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The Diagnostics Investment Landscape Surviving the Challenging Climate in 2008-09

This article discusses the investment landscape for diagnostics in the challenging economic climate of 2008-09. It highlights the market expansion, significant value creation, and accelerated M&A activity in the diagnostics industry. The article also addresses the sustainability of novel diagnostics and the shifting bias of investors towards "best-in-class" companies.

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The Diagnostics Investment Landscape Surviving the Challenging Climate in 2008-09

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  1. The Diagnostics Investment LandscapeSurviving the Challenging Climate in 2008-09 Roopom BanerjeeDirector, Investment Banking

  2. Leerink Swann – Who We Are • The Healthcare Investment Bank • Full-service investment bank – Corporate Finance, M&A, Institutional Sales & Trading, Venture Services, Consulting • Powered by MEDACorp – global network of 27,000 clinical experts, academic thought leaders, business leaders • Most healthcare transactions of any bank on Wall St since 2007 • 75 completed financing deals since 2007 • 20+ announced/closed M&A deals in last 12 months • 230 employees – Boston, New York, San Francisco

  3. Investors’ View of Diagnostics – Circa 2000 • Mature, slow growth industry • Mediocre margins and cost pressures • Fragmented product landscape, starting to consolidate • Led by large diversified companies – few successful pure-play startups • For many big companies, a “cash cow” business • Limited upside or alpha in risk-reward profile • Other life sciences sectors more exciting, e.g., novel biologics, devices • Secular belief that newer, better, safer therapies would eschew the need for targeted diagnostics (clinical and research markets)

  4. Today: Matching Patients with Best Treatments Market Expansion Market Forces Emergence of novel, high cost therapies and procedures to treat serious diseases Diagnostics that match patients and treatments to provide more effective, less costly and safer therapies Higher safety and efficacy thresholds for approval and reimbursement $20 billion market today growing to $60 billion by 2016 3 Source: Kalorama 2006

  5. Significant Value Creation Excites Investors! • Companies with >$100mm market cap today • Current market cap or value at time of sale • 18 IPO's since 2000 • 135 M&A transactions since 2003

  6. Diagnostics M&A Activity is Accelerating M&A Transaction Value $ Millions • 135 transactions since 2003 • Median acquisition multiple 4.2x on an EV/ LTM sales basis • Acquired companies had median of $33.4 mm LTM revenues at time of sale • Consolidation even amongst largest players • Siemens / Bayer / Dade • Invitrogen / ABI • Hologic / Cytyc

  7. Top Buyers of Diagnostics Assets Number of Diagnostics Acquisitions, 2003-08 YTD $ 4,543 mm $ 7,152 mm $ 1,636 mm $2,502 mm $3,936 mm $4,623 mm $616 mm $473 mm $423 mm $423 mm $1,348 mm $80 mm $14,189 mm

  8. Why are Novel Diagnostics Hot? Is it Sustainable? • Rapidly growing commercial opportunities • Economics favorable to key constituents: patients, physicians, hospitals, payors • Disruptive new technologies – small companies can play and succeed! • Sector has created significant shareholder value • Several proven paths to success • Attractive risk reward: biotech upside without biotech risk • Suited to investor demands for predictable revenues and earnings • Several questions loom on the horizon… • How do you pick the winners? • Does the market need an nth breast cancer test? • When will reimbursement and pricing come under pressure? • What is the FDA going to do?

  9. Investors Bias Shifting To “Best-in-Class” • Targeting a large, established market with clear unmet medical needs • Disruptive technology that drives a new standard of care • Compelling safety and efficacy data – established development pathway • Attractive, established reimbursement and strong economic justification • Benefits to key constituents: patients, physicians, hospitals, payors • Rapid commercial adoption with referencable customers • Attractive gross margins, capital efficiency and clear path to profitability • Strong IP and other barriers to entry • Proven management team

  10. 2008 2009 2007 DJIA -33.8% -44.5% 6.4% -38.5% -47.6% 3.5% S&P 500 -40.5% -45.7% 9.8% NASDAQ Composite -34.8% -46.4% -2.8% Russell 2000 -12.6% -11.2% 4.6% NBI 2007 2008 2009 -1.9% -19.4% -17.0% AMEX Pharma. -6.8% -32.1% -11.6% MS HC Providers 10.2% -37.0% -8.4% DJ/W Medical Equip. MS HC Payors 16.2% -54.8% -14.7% Even the Most Successful Companies Need to Contend with Challenging Global Economy Market Performance (Jan 2008 – Feb 2009) U.S. Equity Mutual Fund Flows (Jan 2006 – Jan 2009) • Worst capital markets since 1930’s • Market stabilization efforts stalled in face of global deleveraging and credit crisis • Healthcare initially trailed market decline due to defensiveness; no safe haven today • Small cap healthcare hardest hit – majority trading at or below current cash levels (US$ in billions) Source: FactSet, Placement Tracker, ici.org, sec.gov, company press releases

  11. Healthcare Financing Market Has Contracted Healthcare Financing 2008-09 YTD vs. 2007 ($ in millions) • In 2008, the largest healthcare financings were: • IPO: CardioNet in March 2008 ($81 million) • Follow-On: Illumina in August 2008 ($352 million) • PIPE: Middlebrook Pharmaceuticals in July 2008 ($100 million) • Registered Direct: VIVUS in August 2008 ($65 million) • Total private and public equity raised in healthcare since 2008 is 48% below 2007 levels • Private financings are 25% below 2007; public equity financings (excluding IPOs) are down 56% vs. 2007

  12. VCs Highly Selective in Diagnostics ($ in millions) • VCs highly selective in new investments • Priority #1: support current portfolio • Market is getting cheaper – realism setting in • Later-stage assets are more de-risked; less attractive risk-reward for earlier-stage • VCs seeking “fallen angels” in public market Source: VentureSource.

  13. A Silver Lining in Diagnostics? • More investors adding novel diagnostics to mandate • Traditional VC powerhouses continue to invest: Kleiner Perkins, TPG, Mohr Davidow, New Leaf • New VC entrants: SVLS, Prospect, Radius, Venrock • Growth equity also taking notice: Perseus, Abingworth, Ampersand • The “A-list” companies are getting funded • Strong demand and premium pricing for the right profile • Bulletproof business case for each MDx test – compelling IP alone is not enough • Companies taking portfolio view of MDx to diversify risk • Are the days of “one-hit wonders” gone (e.g., Digene, Biosite, etc.)? • Evolving definitions: “diagnostic” vs. “prognostic” vs. “predictive” • Specific TAs in focus – autoimmune, neurological, cancers, infectious disease • All companies – no matter big or small – are managing cash

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