BIOTECHNOLOGY/LIFE SCIENCEINVESTMENT MARKETS: BIOTECHNOLOGY/LIFE SCIENCE INVESTMENT MARKETS ANGEL ORGANIZATION SUMMIT III Chicago, April 29, 2003 NORM SOKOLOFF MD, MBA


Life Sciences VC Trends(Q4 2002): Life Sciences VC Trends (Q4 2002) Investment in Life Sciences remained relatively steady in Q4 after peaking in Q2 Biotechnology increased slightly to $474 million and 61 companies. Medical Devices increased significantly (30%) to $486 million and 57 companies – outpacing biotech. Total of $5 billion raised in 2002, exceeding every prior year except 2000 and 2001 PricewaterhouseCoo


Fundamentals Drive Investment: Fundamentals Drive Investment HC generally recession-proof Demographics favor growth Today 1:6 > 60 years of age In 30 yrs 1:4 > 60 years of age Industry has matured since “bio bubble” of ’90-’91 350 products already on the market IPO market not entirely closed Pharmaceutical companies have weak pipelines that will continue to drive licensing/M&A Pricewaterh


WHAT’S IN: WHAT’S IN Building real companies Big, proven growth markets Customers that are real companies Serious revenue growth Profits or clear path to profitability Experienced teams Time to market, execution Sustainable competitive advantage Common sense business models


WHAT’S OUT: WHAT’S OUT Hot concepts Quick hits Eyeballs, unique users, clicks IPOs in the milestone chart


HEALTHCARE INVESTING POSITIVES: HEALTHCARE INVESTING POSITIVES Aging population Stabilizing regulatory/pricing environments Strong new technology market demand Decreased siphoning to other investments


HEALTHCARE INVESTING NEGATIVES: HEALTHCARE INVESTING NEGATIVES Unfavorable IPO climate M&A activity centered in smaller group of large-caps Due to decreased IPO picture, power shifts to potential strategic partners Lack of exit avenues decreases valuations


Life Science Venture Investments 2002 : Life Science Venture Investments 2002 Life Sciences sector (Biotechnology and Medical Devices) was the bright spot for 2002 with respect to venture capital investing. Life Sciences increased 15% to $960 million in the 4th quarter compared to the 3rd quarter. For 2002, Life Sciences totaled $4.7 billion, accounting for 22% of all venture capital investing, up from 13% in 2001 and highest proportion of total venture capital in seven years. However, Life Science investing in 2002 was down 12.9% compared to 2001. Biotech $2.8 billion in 2002 Medical Device $1.9 billion in 2002 For 2002, 158 companies in the Life Science sector garnered $943 million or 22% of all first time financings up from 14% the prior year.


Life Sciences Investments1995-2002 : Life Sciences Investments 1995-2002 Billion $


Life Sciences Investment as % of Total 1995-2002: Life Sciences Investment as % of Total 1995-2002 % of capital invested


Life Sciences Sub sector Breakouts: Life Sciences Sub sector Breakouts $’000


Venture Capital Investments 2000-2002 Biotechnology source: PWC Money Tree: Venture Capital Investments 2000-2002 Biotechnology source: PWC Money Tree Number of Deals 2000- 304 ($4,104.2); 2001-250 ($3,300.5); 2002-213 ($2,798.3)


Venture Capital Investments Medical Device 2000-2002 Source: PWC Money Tree: Venture Capital Investments Medical Device 2000-2002 Source: PWC Money Tree Number of Deals 2000-217 ($2, 117.4) 2001-178 ($2,049.2) 2002-154 ($1,862.2)


Top Sectors 2002 – by $’s raised: Top Sectors 2002 – by $’s raised 2002 Software Telecommunications Biotechnology Networking Medical Devices


INVESTMENT BANK PERSPECTIVEBIOTECH/PHARMA MARKETSSOURCE: CIBC WORLD MARKETS: INVESTMENT BANK PERSPECTIVE BIOTECH/PHARMA MARKETS SOURCE: CIBC WORLD MARKETS


What’s Getting Funded?: What’s Getting Funded? First-Round Biopharma Investments, 1996-Present


What’s Getting Funded?: What’s Getting Funded? Biopharma Investments > $20M, 1996-Present


Venture Drivers: Venture Drivers Need for a Return High multiples (expensive money) Need to Put $$ to Work Many VC investors have $400-800 M on-hand Mandates LARGE investments in LARGE opportunities Need for Exit Public comparables play into valuation IPO vs. M&A as exit strategy Impact of Public Valuations Cannot justify ANY investment when public comparables are poorly valued What will be in favor in 3-5 years hence?


Linked Markets: Public and Private: Linked Markets: Public and Private Public Markets Signpost for VC Investors Horrific drops in valuations Negative fund flows most of last two years Search for reduced downside risk and near-term upside Binary risk is “Name of the Game” Private Markets Both Lead and Trail public markets: RNAi investments (may be) ahead of their time Valuations lag public markets Multiple shots on goal avoid “binary” risk Looking to build and grow a sustainable business


Public Market Valuations: Public Market Valuations


Public Investors: Products: Public Investors: Products Old Model An era of $25 million IPOs and $100 million pre-money valuations Unsophisticated investors, unable to evaluate quality of pipeline programs Pharma partnerships needed to both "validate" and fund lead programs Consequently, tremendous biotech shareholder value sacrificed to Pharma New Model An era of much larger offerings and market capitalizations (100/300) Investors are most interested in companies with retained marketing rights Sophisticated investors seek high-quality pipeline programs, which are highly financeable Second-generation biotech success stories have become profitable while marketing their own drugs; consequently their valuations exceed $5 billion In contrast, companies with approved yet partnered drugs either remain unprofitable or have only become barely profitable, and lag significantly behind those peers with retained marketing rights


Public Investors: Tools: Public Investors: Tools Old Model Sell “Picks and Shovels” to those mining for genomic gold Revenue growth, not profitability Momentum New markets will emerge (SNP genotyping) Unproven business models and unproven technology will work New Model A cyclical industry, highly susceptible to economic downturn Large-cap “tools” companies have been hurt by slowdown in capital spending by pharma, biotech, academia and government Smaller “tools” companies face challenges due to lack of critical mass, competitive threats and poor visibility on profitability


INVESTMENT BANKER CONCLUSIONS: INVESTMENT BANKER CONCLUSIONS Financing Environment “Tulip mania happens once every 400 years” New venture-funded companies increasingly “product” focused and driven “Tools” companies will not return to vogue “Platforms” must be product focused


BIOTECH STATE OF THE INDUSTRYAND INDUSTRY DRIVERS: BIOTECH STATE OF THE INDUSTRY AND INDUSTRY DRIVERS SVB COMMENTARY


STATE OF THE INDUSTRY: STATE OF THE INDUSTRY VC’s have their eyes on -companies with well defined products, proven business models Successful game plan -specialty pharma; spinning out product lines from pharma or large biotech Building their companies -trimming excess and strong emphasis on near term prospects -companies that previously performed their own phase 3 will now partner after phase 2. Early round deal size up 69% in 2002 -$13 million in 2002 almost twice the average deal size of $7.2 million in 2001 Pressure on valuations -company valuations are down 50-80% from 2000 Large follow on rounds -2-3 years worth of cash or to next material milestone


STATE OF THE INDUSTRY Continued: STATE OF THE INDUSTRY Continued Tough terms -ratchets, liquidation preferences, warrants, etc. Insider rounds -increased to 38% in 2002 up from 27% in 2001 biotech leads the way with 42% in 2002 Mergers/integration -private to private Flurry of public M & A deals -six recent deals Regulatory issues -approval times increasing/clinical trials are larger and more complex -took FDA a median of 16.3 months to approve 7 NME’s in 2002, more than a 10 month increase vs the 6 month required to approve same number of NME’s in 2001 -the median total approval time for all priority NDA’s slowed to 19.1 months in 2002 from 6 months in 2001. The agency approved 11 priority NDA’s in 2002 and 10 in 2001 New FDA commissioner -Mark McClellan intent on speeding the development and review of new drugs.


BIOTECH INDUSTRY DRIVERS: BIOTECH INDUSTRY DRIVERS Therapeutics are an increasing share of health care Therapeutic breakthroughs on the horizon -RNAi; stem cell/cell therapy; cancer-new classes of targets; other novel approaches based on molecular/mechanistic understanding Blockbuster drugs coming off patent -major pharma will lose 200 drugs off patent by the end of 2004 that generate in excess of $19 billion annually Aging population-US elderly population (over 65) is projected to grow by over 43% from 2002-2005 Pharma has 3 alternatives: -merge like Pfizer/Pharmacia -acquire existing technologies from smaller biotech -negotiate licensing deals and strategic alliances with biotech companies that are in pre-clinical or clinical trials Biotech has almost 400 drugs in phase 2/3 clinical trials; 244 in phase 3 Biotech is an increasing share of total pharmaceutical revenue


BIOTECH INDUSTRY DRIVERS Continued: BIOTECH INDUSTRY DRIVERS Continued Clinical trials are larger and more complex. -today it costs $800 million for a drug up from $362 million in 1987 -number of patients in a new drug trial has increased from about 1,300 in early 1980’s to more than 4,000 for typical new drug today. FDA focus on ultimate safety has led to them being more and more conservative. Industry remains focused on critical business fundamentals such as research, intellectual property creation and strategic collaborations Research remains strong -R&D expenditure in the biotech industry continues to grow $18 billion in 2002 -NIH budget will grow to $27 billion in 2003 a 108% increase since 1995


BIOTECH INDUSTRY DRIVERS Continued: BIOTECH INDUSTRY DRIVERS Continued Recent up tick in merger and acquisition activity underscores the ability of biotech companies to forge ahead during a time of tight finances In many of these M&A deals, companies that have capital but lack mature product pipe lines are joining with firms that have promising technologies but lack resources to fully develop products. These deals amount to more creative financing techniques rather than traditional mergers. Biotech companies growing outside the US with clusters of companies forming in the UK, Switzerland, Germany, Canada, and Israel. This continuing globalization creates greater access to capital, more opportunity for collaboration and more flexibility for the consolidation of complementary technologies and products. Patience and sound business fundamentals will sustain the biotech industry in the short and long term.


BIOTECH INDUSTRY DRIVERS Continued: BIOTECH INDUSTRY DRIVERS Continued For an industry that has long attracted investors who believe in promise, recent history suggests markets will be slow to warm to biotech companies unless they are positioned to deliver products in the near term. Well managed biotech companies will emerge from the doldrums of a down market, ready to develop products, create new IP, and find new ways to utilize technologies to yield new drugs at lower costs.


ANALYSIS: ANALYSIS Capital markets are difficult -but companies are attracting investors FDA seeks to be responsive -but agency is risk adverse Big Pharma dominates distribution channels -but biotech is an essential source of products


NEXT OR FUTURE WINNERS: NEXT OR FUTURE WINNERS Pharmacogenomic personalized healthcare Address global health and environmental issues Bioterrorism preventives, diagnostics and Rxs Chronic disease management implantable high tech diagnostics auto-regulated therapeutic delivery Stem cell therapies Minimally invasive surgery Preventative technologies