Healthcare & Life Sciences Industry Update December 2012 Member FINRA/SIPC www.harriswilliams.com What We’ve Been Reading December 2012 • An article in the New York Times by Robert Pear gives some very useful information around the tax increases that will be taking effect in January as part of the ACA. With the general media mostly focused on the fiscal cliff and the impending rises in capital gains and dividend taxes, many affluent Americans have overlooked the additional taxes they will be hit with in order to fund health reform. The article goes into some detail on the payroll, investment and income taxes that are expected to generate more than $300 billion in tax revenues over the next 10 years with 85% coming from the top 1% of taxpayers. • In order to save costs, California is currently experimenting with a program by which a large group of disabled Medicaid enrollees have been moved out of traditional fee-for- service coverage into managed care plans outsourced to commercial insurers. According to an article by Mary Carey and Sarah Varney at Medcity News, this program is being closely watched by both industry and the federal government ahead of the shift of 2 million Medicare/Medcaid dual eligibles into managed care as required by the ACA. California is expecting to save $663 million as part of the program but there is significant concern that the standard of care for these patients will suffer. • The Supreme Court is set to consider the legality of settlements between branded and generic pharmaceutical companies sometimes called “Pay for Delay” settlements, according to an article in the Wall Street Journal. These involve a branded manufacturer settling a patent litigation with a generic manufacturer by effectively making a payment in return for a delay in the release of the generic. The FTC alleges that “Pay for Delay” costs consumers $3.5 billion dollars annually. The Journal article goes into some depth in discussing this topic, which is currently a major focus of the FTC. Note: a subscription to the Wall Street Journal online is required to view this article. 1 Equity Trading Overview December 2012 Median TEV/ Median TEV/ Key Trading Number of Average Sector Enterprise Change in Stock Price LTM Multiples Forward Mulitples Companies Statistics Value ($ mm) 3 mos. 12 mos. Revenue EBITDA Revenue EBITDA (detail begins Clinical Laboratories 3 $7,834 (3.2%) (1.3%) 1.7x 7.9x 1.7x 7.8x Contract Pharma Manufacturing 5 915 10.0% 58.8% 1.3x 12.0x 1.5x 11.1x on page 6) Contract Research Organizations 5 1,801 19.4% 61.0% 1.4x 10.1x 1.3x 9.5x Disease Management 2 3,032 1.2% 22.6% 1.5x 7.9x 1.5x 8.5x Emergency Services 1 1,935 (5.8%) 35.2% 2.3x 7.7x 2.3x 7.8x Health Care Staffing 4 1,173 11.6% 59.4% 1.0x 13.4x 0.9x 11.7x HMO - Medical 11 13,848 1.6% 11.5% 0.4x 6.0x 0.4x 6.6x Support Services Information Services 11 2,194 2.8% 7.2% 2.9x 13.1x 2.9x 10.7x Specialty Managed Care 2 1,568 (2.8%) (12.4%) 0.7x 5.3x 0.7x NA Payer, Provider, & Pharmacy Specialty Pharmacy Management 5 16,649 13.2% 14.5% 0.6x 10.1x 0.8x 9.3x Dental Products 4 18,965 4.5% 18.5% 2.5x 11.4x 2.5x 10.3x Durable Medical Equipment 4 2,542 2.9% 1.1% 1.4x 7.1x 1.3x 8.1x Life Sciences Tools 3 13,701 3.4% 3.9% 2.2x 8.6x 2.2x 8.0x Devices Medical Devices and Products 14 37,645 2.0% 13.0% 2.5x 9.4x 2.5x 8.8x Products & Medical / Surgical / Dental Supplies 6 10,237 3.9% 13.3% 0.2x 7.6x 0.2x 7.4x Acute-Care Hospitals 6 13,287 10.1% 21.1% 0.9x 6.4x 0.9x 6.6x Assisted Living 7 1,742 12.7% 64.4% 1.9x 10.8x 1.7x 8.7x Diagnostic Imaging 3 2,761 (7.5%) 1.6% 1.4x 5.5x 1.6x 8.0x Dialysis Services 2 23,566 3.8% 21.2% 2.2x 10.5x 2.1x 10.2x Home Care / Hospice 6 593 (1.4%) 36.0% 0.5x 6.0x 0.5x 6.1x Long-Term Care 3 1,159 (3.2%) 7.4% 0.8x 5.8x 0.8x 5.3x Physician Practice Management 3 1,719 (4.9%) 2.0% 1.7x 8.7x 1.6x 9.8x Psychiatric Hospitals / Management 3 2,388 12.6% 12.1% 0.3x 6.0x 0.4x 5.9x Provider-Based Services Provider-Based Surgicenters / Rehabilitation 4 2,107 (1.3%) 27.3% 1.5x 7.1x 1.5x 7.3x Payer, Provider, & Pharmacy Support Services 49 $5,095 4.8% 25.7% 1.4x 9.3x 1.4x 9.2x Products & Devices 31 $16,618 3.3% 9.9% 1.8x 8.8x 1.7x 8.5x Provider-Based Services 37 $5,480 2.3% 21.4% 1.2x 7.4x 1.2x 7.5x HW&Co. HCLS Composite Index 117 $7,640 3.6% 20.8% 1.4x 8.5x 1.4x 8.4x S&P 500 1.2% 13.6% Public Company Assisted Living Sector Contract Research Organizations Health Care Staffing Performance Contract Pharma Manufacturing (12-month % Home Care / Hospice Emergency Services change in stock Surgicenters / Rehabilitation price) Disease Management Dialysis Services Acute-Care Hospitals HW&Co. HCLS Composite Index Dental Products Specialty Pharmacy Management S&P 500 Medical / Surgical / Dental Supplies Medical Devices and Products Psychiatric Hospitals / Management HMO - Medical Long-Term Care Information Services Life Sciences Tools Physician Practice Management Diagnostic Imaging Durable Medical Equipment Clinical Laboratories Specialty Managed Care (30.0%) (20.0%) (10.0%) 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 2 Equity Markets Overview December 2012 Healthcare & 160 Life Sciences Industry Stock Performance 140 34.8% 29.3% 24.8% 120 100 80 60 40 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 S&P 500 Dow Jones U.S Health Care Index HW&Co. HCLS Index Top 25 Equity Gross Proceeds Closing Date Filing Date Issuer Ticker Transaction Type ($mm) Offerings 11/20/12 11/20/12 Neurocrine Biosciences Inc NBIX Follow-On $150.0 (by proceeds) 11/02/12 11/02/12 NuPathe Inc PATH Follow-On 145.2 11/09/12 11/23/11 Array Biopharma Inc ARRY Follow-On 75.6 11/16/12 10/01/12 Cynosure Inc CYNO Follow-On 75.4 11/06/12 11/06/12 Enanta Pharmaceuticals Inc ENTA IPO 69.0 11/08/12 11/08/12 Achillion Pharmaceuticals Inc ACHN Follow-On 50.0 11/30/12 11/14/12 Supernus Pharmaceuticals Inc SUPN Follow-On 48.0 11/13/12 05/09/12 MAKO Surgical Corp MAKO Follow-On 46.0 11/16/12 11/16/12 Patheon Inc PTI Follow-On 30.0 11/27/12 01/31/12 BioDelivery Sciences Intl Inc BDSI Follow-On 28.6 11/04/12 11/04/12 MEI Pharma Inc MEIP Follow-On 27.5 11/08/12 11/08/12 Anthera Pharmaceuticals Inc ANTH Follow-On 25.0 11/26/12 11/26/12 Chelsea Therpeutics Intl Ltd CHTP Follow-On 20.0 11/02/12 11/02/12 Lpath Inc LPTN Follow-On 20.0 11/30/12 11/30/12 Kips Bay Medical Inc KIPS Follow-On 18.2 11/27/12 11/27/12 Arno Therapeutics Inc LRRI Convertible 12.7 11/13/12 11/13/12 Arrayit Diagnostics Inc NA IPO 10.8 11/20/12 11/20/12 Novelos Therapeutics Inc NVLT Follow-On 10.0 11/27/12 11/27/12 TherapeuticsMD Inc TXMD Follow-On 7.1 11/09/12 11/09/12 Idera Pharmaceuticals Inc IDP Convertible 7.0 11/29/12 06/22/11 Rexahn Pharmaceuticals Inc RNN Follow-On 6.6 11/13/12 11/13/12 Advaxis Inc ADXS Follow-On 4.3 11/16/12 05/13/11 AspenBio Pharma Inc APPY Follow-On 4.1 11/07/12 02/13/12 Atossa Genetics Inc ATOS IPO 4.0 11/21/12 11/21/12 TrovaGene Inc TROV Follow-On 3.8 3 M&A Overview December 2012 Announced Quarterly M&A Activity Middle Market Healthcare Transaction Highlights 350 Healthcare & Announced Target Buyer 11/28/2012 Healthpoint, Ltd. Smith & Nephew plc Life Sciences 300 11/8/2012 Fortitech, Inc. Royal DSM N.V. 17 18 11/14/2012 Arcadia Solutions, LLC Ferrer Freeman & Company, LLC 16 11/8/2012 EpiCept Corporation Immune Pharmaceuticals Ltd. M&A __ 18 19 11/8/2012 Vessix Vascular, Inc. Boston Scientific Corporation 250 13 13 18 20 11/6/2012 Harbor Health Systems, LLC One Call Care Management, Inc. 17 11 12 11/6/2012 Sage Products, Inc. Madison Dearborn Partners, LLC 11/5/2012 Heartland Dental Care, Inc. Teachers' Private Capital 200 12 11/5/2012 Milliman Care Guidelines LLC The Hearst Corporation 11/1/2012 Nurse On Call, Inc. Emeritus Corp. 150 278 279 267 255 256 242 245 236 LTM Deal Statistics 225 229 221 Number Number Transactionsof 219 Aggregate Number Median Transaction Multiples 100 187 Value ($bn) of Deals TEV/Rev TEV/EBITDA $112.2 984 2.19x 11.0x 50 Note: Transactions based on publicly available information 0 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 PEG Acquirer Strategic Acquirer Healthcare & Announced Healthcare & Life Sciences Transactions Median Healthcare & Life Sciences Transaction Multiples Life Sciences $500 1400 21x 4.0x M&A Trends $450 1200 18x 3.5x $400 $389.4 EV /LTM EV Revenue Multiple Number Number Transactionsof __ 1000 15.5x 15.2x 3.0x $350 15x $300 12.8x 2.5x 800 11.1x 12x 11.0x $250 2.0x $194.1 600 9x $200 7.7x $174.6 1.5x $141.4 $150 $110.6 400 6x 1.0x $100 $99.0 __ 200 __ EV /LTM EV EBITDA Multiple 3x $50 0.5x AggregateTransaction Value in($ billions) $0 0 0x 0.0x 2007 2008 2009 2010 2011 2012 YTD 2007 2008 2009 2010 2011 2012 YTD Aggregate Deal Value # of deals TEV / LTM EBITDA TEV / LTM Sales Announced PEG Investments by Segment (Last 3 Years) PEG Investments and Exits Private Equity HC&LS Industry Number of 140 Segment Companies 124 M&A Activity 120 Biotechnology 5 120 113 Healthcare Technology 19 ' Healthcare Distributors 9 100 94 95 Healthcare Equipment 24 79 80 Healthcare Facilities 36 80 69 71 Healthcare Services 62 65 62 Healthcare Supplies 8 58 60 60 55 Life Sciences Tools & Services 11 TransactionVolume 49 50 Managed Healthcare 6 40 40 42 40 Pharmaceuticals 19 31 27 23 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD Number of Investments Number of Exits 4 Debt Markets Overview December 2012 Key Credit Quarterly Healthcare Loan Volume Average Spread on Healthcare Loans $24 Statistics L + 500 ___ $21 __ L + 400 $18 $15 L + 300 $12 $9 L + 200 $6 Average Spread Over LIBOR Over Spread Average L + 100 $3 Loan VolumeLoan