnology companies with technology-based research products. (Source: Biotechnology Industry Organization, Guide to Biotechnology 2008)

32. © Avalere Health LLC Page 32 US Public Biopharma Companies by Region, 2006 No data or info 10-19 20-29 0-9 60-69 Number of Public Companies Source: Adapted from Ernst & Young LLP Biotechnology companies are defined as those whose primary activity is to use biological processes to develop health care products, and other companies whose primary activity is to supply health biotechnology companies with technology- based research products. (Source: Biotechnology Industry Organization, Guide to Biotechnology 2008) 30-39

33. © Avalere Health LLC Page 33 The Biopharmaceutical Sector is the Most R&D-intensive in the US  Biopharmaceutical companies invested more than ten times the amount of R&D per employee than manufacturing industries overall. Source: Adapted from N.D. Pham, * Asterisks indicate manufacturing subsectors. R&D Expenditures per Employee, by Manufacturing Sub-sector and Industry, 2000–2007

34. © Avalere Health LLC Page 34 Global Leaders in Biotechnology Research  U.S. biotechnology firms account for 80% of the world’s research development in biotechnology. Source: Burrill and Company 6 * Biotechnology companies are defined as those whose primary activity is to use biological processes to develop health care products, and other companies whose primary activity is to supply health biotechnology companies with technology-based research products. 2008 Biotechnology Statistics* USAEuropeAsia/PacificCanadaTotal Annual R&D$24B$5B$0.6B$0.9B$30B Total Companies1,4501,6007604004,210 Total Employees140,00065,00015,0006,000226,000 Publicly Held Corporations 33615016067693

35. © Avalere Health LLC Page 35 Biotechnology: Who’s providing the money? Biotechnology Financing (in millions $) Source: Biotechnology Industry Organization, Guide to Biotechnology 2008 Total = $24,773.8 Million

36. © Avalere Health LLC Page 36 Global Biopharmaceutical Intellectual Property  The intellectual property related to more than half of new medicines resides in the U.S. Source: J.T. Macher and D.C. Mowrey 5 U.S. Biopharmaceutical Patents 1990–2002, by Location of Inventors

37. © Avalere Health LLC Page 37 The Ripple Effect of High-Value Biopharmaceutical Jobs  The biopharmaceutical sector supported 4 million jobs across the economy in 2009, including about 3.3 million in other sectors. Source: Battelle Technology Partnership Practice 2 Biopharma Jobs More than 650,000 Jobs in the U.S. Biopharmaceutical Sector Total Jobs Supported 4 million total U.S. Jobs Supported by the Biopharmaceutical Sector Each direct biopharmaceutical job supports 5 additional jobs in other sectors