Beyond borders Global biotechnology report 2009 Swedish American Life Sciences Summit 2009 Stockholm, Sweden 20 August 2009

Headlines The big picture

Beyond borders Global biotechnology report The global financial crisis  Valuations plummet  Financing falls sharply  Haves and have- nots  Markets down, cos trading below cash  Funding down 46%  Large numbers with <1 year cash  Restructurings up

Beyond borders Global biotechnology report Robust financial performance  Double-digit revenue growth  Net loss improves  Deal activity remains strong  Revenue grows 12% to US$90b  Net loss falls 53%  US reaches aggregate profitability  New deal highs in US market

Beyond borders Global biotechnology report 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

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

Beyond borders Global biotechnology report Paths to sustainability  Protracted funding drought and potentially slower innovation  Uncertain post- crisis landscape  Four paradigm- shifting trends promise greater sustainability:  Generics  Healthcare reform  Personalized med.  Globalization

Beyond borders Global biotechnology report Biotech performance in 2008 Beyond business as usual?

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

Beyond borders Global biotechnology report Global financing Year IPOs Follow-on and other offerings Venture Total Global financing (US$b) Source: Ernst & Young, BioCentury, BioWorld, VentureSource and Windhover Derived from Ernst & Young, Beyond borders: global biotechnology report 2009

Beyond borders Global biotechnology report Haves and have-nots: survival index The number of companies with less than one year of cash has soared USEuropeCanada Less than 1 year of cash1-2 years2-3 years3-5 yearsMore than 5 years of cash

Beyond borders Global biotechnology report US deals: mergers and acquisitions Deal activity remains impressive... Source: Ernst & Young, BioWorld and Windhover

Beyond borders Global biotechnology report US deals: mergers and acquisitions adjusted for mega deals... particularly after adjusting for mega deals Source: Ernst & Young, BioWorld and Windhover

Beyond borders Global biotechnology report US deals: alliances The potential value of strategic alliances set a new record Source: Ernst & Young, BioWorld and Windhover

Beyond borders Global biotechnology report European deals: mergers and acquisitions European M&A activity remains strong … Source: Ernst & Young, Windhover, MedTRACK, BioWorld and company news via Newsanalyzer Number of M&As

Beyond borders Global biotechnology report European deals: mergers and acquisitions … particularly after adjusting for megadeals Source: Ernst & Young, Windhover, MedTRACK, BioWorld and company news via Newsanalyzer

Beyond borders Global biotechnology report European deals: alliances European alliances by year Source: Ernst & Young, Windhover, MedTRACK, BioWorld and company news via Newsanalyzer Biotech-biotech avg. valuePharma-biotech avg. value Average value (€m)

New necessities and the search for sustainable business models Unprecedented changes

Beyond borders Global biotechnology report 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?

Beyond borders Global biotechnology report Yes, we have been here before This is neither the industry’s first IPO drought nor (so far) its longest Capital raised (US$b) Number of IPOs Capital raisedNumber of IPOs Q2 84 – Q quarters Q4 88 – Q quarters Q2 01 – Q quarters Q3 02 – Q quarters Q208-present 4 quarters and ongoing

Beyond borders Global biotechnology report All prior crises Sector- specific withdrawal from biotech Investors’ enthusiasm for biotech stocks declines

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

Beyond borders Global biotechnology report The interconnectedness of all things How the housing markets sneezed and biotech caught a cold

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

Beyond borders Global biotechnology report Seeking sustainability biotech’s Is becoming unsustainable? business model

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

Beyond borders Global biotechnology report The biotech business model: funding Venture capital LPs’ portfolios down ► Capital call uncertainty ► Ability to raise new funds ► More funds for existing companies ► Less early-stage investing ► More selective Relatively steady (but more selective) Stocks plummet

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

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

Beyond borders Global biotechnology report Shaping the post-crisis landscape Will this be biotech’s Darwinian moment?

Beyond borders Global biotechnology report Darwinism: Evolution is neither linear nor smooth Millions of years ago Number of families Cambrian Silurian Carboniferous Triassic Cretaceous Ordovician Devonian Permian Jurassic Tertiary Earth-shattering events can reshape landscapes and unleash new waves of evolution

Beyond borders Global biotechnology report Four paradigm-shifting trends Opportunities for sustainabilityChallenges Generics ► Generic equivalents of very successful drugs could ease payors’ budgets to pay for new innovative drugs ► Making sure budget relief is applied to paying appropriately for innovative drugs ► Higher bar for reimbursement Healthcare reform ► Expanded access in world’s largest drug market ► Pay-for-performance metrics that truly reward innovation ► Making sure the right metrics are adopted ► Raises the bar for innovative products Personalized medicine ► Efficient drug development shortens the relay race ► Improved bargaining power of small cos. boosts valuations and returns ► Adopting pricing and metrics that sustain funding ► Raises the bar for innovative products Global- ization ► More valuable ex-US rights lead to win-win deals ► New funding/partnering sources from Asian companies ► Lessons from non-traditional business models ► Executing complex global collaborations ► New sources of competition ► Slower growth in global markets

Beyond borders Global biotechnology report Outlook What lies ahead?

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

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

Beyond borders Global biotechnology report Rules of the road: the year ahead Look forRules of the road Tight capital: contraction ahead ► Public investors sidelined ► VCs selective, less early-stage funding ► Options dwindling for many ► Restructurings, bankruptcies, acquisitions Focus deep, search wide, move quickly ► Increase capital efficiency ► Explore nontraditional funding sources ► Partner to survive Active deal space ► Pharma’s patent challenges remain urgent ► Lean times drive deal making ► Haves and have-nots Cash is king, bargaining power matters ► Take the best deal you can get, preserve some upside ► Explore optionality, geographic rights to close valuation gaps Changing rules of the game ► Healthcare reform ► Increased pricing pressure Get ahead of the change – and the competition ► Monitor changes, understand their impact ► Articulate value props early in R&D ► New reimbursement / pricing approaches Source: Ernst & Young

Beyond borders Global biotechnology report 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?

Beyond borders Global biotechnology report 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