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 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 InnovationOpen 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 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 Years IND / FIH PhIIa / PoCPhI 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 … 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 ( ) 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