March 8, 2012 MassBio State of the Industry Biotechnology 2012: The New Normal?

Copyright © 2012 All Rights Reserved 2 Biotechnology 2012: The New Normal? BTK Performance (Jan 2000 – pres.) AMEX Biotechnology Index The BTK has more than doubled since September 2008.

Copyright © 2012 All Rights Reserved Nasdaq Biotechnology Index Biotechnology 2012: The New Normal? NBI Performance (Jan 2001 – pres.) The NBI is at its all-time high.

Copyright © 2012 All Rights Reserved NBI Nasdaq S&P 500 Performance (1/1/11 – pres.) 28.6% 8.0% 4.4% Biotechnology 2012: The New Normal? Index Performance (Jan 2008 – pres.) Over the past 12+ months, the biotech sector has outperformed both the technology sector and the broader market.

Copyright © 2012 All Rights Reserved Biotechnology 2012: The New Normal? Recent Headlines “Ambit Withdraws IPO, Cites Market Conditions” “Biotech IPO Forecast for 2012 Expected to Remain Chilly” “Biotech funding hits four-year high as startups suffer” “Prospect Venture Dumps Latest Fund, Won’t Make New Biotech Bets” - Bloomberg (Jan 2012) - Xconomy (June 2011) - GEN (Jan 2012) - Fierce Biotech (Oct 2011) Despite the sector’s performance, indications of troubled times abound.

Biotechnology 2012: The New Normal? Pharma Industry Perspectives

Copyright © 2012 All Rights Reserved Industry Specific Dynamics Potential Generic Launches: billions of dollars $21.2 b Source: Company reports, Cowen & Co $10.1 b $15.0 b $17.8 b $11.4 b The $75 billion in US revenue at risk over the next 5 years represents 30% of the industry’s 2011 US revenue.

Copyright © 2012 All Rights Reserved $ total R&D expenditure s (b$) $3,000 $2,500 $2.000 $1,500 $1.000 $500 $0 R&D cost per NME ($mm) Pharma R&D Expenditures Industry productivity continues to decline. Source: PhRMA, Ernst & Young

Copyright © 2012 All Rights Reserved Pre/non clinical %: 51.0%44.0%39.0%32.0%25.9%25.7%27.2% Percent of total R&D expenditures Pharma R&D Expenditures 1989 – 2010E (by function) Pre/non clinical Ph I – III clinicals Post-approval studies Regulatory/ other Source: PhRMA, Note: Pre/non-clinical category includes process development, QC and formulation related expenditures. 32.5%31.9%27.3%27.0% $29.2 B$32.4 B$36.1 B$37.0 B$38.7 B$42.0 B$43.8 B$46.2 B$49.6 B$47.2 B$46.4 B$49.4 B 25.2% 24.3%

Copyright © 2012 All Rights Reserved Percent of annual new drug approval Bio/Specialty Pharma: Large Pharma: 66.7% 33.3% 74.4% 25.6% 40.8% 59.2% 42.5% 57.5% 51.2% 48.8% 57.9% 42.1% 39.4% 60.6% 48.4% 51.6% 70.7% 29.3% 84.4% 15.6% Source: PhRMA, BIO, FDA Large PharmaBio/specialty pharma % 20.0% 76.7% 23.3% 60.0% 40.0% % 25.8% 58.3% 41.7% Pharmaceutical Innovation Relative New Therapeutic Contributions (1997 – 2011)

Copyright © 2012 All Rights Reserved TargetAcquirorPurchase Price Genentech Roche $47.0 billion Genzyme Sanofi Aventis $20.1 billion Millienium Pharma Takeda $8.7 billion OSI Pharma Astellas Pharma $4.0 billion King Pharma Pfizer $3.6 billion Crucell Johnson & Johnson $2.3 billion Medarex Bristol-Myers Squibb $2.1 billion Imclone Systems Eli Lilly $6.5 billion Cougar Biotech Johnson & Johnson $2.1 billion Industry Specific Dynamics Acquisition Activity: Pharmaceutical Industry Inhibitex Bristol-Myers Squibb $2.5 billion

Copyright © 2012 All Rights Reserved Number of announced transactions Source: Johnston Blakely & Co. research Merger & Acquisition Activity Life Science Sector (Q – Q4 2011) Acquisition activity in the life science sector remains robust.

Copyright © 2012 All Rights Reserved Pharmaceutical Innovation Escalating Risk Profiles Clinical Risk Regulatory Risk Reimbursement Risk outcomes-based pricing comparative effectiveness significant drop in post Vioxx approvals increasing approval times Reimbursement Development Costs

Copyright © 2012 All Rights Reserved Regulatory Challenges New Drug Approvals (1996 – 2010) NMEs BLA Median approvals Post-VioxxPre-Vioxx Note: Figures based on CDER approvals only. Source: Ernst & Young, FDA number of annual approvals

Copyright © 2012 All Rights Reserved Reimbursement Challenges Case Study: Dendreon price per share Provenge sales guidance withdrawn reimbursement concerns inability to identify eligible patients

Biotechnology 2012: The New Normal? Capital Markets Perspectives

Copyright © 2012 All Rights Reserved Biotechnology Equity Financings (2000 – 2011) $ (dollars in billions) venture follow-on IPO $4.3 $3.5 $6.1 $8.0 $7.9 $9.4 $9.2 $6.2 $10.4 $8.5 Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Burrill & Co $10.5

Copyright © 2012 All Rights Reserved Capital Market Review Venture Investment: Biotechnology (2000 – 2011) Note: Dollar amounts adjusted to reflect 2011 dollar Source: Thomson Reuters; PwC Moneyytree (dollars in millions) $5.2b $4.1b $4.0b $4.4b $4.3b $5.0b $6.2b $3.9b $4.7b $4.8b $4.6 billion Measured in constant dollar terms, venture investment in biotechnology has remained relatively consistent for more than a decade.

Copyright © 2012 All Rights Reserved Venture Investment: Biotechnology First Round Investment (2000 – 2011) 17.2% average (percent of total venture investments) $716$631$662$393$675$578$938$1,034$890$498$534$842 Source: Thomson Reuters; PwC Moneytree The percentage of dollars invested in initial venture rounds has remained in the 15% and 20% range. Invested capital ($mm)

Copyright © 2012 All Rights Reserved Capital Market Review Venture Investment: Biotechnology (2000 – 2011) (percent of total) Percent first round financings 27.3%19.1%34.6%32.3%34.2%25.6%27.3%29.7% 27.6% 22.0%24.8% Total # of financings Source: Thomson Reuters; PwC Moneytree Based on number of completed transactions, there has been a trend towards later-stage investments. 1 st round financings other venture rounds

Copyright © 2012 All Rights Reserved 1 st Round Venture Investment: Biotechnology Average Financing Size (2000 – 2011) Note: Dollar amounts adjusted to reflect 2011 dollar Source: Thomson Reuters; PwC Moneytree $ $6.8 million average (millions of dollars) In constant dollar terms, the size of first-round financings has been fairly consistent.

Copyright © 2012 All Rights Reserved Venture Investment: Biotechnology Net Cash Flows (2005 – 2011) (dollars in millions) Venture Exits Venture Investments $0.3b$1.1b ($3.8b)($4.5b)($5.8b)($3.7b)($4.6b) More recently, venture realizations have outpaced dollars invested. Note: Venture exit totals include dollars from IPO and disclosed M&A activity. Source: Thomson Reuters; NVCA

Copyright © 2012 All Rights Reserved Venture Investment: Biotechnology IPO Profile Number of IPO’s Median age at IPO Source: Ernest & Young, BioCentury, BioWorld, Venture Source Holding times for venture investments continue to lengthen.

Copyright © 2012 All Rights Reserved Number of issues % life science issues 23.5%14.9%9.7%8.8% All Industries Life Science Capital Market Perspectives Annual IPO Activity: 2000 – % Source: IPOMonitor, Hoover’s IPO Central, Johnston Blakely & Co % % % %6.3%12.2% % IPO activity in the life science sector remains weak.

Copyright © 2012 All Rights Reserved Capital Market Perspectives Biopharma IPO Activity 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Preclinical Phase I Phase II Phase III NDA filed 37.7% Percent of total IPOs Source: SEC filings Note:Includes biopharmaceutical and related issues only. Development stage of lead compound % of total life science IPOs 76.8% 100.0% 2011 Phase II Phase III 61.5% 8 NDA filed/approved

Copyright © 2012 All Rights Reserved IPO Performance: Biotechnology Pricing vs. Expected Range: 2011 Issues X X X X X X X X Source: SEC filings Price Per Share X expected range IPO pricing New issues continued to price below the expected per share range.

Copyright © 2012 All Rights Reserved IPO Performance: Biotechnology 2011 IPOs: Insider Participation % insider participation 6 mm5 mm5.8 mm8 mm5.8 mm5.5 mm6.2 mm10 mm Source: SEC filings To succeed, many new issues required meaningful insider support.

Copyright © 2012 All Rights Reserved IPO Performance: Biotechnology 2010 – 2011 Issues Per Share Performance Post IPO Class of 2011Class of 2010 Aggregate return 17.4 %(19.0 %) Note: Aggregate return represents collective return from one share of each new issue.

Biotechnology 2012: The New Normal? The New Normal?

Copyright © 2012 All Rights Reserved The New Normal? Traditional Investment Model INDIND NDANDA Discovery DevelopmentPhase IPhase IIPhase IIIApproval Pre clinical CandidateClinical DevelopmentMarketed Product Go publicVenture funding traditional investment model Follow on offerings Private Institutional InvestorsPublic Markets

Copyright © 2012 All Rights Reserved The New Normal? Sector Influences  Transitioning from revolutionary advances to evolutionary advances − sign of continuing maturation of the industry − M&A activity blurs of sector boundaries  Less public market enthusiasm for hope/hype. − increasing attention on products and profits  Primary interest of big pharma is ability to leverage downstream capabilities. − biopharma sector continued to be viewed as outsourced R&D function. − resource allocation (of necessity) skewed towards later stage candidates.  Venture investors required to adjust their investment horizon – and their exit strategy - accordingly.

Copyright © 2012 All Rights Reserved The New Normal? Shifting Investment Dynamics INDIND NDANDA Discovery DevelopmentPhase IPhase IIPhase IIIApproval Pre clinical CandidateClinical DevelopmentMarket Go publicVenture funding traditional investment model Acquisition/ go public Venture funding current investment model Follow on offerings Private Institutional InvestorsPublic Markets Private Institutional Investors The Financial Abyss ?

March 8, 2012 MassBio State of the Industry Biotechnology 2012: The New Normal? Benjamin Conway