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 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 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, 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, Idec • Jeffrey Elton, 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. funding crises through a combination of The bubble that burst was not in biotech, offering (IPO) windows, shifting creativity and nimbleness. As investor but fueled by real estate, financial sentiment shifted, firms reinvented their investor sentiment, daunting instruments and an environment of easy research focus and market orientation, product-development odds and credit. This time, irrationally exuberant transforming themselves in short order tightening regulatory pressure, investors were seduced by loose lending from vaccine companies to biodefense practices, high-leverage models and this feels different. firms or from bioinformatics providers to the assurances of complex financial drug developers. They opportunistically derivatives that promised to hedge and formed strategic alliances, pared back reduce risk. And so, while biotech’s past their already-lean operations and found how huge, no one really knows. We don’t financing droughts were localized and creative ways to go after untapped know how deep the crisis will run, how far industry-specific, the present downturn sources of capital. In extreme periods, it will extend, or when it will all end. crosses national boundaries and impacts they closed highly dilutive financings This uncertainty is one thing we’re all sure industries across the economy. It is, in a that included warrants and other deal of — and as a result, cash has become word, systemic. “sweeteners” to bring investors on board. king. Companies and consumers are As the impact of the crisis spreads But over the industry’s history, very few cutting spending. Investors and bankers wide — infecting everything from investment companies actually ended up filing for have become increasingly conservative, portfolios in remote Norwegian fishing bankruptcy or being liquidated. making it even more difficult for firms to hamlets to the financial aid packages Several characteristics of the current raise capital. While funding crises in the of undergraduates at leading US crisis make it unlike any previous funding past have typically lasted about 12–18 universities — it can produce unexpected challenge faced by the biotech industry. months, it is quite likely the current ripple effects. We have listed some Each of these distinguishing features, as downturn will run considerably longer. examples of these effects below, though we discuss in this article, has implications the list is by no means exhaustive. (For for biotech companies trying to weather The interconnectedness a simplified graphical representation the storm as well as for the industry’s of all things of these connections, refer to “The sustainability, approaches and models. interconnectedness of all things” on page 4.) In the past, biotech funding droughts have largely been driven by investor • Investment banks and hedge funds. Pervasive uncertainty sentiment toward the biotech industry. The financial crisis has taken a significant toll on investment banks, There is much about the current crisis When investors were bullish about the as some of the most venerable names that has taken practically everyone sector’s prospects — buoyed, for instance, on Wall Street have been humbled by by surprise: the speed with which it by product approvals in the industry’s investments in subprime mortgages. unfolded, the sheer size of the financial formative years or by media excitement But these investment banks also institutions it has leveled, and the extent over the sequencing of the human genome often acted as prime brokers to and nature of public policy responses it around the turn of the millennium — money hedge funds, and hedge funds have has unleashed. There is now a consensus rushed into the sector, and companies in recent years served as a major that this, whatever this is (it has been rushed out to conduct IPOs. Unfortunately, source of capital for publicly traded variously labeled a credit crunch, a the boom was inevitably followed by a bust biotech companies. Consequently, liquidity crisis, a recession and even a few years later, when investors realized while much has been made of those sometimes a depression), is huge. But just that the path to commercialization was now-infamous links between distressed continued on page 6 3 The interconnectedness of all things How the housing markets sneezed and biotech caught a cold

Current crisis Subprime Mortgage-backed US property Credit mortgage securities become crunch values fall default rates “toxic” increase

Foreclosures Risk Less debt climb aversion for biotech

Less capital Public capital Biotech IPOs Biotech for hedge for biotech disappear stocks fall funds constrained

Lower valuations in M&A and alliances

Challenging Less capital exits for for venture biotech funds investors

Biotech venture funding could fall

Less capital New risks Lower valuations Increasing pricing pressure? Lower drug usage? Source: Ernst & Young

4 Beyond borders Global biotechnology report 2009 All prior crises

Investors’ enthusiasm Sector-specific for biotech stocks withdrawal from declines biotech

Banks Less lending Household distressed, to households spending fail declines

Household Less lending income Layoffs to businesses declines

Corporate Drug usage earnings Tax revenues could fall decline drop

Ranks of Stocks uninsured plummet swell Household Pricing wealth shrinks pressure could increase

Institutional University Nonprofit and Increased investors’ endowments foundation counterparty portfolios down endowments risk from suppliers diminish down and partners

Research funding could fall

Less capital New risks Lower valuations Increasing pricing pressure? Lower drug usage?

5 mortgages in Las Vegas, Nevada, financial assets in the economy has come bar for new company formation has and the investments of taxpayers in to be invested in the stock market. So, been raised and venture investors are Narvik, Norway, considerably less has as plunging share prices dragged down becoming very selective about the firms been written about the fact that those everything from the endowments of they back. same distressed mortgages are linked, large universities to the investments of • Convertible debt. The simultaneous through the fortunes of highly leveraged public pension plans, the portfolios of implosion of credit markets and stock investment banks and hedge funds, to many major institutional investors have markets in the current crisis may create the capital invested in scores of biotech been diminished. Many of these investors a ticking time bomb in an industry where companies. A significant portion of the are, in turn, limited partners (LPs) in convertible debt has been a significant capital available to the industry has been the venture funds that invest in biotech source of capital. Convertible debt decimated, not because of changes companies. Since these funds make first became popular in a significant in investors’ attitudes toward biotech portfolio allocations by asset class, they way around the time of the genomics companies, but simply because of the have less money to invest in the sector bubble, when a combination of factors way the dominoes line up in the modern simply because their overall portfolios made it an attractive way to raise financial system. (See Peter Wirth’s have shrunk — the pie is smaller, and money. For many public companies that article, “Connecting the dots,” for a more everyone gets a smaller slice. expected their stock prices to rise over detailed discussion.) This “denominator effect” raises the time with the achievement of clinical In addition, many of the investment risk that venture capitalists (VCs) may milestones, convertible debt offered banks that have traditionally backed not have as much “dry powder” in a way to raise capital in a less dilutive the biotech industry are now focused their funds as they assume they do, manner. Meanwhile, it offered investors elsewhere, including on shoring up and that some LPs may not be able relatively more security and a hedging their own balance sheets. It is unlikely to fulfill the capital calls when the strategy — certain funds invested in that the biotech industry will provide funds come knocking. So far, there is biotech companies by buying convertible enough fee potential in the near term no indication that this has happened debt while simultaneously shorting to grab significant mindshare at these to any large degree, and anecdotal the companies’ stocks. The large debt institutions. As a result, the industry evidence suggests that at least the overhang became a potential problem may see the return to prominence most substantial life sciences VCs will for many companies after the genomics of the boutique, early-stage-focused have access to the funds they need to bubble burst in the early 2000s, but investment bank. continue investing. But the risk is out the crisis was averted because markets there, and it is possible that there could recovered and companies were able to • Venture capital. As the stock market has be a somewhat slower deployment refinance the debt. tumbled, we have all become collectively of capital in the future because of poorer. The separation between the real Today, a similar crisis looms, but these linkages. VCs needing to raise economy and the financial economy this time several factors are in play. new funds will likely find a much more has become ever more blurred in recent The plunging stock prices of biotech challenging environment. So the decades, as an increasing portion of companies have meant that converting

6 Beyond borders Global biotechnology report 2009 debt to equity is improbable, while the with, job losses could leave significant prospects for refinancing are bleak swaths of the nascent middle class As funding options have dried because of the credit crisis. Meanwhile, less able to afford drugs — which up, many companies with little hedge funds, which provide much of the could present a temporary setback for cash may also have little in the capital for convertible debt, have seen Western companies that are counting their portfolios diminished by the stock on emerging markets for future growth. way of options. For many at the market downturn and by a reduction in low end of the survival index, • Government spending and their own borrowing power, and are also reimbursement. The economic survival may truly be at stake. constrained by new rules on shorting slowdown has diminished tax revenues stock. Already we are seeing companies and strained government budgets — a trying to negotiate new terms with debt situation that will only be heightened constrain the flow of money into equity holders to forestall bankruptcy. in the months ahead, either because of markets for an extended period. Things will • Patient► behavior. Between December stimulus spending (such as in the US) only get better when the overall pie — the 2007, when the slowing US economy or because of increased spending on global economy — grows. And that, by all officially entered a recession, and March social safety-net programs as citizens accounts, will take time. 2009, the number of unemployed in the lose jobs (as in many Western European Against the backdrop of an industry US increased by 5.1 million — pushing countries). In the US, where healthcare where it can take well over a decade the official unemployment rate to a reform is a top priority of the new to successfully take a product from 26-year high of 8.5%. The US economy Obama administration, budgetary early research to regulatory approval, is now shedding over 600,000 jobs pressures could be further exacerbated a crisis that lasts several years may a month, and layoffs are becoming by the high cost of expanding appear short-lived. But, of course, for increasingly visible in other countries healthcare access. As governments face companies with dwindling cash reserves as the recession spreads globally. While increasing pressure to rein in healthcare and few funding options, it could be an the uptick in European unemployment costs, it seems almost inevitable that insurmountably long period. has not been as sharp (in part the scrutiny of drug prices will grow. because many European countries had Meanwhile, more people could become higher unemployment rates to begin dependent on governments for health Contraction ahead with), China is concerned about the coverage, increasing the purchasing For most of the 23 years that Ernst & Young potential fallout as large numbers of power of the public sector and has produced an annual biotechnology manufacturing jobs are lost and migrant strengthening its ability to drive down report, we have included a “survival index” workers return to their villages. prices in negotiations with industry. comparing the rate at which companies While health-related industries such The bottom line is that biotech were spending to the amount of cash as biotech are generally regarded as companies — in both pre- and on their balance sheets. And in each of being fairly recession-resistant (people post-commercial stages — face a far more those years, there has always been a fall sick and need healthcare regardless complex environment than in previous sizeable cohort of firms — typically around of the state of the business cycle), the funding crises. This time, it’s not about 25% — with less than one year’s worth of conventional wisdom may not hold true biotech, but about everything. And when cash on hand. But even though about a in a recession of this magnitude. In the it seems that everything is impacted, fourth of publicly traded biotech companies US economy, where health benefits are the impacts may not be everything they have perennially been a few months largely provided through employers, seem. More than ever, companies may away from going out of business, the a significant swelling in the ranks of find many unexpected sources of risk survival index was never followed by the the unemployed could bring the loss beneath the surface. mass extinctions its name appeared to of health insurance for large portions portend. Our chart, it would seem, had The fact that the current crisis is driven of the population. Consequently, been misnamed. It’s not a survival index if by larger economic forces rather than we could see changes in patient everyone survives. a change in investor sentiment toward behavior such as reduced compliance biotech companies also has implications for What was missing in those annual with drug regimens, lower levels of the length of the drought and the path to charts — and the answer to the apparent preventive care, and selective seeking recovery. In the past, conditions improved paradox — is that there was relatively little of healthcare for non-life-threatening when investor sentiment recovered, but overlap between the “at risk” companies conditions. Meanwhile, in many this time the global economy is undergoing in any two consecutive years. Instead emerging economies, where health a significant deleveraging which could of closing shop, most companies simply insurance is not as prevalent to start

7 need some degree of debt financing, mother of all models. The models that Large companies will not particularly as prospective buyers see companies and investors adopt are, in start buying assets en masse revenue-generating blockbusters go off other words, not developed in a vacuum. patent in the years ahead. And getting They are instead compromises shaped that do not fit their strategic credit has become more difficult, even for by a number of constraints — resources, objectives simply because entities with significant cash flows. While funding options, bargaining power and they are relatively cheaper. huge sums have been raised to finance the inescapable reality that it takes Misallocated resources and the , Merck and Roche transactions, US$1–2 billion and upwards of a decade there is a limit to how much debt will be for a biotech company to become a distracted energies are no available, and at a minimum, buyers will mature, financially sustainable enterprise. bargain at any price. confront a higher cost of capital from Few investors have the means and borrowing than they faced in the past. patience to endure such a journey — after all, they face constraints of their own on In spite of these difficulties, we can expect investment horizons and rates of return. replenished their dwindling cash balances considerable industry consolidation in the Consequently, the business model that by raising more capital. months and years ahead, driven by big has evolved in the biotech industry is akin pharma’s growing need to fill the pipeline In the current environment, of course, all to a marathon relay race, in which biotech and achieve cost efficiencies and the of that has changed. As funding options companies work with a series of investors existential funding crisis faced by many have dried up, many companies with little and partners to raise capital and share small biotech companies. Whether by cash may also have little in the way of risk. From venture capitalists through merger and acquisition (M&A), bankruptcy options. For many at the low end of the strategic-alliance partners and public and or liquidation, the number of companies survival index, survival may truly be at other investors, each set of buyers carries in the industry will contract over the stake. While many firms are restructuring the baton for a few years. their operations to stay alive, we are likely remainder of 2009 and into 2010. to see a sizeable number of firms declare Not surprisingly, these necessities move biotech companies to behave in certain bankruptcy or cease operations. New models for new necessities ways. Their overwhelming objective is We are also likely to see increased merger Some of the most sweeping implications often to survive long enough to reach activity in this environment, as some of today’s unprecedented challenges, the next value-creating milestone, financially distressed biotechs combine however, may be for the industry’s where existing investors can pass the operations with similarly sized firms to long-standing models. Over the 33-year baton and companies can raise more improve their odds. And while depressed history of the biotech industry, companies biotech valuations might seem to predict have gravitated toward some enduring increased pharma-biotech mergers, we operational models — approaches for The business model that has are unlikely to see a dramatic uptick. financing, partnering, conducting evolved in the biotech industry Large companies will not start buying research and development (R&D) and assets en masse that do not fit their bringing products to market. These is akin to a marathon relay race, strategic objectives simply because operational models, in turn, collectively in which biotech companies they are relatively cheaper. Misallocated drive the overall business model — helping work with a series of investors resources and distracted energies are no determine, for instance, how vertically and partners to raise capital and bargain at any price. integrated companies become and the share risk. However, pharma companies are likely to degree to which they specialize in specific remain actively interested in more mature aspects of the value chain. firms. Over the last year or so, several of the biotech sector’s bigger names have The world’s longest relay race capital. Consequently, firms often attracted the eye of pharma buyers, keep R&D spending very lean and are To understand why certain models have including , MedImmune, forced to choose short-term priorities evolved in this industry — and why we Millennium and ImClone. In early 2009, over long-term ones — focusing on the think approaches that have largely two big pharmas merged with each other, most advanced pipeline candidate, for withstood the tests of time will become and there is speculation that more could instance, instead of a later-generation increasingly unsustainable in the months follow. But here, too, the outlook could one with more scientific and commercial and years ahead — we need to start by become cloudy because of the financial potential. And given the industry’s presenting an axiom: necessity is the crisis. Large acquisitions will inevitably sequential, pass-the-baton funding continued on page 12

8 Beyond borders Global biotechnology report 2009 A closer look Enlightened competition

Perhaps more than any other sector, the biopharmaceutical process in areas such as molecular imaging, drug delivery, industry depends on innovation for its very survival. While personalized medicine and early prediction of safety. the term “innovation” is usually applied to scientific or The pharmas work closely with Enlight to identify the most technological advancement, financial and organizational pressing needs in the industry and to help guide Enlight’s innovation has also played a critical role in shaping the industry, search for, and development of, novel technologies that address especially during periods of constrained capital investment. those needs. The goal is to form start-ups that will develop At such times, companies have sought to access capital, and commercialize the most promising technologies. Via an reduce burn rates and share risk through a variety of creative approach that the PureTech team applies across its portfolio, transactions and deal structures. In 2008, when pharmaceutical Enlight adds an entrepreneurial component to the pharma companies represented the primary buyers of technology collaborative model: the company serves as an institutional assets and companies, the concept of “precompetitive” entrepreneur, pulling together transformational intellectual collaborations surfaced at companies and venture firms. property (often from multiple sources), assembling preeminent The idea is that, as pharmaceutical companies face growing scientific thought leaders and providing interim management pressures to find new ways to innovate, they could benefit to its new companies. The pharma partners provide the initial from arrangements where several firms collaborate on the funding (they have committed to provide financing of up to a development of early-stage platforms or enabling technologies. combined US$65 million) with additional investment coming Enlight Biosciences, launched in 2008 by Boston-based from the partners, venture investors or other third parties. PureTech Ventures, has translated this vision into a reality, Enlight’s model addresses a critical structural impediment in the process developing a novel collaboration and financial to funding innovation in the biopharma industry, namely the structure. PureTech has assembled a number of big pharma fundamental tension between entrepreneurs and investors backers so far: Eli Lilly, Johnson & Johnson, Merck & Co. around how to apportion financial returns. Enlight’s pharma and Pfizer. With venture investors seeking to mitigate risk by partners are focused primarily on the impact Enlight-supported investing in later-stage companies with clinical compounds, innovations make within their organizations. As such, they are Enlight’s founders and pharma members saw a risk of looking for not just financial returns but strategic returns, and underinvestment in platforms and enabling technologies. Yet turning what was once a zero-sum game (dividing up financial developing new platforms is critical — they could, for instance, returns) into a symbiotic relationship where each party can significantly enhance the drug discovery and development derive benefit in a different way.

Enlight corporate structure Key activities/purpose Ownership

Enlight • Identifying new technologies • Enlight leadership Biosciences, LLC • Forming new companies • PureTech

Endra Holding company 2 Holding company 3 • Investment vehicle for • Pharma partners Holdings, LLC (LLC structure) (LLC structure) new companies • Enlight

• Holding companies Operating Operating Endra, Inc. • Operations company 2 company 3 • Management • Venture capitalists

Source: Enlight Biosciences

9 Necessity is the mother of all models How unprecedented changes are driving new approaches

Unprecedented changes New necessities choices Exploit More flexibility to retain rights, upside and independence Top

innovators Bargaining power shifts from big pharma to top innovators Patent expirations and big pharma’s Boost R&D productivity reinvention Foster innovative cultures (see Beyond borders 2008)

Capture external breakthroughs Change

Big pharma Big Cut costs, maintain earnings

Leverage globalization

Sustain ecosystem

Small caps see further erosion of bargaining power Global

financial Raise capital Survive crisis Retain some upside (see “The interconnectedness

of all things”) companies Small-cap Greater focus to contain costs and reduce burn Sustain Find path to exits returns VCs

Seek novel ways to enhance returns

Source: Ernst & Young 10 Beyond borders Global biotechnology report 2009 New models

Nonexclusive License and leave alone licensing Purdue/Infinity Buy and leave alone Takeda/Millennium Roche/Alnylam

Option and Larger up-fronts Acquisitions with leave alone for sustainability earn-outs /Cytokinetics /Ception Genzyme/PTC Viropharma/Lev

Precompetitive cooperation Early IP lockups CRO/PE “at risk” transactions Enlight Biosciences Pfizer/UCSF TPG-Axon/Lilly

Consolidate to survive More options Monetize (roll-ups) around noncore assets geographic rights The Medicines Company/ Paul Capital, Targanta Therapeutics Royalty Pharma, others

Later-stage Rifle shots Creative project specialty (lean companies) financing pharma Symphony Capital approaches

VCs investing in VCs with public companies Build it to slot it? extended (VIPEs) (medtech model) fund lives?

11 model and the inherent uncertainty of investor sentiment over time, firms attempt to strike a balance between taking money when it’s available and not raising capital in ways that overly dilute existing investors or give away too much potential upside. Among the key constraints that biotech companies have traditionally faced are their limited resources and bargaining power. As a result, the conventional wisdom has been that biotech companies These trends create new necessities Yet the benefits of this power shift accrued “sell their first born” — licensing their with potential implications for the to a relatively small group of companies initial product candidate to big pharma biotech industry’s existing business and developing assets that are widely regarded out of necessity — in order to sustain operational models. (For a simplified as having tremendous commercial operations with the hope of controlling, representation of some of these new potential. For these “top innovators,” even or at least materially participating in, necessities, see “Necessity is the mother the arrival of the global financial crisis did the commercialization of subsequent of all models” on page 10.) The most not alter their power equation with big products themselves. In other words, immediate changes will stem from the pharma. Indeed, while other companies most biotechs aspire ultimately to issues that are confronting companies in were buffeted by roiling capital markets, become fully integrated pharmaceutical the near future: big pharma’s reinvention plummeting valuations and wary investors, companies (FIPCOs) because of one and the global financial crisis. these firms have continued to structure simple reason — that’s where the money deals and access capital at favorable New necessities: is. Companies with top-line revenue earn terms. Examples include Alnylam’s big pharma’s reinvention higher returns than what is generally nonexclusive licensing deal with Takeda possible by outlicensing to another Biotech companies have already started and Infinity Pharmaceuticals’ innovative company and settling for a royalty. seeing the impact of big pharma’s alliance with Purdue Pharmaceuticals. pipeline problems on biotech operational (These transactions, and other creative Of course, not all companies can go the models, since pharmaceutical firms deals involving top innovators, are distance, and successful biotech enterprises have been taking serious measures to discussed in the US deals article, “Buying often choose the ultimate baton pass — to boost R&D productivity for some time biotech, being biotech.”) a strategic acquirer — after concluding now. Not surprisingly, some of the initial that such a move is in the best interest of Big pharma’s challenges are also consequences have been for partnering shareholders and other stakeholders. motivating it to cut costs and maintain models. As pharma’s pipeline problems earnings. Once again, this is driving became more acute, bargaining power creative approaches through deal-making. Unprecedented challenges shifted toward biotech firms with highly In at least one prominent example, the promising products and platforms. Big If models are functions of necessity, creation of Enlight Biosciences, we have pharma companies, many of which had it follows that unprecedented seen several big pharmas collaborate in initially steered clear of the biologics challenges — and the new necessities a precompetitive space. (See “A closer revolution, were determined not to they create — should be fertile ground for look” on page 9 for details.) We’re likely miss the “next big thing.” As a result, seeding new models. This is, of course, to see more structures along these competition for technologies such as RNAi precisely the situation in which the lines. The concept — bringing together became heated in recent years. Biotech industry now finds itself. Companies of many big companies to jointly develop companies developing these desirable all sizes are operating in a landscape that a platform or address a scientific technologies benefited, commanding high is profoundly different from anything quandary — could certainly be applied premiums in acquisitions and structuring they have seen before, because of some more broadly at a time when big pharma deals that gave them greater flexibility historic shifts. needs both scientific breakthroughs and while allowing them to retain more rights. cost containment.

12 Beyond borders Global biotechnology report 2009 New necessities: to lower burn rate, take advantage of operational models can help companies the global financial crisis scale efficiencies and attract investment. address challenges of funding, partnering, To close the valuation gap between developing and commercializing products, While the global financial crisis may not sellers’ expectations and market realities, but these approaches ultimately feed have had much impact on big pharma and acquisitions with earn-outs have become into a larger business model. Is the the top innovators, it has certainly taken a increasingly regular even in purchases business model that biotech has always toll on small-cap biotechs. This has always of public companies — an unprecedented known — built, as it is, on a lengthy been an industry of haves and have-nots, development. Companies that choose relay race — still sustainable? Will but the disparity between those two not to sell out will likely be pushed to various runners — investors, partners, camps has probably never been greater. partner assets earlier than they would buyers — still enter their legs of the race if As described above, small companies have otherwise. To still retain rights and they don’t know whether the next runner are now struggling to survive, and these flexibility for an attractive exit down the will be there to take the baton? Will the firms have fewer funding options and road, these firms will seek deals with an race be run by different sets of runners? considerably less bargaining power than increased use of options or creative ways Will it be run at all? they did even a few months ago. to divide geographic rights. What we’re talking about, in short, is The immediate response of many sustainability. At a time when many firms small-cap companies has been to suspend Seeking sustainability are struggling to remain in business, the development of secondary products in real question is not whether individual the pipeline, seek to sell noncore assets, Clearly, big pharma’s reinvention and cut costs and focus resources on the the global financial crisis are driving most promising pipeline candidate. While companies of all sizes to seek new this response is understandable, it is solutions to the quandaries confronting also, ironically, more of the same. The them. Much of what we’ve discussed so Is the business model existing model — building “rifle shot” far has involved relatively minor changes that biotech has always companies around lean R&D operations to long-standing transaction models. known — built, as it is, on in order to reach the next value-creating This is not entirely surprising — after a lengthy relay race — still milestone — is now in overdrive as all, deal-making has been an integral companies pare back even further in part of the biotech business model sustainable? Will various bare-bones approaches that can risk since the industry’s earliest days, and runners — investors, partners, everything on the fortunes of a single the sweeping changes currently under buyers — still enter their legs clinical candidate. way are fundamentally realigning the of the race if they don’t know balance of power between different Here, too, many companies are looking groups of companies. whether the next runner will be at creative deal-making approaches there to take the baton? Will the to address their challenges. We could But there is also a much deeper question see deals where two or more small at play in this crisis, and it strikes at the race be run by different sets of single-product biotech firms “roll up” very heart of the industry’s business runners? Will it be run at all? their enterprises into a single franchise model. As we articulated earlier,

13 companies will survive (many won’t) but Relay runners wanted whether biotech’s basic business model is itself sustainable. As we articulate below, several major trends in the current market suggest that the biotech business model will not be sustainable in the same form as it has existed in the past. For the model to survive, it needs to sustain both its inputs and its outputs. In other words, it needs steady supplies of the fuel that keeps it going: funding. And it needs to continue to deliver the results that justify its existence: innovation.

Sustaining funding: relay runners wanted To sustain an adequate supply of funding for the industry’s relay-race business model, we need a constant supply of willing runners. Over the next few years, however, the runners that biotech companies have come to rely on — venture capitalists, public investors and big pharma — will face constraints that could limit their participation. For VCs, the existing venture funding model — which was already facing considerable pressure in recent years because of longer paths to exits, New investors? increased regulatory uncertainty and lower returns from IPOs — has come under unprecedented pressure due to the global financial crisis. Exits have become even Better valuations? more difficult, thanks to an extended Quicker IPO famine, depressed public-company valuations and big pharma buyers that exits? may be distracted by their own internal More effective challenges and less able to use debt drug development? for acquisitions. Bargaining power in acquisitions has shifted toward buyers, to the detriment of smaller companies and their VC backers. Raising capital from LPs is becoming more challenging as LPs see their portfolios shrink — meaning return in force any time soon. The era of constrained, both because of the need to that there is now more competition for a easy money and high leverage has come focus on integrating mega-mergers and smaller pool of money and that LPs are to an end, and public biotech companies, because the pharma industry will spend more likely to demand better performance which had attracted significant funding less on R&D (and, likely, R&D alliances with from their investments. from highly leveraged hedge funds in biotechs) as its revenues decline. recent years, will simply have less capital. Meanwhile, public investors — who account Creative partnering models — including Lastly, many pharma firms will likely find for the majority of the recent decline in deals with larger up-fronts or deals that biotech funding — are not expected to their ability to invest in biotech increasingly

14 Beyond borders Global biotechnology report 2009 give VCs partial exits now in exchange While we’ve made impressive progress for a sale at a prenegotiated price if the in treating scores of diseases in recent The process of evolution has product succeeds — could find ways around decades, we still have a ways to go in been neither linear nor smooth. some of these constraints. Such solutions addressing unmet or underserved medical Every now and then it has been could help overcome immediate hurdles needs. There is absolutely no doubt, and allow individual runners to remain in however, that the answers to those shaped by cataclysmic events … the race. But they cannot entirely address needs — from curing cancers to fighting the larger sustainability issue: with the new strains of treatment-resistant industry’s existing business model, it infections and tackling neurodegenerative one. Clearly it’s an issue on the minds of costs US$1–2 billion to build a sustainable diseases — will principally be found industry executives, since the metaphor enterprise, and there will simply not be through biotechnology. is used repeatedly by this year’s guest enough capital to sustain a large number contributors. From the titles of guest As a society, we urgently need to of today’s companies at that level. articles (“Survival of the focused,” “The contain our rapidly growing healthcare Darwinian challenge”) to our roundtable costs — a problem that will only get worse with four next-generation CEOs, much of Sustaining innovation: in the decades ahead as populations age, the discussion in this year’s book revolves watch what you cut setting off demographic time bombs in around a central question — how do we the West, China and Japan. Again, the This lack of funding will inevitably lead create a Darwinian opportunity out of an innovative power of biotechnology has to reduced R&D spending and slow existential threat? How do we ensure that the potential to provide an important innovation. In addition, ultra-lean business this is not the start of a mass extinction part of the answer — through the promise models are likely to put innovation at but rather a process of advancement in of more efficient drug development and risk. The use of these approaches is not which biotech’s best and fittest survive? interventions that are safer, more timely surprising, given the paucity of financing and more effective. alternatives. It is also not entirely If we’re going to use the Darwinian metaphor, then it’s worth remembering without precedent. Indeed, in dire times, If we are to have any hope of improving that the process of evolution has been this industry is used to reverting to the quality of millions of lives through neither linear nor smooth. Every now and cheerleader mode. Biotech companies better treatments and interventions — and then it has been shaped by cataclysmic are exhorted to focus on innovation and do so while containing healthcare events — a helpful meteor or two, a only pursue the targets that are most costs — then we need not just to sustain mega-volcanic eruption — that completely likely to deliver true advancements in biotech innovation, but to unleash its full altered the environment and created meeting patients’ needs. While that’s an transformative potential. understandable response, the unfortunate opportunities for new species to evolve. reality — as we noted in our discussion And that is where we are today — on the of the “drug development lottery” in last Paradigm shifts cusp of a world of change that could quite year’s Beyond borders, and as Merv Turner So how do we jump-start innovation? possibly change the world. of Merck argues in this year’s Roundtable If biotech’s existing business model is Over the next few years, several trends on deals article — is that even the smartest becoming unsustainable, how do we currently in play have the potential to minds and best technologies are unable accelerate the transition to sustainability? shift existing paradigms and, in doing to separate the winners and losers early In last year’s Beyond borders, we talked so, to create new, sustainable business on. If drug development is still dependent about big pharma’s “existential moment,” models. We highlight a few of these here: on a good deal of serendipity, the culling referring to the fact that many large of large numbers of “less promising” R&D • Generics, generics, generics. We have pharmaceutical companies need to either programs raises the very real prospect that written extensively, in this article as fundamentally reinvent themselves we might be killing the next big thing. It’s a well as in last year’s Beyond borders, or risk disappearing, at least in their sobering thought. about the financial implications of big current form. This year, on the 100th pharma’s patent cliff. Pharma’s revenues anniversary of Charles Darwin’s birth, face a precipitous drop. The products What’s at stake? another analogy seems more fitting: the themselves, however, are not in peril. “Darwinian moment.” At a time when the Let’s take a minute to remind To the contrary, they will probably serve biotech industry faces the prospect of ourselves about what’s at stake, and more patients than ever before, as significant contraction and consolidation, what we stand to lose if innovation generic equivalents reach the market. the question is whether this will be a slows down. These are, it should be remembered, destructive process or an evolutionary some of the most successful blockbuster

15 drugs in the world — meaning that medicine should bring more bargaining patients will have access to some of Sweeping changes that are power to biotech companies, creating the best generics the industry has on the horizon — a wave opportunities for deals and business ever seen. Even as this creates new models where biotech firms can make of high-quality generics, competitive pressures — companies will the numbers work by capturing more of need truly innovative products to secure fundamental healthcare the upside. reimbursement from payors — it could reform, personalized medicine • Globalization. Last, but not least, is remove some of the pricing demands and globalization — could globalization, another trend discussed that the industry has faced in recent dramatically shift existing in some detail in last year’s Beyond years, as payors’ budgetary constraints borders. Much of what we discussed are loosened by lower-priced generics. paradigms and generate last year remains unchanged in the This, in turn, could allow for better opportunities to build current environment. The global margins for innovative products and help sustainable business models. financial crisis has not fundamentally make the numbers work for sustainable altered the outlook for the burgeoning business models. biotech industries in many Asian • Healthcare reform. The United States economies, where cost-cutting drives for innovation rather than simply may finally be on the verge of making by Western firms could lead to more aim to lower costs. The movement its much-delayed, long-anticipated, business for local companies. As overall to a system that measures and truly often-feared transition to universal growth in emerging markets slows, rewards companies based on the healthcare coverage. Like the coming however, some Western companies value their products deliver could give wave of generics, this change would may start reconsidering the timing of investors the returns they need and be nothing short of momentous — a their strategies, which are based on create the basis for a more sustainable dramatic expansion in the world’s the assumption that rapidly growing business model. largest (and most laissez-faire) middle classes will give them access to drug market. Indeed, recognizing • Personalized medicine. Some of the previously untapped markets. Beyond healthcare’s paradigm-shifting paradigm-shifting trends discussed these short-term impacts, however, power, the Obama administration above, such as competition from a globalization promises to bring is positioning healthcare reform new wave of generics and the move to sweeping changes to the drug industry, as one of three investments in the pay-for-performance under healthcare with implications for the business future (energy and education are the reform, could also accelerate the models of Western firms. As ex-US others) that will lay the foundation adoption of personalized medicine. and ex-European geographic rights for a more competitive 21st-century We discussed personalized medicine become more valuable, for instance, it economy. For drug companies, in considerable detail in last year’s will become increasingly possible for expanded coverage will likely bring Beyond borders and won’t cover the partners to divide up worldwide rights new pricing regimes where buyers same ground here, but this is another in ways that provide value to each have concentrated bargaining power. development that promises to be truly participant. As companies in these Meanwhile, the push for electronic transformative, with implications for markets develop, they are partnering medical records to increase efficiency the entire business model from early with and acquiring assets from Western could produce vast volumes of data for research through commercialization companies — creating new sources of companies to mine in developing better and marketing. Among other effects, capital and the potential for new ways treatments — creating new winners more targeted and efficient ways of of collaborating that could become and losers, including perhaps from developing drugs should lower R&D increasingly significant with time. competitors and collaborators that costs, reducing the length of biotech’s More broadly, it is worth noting that emerge from outside the traditional marathon relay race. With the use the biotech business model we have healthcare sector. Once again, there of biomarkers to identify promising discussed in this article is really the are opportunities to build sustainable targets up front, personalized medicine Western biotech business model. In the business models in this uncertainty. will also make early stages of the emerging biotechnology industries of Healthcare reform will likely include value chain — research and early Asia, many of the factors that Western the adoption of pay-for-performance development — more valuable. Since companies have relied on — strong metrics. The challenge for the drug these are precisely the activities that university research, technology transfer industry will be to make sure that these have traditionally been biotech’s laws that support commercialization, metrics maintain the right incentives strengths, the move to personalized experienced venture capitalists — have

16 Beyond borders Global biotechnology report 2009 not been as readily available, and Yes, this crisis is truly different. It’s that the pay-for-performance metrics companies have evolved different deep-rooted and systemic, and the developed align incentives with the needs models in response. As Western problems it has prompted are unlikely to of innovation. And its scientists will need companies look for alternatives in the be mitigated any time soon. But times to focus their R&D efforts to embrace current climate, there may be Asian of tremendous change — whether set off personalized medicine, since its adoption examples to learn from. by global recessions or meteors — can offers some of the best hope for quicker reshape landscapes and create new R&D and better returns on investment. opportunities. There is good news in The path ahead: beyond business Necessity is the mother of all models, that realization, because the sweeping models as usual and if history is any guide, today’s changes that are on the horizon — a wave tremendous challenges will unleash Biotech’s existing business model has of high-quality generics, fundamental tremendous creativity. So far, we’ve never been under more strain, with healthcare reform, personalized seen that creativity applied in relatively funding dramatically reduced and medicine and globalization — could small ways to adjust partnering models considerable innovation at risk. The dramatically shift existing paradigms and navigate around immediate question is whether the industry will find and generate opportunities to build roadblocks. As the industry’s creativity new ways to reach a sustainable model. To sustainable business models. is applied to the larger issue of keep runners in the race (or attract entirely For that to happen, biotech executives sustaining the entire relay race, and as new runners), companies will need ways to will need to understand the potential several paradigm-shifting trends unfold, improve returns on investment — through impact of these changes, prepare for we could see the emergence of more better prices and valuations, quicker exits them, and wherever possible, help shape durable models that will carry biotech or more efficient R&D. Alternatively, if they them. The industry’s representatives will through the next 30 years. The sooner can find ways to shorten the race itself, the need to be actively involved in the policy we can get there, the better. model could work with fewer runners. debate on healthcare reform, to ensure

17 John Martin, Ph.D. Gilead Sciences, Inc. Chairman and Chief Executive Officer Survival of the focused

The question of how we sustain growth in transparency for investors to understand assistance program. For companies our industry is, ultimately, one of how we and evaluate risk, which dampened and their investors, this means more sustain innovation in treatment advances investment. In the current crisis, the predictability, fewer surprises — and and ensure greater patient access to perceived risk is mostly systemic rather less risk. those advances. The global financial crisis than sector-specific, and biotech is one We also recognize that our research has had a direct and immediate impact on of many sectors that public investors efforts represent a small percentage the biotechnology industry, most visibly have abandoned. of the overall R&D landscape. Our in the consolidation and downsizing of expertise, however, allows us to many organizations. Without continued Responses evaluate and identify opportunities investment, we face the real danger outside our organization, and affords that an entire generation of biotech At Gilead, we survived past us the credibility to be a valued partner companies will be cut down. periods of uncertainty through a for other companies and academic concerted emphasis on what is most This danger is not unprecedented. We collaborators. In areas where we do not important — developing innovative have been threatened by economic, legal have an inherent efficiency advantage drugs. To this day, our approach is to and policy changes over the history of or strategic rationale for conducting apply critical decision-making to advance the industry. At Gilead Sciences, we have certain activities, we rely on the only those compounds that we believe endured challenging times, and faced the experience and capacity of partners. have the potential to truly address question of whether it made more sense For example, we have outsourced much unmet medical needs. In an environment for us to be acquired rather than remain of our manufacturing to partners with in which regulators and payors are independent. We persevered and went on substantial knowledge in this area. demanding more, it is more important to become one of the industry’s largest than ever that we all have this focus. and most successful fully integrated Drugs that offer significant advances in Rewards companies. Our experience may offer treating patients are the ones that will insights for companies that are similarly Tough times, as the adage goes, don’t gain market acceptance — and deliver challenged today. last. The question is what the industry the returns that investors require. will look like after this crisis is over. Will We have always believed in being a new generation of fully integrated Risks deeply connected with the healthcare companies emerge? I hope so. It won’t Risk is inherent in both the financial ecosystem. Our conversations and be easy, and many firms will perish, but and research components of our industry. collaborations with governments, I am confident that many will make it Bringing novel therapeutics to market companies, physicians and patients through — and be the tougher for it. is a lengthy, difficult and expensive help us understand the needs of the In summary: focus on what matters. endeavor, particularly compared to communities we serve. Through these Innovation matters, because that’s what product development in other industries. conversations, we have, for instance, drives value in this industry. Collaboration Only a small percentage of compounds developed access and care programs for matters for efficiency and strategic in development ever make it to patients who cannot otherwise obtain advantage. Connectivity matters, because commercialization. our medications in the developing success depends on understanding the world and industrialized nations. But With investors already facing significant needs of the communities we serve. being connected also gives a company R&D risk from biotech investments, valuable feedback to make its operations And that, in the final reckoning, is anything that substantially worsens more effective, allowing it to adapt the real reward — the opportunity to the odds can lead to precipitous clinical development programs, make make a difference in curing diseases declines in funding. In the early 1990s, manufacturing processes leaner or and helping patients. I can think of no proposed healthcare reforms were simplify the logistics of a patient greater motivation. initially undertaken without sufficient

18 Beyond borders Global biotechnology report 2009 James M. Cornelius Bristol-Myers Squibb Chairman and Chief Executive Officer Innovation from a string of pearls

A raft of challenges A string of pearls rely more on the intensity of a “can-do” culture. We are well on track to realize Over the next few years, escalating To achieve these goals, we have a total of US$2.5 billion in cost savings pressures will transform the restructured in two significant ways. and avoidance by 2012. as we know it. First, we are divesting assets to focus The industry will face a host of patent intently on innovative medicines. We expirations on many of its most important have moved away from our non-pharma The path ahead products, making innovation and R&D assets — selling our wound care and The drug industry faces sizeable productivity paramount. Meanwhile, access imaging businesses, for instance, challenges, and there will be no quick to physicians is fleeting, and governments and completing a partial IPO for our fixes. Pharma companies will not be able and payors are bearing down on prices, nutritionals group. to instantaneously replace the billions access and prescribing patterns. These measures have given us a of dollars of revenue they are slated to These challenges are being compounded strong cash balance, allowing us to lose over the next few years. For many by the global economic downturn, pursue the second critical component biotech firms, funding is challenging, and which could reduce the uptake of novel of our model: our “string of pearls,” investment is unlikely to return to historic medicines as customers balance medical a series of interrelated acquisitions, levels anytime soon. care with other basic needs. For biotech licensing agreements and partnerships But we believe it is possible — and companies, access to capital has dried with biotech companies. We intend to necessary — for biotech and pharma up — with potentially dire consequences become the partner of choice for the companies to come together to ensure for many innovators. biotech industry. that innovative medicines continue to get In the face of these challenges, old business We don’t have a one-size-fits-all approach to those who need them. To do so, we models are unsustainable, and companies to these alliances. Instead, we aim for will need to partner, to complement each must reinvent themselves — or fail. While transaction structures that can generate other’s strengths and weaknesses. it is clear that new models are needed, the greatest innovation and value. This is the path we are pursuing at there is no consensus around what shape In some cases, we may engage in a Bristol-Myers Squibb. We are already a those models should take. So, while all licensing agreement for a single asset vastly changed company — financially pharma companies are responding, they or a particular group of compounds. In more competitive, culturally more are taking somewhat different approaches other cases, as with our 2007 acquisition innovative and better structured for to the problem. Some are betting that of Adnexus, the value of the purchase delivering novel medicines for serious large-scale consolidation will provide a stems from the innovation we generate disease. In making these changes, path forward. Others have cast their lot by working closely together; as a result, we’ve also positioned ourselves as a with diversification, turning to generics or this subsidiary has flourished as part of much more attractive business partner. non-pharma products. the Bristol-Myers Squibb family. We are confident that this model will Bristol-Myers Squibb’s strategy — adopted The partnerships we’ve formed have promote a sustainable future of medical in late 2007 — is focused on combining been mutually beneficial, as they innovation and scientific cooperation, the best of biotech (intensity, allow for the cross-pollination of ideas bringing meaningful hope to patients entrepreneurialism and agility) and and culture. While our company’s and physicians fighting to prevail against pharma (global reach, vast experience investments have helped nurture the serious disease. and rich resources) with one central biotech industry, we’ve also been able goal: driving innovation. If we can to borrow lessons about how to operate succeed at being truly innovative, we leaner and more productively. By will all benefit — biotech, pharma and following the example of the biotechs, the patients we serve. we have managed to spend less on general and administrative expenses and

19 Venture capitalists speak out

We are in the midst of a global crisis that is buffeting industries from The more things airlines to wireless communications. But unlike most industries, biotechnology is no stranger to financing droughts, and biotech companies change, the more have become quite adept at surviving market slumps. This inevitably raises a couple of interesting questions. Has the biotech industry been they stay the same? here before, and will companies find creative ways to weather this difficult environment as they have in the past? Or is this crisis truly different, and what implications does that have for the industry? To address these questions, we reached out to a number of seasoned venture capitalists from across the US and Europe and asked for their insights. Have we been here before?

“We have been here before. There have been many periods of “Don’t panic, we’ve been here before! Yes, this is a global dramatic mismatch between capital supply and demand in recession of unprecedented magnitude, but biotech the history of the biotechnology industry. I am very confident funding has always been cyclical, and the industry has that these innovative, creative companies will once again always recovered. Today, the fundamentals remain strong. successfully adapt their business models to this challenging Patients still endure huge unmet medical needs — out of environment. Over the last two decades, the biotech 600 ‘classified’ diseases, only 20–25% have effective cures, industry has gained critical mass, and the demand for its and millions of patients still suffer from diabetes, cancer capabilities has never been greater — today, the industry is an and heart disease. Pharma still faces a colossal patent cliff, indispensable source of innovation for big pharma.“ and biotech is crucial for filling the pipeline — biotech’s productive R&D has produced thousands of products — Rainer Strohmenger, Wellington Partners currently in the clinic. So biotech-pharma deals, which tripled between 1999 and 2009, will continue. Yes, biotech “Biotech has gone through several bear markets before, has real challenges, led by financing risk. Hundreds of most notably following the burst of the tech bubble. What firms face capital shortfalls at a time when it is very hard to is different this time is the underlying deep recession in the refinance. No doubt there will be failures. But there will also world economy. However, compared with other industries, be survivors and there will be winners. Times are different, biotech is faring quite well. Large- and medium-cap biotech but some things never change.” have been among the best-performing sectors during this — Samuel Colella, Versant Ventures crisis. Fundamental drivers remain strong: patent expirations in pharma necessitate an ongoing partnership with innovative biotech companies. As a result, I expect biotech to be one of “We have been here before. The biotechnology industry’s the first sectors to attract new capital and recover.” core strength is translating novel science into breakthrough products. Thoughtful people never forget what this requires: — Ansbert Gadicke, MPM Capital hard work on the science, patience, collaborative teams, lots of capital and cooperative partners. Sometimes these elements combine to produce spectacular drugs and “Biotech has been through many down cycles, and they are diagnostics. Sometimes good efforts fail. And sometimes always challenging times for entrepreneurship and venture external factors such as economic cycles, confusing funding. But we also look at these times as an opportunity. regulations and slow reimbursement frustrate us. Visit with For portfolio companies, there is the opportunity to focus doctors, hospitals and patient groups to remind yourself why and prioritize, return to capital efficiency, hire great talent this intensely creative industry is needed. Focus on novel and differentiate themselves from their competitors. The approaches serving unmet medical needs. True innovation will opportunity for VCs is to identify outstanding companies that still get funded and rewarded.” can prosper despite a difficult environment. Retrospectively, we find that great companies and investments often emerge — Brook Byers, Kleiner Perkins Caufield & Byers from the toughest economic conditions.”

— Amir Nashat, Polaris Venture Partners

20 Beyond borders Global biotechnology report 2009 Or is it different this time?

“This time it’s different because the public investors have been “This time it’s different. The model of investing US$50 million burned too many times and pharma growth has ground to a or more for proof-of-concept has grown too risky for most halt. We must now finance companies developing products investors. With unpredictable public markets, projects will and technologies that look very different from the types of need to be financed longer — even to approval or market things that have come before.” launch — requiring much larger investments and/or greater R&D efficiency. Breakthrough science and proven teams — Douglas Fambrough, Oxford Bioscience Partners can still produce strong returns, but frequent failures have hurt overall VC returns. With further fund declines ahead, the biotech VC industry will shrink. We will need new models “This time it’s different. The 2001–02 biotech bust was to boost success rates and returns on investment, but the contained and self-inflicted from our industry’s perspective, current crisis will still form the basis for new winners.” but the current downturn is far-reaching and externally driven. Last time, the promise of genomics engendered early-stage — Andreas Wicki, HBM BioVentures companies with valuations that proved unsustainable when the timelines to product launch became clear — but much of the industry remained robust. This time, a persistent funding gap “Historically, few biotechs have gone under. This will change in will dramatically cull investors and companies. Biotechs with 2009, amid a record downturn. High-quality companies — both novel products will flourish, even if they have to endure a down early- and late-stage — will still raise money, but will need to round. But many lesser companies that might have survived rework business plans, seek capital efficiency and extend prior crises face a much harsher climate today, leading to runways. For the first time, many VCs are focusing on public shotgun marriages and even insolvencies.” companies — and uncovering remarkable values. But while much in today’s market is unprecedented, one truth endures: — Bryan Roberts, Venrock the best investments are often made in difficult times.”

— David Leathers, Abingworth “We are living the tale of two cities. Biotech companies with cash and exciting pipelines, versus those that lack either — or both. Venture investors that closed their funds before the “It’s always different in biotech because we have no stable downturn, versus those trying to raise funds now. Pharma business model. The industry has become more responsive to companies that have late-stage products to get them through investors than big pharma buyers. As new money flows to the the patent cliff of 2012, and the ones that do not. And largest funds, they can dictate valuations. This transfers value products that offer true advances for patients, versus those from early to late investors. As a result, we have abandoned that are merely incremental. The contrast between haves and early-stage investing when pharma is asking for innovation. If have-nots has never been starker. Our industry will survive politicians eliminate the problem of ‘excess’ capital, we might and emerge stronger because smart people are working hard see a ‘pharma-centric’ bioventure industry emerge to seek a to fill real unmet medical needs. But over the next few years, sustainable business model.” its resilience will be tested as never before.” — Standish Fleming, Forward Ventures — Nicholas Galakatos, Clarus Ventures

21 Valuing innovation: new

approaches for new products Andrew Dillon Sarah Garner, Ph.D. NICE NICE and changing expectations Chief Executive Associate Director for R&D

The global financial crisis is straining healthcare resources, they dislike the idea threshold by the UK’s Department of the budgets and spending priorities of that costs are taken into account when Health, so we’ve had to work one out individuals, businesses and governments. deciding what treatments should be made for ourselves, based on what we believe These days, many are being asked to available. It’s a very human contradiction. represents good value for money for the do more with less. Since long before And as always, details matter, so the NHS. To guide us in setting a threshold, this crisis, however, healthcare systems specific approaches to measuring costs we took advice on the threshold which around the world have struggled to and benefits generate controversy. had been used by NHS organizations meet patients’ expectations and seize before NICE was established. Over time, To quantify benefit, NICE considers the health-technology opportunities within it became apparent that the advisory impact of different treatments using a the constraints of available financial committees generally approved at a common yardstick, the quality-adjusted resources. At the National Institute for cost per QALY below around £30,000 life year (QALY). The QALY measures Health and Clinical Excellence (NICE) (US$43,600) and were generally more not just the length of life under an in the , we have been cautious in doing so above this figure. intervention, but also the quality of dealing with these issues since 1999, This experience was subsequently that life — whether patients are able and our methodologies have evolved to translated into a decision framework to undertake their usual activities, address some of the challenges facing which guides committees to routinely for instance, or how much pain they evaluators of new health technologies. approve treatments falling below experience. On the cost side of the £20,000 (US$29,200) per QALY and ledger, NICE considers expenditures to normally approve those costing Costs and benefits incurred by the NHS and personal between £20,000 and £30,000. Above social services (PSS) provided by The fundamental question is this: how this level, committees would rarely local governments. NICE appoints should a society allocate its healthcare approve treatments, although they can independent advisory committees to expenditures to best meet the needs of and do. Some argue that this range is make decisions based not only on this patients? This is not very different from too high, displacing more cost-effective economic analysis, but also on clinical the resource allocation decisions made interventions, and others argue it is effectiveness evidence, submissions by other economic agents — households too low, preventing novel interventions from stakeholders and testimony from choosing to save or spend, or companies from being available. We are bringing patient and clinical experts. deploying capital across different stakeholders together in 2009 to hear investments. One way to address the Because the NHS has a fixed budget, arguments on both sides. problem, therefore, is to use the same any money spent on a new intervention methodology implicit in those other is not available for other things. To be New approaches: measuring “benefit” economic decisions — weighing relative considered cost-effective, therefore, costs and benefits. a new intervention should provide at As discussed above, NICE considers least as much benefit (in QALY terms) as impacts within the healthcare This is precisely what NICE does. other interventions that could have been system — benefits for patients and The agency uses an approach called purchased using the same money. caregivers relative to costs incurred by “cost-utility analysis” to compare the costs NHS and PSS. However, this approach and health benefits of new interventions Of course, we can’t measure the raises the possibility that we may miss to those already provided by the UK’s cost-effectiveness of every alternative costs and benefits that ultimately National Health Service (NHS). While this intervention across all of the NHS, matter to patients by not taking a may sound straightforward, in practice it so we have had to make assumptions wider economic perspective. If we has been somewhat controversial. NICE about cost-per-QALY thresholds at were to broaden our perspective — as surveys show that while most NHS users which interventions may be deemed some have argued we should — by, for support the efficient and equitable use of cost-effective. We weren’t given a example, taking account of the impact

22 Beyond borders Global biotechnology report 2009 on the economy of returning someone approved for advanced and/or metastatic incentives for healthcare investors and to full employment, we would be using renal cancer; an arrangement where innovators, and the ultimately finite resources allocated for health to pursue the company pays for the first cycle of resources of the healthcare system. nonhealthcare objectives. treatment contributed to the agreement. With aging populations and increasingly constrained budgets, these pressures are Certainly there could be circumstances only going to grow. where much of the cost (or cost saving) New approaches: life-extending is incurred outside the NHS and PSS, or treatments Our methods have sometimes generated where the majority of the “benefit” is not controversy. Perhaps that is to be Shepherding new products through health-related. In a number of exceptional expected — after all, those methods do regulatory approval is, of course, a long circumstances, the Department of Health require putting monetary values on health. and expensive process. In recent years, has agreed that NICE can consider a But one way or another, all health systems new biologics have increasingly been wider perspective for costs and benefits. make such choices — NICE’s methodologies targeted at small subpopulations of This has to be agreed at the start of the simply enable us to make them in a more patients. These drugs sometimes come appraisal since it will affect the results of rigorous and explicit manner. with relatively high price tags. At these the economic analysis and may involve prices, NICE’s current methodology The challenge we are discussing here making recommendations about resource sometimes does not find the drugs can be summarized in two words: valuing allocation beyond the health system. cost-effective compared to existing innovation. What approach should The Department of Health is taking the interventions, even given the incremental be adopted by NICE to ensure that lead in researching and engaging with benefit they can offer. innovation is properly taken into account stakeholders on this issue in 2009. when establishing the value of new health This has, on occasion, spurred heated technologies? Should particular forms debate, particularly when the drugs of value be considered more important New approaches: pricing and access in question are treatments that could than others? In 2009, we have asked The UK’s voluntary Pharmaceutical extend life for patients with terminal Professor Sir Ian Kennedy of University Price Regulation Scheme (PPRS), which diseases. How much are additional College London to lead a study and chair modulates the pricing of pharmaceuticals months of life worth to patients and a series of workshops to discuss these manufactured by participating companies, their families compared to an equivalent issues with industry representatives, the including new biologics, has been revised healthcare impact for people with other NHS, patients and the general public. We in 2009 with a broader agenda and two conditions? How much more should the don’t claim to have all the answers, but new elements that better reflect value in healthcare system be willing to pay in we’re certainly open to asking questions the price of drugs. The first new element, these circumstances? Some argue that and launching a dialog. flexible pricing, allows a company to our existing analytical methods cannot increase or decrease its original list price fully account for this value. We would encourage others to do the when new evidence emerges concerning same. Our experiences at NICE may But we are working on new approaches. the drug’s efficacy or risks, or a different provide lessons for policy-makers In January 2009, NICE provided its indication is developed. The second in other countries as they seek new advisory committees with supplementary element, patient access schemes, can solutions. Companies need to be methodological advice on the issue of facilitate patient access for medicines actively engaged as well. They can valuing extensions to life for terminal that were not initially found to be cost or approach NICE for scientific advice patients. The advice applies in a defined clinically effective by NICE. about issues such as clinical-trial design set of circumstances — while recognizing and selecting appropriate outcome Even before the revised PPRS was agreed, exceptional situations, we also need to measures, and they should contribute patient access schemes have allowed maintain a consistent overall approach to to their local comparative-effectiveness us to give patients access to new drugs, equitably allocating the fixed resources of policy debate. Balancing the needs of sometimes by collaborating creatively with the NHS. patients, payors and innovators is not drug companies. Velcade, for instance, easy. For the health of our industry and was approved for relapsed multiple Valuing innovation the health of patients everywhere, we myeloma under an arrangement where will need healthy dialog. the company reimburses NHS for patients These are not easy issues. Our work who make a less-than-partial response at NICE attempts to strike a balance to treatment, based on a predetermined between the expectations of patients and measure. More recently, Sutent was families, the need to provide commercial

23 Global year in review Turbulent times

For the global biotechnology industry, by 46%, from US$30 billion in 2007 to for public companies, venture funding as for the rest of the world economy, US$16 billion in 2008. Not surprisingly, accounted for 37% of total biotech the biggest developments of 2008 the most dramatic falloff was in funds financing in 2008, up from 25% in 2007. were in the capital markets. The market raised from public investors. The amount Venture financing remained relatively meltdown, born in increasing defaults of capital raised in IPOs fell by a dramatic strong in the US and Europe, but fell on US subprime mortgages, rapidly 95%, from US$2.3 billion in 2007 to more sharply in Canada, where there was spread beyond borders, sending stock US$116 million in 2008. The bulk of this a 41% decrease. markets plummeting and fueling a credit funding came from Europe, where three Across the world, biotech companies crisis. In the US, the aggregate market companies went public and raised about can expect a more challenging funding capitalization of the biotech sector, which US$111 million. In the North American environment in 2009. Investors in rose 21% between 1 January and market, IPOs all but disappeared. There publicly traded biotech companies, 15 August, fell sharply in the fourth was just one listing in the US, for a which provided the majority of the quarter, closing 2008 down slightly relatively meager US$6 million, and none industry’s capital in recent years, are relative to the beginning of the year. at all in Canada. Some Asian companies unlikely to return in a big way. Many The impact of the stock market crash did manage to go public in spite of the of these investors have seen their fell disproportionately on the industry’s market conditions, with three IPOs on portfolios decline with the overall stock smallest firms, which saw their valuations Japanese stock exchanges and two market. The era of easy money and fall precipitously. A significant cohort of listings by Chinese firms. high leverage has ended, and there is firms was even trading at values below In recent years, follow-on and other simply less capital to go around, leaving the cash on their balance sheets, as wary offerings have accounted for the majority biotech companies with less funding investors implicitly assigned negative of the biotech industry’s financing. For in the months ahead. And while VCs valuations to the intellectual property instance, these financings — which consist have not abandoned the sector entirely, and other assets of these firms. Similar primarily of follow-on equity transactions, they are being more selective in an declines were seen in other major debt offerings and private investments in environment of challenging exits and markets during the year, as the industry’s public equity (PIPEs) — accounted for 68% reduced valuations. market capitalization fell by 35% in of the industry’s fundraising in 2007. In Europe and by 61% in Canada. 2008, money raised from such financings Financial performance totaled US$9.9 billion — less than half the Financing US$20.3 billion raised in 2007. The revenues of the publicly traded global biotechnology industry increased by 12%, The market turmoil led to significant Venture capital held up relatively well from US$80.3 billion in 2007 to US$89.7 declines in funding in 2008. Overall, during the year, falling by only 19%. As a billion in 2008. However, this growth was capital raised by biotech companies fell result of the steeper decline in financing unevenly distributed across regions.

The year in financing: US, Europe and Canada 2007 and 2008 (US$m) 2008 2007 Percent change Type US Europe Canada US Europe Canada US Europe Canada IPO 6 111 0 1,238 1,010 5 -99.5% -89% -100% Follow-on and other offerings 8,547 1,115 271 14,689 4,880 703 -42% -77% -61% Venture financing 4,445 1,369 207 5,464 1,604 352 -19% -15% -41% Total $12,998 $2,595 $478 $21,391 $7,494 $1,060 -39% -66% -55%

Source: Ernst & Young, BioCentury, BioWorld, VentureSource and Windhover Numbers may appear inconsistent because of rounding Percentage changes for Europe and Canada based on conversion of currency to US dollars

24 Beyond borders Global biotechnology report 2009 In the US, top-line growth fell into Global biotechnology at a glance in 2008 (US$m) single-digit territory as the sector’s Asia- revenues increased by only 8.4%. Global US Europe Canada Pacific However, US revenue was trimmed Public company data by the acquisitions of several mature Revenues 89,648 66,127 16,515 2,041 4,965 biotechs. After adjusting for the impact R&D expense 31,745 25,270 5,171 703 601 of three large deals — Millennium Net income (loss) (1,443) 417 (702) (1,143) (14) Pharmaceuticals’ acquisition by Japan’s Number of employees 200,760 128,200 49,060 7,970 15,530 Takeda Pharmaceuticals, ImClone Systems’ purchase by Eli Lilly, and the acquisition Number of companies of Applied Biosystems by Invitrogen Public companies 776 371 178 72 155 (since renamed Life Technologies) — the Public and private companies 4,717 1,754 1,836 358 769 sector’s revenues would have grown by Source: Ernst & Young 12.7% instead of 8.4%. Revenues were Numbers may appear inconsistent because of rounding Employment totals are rounded to the nearest hundred in the US and to the nearest ten in other regions also diminished by slower growth at the industry’s largest revenue-generating company — Amgen. While Amgen’s In the Asia-Pacific region, revenues grew companies have always been outweighed revenues grew by a compound annual by an impressive 25%, led by strong by the losses of large numbers of smaller, growth rate of 27% between 2002 and growth in Australia, where the sector pre-revenue firms. For several years, 2006, they grew by only 1.6% in 2008, benefited from strong sales of CSL’s Ernst & Young has forecast that the US largely as a result of regulatory and Gardasil. Indeed, in each region, a few publicly traded biotech industry would reimbursement developments that hurt mature companies had a disproportionate reach aggregate profitability before the sales of some of its products. impact on top-line growth, highlighting end of the decade. The industry inched that biotech remains an industry of haves closer to that benchmark in recent In Europe, the revenues of publicly and have-nots. years — including coming within a hair’s traded companies increased by 26%. breadth in 2007 — but never quite made Sustained investments in R&D are This growth rate was boosted by the it. In 2008, the sector finally reached critical to the future success of biotech impact of fluctuations in the exchange aggregate profitability with aggregate companies, and it is encouraging that rate — when stated in euros, revenues net income of US$0.4 billion. Alas, this global R&D expenditures grew by 18% in grew by 17%. The vast majority of this accomplishment will likely turn out to be 2008 — outpacing growth on the top line. increase is attributable to strong product short-lived, given Roche’s acquisition of While the growth in R&D differed across sales at a handful of mature European Genentech in 2009. biotechs, including Actelion, Elan, Eurofins regions, it grew by strong double-digit Scientific, Meda, Qiagen and Shire. rates everywhere except Canada, where Boosted by this positive development R&D expenditures were negatively in the US and by a strong showing in In Canada, revenues of publicly traded affected by the four large acquisitions Europe, where net loss declined by a biotech companies decreased 9%, from mentioned above. very significant US$1.5 billion, the global US$2.2 billion in 2007 to US$2 billion in industry’s bottom line improved by an There was some exciting news with regard 2008, mainly due to the acquisitions of impressive 53%, from a net loss of about to one long-anticipated development: the four significant Canadian firms — Arius, US$3.1 billion in 2007 to a net loss of profitability of the US biotech industry. Aspreva, Axcan and Draxis — by foreign US$1.4 billion in 2008. In the absence As detailed in prior editions of Beyond companies. If 2007 revenues were of the Genentech acquisition, it was borders, the US publicly traded biotech adjusted to exclude those four companies, quite conceivable that the net profit of industry has never been profitable in the industry’s revenues would have the US sector could have soon become aggregate, because the profits of a increased by 26% instead of falling. large enough to make the global industry relatively small group of successful profitable in aggregate. With the loss of

25 Genentech, of course, it will be a lot longer M&A activity was robust in both the Deal activity was also brisk on the before the US or the global industry sees US and Europe. The total value of M&A strategic-alliance front. The potential aggregate profitability again. transactions involving US biotechs was value of strategic alliances involving US more than US$28.5 billion — a record biotech companies reached an all-time The number of companies and number high not counting megadeals in prior high of almost US$30 billion, while the of employees fell in 2008 — a sign of the years, such as the 2007 acquisition of potential value of alliances involving times and a harbinger of things to come MedImmune by AstraZeneca. Though European companies was US$13 billion as the industry is poised for significant absent any megadeals in 2008, the (€8.8 billion). consolidation in 2009. US totals were boosted by three large Reflecting the unprecedented challenges transactions valued at more than US$5 facing large and small companies, there Deals and creativity billion each: Millennium Pharmaceuticals’ were a number of creative deals in 2008. acquisition by Takeda Pharmaceuticals, Deal activity remained strong in 2008, Many of these transactions involved a small ImClone Systems’ purchase by Eli driven both by long-term trends such group of biotech companies that are widely Lilly, and the acquisition of Applied as big pharma’s need to reinvent itself regarded for their innovative platforms Biosystems by Invitrogen (since renamed because of looming patent expirations and drugs. These companies were able to Life Technologies). In Europe, M&A and by the immediate challenges created structure deals that often included options transactions totaled US$5.0 billion by the current funding environment. and allowed them to retain more upside. (€3.4 billion).

26 Beyond borders Global biotechnology report 2009 Growth in global biotechnology, 2007-08 (US$m) 2008 2007 % change Public company data Revenues 89,648 80,344 12% R&D expense 31,745 26,881 18% Net income (loss) (1,443) (3,055) -53% Number of employees 200,760 201,690 -0.5%

Number of companies Public companies 776 815 -5% Public and private companies 4,717 4,799 -2%

Source: Ernst & Young 2008 financials largely represent data from 1 January 2008 through 31 December 2008 2007 financials largely represent data from 1 January 2007 through 31 December 2007 Numbers may appear inconsistent because of rounding

To help close the valuation gap between the distractions which impact the companies’ expectations of sellers and what the market existing and potential partners. is willing to pay at a time of distressed valuations, acquisitions with earn-outs Outlook became a fairly regular feature even in the purchases of public companies — an The global biotech industry turned in a unprecedented development. solid financial performance in 2008, and the US sector’s attainment of aggregate Reflecting the considerable risks profitability is an encouraging, if largely that companies now face even after symbolic and fleeting, achievement. launching products, due to increased Yet, financial growth was led by post-marketing safety surveillance and a strong product sales at a handful of fast-changing pricing and reimbursement larger companies, underscoring that environment, a number of strategic biotech remains an industry of haves alliances contained contingent payments and have-nots. In the current funding linked to commercial milestones rather environment, of course, the realities than R&D milestones. facing those two sets of firms have The most watched biotech deal of the diverged, and many small-cap firms year — the acquisition of Genentech by will have a harder time raising capital, Roche — led to extensive negotiations particularly in the public markets. but did not culminate in an agreement Consolidation seems inevitable. For until March 2009. Meanwhile, other big biotechs looking to raise funds, the good pharmas undertook megamergers of news is that deal activity remains strong. their own, including Pfizer’s acquisition But here, consolidation of a different of and the merger of Merck & Co. sort — among big pharma firms — has with Schering-Plough. Biotech companies made the outlook more complicated. will need to monitor these trends, since To survive and thrive in this market, the integration following such large biotech firms will need to be vigilant, mergers can cause significant internal remain focused and harness creativity.

27 A Darwinian moment? A Darwinian moment?

The Americas perspective Americas introduction A Darwinian moment?

In September 2008, economic In 2008, the biotech industry outperformed the market …

conditions took a dramatic turn for EY biotech industry Nasdaq Dow S&P 500 the worse. In three tumultuous weeks, several leading financial institutions +40% either failed, were acquired or were bailed out by the US government. Stock +20% markets nosedived in waves of dizzying volatility. US regulators initiated a

series of unprecedented measures 0% to prop up ailing banks and boost a flagging economy. As a credit crunch

quickly devolved into a deep global -20% recession, the world economy — which had till then been limping along with a low-grade fever — suddenly seemed -40% struck by a life-threatening infection.

Not surprisingly, the economic turmoil -60% has had a considerable impact on the US Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan biotech industry. The aggregate market Source: Ernst & Young, finance.yahoo.com EY biotech industry represents the aggregate market cap of all US public biotech companies as defined by Ernst & Young capitalization of the sector, which rose 21% between 1 January and 15 August, fell sharply in the fourth quarter, closing 2008 down slightly relative to the … but smaller companies fared considerably worse beginning of the year. While this showing Largest cos (market cap > US$10b) EY biotech industry Mid cap (US$2b - 10b) handily outperformed broad market Small cap (US$200m - 2b) Micro cap (below US$200m) indices such as the Dow Jones Industrial

Average, the Nasdaq Composite and +40% the S&P 500, each of which fell 30% to 40% during 2008, the biotech sector’s numbers were boosted considerably by +20% the strong performance of a handful of large mature companies such as Genentech, Amgen and Celgene. 0% The fortunes of smaller companies were not quite as rosy, and the impact -20% of the crisis fell disproportionately on the industry’s smallest firms. The aggregate market value of mid-cap -40% biotech companies (defined as those with market valuations between US$2 billion and US$10 billion as of 1 January) fell -60% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 30% during 2008, while that of small-cap Source: Ernst & Young, finance.yahoo.com firms (those with market caps between EY biotech industry represents the aggregate market cap of all US public biotech companies as defined by Ernst & Young US$200 million and US$2 billion) fell

30 Beyond borders Global biotechnology report 2009 33%. For micro-cap companies (firms that financing fell to levels not seen since The pace of investments slowed started the year with market valuations before 2003. The market for IPOs, which significantly late in the year as the below US$200 million), the decline was had started to soften in the fourth quarter financial crisis deepened, and the bulk of an astonishing 52%. By 31 December, of 2007, all but disappeared in 2008. the year’s decline in financing occurred about 85 biotech companies were trading The year’s only IPO, by Florida-based in the fourth quarter. Capital raised by US at values below the cash on their balance Bioheart, occurred in February and raised biotech companies had averaged US$3.9 sheets, as apprehensive investors implicitly under US$6 million, a small fraction of the billion per quarter during the first three assigned negative valuations to the US$70 million the company had initially quarters, but fell to US$1.3 billion in the intellectual property and other assets of hoped to raise, and less than the typical fourth quarter. While follow-on offerings these firms. For these unfortunate firms, proceeds of a seed round of venture had maintained a pace comparable to the the decline in market valuation over the financing. The public markets were not prior year during the first three quarters, course of the year was a breathtaking 80%. much more forthcoming for follow-on there were no financings in this category offerings, debt and private investments in the last quarter. Combined with the in public equity (PIPEs), all of which fell lack of IPOs, this means that public equity Financing sharply. The only segment that fared well markets have effectively been shut for As one would expect, the challenging was venture capital, where — in spite of biotech companies. But even venture capital markets environment has also a 19% decrease relative to 2007 — the capital — the one positive element in the taken its toll on fundraising by the US US industry achieved the second-highest year’s financing data — fell notably in the biotech sector, as the US industry’s totals in history. fourth quarter.

Ernst & Young survival index US Canada 2008 2007 2008 2007 Number of Percent Number of Percent Number of Percent Number of Percent companies of total companies of total companies of total companies of total More than 5 years of cash 76 20% 124 31% 14 19% 37 43% 3–5 years of cash 18 5% 53 13% 3 4% 1 1% 2–3 years of cash 41 11% 39 10% 0 0% 4 4% 1–2 years of cash 74 20% 81 21% 14 19% 10 12% Less than 1 year of cash 162 44% 98 25% 41 57% 32 39% Total public companies 371 395 72 84

Source: Ernst & Young and company financial statement data Numbers may appear inconsistent because of rounding

Quarterly breakdown of Americas biotechnology financings (US$m) First quarter 2008 Second quarter 2008 Third quarter 2008 Fourth quarter 2008 Total US Canada US Canada US Canada US Canada US Canada IPO $6 $0 $0 $0 $0 $0 $0 $0 $6 $0 (1) (0) (0) (0) (0) (0) (0) (0) (1) (0) Follow-on $606 $41 $278 $11 $831 $28 $0 $0 $1,715 $80 (8) (3) (4) (2) (8) (3) (0) (0) (20) (8) Venture $1,202 $22 $1,192 $48 $1,177 $120 $875 $17 $4,445 $207 (97) (8) (65) (5) (77) (6) (59) (6) (298) (25) Other $2,120 $41 $879 $48 $3,427 $55 $406 $0 $6,832 $191 (41) (12) (48) (15) (43) (10) (36) (12) (168) (49) Total $3,934 $104 $2,348 $107 $5,435 $203 $1,281 $64 $12,998 $478 (147) (23) (117) (22) (128) (19) (95) (18) (487) (82)

Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource Figures in parentheses are number of financings. Numbers may appear inconsistent because of rounding.

31 Selected 2008 US biotechnology public company financial highlights by geographic area (US$m, percent change over 2007)

Number Market of public capitalization Net income Cash and Region companies 31.12.08 Revenue R&D (loss) equivalents Total assets San Francisco Bay Area 73 149,371 23,605 6,574 2,790 9,162 38,740 -4% 0% 10% 73% 9% 21% -2% New England 59 49,717 13,081 4,973 (49) 5,119 26,913 -8% -24% 15% 3% -92% 5% -5% San Diego 40 17,450 3,972 1,721 (945) 2,235 15,565 -9% -26% 24% -13% -21% -19% 57% New Jersey 28 31,952 3,962 1,637 (2,499) 1,702 8,971 -13% 7% 20% 42% 2705% -13% -5% Mid-Atlantic 22 4,978 771 894 (614) 490 3,145 -4% -33% 11% 5% 5% -13% -6% Southeast 23 1,867 234 258 (304) 406 940 5% -30% -9% -63% -46% -22% -22% New York State 24 5,708 1,070 3,441 73 747 2,895 -14% -53% -30% 268% -120% -53% -36% Midwest 11 598 16 113 (154) 135 212 0% -54% -61% -17% -23% -45% -46% Pacific Northwest 15 1,575 219 481 (635) 241 853 0% -45% 41% -19% 0% -28% -16% Los Angeles/ 18 65,021 15,513 3,544 3,413 2,299 38,557 Orange County -5% 17% 2% -19% 30% -31% 4% North Carolina 11 1,071 434 310 (206) 346 880 10% -40% -4% 11% 81% -22% -12% Pennsylvania/ 15 8,441 2,481 761 (88) 1,180 4,974 Delaware Valley 0% -1% 10% 3% -80% -12% -4% Texas 10 1,281 138 174 (141) 182 504 -17% -9% -16% -24% -46% 75% -20% Colorado 9 912 29 158 (242) 136 301 0% -22% -69% 18% 82% -25% -18% Utah 2 3,375 436 159 16 277 776 0% 52% 57% 16% -152% 34% 26% Other 11 522 167 71 1 46 263 -15% -89% -59% -49% -102% -25% -12% Total 371 343,837 66,127 25,270 417 24,704 144,489 -6% -7% 8% 20% -431% -5% 1%

Source: Ernst & Young and company financial statement data Percent changes refer to change over December 2007 Numbers may appear inconsistent because of rounding

New England: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont Mid-Atlantic: Maryland, Virginia, District of Columbia Southeast: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Tennessee, South Carolina Midwest: Illinois, Michigan, Ohio, Wisconsin Pacific Northwest: Oregon, Washington

32 Beyond borders Global biotechnology report 2009 In the wake of a sharp economic Deals Technologies). Big pharma’s interest in downturn and fewer exit options, successful mid-cap biotech companies While rapid changes have radically altered venture capitalists (VCs) have become remains high, and we could well see more the environment for the biotech industry increasingly risk-averse and selective. such “mini-megadeals” in 2009. in recent months, some long-term drivers While the year’s overall venture funding remain unchanged. In particular, the While no megadeals were completed numbers look relatively strong, the pipeline challenges confronting big pharma during 2008, the back-and-forth totals mask the deterioration in the companies continue to become increasingly negotiations for the mother of all fourth quarter and the struggles of many urgent. Many firms face significant patent megadeals kept the industry transfixed smaller companies trying to raise capital. expirations in the years ahead and do not for much of the year. Roche offered In addition, VCs themselves face the risk have enough in the pipeline to fill the gap. in July to buy the minority stake in that their limited partners, who have Not surprisingly, big pharma companies Genentech that it did not already own, often seen declines in their portfolios, remained active buyers of biotech assets in and the two parties finally agreed will not be able to honor funding 2008, helping drive deal totals for the year in March 2009 to a US$46.8 billion commitments. And VCs looking to raise to impressive heights. purchase price, or US$95 per share. new funds will face a more challenging environment, many likely finding they The total value of M&A during the year Deal activity was every bit as heated for cannot raise targeted amounts. was more than US$28.5 billion — a record strategic alliances, where the potential high not counting the megadeals of prior value of alliances reached an all-time high Meanwhile, investors in publicly traded years, such as the 2007 acquisition of of almost US$30 billion. This was mostly biotech companies, which provided the Medimmune by AstraZeneca. In 2008, due to significant growth in the potential bulk of the industry’s capital in recent although there were no megadeals, value of biotech-biotech deals. years, are unlikely to return in force any there were three large transactions time soon. The turmoil in the capital valued at more than US$5 billion each: markets has ended the era of easy money Financial performance Millennium Pharmaceuticals’ acquisition and caused a massive deleveraging. There by Japan’s Takeda Pharmaceuticals, The US industry’s financial performance is now simply less capital to go around, ImClone Systems’ purchase by Eli Lilly, in 2008 was a mixed bag. The revenues of leaving biotech companies with less and the acquisition of Applied Biosystems publicly traded US biotech companies grew funding for the foreseeable future. by Invitrogen (since renamed Life by 8.4% in 2008, down from the 11.3%

33 US biotechnology at a glance (US$b) borders 2008.) As a result of these Public companies Industry total challenges, the company implemented 2008 2007 % change 2008 2007 % change a restructuring plan that included, among other things, worldwide staff Financial reductions targeting 2,500 positions, a Product sales $54.1 $49.9 8.4% $57.0 $52.7 8.0% rationalization of its worldwide network Revenues 66.1 61.0 8.4% 70.1 64.9 8.0% of manufacturing facilities and the R&D expense 25.3 21.0 20.5% 30.4 26.1 16.8% divestiture of some less significant Net income (loss) 0.4 (0.1) -430.7% (3.7) (4.2) -11.2% marketed products.

Industry The most anticipated financial-performance Market capitalization $343.8 $369.2 -6.9% — — — news was somewhat anticlimactic. For Total financings 8.6 15.9 -46.3% 13.0 21.4 -39.2% several years, Ernst & Young has been Number of IPOs 1 22 -95.5% 1 22 -95.5% forecasting that the US publicly traded Number of companies 371 395 -6.1% 1,754 1,758 -0.2% biotech industry would reach aggregate Number of employees 128,200 131,300 -2.4% 190,400 192,600 -1.1% profitability before the end of the decade. Source: Ernst & Young In 2007, the industry came within a hair’s Data were generally derived from year-end information (31 December). 2008 data are estimates based on January–September breadth of reaching that milestone, and quarterly filings and preliminary annual financial performance data for some companies. 2008 employee data are obtained from 10-Ks at time of publishing and include a combination of 2007 and 2008 employee data. The 2007 estimates have been revised for in last year’s Beyond borders we were compatibility with 2008 data. Numbers may appear inconsistent because of rounding. fairly confident the industry would reach aggregate profitability in 2008. Indeed, growth seen in 2007 and significantly a pro-forma basis) that had the merger the US biotech sector was profitable below the industry’s historical compound occurred on 1 January 2007, the 2008 in 2008 — with aggregate net income annual growth rate (CAGR) of about 15%. revenues of the combined entity would of US$0.4 billion, a historic, if largely As in previous years, the revenues of the have been about US$1.5 billion higher. symbolic, accomplishment. industry were diminished to some extent If these “lost” 2008 revenues are included It also turns out that the industry by the acquisitions of a number of larger in the industry’s numbers, the top-line was considerably closer to aggregate successful biotechs by companies outside growth rate would have been 12.7% profitability in 2007 than we had initially the biotech industry. In particular, the instead of 8.4% — roughly comparable to estimated. Our estimate of the industry’s year’s three mini-megadeals had a palpable the industry’s historic CAGR. net loss for that year included some impact on the industry’s top line. The extrapolation of fourth quarter results acquisitions of ImClone and Millennium by Revenues were also diminished by for companies that had not filed their big pharma buyers removed two firms that slower growth at the industry’s largest quarterly financial reports before our together accounted for more than revenue-generating company — Amgen. publication was printed. In fact, the US$1 billion in revenues. This is the second year of slowing industry’s 2007 net loss was US$0.1 revenue growth at the Thousand Oaks, The merger of Invitrogen and Applied billion instead of US$0.3 billion. California-based stalwart. Amgen’s Biosystems also dampened the industry’s revenues grew by a CAGR of 27% total revenues in 2008, even though between 2002 and 2006, but growth Biotech without DNA? neither company was acquired by a big slowed to 3.5% in 2007 and declined pharma firm. Instead, the merger resulted If aggregate profitability is a largely even further to 1.6% in 2008. For the in the formation of Life Technologies. symbolic accomplishment, it also most part, this slower rate of growth While we include the new company in our turned out to be, in hindsight, a was driven by the negative impact biotech industry numbers, one result of fleeting one. With the acquisition of of regulatory and reimbursement the accounting treatment of the merger Genentech by Roche in 2009, it is developments on sales of the company’s under US Generally Accepted Accounting hard to see how the industry will be erythropoiesis-stimulating agents (ESA) Principles (GAAP) is that for 2008, the profitable in aggregate any time soon. products, including safety-related new company reported the full-year The South San Francisco-based giant revisions to product labels and the revenues of Invitrogen and only those had a net profit of US$3.4 billion loss of or significant restrictions revenues from Applied Biosystems that in 2008, and its departure leaves a on reimbursement. (For additional were after the acquisition date. In its 2008 sizeable hole that other companies will discussion, refer to the “US year in annual report, Life Technologies states (on have to fill for the overall industry to review: products” article in Beyond become profitable again.

34 Beyond borders Global biotechnology report 2009 Biotech without DNA?

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

Revenues (US$b) 70

Biotech without DNA Genentech

60

50

40

30

20

10

0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ernst & Young and company financial statement data

… and the industry’s profitability will likely be very different after Genentech’s acquisition

Net income (US$b) 6

US biotech industry Genentech Biotech without DNA 4

2

0

-2

-4

-6

-8

-10

-12 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ernst & Young and company financial statement data

35 Indeed, Genentech has had an enormous evolutionary process that leaves us with in R&D and innovation. The implications impact on the biotech industry, and it a smaller, but stronger, biotech industry. of that article — that companies will need is hard to imagine what today’s biotech This question is posed repeatedly in to understand, embrace and help shape sector would look like otherwise. We this year’s Beyond borders, not least in four key trends that promise to shift referred to the Roche/Genentech deal the Global introduction article, where existing paradigms and provide some of as the mother of megadeals — that’s so we argue that the industry’s general the best hope for reaching a sustainable in more ways than one, since Genentech business model is becoming increasingly business model — apply in spades to US gave birth to the modern biotechnology unsustainable because of the sharp drop biotech firms. industry. It was the world’s first biotech in funding and corresponding reduction company — created in 1976 by the legendary venture capitalist Robert Swanson and the pioneering scientist Herb Boyer. Over the years, Genentech The number of biotechs trading below cash ballooned … never lost its pioneering and innovative 90 spirit. The company was responsible

for a series of firsts. It was the first 80 to bring biologic products to market, one of the first biotech companies to 70

go public (it has long owned the iconic 60 “DNA” ticker on the New York Stock Exchange) and was one half of the most 50 successful partnership in the industry’s 40 history. Most of all, Genentech’s ability

to remain innovative even as it grew companies Number of 30 into a mature organization, and its 20 remarkable success at developing numerous successful products, 10 demonstrated what was possible to new 0 generations of start-ups. 31.3. 30.6. 30.9. 31.12. 31.3. 30.6. 30.9. 15.10. 31.10. 15.11. 30.11. 15.12. 31.12. 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2008 2008 2008 Source: Ernst & Young and CapIQ A Darwinian moment? Number of companies trading below cash calculated based on the ratio of market capitalization on representative dates to the sum of cash and equivalents and short-term investments on the same date or most recent date available The landscape for US biotech will continue to be challenging in 2009 and 2010. For many smaller companies, … as more and more companies restructure to survive raising capital has become quite difficult, and the results are already appearing in 40 restructurings, layoffs, bankruptcies and 35 delistings. The number of restructuring

announcements by US publicly traded 30 biotechs, which had held steady at about 10 per quarter during the first nine 25 months of the year, jumped dramatically to 35 in the fourth quarter of 2008 and 20 31 in the first quarter of 2009. 15 At the other end of the spectrum, several mature, successful biotechs were 10 acquired by big pharma companies during announcements restructuring Number of 5 2008, and others will probably follow suit

in 2009. Consolidation seems inevitable. 0 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 The question is whether this will be a Source: Ernst & Young, company press releases and Fierce Biotech destructive culling of companies or an

36 Beyond borders Global biotechnology report 2009 A closer look In the “Global introduction” article, we mention that the process of evolution is Compensation and benefits in turbulent times neither linear nor smooth. Often it has been reshaped suddenly by cataclysmic Not too long ago, companies were waging a war for talent as they tried to attract events such as meteor strikes or volcanic and retain the best employees with compelling compensation and benefit programs. eruptions. In 1980, scientists were given Today, the landscape is different, with many firms having to implement hiring freezes, the opportunity to witness first-hand workforce reductions and cutbacks to compensation and benefits programs. the impact of a (somewhat smaller) Companies, both public and private, rely on short- and long-term incentive plans cataclysmic event, the eruption of Mount to link compensation with performance and delivery of shareholder value. But Saint Helens. The devastation — 230 with sudden and dramatic declines in economic circumstances, many are wrestling square miles of charred wasteland — led with a very real dilemma: how do they appropriately reward and retain their best scientists to anticipate that it would take performers while at the same time respecting that shareholders have not prospered many decades for the region’s ecosphere with their investment in the underlying stock? Some investors might argue that to flourish again. But they were surprised if performance targets are not met, companies should not override previously to find that the flora and fauna emerged established pay-for-performance programs. On the other hand, companies face the much sooner than expected. reality that proven performers are often courted by competitors even in downturns. Life, it turns out, is resilient. And if history Addressing “underwater” stock options is often a challenge. There is is any guide, so are the life sciences. no one-size-fits-all approach, and companies need to consider several important financial, regulatory and shareholder factors. Firms have used various approaches, including exchanging existing underwater options with new options and/or restricted stock; buying out underwater options with cash; doing nothing with existing grants but making new option and/or restricted stock grants early; and creating special one-time retention plans. Each approach has advantages, disadvantages and unique considerations. While modifying compensation strategies is a strategic business matter, companies will need to assess cost effectiveness, taxes and financial efficiency; be sensitive to investor issues; align with corporate and individual performance; and evaluate the effectiveness of program structures in foreign jurisdictions. Meanwhile, monitoring competitive pay practices with up-to-date data is challenging during times of tremendous change. While some firms are taking a wait-and-see approach on these issues, others are moving ahead. Regardless of how the rest of 2009 plays out in the executive-compensation arena, though, companies face a delicate balancing act that requires thoughtful action.

It is also worth remembering that not times — see “A closer look” on this page everyone shrinks in a downturn. Indeed, for more details). Even as the ranks of recessions — and yes, even the Great investors and industry supporters shrink Depression — have often been periods of as some decide they don’t have the tremendous innovation. For individuals stomach for it, others will double down and companies willing and able to take and position themselves competitively bold action, tough times can present for the industry’s return. In the past, opportunities, including lower costs of acquisitions of biotech firms by big business inputs, undervalued assets pharma companies have often inspired to acquire and cautious competitors. employees of acquired firms to form new Companies can also draw from an start-ups. The acquisition of Genentech expanded pool of available talent by Roche could lead to a groundswell of (though competition for the best new start-ups in the San Francisco Bay performers remains high as it becomes Area as talented scientists and executives more complex in turbulent economic decide to forge their own paths.

37 Jean-Jacques Jean-Paul Colin Louis Bienaimé Clozel, M.D. Goddard, Ph.D. Lange, M.D., Ph.D. BioMarin Actelion OSI Pharmaceuticals CV Therapeutics Pharmaceutical Inc. Pharmaceuticals Ltd CEO CEO CEO CEO CEO roundtable Only the innovative survive: perspectives from biotech’s next generation

Ernst & Young: What impact has the While the global financial crisis has had a palpable impact on the biotech current financial crisis had on your industry, that impact has been far from uniform. In many ways, the company? How are you responding? crisis has heightened the divisions between the industry’s haves and have-nots — between organizations that have the resources and financial Bienaimé: We are in a very enviable position. We raised close to US$560 strength to weather the crisis and those that are struggling to survive. million when the markets were For the most part, identifying which companies fall into which camp is healthier, and we haven’t spent it. As fairly straightforward. As one might expect, there has been little fallout a result, we are cushioned from the for the top tier of global, mature large-cap biotech companies, while at immediate impact of the financial crisis. Of course, if the crisis deepens, our the other end of the spectrum, hundreds of emerging, privately held or revenues could be impacted, but we small-cap biotechs are having difficulty. have not seen much of that so far. We But what about the firms that lie between these two extremes? How is have tried to conserve cash by staging some of the R&D expenses and reducing the potential “next generation” of mature firms faring, and how do their or delaying some of our projects. We prospects affect the sustainability of the biotech industry? remain well positioned, and 2008 was our first profitable year. We sat down with the CEOs of four mid-cap commercial-stage firms in early 2009 to get their perspectives on the crisis and its implications. Clozel: Our revenue has also not been hurt by the crisis. When you sell, as The companies have similar profiles. Each of them is publicly traded we do, an effective drug for a severe, and has been public for about a decade. They have marketed products life-threatening disease, product sales and sustained revenues from product sales. While none of them has yet remain strong regardless of market reached the global scale of biotech industry leaders, they are all either conditions. We haven’t been completely immune, of course — our share price profitable or cash-flow-positive. has not moved much, even though our Interestingly, they also have some similar perspectives on the crisis. product sales grew by about 40–50% They view this environment as having created more opportunities than over the last two years. How are we responding? Well, so much of what risks for their companies. They see an inevitable wave of consolidation is happening in the markets is being ahead and worry about the implications for funding, innovation and new driven by factors beyond our control company formation. But at the end of the day, they believe fervently that the best thing is simply to focus that it is innovation that creates value in this industry. With that guiding on what we do best: work even harder at finding new drugs. In this market, principle, they are optimistic about biotech’s long-term potential and the it’s much more difficult to get debt ability of the industry at large — and their companies in particular — to financing for acquisitions, so no one deliver meaningful value for investors, shareholders and patients. should count on the fallback solution of buying products and pipeline from

38 Beyond borders Global biotechnology report 2009 other companies. Now more than ever we have to make sure Second, companies at our stage of evolution face more earnings that the breakthrough drugs we will need for our growth are scrutiny, which implies that we need to appropriately balance developed from within. financial performance against reinvestment. While we’re all trying to create value, there’s an inevitable dichotomy between the focus Lange: We have spent much of the last five years ending in of some shorter-term investors and the generally longer-term late 2008 monetizing a decade-long US$1 billion investment view of companies. Investors have a job to do which can lead to a in R&D that resulted in three product approvals and two shorter-term focus. But to create sustainable shareholder value, partnerships. As a result, we were able to initiate new revenue we need to balance short-term financial performance against streams and pay down much of our debt. Of course, we didn’t the longer-term need to reinvest. One way to do this could be know that the financial markets were going to crater, but through creative and thoughtful transactions that have less in hindsight our timing was good. We are going forward in income-statement impact. Over time, of course, with sustained 2009 with a healthy amount of cash on the balance sheet and top-line growth comes credibility and more latitude from investors enough money to get to profitability if things go well. We were to reinvest. We’re on that journey, but it does impact how we preparing to become a profitable biotech company regardless respond to the opportunities in front of us today. of the economic picture. That strategy now provides us with many different choices that are reasonably independent of Those are the opportunities. In terms of risk, one of our having to raise equity dollars. I’m incredibly optimistic about frustrations is around the volatility in interest rates and CV Therapeutics. We had three products approved last year, currency exchange, since a significant proportion of our we raised money, we have a robust pipeline and a strong revenues are earned outside the US. We are considering regulatory track record. We have very good relationships and hedging strategies, but the volatility is there at a level that is credibility with both the Food and Drug Administration and the quite unusual. It’s something for us to think about in terms of European Medicines Agency. We have a bright future with a managing the business as a whole. lot of value that is only going to increase. [Editor’s note: in the Bienaimé: Interest rates have impacted us as well. Interest months after this interview, CV Therapeutics was acquired by rates have fallen with the onset of this recession, lowering the Gilead Sciences for US$1.4 billion.] interest income on our fairly sizeable cash balances and creating more risk on this front. The most significant risk, though, is the Ernst & Young: Challenging economic times produce new potential pressure on reimbursements. This hasn’t materialized risks as well as new opportunities. On balance, which is yet, but, if economic conditions around the world deteriorate, greater for your company at the current time — emerging I’m sure there will be some pushback from payors. opportunities or new risks? What specific challenges or In terms of opportunities, as already mentioned, there are opportunities are you seeing? several smaller biotech companies that have no revenues and no cash. We are getting an increasing number of calls about Goddard: There’s much more opportunity than threat for companies that are desperate, some of which have decent a company like ours, which is anchored around a solid and assets but no ability to fund further development. That creates growing product, because it allows us to look for strategically buying opportunities for us. enriching platform technologies or pipeline assets. We need to do this in a thoughtful manner. First, we need to remember Bigger companies may be less willing to buy some of these that just because something is on sale doesn’t mean that it’s a struggling companies. Well, we’re not big pharma. We good buy. are willing to take some risks with which they may be

39 uncomfortable. Regardless of what they might say, I suspect Ernst & Young: The conventional wisdom is that health-related that big pharma is still uncomfortable with expensive biologics. industries such as biotech are fairly recession-proof — people They worry about the impact to their public image from fall sick and need healthcare regardless of the business cycle. products with price tags exceeding US$75,000 or US$100,000. Is that principle still true?

Benaimé: It’s still true, but with a caveat. Biotech remains somewhat independent from economic cycles because the “Bigger companies may be less willing to buy some valuations of specific companies are dependent upon product of these struggling companies. Well, we’re not big development cycles more than economic cycles. I don’t think pharma. We are willing to take some risks with that’s going to change. However, if the recession continues to deepen for several years, we will inevitably see some impact on which they may be uncomfortable. Regardless of reimbursement and pricing. what they might say, I suspect that big pharma is Clozel: In many ways, biotech remains one of the better-positioned still uncomfortable with expensive biologics.” industries in this crisis. That doesn’t guarantee that we will remain completely immune to its effects over time, but it does mean that we will need to deliver even better drugs. Governments will come under tremendous fiscal pressure as budget deficits balloon and unemployment soars. So only the Clozel: The global financial crisis creates two significant challenges. The first is the impact on drug pricing and the potential for downward pressure on prices. The second challenge is the lack of credit, which could impinge on our ability to make an external expansion. Though we have over CHF1 billion (US$0.9 billion) in cash and short-term deposits, we will need to deploy those funds carefully. I also think the crisis creates some big opportunities. Many companies that are strapped for capital are having to resort to layoffs and turning to licensing deals, which increases the number of experienced specialists and attractive products available to us. We are looking to grow our organization, and I intend to hire an additional 300–500 people globally over the next 12–18 months. So this is a great opportunity for us. Lange: We seized an opportunity when the credit markets froze. Many of the hedge funds holding our convertible debt were in a liquidity crisis, so we repurchased some of our debt at extremely favorable terms. We are now well positioned to go out and fill our pipeline. Many biotechs are unable to raise money today, and their assets are selling at deep discounts. With cash in hand, we have been looking for commercial products and development-stage candidates, and we see tremendous value out there. We can bring When the a lot to any program through our proven track record of executing and securing regulatory approval. drought is over, will we seed real replacement companies?

40 Beyond borders Global biotechnology report 2009 The question is how we will replenish the sector after these “In recent years ... VCs have changed their funding acquisitions. When the drought is over, will we seed real approach — they have placed many more bets, yet replacement companies? In recent years, in response to the pressures they have faced, VCs have changed their funding we have fewer real companies being built in terms approach — they have placed many more bets, yet we have fewer of platforms, technologies and pipelines. What they real companies being built in terms of platforms, technologies are funding, instead, are often no more than project and pipelines. What they are funding, instead, are often no more teams disguised as companies.” than project teams disguised as companies. The investment is around a specific product with the goal of finding a buyer at a certain stage of development, typically clinical proof of concept. That’s a very different model from what we’ve had historically. best drugs are going to be reimbursed — not the “me-too” As the current situation is sorted out through acquisitions by products. Whether it’s automobile companies or biotech firms, pharma and mergers of public companies, I worry that we may innovation is the answer. not build the true replacement companies that have always been there in the past. I fear the entire company formation model has Ernst & Young: How do you see the current downturn? Is it broken down and we’re going to see a different industry emerge similar to crises past, or is this truly different from previous over the next three to five years. funding droughts? What are the implications for the future Benaimé: Yes, there is something truly different about this of biotechnology? crisis. This one is going to be much longer in duration and I think valuations will be reset at new levels for quite a while. For a long Clozel: The last crisis, at the end of the genomics bubble, was really time, we’ve anticipated consolidation and it never happened. different. Then, the crunch was in one sector which had been hyped Well, I think we are finally going to see significant consolidation and then came crashing back to reality. Now, it’s a global crisis, in the industry over the next eighteen months to two years. which makes it a much more profound and worrisome condition. There were too many companies founded on very narrow Lange: I do think it’s different. The worst period that I can technology or a single product, and I don’t think that model is remember before this was the nuclear blizzard from the going to be very viable anymore. proposed US healthcare reform in 1993 and 1994, when it was very difficult to raise money. We were fortunate then as well. We Ernst & Young: Will this consolidation be a positive or raised money just before that and got through it fine. This time, negative development? Will the winnowing of firms produce it’s much worse because of the overall asset deflation across more sustainable, robust companies, or will it prune all asset classes. There’s no credit around. I think the venture innovative technologies and products that might otherwise community is seeing forced withdrawals, forced liquidations, and have come to market? pension funds and endowments that are unable to honor their commitments, so their funds are evaporating. Having cash is Clozel: Like most things, it’s a bit of both. There will be some critical to surviving for the next year or two. Darwinian selection, which may not be entirely bad, because There are too many biotech companies, and the days of funding natural selection implies that the fittest will survive. Many of 2,000 biotech companies are numbered. This asset deflation crisis will drive large numbers of sales and bankruptcies, and venture funding to start new companies in classic biotech is “There will be some Darwinian selection, which going to be extremely limited. There likely are opportunities in services, diagnostics, electronics, personalized medicine and may not be entirely bad, because natural selection very late-stage, highly novel therapeutics. But the era of the implies that the fittest will survive ... money is going classic biotech company is over. to be more concentrated in better companies, which Goddard: This crisis is fundamentally different from others that could be a good thing ... The real danger is that we we have seen. In my view, the model that has been the engine may fail to fund the ideas that appear completely of company formation in this industry has completely broken crazy — and therefore high-risk — to us today, but down. Access to capital has become very difficult, and lots of biotech companies — in the absence of available financing which may prove to be real breakthroughs over time. choices — are looking at their options for being acquired by We can’t let all the funding go to low-risk R&D.” pharma or mid-cap or large-cap biotech companies.

41 Goddard: Cycles of consolidation and regeneration are quite “The FIPCO model is largely over ... I think the normal and healthy in most industries, and we have always had industry is going to return to models that involve a some of that in biotech. What’s worrying is the depth and scale of this consolidation cycle. You have to ask whether we will be more efficient use of capital, early de-risking and able to build enterprises for the creation of long-term value in the smart exits.” future. There are certainly brilliant private and public long-term investors out there, but most investors are working in a different time frame nowadays. Today, companies have less flexibility to adopt longer-term strategies for building multibillion dollar these companies were never really sustainable anyway. As enterprises. As a result, their approaches are inevitably skewed a result, money is going to be more concentrated in better more toward near-term M&A. That’s not to say that an early companies, which could be a good thing. M&A exit — at Phase II, for example — can’t be a way to realize

shareholder value. Of course it can. But we need an environment But we also risk curbing potentially breakthrough research. where companies can also build longer-term strategic value so A decade from now, when companies that might have been that being acquired is a major success rather than a defensive formed today would have delivered new products, we could feel outcome and a suboptimal, near-term exit. the impact of today’s crisis. If you are a young scientist with a major discovery who wants to start a company, you are probably going to have a hard time raising funds in today’s market. That’s Ernst & Young: What do these trends imply for the next very unfortunate, and quite worrying. round of companies? Will new generations of companies go The real danger is that we may fail to fund the ideas that appear the distance and become fully integrated pharmaceutical completely crazy — and therefore high-risk — to us today, but companies (FIPCOs)? If not, would that have implications for which may prove to be real breakthroughs over time. We can’t the sustainability of the industry? let all the funding go to low-risk R&D, because more than ever, we need groundbreaking studies. We need fundamental Lange: The FIPCO model is largely over. When we went public research. We need breakthrough technologies. in 1996, nobody thought a FIPCO was possible; most of the models then were partnerships going through Phase II. I think the Lange: I think investors will become more selective, but the industry is going to return to models that involve a more efficient problem is that it’s very difficult to pick winners and losers. use of capital, early de-risking and smart exits. Few could have predicted back in 1980 that a start-up named Applied Molecular Genetics would go on to become today’s CV Therapeutics was founded in 1992, and I think we faced Amgen. So if we become more picky, we might fail to create market conditions that were very different from what today’s some good companies. emerging companies are likely to encounter. Investors will not be as patient as they were with the companies founded in the early to Bienaimé: It’s inevitable that we will see significant consolidation. mid-1990s. And I don’t think the bull market for small-cap growth With regulatory, reporting and accounting requirements, the as in the late 1990s and early 2000s is going to return any time fixed costs of being a public company are high. I look at some soon. Over time, we raised about US$2 billion. The good news valuations — there are companies with market caps of US$5 is that we could. The bad news is, as we started buying back our million or US$6 million — where the officers’ compensation is convertible debt, it turned out we needed US$1.95 billion of it! more than the market cap. How long can that last? So, we might see FIPCOs created through spin-outs from large The consolidation will be driven more by biotechs merging to companies, where the new company already has revenue or is in survive rather than by pharma acquisitions. There are not many very late-stage clinical development. But if someone is looking biotech companies that can create noticeable value for big pharma. What does buying a company with even US$400 million in revenues do for Pfizer? Nothing. It would barely impact their top line. “There are fantastic opportunities for innovator So we will see some companies go under, but most of them will companies like ours to go the distance if they probably just morph into something else. I hope most of the manage well, make brutally disciplined choices on good assets will not be lost, but rather still be financed somehow where they spend R&D funds, and ensure that they within a smaller number of structures. While this will be painful are differentiated and innovative.” for some, it’s going to produce a more sustainable business model with more robust companies and a better allocation of resources.

42 Beyond borders Global biotechnology report 2009 Bienaimé: I can’t imagine why it would make sense for us to “I can’t imagine why it would make sense for us be acquired at this time. We’re in a position of strength. In to be acquired at this time. We’re in a position of 2008, we became profitable for the first time. We have nearly US$560 million in cash, a growing pipeline and double-digit strength ... We can remain independent even if there revenue growth. We can remain independent even if there is no is no financing opportunity for the next few years. In financing opportunity for the next few years. addition, I can’t think of any other company — biotech In addition, I can’t think of any other company — biotech or or big pharma — that would manage our assets better big pharma — that would manage our assets better than we than we do.” do. We’ve been very successful at commercializing Naglazyme ourselves around the world. We went from investigational new drug to approval for three products in three years, which is to build an R&D-based product company in biotech from scratch, very, very fast. If we were out of cash and had no revenue, that is going to be extremely difficult. that would be a different situation, but that’s not where we are. And with valuations depressed right now because of Bienaimé: Biotech has been a tough environment for many years, market conditions, being acquired wouldn’t make any sense and it’s not going to get any easier. There are so many hurdles. for our shareholders. Still, I think it remains possible for companies to become FIPCOs, and I think the industry will defy the odds. It’s good news that big Clozel: Big pharma is certainly looking to acquire companies, pharmas cannot buy the top fifteen biotech companies because and is even making hostile bids in many cases. But the once they go below the top ten, those companies don’t have a record clearly shows that size is not the answer. These big major impact on their operations. They are going to have to let companies did scores of mergers in the past, and those some of those second-tier companies mature. mergers did not create value for their shareholders. They are now pursuing short-term financial gains — cutting costs and Goddard: There are fantastic opportunities for innovator boosting margins. But the long-term solution is only through companies like ours to go the distance if they manage well, make innovation. Acquisitions don’t create innovation. They may brutally disciplined choices on where they spend R&D funds, allow you to extract more profits from the results of prior and ensure that they are differentiated and innovative. You innovation, but they don’t create new innovation. can still make the journey with your first product if you can get revenues to sustain you till you are financially viable — through If we were to be acquired by a large pharma, we would royalty financing, for instance. But at the end of the day, the get integrated into the larger organization and essentially question is whether the right exit for shareholders and for the disappear. That kills the smaller company’s innovative spirit, industry at large is being acquired or becoming a premium-valued and essentially destroys the thing pharma was hoping to buy. independent — the next Genentech or Gilead — in five years. The To remain innovative, biotech companies should instead grow job is still about building real strategic value so that everybody organically, by discovering and developing new drugs. wins. So, while M&A is always a viable option for value creation, I hope cooler heads will prevail in this crisis and we won’t engage exclusively in a level of pessimism that leads to widespread, Ernst & Young: What advice would you give small-cap premature transactions. biotech companies in the current environment?

Lange: The world has changed before our eyes, so discard your Ernst & Young: How do you see the relative merits of previous assumptions and old ways of doing business. This is remaining independent versus being acquired for your probably not a short-lived market decline, so you need to think company?

Goddard: Planning to sell your company is not a strategy. “The world has changed before our eyes, so discard Regardless of whether you believe the company can become a successful FIPCO or whether you believe it shouldn’t remain your previous assumptions ... The assumption that independent in the long term, there is only one strategy to follow: you will achieve a significant jump in valuation with manage the organization well and create long-term value. If you a positive Phase II study just isn’t true. If you are a do that, you will command an appropriate strategic premium in an company in Phase I or Phase II, focus on just how acquisition, or you will become a Gilead or a Genentech, and you will create value for shareholders either way. It’s as simple as that. long the road ahead still is.”

43 of innovative ways to raise money and keep going. Adapt your spend rate, your focus and your business model to survive. “You won’t create value for your company by going The assumption that you will achieve a significant jump in to investor meetings. You won’t discover drugs valuation with a positive Phase II study just isn’t true. If you are by selling yourself to the financial world. The best a company in Phase I or Phase II, focus on just how long the way to create value is by working hard in your road ahead still is. We got our first Phase III result in 1999 — a company labs.” decade ago. And here’s the rub: the bulk of the money we had to raise and spend came after that Phase III success. Bienaimé: Conserve cash. If you have less than six to nine Goddard: Both as an individual and as a company, we’ve months of cash on hand, try to merge with someone else as had some high highs and some low lows. At times, I’ve been soon as possible. Encourage your boards to be realistic about viewed as something of a hero, and in others, I’ve been seen as valuations. As time goes by, this is likely to only get worse, anything but. So I can tell you that the journey is a hard one, but some boards are being unrealistic about valuations and made more difficult in this environment. Be thick-skinned, bring waiting too long to enter a strategic transaction. Overall, I honest objectivity, and apply disciplined, bold management still believe in the long-term value of biotech. The biotech to your business. It may have been difficult, but I would do revolution is still in its infancy. it again in a heartbeat. Where else do you get the chance to Clozel: Biotech is difficult and complicated, and there are many really pursue a passion and have this sort of impact? I went into disappointments along the way, but don’t get discouraged. Instead, biotech because I wanted to study cancer and have the fun and immerse yourself in your work. You won’t create value for your challenge of participating in building a great business, and I’ve company by going to investor meetings. You won’t discover drugs had the opportunity to do all that and more. The tragedy — for by selling yourself to the financial world. The best way to create budding entrepreneurs, emerging companies and society at value is by working hard in your company labs. This crisis will pass. large — will be if those opportunities to build great, innovative And when the good times return, the results of your work will be companies are diminished for the long term by the current crisis even more valuable, because it’s going to be more rare. and its widespread ramifications.

Will new generations of companies go the distance?

44 Beyond borders Global biotechnology report 2009 The Darwinian challenge: Adelene Q. Perkins Infinity Pharmaceuticals, Inc. why evolution is vital for President building biotech

In biology and business, in natural They attempt to determine quickly Witness the most successful biotechnology selection and economic Darwinism, it is whether a product works, using a company of our era. In 1990, Genentech the fittest that survive. So companies, highly focused — and hence less was a human-growth-hormone company like species, need to evolve by expensive — approach, and don’t spend with enough capital from its initial deal with monitoring and adapting to changes money on infrastructure or pipeline Roche to conduct a large trial for tissue in their environment. Not surprisingly, building. If the product succeeds, plasminogen activator. By 1995, after each of the successful and sustainable attractive M&A exits are available; if it several clinical setbacks, Genentech was businesses with which I have been fails, investors’ losses are limited and forced to renegotiate the Roche deal on associated evolved over time. General balanced by other portfolio investments. terms that brought in no immediate money Electric expanded from lighting and But this “rifle shot” approach has its while giving away significant ex-US product appliances into financial services, drawbacks. The industry has a full rights. But critics of that restructured Bain & Company changed from an graveyard of single-product companies, deal failed to recognize its one saving information technology firm to a global and this approach does not build feature: a stock put, at an attractive price, strategy consultancy, and Genetics sustainable enterprises that can attract that prevented a stock-price free fall if Institute morphed from an agricultural and develop talented employees. Roche decided to let its call option expire. to a health-focused biotech. Experience Genentech got the one thing it needed: the In search of better alternatives, has shown that building a successful ability to evolve. Over the next few years, companies outlicense their technologies business is more about adapting to the company adapted its way through a and products. Biotechs typically delay changes than about picking the right number of additional setbacks, and by the partnering their assets for as long as strategy, technology or products from turn of the century, a star had been born. possible, hoping that their values will the outset. You don’t always have to be increase over time. Companies search for Of course, the ability to evolve does right, but you need to be nimble. the highest bidder for each subsequent not guarantee success. There are Unfortunately, applying these principles program and end up with multiple many examples of companies that to biotechnology is problematic. Since partners. This reduces risk by ensuring never delivered even after being given developing drugs is slow, expensive and that funding is not dependent on a single numerous opportunities by increasingly risky, financial and strategic investors collaborator and diminishes the potential weary investors. This simply highlights often invest based on what is needed to effect of the souring of any individual that success still requires good science, achieve specific product-development relationship. And having multiple partners good decisions and an element of luck. milestones. This can put extraordinary increases the possibility of buyers But good decisions can only come from pressure on companies to stay the course competing in an acquisition — helping to decisions that one has the ability to and pursue original milestones regardless bid up premiums. make. All too often, companies end up of whether the data continue to support in the untenable position of having no An obvious problem with multiple them. Furthermore, as additional choice but to bet everything on products partners, however, is that each capital is needed, the lag between when that no longer merit the bet. The collaborator cares only about the investments are made and when value company may want to change course, fate of its inlicensed product and not is recognized makes further equity but their funding structures preclude about other products in the pipeline financings too dilutive. evolutionary possibilities. or the fate of the entire organization. Consequently, this prevents companies Rifle shots and multiple partners from seamlessly reallocating investment Successful marriages dollars across products in response To reduce dilution, some companies To build sustainable companies, we to new information. Yet the ability to extend their initial capital by keeping need a sustainable source of funding change course and evolve — and maybe themselves on a very short leash, that allows for evolution. Since having even stumble a few times — is vital for focusing limited resources on multiple, competing partners creates an success in this industry. pursuing single-product opportunities. obstacle to portfolio reprioritization and

45 evolution, we must find ways to make mutually transformative relationship. • Interdependence: It is essential that partner concentration a strength rather This partnership replicates several the parties contribute to and benefit from than a liability. characteristics of the relationship each other’s success. With responsibility between Genentech and Roche, which is for global development, Infinity is As with any marriage, this should start credited with driving the companies to the motivated to seek Mundipharma’s with finding the right partner — someone number one oncology positions in the US insights on global commercialization with whom strategic interests are aligned and non-US markets, respectively — not a dynamics. This is reinforced by a and with whom you are willing to align bad role model! financial incentive, as Infinity receives your future. The structure must recognize significant double-digit royalties on the challenges that can test even the • Dependence: At the core of Infinity’s sales from successful Mundipharma best of relationships and include ways to recent partnership is a shared vision: the commercialization outside the US. preserve what is special to each partner global development and commercialization Mundipharma also has a financial while capitalizing on what the parties can of a rich pipeline of oncology products. interest in Infinity’s success, through contribute. The best structures embrace It is a vision better achieved together royalty payments from Infinity’s US three key elements: dependence, and to which each partner makes unique sales and a meaningful equity ownership interdependence and independence. contributions. Infinity brings novel product in Infinity. Relationships must be carefully defined to candidates, discovery and development optimize what is done together and what teams and the investigator relationships • Independence: It was essential to both is done independently — balancing speed needed for global product development. parties that Infinity retain independent and flexibility with access to capital Mundipharma brings a commercial decision-making during development — the and infrastructure. presence in oncology outside the US and right to reallocate resources across product a commitment to building the business, candidates in response to changing data. Infinity Pharmaceuticals’ recent but no discovery or US development Yes, the right to evolve! Interestingly, partnership with and capability in oncology. Finally, Purdue/ Infinity’s independence was facilitated by Mundipharma (associated companies) Mundipharma brings capital for global the parties’ interdependence — the bulk provides an example of how these product development. of Infinity’s pipeline was included in the dimensions can contribute to a partnership, thereby removing potential conflicts of interest with respect to product prioritization. And maintaining Infinity’s independence allows the company to retain its small-company culture and incentive structures — attributes that are critical for attracting and retaining the best employees.

Conclusion Building a successful biotechnology company is hard. Financing strategies that require you to get it right the first time also require that you be very lucky. To the contrary, structures that allow companies to evolve over time empower them to better manage the risks inherent in drug discovery and development. At the end of the day, of course, this improves the odds for successfully developing medicines that make a meaningful difference in patients’ lives.

46 Beyond borders Global biotechnology report 2009 Peter Wirth Genzyme Corporation Connecting the dots: Executive Vice President Legal and Corporate the impact of the global financial Development crisis on biotechnology

The global financial crisis has Fewer options This is now a buyer’s market. While venture fundamentally altered the market capitalists (VCs) have not abandoned This chain reaction has slashed public landscape for biotechnology companies. biotech, many face their own capital funding for biotech companies, and there The headline-making events of recent constraints and all see acquisition as the are few remaining good options. Deals with months — many in seemingly far-flung most likely exit. In a remarkable sign of the pharma companies are unlikely to play a sectors of the economy — connect in times, VCs have been more proactive in major role in filling biotech’s funding gap, often unexpected ways, with profound approaching big pharma and big biotech for a couple of reasons. implications for the biotech industry. firms to ask them which assets they might Market conditions for biotech companies First, big pharma is distracted. Pharma’s want to buy and tailoring their funding are now far from normal, and a return patent cliff boosted deal activity with and development plans accordingly. We to anything resembling normalcy will be biotechs in recent years, and it’s true are also seeing more deals with earn-outs neither quick nor easy. that big pharma still desperately needs (even with public companies!) and option products. But in the near term, these firms deals with prenegotiated prices but no firm are more likely to focus on realigning cost commitment to buy. Connecting the dots structures for the rapidly approaching A major reason for the severe impact of future when most of their products will New models the financial crisis lies in how the dots are compete with lower-margin generics. It isn’t connected. The crisis started, of course, easy for a large company to make radical These are worrisome trends. We need in the US mortgage markets — a segment changes from within, because of cultural innovation. But drug development that, on the surface, would seem to be inertia and other barriers. But a company is expensive, and without adequate far removed from biotechnology. But may be able to overcome those barriers funding, much of that innovation may the collapse of the mortgage market by merging with another large firm and be threatened. also damaged many large investment “buying margin” — the merger boosts the In this environment, we will need new banks, which held significant numbers top line while also providing an opportunity business and financial models. Companies of mortgage-backed securities. Those to slash redundant costs. Consequently, must consider capital-sparing business banks were, in turn, prime brokers to many are predicting increased merger models — partnering assets, for instance, hedge funds, and hedge funds were a activity between large pharma companies. that they would otherwise have developed primary source of capital for the public For biotech, this means there will be fewer independently. Approaches to deal-making biotech industry. remaining buyers, and those buyers will be will have to become more creative as distracted by internal challenges. In the wake of the mortgage crisis, the well. In a buyer’s market, deal structures prime brokers stopped lending to the Second, the presence of undervalued are likely to offer large companies more hedge funds, so the hedge funds stopped biotech companies is unlikely to spur a risk mitigation, e.g., alliances rather than buying biotech companies and instead wave of acquisitions. At Genzyme, for acquisitions or acquisitions with earn-outs. began liquidating their positions. All of a instance, we have a well-defined list of But buyers should also be mindful of sudden, more than half the money going opportunities in which we are interested. smaller firms’ capital constraints and into biotech simply disappeared, and it isn’t But the list is pretty short, and things that structure deals to protect their partners’ likely to return any time soon. This isn’t weren’t interesting to us before are unlikely viability. For their own self-interest, as well another down cycle of investor sentiment to become more interesting just because as for the sake of sustaining innovation, that the industry can wait out. Investors they are cheaper. So while competition large companies may want to value the aren’t disenchanted with biotech; instead, for the most desirable companies remains most promising assets more realistically they have a fundamentally diminished healthy, and they will command strong than the public markets currently do, and capacity to invest. premiums relative to their current public structure deals that provide capital to valuations, others will need to become advance assets while sharing rewards with more pragmatic. original innovators.

47 US financing Collateral damage

From windows to housing collapses and outright collapses increasingly 2007 and 2008 came from a few very common, it was clear that the financing large debt offerings by industry leaders Through much of the history of the environment for biotechnology such as Amgen and Biogen Idec. If these biotechnology industry, companies and companies had become part of the huge transactions are removed from the analysts have relied on the time-tested extensive “collateral damage.” totals of both years, the year-on-year metaphor of biotech financing “windows” decline is 25% instead of 39%. that open and shut. The image refers, of As the system started to deleverage, course, to the sector’s boom-and-bust uncertainty around when equity markets cycles of investment, driven mostly by would touch bottom and where new Venture capital hangs in vacillating investor sentiment toward capital would come from drove buyers Private funding was a relative bright spot biotech stocks — excitement one year to the sidelines and pummeled the in 2008, with the US industry raising about scientific promise followed by a market capitalizations of many biotech approximately US$4.4 billion from precipitous retreat a few years later when companies. Firms without sufficient venture investors. While this was a 19% the timelines to commercializing that capital to fund operations until the decrease relative to 2007, the 2007 total promise become clear. next value-creating milestone were hit had itself been an all-time record that particularly hard as investors put financing In last year’s Beyond borders, we noted outdistanced any prior year by a gaping risk on par with development risk. With that the current crisis, which had started US$2 billion margin. The amount raised so many companies trading at historic to manifest itself in 2007, was something in 2008 represented the second-best lows — and some even facing the prospect entirely new — not the closing of another year on record — comfortably ahead of of being delisted — there was no interest in window so much as the collapse of the the US$3.2 billion average for 2003–06, new issuances of biotech stocks and only house around the window. The house and particularly heartening given the limited interest in funding existing public metaphor, it turns out, is appropriate overall financial-market turmoil. This is companies. Venture capital, while down in more ways than one, since the crisis not to suggest that venture capitalists from the record levels of 2007, remained originated in the US housing market. (VCs) are immune to broader economic relatively strong. However, venture Thanks to the way the cards are arrayed trends. Indeed, the pace of investments investors modified their strategies in light in the global financial system — through slowed significantly late in the year as of bargains in the public markets and the complex derivatives and intertwined the financial crisis deepened, from an need to reserve more funding to sustain financial institutions — mortgage troubles average of US$1.2 billion in the first existing portfolio companies. reverberated throughout the global three quarters to US$875 million in the economy. As 2008 progressed, a credit The total amount raised by the US biotech fourth quarter. crisis devolved into the deepest global industry fell 39% in 2008 to US$13 This decrease can be attributed partially recession in decades. By year’s end, billion — the lowest total since 2002. A to caution, as VCs assessed the need with corporate restructurings, bailouts significant portion of the fundraising in to reserve additional funds for existing

US yearly biotechnology financings (US$m)

2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 IPOs 6 1,238 944 626 1,618 448 456 208 4,997 685 260 Follow-ons 1,715 2,494 5,114 3,952 2,846 2,825 838 1,695 14,964 3,680 500 Other 6,832 12,195 10,953 6,788 8,964 8,306 5,242 3,635 9,987 2,969 787 Venture 4,445 5,464 3,302 3,328 3,551 2,826 2,164 2,392 2,773 1,435 1,219 Total $12,998 $21,391 $20,313 $14,694 $16,979 $14,405 $8,699 $7,930 $32,722 $8,769 $2,766

Source: Ernst & Young, BioCentury, BioWorld and VentureSource. Numbers may appear inconsistent because of rounding.

48 Beyond borders Global biotechnology report 2009 portfolio companies in the expectation US IPOs essentially dried up in 2008 ... that these firms will need to be nurtured IPOs (US$m) longer. In addition, VCs face the risk that 700 limited partners, themselves damaged by declines across their portfolios, will not 600 be able to honor funding commitments. 500 While this phenomenon has not yet manifested itself in any meaningful way, 400 it could become visible as firms seek to raise new funds. Many analysts expect 300 a culling of the ranks of venture funds 200 as well as a decrease in average fund sizes. Established players with strong 100 track records will face less pressure, and 0 several such firms were able to close new Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 funds raised during the market turmoil, Source: Ernst & Young, BioCentury, BioWorld and VentureSource including Clarus Ventures (which raised US$660 million in February 2008), Versant Ventures (US$500 million in … and follow-on offerings disappeared in the fourth quarter ... July 2008) and Aisling Capital (US$650 million in January 2009). Follow-on (US$b) 1.6 Venture capitalists are inherently optimistic (see “The more things change, 1.4 the more they remain the same?” in 1.2 the Global section for ample evidence 1.0 of this inclination) and hold faith in the industry’s resilience, creativity and 0.8 ability to commercialize breakthrough 0.6 technologies. Most VCs are operating under the premise that the economy, 0.4 financial markets and hence the biotech 0.2 industry will ultimately return to 0 “normal.” Since their new investments Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 today require a three- to five-year Source: Ernst & Young, BioCentury, BioWorld and VentureSource gestation period, they are counting on recovery in that time frame. Meanwhile, the reality that the public markets will … but venture capital has not declined dramatically not be a viable exit option for some Venture capital (US$b) time will require new approaches to managing existing portfolio companies. 2.5 This includes strategies such as reducing burn rates by focusing on 2.0 fewer R&D candidates, aggressively seeking partners to share funding and 1.5 development risk, and agreeing to tie up with an acquirer earlier. 1.0 As acquisitions become the most viable exit, building a company to “fit” the 0.5 strategic needs of a larger entity — much the way the medical-device industry has 0 functioned for many years — may become Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 more common. A willingness to share the Source: Ernst & Young, BioCentury, BioWorld and VentureSource

49 risk and the upside rewards of development, specialty pharma, completed an unusual Yes, we have no IPOs for example by agreeing up front to be transaction which included US$50 million in There was only one biotech IPO in 2008: acquired at a defined price following the equity and US$95 million in senior debt, the the February offering by Florida-based achievement of a specified milestone or proceeds of which were in part used to buy BioHeart. However, by industry standards, agreeing to a greater percentage of merger two products from PDL BioPharma. this minor transaction — with gross consideration in the form of downstream As the year progressed, more and more proceeds of less than US$6 million and net milestones, can be a creative way to help companies, including many with advanced proceeds of less than US$2 million — barely establish a path to liquidity. An instance of pipelines, were trading well below their IPO moved the needle. It did little to sustain this is the agreement between Cephalon and prices and sometimes even below the cash the firm in any meaningful way, either, and Ception, which includes up-front payments on their balance sheets. For venture-capital by year-end, BioHeart was warning that it for Ception plus an arrangement whereby funds with charters that permit investments was unable to meet debt obligations due to Cephalon has the option to acquire Ception in public companies, this presented a new a lack of financial resources. following results of a Phase IIb/III trial. buying opportunity. Many began looking for The US industry’s last institutional-sized In 2008, there were 15 venture rounds of undervalued assets, and a new acronym, IPO occurred in November 2007. As we go US$50 million or more, led by the sizeable VIPE (venture investment in a public entity) to press, the sector will have endured over US$103 million raised by San Francisco Bay was duly added to the alphabet soup of five quarters without such an offering, Area-based OncoMed Pharmaceuticals in investment terminology. However, VIPEs which exceeds the post-genomics-bubble several tranches which brought the total are unlikely to provide new capital for drought and is likely to surpass the raised or committed in the series to US$169 many micro-cap companies, since VCs will six-quarter lull of the mid-1980s. Unlike million. OncoMed will use the proceeds, look beyond valuations to strategic fit. the closed windows of the past, which along with the funds raised in a significant They are most likely to focus on specific were biotech-specific, the current lack of 2007 collaboration with GlaxoSmithKline, opportunities where their expertise can add IPO activity has spanned all industries. to further its research of cancer stem value or where assets can be repurposed or According to VentureSource, only seven cells. Another Bay Area company, Pacific positioned for high return. venture-backed IPOs closed in all of 2008, Biosciences, completed a US$100 million and only one of those occurred after the venture round as it continues developing first quarter. The industry is building a its next-generation sequencing technology. significant backlog of new issues, and EKR Therapeutics, a New Jersey-based when IPOs do return, they are likely to do so with a bang rather than a whimper.

Capital raised by leading US regions, 2008 Until then, private companies will have to find other paths to the public markets. 4.5 In 2008, several firms sought mergers with public “fallen angels.” Both parties 4.0 San Diego benefit from these transactions — the public company typically has cash and 3.5 New England a viable stock-market listing but lacks 3.0 ongoing technology value, while the private company usually has a pipeline 2.5 and management team but needs to access public markets for additional San Francisco Bay Area 2.0 fundraising flexibility. The private-company shareholders typically end up with a

Total capital raised (US$b) raised capital Total 1.5 significant majority of the merged entity,

Pacific NW and thus these transactions are called 1.0 New York State reverse public offerings, or RPOs. In a sign Pennsylvania/Delaware Valley 0.5 of the times, any public company willing to enter an RPO in 2008 attracted a long list Mid-Atlantic New Jersey 0 of suitors. Several of these transactions 0 200 400 600 800 1,000 1,200 1,400 closed during the year, including the Venture capital raised (US$m) mergers of AVANT Immunotherapeutics Source: Ernst & Young, BioCentury and VentureSource Size of bubbles shows number of financings per region with Celldex Therapeutics, and Point

50 Beyond borders Global biotechnology report 2009 Therapeutics with Dara BioSciences. RPOs overly dilute the stakes of existing Deerfield will collect fees and warrants up do not always please the public company’s shareholders. Short of a strategic alliance through the 2013 maturity of the facility. existing investors, and this was apparent or asset sale, most chief financial officers In a similar deal with a twist, Deerfield in the proposed merger of NitroMed and must place the continued viability of made available a US$100 million facility Archemix. Deerfield Funds, a significant the company and the interests of all to Seattle-based ZymoGenetics. The NitroMed shareholder, not only refused to stakeholders (including patients and twist is that each US$25 million tranche approve the deal, but also countered with employees) ahead of current investors’ drawn will be secured by a two percent a higher bid and ultimately prevailed in wish to avoid dilution. A little-used royalty on the net sales of RECOTHROM, taking the company private in early 2009. approach that companies may wish to ZymoGenetics’ recombinant thrombin consider is a “rights offering.” These product, which was approved in 2008. transactions, which allow all current Other financing stockholders to invest and maintain their Increased selectivity: venture investors While the IPO market was closed, proportionate shares, take longer and gravitated toward later rounds in Q4 2008 financing was still available to existing incur more costs than typical privately public companies, especially in the first arranged sales. However, they allow the Later stage Second round First round Seed round half of the year. Leading the charge was company to raise capital without diluting

Vertex Pharmaceuticals, which raised the shares of loyal stockholders. 100% US$338 million in two equity offerings (including one for US$220 million in the 80% midst of the September market meltdown) Debt dollars and a further US$287 million in a In spite of the credit squeeze, some convertible-debt transaction. Combined companies did raise convertible debt, 60% with US$160 million raised through a although the total amount raised royalty financing arrangement, Vertex decreased from US$700 million in the 40% filled its coffers for its anticipated final first quarter to under US$100 million in run to the approval of Telaprevir, now in the fourth quarter. In addition to Vertex, 20% Phase III trials for the treatment of HCV. OSI Pharmaceuticals raised US$175 million and Theravance US$173 million Investors clearly favored companies with 0% in first-quarter transactions. It remains commercialized products or near-term Q1 2008 Q2 2008 Q3 2008 Q4 2008 to be seen whether a convertible-debt clinical milestones. Illumina followed its Source: Ernst & Young and VentureSource market will return to biotech as the 2007 US$400 million convertible-debt broader market recovers. As noted in offering with a follow-on equity offering the Global introduction article, there Beyond dilution of US$353 million, the largest of 2008. are impediments to this which may In addition to the royalty deals noted Other companies completing follow-on squeeze current issuers with debt that above, CV Therapeutics and Indevus offerings of greater than US$100 million is significantly under water as the debt Pharmaceuticals also both completed included Rigel Pharmaceuticals, Accorda maturity date approaches. royalty financing transactions, which Therapeutics, Incyte and Seattle Genomics. netted proceeds of over US$100 million Private investments in public entities Not all debt transactions were of the each. Our report last year described the (PIPEs) and registered direct offerings convertible variety. The biggest debt deals project financing structure employed by remained popular because of their speed of the year went to mature companies. Symphony Capital as another potential and lower transaction costs. The largest In February, Biogen Idec raised US$1 source of nondilutive (or at least less PIPE transaction of the year was the billion to refinance existing debt, and in dilutive) capital. Symphony continues to US$100 million raised by Middlebrook September, Life Technologies (formerly entertain opportunities but closed only one Pharmaceuticals to support a new product Invitrogen) secured US$2.65 billion new investment in 2008, with OXiGENE. launch. However, investors, who had been of new debt to fund its acquisition of expecting the company to be bought, did Applied BioSystems. Exelixis availed itself not cheer the deal and instead sent the of a US$150 million line of credit from Geographic distribution stock down more than 50%. Deerfield Management that can be drawn While total capital raised was down in down in US$15 million increments at At a time when most companies’ most regions, the leading clusters of the company’s option, subject to various valuations have seen steep declines, Northern and Southern California and conditions, through the end of 2009. In it is challenging for investors to raise New England once again dominated exchange for making this facility available, additional capital in ways that do not the regional comparisons. San Diego

51 A closer look Outlook State capital: incentive programs On the surface, the current funding situation looks comparable to prior down At a time when many biotech companies are struggling to raise capital for their cycles with respect to the number of operational needs, firms are becoming creative and looking beyond traditional distressed companies. For example, in our sources of funding. In this challenging climate, government incentives can provide 1994 annual report, we noted that 58% welcome injections of cash or relief through tax savings or subsidies. And while of the public companies had less than two many state and local governments are under heightened budgetary pressure in this years of cash on their balance sheets. downturn, attracting and retaining biotech companies remains a priority for economic What is different in this crisis, however, development agencies. is the absence of buyers. In prior down markets, companies could always find Incentives are often keyed to specific metrics such as workforce expansions, new another group of potential investors. These capital investments, R&D spending and/or employee training. As such, companies investors may have exacted more than should explore their incentives options any time they make significant investments the proverbial pound of flesh (industry or undertake business expansions. While incentives are not likely to be the sole driver of a capital investment decision, they should be evaluated when choosing the veterans might remember “death spiral” location and scope of new investments. In reviewing potential incentives, companies preferred-stock offerings with conversion should consider the monetary benefit that each program can provide, the impact of ratios that changed as a company’s stock an incentives application process on the overall project timeline and the compliance price decreased), but at least the additional requirements of each program. This analysis should be done throughout the site capital injections allowed companies to selection and investment process. survive. As a result, very few companies ceased operations or filed for bankruptcy. Not all incentive programs may be relevant. For instance, while many jurisdictions Today, with massive deleveraging across the offer income tax-based credits, these are not very valuable for biotech companies that financial markets, such buyers are scarce. are not currently in an income tax position. Other incentives, such as direct financing, By the end of 2009, there will be fewer cash grants, or abatements for property, sales or use tax may provide greater public companies as firms turn to mergers immediate value. and acquisitions or simply cease operations, Like all money, these funds come with some strings attached. Most incentives while the pipeline of new IPO companies will programs require formal agreements between governments and the companies remain backed up. Companies will still be receiving funding. These agreements list the specific levels of job creation, capital able to raise funds in 2009, but investors investment and/or job training that a company commits to make in exchange for will be more selective, leading to a wider a specified incentives package. If a company fails to meet its commitments, many gap between haves and have-nots. We jurisdictions reserve the ability to retract or “claw back” the incentives. expect venture-capital investment to remain strong, although probably at lower levels than in 2008. vaulted to the top position in terms foundations, which typically target But while market fundamentals may have of total financing because of the Life conditions that have smaller patient changed in 2008, certain fundamental Technologies debt issuance, but still populations in order to increase the truths have not. To access capital, trails the other two regions in number otherwise low commercial incentive for companies will need solid product stories of financing rounds and venture-capital R&D. Some firms are examining whether and a single-minded focus on clinical investment. New England edged out they might qualify for foundation success. Biotech funding, which became Northern California in total dollars money by applying an existing platform collateral damage in the mayhem of global raised, as a result of the Biogen Idec debt to a different therapeutic area or financial markets, will fully recover only refinancing, while the latter region had a reprioritizing items in development. when those broader markets recuperate slight lead in venture-capital investment. Others are looking at government and rebuild investor confidence. By all The remaining regions continue to be grants or incentive programs to accounts, that will take many quarters very close in terms of total dollars raised. understand eligibility requirements and rather than mere months. But, while a examine how their existing platforms number of companies will likely perish, the and projects could be made eligible. (For Casting a wider net biotech industry as a whole will survive to more information, see “A closer look” on see the return of better funding days. In the current market, companies are this page.) increasingly looking at nontraditional sources of capital. These include disease

52 Beyond borders Global biotechnology report 2009 US deals Buying biotech, being biotech

One constant in the world of biotechnology will ultimately be deal- and time-specific. providing an important source of capital is that drug development is costly and Companies with sought-after assets will for current operations. lengthy, requiring companies to raise large continue to command multiple bidders On the M&A front, 2008 was another amounts of capital. Firms have traditionally and high prices, while those with products strong year for the US biotech industry. raised funds from some combination of that address smaller markets or have There were 53 transactions involving US financial buyers — such as equity or debt significant development risk will be at the biotech companies, with a total value of investors — or strategic buyers in the form mercy of the market. more than US$28.5 billion. This aggregate of other corporate entities looking to While the number of strategic alliance value is a record for any single year, if one access technology and products. In 2008, transactions involving US biotechnology excludes megadeals in prior years — such the wholesale retreat of the public equity companies in 2008 remained fairly as the 2007 acquisition of MedImmune by market and convertible-debt market has consistent with prior years, the potential AstraZeneca — which can skew deal totals. limited the menu of choices for many value of strategic alliances increased to While there was no single megadeal in biotech companies. For the most part, what a record level of almost US$30 billion. 2008 (defined as an acquisition valued at is left for those needing capital to sustain This was driven mostly by an increase more than US$10 billion), the year’s totals operations is to tie up with a larger and in the potential value of biotech-biotech were instead heavily influenced by three better-capitalized entity, either through deals, which increased more than 50% to large transactions valued at more than a strategic alliance or an acquisition. In US$9.7 billion. Of course, it is unlikely US$5 billion each: Takeda Pharmaceuticals’ ordinary times, many companies might that all of this cash will actually exchange acquisition of Millennium Pharmaceuticals, have chosen to go it alone longer, hoping hands, since these “biobucks” totals Eli Lilly’s acquisition of ImClone Systems to hit that next value inflection point in implicitly assume that all milestones and the acquisition of Applied Biosystems the development cycle. In the current will be achieved. The disclosed up-front by Invitrogen (since renamed Life environment, dwindling cash balances and payments in these transactions, in the Technologies). This is both familiar and reticent financial investors are increasing form of license payments and equity unprecedented. We have seen very high companies’ urgency to complete strategic investments, totaled US$3.7 billion, M&A totals in the absence of a megadeal transactions. For most assets, with the exception of a few truly innovative platform technologies, buyers would prefer an alliance over an acquisition simply to The potential value of strategic alliances set a new record mitigate risk. However, shrinking equity Pharma-biotech Biotech-biotech valuations may make acquisitions the only reasonable alternative in some cases. 35 The good news is that the primary 30 buyers in this market, big pharmaceutical companies, continue to need products 25 and technologies to supplement their own internal pipelines and are all aggressively 20 reaching out to biotech companies and their investors. The question is, who has 15 the bargaining power at the deal table? In Potential value (US$b) value Potential early 2008, power appeared to be moving 10 toward biotech companies, but by the end of the year, the pendulum had swung 5 rapidly in the other direction as biotech companies’ fundraising options dwindled. 0 Still, as many of the guest authors in 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ernst & Young, Windhover, MedTRACK and company press releases this report suggest, bargaining power Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed

53 Adjusted for megadeals, M&As reached new highs in 2008 companies are attracting the eyes of larger

Pharma-biotech megadeals Pharma-biotech Biotech-biotech Biotech-biotech megadeals buyers, the arrival of the mini-mega may be a harbinger of things to come.

35 M&A: megas and mini-megas 30 Big pharma’s interest in mature biotech

25 enterprises resulted in more than mini- mega activity in 2008. Indeed, it gave

20 us what is probably the year’s most- watched transaction and is certainly 15 the mother of all megadeals: Roche’s Value (US$b) Value acquisition of Genentech. In July, 10 Roche offered to buy out the minority shareholders of Genentech for US$43.7 5 billion. Over the next few months, the deal kept everyone guessing as 0 negotiations dragged on and even 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 turned hostile before the two parties Source: Ernst & Young, Windhover, MedTRACK and company press releases agreed in March 2009 to a deal priced at US$46.8 billion, or US$95 per share. Interestingly, the biggest challenge before, in 2006, when we observed that “mini-megadeals” valued at more than for Roche will not be financing the “the large totals were driven by several US$5 billion each, there were no deals transaction in the midst of a global big deals — a measure of the heightened of this magnitude in 2006 — indeed, credit crisis but rather retaining the interest across a broad spectrum of buyers the largest deal that year was Abbott’s talent and culture that has made for valuable biotech assets.” But while acquisition of KOS for US$3.7 billion. Genentech an R&D and financial the 2008 totals were driven by three At a time when several mid-cap biotech juggernaut over the years. As we argued in last year’s Beyond borders, Selected 2008 US biotech M&As structures and incentives drive conduct and performance. And while many Value Company Location Acquired company Location (US$m) companies are trying not to upset the cultures at their acquired children Takeda Japan Millennium New England 8,800 (examples include AstraZeneca/ Life Technologies San Diego Applied Biosystems SF Bay Area 6,700 MedImmune, GSK/Sirtris and Takeda/ Eli Lilly Other (Indiana) ImClone New York State 6,500 Millennium), stock options and other Texas LifeCell New Jersey 1,700 equity incentives give independent biotechs a powerful tool tying GlaxoSmithKline UK Sirtris New England 720 performance to financial reward. The ViroPharma PA/Delaware Valley Lev New York State 618 Roche-Genentech structure — termed Third Wave “the 60% solution” in the 1990s — was Hologic New England Midwest 580 Technologies the industry’s longest-standing example Johnson & Johnson New Jersey Omrix New York State 438 of this arrangement. Other similar transactions, including Wyeth/Genetics Galderma Pharma CollaGenex PA/Delaware Valley 420 Institute, Novartis/Chiron and Sandoz/ Ipsen Tercica SF Bay Area 404 Systemix ultimately succumbed to the Novartis Switzerland Protez PA/Delaware Valley 400 allure of “valuing synergies more highly than culture.” Teva Israel CoGenesys Mid-Atlantic 400 Dow Roche has promised that Genentech Valeant LA/Orange County Pharmaceutical SF Bay Area 277 will continue to operate autonomously, Sciences but if history is any guide, the takeout

Source: Ernst & Young, Windhover, MedTRACK and company press releases of Genentech could well lead to a

54 Beyond borders Global biotechnology report 2009 groundswell of new start-ups in the of directors. Icahn realized a sizeable Big pharma was not only interested San Francisco Bay Area as talented return on his investment after a very public in large deals; with falling valuations scientists and executives decide to forge process in which Bristol-Myers Squibb, and limited financing options came a their own paths. ImClone’s partner for the blockbuster drug number of acquisitions between existing Erbitux and the most likely suitor, had its alliance partners, including Eli Lilly’s Another pioneering big biotech, Biogen offer rebuffed as too low. Lilly emerged acquisition of SGX for US$64 million Idec, flirted with selling itself after as an unexpected white knight, ultimately (a premium of 122%), GSK’s takeout of public statements by shareholder Carl agreeing to pay US$70 per share — 13% Genelabs for US$57 million (a premium Icahn suggested that a sale was the best higher than BMS’ last offer. Lilly and of 465%) and Roche’s acquisition of way to maximize shareholder value. BMS will now co-promote Eribitux, while Memory Pharmaceuticals for US$50 Seeking to avoid a drawn-out process a potential dispute over whether BMS million (a premium of 319%). While that would impact employee productivity also has rights to a “next generation” the valuations in these acquisitions and retention, Biogen structured a compound through its original agreement (and many of the year’s other sizeable formal auction process with a defined with ImClone remains unsettled. transactions) reflected strong premiums deadline. In the end, the complexities of relative to the day before the deal was Biogen’s relationships with Genentech Another notable acquisition was announced, the share prices of many (for Rituxan) and with Ireland’s Elan (for GlaxoSmithKline’s US$720 million takeout acquired companies had plummeted in Tysabri) resulted in no offers from big of Sirtris Pharmaceuticals, less than a year the weeks and months preceding these pharma. While Mr. Icahn criticized the after Sirtris went public in an offering that deals as markets spiraled downward. process because potential suitors were raised US$69 million. The valuation no When compared to the high price not permitted to talk to Biogen’s partners doubt pleased investors, especially since for the 52 weeks preceding the deal before making an offer, shareholders Sirtris had only one clinical-stage program announcement, the purchase price in supported management and the board’s at the time of the transaction. GSK was each of these acquisitions was not a approach by refusing to elect a slate clearly more interested in the potential healthy premium, but a discount. of Icahn-nominated directors at a of sirtuins to be a new drug-development subsequent annual meeting. platform than in any single drug candidate. As noted above, GSK has chosen to let Milestones and stepping stones Mr. Icahn was also involved in one of the Sirtris continue to pursue its research year’s most prominent deals: Eli Lilly’s Indeed, with the capital markets taking a autonomously in the hope of preserving acquisition of ImClone Systems, where toll on many small-cap company valuations, the entrepreneurial culture and focus of Icahn had been a significant shareholder negotiating an M&A price that reflects the company. for many years and had chaired the board “fair value” has become particularly

Lowered expectations? 2008 US public company acquisition premiums

One–day premium 52–week premium

500%

Deal size: US$50-200 million Deal size: over US$400 million 400%

300%

200%

100%

0%

-100%

Lilly/SGX BMS/Kosan J&J/Omrix GSK/Sirtris Lilly/ImClone GSK/Genelabs Ipsen/Tercica Roche/Memory Stiefel/Barrier Pfizer/Encysive Kinetic/LifeCell Tripos/Pharsight ViroPharma/Lev Life Technologies/ Hologic/Third Wave Takeda/Millennium Ligand/Pharmacopeia Galderma/CollaGenex Applied Biosystems Source: Ernst & Young

55 challenging. On the sell side, management A closer look teams typically start from the premise that current equity markets do not reflect the New rules for the M&A road true value of their companies, especially if clinical-development milestones are Mergers and acquisitions are a constant in the biotech industry, and challenging eventually achieved. One way to bridge this funding environments tend to spur creative deal structures. gap is to settle on an up-front price and In an environment of rapidly decreasing valuations, negotiations often turn on the then provide for additional consideration if ability to bridge a valuation gap between the parties. Earn-out payments or other certain performance targets are reached. contingent considerations have been commonly used in this regard, especially when Such “earn-outs” have been common in the target was closely held. Several recent transactions involving publicly traded acquisitions of private companies, but in companies have also embraced contingent payments as a mechanism to get deals the current environment they are often done rapidly. We expect this trend to continue as long as companies have limited occurring even in acquisitions of publicly capital alternatives. Typically, contingent payments are tied to future milestone traded companies. Public investors’ events such as clinical advancement or revenue. Another recent phenomenon is for increased willingness to forgo a clean exit private and public companies to enter into staged buyouts that include an up-front in exchange for the chance to capture payment, usually to fund clinical trials and product development, in exchange for an more upside later is an indicator of the option to buy the entire company upon product approval or achievement of some tough environment for deal negotiations. other milestone. In this environment, some compensation While companies negotiating a deal may be most focused on strategic and valuation now is better than suffering dilution issues, creative transaction structures with contingent payments such as earn-outs with no guarantee of an exit at a higher can carry significant accounting consequences. These implications should be fully valuation later. explored before signing a deal, particularly in light of the 2009 adoption of US Financial Accounting Standards Board Statement No. 141(R), Business Combinations, One prominent example in 2008 which is substantially consistent with International Accounting Standard 3(R). Under was ViroPharma’s acquisition of Lev these rules, acquirers need to consider the fair value of contingent payments and Pharmaceuticals. While the up-front record these amounts as liabilities at the date of the acquisition. An acquirer will exchange was US$443 million in cash and also need to be comprehensive in identifying contingent payments — for example the stock, Lev’s shareholders can receive up target’s contractual obligations to collaborators (which may or may not relate to the to an additional US$175 million if certain same product or technologies). The ultimate amount paid could differ significantly regulatory and commercial milestones from the amounts recorded at the acquisition date, with any differences generally are achieved. Investors are willing to recognized in earnings. be patient — one of the commercial milestones is for Cinryze, Lev’s product Statement 141(R) and the comparable international standard also require that the for the treatment of hereditary fair value of purchased in-process research and development (IPR&D) be recorded as an asset on the date of the acquisition and then evaluated for impairment over angioedema, to achieve cumulative sales time. If a product is ultimately commercialized, the asset would be amortized to greater than US$600 million over the expense over the expected life of the product. Judgments around impairment next 10 years. will be inherently subjective and will typically require consultation with valuation Two option-based acquisitions of private specialists. Further, under US standards, transactions where a company provides companies were variants of this structure. an up-front payment with an option to purchase the entire company at a later date Actimis Pharmaceuticals agreed to for a predetermined price may require the acquirer to consolidate the operations of a “step” acquisition by Boehringer the target. Interestingly, under Statement 141(R), if the target is consolidated and Ingelheim valued at up to US$515 million. subsequently the milestone is achieved, the contingent consideration paid is recorded Under the deal terms, Boehringer will in stockholders’ equity and does not require the revaluation of any assets of the acquire additional shares of Actimis if target — including IPR&D. milestones related to the company’s lead These new rules, while complicated and at times subjective, will not overshadow asthma product candidate are achieved. the business rationale for transactions. Management teams will be charged with In early 2009, Cephalon announced a explaining in a clear and transparent manner the applicable accounting treatment, similar deal in which it will pay US$100 and financial statement users, including analysts, will need to adapt to a new world million for the option to acquire Ception in which significant adjustments to purchased assets and liabilities in subsequent Therapeutics for an additional US$250 periods will be increasingly common. million (exercisable at any time up to 15 days after Ception receives results from a Phase III clinical trial). US$50 million of

56 Beyond borders Global biotechnology report 2009 the initial payment was made to Ception Strategic alliances tested for the treatment of Duchenne investors, giving them a partial return on muscular dystrophy. Both deals included For the US biotech industry, 2008 was their investment. impressive up-front payments of US$100 another strong year on the strategic million or more. Up-front payments of this While US biotech companies have a long alliance front. The two largest transactions magnitude are in part a recognition of history of deal creativity in response to were biotech-biotech deals — Genzyme’s the need to provide some sustainability to challenging funding climates, one element alliance with ISIS (which also included the the biotech partner and insulate it from that is different in the current environment largest total up-front payment of the year, having to return to the capital markets is changes in the accounting treatment US$325 million, for a technology license in the near term. Indeed, Peter Wirth, of such structures. For instance, the and equity), and Celgene’s transaction with Genzyme’s Executive Vice President adoption of new accounting rules governing privately held Acceleron Pharmaceuticals, of Legal and Corporate Development, business combinations in 2009 could which was more weighted toward future observes in his article in this issue of affect the way acquisitions with earn-outs milestones. Genzyme remained an active Beyond borders that deal structures that and option-to-purchase transactions are acquirer of technologies during the year, give smaller companies sufficient capital reflected on financial statements. Companies forming alliances with Osiris Therapeutics to advance their pipelines can help protect should consider the implications of these for ex-US rights to two late-stage stem-cell their viability in the current climate. (See changes when negotiating deals. (See “A therapies and with PTC Therapeutics for “Connecting the dots” for more details.) closer look” on the previous page for details.) ex-North American rights to a drug being

Selected 2008 US biotech alliances

Up-front license payments Potential value Company Location Partner Location (US$m) (US$m) Genzyme New England ISIS San Diego 175 1,900 Celgene New Jersey Acceleron New England 45 1,871 GlaxoSmithKline UK Archemix New England 21 1,428 Genzyme New England Osiris Mid-Atlantic 130 1,380 Takeda Japan Amgen LA/Orange County 300 1,177 Roche Switzerland Synta New England 16 1,025 Bristol-Myers Squibb New York State Exelixis SF Bay Area 195 1,000 Takeda Japan Alnylam New England 100 1,000 AstraZeneca UK MAP Pharmaceuticals SF Bay Area 40 900 GlaxoSmithKline UK Valeant LA/Orange County 125 820 GlaxoSmithKline UK Dynavax SF Bay Area 10 810 GlaxoSmithKline UK Mpex San Diego 9 765 Astellas Japan CoMentis SF Bay Area 80 760 Pfizer New York State Medivation SF Bay Area 225 725 Bristol-Myers Squibb New York State PDL SF Bay Area 30 710 Immunomedics New Jersey 40 620 GlaxoSmithKline UK Regulus San Diego 20 598 Onyx SF Bay Area S*Bio Singapore 25 550 Amgen LA/Orange County Kyowa Hakko Kogyo Japan 100 520 Cephalon PA/Delaware Valley ImmuPharma UK 15 515 Sanofi-Aventis France DYAX New England — 500

Source: Ernst & Young, Windhover, MedTRACK and company press releases

57 Two other Massachusetts-based US rights to all products — which, as the new challenges and sources of risks companies pursued different approaches Genentech example has proven, can be for partners. While due diligence in to achieve the goal of insulation from the a very lucrative franchise. (For more on alliances may have previously focused capital markets. In a deal that echoed its this transaction, refer to “The Darwinian on technology, intellectual property and 2007 transaction with Roche, Alnylam challenge” by Adelene Perkins, Infinity’s potential market size, buyers must now Pharmaceuticals provided nonexclusive President, in this issue of Beyond borders.) also consider their partners’ financial access to its intellectual-property viability and ongoing fundraising ability. platform to Takeda Pharmaceuticals of Big spenders The other big driver of deals, of course, Japan while retaining independence to is big pharma’s continuing drive to pursue its own R&D. Takeda paid US$100 One company made a big impression replenish its pipeline and reinvent million up front in a deal that could be in the US in 2008 — Japan’s Takeda its approach to R&D. Pharmaceutical worth up to US$1 billion to Alnylam. In Pharmaceuticals. Takeda opened its wallet companies are responding in two ways. addition, Alnylam will have the rights for a diverse set of deals, two of which are In recent years, we saw firms move to to co-promote in the United States any mentioned above. The takeout of Millennium transactions that attempt to preserve drugs developed by Takeda based on (now referred to as “The Takeda Oncology the innovative cultures, structures and its RNAi technology. The deal allows Company”) brought the Japanese pharma incentives of biotech firms — a “being Alnylam, which will not perform research the blockbuster Velcade (marketed jointly biotech” philosophy that is embodied services for its partner, to leverage its with partner Johnson & Johnson) and a in acquire-and-preserve-independence technology platform, and increases strong R&D capability in oncology. The deals such as Takeda/Millennium, GSK/ its opportunity to realize a return nonexclusive license with Alnylam has the Sirtris, Pfizer/Rinat and a host of others. (either through an internal program potential to make Takeda a leading player in In 2008 and 2009, Roche, the company or the success of a partner). With the emerging RNAi space, especially in Asia. that was long synonymous with this US$430 million of cash and short-term In addition, Takeda paid Amgen US$300 philosophy, moved instead to “buy investments on its balance sheet at the million up front and could pay US$700 biotech” by acquiring the remaining end of 2008, Alnylam has independence million or more in development support and stake in Genentech. While some big from the capital markets and a war chest potential milestones to Amgen for Japanese pharmas have come out against to expand its own programs. rights to 13 compounds in development. megamergers as drains on focus and This deal gives Takeda an expanded While not possessing the same kind productivity, others are moving ahead pipeline in the home market — the world’s of technology platform, Infinity with even bigger transactions — for second-largest. These three transactions Pharmaceuticals completed one of example, Pfizer’s acquisition of Wyeth were indicative of a broader trend toward the most innovative alliances in recent and the merger of Merck & Co. with oncology products adopted by many big memory with its transaction with Purdue Schering-Plough, with speculation of pharmas. As Avastin, Erbitux, Velcade Pharmaceuticals. Purdue, a privately more to follow. Post-merger integration and others have demonstrated, biotech held company, was looking to create or necessarily brings distractions which oncology products that address important access an R&D capability for innovative impact both existing and potential medical needs have been less susceptible to drugs in areas it had not previously partners, as jobs, reporting structures price pressures and to generic competition pursued, such as oncology. Infinity, like and even therapeutic areas of focus (at least so far) and can be marketed with most companies its size, needed to raise change. Biotech companies, which are a more modest commercial infrastructure capital, but wanted to retain significant particularly sensitive to the pace of than treatments for chronic illnesses. (For commercial rights to its programs. The development, would be wise to consider more discussion of these deals, see the result is a structure similar to the hallmark what else may be on the radar of the Japan year in review article in this issue of Roche-Genentech transaction, with Purdue partners before entering a transaction. Beyond borders.) taking a significant, but not controlling, equity stake and agreeing to offset a substantial part of Infinity’s R&D expenses Outlook: buying biotech, being biotech in the coming years. In exchange, Purdue What lies ahead? A daunting fundraising gets ex-US commercialization rights to environment will continue to spur all previously unpartnered oncology deal activity, and we expect to see products developed by Infinity during considerable consolidation among the collaboration. Importantly, Infinity small-cap biotechs that are struggling to controls all R&D decisions and retains the survive. These trends are also producing

58 Beyond borders Global biotechnology report 2009 US public policy Will biotech get the change it needs?

For the drug development industry, the government’s involvement in the For the drug industry, a population with these are times of tremendous healthcare system by creating a US$634 more access to healthcare could mute the change. Many private and small-cap billion reserve fund over the next decade, potential effect of lower prices. However, biotechnology companies, hit hard by launching an overhaul that many experts it is critical for the future viability of the tumbling stock markets and reticent project will ultimately cost at least US$1 biotech industry that market incentives investors, are fighting for survival. Large trillion. Called a “down payment on remain to reward the innovation of pharmaceutical companies, meanwhile, healthcare reform,” the reserve fund companies pursuing therapies that are gearing up for the huge changes that would be financed in part by squeezing address unmet medical needs and small will be unleashed by a wave of sizeable US$316 billion in efficiencies out of the patient populations. patent expirations. current healthcare system by aligning incentives toward quality and promoting While many firms may understandably Drug prices: raising the heat accountability and shared responsibility. be focused on responding to these Among other changes, subsidies paid to In the quest for lower healthcare costs, sweeping market changes, there are also insurers that sell Medicare managed-care the political and public pressure to tremendous changes afoot in Washington, plans would be eliminated, and Medicare reduce drug prices continues. The DC, where a new administration with a Advantage plans would be subject to president’s healthcare plan challenges mandate for change could potentially a competitive bidding process. The drug prices on three main fronts, alter the course of public policy and reserve fund would be financed also proposing to 1) increase the use regulation on a host of healthcare-related by trimming tax breaks for the nation’s of cheaper generic drugs, 2) allow issues — with significant implications for wealthiest individuals. drugs approved by the Food and Drug the biotech industry. Administration (FDA) to be imported The last time the US considered from other countries, and 3) authorize fundamental healthcare reform — in Reforming healthcare: fulfilling a Medicare to negotiate with drug makers the early years of the first Clinton campaign promise for lower US prices. administration — the proposal bitterly As a presidential candidate, Barack Obama divided the various stakeholders in the The US$3.5 trillion budget proposal for made healthcare reform a key part of his healthcare economy and ultimately fiscal year 2010 released in April calls campaign platform. He pledged to reduce suffered a decisive defeat. Biotech for a regulatory pathway for companies the number of uninsured Americans, companies and their investors were to bring to market generic versions of improve the quality of care, save the typical concerned about the prospect of price biotechnology drugs — known as follow-on family US$2,500 a year in medical-related controls under universal care, and this biologics, or FOBs (sometimes also costs — and bring much-needed efficiency triggered a wholesale retreat in the public referred to as biosimilars, biogenerics to a health system that costs US$2.3 markets. This time, things are different or bioequivalents). The goal is to keep trillion a year. Yet given the nation’s in that present dialog does not mandate a tighter rein on drug costs by creating economic woes, soaring federal deficit and a single-payer government-run system. greater competition in the biotech market. delays in confirming a new Secretary of There is also much broader consensus on According to budget documents, FOBs Health and Human Services, many have the need for reform, with many industry could save taxpayers an estimated questioned whether healthcare reform is a participants lending their support to the US$9.2 billion over 10 years and help feasible goal for the near-term horizon. administration’s efforts. Still, the reform pay for improved care and expanded debate is expected to be contentious. Healthcare reform remains a high priority, insurance coverage. Drug companies Critics argue that, given the money spent as the president has maintained that would be prevented from blocking on the stimulus and bailout, the nation solving the nation’s healthcare crisis is generic drugs with anticompetitive can’t afford health-system overhaul. inextricably linked to creating a strong agreements to keep FOBs off the market. The president seeks to build consensus economy for the future. In its budget The budget proposal also aims to prohibit before Congress tackles the issue, by blueprint for 2010, the administration makers of brand-name biotech medicines creating a bipartisan reform study group proposed to begin a vast expansion of from “evergreening,” or extending the of key stakeholders.

59 patent-protected life of current products and pharmaceutical companies that return on investment before others can by changing them slightly. choose to play in this space. While the copy their discoveries. biotech industry is supportive of FOBs in The president’s plan for biosimilars In March 2009, a bipartisan group of principle, companies want any legislation has received mixed reactions from Congressional representatives (led by to provide an adequate period of market the biotech industry. Winning a California Rep. Henry Waxman) introduced exclusivity for original products, to legal pathway for FOBs could open biosimilar legislation consistent with ensure a reasonable time to earn a a significant new market for generic the language of the president’s budget

A closer look The FDA: transforming an agency in crisis

With nearly 11,000 employees and an annual budget of more new commissioner to advance the agency’s Critical Path than US$2 billion, the FDA is charged with the critical mission Initiative, a national effort to modernize the scientific of promoting and protecting public health. It oversees products process through which FDA-regulated products are that account for one-fourth of every consumer dollar spent in developed, evaluated and manufactured. the US, from foods to cosmetics, therapies to medical products. • Giving equal weight to the food-safety and drug-safety A recent wave of scandals, ranging from contaminated blood functions. Some lawmakers have argued that the FDA thinner from China to tainted peanuts from Georgia, has is too busy evaluating drugs and medical devices to tarnished the FDA’s gold-standard image, undermining public adequately regulate food. Rep. Rosa DeLauro, for trust and intensifying pressures for an agency overhaul. example, has proposed merging most government Observers agree that transforming the FDA starts with a responsibilities for food safety under a new Food Safety new commissioner. The Obama administration has tapped Administration, which would do the jobs that the FDA and Margaret A. Hamburg, a physician and former New York City US Department of Agriculture now perform separately. health commissioner, for the top post. Joshua Sharfstein, The possibility of separating food from drug has been commissioner of the Baltimore City Health Department and debated for more than two decades and may be revisited also a physician, has been named to serve as Hamburg’s in the Obama administration. chief deputy. • Ramping up for global threats. Along with ensuring the The next commissioner faces a daunting array of challenges, safety of foreign imports, the new FDA must protect including: Americans from bioterrorism, cross-border disease transmission and the threat of intentional contamination of • Improving the safety and effectiveness of drugs, biologics the nation’s food supply. and medical devices. A report from the Government Accountability Office (GAO), the investigative arm of • Attracting a new workforce. Much of the FDA’s staff were Congress, charges that the FDA is putting the public at hired in the boom of the 1970s and are ready to retire. risk of bad drugs and unsafe products. Safety concerns The agency’s well-publicized problems, coupled with lower extend also to the FDA’s capacity for inspecting foreign salaries than the private sector, have it made it difficult drug plants. Although 80% of active drug ingredients are to replenish staff. In addition, the rapid pace of innovation produced abroad, just 7% of the plants exporting to the US requires the agency to attract professionals who are are inspected by the FDA, the GAO says. Recently, the FDA current in their knowledge and have expertise across a Globalization Act of 2009 was introduced in the House of broad array of cutting-edge technologies. Representatives, designed to improve the FDA’s inspection • Updating technology. Reviews by the GAO and others have process for drug-manufacturing facilities. Opponents of the found the agency, working with outdated computers, lacks bill argue that it would likely increase producer costs and the information-technology capabilities to analyze data, patient prices. assess risks and share intelligence. • Speeding up the drug approval process. Although more Many in Congress agree that it is no longer a question of than 600 biologics are under development, fewer than 10 whether or not the FDA will be reformed, but rather how and are approved by the FDA each year. With a renewed focus when. Strong leadership is paramount. Yet to keep American on product safety, approval of new drugs and therapies consumers safe and life-saving therapies in ready supply, could face even further delays. Critics question whether the FDA will also need expanded authority to make sound the FDA is doing its part to make sure new therapies can regulatory decisions — and increased resources to keep pace reach the patients who need them. Advocates look to the with rapidly evolving biomedical innovations.

60 Beyond borders Global biotechnology report 2009 proposal. Dubbed the “Promoting Funding for scientific research in the stimulus package Innovation and Access to Life-Saving Medicine Act,” the bill gives the FDA US$21 billion for science and research spending, including: authority to approve copies of biotech • US$10 billion for the National Institutes of Health, including US$8.5 billion for drugs and take steps to ensure they are research grants (US$2 billion for biomedical research) and US$1.5 billion to safe and effective. The legislation would: renovate university research facilities • Allow the FDA to approve FOBs through • US$3 billion for the National Science Foundation an abbreviated application process • US$4.5 billion for renewable energy research, including bioethanol and other • Require FOB makers to 1) demonstrate biotech solutions there are no clinically meaningfully • US$1.1 billion for grants for disease prevention differences between the biosimilar and branded product and 2) show • US$1.1 billion for comparative effectiveness research the two products are highly similar in Source: Ernst & Young and www.HHS.gov molecular structure and share the same mechanism of action, if known • Allow an FOB maker to show the FDA that a product is a biogeneric and is government is prohibited from engaging One way to apply this philosophy to drug interchangeable with the original product in Medicare drug pricing negotiations pricing and reimbursement is through with pharmaceutical manufacturers. the use of comparative effectiveness The key issue of debate is length of Negotiations are handled strictly by research. In the United Kingdom, the exclusivity. The new bill limits market private-sector managed care and National Institute for Healthcare and exclusivity for innovator products to pharmacy benefit management plans. The Clinical Excellence (NICE) uses cost-utility 5.5 years. Industry advocates argue president and Congressional Democrats analysis to make coverage decisions that biotech companies should be advocate changing the program to based on cost relative to benefit. The entitled to at least 14 years of data enable, or even require, the government Obama administration’s stimulus bill exclusivity to recover their investments to negotiate with drug manufacturers, provides US$1.1 billion for comparative in drug discovery. As in the prior leading to savings estimates of US$10 effectiveness research. But it is important Congress, multiple legislative proposals billion to US$30 billion. Private payers that any measures implemented are are expected as a starting point for often take cues from government constructed in ways that encourage and negotiations. In fact, in March 2009, reimbursement policies, and drug reward innovation and are not just a cover Rep. Anna Eshoo, who represents companies are worried that this change for simply cutting costs. These concerns biotech-heavy Silicon Valley, filed could open a back door to price controls were reflected in the legislative debate, a competing proposal that had 43 as private insurers might follow suit in when the biotech and pharmaceutical cosigners. The Eshoo proposal provides renegotiating prices. industries expressed a preference for for 14.5 years of data exclusivity. using the term “comparative clinical While drug costs account for only a small effectiveness” rather than “comparative The second part of the president’s plan share of US healthcare expenditures, effectiveness,” which many read to mean to reduce drug prices — reimporting because of the industry’s historically high “cost effectiveness,” in the bill’s language. prescription drugs from outside the US — is margins, drug companies have frequently While the emphasis on reducing costs also a point of contention. Drug makers been a convenient scapegoat in media is important at a time of mushrooming argue that reimportation can erode coverage and policy debate about the budget deficits, as mentioned above, intellectual property rights and increase cost of healthcare. It is encouraging that for the US to retain leadership in safety risks, put de facto constraints on the administration’s proposals take a biotechnology, it is also critical that the returns that sustain investment in holistic view, emphasizing, among other prices provide a commercial incentive for innovation, and endanger patients with things, the use of electronic medical innovative R&D. substandard products. records and structuring incentives to The industry is also concerned about improve outcomes. And importantly, the president’s proposed change to not only drugs’ costs but also their Stem cell research: lifting the ban financial benefits — such as reductions in the Medicare Part D prescription drug In an important symbolic victory for the hospitalization or other care — are part of program, which funds drug coverage biotech industry, President Obama issued the debate. for some 44 million elderly Americans. an executive order in March 2009 lifting Under the current system, the

61 the restrictions imposed by President failed to provide an adequate safety legislation mirrors much of the proposed Bush on federal funding for research on warning even though the product’s legislation from 2008 that died on the human embryonic stem cells. label had been approved by the FDA. Senate floor. (See Beyond borders 2008 The decision, which was issued in for more details.) In the last Congress, the The reversal was expected, as the March 2009, upheld a state supreme debate pitted the legitimate needs of drug president — long a proponent of stem cell court decision that concluded FDA companies against those of technology research and regenerative medicine — had approval does not preempt the right of companies. Their different needs result pledged a policy shift on the campaign a plaintiff to claim damages in a state from the very different nature of intellectual trail. Advocates have stressed, however, court. The decision was in contrast to property and length of innovation cycle that the change is more a symbolic move a recent decision by the court in Riegel in the two industries. While technology for industry than a true financial driver. v. Medtronic which upheld preemption. product cycles are rapid and many Federal research grants, distributed A key difference in the Medtronic innovations are incremental improvements almost exclusively to government case was that the federal law granting on existing technologies, drugs often take agencies and academic research centers, the FDA its authority to approve and more than a decade to develop at a cost of will not generally end up in biotechnology regulate medical devices states that at least several hundred million dollars. With companies. Thus companies pursuing federal requirements preempt state both sides remaining actively involved in embryonic stem cell research will still requirements, while no such statement the debate, the new measure could result in need to raise funding from investors, exists for pharmaceuticals. The Court a similar stalemate. which has become more challenging in rejected Wyeth’s argument that a drug the wake of the economic crisis. maker could face an FDA enforcement The change we need? action for strengthening a safety warning. States’ rights President Obama ran his presidential race on the slogan, “the change we need.” In the most watched judicial case of Patent reform: returning to the While the legislative debate on the issues the year, the US Supreme Court heard battleground listed above is just getting started, the arguments in late 2008 in the case of Patent reform is making its way through changes being considered are nothing if Wyeth v. Levine, which dealt with a Congress once again with the introduction not ambitious. While biotech companies plaintiff’s right to pursue a claim. The of the Patent Reform Act of 2009. The may understandably be preoccupied with plaintiff in the case alleged that Wyeth thorny operational challenges related to raising funds and running lean, the issues being debated in Washington, DC, could potentially have huge implications for the future of the entire industry. For lawmakers, the challenge will be to not just change policies, but modify them in ways that sustain the industry and its tremendous innovation and economic engine. From the measurement of outcomes to the protection of intellectual property and the pricing of innovative and life-saving drugs, legislators should consider the incentives created by their policy initiatives. With the right measures that produce the right incentives for the right behaviors, the biotech industry — and the healthcare economy at large — could indeed get the change it needs.

62 Beyond borders Global biotechnology report 2009 US products and technologies Monitoring progress

Progress: increased approvals anti-infectives nor oncology products. further information to help patients avoid The most prominent grouping was the serious adverse events. In a few cases, The US Food and Drug Administration area of imaging and contrast agents the FDA also required that the programs (FDA) approved 27 new molecular where four new products were approved. include steps to assure safe use, such entities (NMEs) and biologic license These included two biotech-developed as the certification of prescribers and applications (BLAs) in 2008 — a marked products, CV Therapeutics/Astellas’ pharmacies and enrollment of patients in improvement over 2007, when product Lexiscan and Epix Pharmaceuticals’ special programs to ensure that they fully approvals at the agency fell to 18, the first drug, Vasovist. Both of these understand the associated risks. lowest level since 1983. This represents products target cardiovascular scanning a return to the levels seen in 2005 and REMS programs are not restricted to procedures. Lexiscan is a stress test 2006, when 20 and 22 products were new drugs seeking approval; the FDA can agent that increases arterial blood flow approved, but a far cry from 2004, when also require them for existing, approved in the arteries for patients unable to 36 NMEs were approved. products. The FDA posted its first list of undergo adequate exercise-induced previously approved products requiring According to “The Pink Sheet” less than stress, while Vasovist is the first contrast REMS in March 2008, which included half of the year’s approvals were for agent approved to support the relatively products such as Biogen Idec and Elan’s breakthrough technologies or products new procedure of magnetic resonance multiple sclerosis drug, Tysabri, and addressing unmet medical needs. angiography (MRA). Celgene’s multiple myeloma and MDS The majority of products receiving therapy, Revlimid. Remarkably, the approval were more than just “me-too” REMS: monitoring safety agency even included Exubera, which technologies, even though they were Pfizer had already pulled from the in treatment classes that already had With the signing of the Food and Drug market in 2007. several existing approved options. To Administration Amendments Act the extent that there were innovative (FDAAA) in September 2007, sweeping Both of the drugs approved in 2008 for products in the class of 2008, they changes were made in the FDA. The Act’s ITP, Amgen’s Nplate and Ligand/GSK’s often stemmed from biotech companies. greatest impact on future drug approvals Promacta, required sponsors to develop Regeneron’s Arcalyst was approved could be through its mechanism for a REMS to meet approval requirements. for Cryopyrin-Associated Periodic post-marketing safety surveillance, the Nplate’s REMS included a medication Syndromes or CAPS, a group of rare, risk evaluation and mitigation strategy guide for patients and required that inherited, auto-inflammatory conditions. (REMS). Of course, post-approval studies all prescribers and patients enroll in a Two products were approved for are not new, but as of 2008, these are special program to track the long-term Idiopathic Thrombocytopenic Purpura no longer voluntary post-marketing safety of Nplate therapy. (ITP), a blood clotting disease: Amgen’s commitments, but rather, enforceable The introduction of the REMS Nplate and Ligand/GSK’s Promacta. studies with predetermined time frames framework may provide greater Genzyme received approval for Mozobil, and outcome targets. The FDA can now comfort to regulators in approving an injectable drug that provides require drug companies to develop and novel therapies for serious conditions enhanced mobilization of stem cells for propose a REMS (which can include a that also have identified risks, and autologous transplantation in patients medication guide, patient package insert may also help in boosting patient and with non-Hodgkin’s lymphoma and or a communication plan) to ensure practitioner acceptance and usage of multiple myeloma. that the benefits of a drug outweigh the these drugs. For example, the REMS risks. As of December 2008, the FDA Overall, additional approvals in 2008 for Tysabri may have allowed the had approved 21 REMS from companies were widely dispersed throughout product to remain on the market and submitting new drug applications multiple product types, including those be seen as an acceptable alternative (NDAs). The majority of these REMS for epilepsy, pain management and by patients and doctors. The product, have required the submission of a contrasting/imaging agents. Unlike the which had initially been pulled from the medication guide to address drug- and last few years, the leading innovative market in 2005 after three patients drug class-specific issues and provide technologies in 2008 were neither developed progressive multifocal

63 leukoencephalopathy (PML), was PDUFA dates: monitoring timelines the delay in approvals was the result subsequently re-approved by the FDA. of inadequate staff, particularly since Another significant issue in 2008 Even though cases of PML have been it needed to implement the safety was the FDA’s inability to meet its reported since the reintroduction of legislation approved by Congress in target dates for acting on new drug Tysabri, the FDA has not pulled the 2007. These missed target deadlines applications. While the FDA had set drug from the market this time around. denied patients access to potential non-binding timelines for review The existence of a REMS has given the treatments and increased uncertainty and action on new medicines under Agency greater confidence that they for companies and investors. In several the Prescription Drug User Fee Act can understand and monitor the degree cases, the missed dates were not (PDUFA) — targeting action within of risk presented to patients, while accompanied with clear reasons from 10 months of submission for 90% of letting doctors know how to carefully the FDA, leaving investors to wonder standard NDAs and within 6 months of monitor for the occurrence of PML in whether the delays were because of the submission for priority applications — the their patients. FDA’s lack of resources or because of agency failed to meet PDUFA dates for problems with the application itself. at least 15 drugs. The FDA stated that

Selected US product approvals, 2008

Brand REMS Company Location name Generic name Type Indication required Month Adolor/GSK Pennsylvania/ Entereg alvimopan New molecular Regain GI function Yes May Delaware Valley entity after bowel resection Amgen Los Angeles/ Nplate romiplostim Biologics license Immune Yes August Orange County application thrombocytopenic purpura (ITP) Cephalon Pennsylvania/ Treanda bendamustine New molecular Non-Hodgkins March Delaware Valley hydrochloride entity lymphoma CV Therapeutics/ San Francisco Bay Lexiscan regadenoson New molecular Cardiac imaging Yes April Astellas Area entity agent Epix New England Vasovist gadofosveset New molecular Contrast agent December trisodium entity Genzyme New England Mozobil plerixafor New molecular Bone marrow December (acquired from entity transplants in non- Anormed) Hodgkins lymphoma and multiple myelomas Lev New York State Cinryze C1 inhibitor Biologics license CI hibitor HAE October Pharmaceuticals application Ligand San Diego Promacta eltrombopag New molecular Chronic ITP Yes November Pharmaceuticals/ olamine entity GSK Progenics/Wyeth New York State Relistor methylnaltrexone New molecular Opiod-induced April bromide entity constipation Regeneron New York State Arcalyst rilonacept Biologics license Cryopyrin-associated February application periodic syndromes The Medicines New Jersey Cleviprex clevidipine New molecular Hypertension August Company entity Zymogenetics Pacific NW Recothrom thrombin, topical Biologics license Stopping blood loss in January (recombinant) application surgery

Source: Ernst & Young, US Food and Drug Administration

64 Beyond borders Global biotechnology report 2009 Complete response letters: Looking ahead: monitoring progress monitoring applications As of early 2009, more than 125 new In 2008, the FDA switched from issuing drug applications (NDAs) and biologics “approvable” and “not approvable” license applications (BLAs) are on file letters in response to NDAs to issuing with the FDA with decisions scheduled complete response letters (CRLs) — which during the year. Approximately one had previously only been used for BLAs. third of these products were developed Under the approvable/not approvable either entirely by or in partnership with system, the release of a letter gave the biotechnology companies. Many of sponsor, investors and the public an them are novel therapeutics, such as instant understanding of the application’s Amgen’s denosumab for postmenopausal status. The new nomenclature is more osteoporosis, Novo Nordisk’s liraglutide ambiguous, making it somewhat harder for type 2 diabetes and Theravance’s to monitor the status of applications. telavancin for the treatment of While the term “complete response letter” complicated skin and skin-structure might suggest the end of a process, it infections. Other submissions seek to often indicates the opposite — signaling expand successful marketed products that an application is incomplete, and into treating new indications, including initiating a new round of action. applications to use Genzyme’s Clolar as a first-line therapy for acute myeloid The biotechnology industry and leukemia and Merck/CSL’s Gardasil biologics products were well human papillomavirus vaccine not just represented in the applications that for women (for whom it is currently received a CRL in 2008. In nearly all approved) but for men as well. Also filed of these cases, the letters required with responses expected shortly are the sponsors to continue working on CRL follow-ups for AMAG’s Feraheme and 2008 was a year of considerable their product applications, and some MedImmune’s motavizumab. procedural change and reasonable of the products were approved in progress in product approvals. An early 2009. These include products After a dismal 2007, there was definite atmosphere of change at the FDA for which additional trials were not progress on the products front in will most likely continue to cloud the required, such as Roche’s Actemra 2008, but that progress will need to be predictability of outcomes. But the and AMAG’s Feraheme (both of monitored to make sure it is sustained. pace of overall applications continues which were challenged to produce The FDA, which has struggled in recent to be strong and much of this pipeline additional documentation concerning years with political pressures and is in truly innovative technologies with manufacturing and final labeling), resource constraints, is undergoing products that target oncology, orphan MedImmune’s motavizumab (in which considerable reform (see the US public diseases, autoimmune disorders and the FDA asked for supplementary policy article for details), and companies other underserved disease segments. We documentation), and Centocor’s will need to stay abreast of developments all have much at stake in ensuring that ustekinumab (which requested the at the agency to understand the these applications are processed promptly sponsor to submit a REMS). However, changing regulatory climate. One area and innovative new products are brought in Targanta’s CRL for ortavancin, where things have already changed, to market. For a drug industry facing a a gram-positive anti-infective for of course, is in the area of monitoring significant patent expiration cliff, 2009 hospital-based patients, the FDA found safety. For companies seeking product applications pending at the FDA — which that the data was not sufficient and approvals in 2009, some of the biggest Cowen and Company estimates could required new clinical trials. The CRL challenges may lie in developing REMS generate revenues of as much as US$60 resulted in Targanta’s sale to The and responding to the anticipated slate of billion by 2013 — could contribute to a Medicines Company. (For details, see CRLs — challenges that will likely require recovery in the sector. And of course, the US deals article.) The Medicines additional investments in the final phases for patients everywhere, these products Company believes ortavancin will add to of bringing products to market. could provide the ultimate benefit — by their strategic plan of becoming a global improving and saving lives. leader in critical care medicine.

65 Canada year in review A time of reckoning

The global financial crisis, which is industry needs sustained R&D investments loss no longer a good indicator of the straining the Canadian economy, has to attract investors and grow sustainably. health of the sector. taken a major toll on the biotech sector. The funding crisis has driven The market capitalization of the Public markets have been firmly closed reductions in R&D programs and Canadian industry declined 61%, from since mid-2007, while follow-on offerings related expenditures and has US$10.8 billion in 2007 to US$4.2 fell to the lowest level in more than produced substantial intangible asset billion in 2008. While this is at least a decade. Venture capital, which had impairments. Net loss increased from partially driven by the four significant rebounded in 2007, fell substantially US$759 million to US$1.1 billion as a public-company acquisitions, the 72 in 2008, especially for new start-ups result of write-offs of intangible assets public companies in existence at the and early-stage corporations. This and goodwill. Angiotech wrote off end of 2008 saw their total market funding crisis is straining companies and US$650 million of goodwill in 2008, value shrink by a very significant 47%. their business strategies, leading to a representing more than the entire This decline was driven by a number significant decline in the number of firms. increase in losses in the industry. In of companies that have announced the More than half of the remaining public the absence of this write-down and need to “pursue strategic alternatives” companies now have less than a year’s the acquisitions of the four companies and by companies that experienced worth of cash. For the Canadian industry, mentioned above, the industry’s net clinical-trial setbacks in addition to this is now a time of reckoning. Without loss would have decreased by 57%. The the general market decline. However, new approaches and solutions, the next extent of noncash charges makes net the fact that the Canadian industry few years could cripple the sector.

Financial performance Canadian biotechnology at a glance 2008 (US$m) The financial results of the Canadian biotech industry reflect the challenging 2008 2007 % change realities of the current economic crisis. Public company data To a large extent, the numbers have Revenues 2,041 2,237 -9% also been dampened by the acquisition R&D expense 703 743 -5% in 2008 of four significant public companies — Arius, Aspreva, Axcan and Net income (loss) (1,143) (759) 51% Draxis — by foreign firms. Market capitalization 4,217 10,844 -61% The revenues of the publicly traded Number of employees 7,972 7,326 9% biotech industry decreased 9%, from Financings US$2.2 billion in 2007 to US$2 billion in Public company financings 271 707 -62% 2008, mainly due to the large acquisitions mentioned above. If 2007 revenues Number of IPOs 0 1 -100% were adjusted to exclude those four Private company financings 207 352 -41% companies, the industry’s revenues would Number of companies have increased by 26% instead of falling. This strong growth is indicative of new Public companies 72 84 -14% product approvals and solid revenue Private companies 286 322 -11% growth of existing products. This can also Public and private companies 358 404 -11% be seen in the 9% increase in the number of employees. However, R&D expenses Source: Ernst & Young Financial data for 2008 were converted to US$ using an exchange rate of 1.07 (Canadian per US$), except market capitalization, decreased from US$743 million to which was converted using an exchange rate of 1.22. Data for 2007 were converted to US$ using an exchange rate of 1.07, except market capitalization, which was converted using an exchange rate of 0.99. Data for 2007 have been restated to reflect US$703 million — a source of concern and full-year results, since estimates in Beyond borders 2008 included some estimation of fourth-quarter results. Numbers may appear a direct result of the lack of funding. The inconsistent because of rounding.

66 Beyond borders Global biotechnology report 2009 is no longer followed by a significant In 2008, the Canadian biotech industry underperformed the market ... number of analysts and many of the EY Canadian biotech industry S&P/TSE Composite Index (Canada) S&P 500 (US) larger investment banks no longer have a separate life sciences industry +20% group also contributed to the decline. In 2004, there were 18 full-time analysts covering the life sciences 0% industry in Canada; at the end of 2008, there were only 3. Further, few mutual funds require a certain percentage of their investments to be in life -20% sciences companies, and most stock market indices contain only one or two

Canadian biotech companies. -40% The number of Canadian public companies decreased by 12%, from 84 in 2007 to

72 in 2008. This was driven in part by -60% the acquisition of successful companies. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Most of the decline in company count, Source: Ernst & Young, finance.yahoo.com EY Canadian biotech industry represents the aggregate market cap of all Canadian public biotech companies as defined by Ernst & Young. however, was due to clinical-trial failures, companies transforming themselves into service or resource companies, or firms ... while Biovail did better than the rest of the industry being wound up or becoming insolvent. For many years, Canada was second Biovail Medium cap (250m–1b) Small cap (100m–250m) Micro cap (under 100m) EY Canadian biotech industry only to the US in the number of biotech +20% companies it had, but it now ranks third, well behind . 0%

Financing In 2008, the industry collectively raised -20% a little more than US$475 million, the lowest total since 1995. Not surprisingly, the decline accelerated in the fourth -40% quarter, when the industry raised less than US$64 million, the smallest -60% quarterly amount in the years that Ernst & Young has been tracking the

Canadian sector. -80% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec The public markets have essentially been Source: Ernst & Young, finance.yahoo.com closed to Canadian biotechs since EY Canadian biotech industry represents the aggregate market cap of all Canadian public biotech companies as defined by Ernst & Young. mid-2007. The complete lack of IPOs during the year was coupled with a striking Funds raised in the “other” offerings securities to debt instruments — which decline in follow-on public offerings of category decreased to US$191 million accounted for 31% of total public common shares or units, from US$398 from US$305 million in 2007. Of this financings in 2008, up from 17% a year million in 2007 to US$80 million in 2008. total, private placements of equity earlier — indicates the level of investor The largest follow-on offerings were by securities represented only US$103 uncertainty. Convertible debt allows Theratechnologies for approximately C$30 million, while private placements of debt investors to participate in any equity million and by Akela Pharma for a little (mostly convertible debt) amounted to upside while also giving them collateral more than US$10 million. US$87 million. The shift from equity from the corporation’s assets, often

67 its intellectual property (IP). If the Canadian yearly biotechnology financings (US$m) corporation is unable to raise additional 2008 2007 2006 2005 2004 2003 2002 2001 2000 financing and is forced into restructuring IPOs 0 5 9 160 85 0 10 42 103 or a liquidation, these investors would have rights to some of the IP and would Follow-ons 80 580 925 295 296 723 186 621 364 come before equity holders in recovering Other 191 122 664 242 139 416 132 155 258 at least some of their investment. Venture 207 353 205 313 271 206 199 388 546 Another concern is the size of the Total $478 $1,060 $1,803 $1,010 $791 $1,345 $527 $1,206 $1,271 individual offerings. The average private Source: Ernst & Young, Canadian Biotech News and company websites placement of equity amounted to slightly Numbers may appear inconsistent because of rounding more than US$4 million, while the average private placement of convertible debt amounted to US$3.8 million. Many of in Canada, where only a small number Provincial distributions of companies have products that are these financings were provided by existing As in prior years, Quebec-based companies marketed or close to approval. investors to maintain minimum operations attracted more total investment than any and were not sufficient for expanding QLT redeemed US$172.5 million of other province, with US$199 million raised, operations or acquiring or developing new convertible senior notes for cash in followed by Ontario (US$138 million) and technologies. Similarly, follow-on offerings September. Since the publicly traded British Columbia (US$90 million). Quebec’s had an average size of only US$10 million, industry raised only US$271 million in lead was facilitated by the province’s US$58 which is significantly smaller than most aggregate during the year, this implies million in follow-on public financings, venture rounds in the US. that net funding for the sector was compared with US$20 million in British Venture funding fell from US$353 less than US$100 million. Further, in Columbia and none in Ontario. December, QLT proceeded with a modified million to US$207 million. This is roughly On the venture-capital front, Ontario Dutch auction tender to purchase US$50 comparable to the annual totals during attracted close to US$109 million, million of common shares. This process most of the last seven years (except 2007 primarily related to a US$45 million expired on January with the company and 2005, when more than US$300 investment in Cytochroma. Following repurchasing 20 million common shares. million was raised.) Interestingly, the Ontario were Quebec (US$51 million The aggregate amount returned to average venture round was about US$8 raised) and British Columbia (US$40 shareholders in these two transactions million, significantly higher than the million). These three provinces accounted represents half of the new funds raised by average size of private placements in for 97% of total venture funding. public companies. This was driven by a the entire Canadian industry in 2008. few large rounds raised by later-stage companies that would normally have gone Capital raised by Canadian province, 2008 public in earlier years. These included Cytochroma (US$45 million), Gemin X Public companies Private companies

(US$38 million), Inimex Pharmaceuticals 250 (US$22 million) and Klarogen Biotherapies (US$17 million). Without these rounds, which represented almost 200 60% of the venture financing in 2008, the 51 average round would have been about US$4 million. 150

Although not included in our financing US$m

data, Quebec-based Æterna Zentaris 100 41

raised US$52.5 million in a royalty 109 financing deal with Cowen Healthcare 148 Royalty Partnership. While the sale of 50 78 future royalty streams is an excellent 3 3 method of raising capital in the current 30 financial crisis — and is increasingly used 0 8 7 Quebec Ontario British Columbia Alberta Other in the US — it has limited applicability Source: Ernst & Young, Canadian Biotech News and company websites

68 Beyond borders Global biotechnology report 2009 The number of Canadian companies cash. Atrium will now become a health which retained ex-US rights, received declined significantly in 2008. The number and nutrition pure-play corporation. US$30 million up front (including an of private firms decreased from 98 to 84 in On the private-company side, Oryx US$8 million equity investment and a Ontario, from 87 to 78 in Quebec and from Pharmaceuticals was acquired by license fee of US$22 million) and could 57 to 55 in British Columbia. Meanwhile, Sepracor for US$50 million. Shareholders receive up to an additional US$285 public companies decreased from 24 to 20 could receive an additional US$20 million in development, regulatory in Ontario and from 25 to 21 in Quebec. million upon accomplishment of various and sales milestones plus royalties. In Since 2004, all provinces except British regulatory milestones. addition, there were at least seven other Columbia have experienced significant pharma-biotech strategic alliances and in The year saw several notable strategic declines in the number of companies, excess of 35 biotech-biotech agreements, alliances as well. In January 2008, including drops of 44 companies each in mostly with small deal values. BioMS Medical completed a previously Quebec and Ontario. announced licensing and development In the current environment, a number agreement with Eli Lilly. BioMS received of small deals were structured to Deals an up-front cash payment of US$87 generate near-term cash for struggling million and could receive additional companies or to cut costs by offloading As mentioned above, several successful development and sales milestones up ancillary products or sharing services Canadian biotechs were acquired in to US$410 million as well as escalating with other corporations. These included 2008. The two largest deals — Aspreva’s royalties on commercial sales. Aegera Cipher Pharmaceuticals’ development, acquisition for US$0.9 billion by Galenica Therapeutics outlicensed its oncology distribution and supply agreement Group and Axcan’s purchase by TPG drug AEG40826 to Human Genome with Ranbaxy Pharmaceuticals and Capital for US$1.3 billion — were among Sciences in exchange for US$20 million MethylGene’s agreement with Otsuka the largest deals ever seen in the in up-front payments including US$5 Pharmaceutical to develop small-molecule Canadian biotech industry. Both million in equity. Aegera could also kinase inhibitors for ocular diseases. Both transactions were announced in 2007 receive up to US$295 million in future agreements provided up-front payments and completed in early 2008. In development and commercial milestone of less than US$2 million but could be addition to these two takeovers, Draxis payments and double-digit royalties. worth anywhere from US$20 to US$50 Health was acquired by India’s Jubilant Theratechnologies signed a collaboration million, depending on milestones. Organosys for US$226 million, and and licensing agreement with EMD Serono Arius Research was acquired by Roche (a subsidiary of Merck-Serono) for the for US$190 million. Atrium Innovations Product approvals exclusive commercialization rights to sold its active-ingredients and specialty- Tesamorelin in the US. Theratechnologies, In a year when the US Food and Drug chemical divisions for US$166 million in Administration (FDA) approved relatively few new molecular entities (see “US year Capital raised by leading Canadian biotech clusters, 2008 in review: products” for details), Canadian firms had limited success bringing $250 new therapeutic products to market. In December, Labopharm received FDA approval of Ryzolt, a once-daily, $200 extended-release formulation of tramadol. Montreal In addition, DiagnoCure received US CLIA

$150 certification to launch Previstage, its new colorectal cancer-staging test. Bioniche

Vancouver Toronto Life Sciences also received licensing $100 approval by the Canadian Food Inspection Agency for Econiche, a cattle vaccine to Total capital raised (US$m) raised capital Total reduce E. coli 0157 shedding. $50 Canada has 22 public companies as Quebec well as some private firms with drugs

$0 Halifax in Phase III trials. In recent years, 0 20 40 60 80 100 120 approvals at the FDA have slowed, but Venture capital raised (US$m) the Obama administration is looking at Source: Ernst & Young, Canadian Biotech News and company websites Size of bubbles shows number of financings per region overhauling the agency in part to speed

69 approvals. (For more details, refer to Canadian biotech industry indicators, 2000-08 the US public policy article.) Companies Revenue Market capitalization Number of companies looking to get new products approved and concerned about survival will need 20 500 to monitor these changes. 18 450

16 400 Consolidation and survival The funding crisis is threatening 14 350

companies’ survival. Fifty-seven percent of 12 300 companies had less than a year’s worth of cash as of 31 December 2008, while 76% 10 250 US$b had less than two years’ worth. Reflecting 8 200 this reality, 43 of the 72 public companies had full going-concern disclosures in their 6 150 2008 financial statements, indicating that 4 100 management believes they have less than a year’s worth of cash. In the past, most 2 50 companies in this situation were able to raise funds to continue, but now this is 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 more difficult since the industry has an Source: Ernst & Young unprecedented number of companies with little cash, very low market values and a lack of new buyers. Only 45 of the 72 public companies have For Canadian biotech companies, One mechanism the government uses noninterest revenue, much of which is investors and policy-makers, this is now to boost biotech is the scientific and generated from research collaborations a time of reckoning. If the industry is to experimental development tax credits and other precommercial activities; and survive in any meaningful, sustainable (SR&ED) program, which returns cash only 24 of these firms have approved way, it will need new approaches to to private companies based on R&D products. For the two-thirds of public address the substantial gaps and spending, and is augmented by similar biotech companies that do not yet have challenges ahead. programs in many provinces. While approved products, access to funding these programs greatly benefit private The government could play a constructive will be critical. In 2008, Canadian public firms, they may be less useful to many role by helping to align incentives and companies raised only US$271 million in companies in the current environment. fill funding and other gaps. Data from aggregate, which is significantly below the As venture-capital firms cut back on Statistics Canada show that, while the industry’s burn rate and represents about early-stage financing, many companies federal government spent US$920 one-third its R&D expenditures. Without lack the funds to invest in R&D and million on biotechnology scientific renewed funding, significant consolidation avail themselves of the credits. Further, activities in the year ending 31 March will be the most likely outcome. these credits are of little value to public 2008, only US$15 million of that total companies since they can only be offset Not surprisingly, six public companies is related to business enterprises. And against taxable income, which few public essentially closed operations in 2008, while this investment is probably at least Canadian biotechnology companies have. and 20 of the 72 remaining companies matched by provincial contributions, For public companies, making a portion of have announced that they are actively the vast majority of those funds are the SR&ED tax credits and unused SR&ED pursuing strategic alternatives such as for pure research. These expenditures expenditures refundable would provide reorganization or sales. If these trends may advance science and contribute to immediate relief. continue, the Canadian biotech industry many new and innovative biotechnology could emerge from the financial crisis products, but without robust funding Other programs to spur investor interest much smaller and essentially restricted and a strong domestic industry, these within the sector could include: to the three major clusters in Montreal, inventions will be commercialized by “flow-through shares” for public companies, Toronto and Vancouver. foreign companies with little economic which would permit shareholders to deduct benefit to the Canadian economy. a proportionate share of R&D expenditures;

70 Beyond borders Global biotechnology report 2009 Canadian biotech companies by province, 2008

Private companies Public companies

Number of companies 90

80

70

60

50

40

30

20

10

0 Ontario Quebec British Alberta Saskatchewan Nova Scotia Manitoba Prince Edward New Newfoundland Columbia Island Brunswick Source: Ernst & Young

deductions from income for capital These measures could help the industry losses incurred from direct investments survive the drought. Longer term, in new shares of public companies; and however, it will need to become more methodologies to permit investors to deduct self-sustaining and not rely on government direct investments into public companies incentives. Canadian companies will need against income, using a stock savings or to behave more like American firms, similar mechanism. which focus on the commercial potential of products and less on pure research Programs to reduce the perceived risk and very early-stage products. Such a associated with start-up investments commercial focus with significant attention could also help attract investors. These and resources committed to moving could include matching government products with good commercial potential funds for start-ups and grants based on toward approval as soon as possible should employment creation in start-ups. reduce risks and attract investors. A number of companies have Phase While the Canadian biotech industry will III products that require at least two experience significant financial challenges or three years of additional funding. in the near term, about one-third of public A loan program to assist such firms companies with approved products are with commercialization would be generating revenue, and their revenue beneficial at a time when the lack growth has been substantial in recent years. of funding could cripple promising These companies will provide a basis for projects or push them abroad. While the industry’s continuance into the future. Canada’s Innovation & Technology But companies that do not have approved Office provides funding to a number of products need a chance to start generating industries, such as aerospace, it has revenue, and unless the industry funds not provided these funds to biotech for new start-ups, Canada will become a small many years. player in the global industry.

71 Staying afloat? The European perspective European introduction Staying afloat?

For the European biotech industry, the to €478 million in 2008 — a 70% decline This is not surprising, given that the last few years have seen sustained growth in net loss and a historic low of less global turmoil in stock markets saw public across several fronts — much-needed than 4% of revenues. Over 40% of company financing for biotechnology progress after a prolonged period this improvement came from just two plummet in most major markets. The during which the sector struggled with a companies — Shire and Actelion. Actelion’s European industry was subject to the challenging financing environment and 2007 bottom line had been impacted same trends — the industry’s market anemic growth. In 2008, the industry’s by a significant in-process research and capitalization fell 34% as investors success streak may have been brought development charge. slashed a substantial €20 billion from the to an abrupt halt by the global financial valuations of Europe’s biotech firms. The crisis. While Europe’s leading mature firms market for IPOs, which had trickled along Financing continue to post strong financial results, in the first half of the year — producing only the environment facing many smaller As in most markets, the global financial three IPOs that generated a relatively small companies is much more challenging. crisis hindered biotechnology companies’ €75 million (US$111 million) — evaporated access to capital, and this was clearly entirely as the financial crisis set in. visible in the European industry’s financing But while the global financial crisis has Financial performance totals. By amount of capital raised, 2008 certainly made matters worse, Europe’s Revenues of publicly traded European was the third-worst year in the past financing challenges pre-date the worst of biotechnology companies increased 17%, decade, ahead of only 2002 and 1999. The the crisis. Indeed, the public markets have from €9.6 billion in 2007 to €11.2 billion European industry’s fundraising fell from been cool to biotech investments since the in 2008. This compares favorably to €5.4 billion (US$7.4 billion) in 2007 to less second half of 2007, when what was then the 6% decline in revenues the industry than €2 billion (US$2.9 billion) in 2008. called the credit crunch prompted investors experienced in 2007. However, as The bulk of this reduction was in funding to abandon stocks with greater perceived noted in last year’s Beyond borders, the for public companies, which shrank from risk. In the first two quarters of 2007, 2007 numbers had been skewed by the more than €4 billion (US$5.5 billion) in biotech companies raised €600 million acquisition of Serono by Merck KGaA, 2007 to only €833 million (US$1.2 billion) (US$822 million) through IPOs and more which had removed one of Europe’s largest in 2008. than €3.1 billion (US$4.2 billion) through biotech companies from the industry. follow-on and other public offerings. In the Adjusted for the Serono acquisition, the 2007 growth rate was 20% — roughly on par with the 2008 growth rate. European biotechnology at a glance (€m) Not surprisingly, the vast majority of this increase in revenues came from a handful Public companies Industry total of mature European biotechs. In particular, 2008 2007 % change 2008 2007 % change the industry’s performance was boosted Financial by top-line growth in excess of 20% at Revenues 11,228 9,591 17% 15,348 13,553 13% Elan (based in Ireland), Eurofins Scientific R&D expense 3,516 3,409 3% 6,812 6,571 4% (France), Meda (Sweden) and Qiagen (the Net income (loss) (478) (1,588) -70% (1,994) (3,077) -35% Netherlands), while Switzerland-based Actelion and British specialty pharma Shire Industry grew by 16% each. For the most part, these Market capitalization 38,487 58,727 -34% — — — impressive increases are attributable to Total financings 833 4,269 -80% 1,764 5,438 -68% strong product sales at these firms. Number of IPOs 3 21 -86% 3 21 -86% The bottom line of publicly traded Number of companies 178 185 -4% 1,836 1,869 -2% companies also improved significantly, Number of employees 49,062 47,775 3% 85,612 83,330 3% from a net loss of €1.6 billion in 2007 Source: Ernst & Young and company financial data

74 Beyond borders Global biotechnology report 2009 six quarters since, the cumulative amount Deals was also strong deal-making activity raised has been less than 40% of the total around preclinical assets. Indeed, 11 of Deals are a perennial presence in the raised during the first six months of 2007. the 15 largest European deals in 2008 biotech industry, and the volume and involved discovery programs or assets in A large part of this decline is in follow-on potential value of transactions conducted preclinical development. and other financings, which withered from by European biotech companies remained €3.5 billion (US$4.8 billion) in 2007 to fairly strong in 2008, despite the financial Some deal trends were driven by larger less than €800 million (US$1.2 billion) in crisis. In fact, the challenging times may challenges facing the industry. For instance, 2008. In contrast with 2007, when there have spurred deal activity in some cases, as as big pharma companies attempt to were eight transactions above the €100 distressed circumstances drove firms to find reinvent themselves (see the “Reinvention million mark, there was only one such solutions through partnerships while private and reinnovation” article in Beyond borders financing in 2008. investors sought exits through acquisitions. 2008 for details), several of these firms are seeking to rationalize operations and divest Venture financing held up better than the During the year, European biotechs themselves of noncore assets — leading to public markets in 2008. But even here, announced M&A transactions worth a a number of transactions in which smaller the amount raised was 20% lower than total of €3.4 billion (US$5.0 billion), split European firms inlicensed commercialized in 2007. Venture funding fell from €1.2 somewhat evenly between biotech-biotech products from large companies. And billion (US$1.6 billion) in 2007 to €932 and pharma-biotech transactions. While as companies face increased risks even million (US$1.4 billion) in 2008 — one of this total is far lower than the €14.3 billion after product launch — from greater only two years since 2000 in which the (US$19.6 billion) of M&A transactions in post-marketing safety surveillance and amount of venture capital raised by the 2007, the 2007 totals had been skewed a changing pricing and reimbursement European industry has dipped below €1 by three deals (Merck KGaA/Serono, environment — this reality drove a number billion (US$1.5 billion). Venture investors Qiagen/Digene and Shire/New River). After of deal structures in which contingent have been demonstrating a lower appetite adjusting for these large deals, the 2008 payments are linked to commercial for risk, preferring companies with more numbers represent an 81% increase relative milestones such as sales performance advanced pipelines that offer relatively to 2007. rather than R&D milestones. low-risk, short-term return horizons. On the strategic alliance front, the total Reflecting this trend, the year’s three value of transactions decreased by twelve largest first-round financings were Products and pipeline percent in 2008, to €8.8 billion (US$13.1 completed by companies with programs in billion). While novel clinical-stage product The industry had a mixed performance with clinical development and with their origins candidates continued to command regard to product approvals and pipeline in established pharmaceutical companies. impressive premiums in alliances, there development. Building on the success of

Ernst & Young survival index: Europe

2008 2007 2006 2005 Number of Percent Number of Percent Number of Percent Number of Percent companies of total companies of total companies of total companies of total More than 5 years of cash 50 28% 68 37% 61 38% 51 39% 3–5 years of cash 13 7% 26 14% 18 11% 20 15% 2–3 years of cash 24 14% 18 10% 17 11% 15 11% 1–2 years of cash 25 14% 40 22% 35 22% 25 19% Less than 1 year of cash 66 37% 33 18% 30 19% 21 16% Total public companies 178 185 161 132

Source: Ernst & Young and company financial data Numbers may appear inconsistent because of rounding

75 previous years, the pipelines of European It is likely that many firms will survive medium sized businesses and multinationals; companies grew across all phases of through measures such as these, but it is refocusing the government’s Strategic clinical development during 2008. The also clear that others will not. Indeed, a Investment Fund (FSI) toward innovative number of candidates in the aggregate number of companies have already gone into companies; and enacting tax breaks for pipeline of the industry increased by more administration or liquidation in 2008, and investment in small innovation-led companies. than 10% relative to 2007, bringing the more are expected to follow suit in 2009. In January 2009, one European country total number of candidates in clinical Beyond the sink-or-swim moment did take positive action: the Norwegian development to more than 1,000. confronting many European biotechs, government included a €318 million The news was not as strong on the products however, is the larger question of the (US$467 million) provision for life sciences front. Only one new molecular entity sustainability of the industry itself. Late in research as part of a wider stimulus received US Food and Drug Administration 2008, fearing the long-term damage that package. The government hopes that the approval, while two received approval might be caused by a prolonged funding intervention — the first such action in Europe from the European Medicines Agency for drought, particularly to small, early-stage this year — will help support companies marketing throughout the European Union. companies, national industry associations through the funding crisis. In addition, product-approval success was and other biotech interest groups began to dominated by specialty pharmaceutical encourage European governments to act. Looking ahead companies, while approvals secured In December, executives from the UK’s by “core” biotechnology companies The European industry’s financial results biotechnology industry sent a dossier to were mainly new formulations of showed sustained growth in 2008, but the UK government proposing a national already-approved and marketed products. as always much of this success came £1 billion (US$1.85 billion) biomedical from a few mature companies. While public-private partnership with half these leading firms will remain largely coming from public funds and half from Staying afloat? unaffected by the crisis, the reality facing private investors. The proposals envisage For many privately held and small-cap many smaller European companies is the creation of two funds — one to fund European biotechnology firms, access to vastly different. Many small-cap and mergers and acquisitions between capital has become very difficult in the private companies will continue to take smaller biotechs, drive consolidation and aftermath of the global financial crisis. urgent measures to raise capital and generate critical mass, and the other With the waters from the market meltdown reduce cash burn, but the number of to provide capital for “high-potential” rising all around them, many are having to companies in the industry is still expected candidates. As this publication goes take urgent measures simply to stay afloat. to decrease in 2009 and 2010 through to press, the UK Government has Without funding options, many of those that M&As, bankruptcies and liquidations. announced the introduction of a £750 are currently treading water will not be able million Strategic Investment Fund While government interventions such to do so indefinitely, and will either have to for emerging technologies, including as those enacted by Norway could help sink or be “rescued” by an acquirer. biotech, and is launching a review to struggling biotech companies, it is not In 2008 and early 2009, a number of firms consider whether and in what form clear that other national governments are took measures to jettison noncore assets further intervention is required. ready to follow suit — after providing capital and operations as part of restructuring to shore up the banking sector, European In February 2009, France Biotech called on programs. Companies terminated or froze leaders are being scrutinized by taxpayers, the French government to enact a stimulus pipeline projects, reduced headcount who generally do not favor “bailouts.” If plan to rescue smaller companies following a and spun off divisions. Those that had governments do act, however, they should collapse in biotech funding. The group called the means to do so sometimes acquired not just provide lifelines for companies in for a wide-ranging package of interventions, cash-generating assets, while several danger of going under, but rather look for including boosting the budget of the state firms were able to raise capital from measures that will promote the long-term innovation agency OSEO; distributing R&D nontraditional sources such as government viability of the industry. tax credits more equitably between small/ grants and royalty financing transactions.

76 Beyond borders Global biotechnology report 2009 Roundtable on deals

New deal Naseem Amin, M.D. Jeffrey Elton, Ph.D. John Goddard Mervyn Turner, Ph.D. Biogen Idec Novartis Institutes for AstraZeneca PLC Merck & Co., Inc. Senior Vice President, BioMedical Research Senior Vice President, Senior Vice President, structures for Business Development Formerly Senior Vice Strategic Planning and Worldwide Licensing and President of Strategy and Business Development External Research and Chief challenging times Global Chief Operating Officer Strategy Officer

good at identifying early the ones Exceptional times spur exceptional creativity. While that maxim has that are likely to succeed. While the number of candidates in Phase I and largely held true for the life sciences industry, it is also true that the Phase II clinical trials has increased challenges companies face today are truly unprecedented. More than steadily in recent years, there hasn’t ever before, companies need to strike a fine balance between pressures been any corresponding increase in and objectives that are often diametrically opposed. Big pharma the number of molecules in Phase III. We need, therefore, to get better at companies need to enhance their R&D productivity while simultaneously early identification of the two or three lowering costs and protecting earnings. The financial crisis is driving successful mechanisms that are going many smaller companies to aggressively seek alliances to sustain to emerge each year, and at effectively operations — but depressed valuations make it harder for them to separating the winners from the losers. negotiate terms that will let them retain sufficient financial upside. What does this imply for deals? Our real challenge is to work with partners to triage While strategic alliances have been an integral part of the biotech more opportunities, more rapidly and at a business model throughout the industry’s history, the basic elements lower cost using smart clinical-development of biotech deals have not changed much during this period. Today, with strategies. One approach, of course, is biotech and pharma companies confronting such thorny challenges, are using biomarker-based strategies, which give us greater certainty — positive or we likely to see increased creativity in structuring deals? negative — earlier in development, so To get some perspective from the executives most likely to be we can manage the portfolio risk more effectively. at the forefront of deal creativity, we caught up with seasoned business-development leaders from four large biotechnology and Elton: The pipeline challenges facing the industry are well known, of course, but the pharmaceutical companies. current environment is creating risks. Key among these is the financial strength of biotechnology companies, our prospective Ernst & Young: The life sciences industry faces unprecedented challenges — from partners. Access to capital is much more big pharma’s need to reinvent its business model/R&D approach, to the funding constrained than it has been historically. challenges of emerging companies. What challenges or bottlenecks are you currently Ideally, we would like to see companies facing that could be addressed through strategic alliances? reach some form of proof of concept on their platform, technology or therapeutic before we partner with them. But given Goddard: The most significant challenge is the one that big pharma is collectively the current economic climate and the struggling with — how do we continue to grow revenues at historical rates when we venture community’s desire to fund have a headwind of patent expiries of some of our most successful drugs? This means mid- to later-stage opportunities, many we need ways to boost R&D productivity and bring enough innovative new drugs to firms may not be able to fund themselves market to replenish and grow the top line. So deal-making becomes one way to fill the through any type of reasonable proof revenue gap. It’s by no means guaranteed to be successful, but it’s one way to go. of concept. The economic situation is Turner: Our biggest challenge as an industry is increasing the productivity of R&D. also negatively impacting the academic Look at where our billion-dollar drugs have come from and you’ll see that this community. Large-scale laboratories with industry survives on two or three new mechanisms a year. But we are not very top talent are vulnerable. And the ability

77 Ernst & Young: Where do you see the balance of power between “Our biggest challenge as an industry is increasing large and small companies today? What implications does this the productivity of R&D. Look at where our have for deal-making? billion-dollar drugs have come from and you’ll see Amin: Clearly, the environment is very tough for small that this industry survives on two or three new companies right now. Many would argue that this is a buyer’s mechanisms a year. But we are not very good at market. But those buyers still need to find quality assets, and identifying early the ones that are likely to succeed.” the quality of the asset drives value. So innovative, promising assets will still be valued fairly, because often more than one company will recognize the asset’s potential. for even the largest academic institutions to provide interim But it’s not just about balance of power — you also need a funding based on income generated from endowments and balance of incentives. If large companies want to retain the discretionary funds is disappearing. culture and entrepreneurship of their small-company partners, The health of the entire life sciences ecosystem is a critical then they need to negotiate appropriate incentives and remain part of this industry’s ability to innovate. I believe we will see open about how rights and risk are shared. some transactions structured to assure the survivability of Goddard: Has the balance of power changed? Absolutely. But smaller companies. This is a survival strategy not only for small what hasn’t changed is how we value an asset. We still do the firms but also for large companies and, indeed, for innovation same analysis to determine how much we think an asset is worth itself. Look for more deal structures with earn-outs and other to us. In an acquisition, we always like to think we strike a fair structures that balance the risk of not surviving with the risks price based on market conditions — the quality of the asset, of earlier-stage innovations. To assure our own success in this the number of people who wish to buy it and how much they’re environment, we are finding increasingly innovative ways of prepared to pay. But we would never pay more than we think it’s working with our partners. worth, because that would destroy shareholder value. Amin: The current financial environment for smaller In an alliance, other considerations can enter the picture. If you’re companies is creating new challenges for us as well. We are doing a license deal rather than an acquisition, you want to make seeing an increasing number of companies facing financial sure that the asset you’re licensing is developed in ways both challenges and approaching us for partnerships. Even before partners want — so any agreement would need to be clear on the present crisis, there were constraints on our ability to matters such as development plans, resources, conflict resolution make deals, and I’d highlight three. The first constraint is and change of control. our competency in assessing opportunities outside our core therapeutic areas. When we go outside therapeutic areas Elton: I agree. We can talk about bargaining power all we like, and disease pathways where we have extensive knowledge but the simple truth is that nothing is a bargain if it fails. So and expertise — such as neurodegenerative, immunology, if an asset is high-quality, and if it makes sense for the buyer oncology and acute heart failure — we would need to rely economically as well as from a scientific perspective, then it’s much more on outside experts to help us assess and identify in the buyer’s interest to pay a price that reflects the asset’s opportunities. As a result, we’ve been reticent to partner market value. If you’re not careful, you can de-motivate your outside these areas. Our second constraint is resources — we already have a large late-stage clinical pipeline today, which is, of course, both people- and capital-intensive, so adding “We can talk about bargaining power all we like, but more clinical-stage opportunities at present is not a high priority for us. Our third key constraint is the amount we can the simple truth is that nothing is a bargain if it allocate to R&D. Our R&D spend is about 30% of revenues, fails ... The true spirit of partnership is neither about which is one of the highest in the industry. And while, as a dumping lots of money on somebody nor about profitable, cash-flow-positive company we aren’t strapped for seeing how little you can get away with paying. capital the way many smaller firms are today, we still have to meet our profitability goals. Instead, it’s about making sure that everybody believes the deal is fair, feels motivated by the In the current environment, we are seeing falling valuations of companies. In situations where we are not making an outright structure and incentives, and knows that when there acquisition but we are buying equity in the other company as is an upside, all parties will get an appropriate share part of a strategic relationship, how those assets are valued is a of the return.” concern, and there is the risk of having to take write-downs.

78 Beyond borders Global biotechnology report 2009 I realize that biotechs also face a lot of risk. Their risk is in the “One thing that has changed in the current capital market — their inability to progress their assets to a point environment is that cash is king and buyers where they can get a true value inflection. We’re all in a very difficult situation when it comes to risk. have more negotiating power, so I suspect we will see more deals that are structured to share Goddard: There are some basic principles that always hold true. In an acquisition, the buyer takes on all the risk of risk ... Therefore, having acquisitions with projects, while a licensing deal is a way of sharing that risk. success-related payments should encourage more Of course, everything else being equal, in most cases, our transactions in the current market environment.” preference would be to share the risk through alliances rather than acquisitions. One thing that has changed in the current environment is that cash is king and buyers have more negotiating power, so I suspect we will see more deals that are partners to the degree where they are not incented to maximize structured to share risk. what they are doing for you. The true spirit of partnership is neither about dumping lots of money on somebody nor about I’ve seen a couple of interesting structures in the recent past. The seeing how little you can get away with paying. Instead, it’s first is alternative mechanisms of funding, such as private-equity about making sure that everybody believes the deal is fair, funds, for drugs in development. A good example is the deal feels motivated by the structure and incentives and knows among TPG-Axon, Quintiles’ NovaQuest unit and Eli Lilly to pursue that, when there is an upside, all parties will get an appropriate specific drug targets. This makes sense conceptually, but the share of the return. details can be challenging. The second interesting development is acquisitions with some Ernst & Young: Strategic alliances are essentially about the form of deferred contingent payments. This allows buyers to sharing of risk and reward. Do you see any changes in how risk share the R&D and commercialization risk with sellers. As you is being shared between large and small companies? know, buyers face a binary, all-or-nothing risk around whether a compound passes a particular milestone. And, as Merv points Turner: There’s a lot of talk about the balance of risk having out, that risk has only gone up, with lower approval rates, delays changed in favor of big pharma. I would say that isn’t true. We’re and additional testing being requested from the Food and Drug absorbing far more risk now because of the increase in failure Administration. Having to assume all that risk by making a very rate in late-stage development. We’re seeing Phase III failures at large up-front cash payment is enough to make even the big unprecedented levels, and they’re failing for strategic reasons. pharmas pause for thought. Therefore, having acquisitions with Either they’re not meeting the commercial goals because of success-related payments should encourage more transactions imposed hurdles, or they’re not overcoming emerging safety in the current market environment. issues, or they’re just plain ineffective.

Has bargaining power shifted toward big pharma?

79 Regarding the cost-versus-innovation question, certainly there is “At a time of depressed valuations, buyers need a cost associated with maintaining large numbers of autonomous to find ways to leave enough upside incentive subsidiaries. But I can tell you that the organization I run is all about searching for innovation, and we have been unencumbered for smaller companies to remain viable and by the (quite appropriate) focus on driving down the cost base. entrepreneurial ... Buyers could consider deals where That’s not to say that we spend our money recklessly. We they take overseas rights and leave US rights for the don’t. But while we have a fiduciary responsibility, our prime seller. With large companies becoming increasingly responsibility is to find innovation opportunities. That’s why we have a scouting model, with individuals around the world who global and getting more of their revenues from function as our antennae in the local biotech and academic overseas, this could be a win-win.” communities. It’s an innovation-based business. And at the end of the day, you can’t cost-cut your way to a pipeline.

Amin: One recent trend around the sharing of risk and reward is Elton: Large pharmas are looking for ways to become more licensing deals that are nonexclusive, allowing the out-licensor entrepreneurial — ways to combine the incentive structures and to strike deals with multiple companies. These transactions are motivational factors of smaller companies with the larger scale typically around platforms and would probably be fraught with of big pharma. I think some of these new models that maintain challenges if applied to a particular compound (unless it involved some degree of autonomy are moving in the right direction. a very different delivery system). For any individual project, this model offers an answer for a What’s changed in recent months, of course, is that valuations have period of time, but it would likely need to change down the road. plummeted. At a time of depressed valuations, buyers need to The strengths of the autonomous unit that helped get something find ways to leave enough upside incentive for smaller companies through clinical trials may not be the best thing to handle to remain viable and entrepreneurial. If the seller only has one broader-scale commercialization. asset and you are going to enter a partnership with them in which Goddard: Time will tell how successful this approach is. We’ve you bear all the risk, then you’ve left no incentive for the seller to certainly used it with some of our acquisitions, but you need perform. So I think we may see more creative use of geographic to evaluate its relevance on a case-by-case basis. It’s easier to rights. Buyers could consider deals where they take overseas rights use this model when the acquired assets are very different from and leave US rights for the seller. With large companies becoming the rest of your business. For instance, if you acquire biologics increasingly global and getting more of their revenues from assets, where many aspects of R&D and manufacturing are overseas, this could be a win-win. It allows a buyer to get rights different from small-molecules activity, then it’s easier to argue that they are better equipped to exploit than a small seller, while for the intangible benefit of keeping the acquisition autonomous still giving the seller lots of potential upside through the US rights. versus the tangible synergies from integration. I would emphasize two additional points. First, by preserving Ernst & Young: Big pharma companies are now going out of an entity separately, you clearly retain some strategic their way to preserve the independent names, workforces and flexibility down the road that you would lose if the asset was cultures of the smaller companies they acquire. How well do totally integrated. The second point I would make is that the you think these efforts will work, and do you see them leading real test always comes when a difficult decision has to be made to real dividends in R&D productivity? What other changes, and it’s no longer being made by the top person in the acquired if any, are needed for this approach to succeed? How will the company. There may come a point when there’s a difference of competing pressures of boosting innovation versus cost-cutting play out? “Regarding the cost-versus-innovation question, Turner: This is something we’ve tried with some of our platform certainly there is a cost associated with maintaining acquisitions, such as Sirna and GlycoFi. We purchased them at an immature stage of development. These platforms were developed large numbers of autonomous subsidiaries. But by very creative and entrepreneurial scientists and we wanted to I can tell you that the organization I run is all move those platforms from 50% or 60% completion to the finish about searching for innovation, and we have been line. So, we needed to make sure that the people who knew the unencumbered by the (quite appropriate) focus on area the best remained motivated. So far, it has worked. Our GlycoFi team, for example, has been enormously motivated by driving down the cost base ... And at the end of the their move to Merck, and they are excited about the expanded day, you can’t cost-cut your way to a pipeline.” opportunities we’ve been able to offer them.

80 Beyond borders Global biotechnology report 2009 Are today’s challenges pulling companies in opposite directions?

Focus Diversify Cut costs Spend to innovate Protect upside Partner to survive

opinion between the autonomous unit and the parent company, would also highlight the acquisition of GlycoFi. That was a very and that’s when the limits of independence get truly tested. interesting technological play and an extraordinary tour de force of modern molecular biology done on a shoe string. We were very pleased with the way that developed for us. It allowed us Ernst & Young: Could you discuss some examples of deals that to think about biologics for the first time, almost to the degree you consider “creative”? of precision that you can think about small molecules. As a company trying to build its way into the biologic space, this Amin: One area where I’m seeing a creative approach is where seemed to be an excellent way for us to get our feet wet. multiple competitors are collaborating to develop a shared resource in certain challenging or precompetitive areas. Elton: I can think of a couple of models that may be One example is answering challenging questions that are an particularly relevant at the current time, when it’s vital that Achilles heel for everyone competing in a given disease. For we maintain a sustainable ecosystem of companies. The first instance, we may not have enough information for a given involves companies with proven teams that have successfully disease on what distinguishes responders from nonresponders delivered projects to the clinic but which are currently without to current treatments. Trying to answer this may be too a program. We have novel structures where we identify a expensive or resource-intensive for any one company, but target and implant that as a program inside the other company if several of us who are trying to address the same problem come together, at least we can collectively try to answer the question. This lack of information is a bottleneck that’s holding “One area where I’m seeing a creative approach is us all back, so once it’s addressed we can each take our best shot at developing our drugs. where multiple competitors are collaborating to develop a shared resource in certain challenging

Turner: In terms of specific examples, I like the deal we closed or precompetitive areas ... Trying to answer this with ARIAD Pharmaceuticals for their mTOR inhibitor in may be too expensive or resource-intensive for any late-phase clinical development for the treatment of metastatic one company, but if several of us who are trying to sarcomas. We recognized their expertise and their ability to address the same problem come together, at least we continue the development for that particular molecule for the sarcoma indications. That deal has several interesting financial can collectively try to answer the question.” structures, which I believe meet the needs of both parties. I

81 A third area where we could get more creative is around “What’s really interesting, though, are the models mid-size companies pooling some of their discovery and and approaches that we might start to consider at a early clinical approaches to specific emerging target areas, in combination with investing companies. The firms could time when we all face such tremendous challenges. prenegotiate terms around the resulting assets — right of first Could big pharma companies get creative and refusal, allocation by geographic area, etc. One approach could explore ways to combine their clinical and scientific even be for European, American and Asian mid-size firms to expertise with private-equity or venture-capital partner, which would make the allocation of geographic rights quite straightforward. For mid-size firms, the risk and cost investing principles?” from the failure of a lead clinical program is so high in the current environment. If the next program is five years behind the lead one, the firm may not be able to continue. But this with distinctive capabilities in that specific area. This benefits sort of pooling arrangement would greatly enhance the ability them but can also benefit us tremendously, allowing us to of such firms to withstand failures. overcome capacity constraints and tap different creative approaches to the same problem — which is obviously a big Ernst & Young: What advice do you have for small and mid-size part of improving R&D productivity. biotech companies in the current deal environment? The second model is the one we just discussed, where you acquire another firm and maintain its operating autonomy. Turner: It’s tough out there. We all have to recognize the The other firm has relatively advanced programs, has clearly realities of the marketplace and the very high hurdles for been successful and you want to continue that success. Our drug approval and reimbursement. So my advice is focus, acquisition of Protez Pharmaceuticals would be one example, focus and focus. Do everything you can to develop the and there are certainly others in the recent past. highest quality asset you can provide. It’s an almost worthless What’s really interesting, though, are the models and piece of advice, because it’s as obvious as it is difficult, but approaches that we might start to consider at a time when we all that’s what it will take to succeed. face such tremendous challenges. Could big pharma companies Elton: In this environment, many small and mid-size get creative and explore ways to combine their clinical and companies may see getting acquired as their exit. But I scientific expertise with private-equity or venture-capital don’t think you can plan on being acquired. So, in spite of their investing principles? They could bring a more integrated considerable constraints, these companies need to remain approach and invest on a larger scale than private investors focused on what is going to bring therapeutic value to patients. alone. What if a pharma created a portfolio of investments In addition, they might want to identify other companies with in specific scientific areas of interest — newly emerging which they could have some complementarities, and consider technologies, sets of targets or focused pathways — and a combination to enhance the likelihood of reaching that next matched those investments with internal resources? value-creating milestone. Could we use our current economic challenges to revisit the Goddard: I would say: understand what you have, and industry’s organizational model and approach to the value-chain understand what it’s worth. At big pharma, we often find that specialization? As we all know, big pharmas, and even some when we do due diligence in a deal, the smaller company’s mid-cap pharmas, have a high degree of vertical integration. asset is not quite as good as they think it is. That sets back Today, many of these companies are massively downsizing in the negotiation while the smaller firm realigns its thinking and specific disease areas or stages of the value chain. Eventually, recalibrates its expectations. In this environment, a biotech they will get to the point where they no longer have enough company will need a realistic assessment of its asset, how scale, critical mass and expertise to effectively conduct much it will cost to advance it to the next stage, and what the those activities. Rather than slowly reaching that point of company’s true options are. With that, they’ll be better prepared diseconomies of scale, it would be better to turn over those for negotiating rather than conducting strategy on the fly. stages of the value chain to someone else. The first wave of outsourcing to India and China was primarily driven by cost-cutting in areas such as chemistry. We could now look at partnering with Asian companies around entire areas of the value chain. We could look at bringing in outside capital from private equity and others and set up new companies.

82 Beyond borders Global biotechnology report 2009 Ernst & Young: At a time of tremendous economic uncertainty, after a merger and less focused on innovation. Third, as large let’s close with some predictions. What deal trends and numbers of companies go under, this is likely to reduce the developments might we see in the next 12-24 months? Do appetite for risk, leading to less funding in the future. All of these trends have any implications for large companies, small this is worrying, because for innovation, the model still needs companies and overall deal creativity? to be driven by smaller companies, which is where the real breakthroughs often originate.

Turner: The physicist Niels Bohr once famously said that Elton: If I could take some liberties to peer beyond your 12–24 prediction is very difficult, especially about the future. Still, I month window, I see a somewhat different picture. First, no think it’s safe to anticipate additional rounds of consolidation matter how you slice the numbers, the longer-term outlook for across all tiers of the drug industry — big pharma and small life sciences is very attractive. We have more people around and large biotechs. As we have already observed, big pharmas, the world with the capability to access therapeutics. We have because of their pipeline issues, will be active acquirers if they more people that are living longer, at much higher functional see quality assets at a good price. The big challenge for all of levels. And we have health systems that want to keep these us will be to identify unsuccessful programs more quickly and people productive for longer without needing to put them cheaply. What sorts of deal structures will emerge around those into high-cost institutions. So under any scenario you can principles? That should be very interesting to watch. create, under any economics — even if we see our fears about pricing pressures and everything else come true — the sheer Goddard: With all due respect to Niels Bohr, I think it’s actually numbers will work in our favor. I can’t paint a picture where become somewhat easier to make some predictions in the the fundamental outlook in terms of the demand for innovative current environment! The lack of funding has left many medicines is not attractive. companies with few good options, so there’s no doubt that the number of smaller companies is going to decrease. But I One question is where those innovative drugs will be developed. think these difficult economic circumstances will be somewhat So far, the United States, along with a few other countries, has Darwinian. While there’s always the risk that we will fail to been a leading innovative force. The US industry has benefited fund what might have turned out to be the next big thing, I from its pioneering venture-capital community, its long history suspect that the truly promising candidates will still find ways of funding from the National Institutes of Health (NIH), its strong to raise capital. And when we look back in 20 years, this will research infrastructure and its ability to attract top talent to probably be a blip rather than the elimination of an entire its universities and research-based companies. But the US has wave of new science. been hit hard by the economic crisis, while other countries are investing in biotech and are now benefiting from “returnees” who are creating new centers for life sciences. As policy-makers and business leaders move to revive the US economy, we all “Understand what you have, and understand what it’s need to focus on the issues that will keep this innovative industry worth ... In this environment, a biotech company will going — NIH research funding, supportive immigration policies and funding for early-stage, higher-risk opportunities. We may need a realistic assessment of its asset, how much even need to apply some of the stimulus funds to ensure that it will cost to advance it to the next stage, and what these early-stage companies don’t disappear, because that could the company’s true options are. With that, they’ll have such a high cost for long-term innovation. be better prepared for negotiating rather than In the life sciences industry and beyond, we are in a climate of conducting strategy on the fly.” tremendous uncertainty that is forcing us to question even our most basic assumptions — how do we organize, what’s efficient, how do the fundamental economics of risk and reward play out? This, more than ever, is the time for us to rapidly adopt new Amin: I agree that more consolidation is in the works, but in my models of collaboration and cooperation that we’ve been talking mind that raises some concerns about the industry’s ability to about for a long time. And that is the real opportunity that any innovate going forward. First, with fewer companies, there will market downturn brings. be fewer platforms and products entering the drug-development funnel, which will hurt us all in the long run. Second, many mergers are driven by commercial considerations — scale economies, expanded reach and so forth — which don’t fundamentally drive innovation. If anything, there’s the danger that acquirers could become distracted by integration issues

83 European financing Down, but not out

After several years of sustained growth, public offerings. The falloff since then has Interestingly, while the full fury of the European biotechnology financing been striking — in the six quarters since, global financial crisis was only unleashed fell dramatically in 2008 because of the cumulative amount raised has been in the fourth quarter of 2008, there was macroeconomic events. With less than €2 less than 40% of the total raised during no dramatic decline in the last months of billion (US$2.94 billion) raised, 2008 was the first half of 2007. the year. the third-worst year in the past decade Venture financing held up better than the Indeed, despite tough conditions, a for European biotech financing, ahead public markets in 2008. Nevertheless, number of European biotechs managed of only 2002 and 1999. The bulk of this with €932 million (US$1.37 billion) to raise venture capital in early 2009, collapse came from the disappointing totals secured by European biotechs, the with follow-on rounds in excess of in public-equity financing, which shrank amount raised in 2008 was down 20% €20 million (US$29.4 million) each from a recent high of more than €4 billion relative to the €1.17 billion (US$1.6 secured by a handful of companies. In (US$5.49 billion) in 2007 to only €833 billion) secured in 2007. This represents January, the Swiss biotech AC Immune, million (US$1.22 billion). The market for the second consecutive year of decline which is focused on discovering drugs IPOs all but disappeared — only €75 million after the all-time high achieved in 2006, targeted at Alzheimer’s disease, (US$111 million) was raised, and there and it is one of only two years since 2000 raised €25.2 million (CHF40 million; were no stock-exchange debuts at all in the in which the amount of venture capital US$37.1 million) in a third round. Also second half of the year. Follow-on and other raised by the European industry has in January, another Swiss company, financing also shrank to less than €800 dipped below €1 billion (US$1.47 billion) Synosia Therapeutics, which is million (US$1.18 billion). And while venture (the other being 2003). engaged in discovery therapeutics for capital held up better than the public psychiatric and neurological disorders, markets, the amount raised was still 20% On a quarterly basis, European raised €20 million (CHF32 million; lower than in 2007. venture financing levels were lower US$29 million) in a second-round in each quarter of 2008 than in the transaction. In February, the Danish corresponding quarter of 2007. Investors retreat company Symphogen secured €33 Conditions in the public markets severely restricted the ability of companies to European yearly biotech financings undertake IPOs or follow-on offerings, driving down the total amount raised from Venture financing IPO Follow-on and other offerings public markets to levels not seen since €b 2003. Only three companies successfully 7 completed IPOs in 2008, raising a total of €75 million (US$111 million), and 6 follow-on and other financing fell to €758 million (US$1.12 billion), from €3.5 billion 5 (US$4.8 billion) in 2007. 4 The public markets have cooled dramatically toward biotech investments since the second half of 2007, when 3 the onset of the credit crunch prompted investors to flee to stocks with less 2 perceived risk. In the first two quarters of 2007, biotech companies raised €600 1 million (US$822 million) through IPOs and more than €3.1 billion (US$4.3 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 billion) through follow-on and other Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer

84 Beyond borders Global biotechnology report 2009 million (US$44 million) to support the Follow-on and other financings also fell a string of strategic acquisitions in the clinical development of its portfolio sharply in 2008. In contrast with 2007 second half of the year that included of recombinant polyclonal antibodies. when there were eight transactions above the acquisition of four pharmaceutical Encouragingly, support for early-stage the €100 million threshold, there was only products from Roche and the businesses was also evident in the one such financing in 2008: the €157 acquisition of Valeant Pharmaceutical’s opening months of 2009, with a number million (SEK1.5 billion; US$231 million) pharmaceutical business in Western and of companies successfully closing first rights offering by Swedish specialty Eastern Europe. The remaining twelve rounds — these included CT Atlantic, pharma company Meda in late November. follow-on and other offerings largely DNA Therapeutics, Evostem Finland and Meda’s rights offering in 2008 financed consisted of small private investments in Immune Targeting Systems.

Public financings: few and far between Public investors have been cool to biotech since the second half of 2007 ...

In March, the Italian biotech MolMed, Follow-on and other offerings IPO which has a pipeline largely composed of €b anticancer therapeutics, made its debut 2.5 on the Milan stock exchange in a €56.2 million (US$82.3 million) offering — a rare event for the Italian market, which 2.0 last saw a biotech IPO in 2000 with the flotation of Novuspharma (since acquired by Cell Therapeutics in 2004). Three 1.5 months later, in June, France’s Ipsogen and Norway-based PCI Biotech completed their IPOs. Drug delivery specialist PCI 1.0 Biotech raised €8.1 million (NOK$60 million; US$11.9 million) on the Oslo 0.5 Access Exchange, and Ipsogen, which develops molecular diagnostic tests for cancers, raised €11.8 million (US$18.7 0 million) on the Alternext market (a Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 submarket of NYSE Euronext). Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer In another indication of the softness of … while there has been no significant decline in venture funding public financings in 2008, all three IPOs priced at the bottom of their filing ranges. Venture capital (€m) The new entrants could not escape the 350 overall tumult in the markets, and all three stocks declined by year-end. While MolMed 300 and PCI Biotech lost 50% and 63% of their market valuations, respectively, Ipsogen 250 performed somewhat better, losing 19% of its value. Ipsogen showed impressive 200 62% year-over-year revenue growth that exceeded expectations, and investors 150 were likely placated by the fact that the company already had marketed products 100 and a predictable revenue stream. MolMed and PCI Biotech, on the other hand, were 50 in preclinical development and years away from commercializing products. 0 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer

85 public equity (PIPEs). Denmark’s Lifecycle Quarterly breakdown of European biotechnology financings 2008 (€m) Pharmaceuticals was responsible for the second- and third-largest deals — a €71 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Total million (DKK529 million; US$105 million) IPO € 56 € 19 € 0 € 0 € 75 royalty financing and a €55 million (1) (2) (0) (0) (3) (DKK408 million; US$80.9 million) rights offering. Follow-on € 0 € 0 € 26 € 0 € 26 (0) (0) (1) (0) (1) Venture funding: down, but not out Venture € 302 € 170 € 257 € 203 € 932 The breakdown of venture financing (44) (25) (43) (26) (138) by round was comparable with 2007, Other € 58 € 254 € 202 € 218 € 732 but notably there was an expansion in (10) (23) (26) (13) (72) the number of second- and later-stage Total € 416 € 443 € 485 € 421 € 1,764 rounds and a contraction in seed and first rounds. Seed and first rounds (55) (50) (70) (39) (214) accounted for approximately 32% of the Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer total number of venture financings in Figures in parentheses are number of financings 2008, down from 45% in 2007. Venture funds are now showing a reduced European venture funding by round class appetite for risk, preferring companies with more advanced pipelines that Seed round First round Second round Later round

offer relatively low-risk, short-term 100% return horizons. While it is possible that the fall in the number of seed and 90%

first-round financings in 2008 is an early 80% indicator of such a shift, one should not over-interpret the data — the distribution 70% in financings in 2008 is not markedly 60% different from investment patterns between 2004 and 2006. 50%

Highlighting the attraction of later-stage, 40% lower-risk assets, the year’s three largest 30% first-round financings were completed by companies with programs in clinical 20% development and with their origins in 10% established pharmaceutical businesses. The year’s largest first-round deal, for €25 0 million (US$40 million), was completed 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource by Albireo, a Swedish spin-out from AstraZeneca focused on gastrointestinal disorders. Vantia Therapeutics, a pharmaceutical company Shogoo KK. At million) in November from private UK-based spin-out from Ferring Research, the time of its financing, Lumavita had investors. The company, focused on raised €24 million (£19 million; US$35 product candidates in Phase IIb and monoclonal antibodies and oncology, million) in first-round financing in March. Phase I development. plans to use the funds to further develop At the time of its financing, Vantia had its Phase Ib monoclonal antibody two clinical programs for its lead product. The most significant European claudiximab (iMAB362) and a pipeline of Lumavita, a Swiss company focused on venture-backed round of the year preclinical assets. anti-infectives for women’s health, raised (and the third-largest globally) was a €11 million (CHF18 million; US$16.2 fourth-round fundraising by the German Other major venture financings of 2008 million) in September. The Swiss firm was biotech Ganymed Pharmaceuticals, included three second-round deals: a formed out of the operations of Japanese which raised €65 million (US$95.6 €27.2 million (US$40 million) round

86 Beyond borders Global biotechnology report 2009 by Israeli company Vascular Biogenics Regional breakout of funding €319 million (US$437 million) it raised in May, a €27.5 million (US$40 million) in 2007. In fact, 11 of the 15 countries In 2008, as in 2007, Germany, transaction by Apogenix of Germany saw reductions in venture-capital funding Switzerland and the United Kingdom in April, and a €26 million (US$38 relative to 2007, and in two of them, led Europe in venture capital raised. million) deal by SpePharm Holding of the Ireland and Norway, venture funding fell While Germany once again took the Netherlands in August. to zero in 2008 from a combined €56 top spot with €198 million (US$291 million (US$76.7 million) a year earlier. million), this was a 38% drop from the Meanwhile, the UK, Netherlands, Israel and Italy saw increases in venture capital Top European venture funding in 2008 raised. In the UK, this represented a reversal from three years of consecutive Amount raised declines between 2004 and 2007. Company Country Round Date (€m) Ganymed Germany Fourth round November 65 Pharmaceuticals Taking evasive action — business restructuring and alternative financing Apogenix Germany Second round April 28 Depending upon its length and severity, Vascular Biogenics Israel Second round May 27 the current crisis has the potential to SpePharm Holding Netherlands Second round August 26 profoundly impact the European biotech Albireo Sweden First round May 25 industry. Indeed, the crisis has already Endotis Pharma France Third round January 25 begun to either eliminate or reshape Pieris Germany Second round March 25 many of the companies that make up the population of European biotechs. Vantia Therapeutics UK First round March 24

PanGenetics Netherlands Third round March 23 A number of companies went into administration during 2008. Ardana Synosia Switzerland Second round December 20 Bioscience, a UK-listed biotech focused Therapeutics on reproductive health, ceased trading in Creabilis Italy Second round June 20 June. Phoqus Pharmaceuticals followed Therapeutics in July, after the company failed to Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource find a partner for its lead project. In Denmark, Curalogic went into liquidation in November.

European venture capital by country, 2007 and 2008

2008 €m 2007 €m 2008 average (€m) 2007 average (€m)

Total raised (€m) Average round size (€m)

350 14

300 12

250 10

200 8

150 6

100 4

50 2

0 0 Germany UK Switzerland France Netherlands Denmark Sweden Israel Italy Belgium Austria Finland Ireland Norway Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer

87 Facing the possibility of a deep and and rights to its Parkinson’s drug Apokyn in a January rights issue, Danish biotech prolonged financing drought, many to Ipsen, raising €7.8 million (US$11.5 Pharmexa announced its intention to companies undertook strategic reviews million) in up-front payments and an freeze development of bone-disease and and embarked on restructuring additional €4.1 million (US$6 million) in early-stage oncology projects in order programs. In addition to headcount potential milestone payments. Separately, to focus on higher-priority programs. In reductions, companies began to close or Vernalis struck a royalty financing deal February 2008, Germany’s GPC Biotech sell operations and leverage marketed by selling 90% of frovatriptan royalties announced a restructuring in order to portfolios and pipeline assets to raise to Paul Capital Healthcare in return extend its cash reserves to sustain three capital. The UK biotech Vernalis provides for €18.4 million (US$27.1 million) in years of burn. More recently, in November, a case in point. Triggered by the failure of nondilutive financing. Switzerland’s Arpida announced plans to the company’s migraine drug to receive focus on its lead product, the intravenous Terminating or freezing the development Food and Drug Administration approval antibiotic iclaprim, while reviewing and of projects has also been a common for the additional indication of menstrual halting a number of noncore clinical feature of restructurings, and many migraine, Vernalis announced plans to development programs. smaller companies are now focusing close its Canadian clinical operations and their resources on just one lead program. Other companies have sought to spin off has sold its US commercial operations Having failed to hit its financing target operations. For example, in January 2009, as part of its efforts to refocus on specialty markets and protein therapeutics, Swedish Select restructuring programs announced by European biotech companies company Biovitrum announced plans in 2008 and early 2009 to spin out its UK-based small-molecule subsidiary Cambridge Biotechnology as Headcount Other restructuring well as primary care assets. Company Location reductions measures Alizyme UK √ Going beyond cost reduction and restructuring, other businesses took Arpida Switzerland √ √ action to become self-sustaining from BioAlliance Pharma France √ a cash perspective. In September, the UK biotech BTG acquired Protherics, Biovitrum Sweden √ √ another UK business, in a €274 million Compugen Israel √ (£218 million; US$403 million) deal. Protherics, which has a portfolio of DeCode Genetics Iceland √ √ niche-market products, brings BTG an Elan Ireland √ √ income stream and moves the business toward cash self-sustainability. Genmab Denmark √ √

GPC Biotech Germany √ √ In addition to restructuring, companies looked to alternative sources of Oxford Biomedica UK √ financing in 2008 to help sustain their businesses. For many firms, deals with Pharmexa Denmark √ √ pharmaceutical companies represent Reneuron UK √ √ their best opportunities for securing funds, either through the realization Sareum Holdings UK √ of milestone payments under existing Stem Cell Sciences UK √ √ agreements or via new deals. Aggregate data (based upon instances where cash TopoTarget Denmark √ √ payments to European biotechs have Tripep Sweden √ been publicly disclosed) suggest that the total cash flowing into the sector Vernalis UK √ √ through deals with large companies York Pharma UK √ √ remains healthy and that the average size of cash payments is stable relative Source: Ernst & Young and company announcements to previous years. In the current financial market environment, pharma

88 Beyond borders Global biotechnology report 2009 money is becoming increasingly included: Santaris Pharma (€6 million; of advancing projects into the clinic, important to the survival of Europe’s DKK45 million; US$8.8 million), securing an IPO and either outlicensing biotech companies. It should be from the Danish National Advanced to pharma or commercializing products noted that while good innovation is Technology Foundation; Noxxon Pharma in-house — is slow, expensive and always likely to attract buyers, many (€1.0 million; US$1.47 million), from high-risk. To sustain this model, big pharma companies are becoming the German Ministry of Education companies will, at the very least, need increasingly cash conscious and more and Research; and BioTie Therapies creative solutions to the European discerning in their deal-making — trends (€1.7 million; US$2.5 million), from sector’s financing challenges. In the that could squeeze Europe’s biotech TEKES, the Finnish Funding Agency for absence of such solutions, companies sector still further. Technology and Innovation. In addition, may have to seek sustainability earlier in Genfit (€7.1 million; US$10.4 million), their lifecycles through fee-for-service Other financing options include royalty Cellectis (€7.2 million; US$10.6 million) revenues or the acquisition of portfolios financing deals such as those struck by Paul and Genomic Vision (€1.1 million; US$1.6 of marketed products. Firms may focus Capital Healthcare with Vernalis (over Frova million) all secured financing from the on acquisitions by pharmaceutical royalties) and with Plethora Solutions (over French state innovation agency OSEO. companies for exits and tailor their the company’s male health portfolio). The strategies toward this end. largest royalty financing deal of the year was struck by Lifecycle Pharmaceuticals, Outlook One solution to the financing which sold the future North American challenge might be for biotech-pharma The year ahead promises to be royalty stream of Fenoglide, its cholesterol partnerships to move toward early-stage, challenging for European biotech drug, to Cowen Healthcare Royalty Partners long-term alliances. A model where companies. Public markets are offering for a total payment of up to €71 million biotechs partner with pharma companies little support for biotech assets, and the (US$105 million) (dependant upon sales earlier in their lifecycles using financing IPO window is shut for the foreseeable milestones) including an up-front payment structures that provide a steadier future. Venture money is still moving of €19.7 million (US$29 million). flow of capital than those currently into the sector, but the financing tap is used could improve the sustainability Others companies secured financing in tightening. If a lower appetite for risk of biotech companies. For at the the form of grants and loans. For example, translates into an investor preference end of the day, improving biotech’s in January 2009, Cardio3Bioscience, for late-stage assets, a financing crisis sustainability is in the interest not only a Belgian company specializing in for early-stage companies could emerge. of biotech firms themselves but also cell-based therapies for the treatment Companies are likely to fail, while others of other constituents of the healthcare of cardiovascular diseases, successfully will attempt to restructure and exploit economy — pharma, payors, providers raised €13.7 million (US$20.2 million) alternative funding sources to survive. and, of course, patients. through a combination of a €7.2 million The coming months and years will (US$10.6 million) venture round and a certainly test the creativity and €6.5 million (US$9.6 million) grant. flexibility of the European industry. For some biotechs, Europe’s national More fundamentally, the situation is innovation funds have been an likely to force executives to revisit important source of grant and loan the industry’s funding model itself. financing. Companies that secured The prevailing model — based on financing from these sources in 2008 several venture rounds with the aim

89 European deals Dealing by dealing

Deal activity remained strong in the European biotechnology sector in 2008, European M&A activity remains strong with sustained activity across all segments. Biotech-biotech Biotech-biotech megadeals Pharma-biotech Pharma-biotech megadeals Number of M&As Pharmaceutical companies continued to secure technologies and early-stage Value (€b) Number of M&As assets through acquisitions and strategic 16 40 alliances, while attractive late-stage assets 14 35 continued to attract favorable deal terms,

as demonstrated by GlaxoSmithKline’s 12 30 record-breaking deal with Actelion. With many biotechs struggling under 10 25 the impact of the global financial crisis, smaller businesses struck deals with each 8 20 other to combine strengths; some even 6 15 purchased income-generating assets from

big pharma. 4 10

2 5 Mergers and acquisitions M&A transactions worth a combined 0 0 2005 2006 2007 2008 €3.4 billion (US$5.0 billion) were Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer announced in 2008, with the value of deals split somewhat evenly between biotech-biotech and pharma-biotech deals. While the total value of European European alliances by year

M&A deals in 2008 fell far short of Biotech-biotech Pharma-biotech Biotech-biotech average value Pharma-biotech average value the €14.3 billion (US$19.6 billion) in Potential value (€b) Average value (€m) 2007, three deals accounted for 87% 12 200 of the 2007 figure. These were Merck KGaA’s €10.1 billion (US$13.8 billion) 180 acquisition of Serono, Qiagen’s €1 billion 10 160 (US$1.42 billion) acquisition of Digene 140 and Shire’s €1.9 billion (US$2.6 billion) 8 acquisition of New River. When these 120 large deals are excluded, 2008 emerges as one of the most active M&A years 6 100 by value in the history of the European 80 biotech sector. 4 60 The United Kingdom was a particular hot 40 spot for transactions. Accounting for 38% 2 of European M&A activity by value, six 20

UK companies were acquired by overseas 0 0 entities, and consolidation occurred 2005 2006 2007 2008 between a number of local players. Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed Pharma-biotech deals include transactions in which biotech companies were buyers

90 Beyond borders Global biotechnology report 2009 Biotech-biotech consolidation success-based payments depending upon Late-stage assets and marketed products There was significant consolidation within the achievement of certain developmental The pressing need of pharmaceutical the population of biotech companies. milestones. In a similar transaction, Roche companies to replace end-of-lifecycle Biotech-biotech deals accounted for acquired Piramed, another privately blockbusters was highlighted by the nearly 50% of total deal value, amounting backed UK business, for €119 million largest M&A deal of the year: Novartis’ to €1.7 billion (US$2.5 billion). A (US$175 million). The deal terms include acquisition of a controlling interest in key driver of consolidation has been a success-based payment of €10.2 million Speedel Holding in September 2008 corporate weakness, with stronger (US$15 million) upon the start of Phase II for €571 million (CHF907 million; companies acting opportunistically to trials of Piramed’s lead oncology program. US$840 million). The acquisition gives capitalize on depressed share prices. Novartis full ownership of revenues Another significant early-stage deal For example, the acquisition of the UK’s flowing from the hypertension drug was Daiichi Sankyo’s acquisition of the CeNeS Pharmaceuticals by Germany’s Tekturna/Rasilez, a follow-up to Novartis’ privately backed German company Paion for €13.8 million (US$20.3 million) blockbuster Diovan which generated U3 Pharma for €150 million (US$234 followed a period of decline in the British €3.9 billion (US$5.7 billion) in 2008 million), under which Daiichi Sankyo company’s share price as it struggled and faces patent expiration in 2012. In secured the rights to a pipeline of to find a marketing partner for its lead addition to Tekturna, Novartis gained therapeutics targeting, among other product. Other companies sought out a pipeline of follow-on renin inhibitor indications, breast, lung and colorectal opportunities to realize synergies, targeted at cardiovascular disorders. cancers. U3’s lead project (being pool cash resources and reduce costs. The deal brings Tekturna full circle. codeveloped with Amgen), is a fully For example, Italian biotech Newron Novartis spun out Tekturna to Speedel in human monoclonal antibody and is due to Pharmaceuticals acquired the private 1998 and exercised its callback option enter the clinic in 2009. UK company Hunter Fleming. The deal to the product in 2002. Tekturna was will allow the companies to combine In a purer technology play, Bayer paid subsequently approved and launched in R&D portfolios, building on Newron’s €210 million (US$300 million) in cash Europe and the US. central-nervous-system pipeline and to buy Direvo Biotech, the German The other significant late-stage M&A deal expanding it into neuro-inflammation. protein-engineering business which of the year was the €328 million (US$517 Similarly, in a drive to achieve cash has a number of high-throughput million) acquisition of Germany’s Jerini sustainability, BTG acquired Protherics platform technologies for optimizing by Shire. The all-cash deal added the for €274 million (£218 million; US$402 the performance of proteins, including orphan drug Firazyr to Shire’s growing million), which has bought BTG an income therapeutic antibodies and proteases. human genetic therapies (HGT) portfolio. stream from a portfolio of niche-market Bayer will integrate Direvo into its R&D Having gained the HGT portfolio in 2005 products. The consolidation trend organization as a center of excellence through the acquisition of Transkaryotic continued into early 2009, driven by for bioengineering. Therapeutics, Shire has focused its macroeconomic conditions and the tight financing environment. In February, following the start of a restructuring program a year earlier, Germany’s GPC Top 10 M&As involving European companies Biotech announced its proposed merger Acquired or Value with US-based Agennix. Company Country merged company Country (€m) Pharma acquisitions Novartis Switzerland Speedel Holding Switzerland 571 In 2008, pharma’s attention was Sanofi-Aventis France Acambis UK 347 essentially balanced between public and Shire UK Jerini Germany 328 privately held targets. A particularly Ipsen France Tercica US 275 interesting development is the emergence BTG UK Protherics UK 274 of acquisitions with success-based milestones. In Wyeth’s acquisition of Bayer Healthcare Germany DIREVO Biotech Germany 210 UK-based private biotech Thiakis, for Solvay Belgium Innogenetics Belgium 201 instance, the firm paid €20.4 million Daiichi Sankyo Japan U3 Pharma Germany 150 (£16.2 million; US$30 million) up front Intercell Austria Iomai US 129 for a portfolio of synthetic oxyntomodulin Roche Switzerland Piramed UK 119 peptides and could make a further €81.6 million (£65 million; US$120 million) in Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer

91 Leading alliances involving European companies associated program costs and profits are to be shared equally between Actelion Value Company Country Partner Country Stage (€m) and GSK with total contingent payments GlaxoSmithKline UK Actelion Switzerland Clinical 2,079 to Actelion totaling €1.723 billion (CHF2.735 billion; US$2.534 billion). GlaxoSmithKline UK Cellzome Germany Early 1,055 Roche Switzerland ThromboGenics/ Belgium/ Clinical 500 For GSK, almorexant adds a first-in-class BioInvent Sweden compound to the pipeline of insomnia drugs International it has been building. Meanwhile, Actelion Merck & Co. US Addex Switzerland Early 477 gains not only GSK’s development expertise Pharmaceuticals and primary-care commercialization muscle GlaxoSmithKline UK AFFiRiS Austria Clinical 430 but also an income stream that will reduce Cephalon US ImmuPharma UK Clinical 350 its reliance on Tracleer, the pulmonary Janssen Netherlands Astex UK Early 343 arterial hypertension drug that accounts for Pharmaceutica Therapeutics the vast majority of its revenues. Merck KGaA Germany Ablynx Belgium Early 335 In another significant late-stage deal, AstraZeneca UK Biocompatibles UK Early 327 Cephalon signed a €10.2 million (US$15 International million) option agreement to acquire the Tibotec Belgium Medivir Sweden Early 277 rights to Lupuzor, ImmuPharma’s treatment Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer for Systemic Lupus Erythematosus, which was in Phase IIb development at the time strategy on building a portfolio of products Clinical-stage deals of signing. In February 2009 and following which, like Firazyr, address rare, highly Novel clinical-stage projects continue to positive results from the Phase IIb trial, symptomatic and serious disorders. be in high demand, remain scarce and Cephalon exercised its option, triggering a Shire’s offer was at a significant premium can command significant premiums. In €20.4 million (US$30 million) license-fee to Jerini’s share price at the time of 2008, a handful of European biotechs payment, and Phase III development and the announcement. After the US Food negotiated such deals. Of particular note commercialization responsibilities were and Drug Administration (FDA) issued a was GSK’s August 2008 deal with Actelion transferred to Cephalon. In total, up-front nonapprovable letter for Firazyr in April, for almorexant, which ranks as the largest fees and success-based payments to Jerini’s share price dropped significantly development and commercialization deal Immupharma could reach as much as €350 amid concerns that the company would in the history of the biopharmaceutical million (US$500 million). It is hoped that need to raise additional capital. Soon industry. GSK acquired the worldwide Lupuzor, which has a novel mechanism of after the announced acquisition, Firazyr rights (excluding Japan) to codevelop action, will be the first therapeutic agent received European approval and Shire and comarket almorexant, Actelion’s able to halt the progression of the disease has expressed confidence that the issues orexin receptor antagonist in Phase III in patients. raised in the FDA’s letter can be addressed. development for primary insomnia. The Although the achievement of clinical deal, which covers additional indications, Building on a long-term relationship, the proof of concept in Phase II trials has is structured to provide total contingent vaccines division of Sanofi-Aventis acquired traditionally been a key inflection point development and sales-related payments the UK vaccines company Acambis for for value creation and asset price, of up to €2.079 billion (CHF3.3 billion; €347 million (£276 million, US$550 pre-proof-of-concept assets attracted US$3.058 billion). million). The deal highlights the recent favorable deal terms. Three of the five resurgence of interest in the vaccines While the deal included a significant largest clinical deals involved assets market by major pharmaceutical companies up-front payment of €92.5 million in Phase I development. Indeed, the and follows a series of similar acquisitions (CHF150 million; US$139 million) and third-largest European deal of 2008 was by the major vaccine manufacturers. potential milestone payments of up struck between Roche and two European to €255.8 million (CHF415 million; biotechs, Bioinvent International and US$384.6 million) for the insomnia ThromboGenics, for worldwide rights Strategic alliances indication, Actelion will lead the to TB-403, a monoclonal antibody After steady rises between 2005 and development program and registration against placental growth factor for 2007, the total value of European strategic of almorexant in insomnia with GSK the treatment of solid tumors. Other alliances decreased by twelve percent in contributing only 40% of development significant Phase I deals were GSK’s 2008, to €8.8 billion (US$13 billion). costs. For additional indications, all agreement with the Austrian biotech

92 Beyond borders Global biotechnology report 2009 AFFiRiS for its Alzheimer’s disease inflammatory disorders, the alliance gives interesting to note that 10 of the largest vaccine program. GSK access to Cellzome’s Kinobeads 15 European deals were focused on either platform technology. The transaction small-molecule discovery programs or Preclinical deals is broad in scope, giving GSK exclusive small-molecule compounds demonstrating Preclinical deals provide the opportunity options to license drug candidates against the continued therapeutic relevance of to gain access at an early stage to drug a total of seven targets, three of which small-molecule drugs. discovery platforms and technologies, have yet to be identified. Cellzome could biological targets and lock-in rights to A two-way street be eligible to receive a total of €1.055 novel candidates. In recent years, these Financing and economic conditions are billion (£840 million; US$1.552 billion) in partnerships have become more frequent, making it difficult for many biotech firms addition to double-digit royalties. Another as pharmaceutical companies attempt to to fund their pipeline development. significant deal was AstraZeneca’s externalize more of their drug discovery At the same time, pharmaceutical agreement with the UK’s Biocompatibles and access novel technology platforms, companies, seeking to streamline for the development of its GLP-1 analog particularly in areas where they have operations and optimize product for the treatment of obesity and diabetes. historically underinvested. The values of portfolios, are out-licensing noncore such deals have also increased, as they Big pharma pays for innovation assets. This confluence of trends creates have become broader in scope — today, Of the top 15 European deals by value, an opportunity for biotech companies they often encompass more than one GSK’s deals with Actelion, Cellzome to bring in revenue-generating assets, biological target, with multiple associated and AFFiRiS accounted for more than and a number of smaller European discovery programs and contingent 50% of total value. Innovation is a key firms acquired rights to commercialized payments linked to the commercialization theme across these deals, showing that products from large companies in 2008. of as many as ten therapeutic agents. pharma will pay substantial sums for good For example, in September, Sweden’s innovation. The Actelion deal gave GSK Biovitrum acquired the marketed biologics In fact, 11 of the 15 largest European rights to a first-in-class compound; the Kepivance and Stemgen from Amgen, deals in 2008 involved discovery programs AFFiRiS deal, a clinical Alzheimer’s vaccine as well as a worldwide license to market or assets in preclinical development. GSK’s program and the AFFiRiS AFFiTOPE Kineret in its current indication — a discovery-stage alliance with Germany’s technology platform; and the Cellzome portfolio of drugs which generated €48 Cellzome was the year’s second-largest deal, the Kinobeads discovery platform. million (US$70 million) for Amgen in deal, albeit structured to provide GSK 2007. Other pharma divestment deals with little financial risk until achievement With so much emphasis placed on the included Meda’s acquisition of four of clinical proof of concept. Focused on therapeutic potential of biologics, it is

European alliances by country, 2008

Biotech-biotech Pharma-biotech Average value

Potential value (€b) Average value (€m)

3.5 490

3.0 420

2.5 350

2.0 280

1.5 210

1.0 140

0.5 70

0.0 0 Switzerland UK Germany Sweden Austria Belgium Denmark Italy France Netherlands Ireland Israel Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed Pharma-biotech deals include transactions in which biotech companies were buyers

93 marketed products from Roche for €120 to speak. Biotech-biotech consolidation sizeable up-front payments in recent million (CHF195 million; US$176 million). is likely to pick up as a survival strategy months, and the question is whether at a time when many firms will find we are likely to see more of them going For smaller companies, acquiring products themselves with dwindling cash reserves forward. (In addition to the strategic (or retaining rights to their own products) and limited financing opportunities. imperatives for large up-fronts, such deal has always come with the risk that they We are also likely to see biotechs structures can also have implications for will not have the resources and expertise pursuing sustainability by acquiring companies’ bottom lines, depending on to realize value from those assets. But rights to commercialized products the accounting standards under which now, companies also face increased and/or divesting themselves of noncore they file their financial returns — issues uncertainty about being able to finance assets and operations. While some that could become more consequential the transaction in the first place. In the large pharma companies are merging over the next few years, as accounting case of the York/Solvay deal, product in a cost-cutting drive, they will still standards converge and large companies rights have since been returned to Solvay need strategic alliances with biotech come under growing earnings pressure. because of problems financing the deal. to address their pipeline issues. In the For more details, see “A closer look” The road lengthens current environment, the challenge will on this page.) Ultimately, of course, A core theme in last year’s Beyond be to structure these transactions in structuring deals in ways that provide borders was that the road to ways that value assets appropriately sufficient capital to advance assets and commercialized products has become and give both parties sufficient provide upside will help sustain not just longer. While companies have traditionally upside. There have been some notable individual companies but also innovation looked at product approval as the final transactions in the US and Europe with across the industry. destination, they now face considerable risks even after launching products, due to increased post-marketing safety surveillance and a fast-changing pricing A closer look and reimbursement environment. This reality is now being reflected in the Up-fronts and bottom lines: accounting for up-front payments structures of R&D alliances, with many under IFRS of the 2008 deals containing contingent payments that are linked to commercial The world of accounting is moving toward a single global standard, with many countries now on board to adopt International Financial Reporting Standards (IFRS) as their milestones such as sales performance principal body of rules. In 2008, the United States made significant strides in this rather than R&D milestones. direction, although the ultimate date of adoption in the US remains uncertain. In the Two deals highlight the extent to which meantime, the governing bodies are cooperating and looking to achieve convergence of payments are being back-loaded. In the standards wherever possible — for example in the accounting for M&A transactions and case of AstraZeneca’s option-to-license through an ongoing project to harmonize revenue recognition rules. As more countries agreement with Biocompatibles for a and companies adopt IRFS, financial statement readers will need to be aware of the GLP-1 analog for use in type II diabetes differences between those rules and the Generally Accepted Accounting Principles and obesity, 78% of the total €327 (GAAP) that govern US registrants. million (US$444 million) deal value is One area of difference between the two standards that could be consequential for contingent upon the achievement of biotech companies is the accounting for up-front license payments in collaborative sales-related milestones. Similarly, Onyx agreements. In the US, if such payments are for products that have not reached Pharmaceuticals and BTG’s deal over technological feasibility, they are charged as an expense. The same is true for ongoing BTG’s preclinical anticancer compound, R&D support payments and milestone payments. BGC 945, was structured so that 73% of Under IFRS rules, on the other hand, companies can (and often do) record the €218 million (US$320 million) deal up-front and milestone payments as assets — which are periodically reviewed for value is contingent upon product approval impairment during development. If a product is approved, these payments are and commercial performance. then amortized to expense over the commercial life of the product. Ongoing R&D support payments, however, are charged to expense, as they are under US GAAP. Outlook Thus, an IFRS-reporting company could make a larger up-front payment in lieu of making ongoing R&D support payments and potentially defer the earnings charge. For many biotech companies, the Of course, this comes with a price — the assumption of more risk embodied in a biggest challenge nowadays is to remain higher (nonrefundable) up-front payment. Nevertheless, as big pharmaceutical sustainable. One way to deal with this companies face growing earnings-per-share pressure, this standard may allow an challenge is through the creative use of IFRS-reporting company more flexibility in closing transactions. strategic deals — dealing by dealing, so

94 Beyond borders Global biotechnology report 2009 European products and pipeline A surging pipeline and a trickle of products

The product pipelines of European sector. More positive still is the movement players. More than companies in other biotech companies demonstrated robust of projects from Phase II to Phase III locations, mature British and Swiss growth across all stages in 2008. Product development — the number of products in biotechs have attracted buyers in recent approval success was less pronounced: Phase III increased 11% to a total of 157. years, including Acambis (acquired only one new molecular entity (NME) by Sanofi-Aventis in 2008), Speedel The United Kingdom continues to lead received US Food and Drug Administration (Novartis in 2008), Serono (Merck country rankings, accounting for 20% of (FDA) approval, and two received approval KGaA in 2007) and Cambridge Antibody the total clinical pipeline and 23% of Phase from the European Medicines Agency Technology (AstraZeneca in 2006). III assets. The UK does not, however, (EMEA) for marketing throughout the While these acquisitions may have hurt have the lead that it once had. In 2006, European Union (EU) (as opposed to the pipeline rankings of Switzerland and for example, the UK accounted for 35% single-territory approvals). Moreover, the UK, the transactions themselves of all products in development and 41% product-approval success was dominated reflect pipeline strength rather than of Phase III products. Switzerland, which by specialty pharmaceutical companies weakness. These biotechs were not in 2006 occupied the number two spot such as Ipsen, Ferring and Shire. struggling companies snapped up at behind the UK, has also seen its relative Approvals from “core” biotechnology bargain-basement prices, but robust contribution diminish, falling behind companies consisted largely of new firms valued for their mature pipeline Germany, Denmark and France in 2007 formulations of already-approved and assets. In addition, Switzerland’s ranking and holding this position in 2008. marketed molecules. Therefore, while the decline with respect to the number of European sector might be described as Ironically, the relative decline of the UK Phase III items — the country fell from promising from a pipeline perspective and and Swiss pipelines is at least partially the number two spot in 2007 to fifth has made consistent progress in recent a reflection of the strength of these place in 2008 — was driven not just by years, success did not translate into biotech clusters. A significant reason acquisitions, but also by the success of a approvals of new and innovative medicines for the decline, for instance, is the number of Swiss companies in securing for smaller biotechs during the year. acquisition of mature biotech companies regulatory approval for marketing in from these countries by big pharma prior years. Pipeline

The European pipeline grew across all European product pipeline by phase, 2006–08 phases of clinical development during 2006 2007 2008 2008, continuing the success of previous years. More than 100 projects were added 800 to the clinical pipeline of Europe’s biotech and specialty pharmaceutical companies, taking the total number of therapeutics to 600 more than 1,000 clinical projects. Critically, Europe’s Phase II product portfolio grew 15% to more than 600 400 products, matching the success achieved in 2007. As we noted last year, Phase II trials are a critical make-or-break stage on the path to commercialization. This is 200 where the first clinical proof of concept is in studies candidates product Number of typically achieved, and it is often pivotal for value creation. Growth in the number 0 of therapeutics in this stage is a positive Phase I Phase II Phase III indicator of the health of the European Source: Ernst & Young, MedTRACK and company websites

95 To some extent, the overall decline European clinical pipeline by country, 2008

of leading countries is also driven by Phase I Phase II Phase III the growing strength of companies in up-and-coming second-tier markets. For UK instance, the UK, Germany, Denmark, Denmark France and Switzerland collectively

accounted for about 70% of the total Germany European pipeline and Phase III products in 2006. By 2008, their share had France declined to about 64%. In addition to Switzerland acquisitions, this reduced share reflects growth and maturity in the biotech Sweden industries of countries such as Israel, Sweden, Italy and the Netherlands, Italy

which saw their collective share of the Israel European Phase III pipeline increase from 12% in 2006 to 23% in 2008. Indeed, Netherlands Sweden had 13 products in its Phase III pipeline in 2008. Spain The therapeutic composition of the Norway European pipeline with regard to Ireland indications targeted changed very little in 2008. Oncology remains the dominant Belgium area of development activity, accounting for 21% of pipeline projects. This reflects Austria

the growing market opportunity created Finland in this category by aging populations in 0 50 100 150 200 250 traditional markets, high unmet need and Number of product candidates an increased understanding of disease Source: Ernst & Young, MedTRACK and company websites biology and new therapeutic approaches. Therapeutics addressing the neurology (15%), metabolic and endocrine (11%) The Phase III share of the top five countries has shrunk, and autoimmune and inflammatory (11%) while other countries have advanced rapidly Netherlands, 3% segments follow. Netherlands, 2% 100% Italy, 2% Sweden, 5% Italy, 6% 90% Israel, 3% Product approvals Sweden, 8% The year 2008 was relatively lean in 80% Israel, 6%

terms of new product approvals for the 70% European industry. European biotech Switzerland, 23% and specialty pharmaceutical companies 60% Switzerland, 11% achieved only a handful of major new 50% France, 4% France, 11% approvals in the US and Europe. In Denmark, 5% 40% addition to NME approvals, two biosimilar Denmark, 11% Germany, 12% products became the first follow-on 30% Germany, 8% granulocyte colony stimulating factor (rG-CSF) products approved in the EU. 20% UK, 30% UK, 23% Swiss specialty pharmaceutical company 10% Ferring was the only European company to 0 gain a product approval in the US market. 2006 2008 Firmagon (degarelix), for the treatment of Source: Ernst & Young, MedTRACK and company websites

96 Beyond borders Global biotechnology report 2009 advanced prostate cancer, was approved approvable letter from the FDA in March, a therapy for severe refractory chronic by the FDA just before the end of the year. and in November, the EU Committee for hand eczema and subsequently received The product also went on to achieve EMEA Medicinal Products for Human Use (CHMP) approval in Denmark, Finland, France, approval in February 2009. issued a positive opinion for use in the Germany and the UK. treatment of complicated skin and soft- The European biotech approval highlight Santhera Pharmaceuticals, another Swiss tissue infections. of the year was Shire’s orphan and company, achieved approval for Catena first-in-class medication Firazyr (icatibant) However, following the FDA’s letter, the (idebenone), a treatment for the rare in July. Firazyr was developed by Jerini AG agency conducted additional inspections neuromuscular disease Friedreich’s Ataxia, prior to its acquisition by Shire. Firazyr, of investigator sites and later concluded and subsequently launched the product which received EMEA authorization for that study-monitoring deficiencies had in October. Oralair Grasses, Stallergenes’s the symptomatic treatment of acute arisen. In November, the FDA indicated in sublingual “desensitization” product for the attacks of hereditary angioedema a complete response letter that further treatment of rhino-conjunctivitis symptoms, in adults (with C1-esterase-inhibitor resolution of specific deficiencies in received German approval in June. deficiency), is the first product to receive study conduct would be necessary. The remaining 2008 approvals pan-European approval for this indication. Subsequently, in February 2009, Basilea were for reformulations and line was informed that European approval Firazyr faces greater regulatory extensions of molecules already would be delayed pending good clinical uncertainty in the US, where the FDA approved for marketing. In the US, practice inspections by the EMEA. responded to its NDA submission with Sular — SkyePharma’s Geomatrix Basilea has since filed a claim against a “not approvable” letter in April. A reformulation of Sciele Pharma’s Johnson & Johnson for damages placebo-controlled trial is planned for nisoldipine for hypertension — was incurred due to the delay of approval and 2009 in an attempt to secure FDA approved by the FDA, as was Antisoma’s lost milestone payments. approval. Shire estimates that Firazyr, oral fludarabine as a second-line which will enjoy market exclusivity in the Basilea also had success in 2008 treatment for chronic lymphocytic EU until 2018, could achieve peak sales with Toctino, an oral formulation of leukemia. In Europe, Orexo AB’s Abstral of US$350–400 million, conditional upon alitretinoin, which was recommended (a fast-dissolving tablet for sublingual approval in the US. for regulatory approval under the administration of fentanyl) received European decentralized procedure as marketing authorization for the The other NME approved for marketing throughout the EU in 2008 was Ipsen’s Adenuric (febuxostat), which was approved in April for the treatment of chronic hyperuricemia in conditions European Phase III pipeline by indication, 2008 such as gout. Inflammation and autoimmune Metabolic and endocrine Europe’s population of smaller biotech 11% 11% companies had less success on the product approval front. Nevertheless, Infectious 9% a small number of companies achieved approvals for NMEs in some European Neurology markets and Canada. 15% Dermatology 7% Basilea Pharmaceutica of Switzerland received marketing authorization in

Switzerland for Zeftera (ceftobiprole), Cardiovascular and hematology and the product was launched in Canada. 6% Zeftera, which was outlicensed and codeveloped with Janssen-Cilag Gastrointestinal 6% (a Johnson & Johnson company), is the Cancer first approved broad-spectrum anti-MRSA 21% antibiotic belonging to the cephalosporin Other 14% class. The product also received an Source: Ernst & Young, MedTRACK and company websites

97 treatment of acute breakthrough cancer to receive marketing authorization in EMEA in September for the treatment pain in the UK, Germany and Sweden, via the EU, followed in 2007 by the first of neutropenia. Early in 2009, rG-CSF Orexo’s licensing partner, ProStrakan. erythropoietin biosimilars. Continuing products from Hexal (Filgrastim) and this trend, the first rG-CSF biosimilars Sandoz (Zarzio) were also approved. received marketing authorization in 2008. Zarzio is the third biosimilar that Sandoz Biosimilars Referencing Amgen’s originator product has successfully steered through the Progress was also made in the biosimilar Neupogen (filgrastim), CT Arzneimittel’s abbreviated approval process. Outside market, which has been emerging in Biograstim, Ratiopharm’s Ratiograstim of the EU, Mepha was granted marketing recent years. In 2005, Sandoz’s Omnitrope (developed by subsidiary BioGeneriX) and authorization for Filgrastim-Mepha in (somatropin) became the first biosimilar Teva’s Tevagrastim were approved by the Switzerland, becoming the first biosimilar to be approved in this market. The biosimilars market is still in relatively early A closer look stages, however, and remains fraught with Growing pains in the European biosimilars market uncertainty. (See “A closer look” on this page for more details.) While the European biosimilars market is still in its infancy, these products are facing tough market conditions and have yet to match the success of small-molecule Orphan drugs generics. Concerns about comparative efficacy and safety have limited uptake with patients and physicians, who are often reluctant to switch from better-known In February 2009, in an attempt to originator products. encourage the development of orphan medical products, the EMEA revised the National rules that prevent automatic substitution — common in many countries, fee structure payable for preauthorization including France, Spain and the UK — have further restricted adoption. Since patients activities such as protocol assistance, and physicians do not bear the cost of product procurement, they have little incentive to opt for cheaper biosimilars. Over time, governments will need policies to increase as well as for products using the biosimilars adoption. Until then, companies launching biosimilars will need to centralized procedure, application for address business planning and forecasting challenges that arise from this near-term marketing authorization, inspections and uncertainty and adopt a sales and marketing model that actively promotes products. post-authorization activities. Companies qualifying as micro, small and medium-sized Even with an abbreviated regulatory pathway, demonstrating similarity to a enterprises (SMEs) no longer have to reference product is more onerous and costly for biosimilars than for small-molecule pay fees for submission of orphan drugs generics. Biologics are highly heterogeneous and regulatory guidelines are likely to for approval, and fees for post-approval be developed case-by-case. To date, only biosimilars of relatively simple and well activities have, in most cases, also been characterized hormones and therapeutic proteins have been approved, and more eliminated. Fees for non-SMEs have also complex biologics, such as monoclonal antibodies, might pose significant challenges been reduced considerably. to regulators and companies. Facing potentially high development costs, comparability challenges and a difficult market environment, some companies might opt to pursue a traditional Crossing the fourth hurdle full development route, bypassing the abbreviated pathway. This option might be While European companies have new particularly attractive for companies for which cost and/or time differences between opportunities related to biosimilars and approval routes are narrow or where there is reason to believe that a product might orphan drugs, companies looking to sell have a superior safety or efficacy profile to the originator. Indeed, some companies in European markets must also contend are likely to abandon biosimilars in favor of “bio-betters” — enhanced versions of with growing regulatory risks. In a originator products. climate of increasing pricing and safety Looking forward, originator, biosimilar and enhanced bio-betters will likely compete concerns, securing marketing approval against each other on the merits of relative safety, efficacy and value. The global is no longer the end of the road for regulatory landscape will remain fragmented. Even within a single jurisdiction, the drug manufacturers. In Europe, pricing regulatory approach to products and classes of biologics will vary on a case-by-case pressures have been particularly visible basis. In the European Union, policy decisions have so far been made at the in the UK market, where the National member-state level, further fragmenting the marketplace. Institute for Health and Clinical Excellence (NICE) uses cost-utility methodologies in its coverage decisions. In recent years, NICE has not recommended several

98 Beyond borders Global biotechnology report 2009 Selected European products approved, 2008

Brand Generic Disease Approved/ Company Country name name Type category Indication registered in Antisoma UK Oral fludarabine New formulation Oncology Chronic US fludarabine lymphocytic leukemia (CLL) Basilea Switzerland Toctino alitretinoin New formulation Dermatology Severe Denmark, Pharmaceutica refractory Finland, France, chronic hand Germany and eczema the UK Basilea Switzerland/ Zeftera ceftobiprole New molecular Infectious MRSA skin Switzerland Pharmaceutica/ Netherlands entity disease and soft tissue Janssen-Cilag infections Santhera Switzerland Catena idebenone New molecular Neurology Friedreich's Canada Pharmaceuticals entity ataxia Ferring Switzerland Firmagon degarelix New molecular Oncology Prostate cancer US Pharmaceuticals entity Ipsen France Adenuric febuxostat New molecular Metabolic Chronic European Union entity hyperuricaemia Jerini/Shire Germany/ Firazyr icatibant New molecular Cardiovascular Hereditary European Union UK entity angioedema (HAE) Orexo/ Sweden/UK Abstral rapinyl New formulation Neurology Breakthrough UK, Germany ProStrakan cancer pain Sweden SkyePharma/ UK/US Sular nisoldipine New formulation Cardiovascular Hypertension US Sciele Pharma Oralair New molecular Allergic rhino- Stallergenes France grass pollen Inflammation Germany Grasses entity conjunctivitis

Source: Ernst & Young, EMEA, FDA and company websites

of the leading biotech cancer drugs considerable public outcry and Pfizer the company wanted to let other patients for reimbursement, often generating offered to reduce the cost of the drug by switch from a placebo to Sutent. controversy in the process. In 2007, paying for the first cycle of treatment. These creative risk- and cost-sharing these trends resulted in the industry’s Under the terms of the agreement, the arrangements were not limited to cancer first-ever money-back guarantee, when National Health Service (NHS) will pay drugs. In September, NICE approved Velcade was approved for treatment of for subsequent treatment cycles if the Lucentis for the treatment of wet multiple myeloma only after Janssen-Cilag drug appears to be working. Bayer made age-related macular degeneration under promised to refund the cost of treating a similar offer, agreeing to pay for the an arrangement where the NHS will pay patients who did not show improvement first pack of Nexavar, but has so far failed for the first 14 injections of Lucentis, based on predetermined decision points. to secure coverage. Interestingly, Pfizer with the manufacturer picking up the bill received independent confirmation of the These trends continued in 2008. In for any more that are needed. effectiveness of Sutent exactly one month August, NICE rejected four drugs under later and, in reaction, announced that it NICE has announced some changes in consideration for the treatment of kidney was prematurely ending a Phase III trial of its methodologies over the last year cancer — Sutent, Avastin, Nexavar and the drug. While trials are typically halted and plans to revisit issues related to the Torisel — based on its cost-effectiveness because of poor results, this decision was value of innovation in 2009. (For more criteria. In February 2009, however, the made because patients with pancreatic information, see the article “Valuing agency reversed course on Sutent after islet cell tumors were showing a significant innovation” by Andrew Dillon and Sarah the denial-of-coverage decision generated increase in progression-free survival, and Garner in this issue of Beyond borders.)

99 Outlook companies. In March, the EMEA accepted for Germany-based TRION Pharma’s Genmab’s marketing authorization Removab (catumaxomab) for the European companies made solid pipeline application for its HuMax-CD20 antibody intraperitoneal treatment of malignant progress during 2008, but product Arzerra (ofatumumab) for the treatment ascites in patients with EpCAM-positive approvals from European companies still of chronic lymphocytic leukemia, carcinomas. The European Commission lag behind those from the more developed triggering a milestone payment from also approved Austria-based Intercell’s and mature US sector. In a tight financing marketing partner GSK. Arzerra was IXIARO vaccine for the prevention of environment, companies will need to also submitted for FDA approval in late Japanese Encephalitis. focus on continued pipeline progress and January. Actelion’s Zavesca (miglustat) particularly on advancing compounds into A number of companies are awaiting received EU approval in January for the Phase IIb and Phase III trials. results for important late-stage trials and treatment of progressive neurological product-approval submissions in 2009, Positive news from larger companies manifestations in patients with and more good news would certainly help is helpful, as it tends to move investor Niemann-Pick type C disease, making attract investors in what promises to be a sentiment toward the sector as a it the first product approved in this challenging year financially. whole. Encouragingly, the start of 2009 indication and expanding its use outside provided positive late-stage news for of Gaucher’s disease. In April, the some of Europe’s more mature biotech European Commission granted approval

100 Beyond borders Global biotechnology report 2009 Karl-Heinz Maurer, Ph.D. Marcel Wubbolts, Ph.D. Holger Zinke, Ph.D. Henkel AG & Co. KGaA DSM Innovation Center BRAIN AG Director Biotechnology, Global Program Director, White CEO R&D: Chemistry, Laundry and Biotechnology Home Care

Roundtable on industrial biotechnology Evolution, progress and sustainability

Ernst & Young: Has industrial (white) to supplement gasoline — even to the In the US, biotechnology has been biotechnology developed differently in point where the US has overtaken Brazil. primarily associated with red (health) applications, and industrial biotech has Europe and the United States? Zinke: Historically there was a strong traditionally had less focus and attention. scientific base on both sides of Companies such as Maxygen and Diversa Wubbolts: Historically, the differences the Atlantic in areas such as strain (now Verenium) have pursued industrial in the development of industrial development, molecular evolution and applications and there have been US biotechnology between Europe and the biocatalysis. But when the biotechnology Department of Energy-funded projects US have not been significant. On both industry took off — during the late focused on energy and new-platform continents, early processes made use of eighties in the US and a decade later in chemicals from renewable sources. I fermentation such as for alcohols (e.g., Europe — this scientific base was rarely agree with Marcel that at the moment ethanol and butanol), organic acids (e.g., visible. So industrial biotechnology the industrial biotech arena in the US is citric acid), vitamins (e.g., biocatalytic step attracted relatively little interest at the dominated by primary and secondary for Vitamin C), amino acids (e.g., Lysine large investor conferences or, for that biofuel initiatives. and MSG) and the production of antibiotics matter, in the capital markets. Despite the (e.g., penicillins and cephalosporins). Early fact that there have been very prominent adopters included both US and European examples of dedicated industrial biotech Ernst & Young: What major business and companies, including the likes of Archer companies, for example Genencor (now public-policy trends are driving industrial Daniels Midland, Bristol-Myers Squibb, a division of Danisco), these companies biotechnology today? Cargill, Roche, Eli Lilly, Novo Nordisk and were not the primary focus of attention. Gist-Brocades (now DSM). Maurer: In Europe, industrial biotech Zinke: The situation has changed today. In recent periods, Europe has specialized developed largely in collaboration with As already mentioned, the visibility of more in the application and production the chemical industry and therefore industrial biotechnology efforts in the of industrial and specialty enzymes. targeted process improvements in chemical US has been influenced by the objective European companies have also focused production, rather than focusing on of achieving energy independence. on higher-value-added molecules developing alternatives for specific raw The political spotlight on industrial (semi-synthetic antibiotics, vitamin B2 materials such as oil. Industrial biotech biotechnology as part of the solution and biocatalysis for active ingredients in Europe is a core competence in a wide has increased investor interest in the in pharmaceutical applications). More array of companies, ranging from pure-play past few years. In Europe, established traditional processes (e.g., amino acids, companies such as Novozymes and industry players adopted biotech on a organic acids, penicillin and MSG) have Genencor to midsized and small biotech case-by-case basis, resulting in a relatively remained strong in the US, but have entities. White biotech is also widely dense network of diverse efforts. also found a new haven in Asia. The distributed throughout industries such Remarkably, despite the different focus US, of course, has become dominant as chemicals, consumer goods and food. of the companies and the diversity of the in bioethanol production as a result of And lastly, academic research in industrial applications and markets, a small but strong governmental support for biofuels biotech has always been a strong asset. coherent industrial-academic community has been established.

101 Interestingly, the political efforts as Wubbolts: There are certainly many that allows for differentiation between well have resulted in diversity. While instances where the use of biotechnology competing products. At the same time, there are several European and national has transformed industrial processes. we may also see further reduction of initiatives using the industrial or white Prominent examples in the European chemicals used in the process. Replacing biotech label, many are aimed in industry include processes for vitamins substances with biocatalysts also different directions. This would seem C and B2, amino acids, and food and allows for more concentrated product to be ineffective at first glance, but the feed additives such as alpha-amylase, and packaging material, and as a multifaceted situation creates room for glucose oxidases, pectinases, proteases, consequence, the amount of fuel needed entrepreneurial activities and academic (phospho)lipases and fytases. for transport can also be reduced. To clusters. We see groups of newly founded some extent, enzymes can also be used In many cases, biotechnology has companies in technologies ranging from to balance the volatility of petrochemical been the enabling technology. In most biocatalysis, bioinformatics and metabolic raw material costs. cases, cost reduction has been the main engineering to product-innovation-driven advantage, combined with an increase Zinke: Industrial biotechnology can be concepts. At this time, one can only in product quality and lower usage defined as using the toolbox of nature speculate as to whether having so many of raw materials and energy — which for industrial production. This is fine, emerging companies pursuing different has direct environmental benefits and but most discussions tend to focus on applications is a strength or a weakness indirect cost advantages as well. Capital the production of standard chemical for Europe. expenditures for these new processes, products or intermediates by means of Maurer: I agree completely that in the in many cases, have been lower than for fermentation or biotransformation. The US the main drivers come from the traditional alternatives. biology competes with established and political area and the focus is biofuels, mostly large-scale chemical processes. Maurer: I believe that the transformation as well as platform chemicals. In Europe If we regard the toolbox of nature as of laundry-detergent products is an there is almost no political motivation a resource for new functionalities, important example. We have seen a move visible beyond an interest in starting the scope of industrial biotechnology from products that required the use of new companies. The focus in Europe is wider. We are absolutely convinced high quantities of detergent and high is on the application of biotechnology that new products will result, including temperatures in the 1970s, to today’s for innovation that meets the needs cosmeceuticals, nutraceuticals, functional laundry detergents which can work in of customers, and on sustainability. If biomaterials and adhesives. Nature has small amounts over a temperature range the transformation of the industry is invented solutions, and it is our task to from 20°C to 100°C and which contain the consequence, it will occur because translate the resulting functionalities in up to seven different enzymes. We it makes sense in the market and not technical use. have seen similar progress in automatic because there is a political motivation. dish-washing detergents, in which Process innovation is the main area enzymes were used for the first time in of interest for the larger, integrated Ernst & Young: Can you point to some the early 1990s. Since then, the amount companies. However, I think there is significant examples of industrial of chemicals used in these detergents has potential for true value creation by processes that have been transformed declined significantly. The role of enzymes entrepreneurial companies in the field through the use of biotechnology? What in the performance of many of today’s of novel functionalities. Given that most advantages or efficiencies do these products cannot be overestimated. speciality chemicals target biological applications create? structures, I would not be surprised to New and improved enzymes will see novel classes of specialty biologics. demonstrate improved performance We are currently in a situation of mining

102 Beyond borders Global biotechnology report 2009 the biological inventory, securing It means premium products for a Maurer: Pragmatically speaking, intellectual property positions and quality-oriented consumer. the driving factors are always cost, developing prototypes. We can also performance, convenience in application Wubbolts: Besides product innovation, profit from the technologies originally and a “natural” or “green” message process innovations that are part of this developed for biopharmaceutical that can be linked to the product. Apart industrial transformation have led to development and apply them for from these factors, there is always the higher product efficiencies for specialty cosmetics and nutrition. Collaborations hope for new innovations branching out and technical enzymes in food, feed, between dedicated industrial biotech from an initial discovery — mostly there textiles and paper/pulp. In addition, lower companies and established industry is greater opportunity for this to occur energy consumption through processing players can be of significant value, since with enabling technologies than with at ambient temperatures, reduced solvent they will permit the creation of novel product innovations. use and solvent recycles, and reduced noncommodity products. use of hazardous intermediates and My belief is that with respect to reagents has occurred. As a consequence, second-generation biofuels, we still have Ernst & Young: Does this industrial fermentation and enzyme-catalyzed a long way to go. But if successful, this transformation lead to advantages processes can be performed at sites that progress will certainly lead to further beyond product and process innovation? are not linked to crude oil pipeline networks innovation opportunities in the industrial or that have lower risk standards than biotech area. some chemical plants. Maurer: The so-called industrial Wubbolts: “Omics” and other transformation is only just beginning. I high-throughput technologies, including agree that the major impact is on product Ernst & Young: What’s the outlook synthetic biology, are critical to ongoing efficiency and performance, and this for industrial biotechnology? In which innovations. Enzyme optimization and performance is based on sustainability, segments or applications are we likely to cell engineering to adapt to industrial a key fact for us at Henkel. All new see significant growth? conditions are imperative. products are evaluated in this light, taking into account every aspect of the Biorefineries may be driven by a focus Zinke: Today we are in a position product life cycle, from production to on energy, but they will not achieve where a technology push is meeting use. Apart from that, there are new the desired sustainable profitability a societal trend toward sustainable suppliers, new business models and new unless by-products are used at a level living and sustainable products. Look at business opportunities that result from of efficiency similar to the oil-based breakthroughs such as the meta-genome industrial transformation. refineries’. Food and feed uses are technology that allows us to work with less likely outlets for biomass-based Zinke: Industrial biotech products are millions of genomes which are valuable processes, and therefore alternatives being boosted by a major societal trend: resources for new biocatalysts. Look at the will need to be implemented. Complex consumer preferences are shifting toward minimal genome initiatives, where we will feed streams are likely to be fractionated sustainable products. Remarkably, this see highly efficient producer organisms. and used in a variety of large-scale trend has not been disrupted by the Or look at the metabolic engineering or applications. Lignin, as an example, will financial crisis; to the contrary, the in vitro evolution technologies we can be available in vast amounts and can demand for sustainability is stronger than use today. We have had an explosion in mostly be used for energy generation, ever, even in the investment community. recent years in technology portfolios and but more valuable applications are likely Sustainability does not mean reduced corresponding throughput, enabling the to emerge. convenience, innovation or performance. use of nature’s toolbox in new ways.

103 Seeds of change? The Asia-Pacific perspective Asia-Pacific introduction Seeds of change?

In 2008, the global economy underwent defensively in reaction to tremendous investments — there is the risk that changes on an unprecedented scale: market uncertainty, the next iteration of some companies could move more dizzying stock market volatility, a responses carries considerable promise. slowly on their Asia strategies. fundamental restructuring of global As Western companies navigate an finance, economies struggling with deep environment where capital is scarce, they Seeking sustainability: business recessions, and major public policy are under increasing pressure to lower models and partnering responses. The seeds of these changes, cash burn and contain costs. Many Asian it is fair to say, were sown in the West. CROs and CMOs expect that this should As discussed in this year’s “Global The crisis started, after all, in the US lead to an increase in outsourcing of introduction” article, the current mortgage markets; but it spread rapidly clinical trials and manufacturing to Asia. environment is putting the biotech beyond national borders as it touched a industry’s business model under But this crisis is also unlike anything series of industries around the world. unprecedented stress. As the industry else in recent memory. Because of “the searches for a path to a sustainable Biotech industries in the West certainly interconnectedness of all things” (refer to business model, there may be felt these changes. Small-cap companies the Global introduction article for more opportunities for Asian companies in most markets now face a much tougher details) there are many hidden sources to sow seeds of change in the other environment for raising capital. They of risk lurking beneath the surface direction — by providing examples are scrambling to raise funds, cut costs that Asian contract service providers and solutions that make sustainability and lower cash burn. Much of this year’s will need to monitor. As they enter or possible. In many Asian countries, Beyond borders discusses these impacts expand contracts with Western firms, for instance, companies have had to and the outlook for biotech industries in they will need to watch for increased evolve without the benefit of success Western economies. counterparty risk. Rapid growth could factors that are typically considered also increase reputational risk, if firms But the seeds of change have also been critical for the emergence of biotech are unable to keep up with the work and carried to the shores of Asia, where the clusters in the West — strong university deliver high-quality services. Indeed, in crisis is clearly having consequences. research, technology transfer laws that anticipation of these changes, a number Since Asia’s rapidly growing biotech support commercialization, experienced of companies are investing in developing industries are fundamentally different venture capitalists and adequate their infrastructure and controls. from those in the West, it is quite likely funding. Consequently, companies have that the fallout in this region will be developed different business models. unlike that in the West. Some of the likely Seeking markets: inward investment For example, the absence of sufficient effects are described below. capital has led many Asian companies Western companies have been investing to hybrid models that combine contract significantly in Asia in recent years, services activities with innovative drug and many larger companies have Seeking cost efficiency: outsourcing development. At a time when Western included the growing economies of Asia and services companies face similar constraints, in their long-term plans. As Western As discussed in recent issues of Beyond there could be models to borrow from markets mature, these firms recognize borders, the biotech industries of Asian companies. the tremendous potential for higher many Asian economies have developed growth in Asian economies, where competitive niches in specific industry vast numbers of people with medical segments. One of these is contract needs do not have access to healthcare. services, where Asian companies Yet these plans are predicated on have attracted increasing amounts assumptions of growing middle of work from the West. While Asian classes and rising incomes. If growth contract research organizations slows substantially in these markets (CROs) and contract manufacturing because of the global recession — while organizations (CMOs) may have seen meanwhile big pharma companies are some immediate backlash from the becoming more selective about their crisis as Western companies cut back

106 Beyond borders Global biotechnology report 2009 The dream of the sea turtles: can China offer a new model for Samantha Du, Ph.D. Hutchison MediPharma Limited Western biotech companies? Chief Executive Officer

necessitated by bare-bones operating and expanded its alliance with Lilly. In late budgets, it fragments knowledge into 2008, Hutchison and Johnson & Johnson far-flung pockets, which often inhibits announced a collaboration in which the integration of expertise. But life J&J selected a project on inflammation sciences activities are complicated and from Hutchison’s internal program. The interdependent, and integration across risk-sharing business model focusing on diverse disciplines is critical. a specific disease target can not only mitigate R&D risks for biotech firms but In contrast, by leveraging some of the also produce deeper knowledge and mutual country’s comparative advantages, learning. It also enables multinationals to Chinese companies are starting to build access China’s capital efficiencies, human enterprises that are more integrated resources and, eventually, the fast-growing than Western firms. It is no secret, for domestic market. instance, that China has a vast supply of Biotech companies in the West have been affordable human capital. The country hit hard by the financial crisis. Traditional produces more than six million college Outlook graduates each year. These resources funding sources have dried up. Many Of course, there are challenges to be met. are now being supplemented by a firms have less than a year of cash on The local talent base lacks specialized growing pool of Western-educated and hand and prospects for raising more experience, although this is at least experienced returnees (nicknamed “sea capital look bleak. partially compensated for by passion, the turtles” in China) drawn back by explosive ability to learn and the contributions of sea It could be argued that the biotech business economic growth and the opportunity turtles. The industry will need supportive model is now truly broken. At the least, to make substantive contributions to policies and regulations, and the Chinese critical aspects of that model are under China’s blossoming biotech industry. This government is helping on this front. The unprecedented strain — there is a complete combination of abundant human capital, government is actively investing and has mismatch between investors’ appetite for lower business costs and experienced designated biotech a high-priority “pillar risk and the long product-development time returnees is allowing entrepreneurs to build industry.” In January 2009, the SFDA frames and relatively low success rates Chinese biotech firms that are far more implemented a fast-track “green channel” for drug R&D. This threatens the survival integrated — with significant capabilities in to accelerate first-in-man studies — a of firms in the short run and the ability to disciplines ranging from discovery research measure that should boost Chinese clinical fund innovation over the long term. through clinical development — than trial activities. There are two basic ways for companies their counterparts in the West. And this to work around this mismatch. In an integrated approach can produce more While China’s economy is not immune environment where capital has become efficient and productive R&D. to the financial crisis, the economic devastation in the West could prompt scarce, they can lower costs to make their Western companies can exploit these talent and capital to flow to emerging limited means go further. Alternately, advantages by leveraging China’s markets. The movement of returnees they can increase research productivity capabilities in their business models or could accelerate from a steady stream of to lower R&D risk and make the biotech partnering with Chinese firms. For instance, sea turtles swimming up to China’s shores business model more attractive to at Hutchison MediPharma — an integrated to a much larger mass migration. And investors. On both fronts, China offers biotech company led by sea turtles and for Western companies straining against the opportunity to do things differently. employing more than 200 scientists — we a challenging business model, the China are not only driving internal programs advantage might offer new approaches to to clinical development but also entering Chinese models boost R&D productivity, to the benefit of into risk-sharing alliances with Western the global biotech industry and patients By now, the West has become habituated majors. The firm’s partnerships with Eli everywhere with unmet medical needs. to an organizational model in which Lilly and Merck AG, initiated in 2007, bore most biotech companies are lean fruit in 2008, when Hutchison delivered organizations. While this is often discovery milestones for both partners

107 M.K. Bhan, M.D. A conversation with M.K. Bhan Secretary to the Government of India, Department of Biotechnology Changing realities

Ernst & Young: Could you give us a understanding of the risk-reward nature of brief update on the state of the Indian drug innovation, and the regulatory system “With the reform of the Patents biotech industry? was never challenged with having to Act in 2005, India fully enforces regulate new drug innovation, especially in product patents. This has the early stages, where the risk is highest. Bhan: The Indian biotech industry is inspired many Indian companies spread over several sectors, including With the reform of the Patents Act in 2005, to go the innovation route, but healthcare, agricultural biotechnology, India fully enforces product patents. This the industry lacks sufficient risk contract services, bioinformatics and has inspired many Indian companies to capital to fund this increase in others. According to the 2008 go the innovation route, but the industry R&D. The Indian government ABLE-BioSpectrum survey, the industry lacks sufficient risk capital to fund this has responded with a host of is growing at an impressive annual growth increase in R&D. The Indian government rate of about 20%. A large chunk of this has responded with a host of programs to programs to fill the gap.” activity is in generics, contract services fill the gap. A new government program, in the early stages of drug discovery, the Biotechnology Industry Partnership clinical development, and manufacturing Program, specifically recognizes this the various agencies currently charged of clinical supplies. However, we are seeing aspect and provides funds for industry to with regulating the industry — the Genetic that several Indian companies are now undertake high-risk research. It provides Engineering Approval Committee, the engaging in product innovation and are support in the form of grants and soft loans Review Committee on Genetic Manipulation developing their own novel molecules. to innovative projects within companies, and the Drugs Controller General of To support this core biotech space, the both at early stages as well as late-stage India — have also improved and streamlined National Biotechnology Development clinical trials. their procedures. A recently approved Strategy has been implemented by the National Science and Engineering Similarly, the Pharma Fund supports Department of Biotechnology. Board will become operational in April innovation at companies, while the New 2009 to give a boost to science and Millennium Indian Technology Leadership technology. The majority of commitments Ernst & Young: What role is the Initiative program assists public-private made in the National Biotechnology government playing in boosting partnerships. The government has Development Strategy have already the Indian biotech industry? What provided early-stage funding through been included in budgetary allocations, measures are you taking to spur the Small Business Innovation Research resulting in a nearly five-fold increase innovation and develop a supportive Initiative — a measure that has been in the biotech budget in India’s Eleventh regulatory structure? well received and has initiated industry Five-Year Plan — one-third of which will be platforms in biopharmaceuticals, focused on industry innovation. Bhan: Indian companies have traditionally vaccines, cell therapy and agricultural been risk averse when it comes to new biotechnology. The Union Cabinet has product development. To a large extent, approved a bill for the public funding of Ernst & Young: What potential this has resulted from the Patents Act R&D to boost innovation and technology risks or challenges could the global of 1970, which did not provide patent transfer; the bill has since been introduced financial crisis produce for Indian protection for products (the act instead in the parliament. biopharmaceutical companies? What protected the process used to make In addition to funding, the government potential opportunities could it produce? a product). As a result, there was no is actively developing a supportive incentive to develop new products and India regulatory framework. The National Bhan: The global economic crisis has did not develop considerable skills in the Biotechnology Regulatory Authority is the potential to create both positive and area of innovation. This was visible not only close to receiving final endorsement — this negative impacts for India’s biotechnology in the scientific arena but also in the areas would create, for the first time, a single industry. Though small, the Indian biotech of finance and government regulation. regulatory body overseeing all aspects sector is integrated into the global industry, Indian bankers never developed a deep of biotech drug regulation. Meanwhile, with nearly two-thirds of its revenues

108 Beyond borders Global biotechnology report 2009 coming from exports of products and infrastructure and expertise to cater to services. In the short term, there could be surging demand over the next few years. “The willingness to learn is an some decline in export orders for India’s inherently Indian trait, and biotech products due to liquidity constraints Ernst & Young: In the current climate, India is a changing country. in importing countries. In addition, the many Western companies will need new To Western companies majority of Indian products are imported models for funding R&D, structuring considering India, I would by a number of multilateral agencies, strategic transactions and approaching which could delay placing new orders in the say: don’t let yesterday’s commercialization and pricing. But current environment. perceptions cloud your Indian firms have often followed a assessment of today’s However, as organizations in the West different path over the years, driven changing realities.” adjust to the recession, there could be new by market conditions that are different opportunities for Indian firms. As Western from those in the West. What lessons, firms move to reduce their costs, they if any, could Western firms learn from demands of Western organizations, by are more likely to turn to Indian biotech their Indian counterparts? upgrading their infrastructure, adhering companies to source their products. to timelines, attracting and retaining Multilateral agencies may place more Bhan: In both geographies, the top-quality human resources and orders with Indian companies to cover business models that have evolved have maintaining global quality standards more patients with limited resources at a been driven primarily by the macro with government support. A few dozen time when fundraising and endowments environment — financial backing, legislation, Indian biopharmaceutical companies are down. Outsourcing of a number regulatory frameworks and other factors. have started to look at the industry from of activities in the drug-development Whether or not companies in India and the a new perspective and are investing value chain to Indian companies may West can learn lessons from each other, the heavily in innovation. These organizations also accelerate in the next few years. important question is really how they can have excellent human resources, India’s contract research organizations capitalize on each other’s strengths in the are run by people who have worked are anticipating increased business, current situation. If we can all do that, we extensively in Western markets, are and we are likely to see them upgrade would be better equipped to face today’s highly quality-conscious and are open to tremendous challenges in ways that provide collaborating with the best in the world. affordable healthcare for patients around “Whether or not companies in the world. Western companies should take a close India and the West can learn look at the facilities of these Indian firms and engage them at a deeper level to lessons from each other, the Ernst & Young: What advice would you understand their immense capabilities for important question is really give Western biotech companies looking partnership in a variety of segments. The how they can capitalize on at opportunities in India? What sorts of willingness to learn is an inherently Indian creative approaches and thinking will each other’s strengths in the trait, and India is a changing country. Indian and Western firms need? To Western companies considering current situation. If we can all India, I would say: don’t let yesterday’s do that, we would be better Bhan: It is our view that India offers perceptions cloud your assessment of equipped to face today’s Western companies highly competitive, today’s changing realities. cost-effective alternatives for research tremendous challenges in and manufacturing work. But for the ways that provide affordable partnership to evolve further, both sides will healthcare for patients need to think progressively. around the world.” Indian institutions will need to make sure they are geared to meet the

109 Australia year in review Haves and have-nots

After a strong financial performance stage and continue to enjoy support (US$11.5 million) respectively. “Other” in 2007, the Australian biotechnology from venture-capital backers. After financings — including private placements, industry has been hit hard with funding these two groups, however, come rights issues and convertible debt — were challenges caused by the global the have-nots — companies that were primarily small, with most transactions economic crisis. However, financial compelled to go public prematurely under A$2 million (US$1.79 million). performance remained strong — largely because of a lack of venture capital, and Unfortunately, this lack of access to because of product sales at CSL — and which often continue to struggle. The capital was exacerbated in May 2008 the sector’s pipeline looks very robust, Australian Stock Exchange (ASX) has when the Australian federal government with a sizeable group of companies traditionally been used for early-stage terminated the Commercial Ready approaching commercialization. financing by relatively immature Grant Scheme, a program that used to companies, and more than 70% of IPOs provide direct financial assistance to over the last six years raised less than Financial performance both private and publicly listed biotech A$10 million (US$8.9 million) each. At companies on a “one dollar for every The financial performance of the the other end of the spectrum, more than two dollars spent” basis. Bioshares, Australian biotech sector continued to half of the follow-on capital raised over Australia’s leading independent biotech improve steadily in 2008 — revenues grew this same period went to the 15 largest investment stock report, estimates that 26% relative to 2007 and R&D increased drug-development companies. this program and two other programs by 32%. The industry also continued to The financing totals for the year, as in that it replaced together invested remain profitable in aggregate, with both most parts of the world, were down. The over A$300 million (US$268 million) Celletis and Cogstate joining the growing IPO market was essentially closed, with in the life sciences industry between list of profitable biotech companies. only two IPOs getting off the ground. 1996 and 2008. With commercial As in prior years, however, the financial Meanwhile, funds raised in the “follow-on funding essentially dried up, the federal performance of the industry was driven and other” category fell sharply. These government’s timing could not have by the largest firm, CSL, which posted funds, which tend to significantly exceed been worse. Continued public-sector a profit of A$702 million (US$626 capital raised through IPOs, fell from a funding could have allowed many million) on revenues of A$3.6 billion record-breaking A$483 million (US$380 companies to sustain their R&D activities (US$3.2 billion), a 30% increase from million) in 2007 to A$112 million and ultimately improve their ability to 2007. This gain, which was tempered by (US$99.8 million) in 2008. Follow-on attract commercial investment when the negative foreign-exchange swings, was funding plummeted to levels not seen markets open up. due primarily to the continuing demand since 2002, and consisted primarily of With government grant money for CSL’s plasma products as well as small financings — notable exceptions unavailable and the window to the public increasing royalties from Gardasil, its were Peplin, which raised A$27.1 million markets firmly closed, there is added cervical cancer vaccine. While CSL’s (US$24.0 million), and Chemgenex and pressure for private companies that market capitalization increased only Neuren, which raised about A$12.9 million 4% to A$20 billion (US$17.9 billion) at year-end, this is in stark contrast to the rest of the sector, which lost 57% of its Australian biotechnology at a glance market value in 2008. Public company data 2008 2007 % change Revenues (US$m) 3,602 2,857 26% Financing trends R&D expense (US$m) 499 377 32% Australia’s publicly traded biotech Net income (US$m) 134 102 31% companies are divided into haves and Number of employees 10,480 9,770 7% have-nots. At the top of the list are Market capitalization (US$m) 21,519 21,450 0% companies with advanced pipelines Total assets (US$m) 6,541 5,431 20% and solid financing, followed by firms that raised venture funding at an early Number of public companies 84 85 -1% Source: Ernst & Young analysis of company financial statement data

110 Beyond borders Global biotechnology report 2009 would previously have turned to the ASX Australian biotech public equity raised, 2002–08 to raise early-stage capital. Times will Follow-on offerings IPO Number of transactions also be challenging for listed companies that did not tap the markets for follow-on A$m 700 70 financing over the last few years while money was comparably easy to raise. 600 60 In spite of the challenging markets, a pair of venture-capital firms (VCs) managed 500 50 to close funds during 2008. Starfish Ventures closed a A$185 million (US$165 400 40 million) fund for investment in cleantech, information technology and life sciences, 300 30 and GBS Ventures closed a A$100million (US$89.3 million) fund dedicated to life 200 20 sciences. However, VCs that did not close 100 10 funds in the past few years and need to go back to raise new funds in 2009 will 0 0 likely find it very difficult. This, coupled 2002 2003 2004 2005 2006 2007 2008 with VCs’ need to focus relatively limited Source: Ernst & Young, Bioshares and company annual reports uncommitted capital on sustaining existing portfolio companies, will make raising venture capital challenging for for medical products derived from human an exit, will allow Sigma to diversify its many biotechs. plasma. Privately held Talecris — which interests and expand in certain niche had been purchased from Germany’s specialty pharmaceuticals markets. Also Exits have become more difficult as well. Bayer in 2005 by US-based venture fund in February, Progen Pharmaceuticals Data collected by the Australian Private Ampersand Ventures and private-equity acquired privately held US oncology Equity & Venture Capital Association shows firm Cerberus Capital Management — had firm CellGate. The transaction expanded that only 16 exits occurred in 2007–08, initially tried to go public in 2007 before Progen’s pipeline in oncology, and Progen in contrast to 44 in 2006–07. CM Capital, agreeing to be acquired a year later. The gained platform technologies in the areas a leading Australian venture fund, noted deal would give CSL greater access to the of epigenetics and polyamines that will that several Australian venture-backed North American and European markets form the foundation for new compound biotech companies are now close to market while giving Talecris a reliable supply of development. Progen issued new shares and could become profitable relatively products for its customers and helping worth A$1.7 million (US$1.5 million) and soon. This could, in turn, boost investor it build its plasma supply platform in a assumed CellGate’s net liabilities of A$1.1 sentiment toward the sector and permit measured, quality-compliant way. As this million (US$1 million). The deal also VCs to exit their investments and return to publication goes to press, the deal has not includes additional earn-out payments fund new companies. yet been approved by regulators, and the totaling up to A$21.8 million (US$19.5 companies are complying with requests million) if certain clinical and regulatory Deals for additional information from the US milestones are achieved. Federal Trade Commission. The biggest M&A transaction of 2008 At a time when cash is king and many was the one that was not completed (at Other significant deals include Sigma companies are finding it difficult to least not yet.) In August, Australian giant Pharmaceuticals’ acquisition of privately raise capital for their long-term needs, CSL announced an agreement to acquire held specialty pharmaceuticals company activist shareholders in some US biotech US-based Talecris Biotherapeutics for Orphan Holdings for A$130 million companies have started to demand that A$3.5 billion (US$3.1 billion) in cash. The (US$116 million) in cash in February companies with failed clinical trials return merger seeks to combine the second- and 2008. The deal, which gave existing their remaining capital instead of funding third-largest firms in the global market owners such as AMP Capital Investors more R&D. These trends were mirrored

111 in the failed merger between Progen and early-stage R&D programs for at least incentives tied to the number of start-ups Avexa. Avexa, a company with Phase the short term to concentrate on their they generate rather than the quality III HIV studies in progress, intended lead drug candidates and reduce cash of those companies. Consequently, the to merge with Progen, a well-financed burn. Alchemia initiated a broad program industry has a large number of companies oncology company with over A$70 million of cost-reduction measures to maintain formed around a single compound (US$62.5 million) in cash and a failed sufficient capital for near-term projects rather than a complimentary group of Phase III trial. However, a block of Progen until revenues from its lead product, compounds, resulting in a larger group of shareholders, attracted by the company’s fondaparinux, begin. These steps included companies competing for the same small healthy cash balance, sought a larger suspending several projects, reducing pool of funds. return of capital than the A$20 million headcount by 60% and restructuring the Australia’s biotech funding model — both (US$18 million) proposed in the Avexa board of directors. Cytopia took similar private and public investment — has merger. To mollify these shareholders, steps by capping staff, trimming expenses historically been based on “drip feed” Progen announced a A$40 million (US$36 and focusing on later-stage trials. financing that gives firms small injections million) voluntary share buyback at a Circadian Technologies, a long-standing of capital to fund operations for 6–12 price of A$1.10 (US$0.96) per share. investor in biotech companies, sold many months to avoid shareholder dilution. Before this plan could proceed however, of its shareholdings and refocused its Unfortunately, this also forces companies the board was required to face another business model to become a developer of to run very lean operations, which general meeting, this time instigated by anticancer drugs. The refocus has given prolongs product-development times, the Cytopia Shareholder Group where the Circadian more than three years’ worth makes retaining high-quality management shareholders were asked to vote on the of cash. Others were not as lucky. Apollo challenging and — in difficult economic removal of all current board members and Life Sciences and Chemeq appointed times — creates a real risk of insolvency. the appointment of three new directors. administrators to initiate bankruptcy Australian companies have traditionally The Cytopia Shareholder Group indicated proceedings, and Diversa Limited exited resisted consolidation, whether for that the new board, if elected, would the biotech space after acquiring a retail reasons of board/management egos or implement a share buyback and consider a superannuation (pension) fund. shareholder dilution. In addition, they merger of Progen with Cytopia Limited (an Of course, the challenging circumstances have often avoided making the difficult ASX-listed biotech company), a deal that will also likely produce an uptick in decisions to terminate projects that fail had already been rejected by the Progen acquisitions as companies consolidate to to meet milestones or have questionable board in favor of the Avexa transaction. survive or are taken out by competitors. commercial viability. The shareholders voted against the Unfortunately, many of these appointment of the Cytopia Shareholder These factors have contributed to the transactions will happen at distressed Group nominees. However, they also voted quandary facing many public and private valuations and unattractive terms. In out four of the six Progen directors. The companies today. More than 52% of an ideal world, M&A deals would be remaining Progen board members are now listed companies have a market cap initiated to achieve cost efficiencies and focused on rebuilding the company and under A$10 million (US$8.9 million), clinical effectiveness, secure top-notch implementing the previously announced and about 36% of companies have less management teams and deepen A$40 million (US$36 million) voluntary than six months of cash left. Many of pipelines, while financing transactions share buy-back. these companies could have benefited would happen at optimal pricing when from consolidation prior to going public, capital was not necessarily needed. making them more attractive to investors. The need for sustainable models While the global economic crisis was As such, they might have raised venture The daunting financing environment created by factors far beyond the control capital, giving them access to a wider, raises questions about sustainability — not of Australian biotech companies — it more sophisticated, shareholder base. just for individual companies struggling had its genesis half a world away, in There are lessons in all of this that could to survive, but also for the Australian US subprime mortgage markets — the help build a strong, sustainable biotech biotech sector as a whole. Australian sector’s long-standing models industry after the downturn is over. The for company formation and financing As of December 2008, approximately sector needs to restructure university have left firms ill-equipped to withstand 36% of listed biotech companies had incentives and focus on cutting-edge, these challenges. less than six months of cash on hand, up readily commercializable technologies. from 13% a year earlier. Not surprisingly, The problem begins with how new Companies should not be built around this has led to corporate restructuring start-ups are formed. Most Australian single products, which should help them initiatives. Many companies are shelving universities and research institutions have raise adequate funding and make them

112 Beyond borders Global biotechnology report 2009 more resilient. When needed, companies such as these that Australia will develop trials, including Chemgenex, Pharmaxis, must make the tough decisions to a truly successful and sustainable biotech Acrux, Alchemia, Peplin, Clinuvel, Avexa, terminate projects that do not show industry that can provide consistent Halcygen and QRxPharma. Certainly, the early commercial viability. Building a financial returns to patient shareholders. odds are that not all of these trials will sustainable industry is not about avoiding succeed. The year 2008 brought two shareholder dilution at all costs. It is disappointments. Progen announced the Promising pipelines about ensuring that the company and the termination of its pivotal Phase III clinical technology are as well funded as possible The good news on the sustainability trial in liver cancer in July 2008, and to either reach commercialization quickly front is that a number of prominent Neuren announced the failure of its Phase or demonstrate sufficient value to attract Australian companies are currently in or III trial of Glypromate to reduce cognitive a licensor. It is only through measures getting ready to launch pivotal Phase III impairment in patients undergoing cardiac surgery with cardiopulmonary bypass. While such setbacks are inevitable in the high-risk endeavor that is drug Will Australian biotech wean itself off the “drip-feed” model? R&D, if several of the leading companies in late-stage trials receive positive results in the months ahead, it could rekindle investor interest in the sector.

Looking ahead In the current risk-averse and Small capital capital-constrained financing environment, the chasm between the injections haves and have-nots is widening, and not everyone will have access to capital. Early-stage funding will be limited. Investors will instead continue to fund Talent-retention lower-risk companies that are on the cusp of commercialization. Unfortunately, challenges companies approaching Phase II trials and in need of significant capital injections may also find few good options. Many companies will not survive the downturn, Lean and we expect significant consolidation to operations leave us with fewer companies. Still, if this proves to be a Darwinian moment for the industry, companies that do survive are likely to emerge stronger Prolonged on the other side. The Australian biotech industry has yet to experience sustained development times commercial success from a broad group of profitable firms. If many of the sizeable cohort of companies in late-stage trials can successfully bring new products to Insolvency risk market, the sector will gain much-needed momentum. And if biotech firms and in downturns their investors are willing to develop new models for company formation, R&D and financing, the sector could gain not just strength but sustainability.

113 India year in review Nurturing growth

India’s biotechnology industry has grown National Biotechnology Regulatory sector in general. The government is rapidly in recent years. Patent reforms Authority (NBRA), to provide a consistent also planning to relax its ban on carrying have exposed domestic companies mechanism for regulatory approvals. out early-stage clinical trials for drugs to foreign competition and spurred developed outside India. In July 2008, India’s Department innovation. Western companies, attracted of Biotechnology (DBT) drafted new All these steps are likely to attract more by a large base of skilled manpower and legislation, the National Biotechnology investments in India from the major lower-cost research, have boosted the local Regulatory Act, which would establish pharmaceutical and biotechnology contract-services industry. And supportive and empower the NBRA. The latter innovators across the globe. For example, government officials are responding with would have the authority to approve Merck is planning to initiate clinical trials reforms to encourage innovation and genetically modified (GM) crops, food, of its cervical vaccine Gardasil in India and streamline regulations. (For more details, recombinant biologics such as DNA, has sought approval from the DCGI for this refer to “Changing realities,” our interview vaccines, recombinant gene therapy trial to be conducted in four major Indian with Dr. M.K. Bhan, Secretary to the products, and recombinant and institutes over a period of three years. Government of India, Department transgenic plasma-derived products such of Biotechnology.) as clotting factors, veterinary biologics Growing clusters and biotech parks These trends continued over the last year. and industrial products. The DCGI Regulators have been quick to anticipate would still retain the rights to approve Domestic biotechnology companies the huge potential of India’s biotech recombinant therapeutic proteins. such as Bharat Biotech and Biological industry. In late 2007, the government E have announced large investments While the new legislation would approved the National Biotechnology in biotechnology parks to be set up in consolidate biotech regulations and Development Strategy (NBDS), which partnership with state governments improve the business environment for aimed to strengthen the industry’s or major corporate conglomerates. both domestic and global players, the human resources and infrastructure while Various state governments, such those proposed bill faces stiff opposition, promoting growth and trade. To further of Karnataka, Orissa, Assam, Kerala and especially from the anti-GM-crop lobby. support the NBDS, the Indian government Andhra Pradesh, have announced new Nevertheless, the reforms are widely has allocated Rs18 billion (US$351 proposals for setting up biotechnology regarded as a breakthrough in advancing million) for biotech R&D in fiscal year parks and Special Economic Zones. India’s global position in biotech. 2009. This forms about 30% of the total While India’s biotech sector continues to budget allocation for this sector. Furthermore, the government of India is show strong growth and attract interest planning to upgrade the DBT to the status from Western companies, the field of of a separate ministry, in recognition of biotech parks has certainly become Moving toward standardized approvals biotech’s emergence as a thriving sector. more crowded, and park developers and Most significant is the development of prospective tenants will need to focus on far-reaching legislation to standardize differentiating offerings to stand out in regulatory approvals. Currently, the Improved monitoring of clinical trials the crowd. (For more information, see authority to approve biotech products India’s growing clinical-trials industry “A closer look” on the next page.) rests with various agencies: the Review is also moving toward a streamlined Mounting interest and investments in Committee on Genetic Manipulation, regulatory set-up. On the agenda are biotech have given rise to many new the Genetic Engineering Approval guidelines for better monitoring of biotech clusters in India. Bangalore has Committee and the Drugs Controller clinical trials conducted in India. A emerged as a leader in this trend, with General of India (DCGI). Ad hoc newly launched clinical-trials registry around 200 diverse companies present in committees are also convened on a and a plan to introduce e-governance the area. Other cities, including Hyderabad, case-by-case basis, resulting in a lack for clinical trials — including fingerprint Chennai, Pune and Mumbai, also have of uniformity. Consequently, the NBDS mapping — of volunteers by 2013 is materialized as preferred destinations to proposed to establish an independent expected to boost clinical-research set up new biotech facilities. and autonomous statutory body, the outsourcing and the health sciences

114 Beyond borders Global biotechnology report 2009 A closer look If you build it, will they come? Deals

A number of Indian companies entered deals Biotech parks have played a prominent role in providing specialized infrastructure with foreign biotech companies. Continuing a for India’s growing biotech industry. India’s first “knowledge” park, focused primarily trend seen in recent years, domestic players on R&D, was the Hyderabad-based ICICI Knowledge Park, set up in 2000. The were active in grabbing new opportunities country’s first biotech-specific park, S.P. Biotech Park, was established soon after in arising out of Western markets, especially close proximity to ICICI Knowledge Park. Since then, a number of parks have sprung for generic biotechnology products. In up across the country, with the aim of attracting biotech companies and boosting the past year, Indian biotech companies emerging clusters. increasingly focused on investing in The early biotech parks covered a broad swath of activities, servicing companies Western companies to strengthen their across the value chain. But over the last two years, new generations of parks have research capabilities and develop a tried to differentiate themselves by focusing on niche segments within the biotech foothold in US and European markets. sector, including agricultural biotech, marine biotech and nanobiotechnology. And India’s largest biotechnology company, while government support was initially instrumental in creating parks, many of the Biocon, and another big player, Panacea, recent developments are being backed by private infrastructure developers. acquired stakes in Western companies With growing competition from a larger group of parks and the onset of a global to strengthen their distribution base in economic downturn, these facilities could face more challenges in attracting the these markets. By acquiring Etna Biotech, right kinds of tenants. As a result, it is even more important for the parks to create a subsidiary of Dutch pharmaceutical differentiated offerings, as some have begun to do, through measures such as: company Crucell, India’s Cadila • Arrangements with investment banks for seed and development funding Pharmaceuticals expects to obtain a research platform to develop new vaccines • Stepped rentals that grow with the maturity of the enterprise and biologicals. Etna is focused on the • Arrangements with equipment manufacturers to provide pooled equipment at research and development of vaccines affordable costs for hepatitis, using the virosome vaccine technology platform, and for malaria • Collaborations with universities for internships and HPV, using the measles technology • Focusing on building all elements of the value chain, even if it means bringing in platform. With the aim of enhancing key anchor tenants across the value chain at differentiated rates its core biotech capabilities, contract research and manufacturing services As Western companies consider setting up Indian operations to cut costs, India’s provider Intas Biopharmaceuticals parks could benefit. But as they select the right parks for their needs, companies acquired California-based Biologics will need to consider a number of factors, including: Process Development. • The amount of area available for future growth The year also saw several noteworthy • The existence of centers of learning, universities and research institutions developments on the strategic-alliance • Access to clients and customers and proximity to international airports front. In June, US-based Itero Biopharmaceuticals entered into a • Proximity to regulatory agencies and ease of obtaining regulatory clearances, partnership with Biological E concurrent especially from an environmental perspective to raising US$21 million in a first-round • The existence of other stakeholders in the value chain venture financing to develop and commercialize biopharmaceuticals. • Whether local governing institutions are business-friendly Under the terms of the agreement, Itero • The vibrancy and responsiveness of local industry associations will finance drug development, while Biological E will be responsible for global If sales will be predominantly exports, companies should also consider setting up manufacturing of resultant products. facilities in tax-advantaged Special Economic Zones. Itero retains commercial rights in the

115 Indian biotechnology venture and private-equity funding, 2006­–08 So far, it is not clear what impact the global financial crisis will have on the Amount raised (US$m) Number of deals Indian biotech sector. In the short run at US$m Number of deals least, many Indian companies could see 140 10 new opportunities as Western firms seek 9 to lower costs by shifting operations and 120 activities to emerging markets. Indian 8 companies, which have been vigorously 100 7 acquiring Western firms, are likely to

6 actively seek undervalued assets in 80 the current environment. Many Indian 5 firms also see opportunities in the 60 4 healthcare-reform debate in the United States, particularly from the prospect of 3 40 increased coverage and the emergence of 2 a market for biosimilars. 20 1 There are certainly risks. In the immediate

0 0 term, there is the issue of exchange-rate 2006 2007 2008 risk. The rupee devalued significantly in Source: Ernst & Young 2008 — good news for Western companies looking to outsource activities to India, US, Europe and Japan, while Biological the interview with Dr. M.K. Bhan for a but making Indian companies’ efforts to E will have rights in all other markets. discussion of some of these programs). expand overseas more costly. And while Biological E also signed a development Encouragingly, private-sector funding the economic slowdown in the West agreement with US-based Heparinex from venture capitalists, private equity may create new opportunities for Indian and Choncept to produce heparin- and and banks has also been increasing in companies in the immediate future, chondroitin-based compounds. recent years. In 2008, the Indian industry things could conceivably change if the raised over US$120 million, up sharply financial crisis devolves into a prolonged India’s Jubiliant Biosys, a subsidiary of from the prior year. Sources of funding and deep recession. For instance, the Jubiliant Organosys, inked a deal with included not only Indian government shelving of a large number of drugs in biotechnology giant Amgen to carry out and private funds and banks but also a development because Western companies preclinical studies of drugs discovered number of US venture funds which have are focusing on their most important by Amgen. Amgen will take over the made inroads into the Indian market. As pipeline candidates — or worse, going compounds once they reach late-stage biotech companies around the world reel out of business — could hurt clinical-trials preclinical and clinical development, and from the impact of the financial crisis, work in India. And job losses and slower will retain marketing rights. Genzyme time will tell whether these trends will be income growth around the world could Corporation formed an alliance with two sustained in 2009. mean reduced opportunities for Indian Indian organizations, Advinus Therapeutics companies looking to tap Western markets and the International Centre for Genetic as well as a change in Western companies’ Engineering and Biotechnology, to develop Outlook: poised for growth? perceptions of the growth potential of the antimalarial medicines. India’s biotech sector remains poised Indian market. for growth, spurred by increased For the time being, though, these Financing competition, a focus on developing second- and third-order effects are innovative drugs and the prospect of India does not have a pool of venture relatively distant. While Indian firms will growing markets at home and in the capital sufficient for the needs of its need to monitor these developments and West. Governmental efforts to reform the relatively new, rapidly growing biotech include comprehensive risk assessments regulatory regime and provide supportive industry. In recent years, the government in their plans and strategies, many infrastructure and funding should help has stepped in with a number of companies are gearing for increased address some of the gaps and challenges funding programs to foster R&D. (See activity in the months ahead. confronting the sector.

116 Beyond borders Global biotechnology report 2009 China year in review On the road to innovation

While the Chinese economy has been biotechs). Despite increased wages in a mix of CROs, active pharmaceutical impacted by the global financial crisis, the larger commercial cities, there are ingredient (API) manufacturers, distribution the prognosis for China’s biotech industry significant cost advantages to conducting companies, research-tool companies, may not be as grim as in Western preclinical development and clinical trials traditional Chinese medicine (TCM) firms, markets. In the current environment, in China, which should drive growth in specialty-pharmaceutical companies and China could be an increasingly viable outsourcing to the multitude of Chinese novel-drug developers. Investors active development partner for Western firms contract research organizations (CROs) in China continue to favor companies that are looking to reduce budgets and and other service providers. China’s with existing or very near-term revenue eliminate fixed costs. Meanwhile, as increased openness to global business, streams. However, as the industry matures, the Chinese industry tries to increase an enlarging pool of qualified researchers the expectation is that earlier-stage its presence in the development of and clinicians, and improvements to innovative technologies will draw interest. innovative products, it is increasingly intellectual property and product safety Companies that raised venture capital in turning to deals and benefiting from regimes may further help China’s biotech 2008 included NovaMed Pharmaceuticals, government attempts to reform. during the current economic turmoil. which secured US$14 million from Atlas Ventures and Fidelity Asia Ventures. The global financial crisis Financing NovaMed, based in Shanghai, provides a range of services from clinical development China was not spared the impact of the The venture-capital community investing through distribution. Also attracting capital chain of events that began in the US in China is still relatively small, and sums from Western investors was API supplier financial markets and rippled to every raised are modest compared to those in Futaste Pharmaceutical, which raised funds corner of the globe. The ChinaBio Stock the more mature markets of the West. from 3i Group. Taking the international Index, which is comprised of 15 US-listed Investments in 2008 were made by a angle one step further was ProGenTech, biopharmaceutical companies, declined handful of local firms as well as established which is based in both Emeryville, 57% during 2008, after rising 70% in 2007. Western players, and recipients included California, and Shanghai. The company The IPO market slowed significantly as well, both for domestic new issues and for listings in the West. In 2008, overseas-listed Chinese biotech companies fell along with broader market indices

Despite the financial market turmoil, Nasdaq Hang Seng SSE Composite ChinaBio Today Index China has cause to remain optimistic. Stimulus activities on the part of the +20% Chinese government, a key investor in the life sciences industry, could give 0% biotech and pharmaceutical concerns enough of a boost to sustain growth. A burgeoning middle class with greater -20% access to medical care is also driving revenue growth for domestic and multinational companies. -40% China is also positioned to be part of the solution for companies in the West that -60% wish to continue to innovate and advance their pipelines but must trim costs either due to expected revenue declines -80% (many pharmaceutical companies) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan or to extend capital resources (many Source: Ernst & Young, finance.yahoo.com and ChinaBio Today

117 secured US$21 million to further the Deals and infrastructure investments In March, it announced that the State Food development of its automated nucleic acid and Drug Administration (SFDA) would be Chinese firms continued to seek deals, purification system from US-based Bay City moved back under the Ministry of Health to both with other domestic firms as well as Capital and China-based DT Capital. improve overall efficiency and oversight. with companies beyond Chinese borders. While several Chinese healthcare Much of the activity occurred in the first Despite these reform measures, two companies have successfully completed half of the year, prior to the full impact of high-profile scandals arose. One IPOs in the West in recent years, there the financial crisis. issue that gained international media were no new market debuts outside China attention was tainted infant formula that WuXi PharmaTech, which went public (including Hong Kong) in 2008. Mirroring reportedly stemmed from an industrial in the US in 2007, acquired AppTec venture investment trends, the companies chemical used to fool quality-control Laboratory Services for US$151 million. seeking to raise funds through public tests that measure milk protein. The AppTec is a contract testing, R&D and offerings are more mature than their other notable issue involved a tainted biologics services company based in St. IPO peers in the West, with significant supply of heparin, a widely prescribed Paul, Minnesota. WuXi, which announced infrastructure and product sales. anticoagulant distributed by Baxter plans to seek other acquisition targets, International, which resulted in However, there were still a few IPOs on had an active year of deal-making. The numerous adverse reactions and deaths. Chinese exchanges, including Jiangsu company also entered into a collaboration The heparin situation highlighted the Nhwa Pharmaceutical and Bloomage agreement with AstraZeneca, providing need for multinational companies to BioTechnology Corporation. Jiangsu Nhwa the pharmaceutical giant with compounds manage the increased risk of a global completed its IPO in July 2008, before for specific products. supply chain and the need for global the worst of the market turmoil, raising Simcere Pharmaceutical Corp., another regulatory cooperation. In response RMB 178 million (USD$25 million) on 2007 IPO, agreed to acquire a 70% stake to the heparin incident, the US FDA the Shanghai exchange. The company in Wuhu Zhong Ren Pharmaceutical announced the opening of China branch develops and distributes drugs for central Co., a producer of branded cancer offices. The China branches are tasked nervous system disorders. Bloomage drugs, for US$9.3 million. In October, with certifying third-party inspectors BioTechnology, which operates in China American Oriental Bioengineering and working with Chinese agencies to but is incorporated in the Cayman Islands, (AOBO) completed the acquisition of inspect US-bound products. manufactures hyaluronic acid used as pharmaceutical wholesaler and distributor an ingredient in various pharmaceutical Nuo Hua Investment Co. for US$39.5 and cosmetic products. The company Intellectual property million. AOBO also completed the successfully completed its IPO in Hong acquisition of R&D firm GuangXi HuiKe Critical to the development of Kong, raising HK$78 million (US$10 R&D Co. for US$13.6 million. innovative products is a strong million) in October. intellectual-property (IP) regime Western companies continued to invest In the absence of an IPO market, a reverse that recognizes and protects novel in infrastructure in China during 2008. merger into a publicly traded company has discoveries. China’s “third amendment” Genzyme committed to build a new R&D become a mainstream strategy in the West to its IP law, approved in December center in Beijing, and Charles River Labs in recent years. Kun Run Biotechnology 2008, institutes several reforms that announced that it would set up a new followed a similar strategy in its November are slated to go into effect in October good-laboratory-practice preclinical 2008 merger into Nevada-based 2009. Under the amendment, in order screening facility in Shanghai. US-based Aspen Racing Stables. Kun Run, which to file a patent, an idea must be not Crown Bioscience announced plans develops and sells polypeptide drugs, only new to China but new globally as to expand its CRO presence in China, now has access to US investors through well. The amendment also contains a and Toronto’s Microbix Biosystems an over-the-counter listing. provision concerning genetic material, announced a joint venture with the requiring that applicants who submit It remains to be seen whether the Hunan provincial government to build inventions that rely on genetic China market will sustain new issues in an influenza vaccine facility. resources must disclose their direct 2009 and when, if ever, a market for sources and prove that the material was innovative precommercial companies Product safety lawfully obtained. For the moment, the will emerge. In the meantime, such significance of this change is unknown; companies are wise to seek alternate After a steady stream of reforms geared its implications will depend largely on sources of revenue through collaboration at improving product safety in China, how the law works in practice and how it or service arrangements. the Chinese government continued its is interpreted over time. focus on product-safety issues in 2008.

118 Beyond borders Global biotechnology report 2009 Outlook Despite trying economic times, prospects for China’s biotech industry appear to remain positive. The Chinese government has made the development of scientific industries a major priority, and is investing heavily. By 2020, the government plans to invest 2.5% of GDP in R&D, up from 1.3% in 2005. The country is also implementing a series of healthcare reforms. This includes building more health clinics in rural areas, a zero markup policy on drugs prescribed by government hospitals and clinics and a goal of providing universal healthcare by 2020. Universal healthcare for a population as large as China’s would significantly expand the Chinese market, benefiting not only the fledgling Chinese biotech industry but multinationals as well. More and more Chinese citizens are gaining access to higher education. In recent years, China’s population of researchers has increased to 926,000 — placing it second behind the US. Every year, 40,000 Chinese students receive doctorates. In addition, the “sea turtles” — Chinese-born nationals who spent their early careers in Western countries and are now returning with advanced degrees and relevant industry experience — are boosting entrepreneurship and innovation. As Western companies grow more comfortable with offshore research and clinical development, China continues to enhance its infrastructure and the education and development of a skilled workforce. The focus on moving beyond generic drugs and services to developing innovative new products will need time to pay dividends, but given China’s infrastructural and educational commitment, and its market size, this transition could be significant in realizing China’s potential to introduce treatments for local, as well as global, medical needs.

119 Japan year in review Seeking investors, seeking innovation

While Japan is one of the world’s leading also valuable strategic and management for IPOs shrank dramatically — data from industrial powers, its biotechnology guidance based on years of experience the Venture Enterprise Center, created by industry has long lagged behind its operating and building similar companies. Japan’s Ministry of Economy, Trade and peers in the West. Traditionally, much And while public investment has ebbed Industry (METI), shows that the number of the biotech sector has been housed and flowed over the years, VCs have of companies that went public in 2008 within the walls of large pharmaceutical, generally remained steady investors in declined by 60% relative to 2007, while chemical, brewery and food companies, the biotech sector. the amount raised fell by more than 70%. and despite recent efforts to encourage Japanese VCs have not played a similar Despite these conditions, there were innovation, the country has had little role. Unlike VCs in the United States three biotech IPOs in 2008 — all of them success generating large numbers of and Europe, Japanese venture investors in the first four months of the year. start-ups or growing new commercial- tend to be far more hands-off. Many NanoCarrier, a company developing stage companies. Japanese VCs tend to be subsidiaries of technologies to deliver drugs directly to One reason for this is Japan’s regulatory banks or security companies and most cells using nanoparticles called micelles, and legal framework, which is often do not focus on biotech. In addition, went public on the Mothers Market in faulted for failing to encourage biotech the amount of capital provided is very March. The company’s offering priced innovation. To its credit, the Japanese small compared to venture investments at ¥20,000 (US$200), at the bottom government has been taking steps in in the West. According to JETRO (Japan of its range, and raised ¥600 million recent years to improve this and promote External Trade Organization), the average (US$6 million). Later that month, Carna the development of a globally competitive “A Round” biotech investment in Japan Biosciences listed on the Jasdaq’s NEO drug-development industry. In 2004, is about US$100,000–500,000 (¥10-50 market in a transaction that raised the government implemented extensive million), a small fraction of the size of a ¥957 million (US$9.57 million). In April, reforms in its university system, including similar financing in the West, and very R-Tech Ueno listed on Osaka’s Hercules rewriting intellectual property laws to small relative to the cost of bringing market for total proceeds of ¥670 million give universities increased incentives for a new product to market. With less (US$6.7 million). commercializing their research. Related access to the capital required for truly to these reforms, the government made innovative R&D, Japanese start-ups Deals start-up formation a key goal of its have often gravitated to activities biotechnology strategies. That same year, that are less capital-intensive and Japan’s big pharmaceutical companies three government organizations were lower-risk — but also offer less potential face pipeline productivity pressures merged to create a new regulatory body, upside. In addition, raising money in such similar to those faced by pharma the Pharmaceuticals and Medical Devices small tranches makes it difficult to build companies in the West, and they have Agency (PMDA), which is charged with the multi-disciplinary teams needed for responded with aggressive deal-making. streamlining, accelerating and increasing successful discovery and development. In 2005, the industry underwent a the transparency of the country’s drug wave of large-company mergers, akin In 2008, Japanese capital markets, like approval process. to the mega-merger activity currently those in most parts of the world, were occurring in the West. Since then, hit by the tsunami of the global financial Japan’s pharma companies have been crisis. The world’s second-largest economy Financing actively purchasing innovative assets shrank by 2.9% in 2008, and is forecasted A major reason for the lack of a vibrant to boost their pipelines and product to drop 4% in 2009 — its worst quarterly community of Japanese biotech start-ups offerings, frequently reaching beyond contraction in more than three decades, is the lack of venture capital. It’s no their borders to do so. exceeding even the stagnation seen secret that venture capitalists (VCs) have during the worst of Japan’s infamous “lost These trends continued in 2008. The played a vital role in the development of decade.” The Nikkei 225 Index lost 42%, year kicked off with Eisai’s acquisition of successful biotech clusters in the West. its worst performance ever. The market US-based MGI Pharma for US$3.9 billion VCs provide not just financial capital, but

120 Beyond borders Global biotechnology report 2009 (¥390 billion). The deal will serve to Daiichi Sankyo aggressively pursued of subjects in clinical trials conducted strengthen Eisai’s presence in oncology, expansion of its global footprint with outside Japan have hampered companies’ which is one of three major areas of focus two major deals. First, in May, Daiichi ability to use data from such trials when for the company. announced its purchase of a privately held seeking drug approvals in Japan. The German biotech, U3 Pharma, for €150 PMDA has attempted to change this In February, Takeda Pharmaceuticals million (US$234 million, ¥23.5 billion). situation by formalizing the requirements announced an exclusive collaboration The purchase gives Daiichi a pipeline of for acceptance of clinical trial data and under which Takeda will develop and novel antibody therapeutics focused on stating that multinational trials do not commercialize for the Japanese market various cancers. In June, the Japanese have any requirements regarding the up to 13 experimental therapies from firm increased its ownership stake in minimum number of Japanese subjects. Amgen’s pipeline in a deal that may be India’s largest generic pharmaceutical To increase efficiencies and facilitate worth over US$1 billion. In addition to company, Ranbaxy Laboratories, to nearly information sharing with major foreign the Japanese rights on these molecules, 64%. The deal expands Daiichi’s global regulatory agencies, the PMDA created Takeda gained worldwide rights to presence in the generics market. Ranbaxy the Office of International Programs another product by becoming Amgen’s continues to operate independently, with (OIP) in November. The OIP is tasked with worldwide partner for motesanib the CEO of Daiichi joining the company’s increasing Japan’s collaboration with diphosphate (AMG 706). In addition to board of directors. other countries on clinical trials. up-front and milestone payments, Takeda agreed to pay 60% of ongoing clinical A fourth Japanese pharma, Astellas, development expenses outside Japan was also active on the deals front. The Outlook for AMG 706 and split profits outside company signed deals with US-based Japan’s biotech and pharma companies Japan with Amgen. The deal helps CoMentis for up to US$760 million continue to wrestle with challenges they Amgen realize value from pipeline assets (¥76 billion) and with Maxygen for have faced for some time, but the global that are lower strategic priorities while up to US$180 million (¥18 billion). financial crisis has added pressure. helping fill Takeda’s pipeline with early In early 2009, the company made a For biotech companies operating in an to mid-stage clinical-stage candidates hostile takeover bid for US-based CV environment where capital has been less in the areas of oncology, inflammation Therapeutics, but was ultimately bested accessible than in the West, the search and pain. The deal also gave Takeda by US-based Gilead. for investors could become still more control of Amgen’s Japanese subsidiary, difficult as capital markets reel under the Amgen KK, which was relaunched as Regulatory reforms weight of the crisis. For companies of all Takeda Bio Development Center. In sizes, the challenge will be to focus on total, the deal has a potential value of The Japanese government continued developing innovative products. Japan’s more than US$1.1 billion (¥110 billion), efforts to reform its regulatory structure big pharma companies have been looking with a whopping US$300 million (¥30 in order to increase the competitiveness for innovation overseas in recent years. billion) exchanging hands in up-front of the Japanese drug industry. To speed The financial crisis, which has led the payments — among the largest up-fronts up drug approvals, which currently lag Japanese yen to strengthen against of the year. those in other parts of the world, the the US dollar and has resulted in the PMDA increased staff levels from 341 Takeda also entered a deal with US-based devaluation of assets in the West, could employees (206 of which were reviewers) Alnylam Pharmaceuticals that gave it bring new buying opportunities — and in fiscal year 2007 to 426 employees nonexclusive access to Alnylam’s platform. increased cross-border deal activity — for (277 reviewers) by the end of fiscal year The transaction, which has a potential Japan’s big pharma companies. 2008 (April). value of up to US$1 billion (¥100 billion), included an up-front payment of US$100 The agency also reformed regulations million (¥100 billion). covering clinical trials. In the past, restrictions regarding the ethnicity

121 New Zealand year in review Strong research and creative approaches

While New Zealand is considered an emerging market in the biotechnology A closer look industry, it is maturing in terms of its Attracting new investment: New Zealand’s new LP structure ability to work within its constraints. New Zealand-based companies are As of May 2008, New Zealand has a For overseas limited partners, there embracing creative approaches to limited-partnership (LP) regime. The may be no New Zealand tax obligations overcome traditional obstacles: LP regime was introduced following arising from an investment in an LP, geographic isolation, limited sources of lobbying from the venture-capital subject to the extent of business funding and a small domestic market. industry, and has been modeled on the activities of the LP. This, together with Delaware Limited Liability Partnership the absence of a capital-gains tax regime structure that is familiar to offshore in New Zealand, means the LP is an Venture funding: a perfect storm investors. The New Zealand LP provides attractive vehicle for overseas investors. A significant challenge facing the New for a separate legal identity for the The LP regime also allows for more Zealand biotech industry is access to partnership, limited-liability status tax-effective structures for angel capital. The sector has not received for limited partners and minimal investors than were previously funding from local public equity public-disclosure requirements. available, with angels being able to markets in the past, and has instead The tax treatment is similar to that access tax losses arising from their had to rely primarily on venture in other limited-partnership regimes: investments in LPs. capital to fund R&D. According to data partners are subject to tax or can Since the introduction of the LP regime, collected by Ernst & Young and the New access losses from the partnership we have already seen spinoffs from Zealand Venture Capital Association, in proportion to their capital established biotech companies looking the biotechnology/health sciences contributions. There are, however, to make use of the LP structure. In segment has attracted an impressive limitations on the levels of losses addition, a number of ventures have 52% of total venture-capital investment that can be utilized by New Zealand established new LPs as an investment over the last five years. limited partners for tax purposes, vehicle as well as a means of preserving and these are based on the level of Unfortunately, venture funding fell some benefit from historic tax losses the limited partners’ funds at stake sharply in 2008, due to the confluence that might be forfeited because of in the LP. of two setbacks. The first of these, not shareholder dilution. surprisingly, is the global financial crisis, which has had a dampening effect on biotech venture capital in most parts of match. Since the funds were all created during the year — leading to a decline the world. The crisis has made venture around the same time, they have reached in overall funding amounts. Funding capitalists (VCs) more risk-averse, forced the end of first vintage simultaneously. continues to be challenging, and this is venture-capital firms to allocate more They have been unable to demonstrate forcing New Zealand biotech companies funds to sustaining existing portfolio significant returns for their limited to increasingly look offshore for capital. companies and made it more challenging partners, which is further impeding Since companies raising seed capital will to close new funds. their fundraising, particularly in the need follow-on rounds to be sustainable, current environment. the lack of new venture funds could be an In New Zealand, the financial crisis hit ongoing challenge. precisely when VCs were going out As a result, there was a 75% reduction to raise new capital — an unfortunate in venture capital raised by the biotech coincidence that resulted from the funds’ sector in 2008. While the number of Government support deals remained roughly consistent with origins. New Zealand’s venture funds The biotechnology sector has been an prior years, there was a heavy skewing were mostly created several years ago, economic-development focus for the toward seed rounds — which represented spurred by a government program that New Zealand government for some time. a staggering 85% of the deals done provided a dollar-for-dollar public-money In November 2008, the newly elected

122 Beyond borders Global biotechnology report 2009 National-party government abolished For instance, KODE has formed R&D its proprietary bacteria-stabilization the recently introduced R&D tax-credit partnerships with firms such as CSL, technology. This will involve an regime. The credit would likely have Immucor and MediCult. KODE’s platform ongoing process of experimentation helped New Zealand biotech companies, is a novel range of synthetic molecules that is intended to develop EnCoate’s since firms in a tax-loss situation would which can harmlessly and accurately technology to the point where it can be have been eligible for the incentive. “paint” functional molecules onto licensed for production — an approach the surface of cells. Similarly, Living that the company thinks will accelerate The new government was concerned Cell Technology (LCT), a New Zealand the commercialization pathway. EnCoate that the credit would reward companies company listed on the Australian is developing its technology in the fields for their existing activities rather than Securities Exchange, has licensed its of probiotics, biocontrol agents and spur an increase in new R&D. To this end, patented encapsulation technology seed coatings. the government is calling for industry to a noncompeting partner to help to develop targeted solutions to boost fund ongoing trials. LCT is perfecting R&D investment, and companies are Outlook a treatment for a range of conditions actively engaged in a dialog to develop including diabetes, stroke and New Zealand companies are betting that an alternative. Developing a solution that Huntington’s disease. these creative approaches will make would provide appropriate incentives for them more competitive by bringing in R&D is critical. Developing innovative Emerging local companies such as revenues to fund R&D, accelerating drugs and technologies is an expensive, LanzaTech and KODE Biotech have also commercialization and providing access R&D-heavy undertaking, and companies utilized the new limited-partnership regime to European and US markets. If they will be challenged to finance these to facilitate investment. (See “A closer look” are successful, this could in turn spark activities at a time when funding sources on the previous page for more details.) increased interest from international are strained. Interestingly, because of Food technology company EnCoate’s investors. It is encouraging that new the timing of its repeal, companies will approach is to identify partners in legislation has made it easier for offshore still be able to claim the R&D credit in the food industry with which it will investors to invest in New Zealand. the 2008–09 income year — potentially codevelop commercial applications of providing some temporary relief in the current market environment.

Creative approaches While the New Zealand market is not an efficient market for commercialization, there is a wealth of intellectual property in the country’s research institutes, much of which may not currently be noticed by foreign companies. At the same time, the relative paucity of domestic funding is driving New Zealand firms to seek other sources of capital to achieve sustainability. In response, some domestic firms are outlicensing their technologies at an early stage to larger companies through noncompetitive partnerships, which provides New Zealand firms with funding and gives their partners early access to new technologies.

123 Singapore year in review Looking beyond borders

Singapore has had success attracting research services, announced plans to In October, S*BIO received US$26 million investment from Western biotechnology expand its presence. in venture capital funding to conduct and pharmaceutical companies and is human trials of two potential cancer drugs. On the biotechnology front, seven new a destination of choice in the region The financing round was led by Aravis, a biologics facilities are expected to open in for manufacturing operations and European venture firm with operations 2009, joining those opened in recent years headquarters because of its access to in Singapore. The company continued to by Genentech, Codexis, Novartis, Qiagen, talent, a modern healthcare system, make news on several fronts. In May, it GlaxoSmithKline, Lonza and others. sophisticated infrastructure and strong received orphan-drug status from the US regulatory framework. Like other Asian Food and Drug Administration for SB1518, economies, the country remains optimistic Local financing which is intended to treat a group of rare that cost-cutting in Western companies blood diseases known as myeloproliferative Singapore has established itself as a could create further outsourcing disorders (MPD). In January 2009, biotech center through significant and opportunities. However, with the growth S*BIO entered into a license and option strategic government investment over of other biotech outsourcing hubs in Asia, agreement with Onyx Pharmaceuticals for many years. This was evident in 2008, Singapore is also focused on innovation. SB1518 and a second product, SB1578. when the government announced the Under the terms of the agreement, S*BIO launch of a S$180 million (US$120 is eligible to receive up to US$550 million, million) research center to be shared by including an up-front payment and equity the National University Hospital and the purchase totaling US$25 million, plus National University of Singapore. The royalties. S*BIO will perform all the clinical facility is modeled after several that exist development activities for SB1518 and in the United States that house research preclinical to clinical development activities institutions near universities and for SB1578 during the option period. hospitals to foster collaboration. Onyx can elect to exercise its options for But given the significant sums necessary the products at predetermined stages to bring a biotech product candidate of development. In another example of from discovery to the market, the real carving up geographic rights to the benefit lifeblood of an entrepreneurial and of both partners, the Onyx option converts innovative biotech cluster is a vibrant (and into an exclusive license for development experienced) venture capital community. and commercialization in all indications in Singapore’s local venture community is the US, Canada and Europe, while S*BIO Inbound investment still quite small, so that companies must retains rights to develop and commercialize In October 2008, Eli Lilly opened look overseas for investments. Currently the products in the rest of the world. the city-state’s largest drug research these companies also have little access to facility. The company plans to spend additional capital through IPOs on a local S$150 million (US$100 million) on exchange. This situation is a significant Outlook the center over the next five years. In constraint for the goal of growing an By necessity, the Singapore economy has January 2009, Abbott Pharmaceuticals innovation-based industry. been built on trading and collaborating opened an R&D facility — its first in Asia. with others. It has been no different However, local companies did manage Schering-Plough expanded its presence for its biotech industry, which has to secure investment from funds based with a new multimillion-dollar R&D been very successful attracting capital overseas in 2008. Moleac raised US$3.5 facility in February 2009. At the time, and talent from around the world. To million in a first round in April from the company, which has since announced succeed in building companies focused Hunza Ventures and several private Asian plans to merge with Merck & Co., on discovering and developing novel and European investors. The company indicated it was also planning to open a products, however, local companies is currently developing NeuroAid, a Singapore-based translational medicine will need continued creativity to access traditional Chinese medicine marketed unit in the future. Finally, Quintiles, capital and expertise in the current in more than 30 countries, for use in the a global leader in outsourced clinical economic environment. recovery of stroke patients.

124 Beyond borders Global biotechnology report 2009 Acknowledgements

Project leadership A number of colleagues were instrumental Numerous contributors helped draft and in helping collect private company write “A closer look” text boxes, including Glen Giovannetti, Ernst & Young’s Global financial data, compile company lists Bruce Bouchard, David Johnson, Biotechnology Leader, provided overall and conduct follow-ups with survey Glen Giovannetti, John Babitt, Ron Xavier, strategic vision for this project and brought respondents, including Lisa Almen Michael Vukcevic and Utkarsh Palnitkar. his years of experience to the analysis of and Christian Trautner (Denmark), industry trends. Glen’s perspective and Russ Colton brought his incomparable Anne-Charlotte Bernard (France), insights helped define many of the themes skills as a copy editor and proofreader to Warren Singh and Ruth Flynn (Ireland), we explore in the book. Beyond leadership, this project. His patience, hard work and Keren Dahan (Israel), Enrico Ronchi and Glen brought a hands-on approach, careful attention to detail make this book Valentina Urbano (Italy), Christine Aardal writing articles and helping to compile and a richer product. Lisa Pease proofread the and Hege Urdahl (Norway), Jacob Hellman analyze data. report in layout. (Sweden) and Jörg Schmidt (Switzerland). Gautam Jaggi, Managing Editor of the The collection of private company data publication, directed the project, wrote Design and layout was based on a survey implemented by or edited all of the articles and managed Ulrike Trauth. This publication would not look the way it the data collection and analysis for the does without the creativity and hard work Canadian and Asia-Pacific sections. Eric Duhaime, Amir Hakakha, of John Fogarty and Heather McKinley. Gautam developed several new themes Jason Hillenbach, Susan Jones, As the lead designer, John was responsible and elements for this year’s book, Kim Medland, Mike Spencer and for managing and implementing the including the global introduction, and had Richard Yeghiayan helped with fact publication’s design and layout. As design responsibility for the entire content and checking and quality review of numbers consultant, Heather provided creative the quality of the publication. throughout the publication. advice and designed the special two-page Siegfried Bialojan, Germany Biotechnology We wish to thank Matthew Chervenak of spreads that grace this year’s report. Leader and Julia Schueler, Editor of the General Biologic for providing data on China. Oliver Voigt helped with layout and related European section, led and managed the marketing materials. development of the European section. Writing and editing assistance Their high-quality analysis of European Marketing and support data and deep understanding of the Andrew Jones led the writing and science and business trends in Europe were analysis for the European deals, Public relations efforts related to the invaluable in producing this book. financings and products articles. Andrew book and its launch were led by Mike contributed the “A closer look” text box Spencer along with Samantha Sims, on biosimilars, and this year’s report Morten Hussmann and Michelle Strategic direction has benefited from his knowledge of Wolf. The PR firm of Feinstein Kean Special thanks to Scott Morrison, European biotechnology trends. Healthcare served as an integral Jürg Zürcher and Chris Nolet, who partner, led by Dan Quinn, Greg Kelley Sue Carrington led the writing of the US continued to play a key role in the and Shelley Jazowski. Gautam Jaggi public policy article, and Scott Sarazen development of this publication, by conceptualized and composed the copy for led on the US products article. Country providing invaluable strategic insights advertisements for the book. overview articles were drafted and written based on their long experience and a feel by professionals in numerous countries, for the pulse of the industry. including Winna Brown (Australia), Rod Budd (Canada), Hitesh Sharma Data analysis (India), Utkarsh Palnitkar (India), Julia Schueler led the collection and Priya Pradeep (India), Gaurav Narang analysis of US and European data, (India), Mike Spencer (Japan), Jon Hooper assisted by Natalie Prib, Nadine (New Zealand) and Michael Vukcevic (New Rauh, Anne Scholz and Ulrike Trauth. Zealand). Stephanie Nickerson helped edit Nina Hahn, Eric Duhaime and some of the guest articles. Heath McKay Jimmy Zhong provided assistance with provided research and writing assistance. data collection and analysis. Rama Ramaswami helped edit the India article. 125 Data exhibit index

This is neither the industry’s first IPO drought, nor (so far) its longest 2 Enlight corporate structure 9 The year in financing: US, Europe and Canada 2007 and 2008 24 Global biotechnology at a glance in 2008 25 Growth in global biotechnology, 2007-08 27 In 2008, the biotech industry outperformed the market … 30 … but smaller companies fared considerably worse 30 Ernst & Young survival index 31 Quarterly breakdown of Americas biotechnology financings 31 Selected 2008 US biotechnology public company financial highlights by geographic area 32 US biotechnology at a glance 34 Genentech has accounted for an increasingly large share of US industry revenues … 35 … and the industry’s profitability will likely be very different after Genentech’s acquisition 35 The number of biotechs trading below cash ballooned … 36 … as more and more companies restructure to survive 36 US yearly biotechnology financings 48 US IPOs essentially dried up in 2008 ... 49 … and follow-on offerings disappeared in the fourth quarter ... 49 … but venture capital has not declined dramatically 49 Capital raised by leading US regions, 2008 50 Increased selectivity: venture investors gravitated toward later rounds in Q4 2008 51 The potential value of strategic alliances set a new record 53 Adjusted for megadeals, M&As reached new highs in 2008 54 Selected 2008 US biotech M&As 54 Lowered expectations? 2008 US public company acquisition premiums 55 Selected 2008 US biotech alliances 57 Funding for scientific research in the stimulus package 61 Selected US product approvals, 2008 64 Canadian biotechnology at a glance 2008 66 In 2008, the Canadian biotech industry underperformed the market ... 67 ... while Biovail did better than the rest of the industry 67 Canadian yearly biotechnology financings 68 Capital raised by Canadian province, 2008 68 Capital raised by leading Canadian biotech clusters, 2008 69

126 Beyond borders Global biotechnology report 2009 4.19.09

Canadian biotech industry indicators, 2000-08 70 Canadian biotech companies by province, 2008 71 European biotechnology at a glance 74 European exchange rate (Euros per national currency) Ernst & Young survival index: Europe 75 European yearly biotech financings 84 2008 2007 Public investors have been cool to biotech since the second half of 2007 ... 85 Denmark 0.1341 0.1342 … while there has been no significant decline in venture funding 85 Iceland — 0.0114 Quarterly breakdown of European biotechnology financings 2008 86 Israel 0.1890 0.1777 Norway 0.1216 0.1247 European venture funding by round class 86 Poland 0.2847 0.2643 Top European venture funding in 2008 87 Sweden 0.1040 0.1081 European venture capital by country, 2007 and 2008 87 Switzerland 0.6300 0.6088 Select restructuring programs announced by European biotech companies UK 1.2558 1.4613 in 2008 and early 2009 88 US 0.6799 0.7297 European M&A activity remains strong 90 European alliances by year 90 Top 10 M&As involving European companies 91 Leading alliances involving European companies 92 European alliances by country, 2008 93 European product pipeline by phase, 2006–08 95 European clinical pipeline by country, 2008 96 The Phase III share of the top five countries has shrunk, while other countries have advanced rapidly 96 European Phase III pipeline by indication, 2008 97 Selected European products approved, 2008 99 Australian biotechnology at a glance 110 Australian biotech public equity raised, 2002–08 111 Indian biotechnology venture and private-equity funding, 2006­–08 116 In 2008, overseas-listed Chinese biotech companies fell along with broader market indices 117

Scope of this report Biotechnology firms are defined as companies that use modern biological techniques to develop products or services for human healthcare or animal healthcare, agricultural productivity, food processing, renewable resources, industrial manufacturing or environmental management. Medical devices, large pharmaceutical, large agribusinesses and large manufacturing companies are outside the scope of this project.

127 Global biotechnology contacts

Global Boston Glen Giovannetti [email protected] +1 617 585 1998 Biotechnology Richard Ramko [email protected] +1 617 585 1805 Center Scott Sarazen [email protected] +1 617 585 3524 Gautam Jaggi [email protected] +1 617 585 3509 Austria Ernst & Young Vienna Erich Lehner [email protected] +43 1 21170 1152 Wirtschaftsprüfungsgesellschaft m.b.H. Australia Ernst & Young Brisbane Winna Brown [email protected] +61 7 3011 3343 Melbourne Don Brumley [email protected] +61 3 9288 8340 Sydney Gamini Martinus [email protected] +61 2 9248 4702 Brazil Ernst & Young São Paulo Jose Francisco Compagno [email protected] +55 11 2112 5215 Auditores Independentes S.S. Belgium Ernst & Young Bedrifsrevisoren Brussels Thomas Sileghem [email protected] +32 2774 9536 Canada Ernst & Young LLP Montréal Rod Budd [email protected] +1 514 879 2605 Sylvain Boucher [email protected] +1 514 874 4393 Edmonton Darrell Jensen [email protected] +1 780 441 4230 Toronto John Goudey [email protected] +1 416 943 2336 Thornhill Mario Piccinin [email protected] +1 905 882 3065 Vancouver Nicole Poirier [email protected] +1 604 891 8342 Winnipeg Tanis Petreny [email protected] +1 204 933 0251 China Ernst & Young (China) Beijing Cherrie Che [email protected] +86 10 581 53533 Advisory Limited Shanghai Francis Lai [email protected] +86 21 222 82933 Czech Republic Ernst & Young, s.r.o. Prague Petr Knap [email protected] +420 225 335 582 Denmark Ernst & Young Statsautoriseret Copenhagen Peter Fredløv [email protected] +45 3587 2513 Revisionsaktieselskab Benny Lynge Sørensen [email protected] +45 35 87 25 25 Finland Ernst & Young Oy Helsinki Timo Virkilä [email protected] +358 207 280 190 France Ernst & Young et Associés Lyon Philippe Grand [email protected] +33 4 78 17 57 32 Paris Pascale Auge [email protected] +33 1 46 93 77 23 Germany Ernst & Young AG Mannheim Siegfried Bialojan [email protected] +49 621 4208 11405 Wirtschaftsprüfungsgesellschaft Julia Schüler [email protected] +49 621 4208 11414 Steuerberatungsgesellschaft Munich Elia Napolitano [email protected] +49 89 14331 13106 India Ernst & Young Private Limited Bangalore Murali Nair [email protected] +91 22 6665 5000 Hyderabad Utkarsh Palnitkar [email protected] +91 40 2789 8850 Mumbai Hitesh Sharma [email protected] +91 22 6665 5000 Ajit Mahadevan [email protected] +91 22 4035 6300 Ireland Ernst & Young Dublin Nick Redmond [email protected] +353 1 221 2322 Neil Byrne [email protected] +353 1 221 2370 Israel Kost Forer Gabbay & Kasierer Tel Aviv Yoram Wilamowski [email protected] +972 3 623 2519 Italy Reconta Ernst & Young Milan Lapo Ercoli [email protected] +39 02 7221 2546

128 Beyond borders Global biotechnology report 2009 Japan Ernst & Young ShinNihon LLC Tokyo Hironao Yazaki [email protected] +81 3 3503 2165 Cedric Halvorson [email protected] +81 3 3503 1784 Netherlands Ernst & Young Accountants LLP Amsterdam Jules Verhagen [email protected] +31 88 40 71888 New Zealand Ernst & Young Limited Auckland Jon Hooper [email protected] +64 9 375 2670 Norway Ernst & Young AS Trondheim Willy Eidissen [email protected] +47 73 54 68 80 Poland Ernst & Young Sp. z o.o. Warsaw Mariusz Witalis [email protected] +48 225 577950 Singapore Ernst & Young LLP Singapore Swee Ho Tan [email protected] +65 6309 8238 South Africa Ernst & Young Inc. Johannesburg Sarel Strydom [email protected] +27 11 772 3420 Sweden Ernst & Young AB Uppsala Björn Ohlsson [email protected] +46 18 19 42 22 Switzerland Ernst & Young AG Jürg Zürcher [email protected] +41 58 286 84 03 United Ernst & Young LLP Bristol Matt Ward [email protected] +44 11 7981 2100 Kingdom Cambridge Cathy Taylor [email protected] +44 12 2355 7090 Edinburgh Mark Harvey [email protected] +44 13 1777 2294 London Chad Whitehead [email protected] +44 20 7951 4425 Les Clifford [email protected] +44 20 7951 8600 Reading Ian Oliver [email protected] +44 11 8928 1197 United Ernst & Young LLP Boston Michael Donovan [email protected] +1 617 585 1957 States Bruce Bouchard [email protected] +1 617 585 6890 Chicago Susan Jones [email protected] +1 312 879 5275 Dallas Kenneth Bernstein [email protected] +1 214 969 8903 Houston Carole Faig [email protected] +1 713 750 1535 Los Angeles Abdul Lakhani [email protected] +1 213 977 3070 Don Ferrera [email protected] +1 213 977 7684 New York/New Jersey Keith Brownlie [email protected] +1 732 516 4269 Tony Torrington [email protected] +1 732 516 4681 Tony Masherelli [email protected] +1 732 516 4719 Orange County Dave Copley [email protected] +1 949 437 0250 Kim Letch [email protected] +1 949 437 0244 Palo Alto Scott Morrison [email protected] +1 650 496 4688 Chris Nolet [email protected] +1 650 496 1620 Philadelphia Steve Simpson [email protected] +1 215 448 5309 Raleigh Michael Constantino [email protected] +1 919 981 2802 San Antonio David King [email protected] +1 210 242 7108 San Diego Dan Kleeburg [email protected] +1 858 535 7209 Jodi Hernandez [email protected] +1 858 535 7292 Seattle Michael Gibson [email protected] +1 206 654 7478 Washington, DC Rene Salas [email protected] +1 703 747 0732 Chris Caffrey [email protected] +1 703 747 1318

129 Ernst & Young

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