For media use only Under embargo until 5:01 UK time on 5 May 2009 Beyond borders Global biotechnology report 2009 “It is different this time because this crisis is deep-rooted, systemic and persistent. But, in spite of that, the industry has been here before, in that biotech companies have overcome seemingly insurmountable challenges in the past, bucking trends and defying odds.“ Glen T. Giovannetti and Gautam Jaggi, Ernst & Young Global Biotechnology Center To our clients and friends As the shockwaves from the global financial crisis rippled across the emphasizes the need for partnering models that allow companies world economy in late 2008 and 2009, they left little untouched. the flexibility to evolve, while Samantha Du of Hutchison The reverberations leveled long-standing institutions, triggered MediPharma discusses how China can offer firms advantages that unprecedented policy responses and revealed new risks. For the address weaknesses in the Western business model. biotechnology industry, the impact of these turbulent times has But turbulent times can make the unimaginable possible, and deepened the divide between the sector’s haves and have-nots. sweeping disruptions have often redrawn maps, changed playing Many small-cap companies are scrambling to raise capital and fields and altered rules and regimes. In “Beyond business as contain spending, while a select few continue to attract favorable usual?” — our Global introduction article — we present four valuations from investors and strategic partners. paradigm-shifting trends that have the potential to reshape the A number of this year’s articles focus on the acute challenges healthcare landscape and create new opportunities: high-quality created by the funding crisis. When we interviewed John Martin generics, fundamental healthcare reform, personalized medicine of Gilead Sciences seven years ago, in the midst of a different and globalization. To create a more sustainable biotechnology funding crisis, he was confident that his company could make the industry, companies will need to understand these trends, prepare long journey to sustainability. He was vindicated, of course, and for them and help shape them. his guest article in this year’s report offers advice to companies As biotech faces the future, it’s worth considering the responses facing similar challenges today. Meanwhile, a roundtable of CEOs of our venture capital panel. We asked a number of leading VCs from four next-generation companies discusses the outlook for to tell us whether biotech has “been here before” or whether it’s their enterprises and for the industry as a whole. “different this time.” It turns out that both interpretations are Challenging times have always inspired biotech’s creativity. So correct. It is different this time because this crisis is deep-rooted, it’s not surprising that the search for creative models — both systemic and persistent. But, in spite of that, the industry has to overcome immediate operational challenges in the been here before, in that biotech companies have overcome current environment and to foster the sector’s long-term seemingly insurmountable challenges in the past, bucking trends sustainability — is a core theme in this year’s Beyond borders. and defying odds. James Cornelius of Bristol-Myers Squibb discusses his company’s Ernst & Young’s global organization stands ready to help you as model for reinventing itself by focusing on R&D and partnering the business of biotech goes beyond business as usual. with biotechs. Adelene Perkins of Infinity Pharmaceuticals Glen T. Giovannetti Gautam Jaggi Global Biotechnology Leader Managing Editor, Beyond borders Global Biotechnology Center Global Biotechnology Center Ernst & Young Ernst & Young Contents Global section Beyond business as usual? The global perspective 2 Global introduction Beyond business as usual? 4 The interconnectedness of all things How the housing markets sneezed and biotech caught a cold 9 A closer look p. 2 Enlightened competition 10 Necessity is the mother of all models How unprecedented changes are driving new approaches 18 Survival of the focused John Martin, Gilead Sciences, Inc. 19 Innovation from a string of pearls James M. Cornelius, Bristol-Myers Squibb 20 Venture capitalists speak out The more things change, the more they stay the same? 22 Valuing innovation: new approaches for new products and changing expectations Andrew Dillon and Sarah Garner, NICE 24 Global year in review Turbulent times Americas section A Darwinian moment? The Americas perspective 30 Americas introduction A Darwinian moment? 37 A closer look Compensation and benefits in turbulent times 38 CEO roundtable Only the innovative survive: perspectives from biotech’s next generation p. 30 • Jean-Jacques Bienaimé, BioMarin Pharmaceutical Inc. • Jean-Paul Clozel, Actelion Pharmaceuticals, Ltd • Colin Goddard, OSI • Louis Lange, CV Therapeutics 45 The Darwinian challenge: why evolution is vital for building biotech Adelene Q. Perkins, Infinity Pharmaceuticals, Inc. 47 Connecting the dots: the impact of the global financial crisis on biotechnology Peter Wirth, Genzyme Corporation 48 US financing Collateral damage 52 A closer look State capital: incentive programs 53 US deals Buying biotech, being biotech 56 A closer look New rules for the M&A road 59 US public policy Will biotech get the change it needs? 60 A closer look The FDA: transforming an agency in crisis 63 US products and technologies Monitoring progress 66 Canada year in review A time of reckoning ii European section Staying afloat? The European perspective 74 European introduction Staying afloat? 77 Roundtable on deals New deal structures for challenging times • Naseem Amin, Biogen Idec • Jeffrey Elton, Novartis Institutes for BioMedical Research • John Goddard, AstraZeneca PLC p. 74 • Mervyn Turner, Merck & Co., Inc. 84 European financing Down, but not out 90 European deals Dealing by dealing 94 A closer look Up-fronts and bottom lines: accounting for up-front payments under IFRS 95 European products and pipeline A surging pipeline and a trickle of products 98 A closer look Growing pains in the European biosimilars market 101 Roundtable on industrial biotechnology Evolution, progress and sustainability • Karl-Heinz Maurer, Henkel AG & Co. KGaA • Marcel Wubbolts, DSM Innovation Center • Holger Zinke, BRAIN AG Asia-Pacific section Seeds of change? The Asia-Pacific perspective 106 Asia-Pacific introduction Seeds of change? 107 The dream of the sea turtles: can China offer a new model for Western biotech companies? Samantha Du, Hutchison MediPharma Limited 108 Changing realities p. 106 A conversation with M.K. Bhan 110 Australia year in review Haves and have-nots 114 India year in review Nurturing growth 115 A closer look If you build it, will they come? 117 China year in review On the road to innovation 120 Japan year in review Seeking investors, seeking innovation 122 New Zealand year in review Strong research and creative approaches 122 A closer look Attracting new investment: New Zealand’s new LP structure 124 Singapore year in review Looking beyond borders Resources 125 Acknowledgements 126 Data exhibit index 128 Global biotechnology contacts iii Beyond business as usual? The global perspective 1 Global introduction Beyond business as usual? In late 2008, the biotechnology industry, sector and the viability of its business biotech funding has ebbed and flowed like the rest of the global economy, was and financing model. Even by the as IPO windows opened wide and then blindsided by the tsunami that is the standards of an industry where “business slammed shut with seeming inevitability. global financial crisis. Biotech companies as usual” is a gauntlet of unpredictable Ernst & Young has been tracking the now face a host of challenges as they initial public offering (IPO) windows, biotech industry since its early days, attempt to navigate through a systemic shifting investor sentiment, daunting and by our count the current crisis is financial meltdown and deep-rooted product-development odds and tightening at least the sector’s fifth major funding uncertainty. In market after market, regulatory pressure, this feels different. drought. And while it is far from over, valuations of precommercial biotechs it is not the longest — not yet, anyway. The question, of course, is whether it have plummeted, capital has dried up and Interestingly, when biotech veterans truly is different. Certainly, biotechnology the landscape is littered with companies are asked to compare the current companies are no strangers to financing struggling to survive. While the crisis will situation to prior downturns, most point challenges. There have been biotech almost certainly wipe out many of these to the “nuclear winter” of the early funding droughts for almost as long firms, it could also, at the extreme, have 1990s that was precipitated by the as there has been a biotech industry. implications for the sustainability of the Clinton administration’s proposals for Through much of the sector’s history, This is neither the industry’s first IPO drought, nor (so far) its longest 2.5 25 Capital raised in US IPOs Number of US IPOs Q2 01–Q3 01 2 quarters 2.0 20 Q2 84–Q3 85 Q4 88–Q3 89 Q3 02–Q3 03 6 quarters 4 quarters 5 quarters Q2 08–present 4 quarters and ongoing 1.5 15 1.0 10 US IPOs Number of Capital raised in US IPOs (US$b) raised Capital 0.5 5 0.0 0 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 Source: Ernst & Young 2 Beyond borders Global biotechnology report 2009 fundamental healthcare reform. But even considerably longer than they had initially in the depths of that period’s uncertainty, Even by the standards of an assumed or when business models failed to IPOs and follow-on offerings made it to industry where “business live up to their promises. Funds withdrew, market with some regularity. bubbles burst, windows slammed shut. as usual” is a gauntlet of In the past, biotech companies survived unpredictable initial public The current funding crisis is different.