Beyond borders Global biotechnology report 2009 Swedish American Life Sciences Summit 2009 Stockholm, Sweden 20 August 2009.

Beyond bordersGlobal biotechnology report 2009

Swedish American Life Sciences Summit 2009Stockholm, Sweden

20 August 2009

Headlines

The big picture

Beyond borders Global biotechnology report 20093

The global financial crisis

Valuations plummet Financing falls sharply Haves and have-nots

Markets down, cos trading below cash

Funding down 46% Large numbers

with <1 year cash Restructurings up


Robust financial performance

Double-digit revenue growth

Net loss improves Deal activity remains

strong

Revenue grows 12% to US$90b

Net loss falls 53% US reaches

aggregate profitability

New deal highs in US market


Did someone say profitability?Biotech without DNA?

0

10

20

30

40

50

60

70

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Rev

enu

es (

US

$b)

Biotech without DNA Genentech

Genentech has accounted for an increasingly large share of US industry revenues ...

Source: Ernst & Young and company financial statement data


Did someone say profitability?Biotech without DNA?

-12

-10

-8

-6

-4

-2

0

2

4

6

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Net

in

com

e (U

S$b

)

US biotech industry Genentech Biotech without DNA

... and the industry's profitability will likely be very different after Genentech's acquisition

Source: Ernst & Young and company financial statement data

Now back to the headlines


Paths to sustainability

Protracted funding drought and potentially slower innovation

Uncertain post-crisis landscape

Four paradigm-shifting trends promise greater sustainability: Generics Healthcare reform Personalized med. Globalization


Biotech performance in 2008

Beyond business as usual?


Global financial performance

0

1

2

3

4

2007 2008

Net loss (US$b) -53%

0

10

20

30

40

2007 2008

R&D expense (US$b) +18%

0

20

40

60

80

100

2007 2008

Revenues (US$b) +12%

0

300

600

900

2007 2008

Public companies -5%


Global financing

Year 2008 2007 2006 2005 2004 2003 2002 2001 2000

IPOs 0.1 2.3 1.9 1.5 2.1 0.5 0.5 0.4 8.0

Follow-on and other offerings

9.9 20.3 20.7 12.9 13.8 13.9 6.5 7.0 27.4

Venture 6.0 7.4 5.4 5.3 5.3 4.1 3.5 4.1 3.9

Total 16.0 29.9 28.0 19.7 21.2 18.4 10.5 11.5 39.4

Global financing (US$b)

Source: Ernst & Young, BioCentury, BioWorld, VentureSource and WindhoverDerived from Ernst & Young, Beyond borders: global biotechnology report 2009


Haves and have-nots:survival index

The number of companies with less than one year of cash has soared

25%

44%

21%

20%10%

11%

13%

5%

31%20%

2007 2008

US Europe Canada

39%

57%

12%

19%

32%

19%

2007 2008

18%

37%

22%

14%10%

14%14%

7%

37%28%

2007 2008

Less than 1 year of cash 1-2 years 2-3 years 3-5 years More than 5 years of cash


US deals: mergers and acquisitions

0

5

10

15

20

25

30

35

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

US

$b

Pharma-biotech mega deals Pharma-biotech Biotech-biotech Biotech-biotech mega deals

Deal activity remains impressive ...

Source: Ernst & Young, BioWorld and Windhover


US deals: mergers and acquisitions adjusted for mega deals

0

5

10

15

20

25

30

35

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

US

$b

Pharma-biotech Biotech-biotech

... particularly after adjusting for mega deals



US deals: alliances

0

5

10

15

20

25

30

35

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

US

$b

Pharma-biotech Biotech-biotech

The potential value of strategic alliances set a new record



European deals: mergers and acquisitions

0

2

4

6

8

10

12

14

16

2005 2006 2007 2008

Value (€b)

Biotech-biotech mega deals Biotech-biotech Pharma-biotech Pharma-biotech mega deals

European M&A activity remains strong …

Source: Ernst & Young, Windhover, MedTRACK, BioWorld and company news via Newsanalyzer

0

5

10

15

20

25

30

35

40Number of M&As


European deals: mergers and acquisitions

0

2

4

6

8

10

12

14

16

2005 2006 2007 2008

Value (€b)

Biotech-biotech Pharma-biotech

… particularly after adjusting for megadeals



European deals: alliances

0

2

4

6

8

10

12

2005 2006 2007 2008

Potential value (€b)

Biotech-biotech Pharma-biotech

European alliances by year


0

20

40

60

80

100

120

140

160

180

200

Biotech-biotech avg. value Pharma-biotech avg. value

Average value (€m)

New necessities

and the search for sustainable business models

Unprecedented changes


Have we been here before?

Or is it different this time?

Have we been here before?

The more things change the more they stay the same?


Yes, we have been here before

This is neither the industry’s first IPO drought nor (so far) its longest

0.0

0.5

1.0

1.5

2.0

2.5

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Cap

ital

rai

sed

(U

S$b

)

0

5

10

15

20

25

Nu

mb

er o

f IP

Os

Capital raised Number of IPOs

Q2 84 – Q3 856 quarters




Q208-present4 quarters and

ongoing


All prior crises

Sector-specific withdrawal from biotech

Investors’ enthusiasm for biotech stocks declines


Biotech stocks fall

Public capital for biotech constrained

Biotech IPOs disappear

Current crisis

Banks distressed, fail

Less debt for biotech

Credit crunch

Foreclosures climb

Risk aversion

Mortgage-backed securities become “toxic”

Subprime mortgage default rates increase

US property values fall


The interconnectedness of all thingsHow the housing markets sneezed and biotech caught a cold



Credit crunch

Foreclosures climb

Risk aversion

Biotech stocks fall

Public capital for biotech constrained

Biotech IPOs disappear

Mortgage-backed securities become “toxic”

Subprime mortgage default rates increase

US property values fall

Lower valuations in M&A and alliances

Less capital for hedge funds

Less lending to businesses

Stocks plummet


But it is also different this time

Systemic crisis

Traditional funding sources constrained

Longer recovery

Contraction ahead

New risks

Increasing pricing pressure?

Lower drug usage?

Uncertain post-crisis landscape

Pervasive uncertainty

Th

e in

terc

on

nec

ted

nes

s o

f al

l th

ing

s

Biotech business model under unprecedented strain


Seeking sustainability

biotech’sIs

becoming

unsustainable?

business model


The biotech business model:necessity is the mother of all models

Limited capital Constrained funding

horizons

Source: Ernst & Young

Limited capital Maximize ROI

Maximize returns

Investors (key input: funding)

$1-2 billion and over a decade to sustainability

Raise capital with less dilution

Less bargaining power Weaker returns from

outlicensing

Companies(key output: innovation)

World’s longest relay

race

FIPCO maximizes

returns

Lean operations, just-in-time financing


The biotech business model: fundingVenture capital

LPs’ portfolios down►Capital call uncertainty►Ability to raise new funds

►More funds for existing companies

►Less early-stage investing►More selective

Relatively steady

(but more selective)

Stocks plummet


The biotech business model: fundingPublic investors


Less capital for hedge funds

Institutional investors’ portfolios down

Biotech stocks fall, IPOs disappear

Major retreat of investors


No quick return to prior levels

Stocks plummet

Risk aversion

Credit crunch

Systemic deleveraging


The biotech business model: innovation

Potential loss of innovative discoveries

=

R+D costi n´ = 1

but

Σ funding options> i=0

n

(n – n´) prob (serendipity)ix

Where n = number of pipeline candidates before financial crisisn´ = number of pipeline candidates after financial crisis

With reduced funding options, many firms have turned to ultra-lean models, betting on a

single clinical candidate

given the serendipity inherent in drug R&D, it’s likely that some innovative discoveries will

be curtailed


Shaping the post-crisis landscape

Will this be biotech’sDarwinian moment?


Darwinism:Evolution is neither linear nor smooth

0

100

200

300

400

500

600

700

800

600 500 400 300 200 100 0

Millions of years ago

Nu

mb

er

of

fam

ilie

s

Cam

bri

an

Silu

rian

Car

bo

nif

ero

us

Tri

assi

c

Cre

tace

ou

s

Ord

ovi

cian

Dev

on

ian

Per

mia

n

Jura

ssic

Ter

tiar

y

Earth-shattering events can reshape landscapes and unleash new waves of evolution


Four paradigm-shifting trends

Opportunities for sustainability Challenges

Generics ► Generic equivalents of very successful drugs could ease payors’ budgets to pay for new innovative drugs

► Making sure budget relief is applied to paying appropriately for innovative drugs

► Higher bar for reimbursement

Healthcare reform

► Expanded access in world’s largest drug market

► Pay-for-performance metrics that truly reward innovation

► Making sure the right metrics are adopted

► Raises the bar for innovative products

Personalized medicine

► Efficient drug development shortens the relay race

► Improved bargaining power of small cos. boosts valuations and returns

► Adopting pricing and metrics that sustain funding

► Raises the bar for innovative products

Global-ization

► More valuable ex-US rights lead to win-win deals

► New funding/partnering sources from Asian companies

► Lessons from non-traditional business models

► Executing complex global collaborations

► New sources of competition► Slower growth in global markets


Outlook

What lies ahead?


When will IPOs return?

Ten steps to recovery

Source: Ernst & Young, BioCentury, BioWorld and VentureSource

Oil prices, stronger $

Earnings improve

Consumer and

investor confidence

improve

Credit crisis abates

Positive fund flow to asset

managers

Overall market

sentiment improves

Improved sector

valuations

More follow-on

and convert.

debt

More active

mid- and late-stage

IPO market

Improved early-

stage IPO market

Source: Jefferies & Co.


When will IPOs return?

Ten steps to recovery: status as of June 2009

Source: Ernst & Young, BioCentury, BioWorld and VentureSource

Oil prices, stronger $

Earnings improve

Consumer and

investor confidence

improve

Credit crisis abates

Positive fund flow to asset

managers

Overall market

sentiment improves

Improved sector

valuations

More follow-on

and convert.

debt

More active

mid- and late-stage

IPO market

Improved early-

stage IPO market

Source: Jefferies & Co. and Ernst & Young


Rules of the road:the year ahead

Look for Rules of the road

Tight capital: contraction ahead► Public investors sidelined► VCs selective, less early-stage funding► Options dwindling for many► Restructurings, bankruptcies, acquisitions

Focus deep, search wide, move quickly► Increase capital efficiency► Explore nontraditional funding sources► Partner to survive

Active deal space► Pharma’s patent challenges remain urgent► Lean times drive deal making► Haves and have-nots

Cash is king, bargaining power matters► Take the best deal you can get, preserve

some upside► Explore optionality, geographic rights to

close valuation gaps

Changing rules of the game► Healthcare reform► Increased pricing pressure

Get ahead of the change – and the competition

► Monitor changes, understand their impact► Articulate value props early in R&D► New reimbursement / pricing approaches

Source: Ernst & Young


Beyond the crisis

Biotech could reach a “new normal”► New levels of funding► New competitors► New rules of the game

Focus on innovation► Science: a higher bar► Business model: a necessity

More sustainable models for biotech’s next 30 years?


Thank you

Stay tuned:

ey.com/biotech

ey.com/beyondborders

Ernst & Young stands ready to help you as the business of biotech goes beyond business as usual

Beyond borders Global biotechnology report 2009 Swedish American Life Sciences Summit 2009 Stockholm, Sweden 20 August 2009.

Documents