Typical Value Chain of a Pharmaceutical Product using Biotechnology Discovery of the Product Marketing of the Product Traditional pharmaceutical produce mostly chemically based medicines, mostly pills Biotech uses living organisms such as bacteria or hamster cells to produce medicines that are protein-based and usually taken by injection Biotech companies tend to be smaller in size and focus on a limited number of products Big Pharma focusing more on development, trying to get the later stage drugs to the market. As the early stage research spending is reduced to reduce their risk profile, their strategy is shifting towards partnering with small biotechs, buying finished or later stages medicines from them to strengthen their pipeline.

Top Ten Companies In Terms of Market Capitalization Pfizer 182.15 B Johnson & Johnson 180.88 B GlaxoSmithKlein 141.87 B Roche Holding 135.28 B Novartis 128.65 B Sanofi-Aventis 122.80 B Astra Zeneca 75.70 B Merck 72.71 B Eli Lilly & Co. 64.67 B Wyeth 62.78 B

Top-Selling Drugs, 2004 (US Only) Lipitor (Pfizer) $7.7B Zocor (Merck) $4.6B Prevacid (Abbott Laboratories) $3.8B Nexium (AstraZeneca) $3.8B Procit (Ortho Biotech) $3.2B Zoloft (Pfizer) $3.1B Epogen (Amgen) $3.0B Plavix (Bristol-Myers Squibb) $3.0B Advair (GlaxoSmithKlein) $2.9B Zyprexa (Eli-Lilly) $2.8B

The New Drug Approval Process New Drug Development The New Drug Approval Process

The FDA Government regulatory body for the industry Imposes requirements on product testing, safety, effectiveness, and marketing of pharmaceutical products Monitors for proper manufacturing and labeling standards Also responsible for food, medical devices, and cosmetics products The FDA approval does not mean a product is harmless

New Drug Application The FDA FDA reviewer’s key decisions: “Whether the drug is safe and effective in its proposed use(s), and whether the benefits of the drug outweigh the risks. Whether the drug's proposed labeling (package insert) is appropriate, and what it should contain. Whether the methods used in manufacturing the drug and the controls used to maintain the drug's quality are adequate to preserve the drug's identity, strength, quality, and purity.”

Drug Approval Process Average of 10 - 15 years and $800 million - $1 billion to nurture a drug from initial discovery to market Process: Academic and Laboratory Research Testing done on animals Phase 1: Drug given to a small number of healthy people to test its safety Phase 2: Drug administered to 100 or more people with the disease that it was intended to treat Phase 3: Rigorous testing done on larger groups of ill patients FDA Review – Approval/Disapproval

Pre Clinical Tests The beginning of the drug approval process To see the potential effects on humans, tests are performed on: Isolated tissues Cell Cultures Animals Company decides whether to put the drug into the human testing process, based on the marketability of the product, their financial situation On average, only one compound in a thousand will actually make it to human testing The drug approval process starts in the laboratory. After discovering a promising compound, studies using the compound in cell cultures, isolated tissues, and laboratory animals are conducted. This gives researchers a pretty good idea of what to expect in human trials. Assuming the data is promising, the company makes the decision whether to begin the long and costly process of getting the compound to market. Since most drug companies have multiple candidates, the company must take into account the size of the potential patient population, whether the market for that particular drug is already well-served, and the company's financial situation, all of which will factor in to the decision to begin clinical trials.

The IND Filing The goal is to provide pre-clinical data of sufficient quality to justify the testing of the drug in humans FDA has 30 days to review the Investigational New Drug (IND) application Must be filed annually until the completion of clinical testing At this time patents are usually applied for; patents last generally for 20 years About 85% of all IND applications move on to begin clinical trials If they succeed, 20% chance of the product making it to the market Before testing on humans can begin, the company must file an Investigational New Drug (IND) application Successful application typically has 20% chance of the product making it to the market, which will take around 5-9 years. Because most companies file for and receive patents for the commercial use of the compound that they are developing during pre-clinical trials, the patent clock usually starts ticking at pre-clinical trail

Phase I Duration: 1 to 3 years Sample size: less than 100 patients Test on: Healthy volunteers If passed this Phase, chances of the product reaching to the market will be 30% Begins to analysis and develop the drugs safety profile How the drug is absorbed, metabolized and excreted safety and dosage The duration of the drug's effects are also measured.

Phase II Duration: 2 years Sample size: 100 – 300 patients Test on volunteers who suffer from the disease Upon passing this Phase, chances of the product reaching to the market will be 60% To evaluate the drug's safety and assess side effects Establishes the optimal dosage of the drug Consists of small, well-controlled experiments to evaluate the drug's safety and assess side effects

Phase III Duration: 3-4 years Sample size: >1000 patients Test on volunteers who suffer from the disease If passed this phase, chances of the product reaching to the market will be 70% Verifies the drug’s effectiveness in its intended use Assessment of long term effects Continues to build the safety profile of the drug and record possible side effects and adverse reactions resulting from long-term use

NDA Filing Upon desirable results from Phase III, New Drug Application (NDA) will be submitted NDA contains data supporting the efficacy and safety of the drug Approval can take 2 month to several years, but on average, it takes around 18 to 24 months Drugs are subject to ongoing review, making sure no adverse side effects appear from the drug. After FDA’s approval, the drug can be marketed and distributed. the company will then file a New Drug Application, which can contain 100,000 pages of data supporting the efficacy and safety of the drug. At this point, the drug has better than a 70% chance of being approved by the FDA. Approval of the NDA can take anywhere from two months to an extreme of several years (in the case that the FDA requests additional information), with an average wait of between 18 and 24 months. Upon approval, the company may begin to market and distribute the drug.

Patent Generally last 20 years Since most companies file for patent during pre-clinical trials, usually the patent is only good for another 10 years or so after it gains FDA approval What can be patented Product Method Use Examples DNA and RNA sequences Proteins, enzymes, antibiotics Antibodies, antigens Micro-organisms, cell lines, hybrids Because most companies file for and receive patents for the commercial use of the compound that they are developing during pre-clinical trials, the patent clock usually starts ticking at pre-clinical trail

Key Points about the Clinical Process To bring a drug through all phases of the clinical trial process, it costs around: $800 M - $1 B 10-15 years Key factors that determine the quality of a company's pipeline: one or more successful products on the market a large pipeline of candidate drugs with some in late-stage enough cash to fund the development of their new drug candidates Sales of the industry is less sensitive to swings in the business cycle The clinical trial process is costly as well as time-consuming The clinical trial process is costly as well as time-consuming. Estimates as to the cost of pushing a drug through clinical trials range from between $350 million and $500 million. Investors interested in early stage companies should factor in the costs, risk, and extended time to market required for FDA approval.

Drug Discovery Process

Troubles the Pharmaceutical Industry is Facing

Patent Expiration 2006: Patents expire on $17 billion in sales for prescription drugs Expected loss of $25 billion in sales over the next three years for “blockbuster” drugs Expected loss of $40 billion expected in total Source: IMS health

Patent Exposure

Patent Protection However, drugs may have several patents Specific delivery method Specific product/molecule Specific manufacturing process Specific medical indication How molecules react Specific Combination Fixed dose/combination of several molecules

Food is being used as a substitute for medication Drug Backlash People needing medical attention are increasingly rejecting manufactured drugs Push towards more natural healing methods to avoid unpleasant side-effects Natural Healing is growing and becoming big business Food is being used as a substitute for medication

Substitutes for Drugs - Examples Dark chocolate is being pegged as the next new thing to combat blood pressure and prevent heart problems – could it replace Aspirin? Cherries and berries are being used by many elderly people with mild arthritis rather than joint medication

Drug Substitutes cont… Olive oil, fish oil, and flax seeds are being used to treat high cholesterol “Cleansing” methods involving apple juice and olive oil are being used to pass gallstones Surgery – and the subsequent medication needed – are being shoved aside

Image Issues Pharmaceutical companies depend on ailments to succeed This can create an image problem, as patients have become far less trusting Pharmaceutical companies are being accused of withholding potentially valuable preventative and alternate healing information from patients

Pricing Problems American Association of Retired Persons disagreeing with price increases: Prices up 7.1% for brand-name drugs in 2004 inflation was only 2.7% Lipitor could increase price by 5% next year From 1999-2004, Drug prices increased by 35.1% on average; inflation was only 13.5% Generic drug prices increased only 0.5% in 2004 More competition

People worry about side-effects of drugs Safety Issues People worry about side-effects of drugs Example: Accupril, a blood pressure medication, may cause kidney disease and/or failure Patients worry than side-effects may be worse than the original problem being treated

Safety Issues cont… The Vioxx crisis sent the Pharmaceutical Industry into a tailspin There are questions as to whether or not patients can ever trust that their medications are safe. The Industry is now left to recover from a “Case of Bad PR”

Drug Instructions There are worries that people who are immigrants (and therefore speak different languages) or who are illiterate cannot properly read instructions Taking drugs improperly can lead to the drug not being effective or worse: overdose Side-effects can be magnified Immediate Death may result.

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