The Changing Pharma R&D Model, GDDIS Leaders Summit Ted Torphy CSO, Head, External Innovation Research Excellence, Advance Technologies Janssen R&D A Johnson & Johnson Pharmaceutical Company Previous Position www.gbx.uk.com www.gddis.com www.gddif.com www.wddis.com

1. September 22nd and 23rd , 2012
Philadelphia, PA
Ted Torphy, Ph.D.
External Innovation & Business Models
Community of Research Excellence & Advanced Technologies
Janssen R&D
The Changing Pharma R&D Model Taking Advantage of Industry Disintegration

2. R&D productivity continues to decrease
Industry consolidation has led to fewer R&D organizations with fewer employees generating (fewer?) new products
Reliance on venture-backed biotech companies for early-stage products is at risk
–VC funding for biotech has dropped 80% since 2007, with early-stage companies and products being hit particularly hard†
The Situation
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†Data from PricewaterhouseCoopers and the National Venture Capital Association

3. Why Is Our Productivity Falling? A Few Thoughts
Laser focus on current markets limits breakthrough innovation
Lack of sharing capabilities and knowledge in the precompetitive space
Cost of failure
Inefficiency of vertical integration in Large Pharma
Failure to leverage Large Pharma capabilities to foster success of external partners
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4. Why Is Our Productivity Falling? A Few Thoughts
Laser focus on current markets limits breakthrough innovation
Lack of sharing capabilities and knowledge in the precompetitive space
Cost of failure
Inefficiency of vertical integration in Large Pharma
Failure to leverage Large Pharma capabilities to foster success of external partners
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5. Central Themes
Obsolete R&D business models underlie the innovation crisis in the pharmaceutical industry
Revitalizing the industry will require Open Innovation to create a “virtually integrated” R&D ecosystem
The alternative:
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Biotech
Pharma
CROs
Academia
Venture Capital
Patients

6. Vertical Integration – Businesses attempt to own and control all aspects the value chain, including designing, making, selling, and delivering their core product or service
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The End of Vertical Integration in Large Pharma?

7. Integrated vs. Disintegrated Industries
Integrated
Automobiles
Movies
Steel
Telecommunications
Oil
Large Pharma
Disintegrated
Automobiles
Movies
Steel
Telecommunications
Oil
Large Pharma
Computers
Semiconductors
Electronics
…and many, many more
What does history tell us?
?
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8. Strategy: cost vs. differentiation
–Is appropriate focus being placed on differentiating activities?
Economies of scale
–Where are economies of scale advantageous?
Capacity utilization
–Is internal capacity being used efficiently?
Degree of vertical integration
–What elements of the value chain need to be “owned”?
Learning, knowledge and expertise
–Is internal expertise fully leveraged as a competitive advantage?
Value Chain Levers
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9. Vertically Integrated Value Chain in Large Pharma
Core Business
Core Functions
Late Development
Supply Chain
Key Support Functions
Human Resources
Administration (Legal, Finance, Procurement, etc.)
Informatics
Infrastructure (e.g., Engineering, Maintenance, etc.)
Business Development
Research & Early Development
Delivering Cost Effective Outcomes
Sales & Marketing
Stakeholder Relations
•Marketing approval
•Pricing
•Reimbursement
•Policy
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10. Vertically Integrated Value Chain in Large Pharma
Core Business
Core Functions
Late Development
Supply Chain
Key Support Functions
Human Resources
Informatics
Infrastructure (e.g., Engineering, Maintenance, etc.)
Business Development
Research & Early Development
Delivering Cost Effective Outcomes
Sales & Marketing
Stakeholder Relations
•Marketing approval
•Pricing
•Reimbursement
•Policy
Research & Early Development
Administration (Legal, Finance, Procurement, etc.)
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11. R&D organizations in Large Phama are not configured to address the realities of today’s environment
−High fixed costs impede flexibility needed to match supply with demand and access to external technologies and capabilities
−Many R&D functions are being commoditized; even highly specialized expertise is becoming available externally
−Partnering and “prospective diligence” skills, critical core competencies for future success, are underdeveloped
−The culture of “closed innovation” leads to vast underutilization of expertise and capabilities in partnerships
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The End of Vertical Integration in Large Pharma?

12. Virtual Integration A New Model for Research & Early Development?
Virtual Integration – Businesses in which there is an advantage for independent members of the industry’s value chain to share competencies, infrastructure, intellectual capital, risk and reward that are essential to deliver the finished product or service
–An inherent characteristic of a virtually integrated industry is that enabling the success of a partner helps ensure ones own success
–This quality tends to drive alignment of all constituencies and requires applying the principles of Open Innovation
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13. Value Chain in Research & Early Development
Lead Generation and Optimization
Preclinical Development
Clinical Pharmacology
•Reg Affairs
•Clin Supplies
•Clin Operations
•Strat Marketing
Target Discovery and Validation
Enabling
Functions
Delivering High Value
Candidates to Full Development
Core Business
Core Functions
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14. Value Chain in Research & Early Development Virtual Integration
Lead Generation and Optimization
Non-clinical Development
Clinical Pharmacology
•Reg Affairs
•Clin Supplies
•Clin Operations
•Strat Marketing
Target Discovery and Validation
Enabling
Functions
External Innovators, R&D Partners, CROs, Investors
Delivering High Value
Candidates to Full Development
Core Business
Core Functions
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…and other Large Pharma

15. External Partners
e.g., Biotechs, VC Funds, Academia
Large Pharma offers end-to-end suite of expertise, capabilities and infrastructure
•Funding
•Discovery platforms
•Therapeutic Area / Biology
•Non-clinical Development
•Clinical Development
•Market Research
•Supply Chain
•CRO Network
Networked Partnering Leveraging Complementary Expertise and Capabilities
Large Pharma
Biotech and academia offer target and product opportunities
•Innovative science
•Gov., angel or venture funding
•Platform technologies
•IP and know-how
•Entrepreneurial culture
•Lean infrastructure
Large Pharma CRO and Provider Network
Large Pharma has access to a broad network of CROs
•Diligence completed
•Proven entities
•Established relationships
•Preferred pricing

16. Cenix BioScience Aligning Incentives by Sharing Risks and Benefits
Cenix: a German/Belgian company with expertise in RNAi delivery technology with applications for target discovery and validation
Janssen provides research facilities at our Beerse, BE site in close proximity to our Systems Biology organization
Cenix and Janssen receives government funding through IWT (€2MM per annum)
Cenix has rights to commercialize joint IP for research and clinical applications
Janssen has rights to use joint IP for research and development purposes
For 5 years, Janssen retains a right of first refusal for exclusive license offerings
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17. No strings attached
Big company infrastructure
Delivered in an entrepreneurial and capital efficient way
Lab space and facilities bundled with professional management provider
Shared common space
Short term, flexible, cost-effective occupancy
P&L neutral operations for Janssen
Focus on accelerating innovative science
18-20 Company Suites
Janssen Labs at San Diego Enabling Life Science Innovation
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18. NuCo Formation
Janssen-Polaris Ventures Seed Partnership
Encouraging Academic Entrepreneurship by Combining Strengths
Strategic intent
Idea sourcing
Janssen ‘Entrepreneur in Residence’
R&D expertise and capabilities
Seed investment budget
Idea sourcing
Start-up culture and know-how
Technical expertise
Incubator: @dogpatch labs
Seed investment budget
Joint Analysis and Review
Great science?
Big idea?
Right people?
Fit for Janssen R&D?
Ready for start-up?
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19. Area of Focus
A
Expertise & Advice
Expertise & Advice
University Alliance Partners
•New York University
•University of Pennsylvania
•University of Florida
•Columbia University
•Memorial Sloan-Kettering
•University of North Carolina
•University of Virginia
•Oregon Health & Sciences U.
•Thomas Jefferson University
Selection
CROs
Sci Ad Board
B
Potential Exit Partners
Strategic Customers
BioPontis Alliance Closing in on Virtual Integration
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20. 20
European Lead Factory (EUC2LID) Proposed IMI-supported Public-Private partnership
Joint European Compound Collection (JECC) and European Screening Centre (ESC)
€80MM funding from EU government
JECC: 300K unique compounds from 6 pharma companies plus 200K unique compounds from IMI investment
ESC: government funded center for screening up to 120 targets from academia
Pharma partners have access to JECC for additional 120 targets (20/partner)
Pharma partners have option rights to 120 public sector targets

21. 21
Venture Philanthropy Curing Cystic Fibrosis – the KALYDECO™ Story
Funds phenotypic screen for ΔG551D
potentiators
1998
Aurora Biosciences
Aurora Acquired by Vertex Pharmaceuticals
2001
CFFT co-funds research and early development
VX-770 identified as development candidate
VX-770 developed by Vertex through the TDN
Fund raising
Patient advocacy
Patient and family services
Funds basic research
Funds drug discovery and development
Top-tier academic centers
Standardized procedures
Clinical trials

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Venture Philanthropy Curing Cystic Fibrosis – the KALYDECO™ Story
2012
KALYDECO™ Launched
Royalties back to CFFT for reinvestment in R&D
Fund raising
Patient advocacy
Patient and family services
Funds basic research
Funds drug discovery and development
Top-tier academic centers
Standardized procedures
Clinical trials

23. Closing Thoughts
All constituencies of the pharma ecosystem are threatened
Large Pharma is disintegrating its business model
Disintegration affords opportunities for radical reconfiguration of our R&D business model
Revitalizing the industry will require Open Innovation to create a “virtually integrated” R&D ecosystem
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24. Re-engineering Pharmaceutical R&D
“Radical change only comes when survival instincts trump comfort zone instincts.” Chuck Clayton
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25. September 22nd and 23rd , 2012 Philadelphia, PA
Ted Torphy, Ph.D. External Innovation & Business Models Community of Research Excellence & Advanced Technologies Janssen R&D
The Challenges Facing R&D in Pharma – Now and Possible Future Scenarios