1. Reinnovation and reinvention MBC Finance Committee “The Evolution of the Biotech Business Model” Gautam Jaggi, Ernst & Young October 24, 2008

2. Beyond Borders2 Is a pattern emerging? Big pharma companies announce layoffs, restructurings Stock buybacks Safety concerns take bite out of product sales Velcade gives NICE an unprecedented money-back guarantee FDA NME approvals fall to lowest level in over 25 years more pricing pressures emerging Product safety incidents in the rising China market Big pharma’s search for pipeline productivity propels a booming deal environment Biotech companies retain more rights in deals The mega deal… is back π?π? 8% Government negotiation of drug prices under MMA returns to public policy debate FIPNETs FIPNETs Creative deal structures ► ► ► ► ► ► M&A REMSREMS FDAAAFDAAA ► $►€►¥►£$►€►¥►£ R&DR&D ► ? ? ? ? ? ►

3. Beyond Borders3 Reinvention Big pharma companies announce layoffs, restructurings Stock buybacks Safety concerns take bite out of product sales Velcade gives NICE an unprecedented money-back guarantee FDA NME approvals fall to lowest level in over 25 years more pricing pressures emerging Product safety incidents in the rising China market Big pharma’s search for pipeline productivity propels a booming deal environment Biotech companies retain more rights in deals The mega deal… is back π?π? 8% Government negotiation of drug prices under MMA returns to public policy debate FIPNETs FIPNETs Creative deal structures ► ► ► ► ► ► M&A REMSREMS FDAAAFDAAA ► $►€►¥►£$►€►¥►£ R&DR&D ► ? ? ? ? ? ► The drug industry is being reinvented by three sweeping trends: ►R&D productivity ►Personalized medicine ►Globalization

4. Beyond Borders4 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

5. The first driver of reinvention: R&D productivity

6. Beyond Borders6 Big companies need sustainable solutions Buying pipeline assets ► High prices  lower upside potential ► Limited reserves of cash Cutting costs ► Short-term gains Boosting EPS ► Short-term gains ► Limited reserves of cash Companies need sustainable solutions to fix the real problem: low R&D productivity Source: Ernst & Young

7. Beyond Borders7 The inertia of size Small companiesConduct and performanceLarge companiesConduct and performance Structure ► Small ► Individuals have more control over outcomes ► Large ► Poor sense of ownership ► Flexible ► Encourages creativity and collegiality ► Rigid ► Centralized, bureaucratic processes ► Risk-aversion over time ► Cash-starved ► Driven to raise capital ► Lean operations, sometimes cut corners ► Strong cash flow ► Not as “hungry” or driven to succeed Incentives ► Stock-based compensation is a strong incentive ► Direct financial tie to performance ► Stock-based compensation is not meaningful ► Less tied to outcomes ► Less passion ► Private investors with longer horizons ► Less focused on short- term financial performance ► Public investors demanding quarterly results ► More sensitive to short- term impact of long- term decisions Structure and incentives drive conduct and performance Source: Ernst & Young

8. Beyond Borders8 Emulating biotech Creating small, autonomous R&D units Emulate Large monolithic big pharma company Preserving entities after acquisitions Adopting networked structures Pay-for-performance tied to small-team milestones culture of small biotech companies Source: Ernst & Young

9. The second driver of reinvention: Personalized medicine

10. Beyond Borders10 Personalized medicine: why now? Safety concerns ► Targeted approaches ► Less misdiagnosis, fewer adverse events Pricing pressures ► Smaller clinical trials ► Cheaper drug development R&D productivity ► More efficient identification and development of drug targets Move from efficacy to efficiency in drug development and healthcare delivery Source: Ernst & Young

11. Beyond Borders11 Challenge 1: end of the blockbuster model Old modelNew model ► Large clinical trials ► Pharma’s Phase III abilities a key strength ► Smaller trials for targeted drugs ► Scale less relevant ► Large-scale manufacturing for high volumes of blockbuster drugs ► Smaller volumes, but more complex manufacturing ► DTC advertising, armies of sales reps for poorly-differentiated drugs ► Drugs better differentiated, compete on merits ► Scale less relevant in sales ► Reimbursement based on efficacy ► Pay-for-performance requires greater allocation of resources to demonstrate value Source: Ernst & Young

12. Beyond Borders12 Challenge 2: making the numbers work Source: Ernst & Young ► Targeted therapeutics for more efficient treatment of disease ► More efficient drug development with smaller, cheaper clinical trials Rx ► Diagnostics for more efficient: ► Prediction ► Diagnosis ► Dosing ► Monitoring ► Lower healthcare costs from new efficiencies Dx3x ► Incentives and metrics to support the economics and ROI for investors: ► Better pricing for diagnostics ► Reimbursement based on value ► Measures across healthcare system

13. The third driver of reinvention: Globalization

14. Beyond Borders14 Drivers and limitations DriverShort-term playLong-term play Outsourcing clinical trials and manufacturing ► Cost cutting for western companies ► Sources of revenue for emerging market companies ► Limited window as cost advantages get eroded ► Emerging market companies looking to develop innovative pipelines ► Goals become more competitive, less complementary Selling drugs to rapidly-growing emerging markets ► Tremendous opportunity as emerging middle classes, rising prosperity create markets that can afford western drugs Source: Ernst & Young ?

15. Beyond Borders15 Globalization: the challenge of the next billion consumers Source: Ernst & Young and International Finance Corporation (IFC) US$20,000 US$3,000 “The unserved base” US$30b market US$65b by 2017 4b patients 6b patients by 2017 1b patients 1.5 b patients Mature markets with slow growth potential Per-capita income thresholds:Market size/potential: “The next billion” Emerging markets with high growth potential

16. The shape of the future: changing business models

17. Beyond Borders17 Changing business models Personalized medicine changes the nature of competition Source: Ernst & Young Present state

18. Beyond Borders18 Changing business models Personalized medicine changes the nature of competition Source: Ernst & Young Future state

19. Beyond Borders19 Changing business models Personalized medicine redistributes value in the value chain Source: Ernst & Young Research Early development Late development Manufacturing Sales and marketing 0% 20% 40% 60% 80% 100% Current stateFuture state - personalized medicine Value accrues to innovation

20. Beyond Borders20 Big pharma’s challenge: maximize the portfolio ObjectivesConstraints Supplement pipeline, more shots on goal ► Increasingly expensive in competitive dealspace ► Impact on current earnings Boost R&D productivity ► Structures and incentives often not aligned innovation and speed ► Difficult to acquire and maintain “culture” Mature product strategy: invest to protect the base to harvest? ► Capital-constrained environment ► More focus on developing new products Variabilize costs / reduce infrastructure ► More risk and complexity dealing with third parties ► Change in culture to be more external

21. Beyond Borders21 Biotech’s challenge: survive and retain options ObjectivesConstraints Access capital ► Constrained public capital markets ► More selective VCs ► Less liquid equity in small caps Retain downstream rights and ability to forward integrate ► Bargaining leverage ► Adds costs, risk and complexity Stay flexible for M&A exit ► Collaborations fill funding gap in constrained public capital markets but encumber assets Accelerate pipeline development ► Increasing cost of drug development

22. Beyond Borders22 The need for new models R&D Source: Ernst & Young Operations Capital formation & efficiency Deals Pharma ► Take on more core risk ► Boost productivity Biotech ► Remain innovative ► Adapt to smaller scale ► Variabilize fixed costs ► Tap networks ► Value chain specialization / non-FIPCO models ► Efficient allocation & deployment of capital ► Access capital with less dilution ► Portfolio approach ► Manage risk ► Retain control & rights ► Higher share of value

23. Beyond Borders23 Opportunities for companies Biotechs gaining more bargaining power More flexibility Greater share of value produced Source: Ernst & Young Pharma’s imperative to fix R&D product- ivity Greater rights retention Minimize P&L impact of investments Creative deals Accept more risk to increase potential upside Acquire culture, not just pipeline BiotechPharma

24. Beyond Borders24 Models of the future Source: Ernst & Young ► Leaner FIPCOs: less infrastructure required ► Value-chain specialization ► Becoming FIPCOs less imperative with higher royalties, co- promotion rights Biotech ► Some successfully reinvent R&D ► New Models: ► More risk accepting in R&D ► Leaner sales ► More networked Pharma 1Pharma 2 ► For those that don’t succeed at reinvention: ► Core strengths are lower-margin ► Competition from emerging markets ► De facto CROs or CMOs?

25. Panel discussion Moderator: Robert Buderi Xconomy.com Kevin J. Bitterman Polaris Ventures Dr. Eric Elenko PureTech Ventures Gautam Jaggi Ernst & Young Mark Kessel Symphony Capital