FINANCING DRUG DEVELOPMENT

Jeremy Whitty

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Topics

Lecture Topic

1 Financing of SME: resource planning In terms of project management, budgeting and cost-control) involved in the management of a drug discovery and development program..

Functions and elements (including business aspects) involved in the integrated development of new drugs. The role and management of SMEs in drug development

2 Budgeting of medicines development projects. Case study

Case study

A cautionary tale….

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Genzyme discloses contamination at Ireland plant

• Fourth-quarter net earnings fell 73 percent to $23.2 million, or 9 cents a share, while revenue declined to $1.08 billion from $1.17 billion.

• Provided a 2010 profit outlook below Wall Street's expectations as the company attempts to restore supply of its top-selling drugs, Gaucher's disease treatment Cerezyme and Fabry disease drug Fabrazyme, which had a combined sales drop of 30% last year. Genzyme expects Cerezyme shipments to return to normal levels in the coming months, but it warned that Fabrazyme may take longer.

• 30% Sales drop

Shire at new 9-yr high on drug approval

• Shire shares hit a new 9-year high after U.S. authorities approve its Gaucherdisease drug Vpriv, an alternative to Genzyme's Cerezyme, which is in short supply due to manufacturing problems.

• Forecasting Vpriv sales of $150 million in 2010 and nearly $500 million by 2014.

• $500 million that Genzyme would have received.

About handout

• A guide for the entire course

• Focuses on data required for each step in the development process, and how to present it.

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Overall costs

The average pre-tax industry

cost per new prescription drug

approval (inclusive of failures

and capital costs) is: $2.5

billion / €2.2 billion*

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Where does the money go?

430

1 100

466

1 996

965

1460

312

2 737

0

500

1000

1500

2000

2500

3000

Pre Clinical Clinical Post Approval Total

Direct Cost Capitalized Column1

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Growth in capitalised r&D Costs

10970

278

135

436

608

1098

1460

0

200

400

600

800

1000

1200

1400

1600

Pre Clinical Clinical

1970s 1980s 1990 - 2004 2005 - 2014

• Depends on your company:

• Start-up

• SME

• Multinational

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Where does the money come from?

• Revenue?

• Equity?

• Debt?

• Grants? NIH, IMI etc

• VC’s?

• Angel Investors?

• Institutions / Foundations?

• Friends and Family?

• Large Pharma? ... why?

• For each of these you need to decide how much you are willing to give up

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Where does the money come from?

• Start-ups & SME’s: What is your end point? Sell company? Sell IP? Collaborate?

• Continue as independent?

• Where will the funding and skills comes from?

• Let’s focus on Clinical

• Licensing, Marketing & Distribution costs?

• Biotech? Data? Diagnostics? Wearable? Medical Device? Small molecule?

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Where does the money come from?

• Consider the idea for any new drug, SME or start-up as an empty box

• The box is worthless.

• Add and suddenly you think you can add €1 & get €10 in return.

• If the box is a medicinal product, building it is expensive.

• “Give me $1M to build a box, and you get X% of everything that comes out of it”

• How much should that X be?

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How do you value start up, sme or new product?

• Berkus Method: do you believe that the box can reach $20M in revenue by the fifth year of business?

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How do you value start up, sme or project?

• Risk Factor Summation Method: Berkus + 12 risks

• You compare project/start up against similar ones

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How do you value start up, sme or project?

• Scorecard Valuation Method RFS adjusted for the value for a certain set of criteria.

• The criteria are weighted, based on their impact to the overall success of the project

• You are considering Management, Size of Opportunity, Product, Sales channels, other factors.

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How do you value start up, sme or project?

• The Comparable Transactions Method

• Number of users: Number of patients, patents files, weekly doses etc

• Use the P&L : sales, gross margin, EBITDA, etc.

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How do you value start up, sme or project?

• Discounted Cash Flow

• The current value of the box is the sum of all the future cash flows over the next years.

• Start Up: You plan to exit after the n year period.

• Estimate the future value of the acquisition, e.g. comparable method transaction.

• Then, discount the future value to get net present value. TV = exit value/(1+r)^n

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How do you value start up, sme or project?

• Discounted Cash Flow

• The current value of the box is the sum of all the future cash flows over the next years.

• SME / Multinational: The business will keep growing at a steady pace, generating indefinite cash flows after the n years period.

• Terminal Value: TV = CFn+1/(r- g) with “r” being the discount rate and “g” being the expected growth rate.

• Option 2 : you consider an exit after the

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How do you value start up, sme or project?

• DCF with Probabilities

• Can use DCF, ROR metrics etc.

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How do you value start up, sme or project?

• VC Method

•

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How do you value start up, sme or project?

• Valuations never show the true value of your company or product.

1) how bad the market is willing to invest in your box,

2) how bad you are willing to accept it.

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How do you value start up, sme or project?

• Total capitalized cost per approved new compound grew at an 8.5% compound annual rate;

• out-of-pocket cost per approved new compound grew at a 9.3% annual rate. •

• Clinical approval success rates have declined significantly. •

• Increases in the cash outlays used to conduct clinical development and higher drug failure rates during clinical testing have contributed most to the estimated increase in R&D costs. •

• Changes in the time to develop and get new drugs approved and in the cost of capital had modest moderating effects on the increase in total R&D cost.

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Tufts report

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Preclinical & Clinical costs

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Attrition rates

• Investigator and site: Institutional overhead, investigator honoraria and fees, ethics review, Institutional Review Board , investigator meetings (travel) ‘

• Patient enrollment: Recruitment costs (advertising, travel stipend, etc.), screening, office visits (equipment, diagnostics, etc.)

• General trial procedures: Initial exam, physical exam, vital signs, detailed medical history

• Materials: Drug supply, comparator drug, other equipment, shipping, etc.

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Main cost areas for clinical research

• Efficacy assessments: MRIs, CT scans, other diagnostic tests

• Laboratory: Local lab fees, storage, shipping of samples, etc.

• Site-based IT/data management: Trial master file, electronic data capture, Interactive Voice/Web Response System

• Site-specific CRO expenses: Monitoring, randomization, biostatistics, travel, meetings, etc.

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Main cost areas for clinical research

• TYPICAL KPI’s at a Clinical Research Site

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Where does the money go?

Total studies enrollingTotal studies currently maintained (ongoing patients but not enrolling)Total studies in close-out, waiting to be closed, no current patientsTotal number of reimbursable patient visits (including unscheduled visits or pre-screening visitsTotal number of significant deviations: i.e. deviations reported to the IRBSite SF ratio: Total number of randomized patients vs total number SF's% of prescreening (come in for a prescreening and sign the prescreening consent) visits that do not convert to a screening visitsTotal number of patients screened Total number of patients randomizedDeviation of marketing budget V planTotal monthly budget: invoices paid V planDeviation of monthly fees V planDeviation of monthly expenses V plan

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Patient recruitment: Total number of callsTotal prescreen passesTotal prescreen failsTotal prescreensTotal Study Coordinator Prescreen FailsTotal screenedTotal Randomized% of Prescreen Passes/PS% of PS Fails/PS% of CRC PSF/PSP% of screened/PSP% randomized/PSPPipeline:Total Number of Feasibility Questionnaires submitted per quarterTotal number of Site Qualification Visits per quarterTotal number of Sivas per quarterTotal number of new studies started (defined as initiating contract and budget negotiations)# Deviation reports to be developed by SC's

• TYPICAL KPI’s at a Clinical Research Site

Where does the money go?

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What actions drive KPI’s?Microsof t Excel 97

- 2004 Worksheet

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How much do they cost?

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How much do they cost?

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Cost per patient

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Cost per patient

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Everything costs: Start UP

• Delays. More than 80% of clinical trials experience delays range on average from one to six months, costing upwards of $35,000 per day per trial.

• Only 10% of trials are completed on time.

• Time delays generate significant variability in clinical development budgets and can add substantial costs.

• Only 14% of clinical financial planners at pharmaceutical companies are confident in their budget forecasts.

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What do you need to know to manage?

• Complexity of trials.

• Trials are expanding in number, size, length and complexity.

• In Dec 2014 the number of registered studies on clinicaltrials.gov i= 181,107 with locations in 187 countries.

• Since 1995 the average length of a clinical trial increased 70%,

• the average number of routine procedures per trial has risen 65%,

• Trials undergo protocol amendments, which can add new trial populations, extension arms, increased assessments, and other design modifications.

• You may not be able to use historical data to accurately predict expenses for future clinical trials.

• The trend toward adaptive trial design, where the trial can be modified during its progress based on interim results, makes forecasting difficult.

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What do you need to know to manage?

• Complexity of trials.

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What do you need to know to manage?

• Unexpected events.

• Slower or faster site activation, lags in enrolment activity, and underperforming sites.

• When sites do not enrol enough subjects, do you add more sites across multiple geographical regions? Do you close sites early due to non-performance?

• Trials have significant funds tied up in procedural costs that may or may not occur in that particular trial, and it can be hard to predict since it isn’t known if patients will progress to a certain stage or if additional procedures will need to happen.

• And with forecasting often done for the worst-case scenario (i.e., every patient completes every procedure and visit).

• This can be prohibitive to other R&D efforts since those funds can’t be allocated to other studies or efforts that may be underfunded.

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What do you need to know to manage?

• If you are managing the budget of a SME or large company. The cost of clinical research cannot be under estimated.

• You should try to

Increase visibility into the impact of patient enrollment.

Improve decision-making through understanding of performance differences between sites and across studies.

Enable real-time consolidation of the entire portfolio forecast.

Create forecasts linked to and driven by underlying protocol design data.

Provides version, scenario, and what-if analysis.

Updates and recalculate for actual spend activity.

Eliminate the need for error-prone Excel spreadsheets! (Primavera, Cognos etc)

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Budget management role

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Key members

• What trials are not meeting their enrollment requirements?

• If requirements aren’t met, what must we change (enrollment expectations, advertisement, number of administrators, number of clinical sites, etc.)?

• If we were to secure more resources, how would we allocate them?

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Key questions

• All budgets are financial models of the operating plans within the business

• All assumptions should be documented

• All relevant deviations should be analyzed for decision making

• All relevant members of the company have to be involved in revision and acceptance of their goals and

• figures

• Don’t get obsessed by short term variations but spot trends (same as 6 Sigma/Lean)

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Remember

WHIRLWIND GUIDE TO BUDGETING

Jeremy Whitty

Purposes of Budgeting Systems

Budgeta detailed plan, expressed in

quantitative terms,

that specifies how resources will be

acquired and used during a specified

period of time.

Planning

Facilitating

Communication and

Coordination

Allocating Resources

Controlling Costs and

Operations

Evaluating Performance

and Providing Incentives

Annual Budget Process

Revenues

Budget

Production

Budget

Direct

Manufacturing

Labor Costs

Budget

Ending

Inventory

Budget

Manufacturing

Overhead

Costs Budget

Direct

Materials

Costs Budget

Cost of Goods

Sold Budget

Operating

Expense

Budget

Budgeted

Income

Statement

Capital

Expenditures

Budget

Cash Budget

Budgeted

Balance Sheet

Budgeted

Statement of

Cash Flows

Operating Budget Financial Budget

Annual Budget Process

• Review and approve

• Review for consistency with goals

• Revise if necessary

• Approve budget after final revisions

• Communicate to departments

• Release resources

Properties of a Good Budget Process

• Minimize game playing• Padding the budget

• Overestimation of resource needs

• Results in misallocation of resources

• Budget slack

• Underestimating achievable goals

• Goals are easily achieved

• May not reach desired level of achievement

• Surpassing goals may strain other areas

Budgets for Performance Evaluation

• “Static” budget is of little use

• Conditions may change, requiring deviation from original plans

• Pointless to compare initial plan to final results when determining appropriateness of resource use

• Always ask “Given what was achieved, what resources should have been consumed?”

Behavioral Dimensions:Top-Down Budgeting

Flow of Budget Data

Supervisor Supervisor

MiddleManagement

Supervisor Supervisor

MiddleManagement

Top Management

Participative Budgeting

Flow of Budget Data

Supervisor Supervisor

MiddleManagement

Supervisor Supervisor

MiddleManagement

Top Management

Participative Budgeting

• What is participative budgeting?

• Allow those at lower levels to have a voice in the creation of the budget numbers

• Why might it be useful?

• Encourages “ownership” of the numbers and commitment to achieving them

• Suitable for SME’s & Depts with budget control

• Why might it be counterproductive?

• May allow “slack” to be built into the budget

• May involve people in predicting who do not have the necessary knowledge/skills

Pseudo-Participative Budgeting

Flow of Budget Data

Supervisor Supervisor

MiddleManagement

Supervisor Supervisor

MiddleManagement

Top Management

Endless Pseudo-Participative Budgeting

Flow of Budget Data

Supervisor Supervisor

MiddleManagement

Supervisor Supervisor

MiddleManagement

Top Management

Things to be aware of

What might people do in budgeting that would be dysfunctional?

Overstating revenues or understating costs to gain resources

Ignoring the implications their actions have for others (keeping relevant “private knowledge” private)

Building in conservative estimates of what can be done so the actual results will “look good” (often termed budgetary slack)

Behavioral Impact of Budgets

Budgetary Slack: Padding the Budget

People may believe that their performance will look better in their superiors’ eyes if they can “beat the budget” or that their lives will be easier if the goals are lower

Goal Congruence

• What is goal congruence?

Managers have goals and the organization has goals

Goal congruence: managers pursuing their own goals will achieve organizational goals

• Why is this important?

Coordinated efforts are more productive

Goal Congruence

• How can goal congruence be achieved?

Offer rewards that are valued

Have achieving these rewards linked to meeting firm goals

Provide feedback to help employees understand how the things they do contribute to (or hurt) firm goals

Dysfunctional Behavior• Dysfunctional = counterproductive

• Example: evaluate a manager based on controlling costs (sole measure of performance) and you will get a manager who will cut costs even when it hurts desirable outcomes (like product quality or patient safety or future productive capacity)

Budget Control

• To be effective, performance measures must motivate managers and employees at all levels to strive to achieve company strategies and goals.

Measuring Budget performance

• Requires a six-step design process:1. Choose Performance Measures that align with companies financial goals

2. Choose the time horizon of each Performance Measure

3. Choose a definition of the components in each Performance Measure

4. Choose a measurement alternative for each Performance Measure

5. Choose a target level of performance

6. Choose the timing of feedback

Step 1: Choosing among Different Performance Measures

• Four common measures of economic performance:1. Return on Investment

2. Residual Income

3. Economic Value Added

4. Return on Sales

Return on Investment (ROI)

• ROI is an accounting measure of income divided by an accounting measure of investment

Income Income Revenues

Investment Revenues InvestmentX=

Residual Income• Residual Income (RI) is a measure of income

minus a dollar amount for required return on investment

• RI = Operating Income – (RRR x Investment)• RRR = Required Rate of Return

• Some companies favor RI because managers will concentrate on maximizing an absolute amount rather than a percentage (excess over ROI)