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//FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986HTL.3D i [1–2] 9.11.2007 3:49PM Commercializing Successful Biomedical Technologies //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986HTL.3D ii [1–2] 9.11.2007 3:49PM //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986TTL.3D iii [3–3] 9.11.2007 2:37PM Commercializing Successful Biomedical Technologies Basic Principles for the Development of Drugs, Diagnostics, and Devices SHREEFAL MEHTA //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986IMP.3D iv [4–4] 9.11.2007 3:49PM CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org # S. S. Mehta 2008 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2008 Printed in the United Kingdom at the University Press, Cambridge A catalog record for this publication is available from the British Library Library of Congress Cataloging in Publication data ISBN 978-0-521-87098-6 hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986DED.3D v [5–6] 9.11.2007 3:50PM To Gauri, whose continuing support and encouragement, whose patience and willingness to shoulder my share of parenting when necessary, and more, made the completion of this book possible. Without your help, there would have been no book. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986DED.3D vi [5–6] 9.11.2007 3:50PM //FS2/CUP/3-PAGINATI; ON/MCOM/2-PROOFS/3B2/9780521870986TOC.3D vii [7–14] 9.11.2007 4:56PM Contents Foreword by F. L. Douglas Preface Acknowledgements 1 page xv xix xxii The biomedical drug, diagnostic, and devices industries and their markets 1.1 1.2 1.3 1.4 The healthcare industry Biomedical technology – definition and scope; applications Drugs and biotechnology – definition and scope Devices and diagnostics – definition and scope 1.4.1 Medical devices industry 1.4.2 Diagnostics – IVD industry 1.5 Industry analysis 1.6 Biomedical industry clusters 1.6.1 Biopharmaceutical and biotechnology concentration in clusters 1.6.2 Biomedical device clusters 1.7 Competitive analysis of an industry or sector with Porter’s five forces model 1.7.1 Competitiveness summary for the pharmaceutical industry 1.7.2 Competitiveness summary for the biomedical devices industry 1.7.3 Competitiveness summary for the diagnostics market 1.8 Industrial value chains 1.8.1 Drug development process 1.8.2 Biomedical device and diagnostic development process 1.9 Technology trends in biomedical device and drug development 1.9.1 Drug development technology trends 1.9.2 Medical device and diagnostics technology trends 1.9.3 Emerging technologies and materials in the nucleic acid diagnostics field 1.10 Convergence of technologies in biotechnology 1.11 Summary Appendix 1.1 Industry classification system for government and other databases 1 1 2 4 8 8 9 10 11 11 13 13 14 15 15 17 20 23 24 24 27 27 29 31 33 //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986TOC.3D viii [7–14] 9.11.2007 4:56PM viii Contents 2 Markets of interest and market research steps 36 2.1 2.2 36 37 37 37 38 39 2.3 2.4 2.5 2.6 3 Introduction General market research methodology 2.2.1 Reports, projections, and historical data 2.2.2 Experimental 2.2.3 Observational 2.2.4 Survey 2.2.5 Primary sources of information in biomedical market research 2.2.6 Secondary sources of information Sizing and segmenting the markets (a stepwise approach) 2.3.1 Market size segmented by application 2.3.2 Market size segmented by geography for drugs, devices, and IVD 2.3.3 How big is the market for my technology or innovation? Drivers and hurdles 2.4.1 Drivers 2.4.2 Hurdles The referral chain – developing market context and understanding customer needs 2.5.1 Market context – insight into biology or disease pathology 2.5.2 Market context – the referral chain 2.5.3 What competitive or alternate products exist? 2.5.4 Defining the end user 2.5.5 Defining the indication Market research in the context of medical device design and development 39 40 40 40 41 42 44 45 46 47 47 48 50 50 53 60 Intellectual property, licensing, and business models 63 3.1 3.2 63 64 64 65 65 66 66 66 66 66 68 68 68 68 Types of intellectual property Patents and patent rights 3.2.1 Patent rights 3.3 Types of patent 3.3.1 Utility patents 3.3.2 Design patents 3.3.3 Plant patents 3.4 What can and cannot be patented? 3.4.1 What cannot be patented (from the US PTO website) 3.4.2 Can living things be patented? 3.4.3 What type of invention or discovery is patentable? 3.5 Protecting intellectual property by filing a patent 3.5.1 How long do issued patents last in the US? 3.5.2 How much does it cost to get a patent? //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986TOC.3D ix [7–14] 9.11.2007 4:56PM Contents 3.5.3 3.5.4 3.5.5 3.5.6 3.5.7 3.5.8 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 4 Considerations before filing a patent Steps to prepare a patent filing What is in a patent? How to read an issued patent Provisional patent application Priority date and publicizing inventions International patent filings and the Patent Cooperation Treaty (PCT) process 3.5.9 Patent prosecution process 3.5.10 Rough estimate of patent costs for project budgets Patent infringement and freedom to operate 3.6.1 Patent infringement and protecting your rights 3.6.2 ‘‘Freedom to practice’’ or ‘‘freedom to operate’’ Trademarks 3.7.1 Why register your trademark? 3.7.2 Filing a trademark with the US PTO 3.7.3 International filing of trademarks Copyrights Trade secrets Intellectual property commercialization and technology transfer 3.10.1 Commercial use of intellectual property 3.10.2 Technology transfer in academic research institutions 3.10.3 The Bayh–Dole Act Licensing 3.11.1 Key non-financial terms of license agreements 3.11.2 Financial terms in a license 3.11.3 ‘‘Boilerplate’’ clauses in the license agreement Biotech business models and IP management strategies 3.12.1 What is a business model? 3.12.2 Practical note on business models for drug, device, and diagnostic innovator companies 3.12.3 Emergent dominant business models among biotechnology (drug) companies Summary New product development (NPD) Why have a new product development (NPD) process – just get it done! 4.2 Planning and preparing an NPD process for biomedical technologies (drugs, devices, and diagnostics) 4.2.1 The project proposal document 4.2.2 Strategy and competency of the company and goal of the project 4.2.3 Product life cycle planning ix 69 70 70 73 73 76 76 78 78 78 80 82 83 83 84 84 84 85 85 86 86 88 88 90 95 95 97 98 99 101 104 4.1 105 106 106 107 108 //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986TOC.3D x x [7–14] 9.11.2007 4:56PM Contents 4.2.4 4.2.5 4.2.6 4.2.7 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 Market research Identify key unknowns and risks Build a milestone-based plan for product development Specific risks known to occur frequently during the development of biomedical products Kill the project early or try some more? 4.3.1 Early failure is better than late failure in biomedical product development 4.3.2 When to kill a project Uncertainty-based view of product development processes Stage-gate approach 4.5.1 Stages and gates 4.5.2 How to configure a stage-gate process plan for my biomedical product 4.5.3 Unique features of biomedical development Ethical requirements in biomedical product development 4.6.1 Institutional Animal Care and Use Committee (IACUC) 4.6.2 Institutional Review Board (IRB) Define the product and process – indications and endpoints Typical drug development process 4.8.1 Discovery and pre-clinical testing 4.8.2 Distinctions in pre-clinical development of biotechnology drugs (large molecule biologics) 4.8.3 Drug candidate clinical testing to market approval 4.8.4 Manufacturing, marketing, sales, and reimbursement 4.8.5 Keeping a record for the FDA 4.8.6 General stage-gate process for new drug development Typical diagnostics development process Typical device development process 4.10.1 Discovery, feasibility, and optimization – design and pre-clinical testing 4.10.2 Special considerations for device clinical trial design 4.10.3 Device manufacturing 4.10.4 Keeping records for the FDA 4.10.5 Device development stage-gate process A few general notes on biomedical product development Project management 4.12.1 Project management tools – Gantt charts and critical path 4.12.2 Team composition 4.12.3 Team management in a matrix environment Formulating budgets How to get your project funded in a larger organization 4.14.1 The art of persuasion 4.14.2 Business case 108 109 109 109 110 110 113 115 118 118 119 119 120 121 121 121 124 124 132 132 137 138 138 138 144 145 150 153 154 154 154 156 156 158 159 160 162 162 162 //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986TOC.3D xi [7–14] 9.11.2007 4:56PM Contents 5 xi 4.14.3 Valuation decision – net present value (NPV) 4.14.4 Stakeholders 4.15 Outsourcing product development 4.16 Summary of pre-clinical certifications and laboratory regulations 4.17 Summary 162 164 166 168 170 The regulated market: gateway through the FDA 172 5.1 5.2 5.3 5.4 5.5 The FDA: its role and significance for biomedical product development 5.1.1 Introduction and history 5.1.2 Role of the FDA and significance for product development Organization and scope of the FDA 5.2.1 Divisions of the FDA 5.2.2 What the FDA does not regulate 5.2.3 What does the FDA regulate? 5.2.4 Friends not foe 5.2.5 Science rules – most of the time 5.2.6 International harmonization Regulatory pathways for drugs (biologicals or synthetic chemicals) 5.3.1 Pre-clinical studies regulated by the FDA 5.3.2 Filing an investigational new drug application (IND; or form FDA 1571) 5.3.3 Working with the FDA in formally arranged meetings 5.3.4 New drug application submission 5.3.5 Clinical trials done in foreign countries 5.3.6 Drug master files 5.3.7 Regulatory pathway for copies of already approved drugs (generic or biosimilar drugs) 5.3.8 Regulatory pathway for OTC (over-the-counter) drugs 5.3.9 Post-market clinical studies (Phase IV) and safety surveillance by FDA 5.3.10 Schematics of IND, NDA, and ANDA review processes 5.3.11 Speeding up access to drugs 5.3.12 Market exclusivity for new drugs and the Hatch Waxman Act 1984 5.3.13 Drugs: helpful FDA websites and the Electronic Orange Book Orphan drugs Devices: regulatory pathways and NPD considerations 5.5.1 Step 1: determine the jurisdiction of the FDA center – is it a device? 5.5.2 Step 2: classify the medical device – what controls and regulations apply? 172 172 174 174 174 175 176 176 178 179 179 181 183 185 185 187 187 188 188 189 190 192 195 195 196 196 197 198 //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986TOC.3D xii xii [7–14] 9.11.2007 4:56PM Contents 5.5.3 5.6 5.7 5.8 5.9 6 Step 3: determine marketing application required to be submitted 5.5.4 Working with the FDA in formal meetings 5.5.5 General controls and exempt devices 5.5.6 Pre-clinical considerations – special controls and QSR for Class II and III devices 5.5.7 The use of master files (MAF) 5.5.8 510(k) submission type and content 5.5.9 PMA submission content 5.5.10 Types of PMA submission 5.5.11 Humanitarian use devices (HUDs) Diagnostics: regulatory pathways and NPD considerations 5.6.1 In vitro devices – regulatory clearance or approval steps to market 5.6.2 Pre-clinical and clinical considerations for in vitro devices 5.6.3 Clinical Laboratory Improvement Amendments program 5.6.4 Analyte-specific reagents or ‘‘home-brew’’ tests Emerging regulatory guidelines for co-development of pharmacogenomic diagnostic tests and drugs Combination products, genetic material, and tissues 5.8.1 Cellular, tissue, and gene therapies Summary 199 200 201 201 204 204 206 206 207 207 209 210 212 212 215 217 219 224 Manufacturing 226 6.1 6.2 226 Introduction Technology transfer to manufacturing operations (drugs, devices, and diagnostics) 6.3 Regulatory compliance in manufacturing 6.3.1 Current good manufacturing practices 6.3.2 Validation 6.3.3 Drug manufacture regulations – control systems reviewed for compliance 6.3.4 Device and diagnostic manufacture regulations – control systems reviewed for compliance 6.4 Manufacturing standards 6.4.1 What are standards and what is their purpose? 6.4.2 Who sets standards? 6.4.3 Which of the thousands of standards apply to my product? 6.4.4 What are ‘‘clean room’’ standards? 6.5 Manufacturing in drug development 6.5.1 Process validation before approval 6.5.2 Bulk drug scale-up and production stages 6.5.3 Commercial manufacturing planning 227 228 228 230 230 231 233 233 235 236 236 237 240 242 243 //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986TOC.3D xiii [7–14] 9.11.2007 4:56PM Contents 7 xiii 6.6 Manufacturing in devices and diagnostics 6.6.1 Design for manufacturability 6.6.2 Design for assembly 6.7 Manufacturing in diagnostics 6.7.1 Labeling requirements for in vitro devices 6.8 Buy or build 6.9 Summary Appendix 6.1 Compliance to pharmaceutical GMP Appendix 6.2 Compliance to device and diagnostic GMP 245 247 247 247 250 250 252 254 258 Reimbursement, marketing, sales, and product liability 264 7.1 7.2 264 265 265 265 266 269 271 271 Introduction Healthcare system in the USA 7.2.1 Economic impact of the healthcare system 7.2.2 Insurance coverage of the US population 7.2.3 Who pays for the national healthcare costs? 7.3 Flow of payments and distribution models for products and services 7.4 Distribution and payment flow for biomedical product types 7.4.1 Drugs and biologics: product payment and distribution model 7.4.2 Devices and diagnostics: product payment and distribution model 7.5 Components of the reimbursement process 7.5.1 Coverage 7.5.2 Coding 7.5.3 Payment 7.6 Reimbursement planning activities 7.7 Reimbursement path for self-administered drugs (mostly pills) 7.8 Reimbursement path for devices and infused drugs 7.8.1 Reimbursement path for physician-administered drugs (continued) 7.8.2 Reimbursement path for devices (continued) 7.9 Reimbursement pathway for in vitro diagnostics (IVDs) 7.10 Major differences among selected national healthcare and reimbursement systems 7.11 Marketing 7.12 Sales 7.13 Product liability Appendix 7.1 Technology assessment center for coverage determination Glossary and acronyms Index 273 274 276 282 284 291 292 293 294 296 299 304 305 309 310 313 317 330 //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986TOC.3D xiv [7–14] 9.11.2007 4:56PM //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986FWD.3D xv [15–18] 9.11.2007 3:50PM Foreword The deciphering of the human genome at the dawn of our twenty-first century not only fueled expectation of an increase in speed of developing therapies for many diseases but also exploded some cherished myths. Among the myths exploded was the belief that there were about 100 000 genes in the human genome and that this would lead to thousands of new ‘targets’ (receptors, enzymes, transporters, ion channels, etc.) for the discovery of new drugs. Although still somewhat in question, the number of genes in the human genome is felt to be about 30 000, thus dampening considerably some of the initial euphoria over the anticipated results of this outstanding achievement: the deciphering of the human genome. Another disappointing projection is that the number of druggable targets will only increase some threefold, from about 550 to 1500. Nonetheless, this incredible achievement, enabled by many technologies, associated with genome sequencing, has fueled additional technologies, such as proteomics and metabolomics, for the innovation of new drugs and diagnostics. The dawn of this century has also seen an increase in awareness of the importance of unwanted side effects in marketed drugs and safety issues in device usage. This debate has not only captured the attention of the public as some widely used drugs, such as Vioxx and pergolide, have been removed from the market, but also that of the Congress whose members have questioned whether there should be an agency separate from the Food and Drug Administration (FDA) to assess and monitor the safety of marketed drugs and devices. In addition to the benefit and risk discussion of new therapies, the cost of drugs is an increasing topic of debate. This debate is part of the overall rapid rise of healthcare costs. The cost for major medical coverage has increased 124 percent above the consumer price index (CPI) every year since 1957. Meanwhile, the fully loaded cost of bringing a new drug to the market is over a billion dollars and only about one third of these drugs make more than $300 000 in sales per year. Another challenge facing the industry as the first decade of the twenty-first century ends is the number of innovative drugs that will lose patent status and be converted to generics. Although this is good news for the consumer, this will be a challenge for the compaines who innovated many of these drugs. For example, between 2004 and 2012, the top 15 pharmaceutical companies will see 95 of their drugs converted to generics. Thus in this first decade, these companies will lose billions of dollars in revenues. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986FWD.3D xvi xvi [15–18] 9.11.2007 3:50PM Foreword It should be noted that manufacturing in devices and drugs has also had its challenges. Manufacturing problems at Chiron led to a potential shortage of flu vaccines in 2004 and manufacturing problems at Schering Plough led to significant loss of sales for their introduction of Clarinex. In fact, the FDA has had only modest success with their Process and Analytical Technology (PAT) initiative in their attempts to improve good manufacturing processes in the companies. Thirtytwo serious Class 1 device recalls in the first six months of 2007 and 56 class I recalls in all of 2006 show that quality assurance and other manufacturing issues in the device industry continue. Thus, manufacturing remains an area for significant improvement and cost reduction in the industry. Where then are the opportunities? The first two decades of the twenty-first century will undoubtedly see the fulfillment of the hopes that genomic-based technologies, predictive modeling, automation, and miniaturization will revolutionize the way drugs are discovered, manufactured, and marketed. Two streams of importance will be the ability to identify that subset of patients that will best respond to a therapy and those patients who are likely to experience unwanted effects from that therapy. This will be the coming of age of ‘‘stratified medicine.’’ Presently, Herceptin, for the treatement of a subset of breast cancers, is the best example. In this example, patients whose breast cancer is found to have HER2/neu receptors respond better to a regimen including Herceptin than to other regimens. Thus the diagnosis of the type of cancer and best therapy for that person are linked by a diagnostic. To be sure, not every therapy will lend itself to this unique constellation of diagnostic enabling therapy, as it is clear that at least three specific criteria will be necessary for this to occur. These criteria include the presence of: differential biological mechanisms, many treatment options, and a biological marker or diagnostic. The biological marker might be genomic-based, clinical obsersvation, or imaging (M. R. Trusheim, E. R. Berndt, F. L. Douglas; Strategic and economic implications of stratified medicine, Nature Reviews Drug Discovery, April, 2007). Another opportunity will be the combination of devices and therapy. A good example of this is the drug-eluting stent for the treatment of occluded coronary arteries. Other applications wait in areas such as diabetes, with the measurement of glucose accompanied by the release of the appropriate amount of insulin from an indwelling insulin reservoir. Other examples exist in cardiology and rheumatology, where measurement of arrhythmia or acute changes in an analyte by indwelling devices can lead to an appropriate release of drug to normalize the condition. When stratified medicine becomes a standared part of the approach to healthcare, changes in the manner of commercialization will occur. It is quite likely that new commercialization paradigms that focus on specialists as opposed to the general practitioners will be associated with this approach. The supply chain issues will also be affected and perhaps there will be more opportunities for ‘‘just-in-time’’ //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986FWD.3D xvii Foreword [15–18] 9.11.2007 3:50PM xvii type approaches in the biopharmaceutical industry. The PAT initiative of the FDA may very well benefit this area. A final area of progress will be in organizations and this is an arena where Dr Mehta’s book will make a major contribution. Because of the complexity and the long times (8–15 years) involved with bring a biomedical product (drugs, novel devices) from idea to market, few employees enter the industry with an appreciation of the pre-clinical, clinical, manufacturing, commercial and regulatory issues, and expertise needed to achieve this noble task of making novel medicines and devices accessible to patients. Dr Mehta’s book not only introduces the reader to the nomenclature and issues but, through problem discussions, he gives the reader (student or industry employee) a sense of the complexity, the creativity as well as the regulatory requirements that must be satisfied to achieve the task. This book should improve the public’s understanding of the challenge of innovating devices and drugs and thus improve the dialogue of benefit and risk decisions associated with the approval and marketing of devices and drugs. Frank L Douglas Ph.D., M.D. Former Executive Vice President, member of Board of Management and Chief Scientific Officer of Aventis Pharmaceutical, Former Professor of the Practice and Executive Director of the MIT Center for Biomedical Innovation and Partner at Pure Tech Ventures. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986FWD.3D xviii [15–18] 9.11.2007 3:50PM //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986PRF.3D xix [19–21] 9.11.2007 4:58PM Preface This book will help readers get an overview of the process of taking a biomedical invention and creating a product that can pass regulatory approval to be successfully commercialized. The regulated products included in this context are drugs (both small molecules and biologics), medical devices, diagnostics, and their combination products, as defined by the Food and Drug Administration (FDA) – the regulatory agency that is responsible for overseeing the world’s single largest healthcare market, the United States. The term ‘‘biomedical technologies’’ refers to the collective technologies underlying these FDA-regulated products: biotechnology, various engineering technologies, chemistry and materials science, etc. The book aims to highlight key issues that might help improve chances of success through the complete commercialization process for biomedical technologies and products. This text started as an expansion of a series of lectures given to students at the Lally School of Management and Technology, Rensselaer Polytechnic Institute in Troy, NY as part of a class called ‘‘Commercializing biomedical technology.’’ However, going beyond the classroom in writing this book, information has been taken from many sources and experienced people from industry have contributed to add current and practical information to various segments of the book. This book could be used to bring science and engineering students together with business and law students, and show them the benefits of approaching this complex process as a team. Many of these students have found the information useful in job interviews and in planning careers in the biotech industry and its service sectors. This book has focused on keeping a practical perspective throughout, so that current scientists, engineers and managers in the industry can apply these concepts, issues, and exercises within the context of their job functions in the industry. What’s more, aspiring entrepreneurs may seek to apply these concepts to their invention or idea; walking through all the steps and exercises to create a sound commercialization plan that can form the basis for a business plan for a new venture (see figure). Business models and financial plans vary with the economic or personal context and the goals of the founders. However, any business model, to be successful, must come from an understanding of the complete commercialization path for the regulated product. The linear roadmap shows the components that must be assessed to build a sound commercialization plan, but the processes are all carried out in parallel, with shifting emphasis on each component as one proceeds down the plan. The sequence of components is mirrored in the sequence of chapters in the //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986PRF.3D xx xx [19–21] 9.11.2007 4:58PM Preface Business plan Business model Financial plan Development strategy Budgets Commercialization plan product development Invention Idea First you have to understand how your idea will be developed into a product and reach the paying customers; then you can choose one of many successful business models in the biomedical industry and prepare a business or financial plan to execute that development strategy. Components of a product commercialization plan Plan Position Patent Product Pass! Production Profits Industry context Market research Intelluctual property rights New product development (NPD) Regulatory plan Manufacture Reimbursement Technology positioning and strategy, corporate portfolio strategy, industrial value chain context Market need, Specific indication of interest, market size and segments, product characteristics Intellectual property management and licensing strategy, Patent content for market protection, Business models Stage gate new product testing and development plan, budget, Gannt chart Regulatory strategy – working with FDA towards approval Production Coverage, planning Coding, Payment, Distribution, Marketing and sales planning Roadmap to create a commercialization plan. The linear stages shown here reflect the layout of the book. book. The arrows below the components in the roadmap illustrate the fact that all these components must be kept in mind to achieve a successful commercial and product development plan. The process of doing science and also the process of building commercial entities can be represented as a linear thought process, but the practice of both is a pathdependent, iterative process, where learning and understanding grow by doing each //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986PRF.3D xxi [19–21] 9.11.2007 4:58PM Preface xxi Product Idea characteristics Indication Invention Market research Intellectual property rights New product development Patents Manufacturing Regulatory plan Reimbursement Sales Marketing Distribution Budgets IP strategy Business model Successful development of new biomedical products for a competitive and regulated marketplace requires a full and thorough understanding of specific issues in the full value chain, discussed in the book. As feedback from various areas is defined for the specific product concept, the commercialization and product development plan will be revised (indicated by thinner feedback arrows above). experiment or building each step of a commercialization plan. The schematic illustrates, with arrows, the process of feedback between the various components of a commercialization process. As an example, the regulatory process influences the product development plan and also defines the markets accessed by the product. Likewise, access to intellectual property rights influences the direction of development and access to specific markets. Thus, iterative feedback from evaluating the specific regulatory pathways or intellectual property rights might require reconfiguration of the product characteristics or might require choosing a different application from that conceived during original invention. The process for planning new product development might, for instance, follow the steps: Idea – invention – market research – intellectual property search – define product and indications of interest – plan the key product development steps – check on regulatory strategy – revise product development plan and characteristics – check on reimbursement strategy – revise product characteristics and product development plan. The result will be a comprehensive product development and commercialization plan with a timeline and budget. The exercises at the end of the chapters will help guide the reader through these steps. While the original multidisciplinary (scientists, engineers, management, and other humanities students) course continues as a graduate-level course, much of the developed material has been incorporated into the Biomedical Engineering undergraduate capstone design course at Rensselaer Polytechnic Institute (RPI) as part of the core curriculum, hopefully creating a more conscious and self-aware breed of product development scientist and engineer. Finally, it is my hope that better thinking and planning in the development of regulated products will help improve the efficiency, success, and quality of biomedical technology commercialization, increasing the number of innovative products that can be delivered to help people. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986ACK.3D xxii [22–24] 9.11.2007 2:54PM Acknowledgements The contributions and suggestions of friends and colleagues who shared their time, their insights from years of industry experience, their editorial suggestions, and specific case studies, have significantly improved this book. I would particularly like to recognize the formative early discussions and exchanges with my colleague Dr Jan Stegemann during the creation of the eponymous class that we co-taught at Rensselaer Polytechnic Institute (RPI). Contributors and reviewers Jim Greenwood, President of Biotechnology Industry Organization, USA Christoph Hergersberg, Global Head of Bioscience Technology, GE Mark Leahy, President of Medical Device Manufacturers Association, USA Andrew Marshall, Editor, Nature Biotechnology Parashar Patel, Vice President of Health Economics and Reimbursement, Boston Scientific; and past Deputy Director of Hospital and Ambulatory Payment Group, Centers for Medicare and Medicaid Services Kim Popovits, Chief Operating Officer and President, Genomic Health Tony Rao, Principal, Stantec Phil Roberts, Head of Process Development, Nektar Therapeutics Lawrence Roth, Vice President of Product and Business Development, Percardia Inc. Randall Rupp, Sr., Vice President of Manufacturing, Regeneron Robert Schaffer, Partner, Darby and Darby PC Jayson Slotnick, Director of Medicare Reimbursement and Economic Policy at the Biotechnology Industry Organization (BIO) Jo Ellen Slurzberg, Vice President of Reimbursement and Health Policy, Almyra, Inc. and Chair of Medical Device Manufacturers Association Reimbursement Task Force Lawrence Zisman, Vice President of Cardiovascular Research, Cytopia Inc. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986ACK.3D xxiii [22–24] 9.11.2007 2:54PM Acknowledgements xxiii Reviewers Jori Frahler, Director of Federal Affairs, Medical Device Manufacturers Association Mary Pendergast, Principal, Pendergast Consulting and past Assistant Commissioner of FDA Hanson Gifford, Founder and CEO, The Foundry Inc. Tanvi Mehta, freelance editor //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986ACK.3D xxiv [22–24] 9.11.2007 2:54PM //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 1 1 [1–35] 9.11.2007 3:40PM The biomedical drug, diagnostic, and devices industries and their markets Plan Position Industry context Market research Patent Product Pass! Intellectual New product Regulatory property development plan rights (NPD) Production Profits Manufacture Reimbursement Roadmap of a product commercialization plan. Stage 1 Learning points: Description of types of FDA-regulated products covered in this book, Understand the technological bas2e and application for each product type, Description of functions and processes involved in commercialization activities for each product type, Analysis of industry sector competitiveness by value chain model and Porter’s five forces analysis, Understand the technology trajectories for the biomedical industry. 1.1 The healthcare industry The healthcare industry and the markets for healthcare services and biomedical products have one significant difference from the rest of the free-market industries in the US – the healthcare market is heavily regulated. But several other differences are also notable. For example, while purchasing a retail item or a service in a competitive market, the user is the primary customer and makes the purchasing decision, the user is given all appropriate requested information on the product, and the user is then the payer. In the healthcare marketplace, the user (patient) usually does not make the purchasing decision (the provider and other intermediary institutions, such as pharmacy benefit managers make that decision), the patient does not get all the information (the provider typically gets the detailed briefing and information packages) and the patient is not the payer (the patient usually does not know the true price of services and products; the payer is the insurance company or government). This marketplace is highly regulated, starting from the early product development stages to the preparation and //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 2 2 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries dissemination of marketing information, and including the flow of payments goods and information. The government is also the largest single payer organization in the healthcare industry and, thus, politics influence payment policies and procedures in the industry. Laws and policies enacted by the legislative bodies play a very important role in shaping the healthcare marketplace. Manufacturers or product developers, therefore, need to pay attention to laws and policies as changes could affect their product development process. In fact, as noted here in Box 1.1 by the heads of two major biomedical technology company associations, companies must be proactive in monitoring and interacting with legislators (elected representatives) in government and with regulatory agencies. The manufacturers must monitor changes in policy that impact the market and take an active role to educate and inform the drafting of such policy and regulation. Any commercialization plan for a new biomedical technology must be carried out mindful of the context of this regulated and politically charged healthcare marketplace. The rest of this chapter discusses the various product development sectors involved in the larger healthcare industry and highlights methods to analyze and understand better the functional structures from a product development perspective. 1.2 Biomedical technology – definition and scope; applications This book covers regulated biomedical products that go through the FDA (Food and Drug Administration, USA) for marketing approval, including therapeutic or prophylactic drugs (the term includes small molecule and biologic drugs), diagnostics, and devices. The term biomedical technology companies will be used to refer to companies whose products need FDA approval to get to market. The ‘‘technologies’’ include engineering and various sciences, including natural (e.g., life sciences or biology) and applied sciences (e.g., materials science). Proceeding through these first few chapters, it will become apparent that the terms ‘‘biotechnology’’ and ‘‘device’’ have blurred boundaries today, as an increasing number of leading medical device companies are incorporating biological therapeutics such as cells, DNA, or proteins, and pharmaceutical companies are increasingly tying their products to diagnostic or delivery devices. Such products, codependent or intermingled with other technologies are called combination products. Some examples of combination products are the drug Herceptin (used to treat breast cancer), which has to be prescribed based on a diagnostic test for the gene HER2, drug-eluting stents, bioresorbable sponges with growth factors, skin grafts containing live cells embedded in a matrix and insulin pumps with glucose monitors. The following sections in this chapter define specific product areas in greater detail. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 3 [1–35] 9.11.2007 3:40PM 1.2 Biomedical technology – definition and scope Box 1.1 Policy matters Building a successful biotechnology company is a risky business. The science is challenging, the endeavor is expensive, and the time horizons from discovery to sales revenue are long. Drugs often fail in clinical trials and investors can be fickle. But even the most skilled research and development teams backed with the brightest management and supported with hundreds of millions of investment dollars can fail in a policy environment that is not conducive to success. If patent law doesn’t adequately protect intellectual property; if the FDA takes too long or demands unrealistic submissions; if CMS refuses to adequately reimburse; if Congress inadequately funds the NIH or the FDA or imposes irrational requirements on drug approvals; if state, federal, or foreign governments impose price controls or ban technologies, the most competent biotech enterprises cannot succeed. Every biotech company employee must add his or her voice to our effort. The future depends upon our success. James C. Greenwood President and CEO Biotechnology Industry Organization (BIO) The importance of medical technology companies engaging in the policy debate and dialogue in Washington, DC has never been greater. Although most start-up companies are primarily concerned with raising money or moving products towards commercialization, the decisions made by policy makers in Washington often have a greater impact on a company’s ability to succeed in the long term. For example, in the past year alone, MDMA and its member companies worked on issues impacting intellectual property, FDA regulations, CMS reimbursement, and barriers to market access. In the past, advocacy efforts were primarily discussed and driven by large companies. However, increasingly, small to mid-size companies are joining associations and organizations in Washington to ensure that their voice is heard on critical issues. Furthermore, there is a growing appreciation in Washington that the majority of innovation is developed by smaller companies. Therefore, the health of the industry requires policies that foster innovation and competition, not hinder it. Mark B. Leahey Executive Director Medical Device Manufacturers Association 3 //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 4 [1–35] 9.11.2007 3:40PM 4 The drug, diagnostic, and devices industries 1.3 Drugs and biotechnology – definition and scope Today, drugs are developed from one of two distinct technological platforms – (1) Synthetic organic molecules – small molecules (the preferred term used here) made de novo by synthetic chemistry processes or naturally occurring compounds, which have been isolated or re-synthesized in the lab. These are interchangeably called small molecules, drugs, or pharmaceuticals. Oligonucleotide-based drugs (RNA or DNA; composed of nucleic acids) made using synthetic processes are also included in this classification of small molecule drugs as they have more in common with small molecule drugs than the large molecule biologic proteins. (2) Biological molecules made by living organisms – using cells or other living organisms to produce therapeutic proteins or biological molecules. These are interchangeably called drugs, biotech drugs, biopharmaceuticals, large-molecule drugs or biologics (the preferred term used here). Therefore, the term drugs includes both biologics and small molecule pharmaceuticals. The US Food and Drug Administration defines a drug rather broadly as a substance (other than food) recognized by an official pharmacopoeia or formulary, that is intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease, and that is intended to affect the structure or any function of the body. The term biotechnology industry was intended to refer to the biologics segment of the drug industry, where core life sciences technologies (and living organisms) are used to make products. However, the term biotechnology industry is currently often used to refer to small or start-up pharmaceutical firms that are developing drugs (whether small molecules or biologics), as most of them are founded based on key inventions in the life sciences. It is important to note that biotechnology companies also develop products for other (non-health related) applications and industries (see Box 1.2). The definition of biotechnology is, in fact, ‘‘the use of cellular and molecular processes to solve problems or make products.’’ Among the therapies produced by biological production processes (produced in cells or bacteria), the various classes of biotech human therapeutics (biologics) being developed for a large variety of diseases are: Vaccines, another class of human therapeutics and prophylactics, are produced in biological systems, such as chicken eggs, or engineered cell lines. Biologic drugs are based on large-molecular proteins or complex biological molecules, such as growth hormones, enzymes, etc. Examples are insulin, growth hormone, enzymes, and immunoglobulins. Erythropoietin (sold as Epogen and other brand names) is a blockbuster drug, with over $10 billion of sales in 2005. These biological drugs are most efficiently produced by cells or within other living organisms. Biopharmaceutical companies use bioreactors where cells engineered to produce a specific type of protein are grown in large //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 5 [1–35] 9.11.2007 3:40PM 1.3 Drugs and biotechnology – definition and scope Box 1.2 Diverse applications of biotechnology While ‘‘biotechnology’’ in this text focuses on life-sciences-based products commercialized in the healthcare industries (needing FDA approval), it is important to remember that many other applications of biotechnology also have great commercial value. In the popular media, the term ‘‘biotechnology industry’’ is used loosely to refer to activities that may be based on a range of technologies unrelated to the life sciences, such as laboratory equipment manufacture, device manufacture, lab automation, reagent production, and synthetic chemistry with small molecules. Therefore, it is always important to understand the specific context in which the term biotechnology is being used. The use of biotechnology processes at the organism, cellular, and molecular level has many diverse applications, some of which are described briefly below but not covered any further in this book (e.g., even though biotechnology food products are regulated, they are not in the same market and approval paths as other biomedical products discussed here). A common technology base of tools and processes for manipulation and analysis of cells, DNA, and proteins ties all these diverse applications together across these different industries. Healthcare This is discussed in the main text. Environmental biotechnology Engineered microbes and enzymes can efficiently clean up pollution, and the application of the life sciences to this process is called bioremediation. Environmental applications also include biobleaching, biodesulfurization (removal of sulfur from oil and gas), biofiltration, biopulping, etc. Industrial biotechnology Engineered microbes and enzymes can be used as highly efficient components in many industrial chemical synthesis processes. Various industrial applications of biotechnology include the efficient use of enzymes to convert sugars to ethanol (transportation fuel), to make polymers such as polylactic acid (PLA) for consumer plastics production, and to improve processes in the production of fine chemicals, bulk chemicals, and commodity chemicals. Currently efforts are underway to convert cellulose to sugars (and ethanol) on a large scale, thus harnessing biomass that would otherwise be discarded as waste products of food and grain processing. Agriculture Biotechnology has been used to engineer new plant and crop varieties that are pathogen-resistant or have greater yield, or add new nutritional benefits to 5 //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 6 6 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries Box 1.2 (cont.) existing crops. Some specific applications are in the development of new genetically modified plant and seed varieties, improved processing of grain products and the development of biofertilizers. Basic biotechnologies are also used to improve livestock for food production and to provide new treatments for veterinary medicine. Genetically modified foods are already in widespread use in the US food supply. Agricultural biotechnology is arguably the oldest continuing application of life sciences and includes the manipulation of plants and micro-organisms to enhance yield, add new characteristics, such as increased nutrition or taste, and reduce the use of toxic pesticides or fertilizers; these are all key goals of biotechnology in agriculture and in the foodprocessing industry. quantities. The proteins are then purified and most are formulated for intravenous delivery. A monoclonal antibody (mAb), a particularly significant type of biologic drug, is a highly specific, purified antibody (protein) that is derived from only one clone of cells and recognizes only one antigen. Monoclonal antibodies (one class of biologics) are an ideally targeted therapy that will only affect the specific protein target against which this antibody is made. The current wave of biologics is driven by mABs: e.g., Johnson & Johnson’s Remicade (infliximab), Roche/Genentech’s Avastin (bevacizumab) and Herceptin (trastuzumab) and Rituxan/MabThera (rituximab), Bristol-Myers Squibb’s Erbitux (cetuximab) and Abbott’s Humira (adalimumab). With 18 mAB products already on the market (as of June 2006) and over 70 in clinical trials, billions of dollars of revenue are projected to be generated by these mAb therapies in the next decade. Like most biologics, mAbs cannot be given orally (they are degraded by digestive enzymes) and hence are infused intravenously. New drug-delivery technologies are also being developed to allow oral administration. Cell based therapies and tissue engineering – for tissue and organ replacement or functional augmentation. The market for regenerative medicine worldwide is in the billions of dollars, primarily using autologous cells. Gene therapy holds many promises but has been hampered by limitations in delivery vehicles and side effects in some patients. In particular, cell-based therapies are attracting a great deal of attention because of the promise shown by stem cells (embryonic and adult) to become truly regenerative therapies. Nucleic acids therapy is a particularly interesting and emerging class of drugs that uses synthetic production processes but is usually included under the biologics sector. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 7 [1–35] 9.11.2007 3:40PM 1.3 Drugs and biotechnology – definition and scope 7 Nucleic acid therapies include gene therapy, which is the introduction of specific genes appropriately into the body to enable tissues to produce proteins currently lacking or malfunctioning in the diseased state. Many different gene therapies are being developed with antisense therapeutics being the first approved in the US. Among other nucleic acid technologies, such as ribozymes, antisense oligonucleotides, and triplex and chimeric endonucleases, siRNA (short interfering RNA, ribonucleic acid molecules) has tremendous current commercial and scientific interest, as seen by the awarding of the 2006 Nobel Prize for Medicine to the discoverers of gene silencing by double-stranded RNA (Andrew Fire and Craig Mello) and Merck’s acquisition of siRNA Therapeutics for over US $1 billion in December 2006. Short interfering RNA interferes with gene expression and uses the cell’s own mechanism to control the production of specific proteins. The biotechnology and biologics segment of the pharmaceutical industry is only 25–30 years old and has seen its revenues grow at an average of 16% per year over the last decade, to reach over $48 billion in global revenues in 2004 (data from Ernst and Young Annual Biotechnology Industry Reports). For the sake of comparison, it is worth noting that small molecule drugs had global sales of over $400 billion in 2004 (data from annual reports, IMS Health). Although still a small segment of the overall pharmaceutical industry, the growth rate and strong product pipeline of biologic drugs has attracted interest from investors and from the traditional pharmaceutical companies themselves. In particular, the recent biotech impact on the pharmaceutical industry has led to the industry naming itself the ‘‘biopharmaceutical industry,’’ as more large pharmaceutical firms (e.g., Johnson & Johnson, Novartis, Wyeth) adopt biotechnology manufacturing platforms to make drugs. The drugs industry thus includes not only large conglomerates with tens of thousands of employees in globally distributed offices but also includes many small start-up companies formed out of university inventions in the life sciences. Smaller and mid-sized companies are increasingly seeking out niche markets to commercialize their innovations, building focused sales forces and taking their own products to market (for more discussion on business models in the biotechnology sector, see Section 3.9). The interest in the biotechnology sector lies in the future impact of this technology, as more and more biologic drugs appear, with over 350 biotechnology drugs in the clinical development pipeline in 2004, for a variety of human diseases. An indicator of this rising wave of biologic drugs is that for the first time in 2004, over half of the new drugs approved by the US FDA were biotechnology-based drugs. Another component of the interest in biotechnology (life sciences as a more general science platform) today is in the promise of forthcoming discoveries that will lead to an even better understanding of normal and pathological (disease) processes in the human body, as discussed later in this chapter. The hope is that discoveries will be followed in time with new therapies that will cure disease instead of merely offering palliative treatment or temporary symptomatic relief. It is important to mention that a significant portion of the biotechnology industry is composed of companies that provide services or make non-regulated products, such as research tools, reagents, bioinformatics programs or services, biomaterials, //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 8 8 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries etc., that are sold to the drug or diagnostic companies or to the research community in general. The business models, product development cycles, financial, and investment profiles of these companies are quite different from most of the companies discussed in this book. An example of a large company of this type is Invitrogen. 1.4 Devices and diagnostics – definition and scope 1.4.1 Medical devices industry Devices are defined by the US FDA as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, . . ., which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals, and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes. Medical device companies use traditional materials like metals or ceramic and advanced materials like composites to produce devices that work by providing mechanical or physical (not chemical) support and interaction with the human body. Some of these devices are implanted (defibrillators), some are non-invasive (EKG monitors) and others are called minimally invasive (catheters). These companies have shorter product cycles and thus are more dynamic in product introductions than biotechnology companies. Medical device products can be classified by two distinct types of markets – commodity products and innovative medical device products. The former are typically made by large mature companies, such as Johnson and Johnson, Becton Dickson, Welch Allyn, and feature a broad portfolio of commonly used products sold to clinics and hospitals. These products have a long life cycle in the market and their development is marked by incremental innovations that do not change the product mix, merely adding specific features to the design. Profit margins for these products are typically low as customers have high price sensitivity. On the other hand, innovative medical products such as implantable devices, minimally invasive surgical devices, and new imaging devices are made by both large and small companies, such as Medtronic, Guidant (now part of Boston Scientific and Abbott), Bard, Stryker, and many others. These innovative devices have a short product life cycle, with the next generation entering advanced development even as the first generation enters the market. Innovative medical devices command high profit margins by delivering greater life-saving benefits directly to the patient, but also require high investment in research and development (R&D) for continued improvement and incorporation of new technologies. The medical device industry’s gross revenues for 2005 in the US were greater than $35 billion. The industry is composed of a few large players, which hold market access and brand name, and many small companies, which have found niche markets in the device industry. The industry sales, broken into the various therapeutic and clinical areas, are summarized in Figure 1.1. Orthopedics and cardiovascular are the two largest device market areas, but others are growing too, as the population demographics shift. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 9 [1–35] 9.11.2007 3:40PM 1.4 Devices and diagnostics – definition and scope Ophthalmic 8% Hearing aids 9% Cardiovascular 33% 9 Durable medical equipment 10% Surgical instruments 11% Orthopedics 29% Figure 1.1 US medical device sales by clinical category ($ 63.9 billion, 2004). Data from Frost and Sullivan, as reported in Standard & Poor’s Industry Survey. For current data and graph, visit www.cambridge.org/97805128707986. 1.4.2 Diagnostics – IVD industry The diagnostics market is segmented broadly into the in vitro diagnostics (IVD; in vitro means in the test tube, in the laboratory, or outside the organism) and in vivo diagnostics businesses (in vivo means within a living organism). In vivo diagnostics is a specialty market, with the key players being large instrument manufacturers of imaging or instrumentation technology (GE, Phillips, Seimens). Examples of in vivo diagnostics are blood pressure screening, MRI, thermometry, and ultrasound, X-ray, and computed tomography (CT) scanning. This book will focus mainly on in vitro diagnostics (IVD). The imaging machines that make up the bulk of in vivo diagnostic products are made and sold by a handful of large companies and represent a specialized market segment of the device and diagnostics industry. Additionally, the development, sales cycles, and regulatory issues (e.g., radiation issues) are quite different from most of the products discussed here. However, it is important to keep in mind that most of these large companies, GE, Siemens and Phillips, have announced initiatives in molecular imaging diagnostics (which will be regulated as imaging agents or drugs). Thus, this exclusion (from the book) is on the basis of a specialty market segment, not an exclusion of specific companies. In vitro diagnostic products are largely regulated as devices by the US FDA. There are two types of IVD products: devices (analyzers for samples like blood, serum, urine, tissue, etc.) and reagents (chemicals used to mark or recognize specific components in the samples). All devices and reagents perform tests on samples taken from the body and the applications can be divided into five broad types of IVD testing: (1) General clinical chemistry – measurements of base compounds in the body, e.g., blood chemistry, cholesterol tests, serum iron tests, fasting glucose tests, urinalysis, etc. (2) Immunochemistry – matching antibody–antigen pairs to indicate the presence or level of a protein, e.g., testing for allergen reactions, prostate-specific antigen (PSA) tests, HIV antibody tests, etc. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 10 10 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries (3) Hematology and cytology – the study of blood, blood producing organs, and blood cells – e.g., CD4 cell counts, complete blood count, preoperative coagulation tests, etc. (4) Microbiology and infectious disease – detection of disease-causing agents, e.g., streptococcal testing, urine culture or bacterial urine testing, West Nile virus blood screening. (5) Molecular, nucleic acid tests (NAT), and proteomic and metabolomic testing – the study of DNA and RNA to detect genetic sequences that may indicate presence or susceptibility to disease, e.g. HER2/neu overexpression testing in breast cancer, fluorescence in situ hybridization (FISH) tests for prenatal abnormality testing, HIV viral load assays, etc. In vitro diagnostics companies are primarily one of three types: (1) Large pharma with diagnostic divisions, (2) Diagnostic companies, which focus on the manufacture, distribution, and marketing of diagnostic test kits (reagents) and devices, (3) Biotechnology (smaller start-up) companies, which focus on the discovery of technology devices and reagents for novel diagnostic methods or tests for specific diseases (e.g., a marker for cervical cancer). In vitro diagnostics is a mature market (estimated US$28.6 billion world-wide in sales in 2005) with the highest volume being clinical tests using immunoassays and simple blood tests. More than 20 billion blood tests are performed annually worldwide. However, a rapidly growing segment of IVD markets is in vitro molecular diagnostics or nucleic acid testing (NAT), which analyzes DNA or RNA from a patient to identify a disease or the predisposition of a disease. These nucleic acid tests also have applications in the area of in vivo diagnostics in the emerging molecular imaging techniques and in the development of pharmaceuticals. Biotechnology processes are used to make NAT diagnostic reagents, such as nucleic acid probes. The industry is fragmented, with larger companies like Quintiles, LabCorp, Covance, Roche, Johnson & Johnson, Abbott, Bayer, and others dominating market access, along with large independent companies such as Bio-Rad, Guerbert, bioMerieux, and Idexx. In terms of lab service revenues, the largest market share, of about 60%, is captured by hospital labs, while independent labs (also called reference labs) hold about 30% of the market share and physician offices cover the rest. Most small private companies either find a niche or get acquired as they are typically unable to attain the market reach of the big players to sustain growth. 1.5 Industry analysis There are many ways to analyze an industry, with some of the more common methods discussed here. The questions addressed in the following sections are: Where are the biomedical industry clusters and what are their key characteristics? //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 11 [1–35] 9.11.2007 3:40PM 1.6 Biomedical industry clusters 11 How can you understand rivalry and rise above the competition ? Porter’s five forces analysis gives us a method to look at industry rivalry through forces exerted by suppliers, buyers, substitute products, barriers to entry, and intrinsic industry rivalry. These five forces govern competitive advantage in an industry. What are the elements that make up the industrial system – the value chain – the context for putting form and function together in industry evaluation? The NAICS (North American Industrial Classification System) codes for the biomedical industry are listed and discussed in Appendix 1.1. These codes can be used to access various economic databases, e.g. labor and trade databases can usually be sorted by NAICS codes (also known previously as SIC – Standard Industrial Classification – codes) or by region or state. 1.6 Biomedical industry clusters 1.6.1 Biopharmaceutical and biotechnology concentration in clusters The growth of the biotechnology industry (mostly biologics-driven drug and diagnostic companies, but in this section, also non-regulated products, such as research tools) has taken place in specific areas in the world, usually driven by the creation of new intellectual property at universities. Thus, it is no surprise that the most active industry clusters in the USA are located around highly active research universities. Some characteristics of three of the top US clusters are described in Table 1.1. The three most active biotechnology clusters with companies and commercialization activities in the USA account for about 27% of total NIH extramural grants given to the top 100 cities or regions in 2000. Table 1.1 Some selected characteristics of the three most active US biotechnology clusters Key Characteristics Medical research activity of total NIH funding given to top 100 cities (2000) Number of top-twenty medical research universities Venture capital 1995–2001 (% of of total) Number of life scientists (1998) Pharmaceutical biotech research alliances until 2001($ million) San Diego and San Jose-San Francisco California Boston–Worcester Massachusetts Raleigh–Durham– Chapel Hill North Carolina 11.8% 12.2% 4.0% 4 3 1 46.5% 19.7% 3.9% 4520 $5476 4980 $5060 910 $225 Note: Data from National Science Foundation and National Institutes of Health websites and reports and DeVol et al. (2004) //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 12 12 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries Table 1.2 Global biotechnology clusters with number of private and public companies Company type Biotech region Public % Private % Total % USA % 329 49% 23% 1086 31% 77% 1415 34% 100% California Massachusetts North Carolina Maryland New Jersey Canada % 18% 81 12% 378 11% 82% 365 250 85 75 63 459 11% Ontario Quebec British Columbia Europe % 8% 122 18% UK Germany Sweden Asia-Pacific (including Australia and New Zealand) % Total % 1491 42% 49 13 13 92% 100% 143 134 74 1613 38% Germany UK France 100% 355 274 177 139 19% 577 81% 716 100% 21% 671 100% 16% 16% 3532 100% 84% 17% 4203 100% 100% Data source: Ernst and Young (2006) Note: California includes San Francisco, San Diego, and Los Angeles/Orange County (in decreasing order of total number of public companies present) The global biotechnology industry and size of clusters in the top five US regions and the top three Canadian and European regions are shown in Table 1.2. Industry cluster sizes are quantified by the number of companies in a region. In Europe, the UK cluster is by far the largest and most mature, but France, Germany, and Sweden also have sizeable clusters. The growth of biotechnology-based companies in the Asia Pacific region in various countries like India, China, Brazil, Taiwan, Korea, Australia, New Zealand, Malaysia, Thailand, Singapore, Vietnam, and Japan is notable, with increasing interest being drawn to the large market potential in these areas. These regions are also bringing their intellectual property rights and regulatory regimes up to global standards, making it more attractive for US or European companies to consider these areas for investment and partnership. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 13 [1–35] 9.11.2007 3:40PM 1.7 Porter’s five forces model 13 Table 1.3 Top states with medical device companies in the US State Number of medical device companies California New York New Jersey Massachusetts Florida Pennsylvania Illinois Texas Ohio Minnesota 2217 895 784 764 748 722 717 513 504 411 Data from Courtney Harris, Home Base, U.S.A., published online December 2003 at www.devicelink.com. 1.6.2 Biomedical device clusters The top USA states, ranked by number of medical device companies, are listed (data from the Medical Device Register, www.MDRweb.com) in Table 1.3. 1.7 Competitive analysis of an industry or sector with Porter’s five forces model In Michael Porter’s five forces model of industry analysis (Porter, 1985), the five dominant forces of supplier power, barriers to entry, buyer power, threat of substitutes, and industry rivalry can be analyzed to understand the best way to gain competitive advantage in that industry. This method is a commonly used strategic planning and analysis tool and is summarized briefly here: For a given industry, analyze various inputs to determine: Supplier power How much influence does a supplier have in the industry and how is it exerted? Is there a need to consider a strategy that includes the supplier as a partner? Buyer power How much influence does an individual buyer have in the industry and how is it exerted? What is the price sensitivity among various buyer groups? Is there a need to consider a strategy that includes the buyer as a partner? Threat of substitutes Is there a switching cost to switch to a rival’s products and what are the trade-offs and comparisons between alternatives and substitutes? Barriers to entry If a particular barrier to entry (patents, large investment, specialized knowledge) is identified, how can you cross it and then keep it up to slow down competitors? //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 14 14 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries Industry rivalry What are the exit barriers, product differences, brand power, growth rate in industry, fixed costs among firms, concentration of firms in market share, etc.? By going through each point and addressing the general and specific issues in that area, a picture of the industry can emerge, giving a direction for development of competitive advantage in the industry. A summary analysis for each product type (device, drug, diagnostic) is presented here. These analyses serve as general overviews for the industry. A specific analysis around an innovative product allows one to focus strategic attention and resources on the primary basis of competition and the specific competitive advantage in the product market of interest. 1.7.1 Competitiveness summary for the pharmaceutical industry Suppliers to the pharmaceutical companies are typically chemical manufacturers and switching costs are low, hence suppliers have low power in this industry. The drug industry is facing challenges as buyer power increases over time. State and federal governments (buyers) are also placing tremendous pricing pressure on the larger pharmaceutical industry. Substitute products are typically generics; generics manufacturers enter markets when a patent expires but have recently been using legal mechanisms to enter markets before anticipated patent expiration, reducing profits of innovator companies. Hence, substitute power is high in this industry. The long and expensive product development cycle is a barrier to entry and leads to multiple risk-sharing and profit-sharing alliances between biopharmaceutical firms and larger pharmaceutical companies and between smaller firms. Merger and acquisition activity in this sector continues, with larger players capturing development pipelines and market share. The competition within the industry is fierce and follow-on products to a new innovation emerge rapidly (18 months or less). Hence, industry rivalry is a strong (high) competitive force. The pharmaceutical industry is, thus, under tremendous pressures from many interfaces (forces). The increased sophistication of contracted research houses could give rise to a stabilizing factor, serving to reduce the cost and time for development. Even with a few large players, smaller firms can still survive through innovation and intellectual property capture; niche drugs can allow smaller companies to address focused markets. Small innovative companies will continue to play a role in this industry as generators of new technology and translators of innovation from academia to industry. Biologic drug companies (the biotechnology industry) face similar pressures from various forces (as compared with the overall pharmaceutical industry), with a few key differences – the supplier power is medium as specialized techniques need to be developed and maintained up-to-date for production of biologics, and the power of substitutes (generics) is rather low at this point owing to a poorly defined regulatory path forward for biogenerics, but is not likely to remain low in the future. Barriers to entry are high, requiring investment in specialized production facilities and analysis techniques that can be quite complex. Overall, the biotechnology segment of the //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 15 [1–35] 9.11.2007 3:40PM 1.7 Porter’s five forces model 15 drug market has a higher hurdle for competition and launching innovative products is the primary means to gain and maintain competitive advantage. Porter’s five forces analysis can also be carried out at the company level, from the perspective of either a large pharmaceutical company or from the perspective of a small biotechnology company; not focused around a specific product, but focused around the company. Each of these perspectives will probably yield different conclusions as the context of analysis changes. 1.7.2 Competitiveness summary for the biomedical devices industry Owing to the diversity of firms and technologies in the device industry, a general analysis is presented here, largely assuming innovative, implanted devices. Buyer power tends to be medium, since larger purchases by hospitals or group purchasing organizations can be offset by individual physician preferences at a hospital. Buyer power is very high in the case of commodity products (such as syringes). For new innovative products, the manufacturer may have substantial negotiating power, owing to the limited market monopoly the patent provides. Device firms are typically taking relatively common parts and materials and transforming them with knowledge to provide extensive added value. Consequently, supplier importance and power is generally relatively low. The multi-year, multimillion dollar process to take a product to market through FDA approval creates a barrier to entry in the industry, but the path through FDA approval can be relatively short (as with generic drugs) in many instances. Patent protection reduces competition for many new products and a first-mover advantage has been noted in many medical device markets. Consequently, a firm that is first to market or temporarily controls a market using patent protection is well placed to dominate the market with brand recognition once the patent expires and competitors are able to enter the market. However, there has been a tendency for established products to become commodities in the device industry. These commodity product markets are highly competitive low-margin markets with a focus on reducing manufacturing costs. 1.7.3 Competitiveness summary for the diagnostics market The diverse nature of this product type also forces a generalized review and analysis of this section of the industry. Thus more qualitative discussion is presented here of various issues in the diagnostics industry. The customers (buyers; hospitals, central labs, and clinics) have been gaining bargaining power over the last few decades, owing to the formation of hospital buying groups and large HMOs that use the power of scale to choose specific tests and reimbursement levels. Buyer power is medium to high in the diagnostics segment of the biomedical industry. Supplier power is medium to low, depending on the type of reagent (monoclonal antibodies are specialized products; basic chemical reagents are not) or device used. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 16 16 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries Several large players in the IVD industry have established technology platform standards and control distribution channels. For example, Bayer/Chiron are market leaders in blood testing and Roche controls a large part of the nucleic acid testing (NAT) markets owing to its proprietary position and established standard base of the PCR technology. A smaller company, like Gen-Probe, a leading developer of NAT tests, has had to establish distribution and sales collaborations with Chiron, bioMérieux, and Bayer. Companies that have diversified product menus and strong commercialization infrastructure (channel access and established technology platforms) are positioned for the long term to capitalize on the opportunities in the diagnostics markets. Competition is intense at the market level and is focused on cost in the clinical diagnostics area. Industry rivalry is high, and barriers to entry into the traditional markets (central labs or physician clinic labs) for a young company are high, as market access is controlled by a few standard-setting large firms. However, in the NAT market segment, patent rights on innovative tests allow smaller companies to establish themselves. A lowering of the regulatory bar also lowers the barrier to entry and these firms can start earning early revenues by selling their tests for ‘‘research use only’’ as specific reagents directly to the clinical laboratories. The emergence of NAT tests puts emphasis on innovative content in the IVD markets. In particular, about half (49%) of the industry is composed of small companies, with less than 20 employees. Another 17% have less than 100 employees.1 Smaller firms are usually focused on specific disease areas or even on single diseases, but larger companies have a diverse portfolio and account for a large part of the revenues. Manufacturers of device platforms (devices that analyze specimens) also command significant margins in this industry, giving rise to strong marketing power for established platforms on which multiple different assays can be run. The majority of IVD tests are used in reference labs (national centers with high volume), centralized labs in hospitals or nursing homes (accounting for 60% of IVD industry revenue), or in physician practice labs. Access to these customers requires building a sales force or partnering with the larger firms to gain access to markets, limiting paths for successful commercialization of IVD tests. Innovative proprietary tests, which are based on the many emerging insights and discoveries into the human genome and proteome, will always command a premium and interest in the market, but could take time to reach commercial success. Significant barriers to widespread adoption of NAT exist – lock-in by specific test platforms, reimbursement issues (Chapter 7), changing regulations, education and awareness of the clinical utility of a test, the inability to interpret test data fully, and the fact that (in some cases) gene patents hinder adoption of the tests by routine clinical laboratories and also prevent competitive development, which would be good for increased market development. Unclear or changing regulatory environments and reimbursement practices that create disincentives for innovation, 1 Data from US Census Bureau. In-Vitro Diagnostic Substance Manufacturing: 2002, 2002 Economic Census, December 2004. Available from www.census.gov. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 17 [1–35] 9.11.2007 3:40PM 1.8 Industrial value chains 17 particularly for the new NAT tests, remain as key impediments to successful commercialization of new IVD tests. Acceptance of a new test by a few leading academic research clinical centers may be rapid, but adoption in the larger volume markets typically takes time. However, new tests that result in improved outcomes in diseases such as cancer should see substantial market pull (demand by market forces) and these market hurdles could be overcome as more biomarkers are clinically validated and familiarity with NAT testing grows through the new tests that are being launched. (See Box 1.3) 1.8 Industrial value chains The value chain of an industry or product offers another way to understand the dynamics of the industry and to understand relationships between its component companies. In particular, the value chain can be used to assess the capabilities of the company and see its dynamic fit and growth opportunities within the industry. A value chain is a high-level model of the various steps involved in converting raw materials to finished products that are used by customers, as shown in Figure 1.2 and in the description below. The individual product development stages are discussed in greater detail in Chapter 4. As a product moves from basic R&D to market, each step increases the value of the work in progress, with the product reaching maximum value when it is finally sold in the marketplace to the end user. A value chain schematic can be used to describe the steps in the development process and also to give an overview of the entire process of taking a concept to market. A supply chain, a common term in many industries, is a part of the overall value chain. The supply chain model focuses on activities that get raw materials and components into a manufacturing operation smoothly and economically. The value chain is a broader concept, looking at every step from raw materials to the eventual end users and their experience with the product. The goal is to deliver maximum value to the end user for the least possible cost and to analyze the specific functions of the company and define strategic advantages. Supply chain management is, therefore, a subset of the value chain analysis. The value chain concept is useful in analyzing the specific activities that the organization performs in the context of the entire value chain, and in understanding how the organization can use technology better in specific areas, or reduce costs, or reconfigure operations to add value. The value chain analysis can also help in business model analysis, wherein a specific organization’s business model can be analyzed by virtue of its current and planned location in the value chain. The following general descriptions represent some typical value chains in the various segments of the biotechnology industry, acknowledging that there can be specific products and developments that take radically different routes. For example, some companies can license technologies at one point in the value chain and sell them at another point, capturing the incremental value represented by that //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 18 18 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries Box 1.3 A competitive analysis for a novel medical device using Porter’s five forces Porter’s five forces analysis can also be applied at a product level, as shown in this example. The product is a vena cava filter. This is a metal filter placed in the large vein near the heart to block an embolus (blood clot) from going to the brain or lungs where it could cause death. The following analysis identifies the key competitive forces in this market, using porter’s five forces model. Supplier power Supplier bargaining power is a weak competitive force as the device companies are taking up commodity materials and adding high value processing to make the filters. Buyer power Buyer bargaining power is a strong competitive force with high impact in this industry, owing to the small number of decision makers (physicians) at each purchasing hospital. Therefore, the firms all compete to get the attention of these physicians and the buyers can exert significant force in the sales process. Buyers will become more powerful as the type and number of filters increases. Substitute products Substitute products are a weak force, as the only other option to the filter is a blood-thinning drug. Many people cannot take blood thinners for long periods of time and in fact blood thinners are a complementary product. There are no other known innovations in development at this time. Competition from substitutes is likely to be very low. Barriers to entry (or new entrants) New entrants are a weak force in this industry, as brand recognition, limited access to decision makers (physicians), and high regulatory requirements and long development times combined with high development costs keep new entrants away. Rivalry Rivalry among competitors is very strong as each competitor fights for market share in a mature market that has seen no significant growth. A combination of innovation in product and aggressive sales methods is used to compete for market share. High profit margins are possible with innovative products and rivalry will increase in the future. Summary The main competitive forces in the vena cava filter market are, thus, rivalry among competitors and buyer influence on purchasing decision. Rivalry is likely to grow and gaining competitive advantage will continue to hinge on product innovations that show significant clinical utility and positive clinical outcome. Note: another type of analysis that can be used at the company or product level is the SWOT – strength, weaknesses, opportunities, and threats–framework. This and other analysis frameworks are useful for thinking through product development characteristics (cheaper or more differentiated), marketing tactics, or corporate strategy around a particular product innovation or for setting a higher-level organizational strategy. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 19 [1–35] 9.11.2007 3:40PM 1.8 Industrial value chains 19 Input value chain Idea Problem to be solved Basic research Technology innovation Applied research Pilot phase (product dev) Application phase (production) Product development Exploratory or discovery research and development Output value chain Introductory phase (marketing) Operational phase (distribution) Distributors Physicians, regulatory, insurance Consumer Manufacturing, marketing, and sales and distribution Figure 1.2 Typical biomedical industry value chain. intermediate development step. Another important point to remember is that although a linear path and growth in value is represented here, new product development (NPD) is seldom a straight-through path. As discussed in the Preface, there is a detailed interaction between functional groups during NPD, which typically will lead to iteration in planning, testing, and development. Exploratory research and development (R&D) Research and development usually begins with a broad concept of the problem to be solved (e.g., cancer, a new AIDS vaccine, or a disease driven by a particular known mechanism). Basic biological research and technology innovation go hand in hand, with new technologies giving rise to novel insights into biology, which in turn lead to new tools. These new innovations lead the way to a possible product idea, and applied research tests the feasibility and scope of the innovation. Serendipity often has a significant role to play in this period of exploratory research, but as the saying often goes: ‘‘The harder I work, the luckier I get.’’ Organizational functions include performing and managing basic R&D, prototype testing, and concept testing. In biomedical organizations this can range from discovery efforts to animal testing for proof of concept or feasibility studies. Product development Prototype development or advanced feasibility testing is usually the next step, and larger scale human clinical trials follow. A formalized product development process is usually introduced shortly after the first feasibility test is positive. Manufacturing and marketing functions are involved early in the product development stage. Important issues here are definition of product characteristics and the specific input from intellectual property, regulatory, finance, marketing, and reimbursement divisions or functions. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 20 20 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries Manufacturing, marketing, and sales These final stages of commercialization can easily become the most challenging. In the early stage, the technology, direction of research, etc., were still under company control; at this stage, outside regulatory agencies, payers, users, and others dictate procedures and processes, and standards have to be followed. Reimbursement of the product through third-party payers adds a level of complexity to the regulated biotechnology and medical device industry, when compared with other commercial manufacturing industries. 1.8.1 Drug development process The drug-development value chain shown in Figure 1.3 (and discussed in greater detail in Chapter 4) begins with a discovery project. The project is typically initiated by discovery of a target’s key involvement in a disease. The target is usually a protein, an enzyme, or a receptor in a cell or tissue that has been discovered to play a central role in the development of a disease or its symptoms. The drug can be a synthetic chemical small molecule that binds to the target and inhibits or activates its function or it can be a biological molecule that replaces a missing or defective enzyme or protein. A large part of the effort in pre-clinical research work is to verify the validity of the target (to verify that interventions aimed at the target will have the desired effect on the system) and to develop a molecule that can become a drug compound. This pre-clinical research stage then ends when the two key milestones Discovery and Pre-clinical Target biology Lead drug candidate Validation Identification Pre-clinical validation, toxicology Early manufacturing Phase I Phase II Value $ Discovery Years Figure 1.3 Manufacture marketing sales Clinical trials Drug discovery process and value chain. Phase III $ Post-approval trials Manufacturing, regulatory phase IV study Distribution channels, marketing Physician, hospital, consumer //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 21 [1–35] 9.11.2007 3:40PM 1.8 Industrial value chains 21 or gates (see Chapter 4) are passed: (1) validation of a therapeutic effect of the drug in animal models of the human disease and (2) satisfactory clearance of formal toxicology and other (absorption, distribution, metabolism, and excretion profiles, other in vivo behavior) testing. The clinical trial process is carried out in specific development steps, phase I–IV clinical trials, each with specific goals. Phase I Toxicity and behavior of drug in humans (pharmacokinetics and pharmacodynamics), Phase II Establish that the drug works to treat the disease (efficacy, dosage), Phase III Establish efficacy in larger population (statistical validity of drug effects), Once the clinical trials are complete, the results are analyzed and submitted to the FDA for approval to market the drug. The review by the FDA can take up to two years. Phase IV Post-marketing surveillance (usually required by the FDA after approval, to further validate efficacy or safety with longer term or broader population exposure to the drug) or may be conducted to expand use of the drug to new indications or diseases or a different population (e.g., children). This entire process can take from 12 to 16 years and hundreds of millions of dollars. The process itself has a high failure rate in chemical compound development (slightly lower for biologics), with only an estimated 1% of compounds that enter early pre-clinical screening successfully becoming drugs for a given disease. The current average cost is $800 million, which includes the cost of failures dropped at various stages of development and the cost of lost returns on alternate investments that could have been made with that capital (DiMasi et al., 2003). Examining the industry’s functional segments through this value-chain perspective reveals a view of the industry’s structure. Some companies focus on the supply of specialty raw materials, others specialize in design layouts and engineering design, still others may only do contract manufacturing work for regulated products, while some work on value-added distribution services. Some areas of the value chain – discovery research, for example – are very fragmented, while others have high barriers to entry and thus see few large players – manufacturing of biologics, for example. Quantifying various outcome measures (e.g., profit margins, return on investment, etc.) of these companies’ operations in various segments of the value chain would allow one to understand the highest value-added component of the value chain and the dynamics of each process that involve multiple stakeholders. For example, economic development agencies could choose segments of the value chain to invest in, and aspiring entrepreneurs can lay out better expectations of returns for companies with similar business models. An example for the biotechnology industry is shown in Figure 1.4 with a caveat that although this analysis is valid only for a handful of firms in the biotech industry (most companies are private and occupy niches in the value chain), it is certainly a good benchmark and indicator. //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 22 22 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries 30% Net profits (after taxes) 22% Net profitability (height of bubble) 25% 20% Clinical development 17% 15% 10% Pre-clinical 5% Sales, G&A, Marketing, 27% Product manufacturing 17% 5% 0% Figure 1.4 Value chain component (size of bubble) Profitability and share of value chain components (shown as bubbles) in the biotechnology drug development value chain. The area of the bubble indicates the % cost of that activity (label next to bubble) and the height represents the profit margin. See details in text. The graph in Figure 1.4 is illustrative in nature and represents one possible method of analyzing the value chain and profitability along the value chain. The major component processes in the value chain – pre-clinical studies; clinical development; manufacturing; sales, general and administrative (G&A) and marketing; and final profits captured in the system – are shown as bubbles, respectively arranged from left to right in the figure. Therefore, the total value created ¼ total revenues ¼ (cost of each component process þ profits) for a fully vertically integrated company. However, in this case, the x-axis is not a quantitative scale and only serves to lay out the value chain components in a progression. The area of each component process bubble relates to the costs incurred for that component, expressed as a percentage of the total cost of development. These component percentages were calculated from reported financial statements of a few fully integrated, representative biotechnology firms. Profit margins (averaged over a five-year period) within each functional process (pre-clinical, clinical, manufacturing, etc.) were obtained from financial statements from a few representative publicly traded firms that specialized in the specific segments of the value chain. The individual profitability figures within each component process are thus independent values that are not supposed to add up to the total net profit reported by the fully integrated firms. These profitability values were used to position the height of the bubbles, with the most profitable component process placed highest (along the y-axis). Both calculated terms, the percentages of the component processes (as part of the total value) and profit margins for each component process, are not expected to add up to the final figures (100% of value created or total contribution to net profit of 22%), as these value assignments are done for illustrative purposes rather than to generate strictly quantitative models. This method of plotting value chain components works for industries in which the right type of data are available. Entrepreneurs can use this chart to //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 23 [1–35] 9.11.2007 3:40PM 1.8 Industrial value chains Discovery & pre-clinical Device specs, design Clinical trials Animal testing Production prototype Pilot Pivotal trial trial Manufacture, Marketing, Sales Manufacturing production Distribution sales, mktg $ Physician, hospital, consumer Value $ Product concept 23 Years Figure 1.5 Biomedical device value chain. assess quickly the best component of the value chain in which to build their business models. 1.8.2 Biomedical device and diagnostic development process The medical device and diagnostics industry value chain, represented schematically in Figure 1.5, typically starts with an R&D project where a concept is developed around some core innovative technology or biological or physiological insight. A project team then develops a design, which is then used to make a prototype with some iteration to the design process. For IVDs, assay development takes place at this stage and a prototype assay protocol is developed. Prototype testing at this stage is typically in vitro or laboratory testing. In IVDs, at this point, the test is placed in the context of usage and a test principle is chosen (the technology platform for the specific assay is chosen). Feasibility testing for IVDs is typically done in cells or in archived human clinical samples to which the company has access. At this point, the IVD company can start to generate revenues by the sale of specific reagents for ‘‘research use only’’ to a selected group of certified laboratories. The final prototype is then refined for manufacturing processes (sometimes in parallel with the design iterations). A refined prototype is then tested in animal models or possibly on human beings, as appropriate. Human testing follows with pilot and then pivotal clinical trials. New IVD tests are typically first validated retrospectively in clinical trials and then more rigorously through prospective //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 24 24 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries Internal R&D In-licensing Biomarker identification and validation Product specifications Technical platform Performance criteria Clinical test development Analytical performance optimization and assessment Commercialization Research use only (RUO) Manufacturing requirements Scale-up and manufacturing Performance, Utility criteria Retrospective clinical validation Registration and commercialization CE Mark, 510(k) tests Performance, Utility criteria Prospective clinical validation Registration and commercialization PMA, CE Mark test Figure 1.6 Diagnostics commercialization value chain. clinical trials. The results are submitted to the FDA and on approval, the device can be distributed and marketed. This entire process can take from two to six years and from a few million to tens or hundreds of millions of dollars (time and costs vary widely owing to the diverse nature of products in this industry). Product development stages are discussed in greater detail in Chapter 4. The component profitability has not been analyzed here, because of the diverse nature of products and firms in the device and IVD industry. A specific value chain and pathway for development in the diagnostics industry is shown in Figure 1.6. Diagnostics offer several intermediate steps for commercialization, as the industry has a large market for non-regulated supplies – hence the value chain for diagnostics is shown in a different format here. 1.9 Technology trends in biomedical device and drug development In depth information in an area builds momentum as multiple iterations are made for better understanding of a phenomenon or a technology, ultimately leading to better tools and new applications and products. These new applications, tools, or products eventually lead to new information that enters the cycle shown in Figure 1.7. The spark of curiosity of humans and the intensified, globally competitive research activities of this century are the drivers for innovations, new technologies, and applications entering the market. 1.9.1 Drug development technology trends Technology has played an important part in drug development and discovery over the years, either by opening new pathways for better treatments or by speeding up the process of developing drugs. Most early drugs were derived as extracts from natural sources. The components of these extracts, when purified, were identified and synthesized using chemical synthesis methods to yield a reproducible //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 25 [1–35] 9.11.2007 3:40PM 1.9 Technology trends 25 Information Better tools and techniques Curiosity/ research Discoveries Inventions New applications, products Figure 1.7 Technologies link curiosity, discoveries, and new applications in a cycle of innovation. compound. Drug technologies have seen a big change in the methods of production with the advent of biotech drugs (biologics). These biotech drugs, typically proteins that are enzymes or antibodies (monoclonal antibodies), are produced using genetically engineered living cells. The biotech industry started off with two basic technologies in 1975, recombinant DNA (rDNA) and monoclonal antibody (mAB) production from hybridomas, and has now accumulated several breakthroughs in its technology platforms, leading to an ever-increasing range of applications, going beyond basic manufacturing techniques to enhance the entire supply chain in drug and diagnostic development (Figure 1.8 and Figure 1.9). Figure 1.8 overlays the actual revenue figures for the biotechnology drugs-based segment of the pharmaceutical industry with a few selected technology milestones. These technology and commercial milestones are meant to be representative and not comprehensive. The next set of emerging technologies include stem cells, tissue engineering, gene therapy, siRNA, and in silico biology. This new generation of human therapeutics will probably require the development of new production technologies. Additionally, advanced material technologies will also influence the pharmaceutical sector throughout the production value chain, from R&D and drug discovery to manufacturing and packaging. New emerging applications, which include nanostructured polymers (dendrimers) for advanced drug delivery, analytical life sciences instrumentation, biochips, membranes, bioreactor design, coatings, and fine chemicals, will all affect the future development of new classes and types of drugs. However, in spite of a steep increase in total industry investment in R&D over the last decade (grown to $40 billion in 2005; data from PhRMA), there has been no increase in filing or approval of new small molecule drugs. The issue of cost-effectively building a business of new products is looming large for many companies, as their blockbuster products are going off-patent or revenues are falling to generic competition. One possible explanation for the lack of increase in new product submissions is that the explosion of information and new targets, with a paucity of historical data, has led to a net loss of productivity, even though individual technologies promise better productivity (Figure 1.9). Both IT systems integration and data integration issues have increased the computational intensity used in drug companies. Pharmaceutical companies are still working on the integration of a large number of new technologies and //FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 26 26 [1–35] 9.11.2007 3:40PM The drug, diagnostic, and devices industries (a) Global biotech industry revenues $120 US$ billions $100 Growth $80 $60 8 $40 Ferment $20 $0 1 2 3 4 1973 (b) 5 1983 7 6 1993 2001 2006 Key growth steps for industry 1 2 1953 – DNA structure solved by Crick and Watson 1973 – Cohen and Boyer perfect recombinant DNA techniques 1975 – Kohler and Milstein produce mABs from hybridomas Figure 1.8 3 1976 – Genentech founded – first commercial life sciences company 4 1980 – Diamond vs. Chakrabarty – Supreme court case approves principle of patenting genetically modified organisms 5