Business of Biotech 8 Yale Biotechnology & Pharmaceutical Society 29 March – 1 April 2010...

Business of Biotech 8

Yale Biotechnology & Pharmaceutical Society

29 March – 1 April 2010

Constance McKeeYale MBA 1986

President & CEO, Manzanita Pharmaceuticals, Inc.

March-April 2010 2

The Business of Biotech 8

A Non-Credit Seminar for Yale & the Biohaven CommunityWeek of 29 March – 1 April 2010

Yale School of Management135 Prospect Street, New Haven

Constance McKeeYale School of Management, MBA 1986

Manzanita Pharmaceuticals, Inc.www.manzanitapharmaceuticals.com

2995 Woodside RoadSuite 400, PMB 309

Woodside, CA [email protected]

m 408.348.3191 v 408.872.1094

Constance McKeeBusiness of Biotech 8

March-April 2010 3

Introduction

• Course approach – part quantitative concepts, part case studies• First hour - basic concepts in start-ups• Modular – OK if you can’t attend all week • Second hour – micro case studies from entrepreneurs, investors & industry• Speakers talk about making decisions – and how it *really* turned out

• Key questions• What’s the opportunity?• What’s the opportunity worth?• How do we – founders & investors – make money?• In the current environment, where *is* the money?

• Emphasis on biopharmaceuticals• Business concepts apply to devices, tools & diagnostics companies• But decision-making process similar for devices & tools


March-April 2010 4

Course Outline & SpeakersCase Studies in Decision Making

• “Basic infrastructure of a start-up” (Monday, 29 March 2010)• Sohini Chowdhury, Michael J. Fox Foundation (Parkinson’s disease) (New York)• Gregory Licholai, MD (Yale), COO, Proteostasis Therapeutics (Boston)

• “Strategy for biotech, big pharma and economic development” (Tuesday, 30 March 2010)• Peter Longo, President & Executive Director, Connecticut Innovations (Hartford)• Ron Burch, MD, CSO, Pacira (San Diego) (former CEO, AlgoRx)• JC Martignoni, Director, U.S. Strategic Transactions and Alliance Management, Boehringer-

Ingelheim (Ridgefield)

• “Case studies in decision-making” (Wednesday, 31 March 2010)• Special guest speaker, U.S. Navy• Jonathan Lewis MD, founder & CEO, ZioPharm Oncology (New York)• Networking at Archie Moore’s following the class

• “Case studies in investment decisions” (Thursday, 1 April 2010)• Jim Dolan, Executive VP, Purdue Pharma (Stamford)• Myles Greenberg, MD, CHL Medical Partners (Stamford)


March-April 2010 5

Course Goals• Explain challenges of raising capital for life sciences start-ups

• No previous experience required• From perspective of scientist• Quantitative approach

• Discuss sources of capital• Nonprofit medical research organizations• State-based economic programs• Military medical grants• Deal-making with pharma, private equity & angels

• Introduce basic concepts that drive the business of biotechnology• Most good business decisions are driven by quantitative concepts• Rules of the game• How to play the game to increase the probability of success

• Develop network of Yale-centric entrepreneurs & investors• Sources of information• Sources of funding• Career opportunities outside the lab


March-April 2010 6

MondayBasic Concepts in Start-up Business Infrastructure

• Patents

• How ownership arises (why Yale owns your ideas)

• How rights to patents get transferred to your start-up

• What is “unmet clinical need”? What is a “market”?

• What is a business model?

• What is a business plan?

• Understanding the global competitive landscape


March-April 2010 7

How Ownership ArisesWhy Yale Owns Your Ideas

• Under US law, the employer owns the ideas of employees• Terms of Yale employment includes faculty, graduate students• Yale Office of Cooperative Research http://www.yale.edu/ocr/ • You can “consult” to your own start-up• Most universities permit this, but your consulting agreement either

(1) continues to allow Yale to own your ideas while consulting, but licenses any discoveries to your start-up, or

(2) grants ownership of ideas generated during consulting period to the start-up

• Document who & where invention occurs• Complicated with multiple academic collaborators• Complicated by multiple granting sources• Expect multiple co-inventors on patent application


March-April 2010 8

Yale Licenses Rights To Start-UpHow Legal Rights Are Transferred

• License is a legal agreement• Yale’s ownership gives it right to confer some or all of its rights, over time• In exchange for grant of rights, Yale may get rights to % of future product value• Future product value – milestones or % of sales (“royalties”)

• Important concept – transfers rights, not ownership• If things go wrong, Yale still owns patents• Start-up licensee usually pays for patent prosecution• Start-up licensee usually obligated to use “best efforts” to develop• Years before Yale (and you, the discoverer) makes any money

• Flexible concept• May have low or no upfront fee• May include milestones for key development steps• May include royalties (% sales) when product launched


March-April 2010 9

Deals: Trading Values & Assets

Products Products

Strategic IP Strategic IP

Non-Core IP Non-Core IP

Universities – NIH – Biomedical Foundations

Big Pharma Emerging Biotech

Spin Out Spin Out


March-April 2010 10

Patents

• What is a ‘patentable invention’?• Patents are issued by US Patent & Trademark Office, European Patent Office

and patent offices of respective countries• Must show your idea is “novel and not obvious” & that it works (data)• When issued, confers the right to sue if an infringer sells a product in the

marketplace based on your idea

• What is intangible intellectual property that can be protected?• Copyright – software, drawings• Know-how – protocols for synthesis of a small molecule drugs• Also known as trade secrets (“secret sauce”)• Almost always key to real value in the product, never disclosed in a patent

application


March-April 2010 11

Why Are Patents Important?

• Worthless unless a product made from it, sold & making $$• Does not keep others from stealing your ideas• Just gives you the right to sue them if they do steal• Formidable barrier to entry if you succeed• In pharmaceuticals, can charge a premium price

• Confers exclusivity• Means you’re the only one legally authorized to sell product• Can be US only, EU only, ROW only or combination• When patent expires for pharmaceuticals, generic drug makers take over &

premium-priced drug revenues decline ~ 60% in one year post-expiry• Strong patents are enormously valuable to pharma


March-April 2010 12

RoyaltiesPercentage of Cash from Products Sold

• Wait years until product developed & finally sold• Industry standard – 2% of net revenues of Rx• Royalties increase as drug price increases, number of patients increases

Income/Expense % Revenue NotesRevenue 100$ Units x priceCost-of-Goods (10)$ Raw materialsGross revenue 90$ Gross margin 90% Percent of RevenueSalaries (10)$ 10% Science - cost of R&D

(2)$ 2% ManagementOffices, plant & equip (3)$ 3% Cost to operate, not buildSales, General & Admin (40)$ 40% How concentrated?NET REVENUES 35$ 35% (earnings before income taxes)NET EARNINGS 35$ 35% (who pays income taxes?)EARNINGS PER SHARE = EPS = Net earnings / number of all shares outstanding


March-April 2010 13

What is a Market?Can Describe Both Place & Total Value Sold

• Place = pharmacy, stock exchange, flea market, souk, eBay

• Total value = number of units sold X price per unit

• Drug market = number of scrip written X price paid by patient

• Example: Exubera (inhaled insulin developed by Nektar, marketed by Pfizer)

• TRx = total prescriptions; NRx = new prescriptions written• Exubera sold $14 million after it was launched• Merck sells Januvia for $4.86 per tablet (100 mg 1X 7 days) x (22,475+48,685) = $2

million per week, $125 million per year just weeks after launch• Pfizer pulled Exubera from the market in October 2007

• Depends on who can afford Rx, who actually takes their meds

• Doesn’t quantify potential Rx with better effectiveness that addresses unmet need

Exubera Exubera Januvia Januvia

NRxs TRxs NRxs TRxs

5/11/2007 1,179 1,659 22,475 48,685

5/18/2007 1,307 1,816 28,416 56,243


http://seekingalpha.com/article/50788-pfizer-four-lessons-from-the-exubera-failure

March-April 2010 14

Unmet Clinical NeedNumber of Patients X Cost of Under-treatment

• Example: 25 million Americans with chronic pain• No drug of choice – many classes of Rx prescribed, but only 30% effective• Direct cost - $1,000 per patient per year• Rx relatively inexpensive, but patients keep going back to the doctor• US Army - $340 BN total cost of treating pain in returning veterans from

Operation Enduring Freedom, Operating Iraqi Freedom

Chronic pain Number Unit or Description

Number of patients 25 million

% drugs effective 30% NSAIDs, tricyclics, gabapentin

Number untreated 18 million

Cost of treatment 1,000$ Per year, Rx plus cost of office visits

Cost of unmet need 500$ Per year, indirect costs (loss of work)

UNMET CLINICAL NEED 18,000$ In US$ billions - direct costs (one year)

ECONOMIC BURDEN 9,000$ In US$ billions - indirect costs (one year)


March-April 2010 15

What is a Business Plan?

• Proxy for future value• Estimates for market size & market opportunity• Estimates risk (amount of $ to product vs amount of potential revenue)• Patents• How much can you expect to sell vs competitors’ products?

• Proxy for reality• Has team done *it* before? (developed this kind of product)• Have other companies tried to address this problem before? Did they fail?• Have other investors made money in this sector? With this business model?• What are the “comparables” (value of deals done in this sector)?• What are the “comparable exits” (value of deals in this sector that were acquired

by other companies, or went public)


March-April 2010 16

> 800 Drugs in Development for CancerKnow your competitive landscape

Only 50% trials complete due to failure to enroll patients (includes 500 biologics)

www.PhRMA.org 2008 data includes overlapping trials


March-April 2010 17

WW Pharma Revenues (in US$ BN)14% Growth in Brazil, Russia, India, China, South Korea, Mexico, Turkey

Growth in the U.S. in 2008 – 1.0%

Region 2008 Revenues GrowthUS 300.0$ 1.0%BRICs 100.0$ 14.0%Biologics 125.0$ 20.0%Generics 69.0$ 11.0%Biosimilars 0.7$ 89.0%Other 155.3$


March-April 2010 18

Pharma WW is growing at 3%-5%Growth in cancer biologics & biosimilars is off the charts

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1980 1985 1990 1995 2000 2005 2010 2015 2020

Pharma WW Pharma US Pharma China

Generics WW Generics US Biologics US

89% biosimilars (WW CAGR 2014)

48% cancer biologics (US CAGR 2009)


March-April 2010 19

Industry patent cliff in 2012: $67 billion

Brand name Company Generic name Uses

Estimated patent expiration

Received FDA approval

Global sales, 3Q 2007 (in millions of dollars)

Actos Eli Lilly / Takeda Pioglitazone Type 2 diabetes 2011 1999 $180

Advair/Seretide GlaxoSmithKline Fluticasone, propionate+salmeterol

Asthma 2010 1998/1999

$1,721

Aprovel Sanofi-Aventis / Bristol-Myers Squibb

Irbesartan Hypertension (high blood pressure)

2011 1998 $392

Aricept Pfizer / Eisai Donepezil HCI Alzheimer’s 2010 1996 $100

Avandia GlaxoSmithKline Rosiglitazone Type 2 diabetes 2012 1999 $463

Cozaar Merck Losartan Hypertension (high blood pressure)

2010 1995 $814

Crestor AstraZeneca Rosuvastatin Cholesterol 2012 2003 $691

Diovan/Co-Diovan

Novartis Valsartan+ hydrochlorothiazide

Hypertension (high blood pressure)

2012 1996 $1,267

Levaquin Johnson & Johnson

Levofloxacin Antibiotic 2010 1996 $366

Lexapro Forest Laboratories/ H. Lundbeck

Escitalopram Antidepressant 2012 2002 $559

Lipitor Pfizer Atorvastatin Cholesterol 2011* 1996 $3,170

Plavix Sanofi-Aventis / Bristol-Myers Squibb

Clopidogrel Anticoagulant 2011 1998 $1,250

Seroquel AstraZeneca Quetiapine Antipsychotic 2011 1997 $1,055

Singulair Merck Montelukast Asthma 2012 1998 $1,018

Symbicort AstraZeneca Budesonide+formoterol Asthma 2012 2000 $371

Taxotere Sanofi-Aventis Docetaxel Cancer 2010 1995 $694

Xalatan Pfizer Latanaprost Glaucoma 2011 1995 $402

Zometa Novartis Zoledronic acid Cancer 2012 2001 $318

Zyprexa Eli Lilly Olanzapine Antipsychotic 2011 1996 $1,166

*Lipitor may face patent expiration in 2010, not 2011. Sources: Datamonitor; Dolphin; WSJ.com research


March-April 2010 20

Global competitive forces

• Revenues: down as patients stop taking Rx in economic downturn

• Revenues: US revenues flatlined in 2009 – growth is ex-US

• Generics: 60% of Rx in America are generics – new Rx must show significant clinical benefit (no more “me-too” products)

• Generics: biosimilars legislation expected in 2010

• R&D costs: China’s & India’s investment in education paying off now as they attract pharma’s drug discovery & clinical trials (future)

• Competition: regenerative medicine competing directly against small molecule approach (example: AMD – Pfizer)

• Funding: collapse of historical funding mechanisms for innovation

• Funding: rise of philanthropic organizations to fund innovation

• Pricing: healthcare reform in U.S. should increase competition

• Regulatory: FDA hypercaution in evaluating risk:benefit ratios


March-April 2010 21

Only 4 IPOs in 2009 in the USBut pre-IPO financings rebounded in 2009


March-April 2010 22

Will Venture Capital Ever Invest in Early-Stage Biotechnology Again?


• Total US VC 2009: $17.7BN

(worst since 1997)• 1 biotech IPO in 2008 ($5 million)• 1 biotech IPO in 2009 (Omeros)• Total US deals in 2009: 2,795

* 37% decrease in dollars

* 30% decrease in deals• Biotech Q4 2009 in Silicon Valley

* 25 deals

* Total $133.5 million

* 5 deals < $ 1 million

* 1 pharma deal < $ 1 million

March-April 2010 23

Early-Stage Funding Gap

Source: Signals Mag; Alzheimer’s Drug Discovery Foundation www.alzdiscovery.org


March-April 2010 24

Sources of Capital

Discovery In vivo POC

Preclinical Phase I/II Phase III/NDA

Market

NIH

Military

State funds

Philanthropy

Angels

Venture capital

Private equity

Hedge funds

Bioinvestment Capital Food ChainCan ‘strategic capital’ fill the preclinical funding gap?

Strategic = interest in product, jobs, cost savings

Financial = interest in ROI


March-April 2010 25

Opportunity for Philanthropic CapitalHint: go where the money is…..


March-April 2010 26

TuesdayManaging Risk in Clinical Development: Focus on Pharma

• What is the FDA-driven development path?

• What is a decision tree?

• What is the decision tree for clinical development?

• What are key strategies to manage development risk?

• What’s a business model and why is that important?

• What does “venture fundable” mean?


March-April 2010 27

Gene“HIT”LibraryMedicinal ChemistryRationale Drug DesignCompound identification

Lead CandidateCell-based assays

In vitro - primary cultureIn vivo - non-mammalian

In vivo - knockoutIn vivo - clinically predictive

In vivo - not clinically predictive

Preclin

icals/IN

D

1: 10

,000 (.

01%

)

Phase

I - 5

0%

Phase

II - 5

0%

Phase

III/IV

- 40

%

FDA Appro

val

50%

Mar

kete

d

Safet

y

Pilot -

Effe

ctiv

enes

s

Effect

iven

ess

$$$

Clinical Development7.5 Years - $750 Million


Research$500M

Clinical Trials$250M

March-April 2010 28

Lead CandidateCell-based assays

In vitro - primary cultureIn vivo - non-mammalian

In vivo - knockoutIn vivo - clinically predictive?

IND application

Phase

1

Safet

yPhas

e 2

Pilot -

Effe

ctiv

enes

s

Phase

3-4

Effect

iven

ess

FDA

Approva

l

What risks, over what period of time?What kind of risks do your investors understand?


Sales

Science risk Clinical risk

Re

gul

ato

ry r

isk

Ma

rke

t ris

k

Financial risk

March-April 2010 29

Decision tree analysis: in-house discovery or license in from university?

Product #1 - CostsProb %

RevenuesRev in $ Millions Product #1

Research (500)$ 10% 500$ 50$ Preclinicals (10) 40% 250 100 Phase 1 (25) 50% 100 50 Phase 2 (50) Phase 3/4 (50) File IND - FDA Approval (10) Market Launch (55)

(700)$ 200$ Less, costs to develop (700)$

Decision tree analysis - do not develop (500)$

Scenario - license in from university

Product #2 - CostsProb %

RevenuesRev in $ Millions Product #2

ResearchPreclinicals (10)$ 10% 500$ 50$ Phase 1 (25)$ 40% 250 100 Phase 2 (50)$ 50% 100 50 Phase 3/4 (50)$ File IND - FDA Approval (10)$ Market Launch (55)$

(200)$ 200$ Less, costs to develop (200)$

Decision tree analysis - need > $200M revenues -$


March-April 2010 30

Decision Tree for Clinical Development

PhRMA; (Brealey & Myers)

Develop 20 compounds (invest -$500M)

Do not develop

.01%

Failure (50%)

Complete preclinicals (invest - $20M)

Restructure R&D (invest - $200M)

Divest division (sell + $50M)

Complete Phase I (invest - $25M)

Failure (50%)

50%

Failure (60%)

Failure (50%)

Complete Phase II (invest - $25M)

Complete Phase III/IV (invest - $50M)

40%

50%

50% FDA approval (launch - $50M for ramp-up)Don’t market (competition)


March-April 2010 31

Spread Portfolio RiskVenture Investors & Pharma Measure Success as “IRR”

• IRR = internal rate of return (complex calculation for both cash invested and time until investment pays off)

• ROI = return on investment (used interchangeably to express increase in value of original investment, adjusted by time)

• For pharma & VCs alike, “shots on goal” - home runs make up for strike-outs• For pharma – known mechanism of action; clinically relevant models

shortens development time & lowers risk


IRR YR1 YR2 YR3 YR4 YR5 YR6 YR7 YR8 YR9Product 1 (8)$ (8)$ (20)$ (25)$ -$ Product 2 (2)$ (8)$ (20)$ -$ Product 3 -12% (0)$ (20)$ (20)$ (25)$ (25)$ 25$ 25$ -$ 10$ Product 4 83% (0)$ (8)$ (8)$ (10)$ 25$ 50$ 75$ 75$ 75$ Product 5 68% (0)$ (8)$ (8)$ (10)$ 25$ 50$ 50$ 25$ -$ Totals 23% (10)$ (52)$ (76)$ (70)$ 25$ 125$ 150$ 100$ 85$

March-April 2010 32

What is a Business Model?Lemonade Stand Revenue Model, Price & Customers

• Are you selling the end product? Or intermediates?• What is the cost of the materials in your product? • What is the price per unit, less the cost of materials per unit?• How much $$ does it take to develop your product & launch it?• How much $$ does it take to keep your business going?

IncomeIncome-

ExpensePerCent Revenue

Revenue 100$ Lemons, sugar, H20 (10)$ Gross revenue 90$ Gross margin 90%Salaries - Research (10)$ -10%Salaries - Management (2)$ -2%Offices, plant & equip (3)$ -3%Sales, General & Admin (40)$ -40%

100$ (65)$ 35%NET REVENUES 35$ NET EARNINGS 22.8$ 35%


March-April 2010 33

What is a Business Model?Life Sciences Sector Overview

• Key risk is time & money until you get to product revenue• Trade-offs between make-it-yourself and license-it-out models• Best scenario – shortest time & money, biggest payoff• Venture capital now only rarely funding drug development


Type of Business ModelYears to Develop

Cost to Develop

Number of Customers

Cash or Royalties?

Years to $$ Market Potential

Drug Disovery - Genomics 2-3 20$ 50 Royalties 10 3 yrs to HITS; +7 yrs to drugTools cf HuMAb mouse 2-3 20$ 50 Royalties 7 3 yrs to IND; + 5 yrs to drugDrug delivery technology 2-3 15$ 50 Royalties 7 3 yrs to IND; +5 yrs to drugReformulate generics 2-3 15$ 1 - 100M Cash 5 3 yrs to IND; + 2 yrs to drugDevelop NMEs* Blockbuster 3-5 500$ 1 - 500M Cash 7 $ 1 BN+ revenue potential* Average new drug 3-5 500$ 1- 500M Cash 7 $50M - $500M revenue potential* Orphan Drug 2-3 20$ 1- 200,000 Cash 3 Acceleate IND - FDA approvalLicense in 20$ * New indication, old drug 0 20$ 1 - 100M Cash 3 Years for new clinical trials* Complete clinical trials 2-3 40$ 1 - 100M Cash 3 Years for new clinical trials* Already approved drug 0 -$ 1 - 100M Cash 1

March-April 2010 34

Genzyme

Period Ending: 12/31/2009 12/31/2008 12/31/2007

Total Revenue $4,515,525 $4,605,039 $3,813,519

Cost of Revenue $1,386,076 31% $1,148,562 25% $927,330 24%

Gross Profit $3,129,449 69% $3,456,477 75% $2,886,189 76%

Operating Expenses

Research and Development $865,257 19% $1,308,330 28% $737,685 19%

Sales, General and Admin. $1,494,180 33% $1,338,190 29% $1,187,184 31%

Non-Recurring Items $0 $2,036 $106,350

Other Operating Items $266,305 $226,442 $201,105

Operating Income $503,707 $581,479 $653,865

Add'l income/expense items $40,026 $46,059 $90,024

Earnings Before Interest and Tax

$543,733 $629,956 $747,821

Interest Expense $0 $4,418 $12,147

Earnings Before Tax $543,733 $625,538 $735,674

Income Tax $121,433 $204,457 $255,481

Minority Interest $0 $2,217 $3,932

Equity Earnings Unconsolidated Subsidiary

$0 $201 $0

Net Income-Cont. Operations

$422,300 $421,081 $480,193

Net Income $422,300 9% $421,081 9% $480,193 13%

Net Income Applicable to$422,300 $421,081 $480,193

Common Shareholders


March-April 2010 35

Affymax


Period Ending: 12/31/2009 12/31/2008 12/31/2007 #

Total Revenue $114,899 $82,851 $44,336 #

Gross Profit $114,899 100% $82,851 $44,336 100% #

Operating Expenses

Research and Development

$157,125 137% $137,492 $69,398 157% #

Sales, General and Admin.

$36,716 32% $34,090 $24,075 54% #

Operating Income ($78,942) ($88,731) ($49,137) #

Add'l income/expense items

$1,105 $3,112 $11,439 #


($77,837) ($85,619) ($37,698) #

Interest Expense $105 $609 $14 #

Earnings Before Tax ($77,942) ($86,228) ($37,712) #

Income Tax ($1,411) $282 $5,357 #


($76,531) ($86,510) ($43,069) #

Net Income ($76,531) -67% ($86,510) -104% ($43,069) -97% #

Adjustments to Net Income

$0 $0 $0 #

Net Income Applicable to($76,531) ($86,510) ($43,069) #

Common Shareholders

March-April 2010 36

Medtronic


Period Ending: 4/24/2009 4/25/2008 4/27/2007

Total Revenue $14,599,000 $13,515,000 $12,299,000

Cost of Revenue $3,518,000 $3,446,000 $3,168,000

Gross Profit $11,081,000 76% $10,069,000 75% $9,131,000 74%

Operating Expenses


$1,355,000 9% $1,275,000 9% $1,239,000 10%

Sales, General and Admin. $5,152,000 35% $5,143,000 38% $4,153,000 34%

Non-Recurring Items $1,555,000 $875,000 $166,000

Operating Income $3,019,000 21% $2,776,000 21% $3,573,000 29%


($208,000) $109,000 $170,000


$2,811,000 $2,885,000 $3,743,000

Interest Expense $217,000 $0 $228,000

Earnings Before Tax $2,594,000 $2,885,000 $3,515,000

Income Tax $425,000 $654,000 $713,000


$2,169,000 $2,231,000 $2,802,000

Net Income $2,169,000 15% $2,231,000 17% $2,802,000 23%

Net Income Applicable to$2,169,000 $2,231,000 $2,802,000

Common Shareholders

March-April 2010 37

Qiagen N.V.


Period Ending: 12/31/2009 12/31/2008 12/31/2007

Total Revenue $1,009,825 $892,975 $649,774

Cost of Revenue $342,752 $293,285 $216,227

Gross Profit $667,073 66% $599,690 67% $433,547 67%

Operating Expenses


$107,900 11% $97,331 11% $64,935 10%

Sales, General and Admin. $360,747 36% $341,344 38% $236,622 36%

Non-Recurring Items $0 $985 $48,857

Other Operating Items $18,221 $14,368 $0

Operating Income $180,205 $145,662 $83,133


$21,766 $11,151 $24,048


$201,971 $156,813 $107,181

Interest Expense $29,641 $37,527 $31,455

Earnings Before Tax $172,330 $119,286 $75,726

Income Tax $34,563 $29,762 $25,555

Minority Interest $0 ($491) ($49)


$137,767 $89,033 $50,122

Net Income $137,767 14% $89,033 10% $50,122 8%

Net Income Applicable to$137,767 $89,033 $50,122

Common Shareholders

March-April 2010 38

What is ‘Venture Fundable’?Venture Investors Seek Least Risk, Highest Upside

• Start-ups usually begin after discovery completed in universities• So VCs focus on the $250M cost of development• Big pharma addresses large, chronic conditions• VCs focus on smaller markets, clear clinical endpoints


Number of Patients YR1 YR2 YR3 YR4 YR5

Preclinicals (8.0)$ Prepare & file IND (2.0)$ Phase 1 100 (25.0)$ Phase 2 500 (50.0)$ Phase 3/4 2,000 (100.0)$ File IND - FDA Approval (10.0)$ Market Launch (55.0)$ Totals (10.0)$ (25.0)$ (50.0)$ (100.0)$ (65.0)$ Cumulative (35.0)$ (85.0)$ (185.0)$ (250.0)$

March-April 2010 39

Wednesday1 – Valuations

2 - Sources of strategic capital: defense research grants

• What is a valuation? for companies? for products?

• Why is this important to founders?

• How are valuations determined in the private (venture) market and in the public markets?

• To what quantitative factors are valuation models sensitive?

• Founders make money when….

• Founders lose money when….

• Wounded warriors & veterans – unmet clinical need & funding gap


March-April 2010 40

Valuation Determined by (1) Value of Latest Round of Financing & (2) Market Conditions

Current New Financing


• If 25% is worth $1 million, then 100% is worth $4 million• ($1 divided by 25% = 4)

25% valued at $1 million

March-April 2010 41

Pricing RoundsVenture Valuations Affect Founders’ Ownership (“Dilution”)

• Begins with pre-money valuation• Pre-money valuation driven by

• (1) absolute amount of cash needed and • (2) target post-money valuation

• New price-per-share calculated as (valuation/new $$ required = price/sh)• New price/sh calculate as (# new shs issued = % owned) = “dilution”


Shares Outstanding 3,000,000 Pre-Money Price Per Share 0.33$ Pre-Money Valuation (No. Shs X Price) 1,000,000$ New $$ Required 1,000,000$ New Price Per Share 0.75$

No. New Shares Issued 1,333,333 4,333,333 New Shs % Total 31%New Valuation $ 3,250,000$

March-April 2010 42

ValuationsMarket Drives Pre-Money Valuations

• Model sensitive to time to exit (acquisition, IPO, product launch)• Model sensitive to cash required for each milestone• Pre-money valuation is whatever investors believe & insist on• Pre-money valuation + funds in = post-money valuation• Next round of investors want a “step up” (assumes you meet your

milestones & your technology is now worth more)


Low Valuation ScenarioTotal $

InA Pre 0.3$ A New $ 0.5$ 0.5$ A Post 0.8$ Step-up X 2B Pre 1.7$ B New $ 5.0$ 5.0$ B Post 6.7$ Step-up X 3C Pre 20.0$ C New $ 20.0$ 20.0$ C Post 40.0$ Step-up X 2EXIT 80.0$ 25.5$

March-April 2010 43

ValuationsExit Assumption Drives Pre- & Step-Up Valuations

But “Liquidity Preference” Dominates Cash Paid At Exit


New funds

Step-up (x) Pre = Post = New funds

Step-up (x) Pre = Post =

Series A $ (5) 2 $ 5 $ 15 Series A $ (5) 1 $ 1 $ 6 Series B (10) 3 $ 10 $ 40 Series B (10) 1 $ 5 $ 15 Series C (40) 3 $ 20 $ 140 Series C (40) 2 $ 10 $ 90 Mezzanine (60) 2 $ 40 $ 160 Mezzanine (60) 2 $ 20 $ 140 Exit $ 275 $ 275 $ 275 Exit $ 275 $ 275 $ 275 Project ROI 61% Project ROI 61% Total invested $ (115) 10 Total invested $ (115) 6 $$ at Exit % Owned ROI $$ at Exit % Owned ROISeries A $ 8 3% 13% Series A $ 5 2% -1%Series B 19 7% 24% Series B 8 3% -6%Series C 28 10% -17% Series C 14 5% -41%Mezzanine $ 165 60% 175% Mezzanine $ 165 60% 175%

March-April 2010 44

Founders Make Money When…Valuations Are High & Keep Ratcheting Up to Exit


Investor Class A A%A

Value B B%B

Value C C%C

ValueSale

or IPO IPO%Exit

ValuePre-Money 2$ 8$ 36$ 104$ New Funds 2$ 4$ 16$ 15$ 12.6% 15$ Post-Money 4$ 2.0 12$ 3.0 52$ 2.0 119$ Total $ in Deal 4$ 8$ 24$ 39$

VC 1 1$ 25% 1.0$ 12.5% 1.5$ 4.2% 2.2$ 2.6% 3.1$ VC 2 1$ 25% 1.0$ 12.5% 1.5$ 4.2% 2.2$ 2.6% 3.1$ VC 3 2$ 25% 3.0$ 8.3% 4.3$ 5.1% 6.1$ VC 4 2$ 25% 3.0$ 8.3% 4.3$ 5.1% 6.1$ VC 5 8$ 33% 17.3$ 20.5% 24.4$ VC 6 8$ 33% 17.3$ 20.5% 24.4$ Public investors 15$ 38.5% 45.8$ Founders 2$ 50% 2$ 25% 8.3% 47.7$ 5.1% 6.1$ Total Funds In 2.0$ 6.0$ 22.0$ 37.0$ Total Ownership 100% 100% 100% 100.0%

March-April 2010 45

Founders Lose Money When…Valuations Remain Low, Exit Is Low…

….and Later-Stage Investors Have Liquidity Preference


Investor Class A A%A

Value B B%B

Value C C%C

ValueSale

or IPO Sale %Exit

ValuePre-Money 2$ 8$ 54$ -$ New Funds 2$ 10$ 40$ 10$ 100.0% 10$ Post-Money 4$ 2.0 18$ 3.0 94$ 2.0 10$ Total $ in Deal 4$ 14$ 54$ 69$

VC 1 1$ 25% 1.0$ 7.1% 1.3$ 1.9% 1.7$ 1.4% 0.1$ VC 2 1$ 25% 1.0$ 7.1% 1.3$ 1.9% 1.7$ 1.4% 0.1$ VC 3 5$ 36% 6.4$ 9.3% 8.7$ 7.2% 0.7$ VC 4 5$ 36% 6.4$ 9.3% 8.7$ 7.2% 0.7$ VC 5 20$ 37% 34.8$ 29.0% 2.9$ VC 6 20$ 37% 34.8$ 29.0% 2.9$ Public investors 15$ 21.7% 2.2$ Founders 2$ 50% 2$ 14% 3.7% 90.5$ 2.9% 0.3$ Total Funds In 2.0$ 12.0$ 52.0$ 62.0$ Total Ownership 100% 100% 100% 100.0%

March-April 2010 46

What’s a Valuation ‘Comparable’?Similar business model, similar products


• Valuations of venture-backed companies• Subscription-services

• (1) Venture One• (2) The Venture Capital Analyst• (3) your lawyers (without naming companies….”we’re seeing deals like

this right now at valuations of etc”)• (4) your friends

• Small cap public companies• Valuations may be affected by major investors’ portfolio concerns, may be

unrelated to company’s future – or inside information? (PTIE)• Valuations may be affected by global market conditions (MAKO)

• Similar class of drugs progressing through clinical trials• Pfizer torcetrapib failure

March-April 2010 47

Product Valuation: ‘Expected Future Earnings’ Public Company Valuations Fluctuate with Price

• For public companies, investors buy on future expected value of earnings• Torcetrapib failed in Phase 3

• Pfizer spent $850M to develop the drug to that point• Conducted trials in 20,000 patients

• On 4 December 2006, stock price dropped from $27.88 per share to $23.00 per share (x 7.2 billion shares, from $201 BN to $166 BN total company value)

• Means investors removed value of future earnings from stock price


March-April 2010 48

What happened on October 7?Venture investors Montreux & Skyline do $60M PIPE on

October 29, 2008 at $6.25 per share*


Montreux bid $6 per share in 2006 in a venture round before MAKO went public, but were outbid by hedge funds. MAKO later went public at $10 per share, has received FDA approval and started marketing its products. Montreux invests later in the company’s development with minimum science, clinical and market risk in a PIPE (Private Investment in Public Entity)…but what is VC doing investing in public companies….?

March-April 2010 49

Change the Math for Early-Stage Investment Strategies to Accelerate Exit & Minimize Dilution


Shorten Time to Market Minimize VC Equity

• License in later-stage compound• Acquire later-stage product• Re-engineer generic compound• Reformulate marketed compound

• NIH & NCI• Venture philanthropies• DARPA• Partner with large pharma or medtech

• Pursue product with shorter test period• Pursue disease with smaller patient

size for smaller clinical trial size

• State funds: CT Innovations, Pennsylvania• Country funds: Scotland’s Co-Investment

Fund; France’s Premier Jour @ Genopole

• Partner with large pharma or medtech University funds• Stanford’s Birdseed Fund• Elm Street Ventures, Yale

March-April 2010 50

Sources of Funding for Early-Stage and Translational Medical Projects

• U.S. Army Medical Research & Materiel Command (USAMRMC)• Small business $524M (FY08)• Telecommunication and Advanced Research Center (TATRC) www.tatrc.org • Broad Agency Announcement (BAA)

• Congressionally Directed Medical Research Programs (CDMRP)• 1992 – 2009 ~ $4.8BN in programs www.cdmrp.mil • Limited funds for military medical research - $300M for TBI & PTSD (2007 only)• FY09 - $374M total• Defense Related Medical Research Program - $235M ($92M 2008)

• Department of Defense (DOD)• Small Business Innovation Research (SBIR)• Defense Advanced Research Projects Agency (DARPA) www.darpa.mil • Biomedical Advanced Research & Development Authority (BARDA) www.hhs.gov • Defense Threat Reduction Agency (DTRA) www.dtra.mil

• Armed Forces Institute of Regenerative Medicine (AFIRM)• Two consortia fully funded at $300M • AFIRM 2? - “fully intend to renew”


March-April 2010 51

Where Our Wounded Warriors and Veterans Are Cared For

• Combat casualties – advance medical teams assigned to combat units• “Far forward” mobile field hospital• Aeromedical staging facility (aircraft adapted to mobile intensive care unit)

• Landstuhl Regional Medical Center• Contingency Aeromedical Staging Facility (100,000 patients as of Nov 2009)• Ramstein Air Base, near Kaiserslautern, Germany• Other Mobile ASFs (aeromedical staging facilities)

• Rehabilitation• Walter Reed Medical Center (Washington DC)• William Beaumont Army Medical Centers (near El Paso, TX)

• Veterans Administration (1)

• ~ 25 million veterans of all conflicts (2008)• 5 million received care from the VA (2008)• 1 million claims processed, pension & benefits to 3.8 million veterans (2009)• Estimated total spend $93.4BN (2009)• 26,000 employees• 54 hospitals & 171 medical centers• > 350 community clinics, 126 nursing care units, 35 domiciliaries• 4,000 housing partners to reduce homelessness (PROGRESS !)


(1) http://www1.va.gov/opa/fact/vafacts.asp

March-April 2010 52

Conflict Neurological condition % total served

n = Treatable?

Vietnam War (1965-1973) Exposure to Agent Orange• Parkinson’s disease (PD)

• Prostate cancer, B cell lymphoma• Coronary artery disease

185,000

no

yes

yes

Gulf War (1990-1991) Gulf War Illness 30% 210,000 no

Gulf War ALS 100 no

OIF/OEF (2003 – Pain 50% 950,000 ~ 50%

Pain – treated with opiates 45% 430,000 ~ 50%

TBI (traumatic brain injury) 360,000 no

Vision impairment (% TBI) 75% 270,000 no

Post traumatic stress disorder 35% 665,000 no

Hearing impairment 58,000 yes

All conflicts Spinal cord injury (% total US) 20% 30,000 no

Many Veterans’ Injuries and Conditions are NeurologicalOnly treatments are care & therapy


Sources: Golomb BA (2008) PNAS; DVBIC; CDC; USA Today; VA;

Institute of Medicine: “Veterans and Agent Orange: Update 2008”

March-April 2010 53

What’s Good for the Taxpayer Isn’t Always The Best Incentive For Private Sector Investment


March-April 2010 54

ThursdayMore on Sources of Capital: Pharma As Source of Capital

• Why biotech does deals with pharma

• VCs in public markets & private equity

• Why pharma sets up venture capital funds

• Angel investors aren’t always (angelic)

• M&A (mergers & acquisitions) as an exit strategy

• Closing comments….are we at a point of inflection in the industry?


March-April 2010 55

Why Biotech Does AlliancesAccess to Capital & Validation

• Discovery companies lack core competency in• Biological validation• Clinical development

• Biotech lacks core competency in• Clinical development• CMC, GMP & manufacturing scale-up• Navigating FDA approval

• Venture investors place enormous value on industry deals• Validate technology• Proxy for product value ~ proxy for financing valuation• Capital that VCs don’t put at risk themselves


March-April 2010 56

Cashflow model for “Big Jersey Pharma & PGx” caseWhat assumptions are you making for each deal point?

Revenues - disease target #5Revenues - disease target #4Revenues - disease target #3Revenues - disease target #2Revenues - disease target #1

Market launchFDA approvalFile NDAPhase 3

Phase 2b What year were patents filed?Phase 2a When could they first issue?Phase 1 In what countries will they be valid?

Prepare INDPreclinical studies - toxPreclinical studies - modelLead candidate development

DATE 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

YEAR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Cash invested by BJP to develop - - - - - - - - - - Deal milestones paid by BJP to PGXAggregate revenues earned by BJP - - - - - - - - - - - - Royalties paid to PGX (on net 35%) 2% - - - - - - - - - - - Net period payment to PGX - - - - - - - - - - - - - - - - - - - - ROI BJPROI PGX


March-April 2010 57

Pharma As Source of CapitalBiotech-Pharma Deals: Credibility, Cash & Expertise


March-April 2010 58

Valuation Comparables“Must-Have” Source: Recombinant Capital


March-April 2010 59

Case Study: Pain (PTIE) & King (KG)How the Market Reacted to FDA News on Remoxy

PTIE – 1 year as of 05/23/2009 KG – 1 year as of 05/23/2009


March-April 2010 60

Why Pharma Does Venture CapitalFills the Funding Gap & Strategic Focus


• Amgen, Genentech, Pfizer all have corporate investment funds located in, and active in investing in California.

• EMD Serono invests an early-stage fund alongside a strategic fund allied with the MS Society, “Fast Forward” – blends corporate & philanthropic strategies

• The Pfizer Incubator www.thepfizerincubator.com combines funding with access to laboratory facilities in San Diego, with another facility mentioned for the Bay Area and one for Philadelphia. The funding commitment is $50 million.

• Since 2005, Takeda has operated a well-respected venture fund located in Palo Alto that invests from the Takeda R&D budget.

• Merck does not have a fund per se, but has a licensing group that is active in the Bay Area. • Baxter (Chicago) is rumored to be considering a corporate venturing fund.• Lilly Ventures operates out of Indianapolis.• Roche Venture Fund (Basel) has invested in 25 companies in ten countries.• Biogen Idec launched its venture fund in Boston in 2004 with a commitment of $100 million.• With a commitment of $2 billion, Novartis Venture Fund (Cambridge, MA and Basel)

http://www.venturefund.novartis.com/ is one of the largest corporate venture investors, with investments in over 50 companies as of 2008.

March-April 2010 61

Venture Capital vs Private EquityCapital market conditions are blurring boundaries

• Venture capital buys stock – key bet is increased value of equity• Fundamental assumption – value of equity mirrors value of underlying asset• But value of equity can be affected by

• (1) capital market conditions, including global economic crises• (2) exit to make private shares liquid is Initial Public Offering (IPO)• (3) performance of similar biotech companies at & after IPO

• Venture train wreck scenario – increased value in asset, as milestones met & risks decline, not reflected in stock price

• Private equity buys assets – key bet is good management increases value• (1) value of deals *relatively independent* of capital market conditions• (2) exit most often sale to another company (“trade sale”)• (3) exit can be IPO


March-April 2010 62

“While investors largely steered clear of biotech and specialty pharma IPOs in 2009, they enthusiastically embraced stock offerings by already-public companies. Over the course of the year, there were 57 underwritten follow-on stock offerings, which together raised more than $5.9 billion in new funds. That’s far superior to 2008’s totals (12 follow-on offerings raised about $1.2 billion) and even better than 2007’s totals (35 follow-on offerings raised nearly $3.4 billion in new funds).” – www.recap.com


Why Venture Capital Invests in Publicly-Traded Companies

March-April 2010 63

What happened to PTIE on March 2?Largest investor Eastbourne sells 1M (of 11M) shares


$4,349 (7.93%) (88,530) 1,028,069 12/31/2008 DIMENSIONAL FUND ADV...

$5,130 126.03% 676,190 1,212,731 12/31/2008 VANGUARD GROUP INC

$6,382 11.14% 151,200 1,508,787 12/31/2008 RENAISSANCE TECHNOLO...

$9,146 (0.90%) (19,604) 2,162,241 12/31/2008 BARCLAYS GLOBAL INVE...

$46,851 0.00% 0 11,075,874 12/31/2008 EASTBOURNE CAPITAL M...

Value($1000)

% Change(Shares)

Change(Shares)

Shares Held DateOwner NameSelect a name below for more information.

$4,349 (7.93%) (88,530) 1,028,069 12/31/2008 DIMENSIONAL FUND ADV...

$5,130 126.03% 676,190 1,212,731 12/31/2008 VANGUARD GROUP INC

$6,382 11.14% 151,200 1,508,787 12/31/2008 RENAISSANCE TECHNOLO...

$9,146 (0.90%) (19,604) 2,162,241 12/31/2008 BARCLAYS GLOBAL INVE...

$46,851 0.00% 0 11,075,874 12/31/2008 EASTBOURNE CAPITAL M...

Value($1000)

% Change(Shares)

Change(Shares)

Shares Held DateOwner NameSelect a name below for more information.

March-April 2010 64

Angel Investors Aren’t Always (Angelic)The Good, The Bad & The Ugly

• Good angel investors• Typically invest $50K - $100K• Anticipate that VCs will follow on – meaning, their terms anticipate VC terms• Understand they will be diluted• Have “deep pockets” – meaning, they can keep putting cash in

• Bad angel investors• Demand terms that VCs will choke on later• Don’t understand your technology, your financing targets & waste HOURS of

time asking for explanations• Leave you hanging when you need more capital

• Ugly angel investors• Sure you want to know……?

For more reading on angel investors: http://www.nature.com/bioent/2004/041201/full/bioent839.htmlhttp://wistechnology.com/article.php?id=4340 http://wsbe2.unh.edu/center-venture-research


March-April 2010 65

Opportunities for ExitIPO Market Slammed Shut in 2008 – But Not M&A


0

5

10

15

20

25

30

2007IPOs

2008IPOs

2008M&A -

Mx

2008M&A -

Dx

2008M&A -

Rx

Total Raised Average Deals Billion$ Deals

March-April 2010 66

Mergers & Acquisitions 2008 Investors’ Only Exit Opportunity in 2008

Transaction Premium

Ann. Date Target Acquiror Industry Value ($mm) 1 Day Prior 1 Week Prior 1 Month Prior

4/7/08 Alcon Inc. Novartis AG Medical Devices 38,579.8 (3.5%) 0.7% 6.1%

7/17/08 Barr Pharmaceuticals Inc. Teva Pharmaceutical Industries Pharmaceuticals 8,920.4 42.0% 50.9% 60.9%

2/1/08 Millennium Pharmaceuticals Inc. Takeda Pharmaceutical Co. Ltd. Biotechnology 7,798.0 64.8% 70.7% 54.4%

9/10/08 Imclone Systems Inc. Eli Lilly & Co. Biotechnology 6,198.0 10.0% 8.6% 9.2%

6/11/08 Applied Biosystems Inc. Invitrogen Diagnostics and Tools 6,158.1 12.9% 7.6% 9.3%

7/6/08 APP Pharmaceuticals, Inc. Fresenius Kabi AG Pharmaceuticals 5,644.1 29.1% 43.2% 64.6%

6/11/08 Ranbaxy Laboratories Daiichi Sankyo Company, Limited Pharmaceuticals 2,243.9 31.4% 42.0% 49.1%

4/7/08 LifeCell Corp. Kinetic Concepts Inc. Medical Devices 1,716.1 18.2% 21.3% 25.8%

6/14/08 Ranbaxy Laboratories Ltd. Daiichi Sankyo Company, Limited Pharmaceuticals 1,588.3 30.0% 45.4% 49.0%

7/31/08 Alpharma, Inc. King Pharmaceuticals Inc. Pharmaceuticals 1,273.5 60.8% 50.0% 61.0%

2/13/08 Toyama Chemical Co. Ltd. FUJIFILM Holdings Corporation Pharmaceuticals 1,273.0 39.5% 31.2% 14.6%

9/1/08 Sciele Pharma Inc. Shionogi & Co. Ltd. Pharmaceuticals 1,262.7 60.9% 64.3% 63.3%

5/22/08 Chugai Pharmaceutical Co. Ltd. Roche Holding AG Pharmaceuticals 913.8 11.6% 13.0% 39.1%

7/23/08 Vital Signs Inc. General Electric Co. Medical Devices 882.9 28.6% 26.3% 32.1%

5/30/08 Leiner Health Products Inc. NBTY, Inc. Pharmaceuticals 794.0 - - -

4/11/08 Sirtris Pharmaceuticals, Inc. SmithKline Beecham Corporation Biotechnology 619.8 68.0% 73.2% 116.4%

7/15/08 Lev Pharmaceuticals, Inc. ViroPharma Inc. Biotechnology 576.1 50.2% 45.5% 51.8% 7/21/08 Symbion Pharmacy & Consumer Businesses Sanofi-Aventis Australia Pty Ltd. Pharmaceuticals 545.8 - - -

6/8/08 Third Wave Technologies Inc. Hologic Inc. Diagnostics and Tools 538.4 7.1% 6.0% 32.7%

6/1/08 Laboratório Americano de Farmacoterapia S.A. Hypermarcas SA Pharmaceuticals 536.6 - - -

3/4/08 Enturia, Inc. Cardinal Health, Inc. Pharmaceuticals 490.0 - - -

7/9/08 Speedel Holding AG Novartis AG Biotechnology 476.3 95.1% 107.5% 64.6%

7/25/08 Acambis plc Sanofi Pasteur SA Biotechnology 466.3 65.2% 71.2% 61.0%

6/4/08 Protez Pharmaceuticals, Inc. Novartis AG Pharmaceuticals 400.0 - - -

1/22/08 Cogenesys, Inc. Teva Pharmaceutical Industries Ltd. Pharmaceuticals 400.0 - - -

2/6/08 Alpharma AS 3i Group plc Pharmaceuticals 395.0 - - -

6/4/08 Tercica Inc. Ipsen S.A. Biotechnology 385.4 111.3% 114.8% 82.9%

7/10/08 Speedel Holding AG Novartis AG Biotechnology 381.8 93.7% 107.0% 67.9%

3/28/08 Del Pharmaceuticals, Inc. Church & Dwight Co. Inc. Pharmaceuticals 380.0 - - -

11/23/08 Omrix Biopharmaceuticals, Inc. Johnson & Johnson Biotechnology 352.2 18.2% 37.5% 69.5%

2/20/08 Encysive Pharmaceuticals Inc. Pfizer Inc. Biotechnology 346.8 117.6% 200.5% 245.6%

3/31/08 Bentley Pharmaceuticals Inc. Teva Pharmaceutical Industries Ltd. Pharmaceuticals 339.2 7.9% 7.2% (0.1%)

4/25/08 Innogenetics NV Solvay Pharmaceuticals S.A. Biotechnology 326.1 73.8% 62.5% 63.3%

9/18/08 Protherics plc BTG plc Biotechnology 321.1 41.8% 25.1% 0.8%

2/25/08 CollaGenex Pharmaceuticals Inc. Galderma Laboratories, L.P. Pharmaceuticals 320.8 31.4% 31.4% 41.3%

8/25/08 Optimum Nutrition, Inc. Glanbia plc Pharmaceuticals 315.0 - - -8/4/08 Valeant (Europe) Meda AB Pharmaceuticals 300.1 - - -

6/16/08 LipoSonix, Inc. Medicis Pharmaceutical Corp. Medical Devices 300.0 - - -

Average 45.1% 50.5% 53.2%


March-April 2010 67

What Happened to 2009-2010 IPO Debuts?(100% = IPO share price)


• Omeros Thera (OMER) – Ph 3

• Cumberland Pharma (CPIX) – marketed

• Talecris Biothera (TLCR - Bayer spin-out) raised $550M – marketed

• China Nuokang Bio-Pharma (NKBP)

• CorMedix (25 Mar 2010 - CRMD/U) raised $12.5M – “re-purposed” clinical

• AVEO Pharma (11 Mar 2010 - AVEO) raised $81M – completed Ph 2

• Anthera Pharma (1 Mar 2010 -ANTH) raised $42M – entering Ph 3

• Ironwood Pharma (2 Feb 2010)– IRWD) raised $216M – Ph 3

March-April 2010 68

Omeros current market cap: $127MIPO Valuation: 6.82 million shs @ $10/sh: $250M

Company started in 1994: should they have exited via M&A instead?


March-April 2010 69

Why I Think 2010 Is A “Point of Inflection”


• IPO window re-opening – but for mature companies

• FDA - REMS

• Congress - biosimilars

• Sources of capital & financing structures

• Personalized medicine - Medco announcement to reimburse genetic tests for Rx

• BioCON speaks at JPMorgan

• “Faster Cures”

• www.essentialmedicine.org

March-April 2010 70

The Unregulated Financial Market Changes The Game for Everyone


March-April 2010 71

Yale’s Contributions to Medicine


March-April 2010 72

Constance McKeeConstance McKee is co-founder, President & CEO of Manzanita Pharmaceuticals, Inc (2007-present). Manzanita is the re-start of Asilomar Pharmaceuticals, Inc., an early-stage biotechnology company which filed for bankruptcy in June 2006. She was a Co-Principal Investigator under the DARPA grant that kickstarted Manzanita’s precursor . Other current activities are:

With Dr. Jay A. Levy of UCSF, she is a co-founder of California Antiviral Foundation, a start-up nonprofit 501(c)3 organization to develop new therapies based on the CAF innate immune response in HIV/AIDS patients. www.californiaantiviralfoundation.org

She is a part-time consultant to The Clearity Foundation, www.clearityfoundation.org, which provides molecular profiling to patients with ovarian cancer. Constance volunteers at the Veterans Administration in Palo Alto in the neurology research unit (Building 7).

From 1990-1994, Constance was Chief Executive of Cambridge Quantum Fund I, a seed venture fund investing in technologies from Cambridge University (Cambridge, UK). From 1994-1995 she was co-founder and Chief Executive of SynGenix Limited, a portfolio investment of Cambridge Quantum Fund. From 1996-2001 she worked in the corporate venture capital group and in General Counsel’s office at Philips Semiconductors.

She was a co-founder in 2001 of BioE2E., Inc., a non-profit organization that presents programs to bioentrepreneurs in the San Francisco Bay Area. She served as Board member from 2001-2009, and served as President and Treasurer. From 2007-2008 she served as Co-Executive Director of Americans for Cures Foundation, a 501(c)3 organization dedicated to supporting advocates for stem cell research. www.americansforcures.org

In 1986-1987 she was a recipient of a Bosch Fellowship (Bosch III) which supported internships in corporate finance in Germany. She holds an MBA from Yale University School of Management,. While at Yale, she also studied voice with Dr. Richard Lalli. She holds an MM from San Francisco Conservatory of Music and BA with distinction from Stanford University.


March-April 2010 73

Acknowledgments & Sources - 1• Matt Plunkett & Rob Weir, Oppenheimer & Co (Menlo Park) - M&A statistics• Howard Palefsky, Montreux Equity Partners (Menlo Park) – MAKO case study

• Mark Edwards, Recombinant Capital www.recap.com & online publication “Signals” www.signalsmag.com • Statistics on deals & deal trends• Article on venture philanthropies

• Cynthia Robbins-Roth – books & columns• From Alchemy to IPO• Alternative Careers in Science• BioWorld Today www.bioworld.com

• www.clinicaltrials.gov • NIH database for clinical trials, current and closed• Reference for trial design, numbers of patients

• www.nasdaq.com • Pricing & valuations for many biotechnology, tools & diagnostics companies


March-April 2010 74

Acknowledgments & Sources - 2• Online reading

• Fierce Biotech• GEN (Genetic Engineering News)• BioBrief, RPM Report

• In Vivo publications• Roger Longman is one of industry’s longest-serving & most insightful analysts

• Patient advocacy organizations• Statistics on patient populations• Current news on experimental therapies, clinical trials

• NIH - information on diseases & disorders; SBIR & other grants programs

• Merck Online www.merck.com/mmpe/index.html • Current information on diseases & disorders• Standard-of-care drug therapy, mechanism of action of drugs

• SEC filings www.sec.gov • Company websites for annual reports (10-Q), quarterly reports (10-K)• Information on failed trials is usually buried in quarterly or interim (8-K) reports


March-April 2010 75

Additional Slides


March-April 2010 76

Term SheetsAn Outline of Key Terms

When to use? • To focus minds, accelerate decision-making process• To announce publicly, to drive up value or share price• Present to Boards to approve “definitive documentation”

Contents • Key terms of deal• Scope, territory, grant of rights• Payments

Responsibilities • What’s involved in due diligence, and who pays for it• Authorizes costs of deal (legal, patent, industry consultants)• Typically each side pays for costs, included failed deals• May require confidentiality

Letter of Intent • Alternative approach • Can be binding as to time, payment, exclusivity• Useful to buy time without losing exclusivity• Payments usually credited against deal payments• Can have option or license as exhibit


March-April 2010 77

Due DiligenceConfirm Ownership, Data & Guesses

IP Ownership • Does company own its own patents?• Were patents licensed in properly? Fees up to date?• Did employees assign rights to IP they invent?• Did advisors & consultants assign rights to IP they invent?• Do Board members assign rights to IP they invent?

Data • “Rights in data” when data obtained with CRO or university• Restrictions on publication?• Already published so cannot be protected with patents?• Scientifically rigorous or b******t? Control data?• Full disclosure of toxicity (example – Rinat Neuroscience)

Operating compliance

• Paid taxes?• Filed hazmat paperwork with local authorities?

Governance • Who makes decisions? • Are they dysfunctional?

Value • Deal comparables for deal points• Guesstimates for future market value


March-April 2010 78

Deal StructuresOption agreement

• May be used when licensing in a university technology (can biotech raise $$ to develop)• May be used in cases of clinical uncertainty (BioMarin – La Jolla Pharmaceuticals case study)

Non-exclusiveExclusive

• Usually enabling IP integrated into multiple products• Most valuable since effectively confers monopoly

Development or collaborative agreement

• Describes which party/-ies carry out development• Who pays for, who manages patent prosecution• Who has responsibility for clinical trials• Who has responsibility for preparing NDA with FDA• Payments may be milestones &/or cover development costs

Co-marketing agreement

• Allows licensor to keep $$ from product revenues• Usually appears as part of ‘strategic alliance’

Acquisition • Asset purchase or stock purchase• Stock purchase assumes residual-hidden liabilities• Rights to key technologies may be lost in licenses


March-April 2010 79

Valuation ComparablesDevelop Internal Model – Compare To External Sources

Process • Develop internal model based on best & rigorous practices• Compare with multiple external sources• Reality check #1: example - Philips investment deal• Reality check #2: can you afford this deal?• Is Board experienced in valuations & disappointments?

Methods • Deal comparables• Discounted Cash Flow (DCF), “replacement (buy it new again)”

Sources • Recombinant Capital DeLoitte (subscription)• IN VIVO (subscription), Fierce Biotech, Genetic Engineering News• Your law firm (larger firms keep internal databases of deal terms)• Merchant & investment banks, analysts• Competitors’ public disclosures• SEC filings: Pain-King transaction

Discipline • Most deals fail - have the courage to walk away from bad deals• Remember Harvard Business School option: “Do nothing”• Does your management understand likelihood of failure?


March-April 2010 80

Licenses – Grant of RightsAdaptable to parties’ needs & positions

AssignmentLicense

• Outright transfer (sale) of rights• Grant only of specific rights, specific terms, specific scope

ExclusiveNonexclusive

• Grants to only one licensee (more valuable ~ monopoly)• Grants to multiple parties (strategic or enabling IP)

Scope • Describes only technology to be licensed • Can limit disease targets ie auto-immune only• Territory – specific geographies ie US or India only or WW• Restricted to geographies where IP is enforceable

Payments • Upfront and/or milestone payments• Payments that support developed ie $250K/yr for x FTEs• Fully-paid up (no royalties) or royalties (% net profit)

Revocable?Sub-licensable?Patents? Publication?Termination

• Or irrevocable, means cannot be changed or terminated• Can be sublicensed to 3rd parties, usually non-exclusives• Who’s responsible and who pays for them?• Who’s responsible for publishing & protecting confidentiality?• Who owns the data when things crash? When patents expire?


March-April 2010 81

Market – Not Progress on Milestones - Drives Pre-Money Valuations

• Model sensitive to time to exit (acquisition, IPO, product launch)• Model sensitive to cash required for each milestone• Pre-money valuation is whatever investors believe & insist on• Pre-money valuation + funds in = post-money valuation• Next investors want a “step up” (your technology is now worth more)

Low Valuation ScenarioTotal $

InA Pre 0.3$ A New $ 0.5$ 0.5$ A Post 0.8$ Step-up X 2B Pre 1.7$ B New $ 5.0$ 5.0$ B Post 6.7$ Step-up X 3C Pre 20.0$ C New $ 20.0$ 20.0$ C Post 40.0$ Step-up X 2EXIT 80.0$ 25.5$


March-April 2010 82

Valuation Based on Estimates of Future RevenuesExubera®: analysts predicted $1 billion drug

• Exubera ™ = inhaled insulin for diabetes (control blood sugar)• Analysts predicted this would be a $1 billion drug• Key assumptions of future revenues

• Offered significant clinical benefit vs standard-of-care (injected insulin)• Offered lower risk than standard-of-care • Patient-friendly – diabetics have strong feelings about injecting insulin• Clinical trials data appeared robust• Device was easy-to-use for patients• Pricing was reasonable, 3rd-party payors would reimburse • Pfizer as marketing partner would market very effectively

• Competitors developed competitive products, therefore must be real• Lilly• Novo Nordisk• sanofi-aventis


March-April 2010 83

Biotech v PharmaDifferent risks reflected in distinct stock performances


March-April 2010 84

CDMRP Funding History (1992 – 2009)


Research Topic Areas – DRMRP (2008)

• blood safety and blood products

• final development of medical devices for use in theater (including portable suction machines and EKGs for theater hospitals)

• injury prevention

• TBI and psychological health (including PTSD)

• trauma treatment and rehabilitation (including face, visual/ocular and nerve damage, dental, and auditory systems)

• wound infection and healing

• wound infection vaccines

March-April 2010 85

Biotech IPOs – Canaries in Capital Markets?the venture capital industry is not investing….


Series A Series B Series C+ IPO* Year Total2008 TOTAL DEALS 43 29 37 1 110

613$ 595$ 1,070$ 6$ 2,284$ Preclinical 68% 36% 16%Clinical 32% 64% 84%Specialty pharma 29% 33% 32%Marketed 2% 16%

Preclinical A deals 16Preclinical A $ raised 181.0$ Preclinical A % total 7.9%

2007 TOTAL DEALS 51 35 62 16 164827$ 783$ 2,400$ 1,010$ 5,020$

Preclinical 61% 43% 1% 0%Clinical 39% 57% 99% 100%Specialty pharma 46% 42% 30% 40%Marketed 8% 13%

Preclinical A deals 36Preclinical A $ raisedPreclinical A % $ total

* strictly speaking two IPOs in 2008, but one involved no money

March-April 2010 86

Licenses – Nonexclusive ExamplesStanford: “download, sign here & return”

http://otl.stanford.edu/industry/resources/rts.html

Technology Type(link to all techs of this type)

Stanford Docket Technology Title(link to abstract)

License Type(link to license)

AvailableviaGoogleCheckout

Bioinformatics 97-072 GENSCAN software Non-exclusive license Yes

Cell Lines 96-139 Phi-Nx Helper-free Retrovirus Producer Lines

Non-exclusive license (biological material)

97-079 293T Cell Line Non-exclusive license (biological material)

Yes

05-164 Cell-based assay for Wnt signaling Non-exclusive license

07-069 Reporter cell line for TGFbeta signaling

Non-exclusive license


March-April 2010 87

Exubera®: the $1BN valuation error


Business of Biotech 8 Yale Biotechnology & Pharmaceutical Society 29 March – 1 April 2010...

Documents

Transcript of Business of Biotech 8 Yale Biotechnology & Pharmaceutical Society 29 March – 1 April 2010...