Beyond Borders

					Beyond Borders
Global biotechnology report 2008
Vancouver, Canada

29 October 2008
Headlines: the big picture
Strong growth in 2007




                                        All-time high, led
     Record deals                       by mega-mergers
     Booming financings                VC sets new record
     Improved                           of US$7.4 billion
      profitability                     US publicly traded
                                         industry’s net loss
                                         reaches record low



3                     Beyond Borders
Emerging challenges



                                     Several new black
                                      box warnings
     Safety concerns                Lowest FDA NME
     Regulatory                      approvals in 25
      challenges emerge               years
     Public equity                  CMS, NICE
      markets cool late in            decisions
      year                           Credit crunch
                                      drives flight to
                                      safety

4                  Beyond Borders
A challenging landscape in 2008




     Credit crisis, global          Market cap decline,
      recession fears                 IPO drought,
      drive risk-averse               debt offerings
      public investors                down
     Companies focus on             Restructuring,
      efficiency, survival            bankruptcies up
     VC, alliances, M&A             Activity on par with
      remain strong                   recent years



5                  Beyond Borders
Reinventing drug development



                                    Short-term: cost
                                     cutting, stock
                                     buybacks, late-
     Pharma’s patent                stage acquisitions
      productivity                  Long-term:
      challenges drive               platform deals,
      change                         restructuring R&D
                                     (smaller teams,
                                     networked, more
                                     autonomous)


6                 Beyond Borders
Americas overview: the road lengthens
US financial performance


      Revenues (US$b)                  +11%   R&D expense (US$b)       +6%
      70                                      30
      60
      50                                      20
      40
      30
                                              10
      20
      10
       0                                          0
               2006           2007                    2006      2007




      Employees (000)                  +3%    Net loss (US$b)          -95%
      150                                     6


      100                                     4


       50                                     2


           0                                  0
               2006            2007                   2006      2007




8                     Beyond Borders
Behind the numbers:
acquisitions and black box warnings
    Acquisitions and black box warnings dented revenue growth in 2007

                  20%                                       19%




                  15%       14%


                                               11%
    Growth rate




                  10%




                  5%




                  0%
                            2006               2007      2007 adjusted

    Source: Ernst & Young


9                             Beyond Borders
Behind the numbers: net loss in context

     US publicly traded industry historically close to profitability

                           35%


                           30%


                           25%                                                     Less than 0.5% of
     Net loss / revenues




                                                                                       revenues
                           20%


                           15%


                           10%


                           5%


                           0%
                                 2000   2001     2002      2003   2003   2004   2005    2006   2007

     Source: Ernst & Young



10                                        Beyond Borders
Current public market turmoil in the US

     Biotech stock market performance, 2007
                                                          EY Biotech Industry                                                                                                              Nasdaq                                                                                             DJIA

     1.2




     1.1




     1.0




     0.9




     0.8




     0.7




     0.6
           1/3/2007




                                                                                                                      5/9/2007




                                                                                                                                             6/6/2007




                                                                                                                                                                    7/4/2007




                                                                                                                                                                                             8/1/2007
                      1/17/2007

                                  1/31/2007

                                              2/14/2007

                                                          2/28/2007

                                                                      3/14/2007

                                                                                  3/28/2007

                                                                                              4/11/2007

                                                                                                          4/25/2007




                                                                                                                                 5/23/2007




                                                                                                                                                        6/20/2007




                                                                                                                                                                               7/18/2007




                                                                                                                                                                                                        8/15/2007

                                                                                                                                                                                                                    8/29/2007

                                                                                                                                                                                                                                9/12/2007

                                                                                                                                                                                                                                            9/26/2007

                                                                                                                                                                                                                                                        10/10/2007

                                                                                                                                                                                                                                                                     10/24/2007

                                                                                                                                                                                                                                                                                  11/7/2007

                                                                                                                                                                                                                                                                                              11/21/2007

                                                                                                                                                                                                                                                                                                           12/5/2007

                                                                                                                                                                                                                                                                                                                       12/19/2007
     Source : Ernst & Young, finance.yahoo.com. EY Biotech Industry represents the aggregate market cap of all U.S. public biotech companies, as defined
     by Ernst & Young.



11                                                                                Beyond Borders
Current public market turmoil in the US

     Biotech stock market performance, 1 Jan – 15 Oct 2008
                               EY Biotech Industry                                           Nasdaq                                         DJIA

        1.2




        1.1




        1.0




        0.9




        0.8




        0.7




        0.6
             08




                          08




                                                                               08
                                        8




                                                      8




                                                                   8




                                                                                             8




                                                                                                          8




                                                                                                                       8




                                                                                                                                    8




                                                                                                                                                 08
                                      00




                                                    00




                                                                 00




                                                                                           00




                                                                                                        00




                                                                                                                     00




                                                                                                                                  00




                                                                                                                                               20
           20




                        20




                                                                             20
                                    /2




                                                  /2




                                                               /2




                                                                                         /2




                                                                                                      /2




                                                                                                                   /2




                                                                                                                                /2




                                                                                                                                             0/
        1/




                     8/




                                                                          5/
                                  15




                                                22




                                                             29




                                                                                       12




                                                                                                    19




                                                                                                                 26




                                                                                                                              /3




                                                                                                                                           /1
     8/




                  8/




                                                                       9/




                                                                                                                           10
                               8/




                                             8/




                                                          8/




                                                                                    9/




                                                                                                 9/




                                                                                                              9/




                                                                                                                                        10
     Source : Ernst & Young, finance.yahoo.com. EY Biotech Industry represents the aggregate market cap of all U.S. public biotech companies, as defined
     by Ernst & Young.



12                                          Beyond Borders
US financing

     US financing reaches second-highest total on record
                  Venture                      IPO                Follow-on   Other

            35

            30

            25

            20
     US$b




            15

            10

             5

             0
                 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
                                                                    H1
     Source: Ernst & Young, BioCentury, BioWorld and VentureOne



13                               Beyond Borders
US financing: public equity

     Public equity markets are challenging for biotech companies
                       IPO                                 Follow-on                Financial market
                                                                                       uncertainty
             25
                           Genomics                Recovery            The “end of windows”
                            bubble
             20


             15
      US$b




             10


              5

                                                                                               ?
              0
                  1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
     Source: Ernst & Young, BioCentury, BioWorld and VentureOne



14                               Beyond Borders
US financing: regional distribution

     Capital raised by leading US regions in 2007




15                    Beyond Borders
US deals: mergers and acquisitions


        Pharma-biotech mega deals          Pharma-biotech         Biotech-biotech   Biotech-biotech mega deals

            35


            30


            25


            20
     US$b




            15


            10


            5


            0
                 1999     2000      2001       2002       2003      2004     2005   2006     2007   2008 H1

     Source: Ernst & Young, BioWorld, Recombinant Capital and Windhover



16                               Beyond Borders
US deals: mergers and acquisitions
adjusted for mega deals

                         Pharma-biotech                                           Biotech-biotech

            35


            30


            25


            20
     US$b




            15


            10


            5


            0
                 1999     2000      2001       2002       2003      2004   2005       2006     2007   2008 H1

     Source: Ernst & Young, BioWorld, Recombinant Capital and Windhover



17                               Beyond Borders
US deals: alliances


                        Pharma-biotech                                      Biotech-biotech

            30


            25


            20
     US$b




            15


            10


            5


            0
                 1999     2000       2001      2002       2003       2004   2005   2006   2007   2008 H1

     Source: Ernst & Young, BioWorld, Recombinant Capital and Windhover



18                               Beyond Borders
Behind the numbers: shrinking IPO returns

      More money in …
                    Avg pre-IPO investment

              140

              120

              100
       US$m




              80

              60

              40

              20

               0
                                  1997                             Recovery     "End of windows"
                                                                  (2002-2003)      (2004-2007)
     Source: Ernst & Young analysis of company financial statements




19                              Beyond Borders
Behind the numbers: shrinking IPO returns

      More money in … and relatively less money out
                    Avg pre-IPO investment                             Avg pre-money preferred stock
                                                                       valuation at IPO
              140

              120

              100
       US$m




              80

              60

              40

              20

               0
                                  1997                             Recovery        "End of windows"
                                                                  (2002-2003)         (2004-2007)
     Source: Ernst & Young analysis of company financial statements




20                              Beyond Borders
Behind the numbers: shrinking IPO returns

      More money in … and relatively less money out
                    Avg pre-IPO investment                             Avg pre-money preferred stock
                                                                       valuation at IPO
              140

              120

                                                             1.60x                 1.55x
              100
       US$m




              80

              60         2.16x

              40

              20

               0
                                  1997                             Recovery        "End of windows"
                                                                  (2002-2003)         (2004-2007)
     Source: Ernst & Young analysis of company financial statements




21                              Beyond Borders
Behind the numbers: the valuation gap

      Selected acquisitions of private “IPO ready” companies, 2006-2007
      Company                        Acquirer               Value (US$ million)
      Agensys                        Astellas                      537
      Adnexus                        BMS                           505
      Rinat                          Pfizer                        478
      Domantis                       GSK                           454
      Illypsa                        Amgen                         420
      Glycofi                        Merck                         400
      Avidia                         Amgen                         380
      Illumigen                      Cubist                        341
      Alantos                        Amgen                         300

        Average value of “IPO-ready” company acquisitions: $425 million
              Average pre-money IPO valuation: $150-160 million
     Source: Ernst & Young


22                           Beyond Borders
US financing: creative financings
Symphony Capital

         RRD                    Clinical development assistance (optional)
     International
                                             Shares / warrants


                                                                         Funding             Portfolio
                                                                         clinical            Company
                                                                       development
                                                 NewCo                                  ►Retains
     Symphony           $                                                    $           right to
      Capital                       ►InlicensesIP                                        acquire IP
                                    ►Funds clinical development                  IP     ►Conducts
                                                                       License to IP     clinical
                                                                                         developmt



                                                                                 IP
                                                                            $
                                                            Future option to re-acquire IP
                                                             at pre-negotiated premium
Source: Ernst & Young


23                          Beyond Borders
US public policy: a changing environment

     Legislative issues strike at heart of biotech’s risk-reward model




                    Upward                             Downward
                  pressure on                         pressure on
                             risk                       reward
      ▲FDAAA and REMS                           ▼Pricing pressures
      ▲Drug safety concerns                     ▼MMA negotiations
      ▲Patent reform                            ▼Follow-on biologics




     Source: Ernst & Young



24                             Beyond Borders
Canadian overview: sustainability?




25          Beyond Borders
Canadian financial performance – Public
Companies
     Revenues (US$ B)              +1%    R&D Expense (US$ B)          +12%



                                           1.0
     2.5
                                           .8
     2.0
                                           .6
     1.5
                                           .4
     1.0
                                           .2
      .5
                                            0
       0
                                                     2006       2007
              2006      2007



     Employees (000)
                                   + 2%   Net Loss (US$ B)
                                                                       + 21%
                                           .8
     10.0

                                          .6
      7.5
                                          .4
      5.0
                                          .2
       2.5
                                                    2006        2007
                2006     2007


26                      Beyond Borders
Canadian financing


                  Venture                    IPOs                 Follow-on            Other

            2.0
            1.8
            1.6
            1.4
            1.2
     US$b




            1.0
            0.8
            0.6
            0.4
            0.2
            0.0
                    2000        2001         2002        2003     2004   2005   2006      2007
     Source: Ernst & Young, BioCentury, BioWorld and VentureOne



27                               Beyond Borders
Financing public companies
– IPOs

 ►   None to date in 2008
 ►   1 in 2007 - $5 million.
 ►   2 in 2006 - $9 million.
 ►   Not a significant source of funding for Canadian
     companies since 2004 and 2005 when $85 million
     and $160 million raised.
 ►   Canada did not follow U.S. trend in 2007.




28              Beyond Borders
Canadian financing by province

     Canadian census 2007
                     Public companies                       Private companies

         400

         350

         300

         250

         200

         150

         100

          50

            0
                    Quebec     British Columbia   Ontario      Alberta          Other

     Source: Ernst & Young



29                           Beyond Borders
Canadian public company financing
 by quarter $M


      800                  770
      700

      600

      500 493

      400                          352
      300
                248
      200                                190

                      87                       87   79
      100                                                          39
                                                         21   27
        0
            Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
                        2006                        2007           2008


30                Beyond Borders
BC public company financing
 by quarter $M

     $400
     $350
     $300
     $250
     $200
     $150
     $100
     $50
      $0
            Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
               2006             2007   2008

31             Beyond Borders
VC funding – Canada $M

     $200
                          $174
     $180
     $160
     $140                                          $125
     $120
                                   $96
     $100     $81
      $80             $61
          $57
      $60                              $50     $46
      $40                      $33
                  $19                      $20
      $20
       $0
           Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
               2006       2007     2008



32               Beyond Borders
VC funding – British Columbia ($M)


     $50
     $45
     $40
     $35
     $30
     $25
     $20
     $15
     $10
      $5
      $0
           Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
               2006              2007   2008
33              Beyond Borders
Number of VC financings and average value

     Avg. $USM

        $12.00
                                                               $11.40
        $10.00                                                 17
         $8.00
                                  $6.10                $7.50
         $6.00                            $4.90   47
                                   55
         $4.00   $2.50                     42

         $2.00         110
         $0.00
                  2004            2005    2006    2007    2008 TO
                                                           DATE




34               Beyond Borders
Canadian financial performance

Market Capitalization (US$ B)
               17.442
         17
         16
         15
                                           13.837
         14                                         13.685
                                                             13.219
                        12.909                                        12.934
         13
         12
                                                                               10.844
         11
         10
                                 8.867
           9                                                                            8.500

           8
               2000     2001     2002       2003     2004     2005    2006 2007         2008
                                                                                         Mid
                                                                                        Year



35                        Beyond Borders
Ernst & Young’s survival index for Canadian public
companies – 2007

                                                            40%



                                           30%
     Less than 1 year of cash

     Between 1 and 2 years of                    23%
     cash
     Between 2 and 3 years of
     cash
     More than 4 years of cash

                                                       8%




36                        Beyond Borders
Canadian private biotech companies


      400
      350
      300
      250                           Total
      200                           Ontario
      150                           Québec
                                    BC
      100
       50
       0
              2006           2007



37          Beyond Borders
Number of companies

     Canadian census 2007
                                        Public companies                                    Private companies

                           140

                           120
     Number of companies




                           100

                            80

                            60

                            40

                            20

                             0
                                                                                  ta
                                   io




                                                                                  ia




                                                                                                                          k
                                            ec




                                                                                                                                      nd
                                                                                              ba
                                                             a




                                                                                an




                                                                                                           nd
                                                           bi




                                                                                                                       ic
                                                                               ot
                                                                               er
                                ar



                                           b




                                                                                           ito




                                                                                                                                   la
                                                                             ew




                                                                                                        la


                                                                                                                    sw
                                                       um
                                        ue




                                                                            lb




                                                                            Sc
                             nt




                                                                                                                                nd
                                                                                                     Is
                                                                                        an
                                                                          ch
                                                                 A




                                                                                                                   n
                            O



                                        Q



                                                     ol




                                                                          a




                                                                                                                                 u
                                                                                                    d


                                                                                                                ru
                                                                                       M
                                                                        at


                                                                       ov
                                                     C




                                                                                                                              fo
                                                                                                  ar



                                                                                                                B
                                                                    sk
                                                h




                                                                                                 w




                                                                                                                         ew
                                                                     N




                                                                                                          ew
                                                is




                                                                                                Ed
                                                                  Sa




                                                                                                                         N
                                            rit




                                                                                                        N
                                                                                           e
                                            B




                                                                                            c
                                                                                         in
                                                                                       Pr




     Source: Ernst & Young



38                                                       Beyond Borders
Canadian financing by leading clusters

     Capital raised by leading Canadian biotech clusters in 2007




39                    Beyond Borders
    Distribution of Canadian companies


                            2004

Drug deliveriy                3%                                             Other   Geonomics
Advanced materials            4%                                              2%        8%
Environment                   6%                                                                 Environment
                                                                   Ag / Aq
Diagnostics                   6%                                    19%                               7%
Genomics / BioInformation     9%                                                                     Drug Delivery
Ag / Aq Bio                  15%                                                                         3%
Therapeutics                 57%
                            100%
                                                    Biomaterials
                                                        5%



                                                      Diagnostics
                                                          9%




                                                                                           Therapeutics
                                                                                               47%




    40                             Beyond Borders
    Distribution of Canadian companies


                            2007

Drug deliveriy                3%                                             Other   Geonomics
Advanced materials            5%                                              2%        8%
Environment                   8%                                                                 Environment
                                                                   Ag / Aq
Diagnostics                  10%                                    19%                               7%
Genomics / BioInformation     8%                                                                     Drug Delivery
Ag / Aq Bio                  19%                                                                         3%
Therapeutics                 47%
                            100%
                                                    Biomaterials
                                                        5%



                                                      Diagnostics
                                                          9%




                                                                                           Therapeutics
                                                                                               47%




    41                             Beyond Borders
Major Canadian Transactions in 2008

►    Axcan Pharma acquired by TPG Capital - $1.3 billion
►    Aspreva Pharmaceutical acquired by Galencia Group -
     US$900 million.
►    Draxis Health Inc. acquired by Jubilant Organosys -
     $255M
►    Arius Research Inc. acquired by Roche - $191 million




42                 Beyond Borders
BC Transactions in 2008


 ►   Tekmira Pharmaceuticals Corporation and Protiva
     Biotherapeutics Inc. (share deal worth approx. $32M per
     Tekmira Q2 FS)
 ►   OncoGenex Technologies Inc. reverse takeover of
     Sonus Pharmaceuticals, Inc. (share exchange deal
     worth about US$11M per Sonus proxy)
 ►   Medigen Biotechnology Corporation planned reverse
     takeover of Pacgen Biopharmaceuticals Corporation (per
     Pacgen October 24 press release)
 ►   Angiotech?



43               Beyond Borders
European overview: growing strengths




44         Beyond Borders
European financial performance


      Revenues (€b)                  -6%   R&D expense (€ b)          +7%
      12                                   4
      10
                                           3
       8
       6                                   2
       4
                                           1
       2
       0                                   0
             2006           2007                  2006         2007




      Employees (000)                +6%   Net loss (€ b)             108%
      60                                   1.4
                                           1.2
      40                                   1.0
                                           0.8
                                           0.6
      20                                   0.4
                                           0.2
       0                                   0.0
             2006            2007                  2006        2007




45                  Beyond Borders
Behind the numbers: the Serono acquisition

     The Serono acquisition had a huge impact on biotech financial results

                    60%
                   120%
                                                                          108%


                   100%
                    40%
     Growth rate




                                                  20%
                    20%
                          13%



                    0%
                                                                  -2%                   3%
                                    -6%

                   -20%
                          2006     2007           2007            2006     2007         2007
                                              adjusted for                          adjusted for
                                                Serono                                Serono
                                 Revenues                                Net loss
     Source: Ernst & Young, BioCentury, BioWorld and VentureOne


46                               Beyond Borders
European financing: IPOs



          900

          800

          700

          600

          500
     €m




          400

          300

          200

          100

           0
                  2001         2002         2003        2004         2005         2006         2007    2008 H1

     Source: Ernst & Young, BioCentury, BioWorld, VentureOne and company news (through NewsAnalyzer)



47                              Beyond Borders
European financing: follow-on and other



          4000

          3500

          3000

          2500
     €m




          2000

          1500

          1000

          500

            0
                  1999      2000      2001      2002       2003      2004      2005      2006      2007   2008 H1

     Source: Ernst & Young, BioCentury, BioWorld, VentureOne and company news (through NewsAnalyzer)



48                              Beyond Borders
European financing: regional distribution

     Capital raised by major European countries in 2007




49                    Beyond Borders
European deals: mergers and acquisitions


               Biotech-biotech                    Pharma-biotech                     Pharma-biotech mega deals

          16

          14

          12

          10
     €b




          8

          6

          4

          2

          0
                       2005                       2006                      2007                    2008 H1

     Source: Ernst & Young, Windhover, BioWorld, Recombinant Capital and company news (through Newsanalyzer)



50                               Beyond Borders
European deals: alliances


                           Biotech-biotech                                            Pharma-biotech

          12


          10


          8
     €b




          6


          4


          2


          0
                       2005                      2006                       2007                    2008 H1

     Source: Ernst & Young, Windhover, BioWorld, Recombinant Capital and company news (through Newsanalyzer)



51                              Beyond Borders
European pipeline by phase

     European pipeline shows strong growth, particularly in Phase II
                                                            2006                                  2007
     Number of product candidates in studies




                                               800

                                               700

                                               600

                                               500

                                               400

                                               300

                                               200

                                               100

                                                 0
                                                     Preclinical             Phase I   Phase II          Phase III
     Source: Ernst & Young and company websites



52                                                          Beyond Borders
Outlook: the year ahead
Rules of the road

                         Look for                                 Rules of the road
     Deals               ► Increasing urgency around big          “Bargaining power matters”
                           pharma pipeline issues                 ► Dual-tracking   preserves options
                         ► Stiff competition for biotech assets     for private companies
                         ► High valuations, more negotiating      ► Creative deal structures can retain
                           power for biotechs                       flexibility, capture greater share of
                                                                    value
     Financing           ► Sustained strength in venture          “Stay lean, mean and focused”
                           investments                            ► Capitalefficiency for leaner times
                         ► Challenging public equity markets
                                                                  ► Alternative sources of capital
                         ► New, creative financing options
                         ► Restructuring

     Products &          ► Increased safety scrutiny, including   “Show me the value”
     regulatory            post-marketing                         ► Articulate   value props early in
                         ► Higher bar from payors, pay-for-         R&D
                           performance                            ► New reimbursement / pricing
                         ► Continued focus on sales/mktg.           approaches
 Source: Ernst & Young



54                                  Beyond Borders
Long-term outlook:
reinnovation and reinvention
Is a pattern emerging?

Big pharma companies announce layoffs, restructurings
Stock buybacks ► Velcade gives NICE an unprecedented
Safety concerns take bite out of money-back guarantee




     re-in
product sales FDA NME approvals         Product safety
Creative deal ►fall to lowest level in  incidents in the
structures R ? ? ? ? over 25 years rising China market
      ►
 $         &?             more pricing                 F
►          D                pressures    F
                 π?                                    I
 €     M&A                   emerging   D      R       P
►                           ►        ►  A      E
       The                                             N
 ¥               Biotech companies      A      M       E
►      mega       8%       retain more
       deal…                            A      S       T
 £                      rights in deals                s
       is back                           ►      ►
Big pharma’s search for pipeline productivity propels a
booming deal environment ► Government negotiation of
► drug prices under MMA returns to public policy debate

56             Beyond Borders
Reinvention

BigThe drug industry is being reinvented
    pharma companies announce layoffs, restructurings
Stock buybacks ► Velcade gives NICE an unprecedented
           by three sweeping trends:
Safety concerns take bite out of money-back guarantee




     re-in
product sales FDA NME approvals           Product safety
Creative deal ►fall to lowest level in    incidents in the
structures R ? ? ? ? over 25 years rising China market
      ►
 $         &?             more pricing                   F
►          D                pressures      F
                 π?                                      I
 €     M&A                   emerging     D      R       P
►                           ►        ►    A      E
       The                                               N
 ¥               Biotech companies        A      M       E
►      mega       8%       retain more
       deal…                              A      S       T
 £                      rights in deals                  s
       is back                             ►      ►
Big pharma’s search for pipeline productivity propels a
                              ►Personalized medicine
  ►R&D productivity
booming deal environment ► Government negotiation of
                              ►Globalization
► drug prices under MMA returns to public policy debate

57              Beyond Borders
These drivers will fundamentally change the
business of drug development

 ►   Approaches to research and development
 ►   Business models
 ►   The value chain
 ►   Deal structures
 ►   Balance of power between biotech and big pharma
 ►   Partnerships between western companies and
     companies in emerging markets




58               Beyond Borders
ig pharma companies announce layoffs, restruc
tock buybacks ►Velcade gives NICE an unprece
afety concerns take bite out of money-back gu
roduct sales FDA NME approvals         Product
reative deal ►fall to lowest level in  incidents
 ructures R ? ? ? ? over 25 years rising China
     ►
          &?             more pricing
    The first driver of reinvention: F
          D                pressures
                π?
    R&D productivity emerging          D      R
      M&A
                           ►        ►  A      E
      The       Biotech companies
      mega                             A      M
                 8%       retain more         S
      deal…                            A
      is back          rights in deals  ►      ►
 g pharma’s search for pipeline productivity pr
ooming deal environment ► Government negoti
drug prices under MMA returns to public policy
The problem: patent expirations

     Projected sales losses from patent expirations to reach US$67b by 2012


            25



            20



            15
     US$b




            10



            5



            0
                    2007              2008         2009   2010   2011   2012

     Source: Sanford C. Bernstein & Co.



60                                Beyond Borders
Big companies need sustainable solutions


                                 ► High prices lower
          Buying
                                   upside potential
          pipeline
                                 ► Limited reserves of
           assets                                        Companies
                                   cash
                                                              need
                                                         sustainable
           Cutting                                       solutions to
                                 ► Short-term   gains
            costs                                         fix the real
                                                           problem:
                                                           low R&D
                                 ► Short-term gains      productivity
         Boosting
                                 ► Limited reserves of
           EPS
                                   cash

     Source: Ernst & Young


61                           Beyond Borders
The inertia of size

                  Small companies         Conduct and performance       Large companies         Conduct and performance

                  ►   Small               ►   Individuals have more     ►   Large               ►   Poor sense of
                                              control over outcomes                                 ownership
     Structure




                  ►   Flexible            ►   Encourages creativity     ►   Rigid               ►   Centralized,
                                              and collegiality                                      bureaucratic processes
                                                                                                ►   Risk-aversion over time
                  ►   Cash-starved        ►   Driven to raise capital   ►   Strong cash flow    ►   Not as “hungry” or
                                          ►   Lean operations,                                      driven to succeed
                                              sometimes cut corners
     Incentives




                  ►   Stock-based         ►   Direct financial tie to   ►   Stock-based         ►   Less tied to outcomes
                      compensation is a       performance                   compensation is     ►   Less passion
                      strong incentive                                      not meaningful
                  ►   Private investors   ►   Less focused on short-    ►   Public investors    ►   More sensitive to short-
                      with longer             term financial                demanding               term impact of long-
                      horizons                performance                   quarterly results       term decisions




                          Structure and incentives drive conduct and performance

       Source: Ernst & Young


62                                        Beyond Borders
Emulating biotech

                                    Creating small,
                                    autonomous R&D
                                                           Emulate
                                    units
                                                           culture
                                    Preserving entities
        Large                       after acquisitions       of
     monolithic
     big pharma
                                    Adopting networked      small
      company
                                    structures
                                                           biotech
                                    Pay-for-performance
                                    tied to small-team
                                    milestones
                                                          companies
     Source: Ernst & Young


63                           Beyond Borders
ig pharma companies announce layoffs, restruc
tock buybacks ►Velcade gives NICE an unprece
afety concerns take bite out of money-back gu
roduct sales FDA NME approvals            Product
reative deal ►fall to lowest level in     incidents
 ructures R ? ? ? ? over 25 years rising China
     ►
          &?             more pricing
                            of reinvention:
    The second driver pressures
          D                                F
                π?
    Personalized medicine   emerging      D      R
      M&A
                           ►        ►     A      E
      The       Biotech companies
      mega                                A      M
                 8%       retain more            S
      deal…                               A
      is back          rights in deals     ►      ►
 g pharma’s search for pipeline productivity pr
ooming deal environment ► Government negoti
drug prices under MMA returns to public policy
Personalized medicine: why now?


                                 ► Targeted approaches
          Safety
                                 ► Less misdiagnosis,
         concerns
                                   fewer adverse events      Move from
                                                             efficacy to
                                                             efficiency
                                 ► Smallerclinical trials
         Pricing                                               in drug
                                 ► Cheaper drug
        pressures                                           development
                                   development
                                                                 and
                                                             healthcare
                                 ► More   efficient
                                                              delivery
          R&D                       identification and
       productivity                 development of drug
                                    targets
     Source: Ernst & Young


65                           Beyond Borders
Challenge 1: end of the blockbuster model


     Old model                                   New model
     ► Large clinical trials                     ► Smaller trials for targeted drugs
     ► Pharma’s Phase III abilities a key        ► Scale less relevant
       strength
     ► Large-scalemanufacturing for                      volumes, but more complex
                                                 ► Smaller
       high volumes of blockbuster                manufacturing
       drugs
     ► DTC  advertising, armies of sales         ► Drugs  better differentiated, compete
       reps for poorly-differentiated              on merits
       drugs                                     ► Scale less relevant in sales

     ► Reimbursement         based on efficacy   ► Pay-for-performance  requires greater
                                                  allocation of resources to
                                                  demonstrate value
     Source: Ernst & Young




66                            Beyond Borders
Challenge 2: making the numbers work

                    Rx                        Dx                   3x


                                                          ► Incentivesand
     ► Targeted                      ► Diagnostics  for    metrics to support
       therapeutics for                more efficient:     the economics and
       more efficient                   ► Prediction       ROI for investors:
       treatment of                     ► Diagnosis         ► Better pricing for
       disease                          ► Dosing              diagnostics
     ► More efficient drug              ► Monitoring        ► Reimbursement
       development with              ► Lower healthcare       based on value
       smaller, cheaper                costs from new       ► Measures across
       clinical trials                 efficiencies           healthcare
                                                              system



     Source: Ernst & Young


67                           Beyond Borders
ig pharma companies announce layoffs, restruc
tock buybacks ►Velcade gives NICE an unprece
afety concerns take bite out of money-back gu
roduct sales FDA NME approvals           Product
reative deal ►fall to lowest level in    incidents
 ructures R ? ? ? ? over 25 years rising China
     ►
          &?             more pricing
                            reinvention: F
    The third driver of pressures
          D
                π?
    Globalization           emerging     D      R
      M&A
                           ►        ►    A      E
      The       Biotech companies
      mega                               A      M
                 8%       retain more           S
      deal…                              A
      is back          rights in deals    ►      ►
 g pharma’s search for pipeline productivity pr
ooming deal environment ► Government negoti
drug prices under MMA returns to public policy
Drivers and limitations

      Driver                              Short-term play           Long-term play
      Outsourcing clinical         ► Cost cutting for western   ► Emerging  market
      trials and                     companies                    companies looking to
      manufacturing                ► Sources of revenue for       develop innovative
                                     emerging market              pipelines
                                     companies                  ► Goals become more
                                   ► Limited window as cost       competitive, less
                                     advantages get eroded        complementary
      Selling drugs to                                          ► Tremendous
      rapidly-growing                                            opportunity as
      emerging markets                                           emerging middle
                                                ?                classes, rising
                                                                 prosperity create
                                                                 markets that can
                                                                 afford western drugs
     Source: Ernst & Young




69                           Beyond Borders
Globalization:
the challenge of the next billion consumers
Per-capita income thresholds:                                              Market size/potential:


                                                       1.5 b                Mature markets with
                                                      patients             slow growth potential
US$20,000
                                                                               “The next billion”
                                                   1b patients            Emerging markets with
                                                                           high growth potential
US$3,000
                                                                            “The unserved base”
                                              4b patients                         US$30b market
                                          6b patients by 2017                    US$65b by 2017




      Source: Ernst & Young and International Finance Corporation (IFC)

70                                Beyond Borders
ig pharma companies announce layoffs, restruc
tock buybacks ►Velcade gives NICE an unprece
afety concerns take bite out of money-back gu
roduct sales FDA NME approvals         Product
reative deal ►fall to lowest level in  incidents
 ructures R ? ? ? ? over 25 years rising China
     ►
          &?             more pricing
          D                pressures    F
                 of
    The shape π? the future            D      R
      M&A                   emerging
                           ►        ►  A      E
      The       Biotech companies
      mega                             A      M
                 8%       retain more         S
      deal…                            A
      is back          rights in deals  ►      ►
 g pharma’s search for pipeline productivity pr
ooming deal environment ► Government negoti
drug prices under MMA returns to public policy
Changing business models

     Personalized medicine changes the nature of competition

                                              Present state




     Source: Ernst & Young



72                           Beyond Borders
Changing business models

     Personalized medicine changes the nature of competition

                                              Future state




     Source: Ernst & Young



73                           Beyond Borders
Changing business models

     Personalized medicine redistributes value in the value chain

 100%
                                                            Sales and marketing
               Sales and marketing
     80%
                                                               Manufacturing


     60%           Manufacturing                             Late development
                                                                                               Value
                                                                                            accrues to
                 Late development                            Early development
     40%                                                                                    innovation

                 Early development
     20%
                                                                 Research
                      Research

      0%
                   Current state                     Future state - personalized medicine
     Source: Ernst & Young




74                                  Beyond Borders
The need for new models

                                         Pharma                     Biotech


              R&D            ► Boost    productivity     ► Remain   innovative


                             ► Adapt to smaller scale    ► Valuechain
         Operations          ► Variabilize fixed costs    specialization
                             ► Tap networks               / non-FIPCO models

          Capital                                        ► Access   capital with
                                     allocation &
                             ► Efficient
        formation &                                        less dilution
                              deployment of capital
         efficiency                                      ► Minimize burn rate



                                       approach
                             ► Portfolio                 ► Retain control & rights
              Deals
                             ► Manage risk               ► Higher share of value

     Source: Ernst & Young


75                            Beyond Borders
Opportunities for companies

                             Biotech                                Pharma

                                                                 Minimize
                                  More                          P&L impact
                               flexibility                          of
                                                               investments

      Biotechs                                                 Accept more      Pharma’s
      gaining                   Greater                           risk to      imperative
                                                    Creative
        more                     rights                          increase      to fix R&D
     bargaining                retention             deals      potential       product-
       power                                                      upside           ivity

                                Greater
                                                                  Acquire
                                share of
                                                                culture, not
                                 value
                                                               just pipeline
                               produced
     Source: Ernst & Young


76                                 Beyond Borders
Models of the future

              Biotech                         Pharma 1          Pharma 2


     ► Leaner  FIPCOs:                                      ► For those that don’t
       less infrastructure           ► Some  successfully    succeed at
       required                        reinvent R&D          reinvention:
     ► Value-chain                   ► New Models:            ► Core strengths
       specialization                   ► More risk             are lower-margin
     ► Becoming FIPCOs                    accepting in        ► Competition
       less imperative                    R&D                   from emerging
       with higher                      ► Leaner sales          markets
       royalties, co-                   ► More networked      ► De facto CROs
       promotion rights                                         or CMOs?



     Source: Ernst & Young


77                           Beyond Borders
Thank you

                             Stay tuned:

                             ey.com/biotech

                             ey.com/beyondborders


                             Reinnovate.
                             Reinvent.
                             You in?


84          Beyond Borders

				
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