Beyond borders Global biotechnology report 2012

To our clients and friends:

Welcome to the 26th annual issue of Beyond borders, Ernst & Young’s annual report on the global biotechnology industry.

Our analysis of trends across the leading centers of biotech activity reveals both signs of hope and causes for concern. The financial performance of publicly traded companies is more robust than at any time since the onset of the global financial crisis, with the industry returning to double-digit revenue growth. Companies that had made drastic cuts in R&D spending in the aftermath of the crisis are now making substantial increases in their pipeline development efforts.

But even as things are heading back to normal on the financial performance front, the financing situation remains mired in the “new normal” we have been describing for the last few years. While the biotech industry raised more capital in 2011 than at any time since the genomics bubble of 2000, this increase was driven entirely by large debt financings by the industry’s commercial leaders. The money flowing to the vast majority of smaller firms, including pre-commercial, R&D-phase companies — a measure we refer to as “innovation capital” — has remained flat for the last several years.

As such, the question we have posed for the last two years is more relevant than ever: how can biotech innovation be sustained during a time of serious resource constraints? In this year’s Point of view article, we offer a perspective that addresses not just the challenges in the changing health care ecosystem but also the latent opportunities. The paradigm we present — the holistic open learning network, or HOLNet — takes advantage of health care’s move to an outcomes-focused, patient-centric, data-driven future. HOLNets could fundamentally change how R&D is funded and conducted, by bringing together a diverse range of participants, encouraging the pooling of precompetitive data and permitting researchers to learn in real time from each others’ insights and missteps.

These are timely topics, and we look forward to exploring them with you — and helping each other learn in real time — through our Global Life Sciences Blog and other social media venues. Please look for information about the blog on ey.com/lifesciences in the months ahead and join the conversation. Ernst & Young’s global organization stands ready to help you address your business challenges.

Glen T. Giovannetti Gautam Jaggi Global Biotechnology Leader Managing Editor, Beyond borders

Contents

1 Perspectives 1 Point of view HOLNets: learning from the whole network 2 Focusing on what you do best • Bruce Booth, Atlas Venture 5 Collaborative innovation • David Steinberg, PureTech Ventures 7 More pharma spinoffs? • Ron Cohen, Acorda Therapeutics 8 Case study: Coalition Against Major Diseases (CAMD) • Marc Cantillon, Coalition Against Major Diseases 9 Case study: One Mind for Research • Magali Haas, One Mind for Research 10 Leveraging our strengths • Samantha Du, Sequoia Capital China 12 Making it happen: building collective intent care networks to change health care delivery • Sanjeev Wadhwa, Ernst & Young 15 Getting personal, getting networked • Christian Itin, Micromet 17 Partnering for specialization • John Maraganore, Alnylam Pharmaceuticals 20 Patient-centric innovation N. Anthony Coles, Onyx Pharmaceuticals 21 Protecting the biotech ecosystem Moncef Slaoui, GlaxoSmithKline 22 To boost R&D, stop flying blind and start observing Joshua Boger, Vertex Pharmaceuticals 25 Financial performance Recovery and stabilization 27 • United States 32 • Europe 36 • Canada 37 • Australia 39 Financing Innovative capital 44 • United States 51 • Europe 55 • Canada 59 Deals Pharma recalibrates 67 • United States 69 • Europe 71 • Canada 73 Products and pipeline Promising signs

81 Acknowledgments 82 Data exhibit index 84 Global biotechnology contacts Perspectives Point of view HOLNets: learning from the whole network

The same old new normal

Over the last two years, we’ve written and as numerous pressures have squeezed For much of the past, learning from extensively about the global financial crisis VC multiples — both of those preconditions the outside has been a particularly and the “new normal.” This has mainly have come under increasing strain. In the acute challenge for big pharma, as the been a new normal for capital markets aftermath of the financial crisis, therefore, “not invented here” mentality led large and financing, with implications for the the tensions that have always existed companies to dismiss innovative ideas biotechnology industry because of the beneath the surface have bubbled to that did not originate from their own labs. capital-intensive nature of biotech R&D. the top. The underlying inefficiency and Pharma companies paid a steep price for Investors and companies have responded redundancy of drug development have this closed mindset, as emerging biotech with creative approaches to make R&D become particularly incongruous in the companies stole the lead in developing more efficient and sustainable. They have current financing climate — an extravagance new generations of game-changing tweaked the existing drug development we can no longer afford. The solutions platforms and efficacious new products. paradigm (e.g., fail fast approaches) and/ we’ve seen so far, while very creative and Today, pharmaceutical companies have or made reductions in operating costs innovative, are largely tinkering around the a more outside-in approach. Not only and overhead (e.g., asset-centric models, edges — refinements and adjustments to has big pharma come to rely on biotech outsourcing, virtual business models). a long-standing drug development model. for a significant portion of its pipeline, These efforts continued over the last year. They lead to incremental improvements in but pharma companies are also boldly We have even seen the emergence of some efficiency but are unlikely to change the experimenting with new business models to new models (e.g., pharma/VC strategic numbers in a fundamental way. prepare for a future in which success will be partnerships — more on these later). determined by not just drug sales, but also the ability to demonstrably improve health However, these creative approaches are Even as health care is being outcomes. To develop these models, pharma making only marginal improvements to completely reinvented in response companies are beginning to experiment a funding and innovation business model to unsustainable increases in with partnerships with other life sciences that, while under unprecedented strain in costs, the drug development firms as well as a range of companies from the current environment, has long grappled paradigm has remained other industries: health care providers and with basic tensions. Gary Pisano of Harvard essentially unchanged. payers, information technology companies, University, for instance, has pointed out mobile telephony providers, retailers and that intellectual property (IP) is highly others. (For a deep discussion of pharma’s fragmented in the biotech industry, in part What we need, more than ever, is a new “Pharma 3.0” business model innovation, because the murky and complex nature of paradigm — something that radically refer to the 2010–12 issues of our sister IP and IP law makes companies unwilling rethinks the ways in which scientific publication, Progressions.) to share. This inevitably wastes resources insights are gained and translated into new as companies duplicate efforts. In prior products, and which creates new ways of In many ways, it is now time for the drug issues of Beyond borders, we have similarly assembling resources to fuel this important development side of the industry (including pointed to the timing mismatch between endeavor. In this year’s Point of view article, biotech) to do the same. Even as the the investment horizons of venture funds we present one such solution, something we health care ecosystem around us is being and drug development time frames. Such call holistic open learning networks. It’s an completely reinvented in response to tensions did not matter much as long as idea that builds on trends already visible in unsustainable increases in health costs, the investors were willing to put up the large the market and, more importantly, involves drug development paradigm has remained sums of capital required to fund drug learning from beyond the life sciences essentially unchanged. To understand development, and as long as they could industry and leveraging the strengths of a where the opportunities lie for reinventing earn returns high enough to keep them diverse range of entities — from providers drug development, let’s start by revisiting coming back. In the new normal — as the era and patient groups to social media networks how health care itself is changing. of easy money and high leverage has ended and data analytics firms.

Point of view HOLNets: learning from the whole network 1 Outcomes, technology and big data: the new ecosystem

Even as biotech adjusts to its new normal, we are in the midst of programs, payment regimes that shift financial risk to providers and other seismic shifts in the health care ecosystem, all of which have in some cases drug companies, and more. The bottom line for life implications — both challenges and opportunities — for companies in sciences companies is that they will increasingly find themselves in the business of drug development. the business of changing patient behaviors and delivering health outcomes rather than purely in the historic business of selling The shift is being driven by two trends that are occurring products. simultaneously. The first — the need to make health care costs sustainable — is driving payers to change incentives. Through Accompanying the increasingly urgent need to bring health care a range of health care reforms across key markets, payers are costs under control is the emergence of the second driver of focusing increasingly on health outcomes. Systems are shifting change — an explosion of new technologies that have the potential away from paying for products and procedures and toward paying to make health care delivery radically more efficient. Electronic for performance. This is playing out in multiple ways: comparative health records, which have existed in concept for decades but never effectiveness research, prevention and disease management really gained much traction, are being used in larger numbers than

Focusing on what you do best

Bruce Booth, PhD Atlas Venture, Partner

The simple answer to sustaining innovation is that each player in the ecosystem should focus on what it does best.

Academics should focus on basic research and early biologic target validation. Start-ups, with experienced talent, unleashed from the constraints of big-company behavior, should experiment with lots of approaches for high-value, emerging targets: biological variables (e.g., different drug modalities such as NCEs, mAbs, peptides, antisense and RNAi), clinical variables (e.g., patient subtypes, new translational designs, repurposing and indications discovery), organizational variables (e.g., virtual CRO-enabled models vs. fully integrated teams) and business model variables (e.g., drug platforms vs. single-asset companies). We should let a lot of start-up flowers bloom. Some will grow, some won’t.

Venture capitalists — traditional and corporate venture funds along with alternative capital providers such as angel investors and philanthropic foundations — should strive to allocate resources to winning experimental start-up models. Importantly, these capital providers need to be disciplined about reducing the costly false positives in drug research and reallocate to new opportunities more efficiently.

Big pharma companies should participate in this diverse research ecosystem through “open innovation” strategies that pair up their deep capabilities (e.g., chemical libraries, biologics technologies) and creative partnering power with the agility, specific expertise, and passion of the start-up culture. As valuable, high-impact medicines emerge from this research ecosystem into the later stages of clinical development, big pharma should bring its balance sheet and unparalleled global development and marketing capabilities to successfully drive new drug approvals and commercial launches.

Sharing value across these various elements from target validation through product sales would help foster a vibrant, healthy ecosystem. Of course, this is all great in theory. Unfortunately, things such as legacy infrastructure, cultural differences, decision- making inertia, frictional costs, resource misallocation, misperception of risk, and winner-take-all mindsets conspire to make this efficient ecosystem a challenge. But that doesn’t mean we shouldn’t keep trying.

2 Beyond borders Global biotechnology report 2012 ever before, as policy makers increase incentives for adoption. In the 2010 issue of Progressions, we discussed how big data Mobile health technologies have taken off in a big way, as an is driving a new trend with tremendous implications for drug incredible variety of smartphone apps are empowering patients with companies. Payers and others are mining electronic health records more transparent information and a greater ability to monitor and and other data to identify correlations and make assessments about manage their own health. Health-specific social media platforms interventions and standards of care. This development — something have emerged, allowing patients and physicians to interact with we termed “value mining,” or the use of data mining to make their peers and with each other to discuss their progress and side decisions about the relative value of products and interventions — effects — and learn from each other in real time. A sea of sensors — means that other entities are making decisions about drug embedded not just in new generations of medical technology companies’ products using data that is outside the control of these products but even in everyday objects such as mobile phones, firms. Even more compelling, value mining is much quicker and weighing scales, running shoes, sportswear and wristwatches — cheaper than the way drug companies have traditionally gained are providing real-time feedback to patients and their caregivers, insights about the value of medical products — the extended process allowing for better management of health and a greater focus on of hypothesis testing through clinical trials. prevention. To date, value mining has only happened at the commercial end of the value chain, to assess the value of marketed products. But what What if the power of big data could be harnessed to if the power of big data could be harnessed to similarly develop similarly develop quicker, real-time insights about quicker, real-time insights about candidates in the pipeline? How candidates in the pipeline? much power could we unleash by connecting the dots between the huge volumes of data scattered across the ecosystem? How do we achieve this potential and who could take the lead? We think these Since all of these technologies are generating massive amounts of are compelling questions, and we turn to them next. data, a significant corollary of the changing ecosystem is health care’s move to the era of big data. We are already seeing dramatic increases in the amount of data being generated from numerous sources — genomic research, clinical trials, electronic medical records, wireless devices, smartphone apps and social media platforms, to name a few — with the volume expected to grow exponentially. The 1000 Genomes Project — an initiative to analyze large amounts of genomic data to find genetic variants that affect at least 1% of the population — has already built a data set that is 200 terabytes in size, the equivalent of 16 million file cabinets worth of text. Across the US health care system, it is estimated that the amount of data crossed the 150 exabyte threshold (150 billion gigabytes) last year. But big data is not just about more information. It’s also about more types of information (e.g., health records, medical claims data, social media threads, imaging data, video feeds, data from sensors) from more diverse sources. While drug development companies have always been steeped in a culture of data (indeed, their very success has depended on the quality of the clinical trial data they generate), in the era of big data, most of this information will be generated in real time, will be controlled by others and will cut across the value chain, from R&D to health care delivery.

Point of view HOLNets: learning from the whole network 3 Reinventing R&D: learning from the ecosystem

Over the last few decades, as the emergence of the modern • Siloed. Lastly, the R&D process is highly fragmented. Driven by biotechnology industry introduced new technologies to the drug the need to protect their intellectual property, companies fail to development process, there has been considerable innovation in learn from experiences and the mistakes of others. the capabilities used to conduct R&D. Combinatorial chemistry Of course, there is good reason for much of this, including and high-throughput screening have brought industrial-scale regulatory requirements that define the approval process and the processes to drug development by allowing for the automated fact that firms have always succeeded or failed on the strength generation and testing of enormous numbers of potential drug of their intellectual property. But we can no longer afford to keep candidates. Pharmacogenetics and other personalized medicine doing things this way, particularly in today’s resource-constrained, approaches have created the potential for developing therapeutics escalating-cost environment. Instead of a drug development that are vastly more targeted and efficacious on individual patients. paradigm that is linear, slow, inflexible, expensive and siloed, Meanwhile, the emergence of bioinformatics brought with it the we desperately need one that is iterative, fast, adaptive, cost- promise of bringing drug development into the information era, efficient and open/networked. by enabling the use of computers for understanding disease mechanisms, predictive modeling, drug synthesis, testing and more. We are already seeing examples that are taking us in this direction. As discussed extensively in the last two issues of Beyond borders, a Yet, despite these innovations, R&D productivity has not improved — host of new approaches are attempting to make drug development drug approvals have not increased to any appreciable degree, faster and more cost-efficient, from fail-fast R&D paradigms to while development costs have escalated. Indeed, the process of asset-centric funding models that attempt to get to a value-creating developing drugs has remained unchanged in several key respects. proof-of-concept milestone with minimal overhead. To make R&D Despite the new technologies that have been introduced, drug more fast, iterative and adaptive, there has been a growing focus development is still linear, slow, inflexible, expensive and siloed: on adaptive clinical trials. In one particularly noteworthy example, the I-SPY2 trial, three drug companies are collaborating to screen • Linear. Drug R&D is conducted in a stepwise manner. Through multiple breast cancer drugs, each targeting a different pathway. a series of preclinical studies and clinical trials in sequentially The trial has an adaptive design under which patient outcomes are larger populations, researchers seek to answer questions related immediately used to inform treatment assignments for subsequent to safety, ef cacy and dosages. trial participants. The trial designers claim that I-SPY 2 can test • Slow. The process of taking a compound or molecule from new treatments in half the time of standard trials, at a fraction of early research to approved product takes well over a decade. In the cost and with significantly fewer participants. Meanwhile, we’ve essence, researchers come up with an idea and then wait years seen several examples of more open approaches, from an uptick in to nd out whether it works. precompetitive collaboration to GlaxoSmithKline’s contribution of intellectual property for neglected tropical diseases. • Inflexible. The drug development process is also very rigid. This is particularly tragic given the length of the process. To take such efforts to the next level, we now need mechanisms for Over months and years of trials, valuable information is being breaking down silos more broadly. We need processes for sharing gathered. Yet, the double blinding of trials effectively means information and learning from the ecosystem in real time. We that researchers can only learn at a few points along the process need to move to a world in which the division between the R&D — when the current phase of clinical trials is completed and the and commercial ends of the value chain becomes increasingly data analyzed. There is little ability to learn continuously and meaningless because scientists and practitioners are continuously adjust one’s approach based on real-time information. gaining insights from data being generated across the value chain • Expensive. An inevitable consequence of this slow and in exible and throughout the cycle of care. To achieve all of this, we propose process is that drug development has become increasingly the widespread use of holistic open learning networks (HOLNets). expensive. On average, companies spend well over US$1 billion to bring an approved drug to market (a number that includes the cost of products that fail along the way).

4 Beyond borders Global biotechnology report 2012 The four characteristics embedded in this moniker don’t just define • Learning. Above all, HOLNets are about learning — their HOLNets — each one of them is also a critical requirement for the raison d’être. But while learning in the drug development process success of this approach: has historically been slow, sequential and siloed, HOLNets are about learning rapidly, in real time, by connecting data from • Holistic. The HOLNet approach represents a vastly different across the ecosystem. Real-time learning allows constituents to and inclusive approach to R&D. The boundaries between drug quickly adjust their approaches — from clinical trials to standards development, product commercialization and health care of care — saving time and money and increasing success rates. delivery are blurred. Rather than being con ned to the traditional But to learn from big data, we need standards that allow data to siloed and sequential approach to drug development, HOLNets be combined as well as sophisticated analytics to mine insights — would share data and connect dots across the entire value chain capabilities that HOLNets will need to enable and foster. of companies (from early research to marketing) and cycle of • Network. Last, but not least, a HOLNet has to be a network. care of patients (from prevention to cure). Radically reinventing R&D and unleashing the transformative • Open. One of the biggest changes in the HOLNet approach is potential of big data requires the participation of diverse players openness. While the speci c rules of each HOLNet will depend on from across the ecosystem. The network needs a common goal — the needs and preferences of its members, these networks will a collective intent — around which all its members are aligned. typically require that members pool their strengths and assets Different entities don’t all need to do the same thing — indeed, (e.g., talent and precompetitive data). They will also involve given their diverse backgrounds and strengths, it would be sharing any resulting output (e.g., creating open standards, better if they didn’t — but they do need to be pulling in the same making insights available to all members and often to non- direction. The optimal network size and participants will depend members as well). This is one of the most powerful aspects of a on the challenge being addressed. HOLNet, since it has the potential to make R&D radically more ef cient and productive, by reducing redundant expenditures and allowing researchers to learn from each others’ insights and mistakes. But in an industry where companies have historically Collaborative innovation operated under shrouds of secrecy, this is also one of the biggest obstacles to the adoption of HOLNets by life sciences David Steinberg rms. Consequently, HOLNets will need to address intellectual PureTech Ventures, Partner property concerns by clearly de ning precompetitive information that is available for sharing as opposed to information that is To sustain innovation, we could do two things. First, let’s reduce proprietary. It is encouraging that the term “precompetitive” redundant research. There’s no reason every pharma has to is being used more broadly in recent years, as companies study fundamental biology in every research area, wasting grow willing to collaborate in areas once considered sources of hundreds of millions of dollars in the process. Academics, NIH, competitive advantage. But we believe that the notion of the pharma and entrepreneurs should work together to explore precompetitive space will have to expand even further, changing new biology areas and get them “drug development ready.” to some extent the very basis of competition. For example, while Pharma and biotech can access the assays, probes, etc., and do it is entirely appropriate for companies to compete based on their own drug development. Second, let’s parallelize biotech the effectiveness of molecules they discover, is it essential that entrepreneurship. Typically, solo entrepreneurs work for two they compete on all underlying technologies (e.g., biomarkers) years and then pitch to VCs, who then pivot, work for two to and even on processes such as clinical trial enrollment? three more years, and pitch to pharma, who then discard all but Companies are growing increasingly comfortable with the the one program of interest. Let’s get entrepreneurs, VCs and notion of collaborating with competitors, and as we’ll see later, pharmas working together, at the same time, to start and fund early examples of networks that are taking open approaches to biotech start-ups around a common vision. intellectual property have had no problem attracting large and small life sciences members.

Point of view HOLNets: learning from the whole network 5 HOLNets in action

When all of this comes together — when an initiative is a truly • Engaging patients. But regulators are not the only entities holistic, open, learning network with a diverse set of stakeholders — with which HOLNets will engage. The new ecosystem is, in it has the potential to tangibly transform the ways in which insights essence, a patient-centric world, and HOLNets will need to are gathered and new drugs developed. In practice, a HOLNet could engage with patients by identifying relevant populations play a critical role in: (perhaps with the assistance of disease foundations), developing ongoing relationships with them and collecting their data • Pooling data. Because of their charter to be open and learn by with their informed consent. This has the potential to enable connecting diverse data sets, HOLNets can enable the pooling better outcomes through an increased focus on prevention of data in precompetitive spaces. This becomes particularly and health management, but it also has tremendous bene ts compelling given their diverse membership, since these networks for drug R&D. Based on these ongoing relationships and a could bring together genetic data from patients, claims data deeper understanding of patients’ real-world experiences with from payers, outcomes data from providers’ EHR systems, data their conditions and medications, HOLNets can provide new on failed clinical trials from life sciences companies, insights from insights for the drug development process. In addition, it may disease foundations and more. They can create common pools be possible to substantially speed up clinical trial enrollment. for their members (and perhaps non-members) to draw from, The existing paradigm of clinical trials — in which a hypothesis is including shared libraries and tissue banks. articulated rst, a trial protocol is developed next and only then do researchers start looking for appropriate patients to enroll • Creating standards. The pooling of data raises a corollary — can be turned on its head. A world in which HOLNets have question: standards. This is another area where HOLNets can existing patient relationships and databases with comprehensive play a much-needed role. After all, data sharing means nothing information — including contact information, genetic pro les, unless data can also be combined and studied holistically. conditions, disease states and prior treatments — is one in which Without uniform standards and the ability to collectively analyze patients have in essence been pre-screened. With patients this information, pooled data is not big data — it’s just a collection already identi ed (and perhaps consent to participate in trials of smaller data sets. Developing standards will also play a big obtained in advance) appropriate individuals can quickly and role in accelerating the creation of promising R&D tools, such easily be enrolled once a suitable trial comes along. as biomarkers and disease models. And once again, by putting these standards, assets and insights into the public domain, a HOLNet can help make drug R&D vastly more productive and ef cient across the breadth of the ecosystem. • Engaging regulators. As articulated earlier, much of what life sciences companies and other health care entities do is de ned by regulatory regimes. To truly unleash the potential of the HOLNet approach, it will be essential that regulators adapt to a world in which insights can be gathered in real time through more exible approaches. As entities that represent a broad coalition of partners — often focusing on diseases that are becoming high priorities for policy makers — HOLNets will have the credibility to engage with regulators and/or to encourage new approaches to R&D and clinical trial design. The good news is that regulators recognize the need to move in this direction. Senior leaders from the FDA, for instance, have gone on record encouraging experimentation, and there is at least one compelling example of a exible, learning clinical trial paradigm — the I-SPY2 trial discussed earlier.

6 Beyond borders Global biotechnology report 2012 More pharma spinoffs? To achieve their full potential, HOLNets will need an organization at the center to orchestrate all these activities and to balance the Ron Cohen, MD needs and priorities of members. The organization needs dedicated Acorda Therapeutics, President and CEO human resources, which could be a combination of full-time employees and talented individuals on secondment from member We’re already seeing the ecosystem trying to adapt to the organizations. challenge of sustaining innovation. For example, some VCs are now emphasizing single-product plays, designed to be advanced to a value-creating clinical endpoint with minimal infrastructure When all of this comes together — when an initiative is and cost, relying heavily on outsourcing to CROs and with a truly holistic, open, learning network with a diverse the aim of selling to a pharma company once milestones are attained. Some are entering into funds together with pharma set of stakeholders — it has the potential to tangibly companies to leverage both capital and expertise — though this transform the ways in which insights are gathered and may not be truly novel, since many pharma companies have had new drugs developed. their own venture arms for years. In the recently announced partnership between Johnson & Johnson, GlaxoSmithKline and Index Ventures, the pharma companies will get a first look at We are seeing examples that do much, but not all, of this. At the early-stage projects funded by the Index fund. Sanofi and Third R&D end of the value chain, the charge is being led by disease Rock Ventures have an arrangement that is focusing on single foundations and other nonprofits, often focused on brain diseases. product plays. Several pharma companies are trying to inject a For instance, the Alzheimer’s Disease Neuroimaging Initiative biotech-like risk-taking ethos into their discovery/development (ADNI), an early example of this sort of collaboration, was set up in programs, by creating smaller, more focused units, often with a the early 2000s to identify biomarkers that show the progression mandate to partner with outside academic and biotech of Alzheimer’s. The initiative — a public-private-partnership with groups as needed (e.g., GlaxoSmithKline’s Discovery funding from the National Institutes of Health as well as private Performance Units). partner support from various companies and associations — deliberately took an open approach to information. All data coming One could imagine more variations. Pharma might actually out of its studies are immediately released to the public over the create mechanisms for some of its talent to propose ideas for internet. NewDrugs4BadBugs, a new European initiative to combat spinoff companies based on ideas or products in development, antibiotic-resistant bacteria, is bringing together several entities, giving the pharma right of first offer after certain milestones including the Innovative Medicines Initiative, GlaxoSmithKline, are attained. The companies could be funded by the pharma Sanofi, AstraZeneca, Janssen and Basilea. The initiative plans company or in partnership with a VC fund. to share data openly, develop better networks of researchers and create more fluid trial designs. Two other initiatives in the neuroscience space — One Mind for Research and the Coalition Against Major Diseases — are profiled in greater depth in the accompanying articles by Marc Cantillon and Magali Haas on pages 8 and 9. These initiatives and numerous other examples — the CommonMind Consortium, the Biomarkers Consortium, the Structural Genomics Consortium, the Multiple Myeloma Research Consortium and others — are seeking to assemble a diverse network of actors to pool data, develop common standards and accelerate research, often with the requirement that data and insights be shared openly.

continued on page 10

Point of view HOLNets: learning from the whole network 7 Case study Coalition Against Major Diseases (CAMD)

Marc Cantillon, MD Former Executive Director and R&D Consultant

Behavior originates in needs and signals from the environment. • Disease modeling. Standardizing and sharing data will So my decision to be a founding member of the Coalition Against allow for the development of disease models to understand Major Diseases (CAMD) in 2008 was guided by my needs. At differences in progression in different categories of patients the time, I was head of neuroscience clinical development (e.g., by age, ethnicity and medication). This does not need to at Schering-Plough and was seeking a neutral venue for the be limited to traditional research settings. With large volumes precompetitive sharing of development tools. As a collaborative of secure anonymized data, there’s no reason we couldn’t use effort to accelerate the translation of scientific discoveries these assets to better understand when memory problems into treatments, CAMD — a part of the Critical Path Institute — begin, identify early warning signs and track the course of the provided such a venue. The coalition, which focuses on diseases disease — which could help develop new treatments and also in which the efforts of individual pharma actors have made little boost prevention. To be used in the regulatory context, these headway, took on Alzheimer’s disease (AD) and Parkinson’s disease models need to be widely accepted. It can be a tough disease (PD) as its first challenges. sell for a drug company to get the FDA to accept proprietary CAMD members are scientists from pharma, biotech, universities, disease models when the agency hasn’t had a say in vetting government organizations (e.g., FDA and NIH) and patient/ these models. But all of that changes in a coalition like CAMD, voluntary health organizations. All members must abide by where the FDA is a member and actively involved in developing a uniform charter, which requires them to share data and disease models. contribute time and energy. To avoid even a perceived conflict of • Biomarkers. Biomarkers have tremendous potential for helping interest, CAMD doesn’t accept money from the pharma industry, us understand disease mechanisms and subtypes and selecting relying instead on competitive grants. A uniform charter requires patients in clinical trials. Once again, we need standards — that any IP developed by the consortium is shared — creating a biomarkers that are validated, standardized and quali ed pool of knowledge and assets that could truly accelerate R&D — for use — and a single company will have less credibility and while allowing members to protect material that they developed resources to establish standards than a collaborative effort. independently of their collaborative efforts. Yet, IP concerns have in no way hampered the ability to attract life sciences members. Approaches such as CAMD are not just for large pharma; they are To the contrary, these companies see a net benefit from joining. equally relevant and useful for R&D-stage biotech firms. While The advantages of being a member of CAMD span the three areas small companies may sometimes see biomarker identification in which the coalition is focused: data sharing, disease modeling as a source of competitive advantage, the truth is that they and biomarkers. stand to benefit from establishing standards in such areas. In addition, members can gain early access to the FDA — potentially • Data sharing. CAMD, working with the Clinical Data working to create review standards and gaining early visibility Interchange Standards Consortium, has done groundbreaking into standards as they are being created. For too long, our work in creating common AD data standards — something no industry has resisted sharing. Today, we are seeing a rethinking company could achieve alone. Indeed, different standards of where companies should compete and where they might join even within companies prevented rms from combining their forces. Collaborations such as CAMD can be critical in sharing own clinical trials, much less those of multiple entities, in data, establishing standards and accelerating the development of a common database. For instance, there was no consistent much-needed cures. way of recording answers to questions on memory, recall, etc., that are part of the Alzheimer’s Disease Assessment Scale-Cognitive subscale (ADAS-cog, the main benchmark for measuring outcomes). In June 2010, CAMD solved this problem when it created a standard database combining the placebo arms of members’ Alzheimer’s trials. Data sharing and common standards could drive faster drug development and faster review by the FDA. Today, we are in the early stages of an explosive increase in the amount of health data, and it’s happening faster than most people probably would have anticipated. But again, unless these data are collected in a standardized way, their true potential will not be realized.

8 Beyond borders Global biotechnology report 2012 Case study One Mind for Research

Magali Haas, MD, PhD Incoming Chief Science & Technology Officer

One Mind for Research was founded by Patrick Kennedy (son of We are going about this in three ways. First, we are raising the late Senator Ted Kennedy) and Garen Staglin (co-founder of awareness about the impact and burden of these disorders. This the International Mental Health Research Organization). They is critical for building public support among policy makers and the launched the One Mind Campaign on 25 May 2011, the 50th public and making brain disorders a top priority on the health care anniversary of President John F. Kennedy’s famous “moon-shot” agenda. speech. Second, we are seeking to de-risk the model to stimulate One Mind’s mission is to accelerate neuroscience research so that, investment. To do this, we will need to accelerate research by within a decade, all humanity can experience a lifetime free of generating a knowledge base across disorders, understanding brain disease. Like President Kennedy’s moon shot, this is a bold, mechanisms of action, conducting large-scale trials, identifying audacious goal, but we feel that without an ambitious target, we biomarkers and developing disease models. All of this requires will not get the urgency, resources and alignment that’s needed. combining data from various stakeholders — not just clinical trial A collaborative approach is critical for this challenge. The brain data, but also real-time information from patients about their is the most complex organ in the human body and also one conditions. of the most inaccessible. To date, neither academia nor the Third, we are trying to alter the policy landscape. This pharmaceutical industry has fully understood the mechanisms of encompasses everything from incentive models to motivate the brain. We will need the holistic involvement of all stakeholders cooperation and sharing, to regulatory constructs, IP patent — industry, governments, patients, academic organizations, constructs and more. These are all issues that need to be advocacy groups — each of which holds a piece of the puzzle. systematically addressed. Historically, the level of investment in brain research has not Our corporate partners are essential to this effort. It will take the been proportionate to the burden this disease imposes on society combined capabilities of companies from numerous industries — — something we are only starting to appreciate. Last year, for pharma, biotech, information technology and others — to advance the first time, the European Brain Commission estimated the this field. Depending on their strengths, companies can contribute aggregate burden imposed by 19 brain disorders on that society. different assets — data, platforms, imaging capabilities and, of The total they came up with was a staggering US$1 trillion. For course, financial investments. We hope that many companies will the first time, Europe recognizes that this is the number one allow representatives from their organizations to work with us in priority for their health care agenda. workshops or even do rotational fellowships with us. We have yet to do such a comprehensive assessment in the US, The One Mind model is every bit as relevant for early-stage R&D where we still look at brain disorders disease by disease instead of companies, and we have a number of small biotech companies as thinking of the brain as one organ system. However, a preliminary members. At a time when the FDA is revising its guidelines for independent study conducted for the US came up with a similar medical device companies and biomarker platforms, companies estimate for the economic burden in this country. in these areas need evidence that their platforms provide valid When you add to that the social stigma still associated with these clinical insights. This typically requires larger studies than small conditions, one can appreciate why we haven’t focused on how companies can afford. But in this cooperative model, small burdensome brain disorders are and how much the loss of mental companies can test their platforms against the large datasets, capital constrains our society. which is far quicker and more cost-effective than if they tried to generate their own large datasets. Similarly, a small therapeutic Compounding the challenge, we are now seeing a reduction in company will benefit from the disease models One Mind is investment in brain research. Investors have become frustrated building, which will allow them to pursue personalized medicine by relatively low returns on investment, driven by the poor approaches more efficiently. understanding of brain disease mechanisms and the inability to translate basic science to advance the drug pipeline. One Mind is already reshaping the boundaries between competitive research and precompetitive collaboration. For To really change things, we have to change the way we work. That example, we are developing disease models that we plan to put is what One Mind is attempting to do, by gathering resources, into the public domain. Not too long ago, this was an area where aligning stakeholders, prioritizing an agenda, promoting a culture companies would have wanted their own unique IP protected of sharing, transforming public policy and eliminating stigma. We models. To accelerate the development of new cures, such shifts see ourselves as a central trusted third-party organization whose are long overdue. single mission is to accelerate the development of preventions and cures and eliminate the silos that have slowed our progress.

Point of view HOLNets: learning from the whole network 9 One organization that is playing a central role in driving for more At the same time, we are also seeing examples at the other end open drug development is Sage Bionetworks, a Seattle-based of the value chain — health care delivery. For instance, Sanofi has nonprofit organization that was founded in 2009. One of the recently partnered with the Baltimore County Department of Aging, organization’s first initiatives, the Sage Commons, has created the John A. Hartford Foundation and the National Coalition on an “open source community where computational biologists can Aging on a pilot program to help doctors connect older diabetics develop and test competing models built from common resources.” with evidence-based education and wellness support. Merck & Co. The Sage Commons platform allows for integrating large data sets has partnered with the Camden Coalition of Healthcare Providers from various health ecosystem constituents and making them freely to create the Camden Citywide Diabetes Collaborative to implement available for genomics analysis and predictive disease modeling. comprehensive diabetes prevention and management programs in the city of Camden, New Jersey. Similarly, Eli Lilly and Company Earlier this year, Sage announced the creation of Portable Legal is partnering with Anthem Blue Cross Blue Shield and five Indiana- Consent (PLC), a potentially game-changing standard that reverses based health care providers to achieve better health outcomes the way in which consent is typically obtained from patients. Anyone for diabetes patients. (For more on how collaborative network participating in a clinical trial or having their genome sequenced approaches are transforming health care delivery, refer to the would now have the option of making their data available to any article by Sanjeev Wadhwa on page 12.) researcher who accepts the terms of the PLC approach (including the requirement that any discoveries from this data must also be Many of these initiatives — at both ends of the value chain — have put in the public domain). The data is anonymized and Sage has key aspects of HOLNets. They are networks that bring together a gone to considerable lengths to make sure that consent is truly diverse set of actors. They are often open, insisting that information informed (e.g., through online tutorials that cannot be bypassed). be shared openly to facilitate greater learning. For the most part, With PLC, researchers would save time, because they do not have to though, they are not holistic, in that they are still confined to obtain consent from subjects every time they initiate a new study, traditional definitions of R&D and commercial delivery. while patients could have greater confidence that any use of their data will comply with a standard set of rules. Perhaps the most Over time, we believe there is a case for more of these initiatives promising implication of the PLC approach, though, is that having to expand across the value chain, to truly unleash the power of a widely adopted standard for consent could allow for data sets to data being generated throughout the ecosystem. In particular, as be combined and analyzed in aggregate — unleashing the power of discussed below, we think that pharma companies could play a big big data. role in driving the widespread adoption of these networks.

Leveraging our strengths

Samantha Du Sequoia Capital China, Managing Director

By leveraging our strengths, biotech firms, investors and networks. Lastly, non-dilutive capital from governments and pharma companies can effectively increase R&D productivity foundations can be very helpful in today’s resource-constrained and efficiency. Biotech’s strengths are its entrepreneurship, environment. operational efficiency (much less bureaucracy) and focus, while pharma can contribute high-quality late development and A key part of the solution will be robust and relevant regulatory commercialization excellence. Biotech start-ups need to think regimes. In a highly regulated industry such as ours, regulators very early about partnering with pharma companies to access (e.g., the FDA, EMEA and SFDA) are key ecosystem stakeholders. their domain expertise. Investors will continue to be critical in Without efficient and progressive regulators, no amount of today’s challenging business climate. For a resource-constrained effort from biotech and pharma will change the productivity and biotech start-up, it is crucial to work with investors that can capital efficiency of the drug development model. provide not just capital but also appropriate knowledge and

10 Beyond borders Global biotechnology report 2012 Getting there

While the HOLNet is a compelling vision of a future state that could make drug development vastly more efficient and productive, it has always been easy to imagine utopian health care systems. The challenge in this business is inevitably in how we get there. The health care ecosystem is so complex and intertwined — with so many competing constituencies and interests — that aligning incentives and structures is no mean task.

The good news is that health care has never been more primed for this sort of collaborative approach. The unprecedented pressures that many of its denizens now face — from payers wrestling with runaway costs and rapidly aging populations, to big pharma’s As their strategies move in different directions — against a backdrop pipeline challenges, to emerging biotech startups and investors of an ecosystem where innovation is under pressure — pharma grappling with a strained innovation model — are starting to change companies recognize that it is in their strategic interest to sustain a mindsets and dismantle long-standing barriers. This is being further robust ecosystem of innovative biotech companies and investors. It catalyzed by changing incentives, new technologies and new is not surprising, therefore, that we have seen a dramatic uptick in sources of data — all of which play a key role in driving the shift to transactions in which pharma companies are partnering with VCs to HOLNets. send more capital in directions that are strategic to them. In the last few months alone, we have seen such partnerships between Shire Now, more than ever, the approach we describe above is feasible and Atlas Venture (to invest in rare diseases), GlaxoSmithKline, because it is in the self-interest of the entities that would need to be Johnson & Johnson and Index Ventures (targeting early-stage part of it: investments), Merck and Flagship Ventures and others.

But the ripple effects of pharma companies’ patent expirations Big pharma extend beyond their walls. As more and more products become subject to generic competition, pharma will have less aggregate We think that the pharmaceutical industry is well positioned at this capacity to engage in activities such as corporate venture capital, point in time to play a major role in making this approach more strategic alliances and M&A transactions — all of which have mainstream and widespread, for several reasons. For pharma provided a continuing source of funding for biotech companies companies, the biggest challenge, of course, is the patent cliff over even as financial investors (VCs and public markets) have become which they are now plunging and the fact that their pipelines are not more stringent. For this year’s Beyond borders, Ernst & Young’s robust enough to fill the significant revenue gaps that will inevitably Transaction Advisory Services professionals have built a model follow. to estimate the reduction in big pharma’s “firepower” to support the innovation ecosystem. By our calculations, the capacity of Pharma companies have been reacting to these challenges the top 28 biopharmaceutical companies has already declined by by restructuring and sharpening their strategic focus. As it about 30% between 2006 and 2011. Much of pharma’s remaining becomes increasingly clear that companies cannot do everything, capacity will also be targeted for building their presence in higher- everywhere that they have in the past, pharma firms are evaluating growth emerging markets, rather than supporting innovation in which diseases, product segments and geographic markets are mature ones. With more patent expirations ahead, and continuing most strategic for them — leading companies to sell or spin off entire pressures from investors (who expect continued high dividends divisions while moving more aggressively into other segments. and stock repurchases), we don’t anticipate that this situation will appreciably improve in the foreseeable future.

continued on page 14

Point of view HOLNets: learning from the whole network 11 Making it happen: building collective intent care networks to change health care delivery

Sanjeev Wadhwa Ernst & Young While holistic open learning networks (HOLNets) have the Achieving better patient outcomes will, in turn, require that potential to reinvent drug R&D for biotech and pharma providers get closer to patients and build long-term relationships companies — making drug development more efficient and with them. Over time, we will move to a paradigm in which productive and enabling real-time learning — these networks patients enroll in lifelong protocols of care with specific payers also have tremendous potential to reinvent both the delivery of and/or providers. Having such enduring relationships will be health care and the ways in which drug companies go to market critical for improving health outcomes, since they will enable an (their commercial models). After all, HOLNets are holistic by increased focus on preventive care and allow all stakeholders to definition, and as already articulated, they are expected to make take a more holistic view of patients’ health and diseases. old demarcations, such as the distinction between the R&D In the next decade, patient-doctor relationships and health care and commercial phases of product development, increasingly delivery will be radically different from how they are today. We irrelevant. And, in a construct that is open by design and built will move from a world in which care is delivered in just two for real-time learning, it stands to reason that there would be types of locations (hospitals and doctors’ offices) to a paradigm opportunities for health care delivery to benefit from these in which care is delivered in the communities where patients networks as well. live. The emphasis will move toward virtual care and remote In other spaces, we have discussed the need for “collective intent health delivery with the majority of patients using integrated care networks” (CICNs) that would bring together providers, CICNs staffed by collaborative teams of drug researchers, clinical payers, pharmacies, academic medical centers, pharmaceutical development scientists and health care providers. Seeking to industry researchers and non-traditional partners to deliver provide better care at lower cost, primary care teams will join with health care in more patient-centric and outcomes-driven community partners to address factors that affect a community’s ways. CICNs will be jointly accountable for delivering improved health. To achieve the triple aim of health care initiatives (i.e., health outcomes and will align the behaviors of all participants enhancing patients’ experience of care, reducing per-capita around outcomes through financial and other incentives. These health care costs and improving population health) patient- networks will transform health care delivery by increasing patient centricity will inevitably need to be transformed into community- engagement, enabling remote health monitoring, expanding centricity. Advanced knowledge technologies, along with multi- access and building prevention into care. comorbidity epidemiology, behavioral interactions, ethnographic CICNs are similar to HOLNets but with a focus on care delivery. commercial interventions, predictive patient profiles (“health To realize their full potential, CICNs need to follow the four basic avatars”) and disease opportunity maps identifying undiagnosed principles of HOLNets, by being holistic in scope, being open by patients will allow people to take over many functions of primary design, encouraging real-time learning and building a network of care for themselves. diverse participants. In fact, we expect that, even though such a As already articulated in this year’s Point of view article, HOLNets network starts with participants from the health care delivery end promise to make drug development vastly more efficient and of the value chain, over time it would find benefits in expanding productive, by allowing for R&D paradigms that are adaptive to include a more holistic set of participants, and would in turn and have the ability to learn from real-time data and the deliver benefits across the ecosystem. insights and missteps of others. But such networks also provide The move to such networks is being driven, of course, by the opportunities for payers and providers to learn from real-time increasingly urgent need to make health care costs sustainable — data. By connecting the dots between datasets that are currently manifested in developments such as the passage of the Patient owned by individual entities, these networks will provide better Protection and Affordable Care Act in the US and the move information on benefits, risks and relative effectiveness of toward comparative effectiveness research in several major new therapies. They will enable greater access to affordable markets. These trends are fundamentally changing health care treatments and more effective ways to measure unmet needs. delivery. Payer incentives (and hence provider behaviors) are driving the move to patient-centric health care organizations that are fully aligned around patient outcomes and value.

12 Beyond borders Global biotechnology report 2012 Drug companies can play a relevant role in CICNs by adopting accountable care organizations and patient-centered medical communities with the goal of improving health outcomes, homes in the US to primary care trusts in the UK. By focusing often within a specific disease. BMS, for instance, launched a on outcomes, patient-centric approaches and preventive care, program in South Africa called Secure the Future to support such programs already provide some of the key building blocks the development and evaluation of cost-effective, sustainable of a HOLNet approach. HOLNets could supplement such models and replicable models for providing care and support to by bringing a broader spectrum of constituents from across the people living with HIV/AIDS in Africa. The program sought to ecosystem. They could also bring a disease-specific focus and, supplement the half hour of care that patients received at the more important, create a bold collective intent to cure or radically clinic with “23 ½ hours” of disease management, and ongoing improve outcomes within that disease. support was provided in patients’ homes and communities. At Ernst & Young, we are actively engaging with a broad Similarly, the Merck Foundation has committed US$15 million spectrum of health care stakeholders to build CICNs. People to fund the Alliance to Reduce Disparities in Diabetes, a public/ see the need for change and recognize the tremendous private partnership encouraging evidence-based collaborative transformative potential of a holistic network approach. approaches to improve care, improve health outcomes and Getting there won’t be easy, but we’re moving in the right reduce care disparities in low-income, underserved populations in direction. Stay tuned. Camden, New Jersey. This approach will have implications for the commercial models of drug companies. Successfully launching products in such networks will require an altogether different focus on understanding and articulating the value proposition to a community of patients and the network of participants. R&D transformation Building a network of this magnitude, and with this Health care much disruptive potential, is no trivial task. For delivery • Pooled precompetitive data organizations interested in moving in this direction, transformation • Standards a good starting point might be to create disease • Improved outcomes rs C Real-time learning networks which leverage the creative models that ye are • a N g • Patient-centric P Patient iv many health care systems are now piloting — from e approaches r • Adaptive trial s designs

s

n • Patients for life

a

i

Self-managed

c F

i

a

s

• Prevention patient m y

h i

l

y

P

Community-based

•

s

approaches C

e

o i t m i n m

u Commercial transformation • Pills+ • Services/solutions • Outcomes-focused and patient-centric • Demonstrating value with ecosystem data

Point of view HOLNets: learning from the whole network 13 HOLNets could also benefit by attracting the most innovative Pharmaceutical companies have much more to offer biotech and academic collaborators. This would represent a clear than just their fi nancial capital. departure from the current business development model, which is focused on securing technology/product rights and maintaining control of key decisions and data. Despite these pressures, pharma companies are acutely aware that more needs to be done to sustain the ecosystem of innovative In Progressions, we talk about the challenge that pharma companies emerging companies — not least because their own future growth face when trying to serve as “aggregators” in their experiments depends on it. This is a subject that large companies are giving with outcomes-focused approaches and partnerships. Pharma serious consideration. How can they do more to boost R&D companies are often viewed with suspicion in these coordinating productivity and support the ecosystem of emerging companies at a roles because they are perceived to have several conflicts of time when their own resources are growing relatively constrained? interest in the outcomes business (e.g., increasing the use of generics and focusing on prevention could save health systems One solution that has been proposed by some industry veterans large sums of money but would cannibalize pharma product is that pharma companies should band together to create a sales). But HOLNets are an area where they could play a central fund to purchase biotech IPOs. In the 9 January 2012 issue role in developing a new business model, while establishing their of BioCentury, for instance, Moncef Slaoui, John Maraganore credibility by contributing their own assets, bringing together a wide and Stelios Papadopoulos argue that such an approach could range of participants (including, where appropriate, competitors) validate companies and their approaches for other investors and setting up rules for open sharing and access. Unlike their and give a boost to the market for biotech public offerings. (For experiments with outcomes-focused business models, this would more on this approach, see the article by Moncef Slaoui on page be much closer to their traditional business of drug development. 21; John Maraganore’s views on making R&D more sustainable It would also be consistent with their corporate missions’ focus on and productive can be found on page 17.) While this is certainly bringing meaningful new medicines to patients. And the payoff an innovative idea that might be worth trying (assuming that could be bigger: a way to truly jump-start innovation, accelerate governance and other challenges could be appropriately the development of new products and improve health care delivery. addressed), it is not clear that catalyzing several more IPOs every By embracing and developing HOLNets, pharma companies would year would be sufficient to truly address the strains on biotech be helping themselves, helping the ecosystem of emerging biotech funding and the overall drug innovation model. companies and, ultimately, helping patients. More important, pharmaceutical companies have much more to offer than just financial capital. Even more valuable than funding are the other assets that pharma could contribute — data, knowledge (including valuable lessons about what has not worked) and human capital. If each large pharma shared some of these assets and allocated a tiny fraction of what it spends each year on in-house R&D to set up a HOLNet with other constituents around a particular area of interest, it might well have more impact on the efficiency and economic return of drug development than a business-as-usual approach. Pharma companies that take the lead in establishing

14 Beyond borders Global biotechnology report 2012 Biotech companies and investors Getting personal, getting networked As we’ve been discussing in these pages for the last few years, the biggest challenge for biotech companies and Christian Itin, PhD their investors is sustaining innovation at Micromet, Former President, CEO and Director a time when the long-standing business As demographic trends and increasing prosperity increase health care costs, innovators model for investment and R&D is under need solutions that truly address underserved medical needs while also reducing unprecedented strain. Sustaining overall costs. To do this, constituents across health care will need to avoid unnecessary innovation will inevitably involve some treatments — making personalized medicine approaches increasingly relevant. Yet, combination of drastically reducing biotech and pharma companies face several challenges in accomplishing this goal. development costs and time frames on the For most diseases, we lack diagnostic markers for selecting appropriate patients. The one hand and significantly boosting pipeline economics are challenging, with smaller market segments, clinical trials and ongoing output on the other. post-approval commitments to ensure safety.

These pressures have led to much soul- To truly achieve the potential of personalized medicine, we will need more searching by biotech leaders and investors. collaboration. We are in early days of identifying molecular biomarkers correlated Already, we have seen challenges to with disease progression and outcomes. Today, the search for biomarkers in clinical long-established ways of operating and trials and development of companion diagnostics is done by individual companies. increasingly creative approaches to But to really succeed, we need larger databases and uniform standards. Creating partnering, financing and conducting R&D this knowledge base systematically for all key disease areas is a huge undertaking in that attempt to adjust the risk/reward terms of scope, time and resources and can only be tackled through a broad common equation. Yet, these initiatives are not effort. Payers, pharmaceutical companies, regulators and clinicians have a common enough — even in aggregate — to truly make interest and will need to work together to generate such data sets, building on the biotech innovation model sustainable initiatives under way in the US and Europe. Policy makers may need to create stronger and fuel the leaps in productivity and incentives for biomarker studies. We will need strong protections for patients’ privacy efficiency that are needed. and other rights. It will be critical to get a broad spectrum of entities to join these networked efforts and we will need to negotiate access to their data — from the massive Against this backdrop of challenges, claims databases of payers to R&D data developed by the life sciences industry and companies and investors are more likely government. Pooling such data and making it publicly available would provide a key to be receptive to new approaches than starting point for new innovations in diagnostics, therapeutics and patient care. at any point in the industry’s past, and HOLNets have many advantages for biotech companies as well. As part of For small companies in particular, examples of open learning networks have such a consortium, biotech firms could such access is both hard to come by had no problem attracting small companies. contribute their own innovative strengths and increasingly valuable at a time of In an environment where the existing but, importantly, would also gain insights heightened regulatory uncertainty and risk. model is under strain and companies and from other members, including into investors are looking for ways to reduce previously unsuccessful approaches for For small companies, participation will the regulatory and other risks associated target selection, clinical trial design and likely be a trade-off between the perceived with drug development, we think that the like. In addition, biotech firms may need to hold on to information and the others may similarly see a net benefit in gain access to regulators in a way that an benefits of participation, such as access participating. Over time, if this approach individual company would be unlikely to to regulators and earlier insight into gains traction and shifts the very paradigm achieve — in effect getting an early view at new standards before they are publicly of drug development, companies may find new standards as they are being developed disclosed. As Marc Cantillon and Magali that investors see participation in a HOLNet and even playing a role in shaping them. Haas articulate in their articles, early as a significant risk-reduction strategy.

Point of view HOLNets: learning from the whole network 15 Providers Payers and policy makers

For providers, a key challenge in the new ecosystem will be The interests of payers and policy makers, perhaps more than figuring out how to succeed in an outcomes-driven, patient-centric those of any other entities, are perfectly aligned with the move to world. In the US, physicians will increasingly find themselves HOLNets. Indeed, the changes they are making to incentives to moving from a fee-for-service model to one in which they are address their biggest challenges — the need to tame health care costs rewarded based on episodes of care or their ability to improve while simultaneously covering more unmet medical needs due to outcomes. Indeed, the emphasis on outcomes is likely to affect demographic changes and expansions in coverage — are accelerating providers everywhere, as payers across the world look at ways to the shift. manage costs. As already discussed, these entities have so far been addressing To succeed in this environment, providers will need to improve these challenges by moving toward outcomes-based models such patient outcomes — and to do that, they will invariably need to as adopting some form of health technology assessment and get closer to patients. While one could argue that providers are negotiating pay-for-performance or episode-of-care reimbursement already closer to patients than most other potential HOLNet arrangements. With HOLNets, they have the opportunity to take members, the interactions they currently have with patients are this to the next level. Payers might contribute claims data and would a far cry from what success will increasingly require — enduring benefit significantly if these networks are able to drive down costs relationships and a deep understanding of individuals’ needs, across the spectrum of health care. Additionally, HOLNets provide an conditions and behaviors. Health care delivery will need to move opportunity to increase the focus on developing cures for diseases from a world in which patients only meet their doctors sporadically where there is significant unmet social need — a big gap between — typically for an annual checkup or when they fall sick — to one the costs a disease imposes on society and the resources currently in which new technologies and more sophisticated data allow devoted to R&D. It is no coincidence that early examples of this providers to monitor patients’ conditions on an ongoing basis and approach are often focusing on diseases where this gap is large, such develop real-time insights into the progression of their diseases. as Alzheimer’s disease and Parkinson’s disease.

This is one reason we are seeing an acceleration in EHR adoption Non-traditional entrants and the use of data to better define standards of care. Over time, providers will also need to develop enduring relationships with The move to an outcomes-focused ecosystem is attracting a host of patients to truly provide holistic care. “non-traditional” entrants. Firms from a broad range of industries — information technology, telecommunications, retail trade and others Providers would have much to contribute — EHR data, patients for — are drawn by the opportunity to apply their skills to the challenge clinical trials, etc. — and would also gain much in return, including of making health care costs sustainable. Developing new offerings the ability to improve outcomes by learning in real time from that are patient-centric and outcomes-driven will involve combining a research and from a richer pool of data that makes connections wide variety of capabilities. And at a time when finding new sources between EHRs, genetic profiles, claims data and much else. of growth is often challenging, the sheer size of the opportunity in health care is an attractive target. It will often be necessary to include some of these companies in HOLNets, since the skills and assets they bring (e.g., data mining, analytics, mobile technology to interact with patients) could be very valuable. They might participate as full partners or on a more limited, fee-for-service basis.

16 Beyond borders Global biotechnology report 2012 Patients and disease foundations

Last, but certainly not least, patients will To make this happen, patients will need to need to be part of the HOLNet approach. contribute their data — genetic information, It may become imperative Indeed, as already discussed, patients are social media threads, data about their to broaden the focus beyond at the center of the new ecosystem, with conditions, disease progression, side individual diseases as we more control over their data and health effects, etc. As we move to a world where currently defi ne them. care. Certainly, they have much to gain patients have more control over their by participating — no one has a bigger data, it will be important for HOLNets and So far, disease foundations have led the interest in improving health outcomes than their member entities to be transparent charge on behalf of patients by driving patients themselves. And, as discussed about how this data will be used, clearly academic researchers, companies and above, HOLNets are often likely to focus articulate the benefits to patients and regulators to focus on the urgent needs of on intractable diseases where there are ensure compliance with their data usage patients with a particular condition. These significant unmet needs — something that policies. Privacy remains a sensitive issue — organizations will continue to play a critical patients in those disease groups should be particularly in an area as personal as health role, since they have the trust of patients happy to encourage, particularly at a time — but with appropriate protections (such and can serve as an important intermediary. when there is increased competition for as separating medical data from personally In some cases, however, it may also become relatively scarce R&D budgets. identifiable information), informed consent imperative to broaden the focus beyond and a full understanding of the benefits, individual diseases as we currently define patients can be motivated to participate. As them. We turn to this aspect next. “trusted brokers,” disease foundations could help encourage patient participation.

Partnering for specialization

John Maraganore, PhD Alnylam Pharmaceuticals, CEO

If big pharma’s pipelines are any indication, the drug industry is The solution is increasingly obvious: partnership structures starving for innovation. While pharma needs to access biotech’s in which the discovery innovator gets paid for, and maintains innovation, biotechs and their investors are resistant to cede control of, higher-risk stages — and where the pharma partner its value. This is a recipe for stalemate. The industry needs provides downstream expertise. But this solution in turn requires different partnership structures which fully pay biotech firms for a fundamental rethinking of transaction and company structure. innovation and leave early-stage development in their hands, No biotech will forfeit the value of its innovation without a while allowing pharma to conduct later-stage development and considerable rethink of the economics. Nor will it readily give commercialization. up control of early development, for fear of being buried in a large company’s bureaucracy or sidelined in favor of an in-house The question is whether pharma can rely fully on biotech for its candidate. Only when companies cede authority over those innovation and whether biotech can rely fully on pharma for its areas in which they aren’t competitive will we see an industry late-stage development and global commercialization. For too whose productivity is commensurate with its investment, an long, the industry has been splintered into camps, each focused industry best prepared to harness the remarkable pace of on building value within its own organizations the only way it biomedical discovery and capable of meeting its obligations to knows: by maintaining control over the entire value chain. But patients. drug R&D and commercialization are now far too complex for any one company to be good at all of those disparate activities.

Point of view HOLNets: learning from the whole network 17 Beyond disease

It is not surprising that many of the early examples of R&D networks are focused on brain diseases. After all, these are conditions where there is a large (and, thanks to aging populations, growing) unmet medical need coupled with insufficient R&D investment relative to the cost imposed on society. The brain is perhaps the most complex system in the human body, but because of our limited ability to access this organ, it is also one of the least understood. These challenges have made it exceedingly difficult to develop treatments in this area — leading investors and companies to pull back because of the high risk involved.

While this investment gap — between the societal cost and level of investment — might be most significant in brain diseases, similar gaps exist for other ailments. Chronic diseases, for instance, are expected to impose a very large and rapidly escalating societal cost as populations age and emerging markets grow increasingly prosperous. While we have proven drugs to manage these conditions, very little has been done to apply personalized medicine approaches to better classify these diseases into subtypes and develop treatments that are more targeted and efficacious. At the same time, the economics of developing drugs for these diseases has become increasingly difficult, as drug developers have to compete with newly generic versions of their own past successes and an exceedingly cautious regulatory environment has escalated safety concerns in these indications. Chronic diseases would therefore be another prime candidate for a HOLNet approach, to close the gap between the high societal cost/medical need and relatively low levels of investment.

It is equally noteworthy that most of the efforts to close such gaps are being led by disease foundations and other nonprofits. Yet, HOLNets may at times also need to rethink traditional boundaries and definitions of disease. This has already been happening in personalized medicine, as insights from genetic data have redirected how we think about disease. In cancer — the area where personalized medicine approaches have made greatest headway — it has become increasingly apparent that what’s relevant is not where the disease is manifested (“breast cancer” or “blood cancer”) but the mechanism that causes it (e.g., a specific genetic mutation). By the same token, a disease foundation focused on a particular type of cancer may be too narrow if it seeks to develop a HOLNet purely for this ailment. It is therefore appropriate that organizations such as One Mind for Research are focusing on all brain diseases holistically rather than focusing only on individual diseases such as Alzheimer’s or Parkinson’s. Over time, such groups may find that even a widening of disease boundaries is too limiting an approach. After all, the human body is a very complex and interconnected system.

The bottom line is that, while many of the early examples are being led by disease foundations, it will be imperative to ensure that the focus is not overly narrow. Today’s networks have often been referred to as “disease networks,” but we think this name is too narrow and have intentionally chosen a broader term to emphasize that what’s important is not the focus on a specific disease but the creation of a framework that allows for continuous learning from real-time information sharing and openness.

18 Beyond borders Global biotechnology report 2012 Conclusion

Today, the health care ecosystem and its constituents face historic challenges. At a time when key stakeholders — payers, pharma companies, biotech firms and their investors — are increasingly resource-constrained, we need R&D paradigms that are several shades more efficient and productive. With aging populations and rapidly growing middle classes in emerging markets, societies need ways to accelerate cures for ailments that are expected to impose huge societal costs, such as neurodegenerative and chronic conditions. And as health care moves to a new patient-centric, outcomes-focused ecosystem, its constituents need ways to develop deeper relationships with patients to demonstrably improve their outcomes.

The HOLNet is a boldly different paradigm that seizes the opportunities latent in the changing health care ecosystem — big data, real-time insights, the diverse strengths of a wide range of players.

HOLNets provide some answers to all of these challenges. At a time when traditional approaches have become increasingly untenable, the HOLNet is a boldly different paradigm that seizes the opportunities latent in the changing health care ecosystem — big data, real- time insights, the diverse strengths of a wide range of players.

Getting there will take some adjustments. If HOLNets are about openness and learning, health care’s constituents will often need to be open to new approaches and learn new ways of doing things. For life sciences companies, this will involve different ways of thinking about intellectual property and recognizing that in some situations, sharing information may create more value than protecting it. Regulators will need to adapt frameworks to allow for drug development paradigms that are flexible and learn in real time. And ultimately, patients will need to willingly share their personal health data, with the recognition that they might reap some of the biggest dividends from this approach: better health outcomes, better drugs and cures for long-intractable diseases.

Point of view HOLNets: learning from the whole network 19 Patient-centric innovation: networked and personalized

At the same time, we must work even more closely with governments and regulators around the world. It currently takes too long to bring a new drug to market, particularly when one considers the benefit and life extension many therapies provide. N. Anthony Coles, MD Efforts are currently under way by both regulators and lawmakers, in collaboration with industry, to shorten the time from bench to Onyx Pharmaceuticals bedside. But more work must be done to incorporate the latest President, CEO and Member of the Board thinking about new clinical trial approaches and the acceptable Over the past decade, the traditional “one-size-fits-all,” chemistry- trade-offs between risk and benefit in order to race forward with based approach to pharmaceutical drug development has become much-needed improvements to our existing crop of therapies. increasingly untenable. It now takes an average of more than Despite the progress we have made in several disease areas, several US$1 billion and 12 years to bring new products to patients, and others — cancer, Parkinson’s disease and Alzheimer’s disease, to only 10% of promising compounds become new medicines. Spurred name a few — still need new and effective treatments. by the need to make drug development more cost-effective and by advances in genomics and genetics, a new paradigm has emerged Finally, we must be creative and open-minded about new that balances traditional chemical approaches with biological partnerships — with other companies, academic institutions, and genomic techniques to identify a new generation of targeted government and nonprofit organizations — and need to move therapies. These “smart drugs” can be given to the right patient at beyond the standard technology licensing approach. This means the right time and can treat the individual basis of disease. more unique collaborations, such as the one between Ford Motors and Medtronic to create an in-car glucose monitor, or between Meanwhile, our industry’s long-standing “go-it-alone” approach, in Novartis and Nintendo to raise disease awareness and educate which companies attempt to single-handedly discover and develop patients through the use of online gaming. In an effort to create one new medicines, is being challenged for its scientific productivity of these new approaches, Onyx has recently initiated an innovative and efficiency, and for the absence of scale in an age of rapid research alliance with the University of Texas MD Anderson innovation. We have to — and are starting to — find new ways to Cancer Center to accelerate the discovery and translation of new accelerate the development of even better therapies for unmet knowledge about cancer from the laboratory to patients. medical needs. Underpinning this new approach is the opportunity to collaborate with key groups and stakeholders to, in effect, The biopharmaceutical environment grows ever more complex “network” innovation. By partnering with networks of academicians, and potentially more prolific as new technologies give us fresh scientists, regulators, policy makers and patient communities, we insights into biology and the genome and as new digital tools make can create more breakthroughs that patients desperately need. it possible for researchers, patients and providers to collaborate in ways that would have been impossible even a decade ago. This First, and most important, our focus must remain on the patient. fundamental shift in thinking and activity creates the potential for As clinicians, we understand that no two patients are alike. For tremendous upheaval, and with this disruption comes unparalleled industry to embrace the individual differences between patients, opportunity to experiment with new models of collaboration. With we will need an intense focus on personalized medicine. By taking a so many people pulling toward a common goal, our challenge now is holistic, patient-centered approach and integrating patients’ genetic to all pull in the same direction. information with genomic research, we can partner with patients to move beyond one-size-fits-all pills and create new approaches to personalized health. Access to electronic medical records, biometric data and emerging technologies from the digital revolution leads to the assimilation and utilization of state-of-the-art clinical knowledge, which can allow us to move even closer to patients to meet their needs.

20 Beyond borders Global biotechnology report 2012 Protecting the biotech ecosystem

Beyond these efforts, I’ve also proposed — with a couple of other industry veterans, John Maraganore and Stelios Papadopoulos — that pharma companies should consider creating investment funds with the purpose of buying biotech IPOs. Acquisitions do not Moncef Slaoui, PhD currently represent a sustainable exit strategy, since they have very high hurdles and are relatively infrequent events beyond the control GlaxoSmithKline of small companies and their venture investors. Pharma-supported Chairman, Research & Development investment funds could boost the IPO market by validating At GlaxoSmithKline, we have about 14,000 scientists and spend companies — after all, pharma buyers have the most sophisticated almost US$6.4 billion a year on R&D. With such vast resources, one technical capabilities for assessing technology risks and the value could easily believe — and many large companies did as recently as a of companies. decade ago — that having a healthy ecosystem of emerging biotech companies is not terribly material to our success. Another way in which pharma companies could do more to support the ecosystem is through precompetitive collaboration. In target In fact, we believe the opposite. We have 14,000 scientists, but validation, for instance — the process of figuring out whether a there are probably a million life science scientists in the world — certain target can affect a particular biology and physiology for a which suggests that we will generate only 0.1% of the good ideas. disease — about 60%–70% of the targets we are working on are also So, everything we do is built on the premise that we need a strong being pursued by our competitors. This is expensive and wasteful, ecosystem of biotech companies. because target validation is not where we ultimately compete. The competitive play really comes after a target has been validated — for Yet, today this ecosystem is threatened. The biotech industry instance, in the kinds of chemistry we develop to create a drug. has historically thrived because investors could earn high returns commensurate with the huge risks involved in drug R&D. In recent This is particularly relevant in neurodegenerative diseases such years, investors’ willingness to make such high-risk bets has as Alzheimer’s, where target validation is tremendously slow and declined, for two reasons. First, as pharma companies’ resources expensive for numerous reasons. Animal models have proven got squeezed, they started looking for lower-risk approaches and ineffective, so validation has to happen in the clinic. Cognition is a investments. Second, returns from IPOs have declined — putting the subjective measure, and you need very large patient populations VC investment model under strain. to truly understand it. Lastly, neurodegeneration is a very slow process — it takes 10–20 years to express itself clinically. As a result, GSK is beefing up its venture arm, SR One. We have also announced deals with at least three other VCs — Europe’s Precompetitive collaboration may not be universally applicable. Index Ventures, Boston’s Longwood Fund and North Carolina- In disease areas where target validation is fairly quick and based Hatteras Venture Partners — where we are investing as straightforward, companies may not have much incentive to limited partners. And we continue to look for similar opportunities collaborate, and many biotech companies, in particular, view elsewhere with the right VCs. target validation as a source of competitive advantage. But in certain disease areas, precompetitive collaboration could be a We are also very active in business development, with alliances game changer. with about 50 different biotech companies. Almost all of these are strategic in the sense that they are not focused on a single project Now, more than ever, we need game changers. Sustaining the but rather on an entire segment of the company’s portfolio. This is biotech ecosystem is not an act of charity or corporate social critical, because it creates multiple exit opportunities for investors. responsibility — it is in the self-interest of big pharma companies. The good news is that through approaches such as the ones described here, we can use our extensive resources to really make a difference.

Moncef Slaoui Protecting the biotech ecosystem 21 To boost R&D, stop flying blind and start observing

Over the last couple of decades, Phase II trials have often grown from exploratory observational experiments at one or two clinical centers to quite large “mini-Phase-III” trials at tens of clinical sites, often on multiple continents, with tightly defined primary endpoints and structures designed to obtain the holy grail: p-value. This Joshua Boger, PhD drive to obtain a p-value of “significance” (i.e., below the arbitrary Vertex Pharmaceuticals and religious cutoff of 5%) on a primary endpoint thought to be Founder and Board Director “approvable” (i.e., acceptable for Phase III and for drug approval) Drug development is often described as a linear process: often leads to overreaching. In many cases, more modest endpoints formulating a hypothesis and then testing it in a series of would be more appropriate for the state of the drug candidate and experiments. That’s accurate as far as it goes, but it minimizes the known data. The result is Phase II trials that are larger, longer another pillar of science, observation. Science is an inherently and more expensive than should be necessary to advance the drug iterative process: hypotheses are refined based on observations into Phase III. and learning from prior experiments. Yet in our industry, drug development has become less and less about observation and Exacerbating the problem is the perceived need to “blind” Phase more and more about a rigid approach to hypothesis testing. This is II trials, keeping all but the most catastrophic observations under particularly true in Phase II clinical trials, the central — and arguably wraps until the process is completed and the data locked. Ironically, most important — phase of the development process. Phase II trials of this kind often generate a wealth of information about rich secondary endpoints (in addition to the primary The purpose of Phase II is to identify and begin to frame a drug’s endpoints) and about other scientific and mechanistic questions, possible benefits — how it improves health outcomes and the risks but none of these data are available for examination in real time, it might carry — which involves observing benefits and risks and due to the desire to “preserve the integrity” of the precious primary assembling data to determine dosage amount and schedule. While endpoint and its p-value. This strict blinding of Phase II trials this definitely requires hypotheses based on previous observations, imposes significant costs, including: lengthening the development the process of observation and hypothesis generation needs to process; losing the ability to quickly incorporate lessons from the continue in Phase II, as well. trial into subsequent, even overlapping, trials; and losing the ability to manage overall R&D resources in a more rational and timely Unfortunately, today’s Phase II trials often pay lip service to fashion. For sure, there are disease areas where, because of the observation and exploration, breezily truncate dose selection lamentable lack of objective endpoints, blinding of trials may be and do not welcome hypothesis generation — often before a drug required. But increasingly, efficacy endpoints for modern trials are candidate’s effects and side effects have been well characterized. In (or should be) beyond subjective influence. Safety reports, many of too many cases, we blow past experimental learning and go straight which are self-reported by patients, might be unduly influenced by to confirmation. So what’s wrong with that? Doesn’t that get you to inappropriate dissemination of ongoing data, but even here, there a drug sooner? Well, no, almost never. are procedures available to minimize this bias.

In an era of scientific breakthroughs, almost every important new So if running Phase II trials in a more open and exploratory manner drug will be forging new paradigms, breaking ground on endpoints has so many possible advantages, who is against it? Why doesn’t it and mechanisms and may even be the first therapy targeting a happen more often? The interests of many constituencies maintain disease. At the start of Phase II, there may be some anecdotal this p-value-worshipping status quo. Investors and analysts crave clinical observations and even considerable biochemical evidence simplicity, and there is no simpler discriminator than “What’s the thought to be predictive of benefit, but all of these data are usually p-value?” Complex, multi-endpoint, dose-range-finding trials are based on assumptions and analogies with other approaches. One of punished on Wall Street. Investors ask, “Why are your trials so the many guarantees of clinical research is that you are going to be hard to understand?” (The answer — that they were not designed surprised, with both downside and upside surprises. If you’ve locked to be easy for investors to understand — is usually not welcomed.) in your hypotheses before you get to Phase II, you’re going to miss In addition, regulators often insist on p-value trials. In the last much of that upside, and you won’t be agile enough to cope with the couple of decades, the FDA has taken a far more directive role downside. in the design of Phase II trials. Ironically, as the opportunities for

22 Beyond borders Global biotechnology report 2012 drug breakthroughs have increased, many in the FDA have taken The best clinical experiments gather the most (and most relevant) a more conservative and dogmatic approach to mid-stage clinical information in the shortest possible time and with the least possible development. Under the mandate of safety, detailed control of resources. Phase III awaits with its immutable endpoints and black- Phase II clinical plans by regulators has become the norm. The and-white success criteria. Meanwhile, let’s preserve Phase II as the implicit message from too many medical reviewers is: “design it my place in development to learn every day, not just in fits and starts way or face a clinical hold.” In new therapeutic areas or in existing separated by months — or even years — of self-imposed blindness. areas witnessing paradigm shifts, this often drives doctrinaire Time and money are wasting, and our patients need us faster than exploratory trials, which prematurely slot a new drug development any definitive Phase II “shortcut” will allow. plan into the closest precedent, rather than letting new insights drive new hypotheses and testing. Science by consensus is rarely In my experience, drugs that do not work and drugs that innovative. Lastly, management at drug development companies substantially exceed minimal expectations are easy to spot. While are often overly cautious. Who can criticize the crisp thumbs-up there are exceptions, if you need a statistician to measure benefit in or thumbs-down of a definitive Phase II trial? Lost opportunity and Phase II, then the drug didn’t work that well. In a world of profound missed serendipity are invisible losses, and the hyperbolic escalation opportunity to change medicine, maybe we shouldn’t be working of costs and time continues with no finger-pointing. on those middling cases. Identify as fast as possible the drugs that don’t work (and learn from them), and identify as fast as possible the upside surprises. Get on with the breakthroughs and leave the rest behind.

Joshua Boger To boost R&D, stop flying blind and start observing 23 Financial performance Financial performance Recovery and stabilization

The big picture

Growth in established biotechnology centers, 2010–11 (US$b)

% change 2011 2010 % change (normalized for large acquisitions) Public company data Revenues 83.4 84.1 -1% 10% R&D expense 23.1 22.6 2% 9% Net income 3.8 5.0 -24% -5% Market capitalization 376.0 401.1 -6% 0.2% Number of employees 163,630 177,100 -8% 4% Number of companies Public companies 617 629 -2% -1%

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

The aggregate financial performance of publicly traded Genzyme Corp., Cephalon and Talecris Biotherapeutics — which biotechnology companies in the four established clusters — the collectively had revenues of US$8.5 billion in 2010, made a United States, Europe, Canada and Australia — was encouraging significant dent in the industry’s 2011 performance. To get a in 2011, as the industry built on the recovery that had started sense of the organic “apples-to-apples” growth of the industry, we a year earlier. To fully appreciate this, one needs to view the have therefore calculated normalized growth rates that remove year’s numbers not just against the performance in 2010, but these three firms from the 2010 numbers. also in the context of the situation in 2009, when the industry was hit hard by the financial crisis and initiated a wave of cost With these adjustments, it becomes apparent that the biotech cutting unlike anything it had seen before. This resulted in a industry continued its return to pre-crisis levels of normalcy truly remarkable development — the industry reached aggregate in 2011. The revenue growth of public companies in the four profitability for the first time in its history, not because of the established clusters returned to double-digit territory for the first success of its commercial leaders, but because of steep cost time since the advent of the crisis. The sector’s top-line growth cutting by a broad swath of companies. of 10% compares favorably to the 8% growth rate in both 2010 and 2009 (adjusted for the Genentech acquisition). While this is To get a true picture of the year’s performance, we also need still a far cry from the high double-digit growth rates the industry to adjust for the fact that three large US-based companies were delivered through much of the last decade, companies are also acquired by non-biotech buyers, effectively removing them operating in a new reality now, with more cautious regulators and from the biotech pool in 2011. The loss of these three firms — increased pricing pressure from payers.

Financial performance The big picture 25 Perhaps the strongest measure of the industry’s increasingly On the other hand, the industry’s net income fell in 2011, even stable financial picture is R&D expenses. The industry, which had after adjusting for the three large acquisitions mentioned earlier. slashed R&D by 21% in 2009 (the only time in its history that this Among the commercial leaders that experienced a decline in net research-driven sector has cut R&D spending in aggregate), had income in 2011 were Amgen (which incurred a US$780 million seen a cautious return to positive territory in 2010, when R&D charge for a legal settlement), Amylin Pharmaceuticals (which grew by a modest 2%. In 2011, the picture strengthened further, incurred a US$431 million charge related to the termination of a as R&D increased by 9% (on a normalized basis). Even more telling strategic alliance) and Actelion (which incurred a US$407 million is evidence that the growth in R&D spending was broad-based, not charge related to a lawsuit). To a considerable extent, however, the driven by the activities of a few large firms. In the US, 62% of public fall in net income was driven not by events at a few companies as companies increased R&D spending in 2011, which is roughly in line much as broader trends across the industry. Companies that were in with historic trends. This represents a significant improvement from deep cost-cutting mode in 2009 and cautiously optimistic in 2010 2010, when 51% of companies had increased R&D spending, and a may have become somewhat more willing to loosen their purse dramatic reversal of the situation in 2009, when an almost identical strings in 2011. After all, while the huge aggregate profits of the percentage — 64% — had decreased R&D spending. The situation last two years have been a noteworthy event, this is an industry that in Europe was similarly encouraging, with 58% of companies has been in the red for the vast majority of its history. A decline in increasing R&D spending in 2011 (up from 55% in 2010). profitability may simply be a sign that things are indeed starting to return to normal.

Ernst & Young survival index, 2010–11

US Europe Canada 2011 2010 2011 2010 2011 2010 More than 5 years of cash 22% 24% 27% 39% 10% 18% 3–5 years of cash 9% 7% 10% 6% 10% 6% 2–3 years of cash 10% 13% 10% 14% 7% 7% 1–2 years of cash 20% 21% 21% 19% 24% 16% Less than 1 year of cash 39% 35% 32% 34% 49% 53%

Source: Ernst & Young and company financial statement data. Chart shows percentage of biotech companies with each level of cash. Numbers may appear inconsistent because of rounding.

26 Beyond borders Global biotechnology report 2012 United States

US biotechnology at a glance, 2010-11 (US$b)

% change 2011 2010 % change (normalized for large acquisitions) Public company data Revenues 58.8 61.1 -4% 12% R&D expense 17.2 17.2 0% 9% Net income 3.3 5.2 -36% -21% Market capitalization 278.0 292.1 -5% 4% Number of employees 98,560 113,010 -13% 5% Financings Capital raised by public companies 25.4 17.1 49% 49% Number of IPOs 10 15 -33% -33% Capital raised by private companies 4.4 4.4 -1% -1% Number of companies Public companies 318 320 -1% 0% Private companies 1,552 1,594 -3% -3% Public and private companies 1,870 1,914 -2% -2%

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

As always, since the US accounts for a large majority of the 2009 (adjusted for the Genentech acquisition). R&D increased industry’s revenues, the US story is very similar to the global one. by 9% on a normalized basis, after having declined sharply in The revenues of US publicly traded biotech companies declined 2009 and increasing by a modest 3% in 2010. The industry’s in 2011, but this was driven by the acquisitions of Genzyme, net income position weakened, even after normalizing for the Cephalon and Talecris by non-biotech acquirers. After normalizing three megadeals mentioned above. The number of companies for these large acquisitions, the US industry’s revenues increased held steady and employees grew by 5% on a normalized basis — by 12%, outpacing the 10% growth rate seen in 2010 and identical to the increase in headcount in 2010.

Financial performance United States 27 US commercial leaders, 2008-11

2008 2009 2010 2011 13 companies 13 companies 16 companies 16 companies

Organic growth Alexion Alexion

Amgen Amgen Amgen Amgen

Amylin Amylin Amylin Amylin

Biogen Idec Biogen Idec Biogen Idec Biogen Idec

Bio-Rad Laboratories Bio-Rad Laboratories Bio-Rad Laboratories Bio-Rad Laboratories

Celgene Celgene Celgene Celgene

Cephalon Cephalon Cephalon Acquired by Teva

Organic growth Cubist Cubist Cubist

Organic growth Gen-Probe Gen-Probe

Genentech Acquired by Roche

Genzyme Genzyme Genzyme Acquired by Sanofi

Gilead Sciences Gilead Sciences Gilead Sciences Gilead Sciences

Illumina Illumina Illumina Illumina

Life Technologies Life Technologies Life Technologies Life Technologies

Organic growth Salix Pharmaceuticals

Sepracor Acquired by Dainippon Sumitomo

IDEXX Laboratories IDEXX Laboratories IDEXX Laboratories IDEXX Laboratories

IPO Talecris Biotherapeutics Talecris Biotherapeutics Acquired by Grifols

Organic growth United Therapeutics United Therapeutics

Organic growth Vertex Pharmaceuticals

Organic growth ViroPharma

Source: Ernst & Young and company financial statement data. Commercial leaders are companies with revenues in excess of US$500 million. As mentioned earlier, the US biotech industry lost three of its companies graduated into the ranks of the commercial leaders. “commercial leaders” (firms with revenues in excess of US$500 Specifically, the revenues of Salix Pharmaceuticals, Vertex million) in 2011 due to the purchase of Genzyme, Cephalon and Pharmaceuticals and ViroPharma crossed the US$500 million Talecris. But biotech has always been a dynamic industry, and threshold, leaving the total number of commercial leaders even as these big companies were taken out, a fresh crop of unchanged at 16.

28 Beyond borders Global biotechnology report 2012 US biotechnology: commercial leaders and other companies, 2010-11 (US$b)

2011 2010 US$ change % change

Commercial leaders

Revenues 48.0 50.3 (2.3) -5%

R&D expense 9.2 9.4 (0.2) -2%

Net income (loss) 10.0 11.5 (1.5) -13%

Market capitalization 190.6 193.4 (2.7) -1%

Number of employees 64,050 79,000 (14,950) -19%

Other companies

Revenues 10.8 10.8 (0.0) 0%

R&D expense 7.9 7.7 0.1 2%

Net income (loss) (6.6) (6.2) (0.4) 6%

Market capitalization 87.0 97.1 (10.1) -10%

Number of employees 34,510 34,010 500 1%

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

Even though the number of commercial leaders remained numbers), the revenues of the commercial leaders grew by 9% unchanged at 16, the big firms that were acquired were much and R&D expenses grew by 4%. However, net income decreased larger than the three companies that replaced them. As a by 7% even after normalization. result, these mega-acquisitions had a significant impact on the performance of the industry’s commercial leaders. On a The performance of the other companies — the vast majority of normalized basis (i.e., removing the three acquisitions and the publicly traded US biotech industry — was relatively flat, with the three new commercial leaders from the 2010 and 2011 very small changes in revenues, R&D expense and net loss.

Financial performance United States 29 The US biotech industry outperformed the overall market in most of 2011 and early 2012 NASDAQ Composite Index EY biotech industry Dow Jones Industrial Average S&P 500 Index +25% The market capitalization of the US 2011 2012 biotech industry slightly outperformed +20% leading stock market indices during 2011 and the first five months of 2012. +15%

Micro caps did significantly better than +10% companies of other sizes during this +5% period, continuing the trend observed in last year’s report. 0%

-5%

-10%

-15%

-20% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Source: Ernst & Young and finance.yahoo.com. EY biotech industry represents the aggregate market cap of all US public biotech companies as defined by Ernst & Young.

US micro caps led the industry’s stock market performance in 2011 and early 2012 Largest cos (market cap above US$10b) EY biotech industry Mid-cap (US$2b–US$10b) Small-cap (US$200m–US$2b) Micro-cap (below US$200m)

+60% 2011 2012 +50%

+40%

+30%

+20%

+10%

0%

-10%

-20%

-30% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Source: Ernst & Young and finance.yahoo.com. EY biotech industry represents the aggregate market cap of all US public biotech companies as defined by Ernst & Young.

30 Beyond borders Global biotechnology report 2012 Selected US biotechnology public company financial highlights by geographic area, 2011 (US$m, % change over 2010)

Cash and Number Market equivalents of public capitalization Net income plus short-term Region companies 31.12.2011 Revenue R&D (loss) investments Total assets San Francisco Bay Area 68 61,108 14,376 3,954 1,412 16,698 30,691 5% 4% 7% 11% -31% 129% 55% New England 46 64,994 10,326 3,473 842 6,685 18,935 -2% 2% -17% -17% 207% -10% -29% San Diego 33 21,215 6,733 1,383 (810) 4,252 16,655 -3% -31% 11% 6% 148% 46% 27% New Jersey 24 42,723 5,570 1,541 964 3,836 11,908 -4% 29% 26% 3% 56% -2% -1% New York State 23 7,607 1,164 770 (336) 1,188 2,479 10% 17% 19% 18% -28% 60% 17% Southeast 20 3,211 209 200 (238) 528 828 5% 9% -29% -17% 11% 29% 36% Mid-Atlantic 18 6,658 1,399 816 (400) 1,720 4,465 -5% -45% 9% 10% 74% -17% 3% Los Angeles/Orange County 13 51,791 15,787 3,358 3,320 20,716 49,165 0% -3% 4% 9% -23% 18% 12% Pacifi c Northwest 13 3,916 501 431 (701) 585 756 0% -48% 137% 16% -8% -23% -40% Pennsylvania/Delaware 11 5,021 907 378 (186) 994 2,104 Valley -21% -48% -76% -51% -157% -58% -70% Texas 10 1,463 214 143 (112) 398 738 0% 5% 34% 28% 22% 74% 87% North Carolina 9 3,564 739 310 25 711 1,816 -25% -55% -67% 14% -71% -42% -44% Midwest 9 406 29 129 (227) 162 272 -10% -32% -10% 37% 48% 139% 155% Colorado 8 825 148 167 (206) 354 420 14% 8% 66% 46% 7% 49% 34% Utah 3 1,861 402 48 60 453 735 0% -17% 11% -4% -42% -16% -2% Other 10 1,638 295 101 (71) 394 676 25% 109% 79% 12% -36% 159% 201% 318 278,000 58,800 17,202 3,334 59,676 142,644 Total -1% -5% -4% 0% -36% 24% 5%

Source: Ernst & Young and company financial statement data. Percent changes refer to change over December 2010. Some 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

Financial performance United States 31 Europe

European biotechnology at a glance, 2010–11 (US$m)

In Europe, as in the US, publicly traded 2011 2010 % change biotechnology companies increased Public company data their top lines by 10%, compared to Revenues 18,911 17,233 10% 12% in 2010 and 8% in 2009. R&D expense, which had declined by 2% in R&D expense 4,921 4,513 9% 2009 and increased modestly by 5% in Net income (loss) (0.3) (568) -100% 2010, grew by a much more robust 9% Market capitalization 71,519 78,639 -9% in 2011. A significant difference from Number of employees 48,330 46,450 4% the US performance, however, was on Financings the bottom line. While US companies’ net profit decreased in 2011, European Capital raised by public 1,570 2,407 -35% companies companies went in the other direction, essentially bringing the industry to the Number of IPOs 6 10 -40% brink of aggregate profitability for the Capital raised by private 1,321 1,371 -4% companies first time in its history. However, this was essentially driven by a single event Number of companies at a commercial leader: Elan’s sale of its Public companies 167 170 -2% drug technology to US-based Alkermes Private companies 1,716 1,758 -2% for US$500 million. The number of Public and private companies 1,883 1,928 -2% employees increased by 4%, compared to 1% in 2010 and 2009 — another Source: Ernst & Young and company financial statement data. Numbers may appear inconsistent because of rounding. positive indication.

32 Beyond borders Global biotechnology report 2012 European biotechnology: commercial leaders and other companies, 2010-11 (US$m)

2011 2010 US$ change % change In the US, the list of commercial leaders Commercial leaders has been quite dynamic, with some companies being acquired and others Revenues 15,522 13,042 2,480 19% crossing the US$500 million threshold R&D expense 2,641 2,100 541 26% through organic growth. In Europe, Net income (loss) 2,024 1,429 595 42% however, the list of commercial leaders — Market capitalization 51,667 48,697 2,970 6% Actelion, Elan Corporation, Eurofins Number of employees 33,570 30,970 2,600 8% Scientific, Ipsen, Meda, Novozymes, Qiagen and Shire — has not changed Other companies since 2007. Revenues 3,389 4,191 (802) -19% R&D expense 2,280 2,413 (133) -6% In 2011, the performance of these Net income (loss) (2,024) (1,997) (27) 1% commercial leaders stood in stark Market capitalization 19,852 29,942 (10,090) -34% contrast to that of the rest of the industry. The revenues of commercial Number of employees 14,760 15,480 (720) -5% leaders increased by 19%, while those

Source: Ernst & Young and company financial statement data. of the other companies decreased by an Numbers may appear inconsistent because of rounding. identical percentage. The same pattern was repeated across all the major indicators, with the health of a few large companies increasing as the rest of the industry saw its performance worsen.

Financial performance Europe 33 Europe’s largest biotech companies outperformed the rest of the industry in 2011 and early 2012

Largest cos (market cap above US$2.5b) EY biotech industry Mid-cap (US$1b—US$2.5b) Small-cap (US$200m—US$2.5b) Micro-cap (below US$200m)

+40% As one might expect from the analysis 2011 2012 of commercial leaders and other +30%

companies, the market capitalization +20% of the largest companies outperformed that of the rest of the industry in 2011 +10% and the first five months of 2012. Small- 0% and micro-cap stocks performed worst -10% during this time frame. -20%

-30%

-40%

-50% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Source: Ernst & Young and finance.yahoo.com. EY biotech industry represents the aggregate market cap of all European public biotech companies as defined by Ernst & Young.

34 Beyond borders Global biotechnology report 2012 Selected European biotechnology public company financial highlights by country, 2011 (US$m, % change over 2010)

Cash and Number Market equivalents of public capitalization Net income plus short-term Country companies 31.12.2011 Revenue R&D (loss) investments Total assets United Kingdom 36 23,173 4,967 1,073 626 1,346 8,662 -10% 7% 13% 0% 54% 0% 14% France 19 5,985 3,371 588 (80) 1,098 4,989 -14% -26% 12% -5% 925% 14% 8% Sweden 24 4,964 2,612 676 124 438 7,798 9% -22% 14% 121% 4,943% -7% 17% Israel 21 1,604 82 92 (176) 202 454 11% -11% -8% -20% 26% -26% 7% Denmark 9 10,737 2,195 529 (12) 422 3,657 0% -2% 12% 3% -172% -56% 5% Germany 14 1,458 295 249 (151) 208 1,123 0% -28% 34% 14% -6% -53% 3% Switzerland 9 4,664 2,128 762 (425) 1,861 3,636 0% -37% 5% 32% -214% 1% 5% Norway 9 1,581 117 78 (44) 219 361 0% 1% 2% 30% -2% -16% 1% Netherlands 5 3,329 1,185 150 40 290 3,839 -29% -56% -31% -55% 109% -79% -31% Belgium 6 1,617 232 256 (209) 367 768 0% -22% -12% 7% 142% -1% 0% Other 15 12,407 1,727 467 307 834 3,879 15% 36% 51% 3% -132% 16% 18% Total 167 71,519 18,911 4,921 (0) 7,285 39,166 -2% -9% 10% 9% -100% -13% 12%

Source: Ernst & Young and company financial statement data. Percent changes refer to change over December 2010. Some numbers may appear inconsistent because of rounding.

Financial performance Europe 35 Canada

Canadian biotechnology at a glance, 2010-11 (US$m)

The financial performance of Canadian 2011 2010 % change publicly traded biotech companies continued to decline in 2011. Revenues Public company data decreased 21% to US$998 million. Revenues 998 1,271 -21% R&D expenditures fell for the third R&D expense 431 449 -4% consecutive year, to US$431 million, Net income (loss) (344) (358) -4% driven largely by continued cost- Market capitalization 4,042 4,714 -14% cutting measures. This drive to achieve efficiencies and cut costs also resulted Number of employees 3,600 4,880 -26% in a fall in employment in the sector. Financings Capital raised by public companies 574 396 45% There are, however, some signs of hope. Number of IPOs 0 0 0% After the financial crisis in 2008, the Capital raised by private companies 166 87 91% Canadian biotech sector responded with cost-cutting and efficiency Number of companies measures. The drive to do more with Public companies 71 72 -1% less has in turn led to some successes Private companies 146 153 -5% on the product development front, and Public and private companies 217 225 -4% many Canadian biotech companies announced positive clinical news in Source: Ernst & Young and company financial statement data. Numbers may appear inconsistent because of rounding. 2011 — a trend we haven’t seen for a while. Some companies obtained clinical and regulatory successes and others announced that they successfully advanced their products. These promising results were rewarded with an overall 53% increase in financing in 2011. However, despite this significant increase in financing over 2010, the sector is still below financing levels of 2005, 2006 and 2007.

36 Beyond borders Global biotechnology report 2012 Australia

Australian biotechnology at a glance, 2010-11 (US$m)

2011 2010 % change The performance of Australian publicly traded biotechnology companies showed Public company data robust improvement in 2011. Revenues Revenues 4,712 4,465 6% grew by 6%, R&D expenses by 13% and the R&D expense 583 517 13% collective bottom line improved by 15% Net income 822 717 15% relative to 2010. As always, these results Market capitalization 22,411 25,626 -13% are strongly affected by CSL, the colossus of Australia’s biotech sector, which continued Number of employees 13,140 12,760 3% to post healthy product sales and revenue Number of companies growth. In addition, the 2011 numbers Public companies 61 67 -9% were affected by transaction-related events at a couple of other Australian firms. Source: Ernst & Young and company financial statement data. Numbers may appear inconsistent because of rounding. Melbourne-based Mesoblast saw a significant improvement in its top and bottom lines thanks to a US$263 million up-front payment from US-based Cephalon as part of a strategic alliance in which Cephalon acquired global rights in three treatment areas to products derived from Mesoblast’s adult mesenchymal precursor stem cell technology. Similarly, results at Acrux were considerably boosted by a milestone payment of US$87 million from US-based Eli Lilly and Co. after the FDA issued marketing approval for Axiron.

Financial performance Australia 37 Financing Financing Innovative capital

The big picture

At first glance, 2011 might appear to be an impressive year steady at US$5.8 billion — essentially unchanged from last year for biotech fund-raising. Companies in the industry raised a and comparable to amounts raised by the industry in the years staggering US$33.4 billion during the year, second only to 2000, preceding the global financial crisis. when the genomics bubble was at its height. Venture capital held

Capital raised in North America and Europe by year (US$m)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

IPOs 602 484 2,157 1,781 1,806 2,263 116 840 1,316 857

Follow-on and other 3,885 12,894 12,968 10,235 19,972 14,246 5,360 11,270 8,497 9,780

Debt 2,628 92 33 2,958 561 6,249 4,758 4,078 10,117 16,915

Venture 3,623 4,096 5,682 5,417 5,379 7,638 6,184 5,743 5,867 5,838

Total 10,738 17,566 20,840 20,391 27,719 30,396 16,418 21,931 25,797 33,389

Source: Ernst & Young, BioCentury, BioWorld and VentureSource. Numbers may appear inconsistent because of rounding. Convertible debt instruments included in “follow-on and other.”

Debt ratios of selected companies: big biotech reaches maturity

Debt to market But the overall numbers do not tell the real story, and the true Debt to equity capitalization picture is very different. The dramatic increase in capital raised Big biotech can be explained in one word — debt. Specifically, a handful of “commercial leaders” (companies with revenues in excess of Amgen 113% 42% US$500 million) took advantage of low interest rates to raise Gilead Sciences 111% 25% large sums of debt, propelling debt totals to US$17 billion — the Celgene 33% 5% highest amount in the last decade, by a wide margin. As mature, Biogen Idec 17% 4% cash-flow-positive entities, these companies do not need to raise capital to fund R&D. Instead, they raised these large sums Big pharma for other purposes, such as financing acquisitions or stock Pfizer 47% 24% buybacks. The debt-to-equity and debt-to-market-capitalization Johnson & Johnson 34% 11% ratios of some big biotech companies now rival — and in some cases, exceed — those of their big pharma counterparts. Merck & Co. 30% 15%

Source: Ernst & Young and company financial statements. Ratios based on financial results as of 31 December 2011.

Financing The big picture 39 Innovation capital: enough to sustain innovation?

Conversely, the amount of capital raised in 2011 by the vast majority of firms that are not mature commercial leaders — what we term “innovation capital” — remained relatively unchanged at US$16.8 billion. Indeed, the amount of innovation capital has remained remarkably flat over the last four years, averaging US$16.2 billion — about US$2 billion below the average amount of innovation capital raised between 2004 and 2007. In addition, there is a haves-and-have-nots story even within the ranks of those that raised innovation capital. These funds were not evenly distributed, and a relatively small number of companies garnered a significant portion of the total innovation capital invested in any given year.

Enough to sustain innovation? Innovation capital in North America and Europe by year

Capital raised by commercial leaders Innovation capital 40

35

30

25

US$b 20

15

10

5

0 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, Capital IQ, BioCentury and VentureSource. Innovation capital is the amount raised by companies with revenues of less than US$500 million.

The differing realities for biotech’s haves and have-nots are likely to persist for the foreseeable future. Investors have moved beyond buying dreams of better, faster and cheaper drug development. Instead, in today’s market, an increasingly concentrated and sophisticated group of investors sets the terms of most fund-raising transactions. (See the 2011 issue of Beyond borders for a discussion of the skills leaders of earlier-stage companies need to thrive in this environment.)

40 Beyond borders Global biotechnology report 2012 Since innovation capital is the lifeblood of the biotech industry, let’s • The decline in IPOs has been well documented in many take a closer look at where these funds are going. Some facts: forums, including a recent cover story in The Economist which noted that the number of IPOs across all industries in the • Private companies raised US$5.8 billion in venture capital in US declined from an average of 311 per year between 1980 2011 — an amount that has remained remarkably steady despite and 2000 (a period that was also the heyday of biotech IPOs) all the turmoil over the last several years. Indeed, venture to an average of 99 per year between 2001 and 2011. The capital totals during 2004–12 have averaged US$5.9 billion article further points out that companies with revenues under annually. Within the US and Europe, the number of venture US$50 million (the typical biotech IPO) have been hardest hit, rounds larger than US$5 million decreased by 33 (or 12%) from declining from an annual average of 165 IPOs during 1980– 2010, while the average amount raised per round increased by 2000 to only 30 per year in the 2001–09 period. The most 15% to US$22.1 million. This increased concentration re ects commonly cited reasons for this decline are the increased an ongoing trend: investors are being more selective, but once regulatory burden and related ling costs. For biotech they decide to back a technology, they are willing to provide companies, however, the decline in IPOs is not attributable signi cant capital to fund at least the initial value-creating to increased compliance costs, but rather to market realities. activities. Despite expectations that a multiyear decline in Many VCs and management teams now prefer to exit by selling fund-raising by venture rms would negatively impact new the company to a strategic investor rather than pursue an IPO. company formations, the number of rst-round transactions In addition, generalist funds often avoid biotech IPOs because larger than US$5 million actually increased modestly in 2011 of liquidity considerations or an inability to evaluate emerging to 63 (from 55 in 2010) and the average amount invested per technologies or regulatory/reimbursement risks. As a result, round increased a robust 24%. As we have pointed out in prior companies going public must meet the standards of an years, the announced values in rst rounds are typically invested increasingly savvy group of specialist investors who can, and in tranches over many months, or even years, as companies do, set transaction terms. This is one reason why most biotech achieve development milestones. The 2011 average gures were IPOs in recent years priced below their desired offering ranges. also affected by three large initial rounds in the US that ranged • The bulk of innovation capital comes from equity and between US$60 million and US$100 million. Overall, these convertible debt nancings of publicly traded biotech gures show a more positive picture for venture nancing than companies. This has also held reasonably steady over the past is often re ected in the conventional wisdom about the industry. few years, though the list of companies accounting for most of That said, less than 10% of the 3,000-plus companies operating the capital raised varies somewhat from year to year. In 2011, across North America and Europe garnered over 70% of the these offerings raised a total of US$9 billion, a 14% increase aggregate venture capital invested. from 2010. Of this amount, approximately US$6 billion was • The amount of innovation capital arising from initial public raised in just 45 deals larger than US$50 million each. In offerings remains a modest part of overall capital raised. In 2010, there were 46 offerings larger than US$50 million, 2011, there were 16 IPOs in the US and Europe with aggregate which raised US$4.8 billion in aggregate. The US was home to proceeds of US$857 million. Of this amount, US$227 million was the vast majority of these offerings in both years. raised by the industrial biotech company Solazyme, reducing the take for therapeutic and diagnostic biotech companies.

Financing The big picture 41 Trend watch: evolving structures, exits and paths

The biotech industry has, by necessity, been at the forefront of novel business and financing structures over its history. Recently, many of the novel structures have centered on efficient exits for venture investors who are seeking quicker and more reliable paths to exit in the absence of an IPO market. In previous reports, we have described venture investors pursuing capital-efficient project financing structures, typically around a single asset (see, for example, the article by Francesco DeRubertis of Index Ventures in the 2009 issue of Beyond borders). More players have adopted this approach (e.g., Atlas Venture through its Atlas Development Corp.) for the right types of assets. Beyond capital efficiency, the goal is to balance the overall portfolio between assets that will “fail fast” (and fail cheaply) and those that will provide a quicker exit through a sale.

Tax minimization has not been a significant consideration for much of the history of biotech, since taxable income was a distant concept for most companies. However, as investors and companies adapt to the financing environment and seek ways to provide liquidity to investors sooner, we have seen a proliferation of tax-efficient limited liability company (LLC) structures. These structures have the advantage of allowing a company (or holding company) to sell or license multiple assets and return capital to shareholders without incurring corporate-level tax. Meanwhile, companies retain the flexibility of converting to a traditional corporate structure at a later date if an IPO becomes a real possibility. Examples of companies that have used the LLC approach include firms with licensing models such as antibody company Ablexis and Resolve Therapeutics, as well as holding company structures such as Forma Therapeutics (which reorganized itself under an LLC parent and may seek different buyers for individual programs that are held in discrete subsidiaries).

Reverse mergers have offered an alternative path to the public market, with 6–10 such transactions occurring in each of the last several years. However, regulators have tightened the listing requirements for reverse mergers, leading some companies to consider other alternatives. In 2011, Coronado Biosciences became the first biotech to take a different path. The company voluntarily registered its securities (without a public offering of stock), then sought permission to trade over the counter and subsequently pursued a listing on a national exchange. In early 2012, OvaScience initiated a similar process. This approach may become a viable alternative for companies that require a path to liquidity but want or need to avoid the time, expense and execution risk of a traditional IPO.

For a small-cap public company seeking to access the public market, announcement (or leak) of its intent to conduct a follow-on offering inevitably drives down the stock price before the deal. In the past, PIPE deals allowed companies to address this problem by conducting a privately negotiated transaction, but PIPEs have fallen out of favor with investors, who are unwilling to wait for liquidity in a volatile market. A new innovation has therefore emerged to fill the gap — the at-the-market, or ATM, offering. Under this arrangement, a company engages an investment bank to sell up to a certain number of shares in the open market (to fulfill buy orders that arise in the ordinary course of business) at prices that fall within a pre-established range. While it may take several weeks to complete the full fund-raising, depending on the daily volume of trading in the company’s stock, if managed correctly a company may achieve a better overall result.

42 Beyond borders Global biotechnology report 2012 Distribution of total capital raised in North America and Europe by year

US Europe Canada

100% 3% 3% 3% 2% 2% 5% 8% 4% 5% 7% 9% 90% 15% 15% 16% 17% 17% 26% 80% 22% 22% 22%

70%

60%

50% 89% 80% 81% 83% 40% 76% 74% 73% 79% 71% 71% 30%

20%

10%

0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, BioCentury, BioWorld and VentureSource. Percentages may not total to 100% due to rounding.

Distribution of innovation capital raised in North America and Europe by year

US Europe Canada

100% 4% 6% 5% 3% 3% 3% 10% 4% 90% 15% 16% 15% 24% 24% 24% 22% 80% 27% 70%

60%

50% 82% 81% 80% 40% 72% 71% 71% 75% 63% 30%

20%

10%

0% 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, BioCentury, BioWorld and VentureSource. Percentages may not total to 100% due to rounding. Innovation capital is the amount raised by companies with revenues of less than US$500 million.

Financing The big picture 43 United States

US biotechnology financings by year (US$m)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

IPOs 456 448 1,618 626 944 1,238 6 697 1,097 814

Follow-on and other 3,442 9,986 10,337 8,110 15,242 8,944 4,250 8,745 6,313 8,199

Debt 2,564 53 9 2,857 282 5,930 4,641 3,421 9,717 16,395

Venture 2,164 2,826 3,551 3,328 3,302 5,464 4,445 4,556 4,409 4,352

Total 8,626 13,313 15,515 14,922 19,770 21,576 13,342 17,419 21,537 29,760

Source: Ernst & Young, BioCentury, BioWorld and VentureSource. Numbers may appear inconsistent because of rounding. Convertible debt instruments included in “follow-on and other.” As the US goes, so goes the world in terms of biotech US$10.5 billion), Gilead Sciences (US$4.7 billion) and financing. Capital raised in the US rose by an impressive Illumina (US$800 million). Amgen also repaid US$2.5 38%, to US$29.8 billion. However, the increase was billion of debt, repurchased US$8.3 billion of its common driven by debt issuances by commercial leaders, stock and paid its first-ever dividend of US$500 million. principally Amgen (which issued debt in excess of

44 Beyond borders Global biotechnology report 2012 US innovation capital flatlines, even as total funding rises sharply

Capital raised by commercial leaders Innovation capital 35

30

25

20 US$b 15

10

5

0 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, Capital IQ, BioCentury and VentureSource. Innovation capital is the amount raised by companies with revenues of less than US$500 million.

Innovation capital, while increasing slightly in 2011, rounds of around US$100 million each (Tesaro, Ascletis, has reached a plateau of approximately US$14 billion Intrexon Corp. and Portola Pharmaceuticals). Ascletis, annually in the US — virtually unchanged from the levels which received an initial US$50 million tranche, is a seen before the financial crisis, with the exception particularly interesting story, as the company’s business of 2007. Significant transactions in 2011 included plan is built around operating in both the US and China, convertible debt issuances by Dendreon (US$620 and the majority of the investment came from investors million), Human Genome Sciences (US$495 million) in China. As noted previously, the largest IPO of the and Regeneron Pharmaceuticals (US$560 million) as year was the US$227 million raised by industrial biotech these companies ramped up commercial operations. The Solazyme, while Clovis Oncology had the largest IPO by industry also saw 11 follow-on equity offerings of greater a therapeutics company (US$139 million) as well as a than US$100 million each, led by the US$258 million subsequent follow-on offering of US$75 million. raised by Ariad Pharmaceuticals and four venture

Financing United States 45 Quarterly breakdown of US biotechnology financings (US$m), 2011 Macroeconomic trends are evident First quarter Second quarter Third quarter Fourth quarter Total in the pattern of capital raised during IPOs $295 $287 $49 $182 $814 2011, as growing confidence in (5) (2) (1) (2) (10) the economy prompted increasing Follow-on and other $3,374 $1,923 $720 $2,183 $8,199 investment in the latter half of 2010 (56) (57) (29) (40) (182) and the first half of 2011. However, Debt $1,176 $3,514 $457 $11,248 $16,395 (23) (17) (17) (23) (80) that forward momentum slowed Venture $966 $1,200 $819 $1,366 $4,352 significantly in the second half of (79) (72) (78) (83) (312) the year (with the exception of debt Total $5,811 $6,924 $2,046 $14,979 $29,760 offerings by commercial leaders) (163) (148) (125) (148) (584) as public market investors sought Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource. lower-risk investments in the wake Figures in parentheses are number of financings. Numbers may appear inconsistent because of rounding. of the debt ceiling debate in the US Congress and the growing economic challenges in the Eurozone. Venture capital — with its inherently longer- term view of the world — held steady through 2011.

46 Beyond borders Global biotechnology report 2012 Capital raised by leading US regions, 2011 4.0 There is a haves-and-have-nots New England story even within the ranks of San Francisco Bay Area 3.5 companies raising innovation capital. The equivalent chart in

3.0 prior years’ reports has presented total capital raised and venture capital raised on the two axes. 2.5 This year, we replaced total capital raised with innovation capital raised 2.0 — effectively removing the skewing effect of the large financings of 1.5 Pacific Northwest commercial leaders. This had a

San Diego dramatic impact on Los Angeles/

Innovation capital raised (US$b) raised capital Innovation 1.0 Orange County, which was typically an outlier on the top left hand Mid-Atlantic 0.5 New York State corner of the chart because New Jersey of Amgen’s debt transactions. Los Angeles/Orange County New England, San Francisco Bay 0 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Area and San Diego retain their Venture capital raised (US$m) positions as the three leading clusters for venture capital raised. Source: Ernst & Young, BioCentury and VentureSource. Size of bubbles represents number of financings per region. Innovation capital is the amount raised by companies with revenues of less than US$500 million.

Financing United States 47 US biopharmaceutical venture capital as a share of total venture capital by year

While the amount of innovation 20%

capital and venture capital 18% raised by biotech has held steady in recent years, the 16% industry’s share of total venture 14% capital raised has fallen over 12% the last two years. In 2011, 10% biopharmaceutical companies attracted 12% of US venture 8% capital, down from 13% in 6%

2010 and 17% in 2009. This 4% represents the lowest share that 2% the industry has garnered in the last seven years. The share 0% of venture capital raised by 2005 2006 2007 2008 2009 2010 2011 health care companies showed Source: VentureSource. a similar decline, from 28% in 2010 to 26% in 2011.

US biotechnology IPOs by year

Capital raised Number of deals

In 2009 and 2010, the US IPO 1.8 30 market rebounded from its 1.6 2008 financial-crisis depths. 25 1.4 In 2011, however, the market retreated both in terms of the 1.2 20 number of completed deals and 1.0 15 the aggregate proceeds raised. 0.8 The median amount raised 0.6 10 deals Number of in 2011 was US$55 million 0.4 (similar to the prior year’s in IPOs (US$b) raised Capital 5 US$52 million) and the smallest 0.2 transaction was US$40 million. 0.0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, BioCentury, BioWorld and VentureSource.

48 Beyond borders Global biotechnology report 2012 The vast majority of 2011 US IPOs priced below their desired ranges

$20

$15

$10

$5

$0 CLVS ECYT PCRX FLDM ACRX NLNK TZYM HZNP SZYM BGMD

Source: Ernst & Young, finance.yahoo.com and media reports. Vertical lines indicate IPO filing ranges; horizontal dashes indicate offer prices.

Only Solazyme drew enough investor interest for its IPO to price above the expected range in 2011, while Fluidigm Corp. and Clovis Oncology priced within their expected ranges. In the remaining transactions, investors required companies to reset their expectations of value and in some cases issue additional shares so that proceeds would be sufficient to fund operations to the next meaningful development milestone.

Financing United States 49 2011 US IPO performance

+30%

+20%

+10%

0%

-10%

-20%

-30%

-40%

-50% 31 December 2011 closing price relative to offer price offer to relative price 2011 closing 31 December

-60%

-70% PCRX ECYT BGMD ACRX FLDM TZYM SZYM HZNP NLNK CLVS

Source: Ernst & Young and Capital IQ.

Despite lower-than-expected IPO prices on debut, most new their IPO prices, and 40% lost more than half of their value listings declined significantly by the end of 2011, further by the end of 2011 (the overall performance is a decrease dampening investor enthusiasm for more new listings. Overall, of 25%). The companies suffering the biggest declines fall the IPO class of 2011 traded down 22% through the end of into two categories: commercial-stage companies that have 2011. However, this has improved to just a 1% decline as we missed revenue growth expectations and development-stage go to press at the end of May 2012. Two-thirds of companies companies that have had clinical setbacks on their lead, and in that went public over the last three years are now trading below some cases only, product candidate.

50 Beyond borders Global biotechnology report 2012 Europe

European biotechnology financings by year (US$m)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

IPOs 136 36 454 995 853 1,021 111 143 219 43

Follow-on and other 126 1,769 2,196 1,587 3,141 4,600 872 1,892 1,792 1,134

Debt 63 39 24 100 279 319 108 654 396 393

Venture 1,259 1,064 1,860 1,776 1,872 1,821 1,531 1,091 1,371 1,321

Total 1,585 2,908 4,534 4,459 6,146 7,761 2,622 3,779 3,778 2,891

Source: Ernst & Young, BioCentury, BioWorld and VentureSource. Numbers may appear inconsistent because of rounding. Convertible debt instruments included in “follow-on and other.”

In contrast to the US, financing in Europe has not regained the Across Europe, there were 56 venture rounds of greater than levels seen prior to the financial crisis. A retreat in the public US$5 million (down from 65 in 2010). The most significant markets in 2011 resulted in overall financing levels that are venture capital transactions included US$139 million raised back to those seen in 2008 — the height of the global financial by Symphogen (Denmark), US$99 million raised by Biocartis crisis — reflecting the continuing struggles of the Eurozone (Switzerland) and US$96 million raised by Circassia (United countries over the sovereign debt of some member countries. Kingdom). In aggregate, biotech accounts for approximately While the biotechnology sectors of these countries are 15% of total venture capital investment across Europe, a slightly relatively small, the uncertainty has driven investors across the higher percentage than in the US in 2011. European companies continent to seek lower risk. One bright spot is that, similar to issued US$393 million in debt, about two-thirds of which came the US, Europe has seen venture capital hold relatively steady. from Switzerland-based Actelion.

Financing Europe 51 European innovation capital by year

Capital raised by commercial leaders Innovation capital 9

8

7

6

5 US$b 4

3

2

1

0 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, Capital IQ, BioCentury and VentureSource. Innovation capital is the amount raised by companies with revenues of less than US$500 million.

Reflecting the fact that Europe has fewer large commercial stage companies, the vast majority of all capital raised meets our definition of innovation capital. Capital raised by commercial leaders in 2011 includes a US$265 million debt transaction by Actelion Pharmaceuticals.

52 Beyond borders Global biotechnology report 2012 Quarterly breakdown of European biotechnology financings (US$m), 2011

First quarter Second quarter Third quarter Fourth quarter Total The year began strong for Europe, IPOs $30 $12 $0 $0 $43 as capital raised in the first quarter (4) (2) (0) (0) (6) of 2011 represented an increase Follow-on and other $606 $284 $139 $105 $1,134 of approximately 18% over the (31) (21) (20) (19) (91) fourth quarter of 2010. However, Debt $72 $50 $2 $268 $393 concerns about overall economic (3) (5) (2) (2) (12) conditions caused a precipitous Venture $455 $190 $252 $423 $1,321 decline in funding beginning in (40) (39) (37) (37) (153) the second quarter. This was Total $1,164 $537 $394 $796 $2,891 particularly marked in the public (78) (67) (59) (58) (262) markets, where investors became Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource. more risk averse in the face of Figures in parentheses are number of financings. Numbers may appear inconsistent because of rounding. mounting concerns about recession and debt defaults. These conditions had less of an impact on venture capital investing, since VCs can take a longer-term view and increasingly expect to achieve returns from strategic sales rather than the equity markets.

European biotechnology IPOs by year

Capital raised Number of deals The IPO market has been virtually 1.2 30 closed in Europe since the financial crisis, with no improvement 1.0 25 expected in the near term. Many of the transactions that have 0.8 20 been completed in recent years were listed on alternative market 0.6 15 exchanges with lower listing standards. The 2011 IPOs took 0.4 10 deals Number of place on such exchanges in Sweden

Capital raised in IPOs (US$b) raised Capital 0.2 5 and Israel and raised less than US$15 million each. 0.0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, BioCentury, BioWorld and VentureSource.

Financing Europe 53 Capital raised by leading European countries, 2011 As in prior years, the UK led Europe in 0.6 number of financing rounds and venture Switzerland capital raised. The venture amount raised in 2011 rose slightly from 2010. 0.5 Switzerland retains its perennial strength in venture capital and rose up the rankings 0.4 due to the debt offering of Actelion. Sweden The size and position of the remaining Denmark countries is heavily dependent on whether United Kingdom France a single large investment occurs in any 0.3 particular year. Germany

0.2 Total capital raised (US$b) raised capital Total Netherlands Austria 0.1

0 0 50 100 150 200 250 300 Venture capital raised (US$m)

Source: Ernst & Young, BioCentury and VentureSource. Size of bubbles represents number of financings per country.

54 Beyond borders Global biotechnology report 2012 Canada

Canadian biotechnology financings by year (US$m)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

IPOs 10085160950000

Follow-on and other 703 238 633 392 447 318 1,139 435 537 1,589 Debt 0934127

Venture 199 206 271 313 205 352 207 97 87 165

Total 527 1,345 791 1,010 1,803 1,060 453 733 482 739

Source: Ernst & Young, Canadian Biotech News and company websites. Numbers may appear inconsistent because of rounding. Separate subtotals for “follow-on and other” and “debt” are not available prior to 2007.

In 2011, Canadian public biotech companies raised The Canadian government, along with several of the provinces, US$574 million, a US$178 million increase over 2010. Fifteen announced various programs to help stimulate innovation in the public companies raised 80% of the total public financing sector. Some big pharma companies have also partnered with take, including Atrium Innovations, which conducted a large the public sector to create investment funds that should result debt transaction. This represents an improvement over in increased investments in private companies. Similar to trends 2010, when most of the public company financing went to in the US, there has been an increase in venture financings just eight companies. Private companies raised more than of single-product companies with lean operations that focus US$165 million, which represents a 91% increase over 2010. on advancing a technology or molecule in the most capital- In addition, 2012 is already off to a strong start with just over efficient manner possible. With a complete dearth of IPOs over US$50 million in investments announced. the last five years, the focus of venture investors is clearly on positioning companies and their technologies for acquisition.

Financing Canada 55 Capital raised by leading Canadian biotech clusters, 2011 The relative position of leading clusters 250.0 changed in 2011. Quebec moved into first place in total capital raised on the Québec strength of Atrium Innovations’ large 200.0 debt financing. On the venture capital front, Montréal and Vancouver switched places relative to their 2010 standings, Montréal Toronto with Montréal taking the lead. 150.0

100.0

Calgary Vancouver Total capital raised (US$m) raised capital Total

50.0 Ottawa

0 010203040 50 60 70 80 Venture capital raised (US$m)

Source: Ernst & Young, BioCentury and VentureSource. Size of bubbles represents number of financings per country.

56 Beyond borders Global biotechnology report 2012 Quarterly breakdown of Canadian biotechnology financings (US$m), 2011

On a quarterly basis, the total First quarter Second quarter Third quarter Fourth quarter Total amounts raised in 2011 were IPOs $0 $0 $0 $0 $0 relatively consistent for three of (0) (0) (0) (0) (0) the four quarters and approximated Follow-on and other $121 $125 $105 $97 $447 quarterly amounts in 2010. (23) (17) (15) (19) (74) Financings in the third quarter in Venture $40 $2 $102 $21 $165 (7) (4) (10) (5) (26) 2011 were double those of the Debt $4 $1 $116 $6 $127 other three quarters. Based on (1) (1) (4) (4) (10) a preliminary review of the first Total $165 $128 $323 $124 $739 quarter of 2012, the upward trend (31) (22) (29) (28) (110) observed in 2011 appears to be Source: Ernst & Young, BioCentury, BioWorld and Venture One. continuing. Figures in parentheses are number of financings. Numbers may appear inconsistent because of rounding.

Financing Canada 57 Deals Deals Pharma recalibrates

The big picture deals being driven by non-big pharma We are unlikely to see many (if any) acquirers (e.g., Teva Pharmaceutical additional megadeals involving big Industries, Grifols and Forest Laboratories). pharma in the foreseeable future, as Mergers and acquisitions Given the critical role that big pharma could most companies have announced their play in supporting the biotech innovation intention to focus on smaller “tuck-in” deals Based on the overall numbers, merger and ecosystem (discussed in this year’s Point (acquisitions of products and technologies) acquisition (M&A) activity in the biotech of view article) and the fact that the valued below US$5 billion, and quite often industry looked robust in 2011. The number expected exit for most venture investors below US$1 billion (e.g., Merck & Co.’s of pharma-biotech and biotech-biotech is an acquisition, this lack of activity is acquisition of Inspire Pharmaceuticals M&As in the US and Europe increased from unsettling. With big pharma in the midst of and Novartis’ purchase of Genoptix in 49 in 2010 to 57 in 2011, while their total crossing the long-awaited patent cliff, many 2011). This trend continued to be visible value grew from US$20 billion to about observers assumed that we would witness a in early 2012 with GlaxoSmithKline US$25 billion over the same time period more pronounced upsurge in transactions — taking a run at Human Genome Sciences (after normalizing the numbers by removing particularly for targets with product revenue with a US$2.6 billion offer, and Bristol- US$31 billion of megadeals from the 2011 or very late-stage product candidates. In Myers Squibb Co. buying Inhibitex for totals). The US$25 billion in megadeal- this light, it’s remarkable how few pharma- US$2.5 billion and reportedly offering adjusted M&A transactions represents the biotech acquisitions actually occurred in US$3.5 billion for Amylin Pharmaceuticals second-highest total in the last six years, 2011. Only Sanofi’s acquisition of Genzyme (which, according to media reports, second only to 2008, when the industry (which really played out in 2010 but did not subsequently attracted the interest of other announced US$28 billion of M&A deals. get finally negotiated and closed until 2011) bidders as well.) entered the ranks of the year’s 10 largest But the overall numbers mask some deals. Even more noteworthy, big pharma The reasons for big pharma’s focus on more troubling trends. In particular, big pharma was the buyer in only 7 of the year’s 57 modest-sized deals are varied. Many big was conspicuously absent from the buyer’s M&A transactions. players have taken on more debt thanks to table in 2011, with many of the largest large mergers in prior years (e.g., Pfizer/

US and European M&As, 2006-11

Pharma-biotech Biotech-biotech Pharma-biotech megadeals Biotech-biotech megadeals Number of deals

70 70

60 60

50 50

40 40

30 30 Number of deals Number of

Potential value (US$b) value Potential 20 20

10 10

0 0 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, Capital IQ, MedTRACK and company news. Chart excludes transactions where deal terms were not publicly disclosed.

Deals The big picture 59 Wyeth, Merck/Schering-Plough, Novartis/ bargains to be had. Gilead Sciences, Biogen US$16 billion, although its stock price has Alcon, Roche/Genentech). In addition, all of Idec and Celgene Corp. all have market caps remained relatively flat over the last year. the big pharmas are focused on rationalizing of more than US$30 billion, while Amgen’s Actelion Pharmaceuticals, with a market their operations and seeking new markets value rivals that of several big pharma cap of US$5 billion, has seen its stock under for growth (including pursuing deals in companies. Such valuations effectively pressure over the last year. Other European emerging markets). As mentioned in the place these companies out of reach of most firms with significant market caps include Point of view article, this increased debt big pharma acquirers, especially when Elan Corp., Novozymes and Qiagen. load combined with slowing revenue growth one factors in a premium and accounts for and the need to maintain dividends and pharma’s reduced firepower. The next tier So who was active in M&A deals? In the stock buybacks has resulted in a decrease of commercial leaders valued above US$5 relative absence of big pharma, acquirers in acquisition firepower of the pharma billion includes Alexion Pharmaceuticals included: big biotech firms (Amgen, Gilead industry by as much as 30%, according to (an orphan-drug-focused company with Sciences, Cephalon, Alexion and Shire); an internal Ernst & Young analysis. And one product on the market), with a value generic/specialty pharma players (the of course previous consolidation in the in excess of US$17 billion, up nearly previously mentioned Teva and Forest); industry has reduced the absolute number 100% over the last 12 months; and Vertex Japanese pharma companies (Daiichi of buyers with the scale to execute a large Pharmaceuticals, valued above US$13 Sankyo, Kyowa Hakko Kirin and Takeda transaction. billion, a nearly 20% rise from the previous Pharmaceuticals) seeking technologies and year. These market values likely reflect sources of growth beyond the domestic Meanwhile, the market caps of biotech optimism regarding a takeover, but given market where they have traditionally commercial leaders (companies with that only Genentech and Genzyme have been strong; diagnostic companies revenues in excess of US$500 million — been purchased for values above US$15 (Quest Diagnostics); and even a food essentially the only firms that are likely to billion in the history of the industry, deals of company (Nestlé). move the needle on big pharma revenues) this magnitude cannot be considered likely. are high enough to ensure that there are no In Europe, Shire also has a value above

Selected M&As, 2011

Company Country Acquired or Country Total potenial CVRs/milestones merged company value (US$m) (US$m)

Sanofi France Genzyme US 20,100 3,800 Gilead Sciences US Pharmasset US 11,200 – Teva Pharmaceutical Industries Israel Cephalon US 6,200 – Grifols Spain Talecris Biotherapeutics US 4,000 - Forest Laboratories US Clinical Data US 1,200 – Alexion Pharmaceuticals US Enobia Pharma Canada 1,080 470 Alkermes US Elan Drug Technologies Ireland 1,000 – Amgen US BioVex US 1,000 575 Daiichi Sankyo Japan Plexxikon US 935 130 Shire UK Advanced Biohealing US 750 ND Quest Diagnostics US Celera US 657 ND Gilead Sciences US Calistoga Pharmaceuticals US 600 225 Cephalon US Gemin X Pharmaceuticals US 525 300 Bristol-Myers Squibb US Amira Pharmaceuticals US 475 150

Source: Ernst & Young, Capital IQ, MedTRACK and company news. “Total potential value” includes up-front, milestone and other payments from publicly available sources. “ND” refers to deals where CVR/milestone amounts were not publicly disclosed.

60 Beyond borders Global biotechnology report 2012 Premiums, multiples and In last year’s report, we noted the increased to Genzyme’s shareholders was certainly risk sharing use of post-close milestones to help bridge present during the deliberations. In 2011, valuation gaps between buyers and sellers. Cephalon negotiated a deal to be acquired Gilead Sciences made a huge splash with It is interesting to note that all of the by Teva Pharmaceuticals in the year’s third- its fourth-quarter offer for hepatitis C largest acquisitions of private companies largest transaction after defending against virus company Pharmasset for a startling included in the chart on page 60 and two a hostile bid from Valeant Pharmaceuticals. US$11.2 billion — an 89% premium over of the public-company acquisitions (Sanofi/ In early 2012, GlaxoSmithKline took its the value the company was trading at Genzyme and Forest Labs/Clinical Data) appeal directly to shareholders after Human prior to the deal announcement, and used milestones. Genome Sciences rejected its bid. In the well above the industry’s average deal past, biotech M&As were rarely hostile because of the fear of losing key scientists premium. By contrast, the other significant Not afraid transactions of 2011, Sanofi/Genzyme or other employees — some of the target’s most valuable assets — during an extended and Teva/Cephalon, had premiums of 48% In last year’s report, we also commented battle. The newfound willingness to go and 39%, respectively. After a protracted on the emergence of hostile takeovers hostile suggests that suitors are often negotiation, Sanofi paid a premium of in biotech, beginning with the Astellas placing most of the value of the transaction five times Genzyme’s sales. While this is acquisition of OSI Pharmaceuticals (which on commercialized products. in the range of other biotech tie-ups, it ultimately became friendly after a period is substantially higher than the multiples of negotiation). While Sanofi and Genzyme seen in big pharma mergers such as Pfizer/ were ultimately able to negotiate a deal Wyeth (3x) or Merck/Schering (2.2x), that was acceptable to both parties, the indicating higher growth expectations for prospect of Sanofi taking the offer directly the Genzyme business.

Deals The big picture 61 Strategic alliances

Fewer deals, smaller deals saw a significant fall-off, for the second year running, in announced up-front payments. Up-fronts fell to US$2.1 billion in 2011, By now, every large pharma company has embraced a strategy that approximately 64% below the level in 2009. Abbott’s US$400 involves externalizing more of its R&D as part of an effort to reverse million up-front payment to Reata for a portfolio of preclinical the multiyear decline in pipeline productivity. These strategies compounds comprised 19% of the total up-front payments for the include many elements: direct alliances with smaller biotechs, year. In aggregate, up-front payments made by pharma companies corporate venture capital, enhanced relationships with leading to biotech companies as part of strategic alliance transactions have academic institutions, outsourcing of non-core activities, and even declined from a high of US$5.3 billion in 2009 to US$1.6 billion arrangements with payers to access patient-level “real-world” data. in 2011. While the ultimate payoff of these efforts will not be known for many years, the early pipeline progress appears to be encouraging. Clearly, strategic alliances are still important to both pharma and biotech companies, but the overall trends indicate that With all the attention on externalization, one might expect the pharmaceutical buyers are being more selective in their deal volume and value of strategic alliances with biotech companies to interests and are focused on negotiating up-front payments that be increasing. In reality, the opposite has occurred. The number of reflect only the value that has been proven to date – presumably strategic alliance transactions declined for the second straight year, with more consideration reflected in downstream, success-based and the potential “biobucks” value of these deals hit a six-year low. milestones. For biotechs, while an alliance transaction is still considered to be a validation of the company’s technology, the Of course, biobucks numbers may not be the best marker of deal reduced capital flows from licensing increase the importance of trends, given the “creative accounting” that occurs in many deal capital efficiency. announcements. It is therefore even more distressing that 2011

US and European strategic alliances based on biobucks, 2006-11

Pharma-biotech Biotech-biotech Number of deals 50 250

45

40 200

35

30 150

25

20 100 Number of deals Number of

Potential value (US$b) value Potential 15

10 50

5

0 0 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, Capital IQ, MedTRACK and company news. Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed.

62 Beyond borders Global biotechnology report 2012 Big biobucks alliances, 2011

Company Country Partner Country Total potential Up-front payments value (US$m) (US$m) Vertex Pharmaceuticals US Alios BioPharma US 1,525 60 Astellas Pharma Japan Aveo Pharmaceuticals US 1,425 125 Les Laboratoires Servier France miRagen Therapeutics US 1,000 ND Johnson & Johnson US Pharmacyclics US 975 150 Amgen US Micromet US 967 14 Les Laboratoires Servier France Xoma US 885 35 Roche Switzerland Evotec Germany 830 10 Takeda Pharmaceutical Japan Intra-Cellular Therapies US 750 ND Roche Switzerland Array BioPharma US 713 28 Merck KGaA Switzerland F-star Austria 692 ND GlaxoSmithKline (GSK) UK Epizyme US 650 20 Pfizer US Theraclone Sciences US 632 ND Pfizer US Santaris Pharma Denmark 614 14 Johnson & Johnson US Aveo Pharmaceuticals US 555 15

Source: Ernst & Young, MedTRACK and company news. “Total potential value” includes up-front, milestone and other payments from publicly available sources. “ND” refers to deals where up-front amounts were not publicly disclosed.

Deals The big picture 63 Alliances with big up-front payments, 2011

Company Country Partner Country Up-front payments (US$m) Abbott Laboratories US Reata Pharmaceuticals US 400 Johnson & Johnson US Pharmacyclics US 150 Astellas Pharma Japan Aveo Pharmaceuticals US 125 Celgene US Elan Corp. Ireland 78 Valeant Pharmaceuticals Canada Meda Sweden 76 Astellas Pharma Japan Optimer Pharmaceuticals US 68 Salix Pharmaceuticals US Progenics Pharmaceuticals US 60 Allergan US MAP Pharmaceuticals US 60 Vertex Pharmaceuticals US Alios BioPharma US 60 Human Genome Sciences US Five Prime Therapeutics US 50 Mundipharma International UK Allos Therapeutics US 50

Source: Ernst & Young, MedTRACK and company news. “Total potential value” includes up-front, milestone and other payments from publicly available sources.

64 Beyond borders Global biotechnology report 2012 US and European strategic alliances based on up-front payments, 2006–11

Pharma-biotech Biotech-biotech Up-fronts/biobucks

7 16%

6 14%

12% 5

10% 4

8%

3 6% Up-front value (US$b) value Up-front

2 4% biobucks of as a share Up-fronts

1 2%

0 0% 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, Windhover Information, MedTRACK and company news.

Deals The big picture 65 Breakups

While alliance transactions are frequently terminated early, and the product candidate returned to the biotech, this is usually because of a clinical setback or a strategic portfolio review after a change in ownership or management. Often the end of the alliance does not mean the end of the product, and several biotechs have regrouped, reinvested and even re-partnered a returned asset. One of the largest transactions of 2011, however, involved a termination related to an approved product. Amylin Pharmaceuticals and Eli Lilly and Company terminated their long-standing deal related to the diabetes drugs Byetta and Bydureon (which won FDA approval shortly after the breakup). Amylin agreed to pay US$250 million up-front, including royalties of 15% and other future consideration.

Similar territory — new deals for a new market

The regulatory pathway for biosimilars and the time and cost to obtain marketing approval is still uncertain in many markets, including the US. Nevertheless, in 2011, companies began staking out their biosimilar alliances. Biotech commercial leaders Amgen and Biogen Idec struck deals that take advantage of their biologic development and manufacturing expertise while leveraging the financial resources of other companies (Watson Pharmaceuticals and Samsung, respectively). Baxter’s alliance with Momenta Pharmaceuticals was motivated by the desire to access the biotech company’s cutting-edge analysis technology, which allowed Momenta to assist partner Sandoz in obtaining approval for a generic version of Lovenox (a complex mixture drug) without the need for extensive clinical trials to prove equivalence.

66 Beyond borders Global biotechnology report 2012 United States

US M&As, 2006-11

While the headlines were captured by the Pharma-biotech Biotech-biotech Pharma-biotech megadeals Biotech-biotech megadeals Number of deals year’s megadeals — the Sanofi/Genzyme 80 saga, which concluded with a negotiated 45 agreement in the first quarter, and 70 40 35 the offer by Gilead Sciences to acquire 60 Pharmasset in the fourth quarter — 2011 30 50 was very strong on the US M&A front, 25 even without these large transactions. 40 20 The number of M&A deals rebounded

30 deals Number of to 37 from a low of 26 in 2010. The 15 Potential value (US$b) value Potential 20 increase in megadeal-adjusted aggregate 10

deal values was driven by the acquisitions 10 5 of biotech commercial leaders Cephalon 0 0 and Talecris Biotherapeutics, as well 2006 2007 2008 2009 2010 2011 as Forest Laboratories’ acquisition Source: Ernst & Young, Capital IQ, MedTRACK and company news. of Clinical Data for US$1.2 billion. In Chart excludes transactions where deal terms were not publicly disclosed. 2011, the median value of acquisitions of US-based biotech companies was US$370 million (including the potential value of post-close milestones), compared to US$135 million in 2010 and only US$95 million in 2009.

Deals United States 67 US strategic alliances based on biobucks, 2006-11

The number of alliances with announced Pharma-biotech Biotech-biotech Number of deals deal terms decreased by 10% in 2011, 35 160 building on a 14% decline the prior year. Even more striking, aggregate potential 30 140

deal values plummeted to a level not 25 120 seen for at least the last five years. It 100 is probably reasonable to assume that 20 biobucks were calculated and disclosed 80 15 in a similar manner over the last six 60 Number of deals Number of

years, and this decline reflects fewer (US$b) value Potential 10 40 large transactions (nine deals with US 5 biotechs in 2010 had biobuck values 20 above US$1 billion) as well as lower up- 0 0 front payments, as can be seen in the 2006 2007 2008 2009 2010 2011 next chart. Source: Ernst & Young, Capital IQ, MedTRACK and company news. Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed.

US strategic alliances based on up-front payments, 2006-11

Pharma-biotech Biotech-biotech Up-fronts/biobucks Licensors in strategic transactions have 4.5 18% clearly become more price sensitive in 4.0 16% recent years, with the aggregate value 3.5 14% of up-front payments declining for the third year running from the high-water 3.0 12% mark in 2008. The up-fronts received by 2.5 10% US biotechs on the sell side of strategic 2.0 8% alliance transactions declined by Value (US$b) Value approximately US$1.5 billion compared 1.5 6% to 2009, a sum which has not been 1.0 4%

made up by increased funding from biobucks of as a share Up-fronts 0.5 2% the capital markets, as discussed in the 0% financing section of this report. 0.0 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, Windhover Information, MedTRACK and company news.

68 Beyond borders Global biotechnology report 2012 Europe

European strategic alliances based on biobucks, 2006-11

Pharma-biotech Biotech-biotech Number of deals The number of strategic alliances

16 80 involving European biotechs fell to a six- year low in 2011, as did the aggregate 14 70 biobucks values of those transactions. 12 60 The 29% decline in number of deals

10 50 is in contrast to a 16% increase in the number of deals in 2010. Merck KGaA 8 40 and France-based Ipsen Pharmaceuticals 6 30

Number of deals Number of closed three deals each with European

Potential value (US$b) 4 20 biotechs, while a number of big pharma companies did two transactions each. 2 10

0 0 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, Capital IQ, MedTRACK and company news. Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed.

European strategic alliances based on up-front payments, 2006-11

Pharma-biotech Biotech-biotech Up-fronts/biobucks

3.0 25 Despite the decline in the number of strategic alliances, announced up-front 2.5 20 payments were largely unchanged in 2011 as compared to 2010. European 2.0 15 companies on the sell side of alliances, 1.5 however, garnered up-front payments

Value (US$b) Value 10 of US$461 million, a significant decline 1.0 from the US$621 million received in 5 2010 and the US$2.5 billion received

0.5 biobucks of as a share Up-fronts in 2009 (which included nearly US$900

0.0 0 million received by Elan Corp. in a 2006 2007 2008 2009 2010 2011 transaction with Johnson & Johnson).

Source: Ernst & Young, Windhover Information, MedTRACK and company news.

Deals Europe 69 European M&As, 2006-11

M&A activity in Europe also improved Pharma-biotech Biotech-biotech Pharma-biotech megadeals Number of deals in 2011 for the second straight year. 14 25 There were 22 transactions with announced deal terms, an increase 12 20 from the 17 seen in each of the two previous years. The improvement in 10 15 aggregate deal values was largely 8 driven by Grifols’ acquisition of US- based Talecris Biotherapeutics. Only 6 10 one of the 19 acquisitions of European deals Number of

Potential value (US$b) value Potential 4 biotechs was by a big pharma 5 company. The median deal size of 2 biotech companies sold was US$84 0 0 million, up from US$65 million in 2006 2007 2008 2009 2010 2011 2010. Only four transactions involving Source: Ernst & Young, Capital IQ, MedTRACK and company news. the sale of a European biotech included Chart excludes transactions where deal terms were not publicly disclosed. meaningful post-closing milestone payments, which is in contrast to the high percentage of private-company acquisitions in the US that included milestones.

70 Beyond borders Global biotechnology report 2012 Canada

In 2011, Canadian M&A activity remained consistent with the levels in milestones. Meanwhile, Montreal-based Enobia Pharma was seen in recent years. Significant transactions included those by acquired by Alexion Pharmaceuticals for US$610 million up-front Paladin Labs, which acquired Laval-based Labopharm for US$20 and up to US$470 million in milestones. Given the lack of an IPO million, and Valeant Pharmaceuticals, which outbid Paladin Labs to market, these exits were certainly welcome news for Canadian purchase Edmonton-based Afexa Life Sciences for US$76 million. venture capital investors.

Two private Canadian companies were also acquired in 2011, Contrary to 2010, there were only a few licensing agreements in providing very significant sums to their early investors at closing 2011 involving Canadian biotech companies. For instance, both and the prospect of even higher returns if downstream milestones Paladin Labs and Bioniche Life Sciences in-licensed product rights are achieved. Gemin X Pharmaceuticals was acquired by Cephalon for specific territories. (just prior to Cephalon itself being acquired by Teva Pharmaceutical Industries) for US$225 million up-front and up to US$300 million

Deals Canada 71 Products and pipeline Products and pipeline Promising signs

The big picture inhibitors spawned the current environment concerned about the unpredictability of of heightened concerns about drug safety. the requests for additional information, For much of its history, biotechnology has The agency also reported progress on the adding to the cost, time and risk of drug attracted researchers, entrepreneurs, speed with which these new medicines development. investors and strategic partners because of were approved — all but one of the drugs its promise — the game-changing potential approved in fiscal year 2011 were approved Ultimately, an approval process that is of innovative platforms and targeted, vastly on or before their target dates, and 70% of more transparent, predictable and timely efficacious therapies. In recent years, them were approved in the US before they is not just important for sustaining biotech however, investors have been less allured received approval anywhere else in the innovation. With aging populations and by biotech’s promise and more concerned world. large unmet medical needs, an efficient about paths to commercialization and regulatory regime will be required to returns on investment. This has, at least These are certainly encouraging develop cures for neurodegenerative in part, been driven by concerns about an developments, and continued progress diseases such as Alzheimer’s disease and uncertain regulatory environment. on this front will be a critical part of the Parkinson’s disease and more targeted and answer to the challenge of sustaining efficacious treatments for chronic ailments In 2011, there were signs of a different biotech innovation. While the FDA pointed such as diabetes. By making such changes, kind of promise. The US Food and Drug out that “over half” of the drugs approved regulators will help the industry fulfill Administration (FDA) approved more in FY2011 were approved on the first another promise — its commitment to bring new drugs than at any time since 2004, cycle of review (i.e., without requests for patients better treatments and cures to when the recalls of Vioxx and other COX-2 additional information) the industry remains address their most critical ailments.

Products and pipeline 73 ppp FDA product approvals, 1996–2011

New molecular entities Biologic license applications

60

50

40

30 Number of approvals 20

10

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ernst & Young, FDA. US product approvals are based on CDER approvals only.

The FDA approved 24 new molecular entities and 6 biologic license applications in 2011 — the second-highest total in the last dozen years.

74 Beyond borders Global biotechnology report 2012 Selected FDA approvals, 2011 Company Brand name Generic name Type of approval Indication Month Centocor Ortho Biotech (Johnson & ZYTIGA Abiraterone acetate New molecular entity Late stage prostate cancer April Johnson)

Human Genome New biologic license Systemic lupus BENLYSTA Belimumab March Sciences application erythematosus

Merck & Co. VICTRELIS Boceprevir New molecular entity Hepatitis C May

Vertex INCIVEK Telaprevir New molecular entity Hepatitis C May Pharmaceuticals

Optimer Clostridium difficile- DIFICID Fidaxomicin New molecular entity May Pharmaceuticals associated diarrhea

Johnson & Johnson XARELTO Rivaroxaban New molecular entity Non-valvular atrial fibrillation July

Regeneron New biologic license Neovascular “wet” age- EYLEA Aflibercept November Pharmaceuticals application related macular degeneration

Source: Ernst & Young, FDA and company websites. There were a number of noteworthy commercial leaders. (See the Financial genetic engineering techniques in this drugs approved in 2011, including performance section.) Earlier that same area is, of course, the potential for two new medications for hepatitis C, a month, Merck & Co. gained approval for personalized medicine approaches that viral infection that affects an estimated its competing drug, Victrelis (boceprevir), are many shades more efficacious in 130 million–170 million people, or setting up a contest between the two specific cancer subtypes. In this regard, approximately 3% of the world’s products. it is worth noting that two of the year’s population. Massachusetts-based Vertex cancer approvals were approved with Pharmaceuticals’ much-anticipated Reflecting the strength of the industry’s companion diagnostics: Genentech/ Telaprevir was approved in May, and pipeline in oncology, a number of the Roche’s Zelboraf (vemurafenib) for sales of the new product soon catapulted new approvals were for various types of late-stage melanoma and Pfizer’s Xalkori Vertex into the ranks of the industry’s cancer. One of the promises of applying (crizotinib) for late-stage lung cancer.

Products and pipeline 75 Selected orphan drug approvals by the FDA, 2011 Company Brand name Generic name Type of approval Indication Month New biologic license Bristol-Myers Squibb YERVOY Ipilimumab Metastatic melanoma March application

Advanced medullary IPR Pharmaceuticals CAPRELSA Vandetanib New molecular entity April thyroid cancer

New biologic license Prevent organ Bristol-Myers Squibb NULOJIX Belatacept June application transplant rejection

Hodgkin lymphoma and New biologic license Seattle Genetics ADCETRIS Brentuximab vedotin systemic anaplastic large August application cell lymphoma

Roche ZELBORAF Vemurafenib New molecular entity Metastatic melanoma August

Shire FIRAZYR Icatibant acetate New molecular entity Hereditary angioedema August

Pfizer XALKORI Crizotinib New molecular entity Late stage lung cancer August

ApoPharma Ferriprox Deferiprone New molecular entity Thalassemia October

Seizures associated Lundbeck ONFI Clobazam New molecular entity with Lennox-Gastaut October syndrome

Incyte Jakafi Ruxolitinib New molecular entity Myelofibrosis November

Asparaginase Erwinia New biologic license Acute lymphoblastic EUSA Pharma ERWINAZE November chrysanthemi application leukemia

Source: Ernst & Young, FDA and company websites.

It is also noteworthy that 11 of the year’s drug approvals were approved with orphan designations. The economics of orphan drugs are changing dramatically as the focus in the health care ecosystem shifts to health outcomes. Even at a time of escalating pricing pressures, payers have so far been willing to pay high prices for life- saving treatments, particularly in disease areas where no cures have previously existed and where the prevalence of very small patient populations means there is little impact on overall costs.

76 Beyond borders Global biotechnology report 2012 US clinical pipeline by indication, 2011 As in prior years, cancer continues to dominate the US clinical pipeline. Not Other surprisingly, cancer is the area where 19% science has made the greatest progress in understanding and classifying disease into subtypes based on specific genetic mutations. Cancer also remains Respiratory attractive because the relatively small 4% patient populations imply smaller clinical

Cancer trials and the large unmet medical needs Cardiovascular 44% can give companies more traction in the 4% market. Neurology, which ranks second,

Autoimmune will become increasingly important in 4% the years ahead, as aging populations increase the need for cures for a number

Metabolic and of neurodegenerative diseases. endocrine 6%

Infectious disease 9% Neurology 10%

Source: Ernst & Young, MedTRACK and company websites. US Phase III pipeline by indication, 2011

Other 31% Cancer 32%

Respiratory 3% Cardiovascular 3% Neurology Autoimmune 13% 4% Metabolic and Infectious disease endocrine 7% 7%

Source: Ernst & Young, MedTRACK and company websites.

Products and pipeline 77 The European pipeline by indication European clinical pipeline by indication, 2011 looks fairly similar to that of the US, with cancer on top and neurology in Other 15% second place.

Respiratory 3% Cancer 33%

Cardiovascular 6%

Autoimmune 14%

Neurology Metabolic and 12% endocrine 7% Infectious disease 10% Source: Ernst & Young, MedTRACK and company websites.

European Phase III pipeline by indication, 2011

Other 18%

Cancer 29%

Respiratory 3%

Cardiovascular 8%

Neurology 11% Autoimmune 16%

Infectious disease Metabolic and 6% endocrine 9% Source: Ernst & Young, MedTRACK and company websites.

78 Beyond borders Global biotechnology report 2012 European clinical pipeline by year The clinical pipeline of European biotechnology companies continues 2008 2009 2010 2011 to grow on an overall basis. Growth in 700 the Phase II pipeline, which had been proceeding at a very fast clip in recent

600 years, essentially flatlined in 2011, but growth in Phase III continues unabated.

500

400

300

200 Number of product candidates in studies 100

0 Phase I Phase II Phase III

Source: Ernst & Young, MedTRACK and company websites.

Products and pipeline 79 European clinical pipeline by country, 2011

Phase I Phase II Phase III

United Kingdom

Germany

Denmark

Switzerland

France

Sweden

Italy

Israel

Austria

Spain

Belgium

Netherlands

Ireland

Norway

Finland

0 50 100 150 200 250 Number of product candidates

Source: Ernst & Young, MedTRACK and company websites. On a country-by-country basis, the distribution of European clinical assets remains very similar to that in 2010. The relative position of the top five countries did not change. Countries that showed strong growth in their clinical pipelines included Italy (which overtook Israel to move into 7th place), Austria (which moved from 11th place to 9th place) and Belgium (which moved from the 14th to the 11th spot).

80 Beyond borders Global biotechnology report 2012 Acknowledgments

Project leadership Writing and editing assistance

Glen Giovannetti, Ernst & Young’s Global Life Sciences Leader, The Canada section was written by Paul Karamanoukian. provided overall strategic vision for this project and brought his years of experience to the analysis of industry trends. Glen’s Russ Colton was the copy editor and proofreader for this project. perspective and insights helped define many of the themes we Russ also played an integral role in managing the workflow of edits explore in the book. Beyond leadership, Glen brought a hands-on and ensuring that edits were implemented correctly. approach, writing articles and helping to compile and analyze data. Design and layout Gautam Jaggi, Managing Editor of the publication, directed the project, wrote or edited all of the articles and helped manage the Christian Gonswa was the lead designer for this project. data analysis. Assisting Christian were David Eshenbaugh (chart design) and Robert Fernandez, Brittney Cline and Chris Grapa (design Siegfried Bialojan, Germany Biotechnology Leader, led and and text layout). managed the development of the global data. His team’s high- quality analysis was invaluable in producing this book. Logistics and marketing Strategic direction Alison DeCourcey served as Project Manager. Jason Hillenbach and Rebekah Craig helped with various logistical aspects of the Special thanks to Scott Morrison and Jürg Zürcher, who project. continued to play a key role in the development of this publication, by providing invaluable strategic insights based on their long Public relations efforts related to the book and its launch were led experience and a feel for the pulse of the industry. Sanjeev by Sue Lavin Jones, Dan Cusworth and the PR firm of Feinstein Wadhwa’s insights played an integral role in guiding and informing Kean Healthcare, led by Greg Kelley and Dan Quinn. the development of this year’s point of view.

Data analysis

The research, collection and analysis of global financial, financing, deals and pipeline data was conducted by Ulrike Trauth, Eva-Marie Hilgarth and Claudia Pantke. The Canadian financing data was collected by Paul Karamanoukian. Additional analysis was conducted by Gautam Jaggi, Glen Giovannetti and Paul Karamanoukian.

Jason Hillenbach, Kim Medland, Ulrike Trauth and Samir Goncalves conducted fact checking and quality review of numbers throughout the publication.

Acknowledgments 81 Data exhibit index

Growth in established biotechnology centers, 2010–11 (US$b) ...... 25 Ernst & Young survival index, 2010–11 ...... 26 US biotechnology at a glance, 2010-11 (US$b) ...... 27 US commercial leaders, 2008-11 ...... 28 US biotechnology: commercial leaders and other companies, 2010-11 (US$b) ...... 29 The US biotech industry outperformed the overall market in most of 2011 and early 2012 ...... 30 US micro caps led the industry’s stock market performance in 2011 and early 2012 ...... 30 Selected US biotechnology public company nancial highlights by geographic area, 2011 (US$m, % change over 2010) ...... 31 European biotechnology at a glance, 2010–11 (US$m) ...... 32 European biotechnology: commercial leaders and other companies, 2010-11 (US$m) ...... 33 Europe’s largest biotech companies outperformed the rest of the industry in 2011 and early 2012 ...... 34 Selected European biotechnology public company nancial highlights by country, 2011 (US$m, % change over 2010) ...... 35 Canadian biotechnology at a glance, 2010-11 (US$m) ...... 36 Australian biotechnology at a glance, 2010-11 (US$m) ...... 37 Capital raised in North America and Europe by year (US$m) ...... 39 Debt ratios of selected companies: big biotech reaches maturity ...... 39 Enough to sustain innovation? Innovation capital in North America and Europe by year ...... 40 Distribution of total capital raised in North America and Europe by year ...... 43 Distribution of innovation capital raised in North America and Europe by year ...... 43 US biotechnology nancings by year (US$m) ...... 44 US innovation capital atlines, even as total funding rises sharply ...... 45 Quarterly breakdown of US biotechnology nancings (US$m), 2011 ...... 46 Capital raised by leading US regions, 2011 ...... 47 US biopharmaceutical venture capital as a share of total venture capital by year ...... 48 US biotechnology IPOs by year ...... 48 The vast majority of 2011 US IPOs priced below their desired ranges ...... 49

82 Beyond borders Global biotechnology report 2012 2011 US IPO performance ...... 50 European biotechnology nancings by year (US$m) ...... 51 European innovation capital by year ...... 52 Quarterly breakdown of European biotechnology nancings (US$m), 2011 ...... 53 European biotechnology IPOs by year ...... 53 Capital raised by leading European countries, 2011 ...... 54 Canadian biotechnology nancings by year (US$m) ...... 55 Capital raised by leading Canadian biotech clusters, 2011 ...... 56 Quarterly breakdown of Canadian biotechnology nancings (US$m), 2011 ...... 57 US and European M&As, 2006-11 ...... 59 Selected M&As, 2011 ...... 60 US and European strategic alliances based on biobucks, 2006-11 ...... 62 Big biobucks alliances, 2011 ...... 63 Alliances with big up-front payments, 2011 ...... 64 US and European strategic alliances based on up-front payments, 2006–11 ...... 65 US M&As, 2006-11 ...... 67 US strategic alliances based on biobucks, 2006-11 ...... 68 US strategic alliances based on up-front payments, 2006-11 ...... 68 European strategic alliances based on biobucks, 2006-11 ...... 69 European strategic alliances based on up-front payments, 2006-11 ...... 69 European M&As, 2006-11 ...... 70 FDA product approvals, 1996–2011 ...... 74 Selected FDA approvals, 2011...... 75 Selected orphan drug approvals by the FDA, 2011 ...... 76 US clinical pipeline by indication, 2011 ...... 77 US Phase III pipeline by indication, 2011 ...... 77 European clinical pipeline by indication, 2011 ...... 78 European Phase III pipeline by indication, 2011 ...... 78 European clinical pipeline by year ...... 79 European clinical pipeline by country, 2011 ...... 80

Data exhibit index 83 Global biotechnology contacts

Global Life Sciences Leader Glen Giovannetti [email protected] +1 617 585 1998 Global Pharmaceutical Leader/EMEIA Life Sciences Leader Patrick Flochel [email protected] +41 58 286 4148 Global Life Sciences Assurance Leader Scott Bruns [email protected] +1 317 681 7229 Global Life Sciences Advisory Leader Thomas Sileghem [email protected] +32 2 774 9536 Global Life Sciences Tax Leader Neil Byrne [email protected] +353 1 221 2370 Global Life Sciences Transaction Advisory Services Leader Jeff Greene [email protected] +1 212 773 6500 Managing Editor of Beyond borders Gautam Jaggi [email protected] +1 617 585 3509 Australia Brisbane Winna Brown [email protected] +61 7 3011 3343 Melbourne Denise Brotherton [email protected] +61 3 9288 8758

Sydney Gamini Martinus [email protected] +61 2 9248 4702

Austria Vienna Erich Lehner [email protected] +43 1 21170 1152 Isabella Schwartz-Gallee [email protected] +43 1 21170 1072

Belgium Brussels Thomas Sileghem [email protected] +32 2 774 9536 Brazil São Paulo Frank de Meijer [email protected] +55 11 2573 3383 Canada Montréal Paul Karamanoukian [email protected] +1 514 874 4307 Lara Iob [email protected] +1 514 879 6514

Edmonton Trevor Lukey [email protected] +1 780 638 6644

Toronto Darrell Jensen [email protected] +1 416 943 2475

Mario Piccinin [email protected] +1 416 932 6231

Vancouver Nicole Poirier [email protected] +1 604 891 8342

Winnipeg Tanis Petreny [email protected] +1 204 933 0251

Czech Republic Prague Petr Knap [email protected] +420 225 335 582 Denmark Copenhagen Benny Lynge Sørensen [email protected] +45 35 87 25 25 Finland Helsinki Timo Virkilä [email protected] +358 207 280 190 France Lyon Philippe Grand [email protected] +33 4 78 17 57 32 Paris Brigitte Geny [email protected] +33 1 46 93 6760 Germany Mannheim Siegfried Bialojan [email protected] +49 621 4208 11405 Munich Elia Napolitano [email protected] +49 89 14331 13106

Greater China Beijing Stanley Chang [email protected] +86 10 5815 3628 India Mumbai Murali Nair [email protected] +91 22 61920000 Hitesh Sharma [email protected] +91 22 61920620

Ajit Mahadevan [email protected] +91 22 61920000

Ireland Dublin Aidan Meagher [email protected] +353 1221 1139 Israel Tel Aviv Yoram Wilamowski [email protected] +972 3 623 2519 Italy Milan Lapo Ercoli [email protected] +39 02 7221 2546

84 Beyond borders Global biotechnology report 2012 Japan Tokyo Hironao Yazaki [email protected] +81 3 3503 2165 Yuji Anzai [email protected] +81 3 3503 1100 Netherlands Amsterdam Jules Verhagen [email protected] +31 88 407 1888 New Zealand Auckland Jon Hooper [email protected] +64 9 300 8124 Norway Trondheim/Oslo Willy Eidissen [email protected] +47 918 63 845 Poland Warsaw Mariusz Witalis [email protected] +48 225 577950 Singapore Singapore Swee Ho Tan [email protected] +65 6309 8238 South Africa Johannesburg Sarel Strydom [email protected] +27 11 772 3420 Sweden Uppsala Björn Ohlsson [email protected] +46 18 19 42 22 Switzerland Basel Jürg Zürcher [email protected] +41 58 286 84 03 United Kingdom Bristol Matt Ward [email protected] +44 11 7981 2100 Cambridge Cathy Taylor [email protected] +44 12 2355 7090

Rachel Wilden [email protected] +44 12 2355 7096

Edinburgh Mark Harvey [email protected] +44 13 1777 2294

Jonathan Lloyd-Hirst [email protected] +44 13 1777 2475

London/Reading Ian Oliver [email protected] +44 11 8928 1197 United States Boston Michael Donovan [email protected] +1 617 585 1957 Bruce Bouchard [email protected] +1 617 585 6890

Chicago Jo Ellen Helmer [email protected] +1 312 879 5262

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 Tony Torrington [email protected] +1 732 516 4681

Tony Masherelli [email protected] +1 732 516 4719

Kim Ramko [email protected] +1 615 252 8249

Sanjeev Wadhwa [email protected] +1 732 516 4183

Orange County Dave Copley [email protected] +1 949 437 0250

Kim Letch [email protected] +1 949 437 0244

Redwood Shores 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

Howard Brooks [email protected] +1 215 448 5115

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

Seattle Kathleen Smith [email protected] +1 206 654 6305

Washington, D.C. Rene Salas [email protected] +1 703 747 0732

Global biotechnology contacts 85 Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

© 2012 EYGM Limited. All Rights Reserved.

EYG no. FN0011

1205-1356497 LA

ED: 0613

Ernst & Young is committed to reducing its impact on the environment. This document has been printed using recycled paper and vegetable-based ink.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. www.ey.com/beyondborders