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Beyond borders Global biotechnology report 2009

Beyond borders Global biotechnology report 2009. Swedish American Life Sciences Summit 2009 Stockholm, Sweden 20 August 2009. Headlines. The big picture. Markets down, cos trading below cash Funding down 46% Large numbers with <1 year cash Restructurings up. The global financial crisis.

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Beyond borders Global biotechnology report 2009

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  1. Beyond bordersGlobal biotechnology report 2009 Swedish American Life Sciences Summit 2009 Stockholm, Sweden 20 August 2009

  2. Headlines The big picture

  3. Markets down, cos trading below cash • Funding down 46% • Large numbers with <1 year cash • Restructurings up The global financial crisis • Valuations plummet • Financing falls sharply • Haves and have-nots

  4. Revenue grows 12% to US$90b • Net loss falls 53% • US reaches aggregate profitability • New deal highs in US market Robust financial performance • Double-digit revenue growth • Net loss improves • Deal activity remains strong

  5. Did someone say profitability?Biotech without DNA? Genentech has accounted for an increasingly large share of US industry revenues ... Source: Ernst & Young and company financial statement data

  6. Did someone say profitability?Biotech without DNA? ... and the industry's profitability will likely be very different after Genentech's acquisition Now back to the headlines Source: Ernst & Young and company financial statement data

  7. Four paradigm-shifting trends promise greater sustainability: • Generics • Healthcare reform • Personalized med. • Globalization Paths to sustainability • Protracted funding drought and potentially slower innovation • Uncertain post-crisis landscape

  8. Biotech performance in 2008 Beyond business as usual?

  9. -53% +18% +12% -5% Net loss (US$b) R&D expense (US$b) Revenues (US$b) Public companies Global financial performance

  10. Global financing Global financing (US$b) Source: Ernst & Young, BioCentury, BioWorld, VentureSource and Windhover Derived from Ernst & Young, Beyond borders: global biotechnology report 2009

  11. Haves and have-nots:survival index The number of companies with less than one year of cash has soared Less than 1 year of cash 1-2 years 2-3 years 3-5 years More than 5 years of cash US Europe Canada

  12. US deals: mergers and acquisitions Deal activity remains impressive ... Source: Ernst & Young, BioWorld and Windhover

  13. US deals: mergers and acquisitions adjusted for mega deals ... particularly after adjusting for mega deals Source: Ernst & Young, BioWorld and Windhover

  14. US deals: alliances The potential value of strategic alliances set a new record Source: Ernst & Young, BioWorld and Windhover

  15. 40 35 30 25 20 15 10 5 0 European deals: mergers and acquisitions European M&A activity remains strong … Number of M&As Source: Ernst & Young, Windhover, MedTRACK, BioWorld and company news via Newsanalyzer

  16. European deals: mergers and acquisitions … particularly after adjusting for megadeals Source: Ernst & Young, Windhover, MedTRACK, BioWorld and company news via Newsanalyzer

  17. 200 180 160 140 120 100 80 60 40 20 0 European deals: alliances European alliances by year Biotech-biotech avg. value Pharma-biotech avg. value Average value (€m) Source: Ernst & Young, Windhover, MedTRACK, BioWorld and company news via Newsanalyzer

  18. New necessities Unprecedented changes and the search for sustainable business models

  19. Have we been here before? Or is it different this time? Have we been here before? The more things change the more they stay the same?

  20. Yes, we have been here before This is neither the industry’s first IPO drought nor (so far) its longest 25 2.5 Capital raised Number of IPOs Q2 01 – Q3 01 2 quarters 20 Q3 02 – Q3 03 5 quarters 2.0 Q2 84 – Q3 85 6 quarters Q4 88 – Q3 89 4 quarters Q208-present 4 quarters and ongoing 15 1.5 Capital raised (US$b) Number of IPOs 10 1.0 5 0.5 0 0.0 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

  21. All prior crises Investors’ enthusiasm for biotech stocks declines Sector-specific withdrawal from biotech

  22. Credit crunch Subprime mortgage default rates increase Mortgage-backed securities become “toxic” Banks distressed, fail Risk aversion Foreclosures climb Less debt for biotech Public capital for biotech constrained Biotech IPOs disappear Biotech stocks fall Current crisis US property values fall

  23. Credit crunch Subprime mortgage default rates increase US property values fall Mortgage-backed securities become “toxic” Banks distressed, fail Less lending to households Household spending declines Risk aversion Household income declines Layoffs Foreclosures climb Less debt for biotech Less lending to businesses Drug usage could fall Corporate earnings declines Tax revenues drop Stocks plummet Less capital for hedge funds Public capital for biotech constrained Biotech IPOs disappear Biotech stocks fall Household wealth sinks Ranks of uninsured swell Lower valuations in M&A and alliances Pricing pressure could increase Less capital for venture funds Increased counterparty risk from suppliers and partners Institutional investors’ portfolios diminish University endowments down Nonprofit and foundation endowments down Challenging exits for biotech investors Biotech venture funding could fall Research funding could fall The interconnectedness of all things How the housing markets sneezed and biotech caught a cold

  24. But it is also different this time The interconnectedness of all things Systemic crisis • Traditional funding sources constrained • Longer recovery • Contraction ahead • New risks • Increasing pricing pressure? • Lower drug usage? • Uncertain post-crisis landscape Pervasive uncertainty Biotech business model under unprecedented strain

  25. Seeking sustainability Is biotech’s business model becoming unsustainable?

  26. The biotech business model:necessity is the mother of all models Investors (key input: funding) Companies(key output: innovation) • Limited capital • Constrained funding horizons World’s longest relay race • $1-2 billion and over a decade to sustainability • Limited capital • Maximize ROI Lean operations, just-in-time financing • Raise capital with less dilution • Maximize returns FIPCO maximizes returns • Less bargaining power • Weaker returns from outlicensing Source: Ernst & Young

  27. The biotech business model: fundingVenture capital LPs’ portfolios down • Capital call uncertainty • Ability to raise new funds Relatively steady (but more selective) Stocks plummet • More funds for existing companies • Less early-stage investing • More selective

  28. The biotech business model: fundingPublic investors Banks distressed, fail Less capital for hedge funds Major retreat of investors Stocks plummet Institutional investors’ portfolios down Risk aversion Biotech stocks fall, IPOs disappear Less debt for biotech Credit crunch Systemic deleveraging No quick return to prior levels

  29. The biotech business model: innovation With reduced funding options, many firms have turned to ultra-lean models, betting on a single clinical candidate Σ R+D costi funding options n´= 1 n >  i=0 but given the serendipity inherent in drug R&D, it’s likely that some innovative discoveries will be curtailed Potential loss of innovative discoveries (n – n´) x prob (serendipity)i = Where n = number of pipeline candidates before financial crisis n´ = number of pipeline candidates after financial crisis

  30. Shaping the post-crisis landscape Will this be biotech’s Darwinian moment?

  31. Cambrian Ordovician Silurian Devonian Carboniferous Permian Triassic Jurassic Cretaceous Tertiary Darwinism:Evolution is neither linear nor smooth 800 700 600 500 Number of families 400 300 200 100 Earth-shattering events can reshape landscapes and unleash new waves of evolution 0 600 500 400 300 200 100 0 Millions of years ago

  32. Four paradigm-shifting trends

  33. Outlook What lies ahead?

  34. When will IPOs return? Ten steps to recovery Improved early-stage IPO market More active mid- and late-stage IPO market More follow-on and convert. debt Improved sector valuations Overall market sentiment improves Positive fund flow to asset managers Credit crisis abates Consumer and investor confidence improve Earnings improve Oil prices, stronger $ Source: Jefferies & Co. Source: Ernst & Young, BioCentury, BioWorld and VentureSource

  35. When will IPOs return? Ten steps to recovery: status as of June 2009 Improved early-stage IPO market More active mid- and late-stage IPO market More follow-on and convert. debt Improved sector valuations Overall market sentiment improves Positive fund flow to asset managers Credit crisis abates Consumer and investor confidence improve Earnings improve Oil prices, stronger $ Source: Jefferies & Co. and Ernst & Young Source: Ernst & Young, BioCentury, BioWorld and VentureSource

  36. Rules of the road:the year ahead Source: Ernst & Young

  37. Beyond the crisis Biotech could reach a “new normal” • New levels of funding • New competitors • New rules of the game Focus on innovation • Science: a higher bar • Business model: a necessity More sustainable models for biotech’s next 30 years?

  38. Thank you Stay tuned: ey.com/biotech ey.com/beyondborders Ernst & Young stands ready to help you as the business of biotech goes beyond business as usual

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