Constance McKee
Yale MBA 1986
President & CEO, Manzanita Pharmaceuticals, Inc.
Business of Biotech 8
Yale Biotechnology & Pharmaceutical Society
29 March – 1 April 2010
Constance McKee
Business of Biotech 8
The Business of Biotech 8
A Non-Credit Seminar for Yale & the Biohaven Community
Week of 29 March – 1 April 2010
Yale School of Management
135 Prospect Street, New Haven
Constance McKee
Yale School of Management, MBA 1986
Manzanita Pharmaceuticals, Inc.
www.manzanitapharmaceuticals.com
2995 Woodside Road
Suite 400, PMB 309
Woodside, CA 94062
constance.mckee@comcast.net
m 408.348.3191 v 408.872.1094
March-April 2010
1
Constance McKee
Business of Biotech 8
Introduction
•
Course approach – part quantitative concepts, part case studies
•
•
•
•
•
Key questions
•
•
•
•
•
First hour - basic concepts in start-ups
Modular – OK if you can’t attend all week
Second hour – micro case studies from entrepreneurs, investors & industry
Speakers talk about making decisions – and how it *really* turned out
What’s the opportunity?
What’s the opportunity worth?
How do we – founders & investors – make money?
In the current environment, where *is* the money?
Emphasis on biopharmaceuticals
•
•
March-April 2010
Business concepts apply to devices, tools & diagnostics companies
But decision-making process similar for devices & tools
2
Constance McKee
Business of Biotech 8
Course Outline & Speakers
Case Studies in Decision Making
•
“Basic infrastructure of a start-up” (Monday, 29 March 2010)
• Sohini Chowdhury, Michael J. Fox Foundation (Parkinson’s disease) (New York)
• Gregory Licholai, MD (Yale), COO, Proteostasis Therapeutics (Boston)
•
“Strategy for biotech, big pharma and economic development” (Tuesday, 30 March 2010)
• Peter Longo, President & Executive Director, Connecticut Innovations (Hartford)
• Ron Burch, MD, CSO, Pacira (San Diego) (former CEO, AlgoRx)
• JC Martignoni, Director, U.S. Strategic Transactions and Alliance Management, BoehringerIngelheim (Ridgefield)
•
“Case studies in decision-making” (Wednesday, 31 March 2010)
• Special guest speaker, U.S. Navy
• Jonathan Lewis MD, founder & CEO, ZioPharm Oncology (New York)
• Networking at Archie Moore’s following the class
•
“Case studies in investment decisions” (Thursday, 1 April 2010)
• Jim Dolan, Executive VP, Purdue Pharma (Stamford)
• Myles Greenberg, MD, CHL Medical Partners (Stamford)
March-April 2010
3
Constance McKee
Business of Biotech 8
Course Goals
•
Explain challenges of raising capital for life sciences start-ups
•
•
•
•
Discuss sources of capital
•
•
•
•
•
Nonprofit medical research organizations
State-based economic programs
Military medical grants
Deal-making with pharma, private equity & angels
Introduce basic concepts that drive the business of biotechnology
•
•
•
•
No previous experience required
From perspective of scientist
Quantitative approach
Most good business decisions are driven by quantitative concepts
Rules of the game
How to play the game to increase the probability of success
Develop network of Yale-centric entrepreneurs & investors
•
•
•
March-April 2010
Sources of information
Sources of funding
Career opportunities outside the lab
4
Constance McKee
Business of Biotech 8
Monday
Basic Concepts in Start-up Business Infrastructure
• Patents
• How ownership arises (why Yale owns your ideas)
• How rights to patents get transferred to your start-up
• What is “unmet clinical need”? What is a “market”?
• What is a business model?
• What is a business plan?
• Understanding the global competitive landscape
March-April 2010
5
Constance McKee
Business of Biotech 8
How Ownership Arises
Why Yale Owns Your Ideas
•
Under US law, the employer owns the ideas of employees
•
•
•
•
•
Terms of Yale employment includes faculty, graduate students
Yale Office of Cooperative Research http://www.yale.edu/ocr/
You can “consult” to your own start-up
Most universities permit this, but your consulting agreement either
(1) continues to allow Yale to own your ideas while consulting, but licenses any
discoveries to your start-up, or
(2) grants ownership of ideas generated during consulting period to the start-up
Document who & where invention occurs
•
•
•
March-April 2010
Complicated with multiple academic collaborators
Complicated by multiple granting sources
Expect multiple co-inventors on patent application
6
Constance McKee
Business of Biotech 8
Yale Licenses Rights To Start-Up
How Legal Rights Are Transferred
•
License is a legal agreement
•
•
•
•
Important concept – transfers rights, not ownership
•
•
•
•
•
Yale’s ownership gives it right to confer some or all of its rights, over time
In exchange for grant of rights, Yale may get rights to % of future product value
Future product value – milestones or % of sales (“royalties”)
If things go wrong, Yale still owns patents
Start-up licensee usually pays for patent prosecution
Start-up licensee usually obligated to use “best efforts” to develop
Years before Yale (and you, the discoverer) makes any money
Flexible concept
•
•
•
March-April 2010
May have low or no upfront fee
May include milestones for key development steps
May include royalties (% sales) when product launched
7
Constance McKee
Business of Biotech 8
Deals: Trading Values & Assets
Big Pharma
Emerging Biotech
Products
Products
Strategic IP
Strategic IP
Spin Out
Spin Out
Non-Core IP
Non-Core IP
Universities – NIH – Biomedical Foundations
March-April 2010
8
Constance McKee
Business of Biotech 8
Patents
•
What is a ‘patentable invention’?
•
•
•
•
Patents are issued by US Patent & Trademark Office, European Patent Office
and patent offices of respective countries
Must show your idea is “novel and not obvious” & that it works (data)
When issued, confers the right to sue if an infringer sells a product in the
marketplace based on your idea
What is intangible intellectual property that can be protected?
•
•
•
•
March-April 2010
Copyright – software, drawings
Know-how – protocols for synthesis of a small molecule drugs
Also known as trade secrets (“secret sauce”)
Almost always key to real value in the product, never disclosed in a patent
application
9
Constance McKee
Business of Biotech 8
Why Are Patents Important?
•
Worthless unless a product made from it, sold & making $$
•
•
•
•
•
Does not keep others from stealing your ideas
Just gives you the right to sue them if they do steal
Formidable barrier to entry if you succeed
In pharmaceuticals, can charge a premium price
Confers exclusivity
•
•
•
•
March-April 2010
Means you’re the only one legally authorized to sell product
Can be US only, EU only, ROW only or combination
When patent expires for pharmaceuticals, generic drug makers take over &
premium-priced drug revenues decline ~ 60% in one year post-expiry
Strong patents are enormously valuable to pharma
10
Constance McKee
Business of Biotech 8
Royalties
Percentage of Cash from Products Sold
•
•
•
Wait years until product developed & finally sold
Industry standard – 2% of net revenues of Rx
Royalties increase as drug price increases, number of patients increases
Income/Expense % Revenue Notes
Revenue
$ 100
Units x price
Cost-of-Goods
$ (10)
Raw materials
Gross revenue
$
90
Gross margin
90%
Percent of Revenue
Salaries
$ (10)
10%
Science - cost of R&D
$
(2)
2%
Management
Offices, plant & equip
$
(3)
3%
Cost to operate, not build
Sales, General & Admin $ (40)
40%
How concentrated?
NET REVENUES
$
35
35%
(earnings before income taxes)
NET EARNINGS
$
35
35%
(who pays income taxes?)
EARNINGS PER SHARE = EPS = Net earnings / number of all shares outstanding
March-April 2010
11
Constance McKee
Business of Biotech 8
What is a Market?
Can Describe Both Place & Total Value Sold
•
•
•
•
•
•
•
Place =
pharmacy, stock exchange, flea market, souk, eBay
Total value =
number of units sold X price per unit
Drug market =
number of scrip written X price paid by patient
Example: Exubera (inhaled insulin developed by Nektar, marketed by Pfizer)
TRx = total prescriptions; NRx = new prescriptions written
• Exubera sold $14 million after it was launched
• Merck sells Januvia for $4.86 per tablet (100 mg 1X 7 days) x (22,475+48,685) = $2
million per week, $125 million per year just weeks after launch
• Pfizer pulled Exubera from the market in October 2007
Depends on who can afford Rx, who actually takes their meds
Doesn’t quantify potential Rx with better effectiveness that addresses unmet need
March-April 2010
Exubera
Exubera
Januvia
Januvia
NRxs
TRxs
NRxs
TRxs
5/11/2007
1,179
1,659
22,475
48,685
5/18/2007
1,307
1,816
28,416
56,243
http://seekingalpha.com/article/50788-pfizer-four-lessons-from-the-exubera-failure
12
Constance McKee
Business of Biotech 8
Unmet Clinical Need
Number of Patients X Cost of Under-treatment
•
•
•
•
•
Example: 25 million Americans with chronic pain
No drug of choice – many classes of Rx prescribed, but only 30% effective
Direct cost - $1,000 per patient per year
Rx relatively inexpensive, but patients keep going back to the doctor
US Army - $340 BN total cost of treating pain in returning veterans from
Operation Enduring Freedom, Operating Iraqi Freedom
Chronic pain
Number
Number of patients
25
% drugs effective
Number untreated
million
30% NSAIDs, tricyclics, gabapentin
18 million
Cost of treatment
$
1,000
Cost of unmet need
UNMET CLINICAL NEED
$
$
500
18,000
ECONOMIC BURDEN
$
9,000
March-April 2010
Unit or Description
Per year, Rx plus cost of office visits
Per year, indirect costs (loss of work)
In US$ billions - direct costs (one year)
In US$ billions - indirect costs (one year)
13
Constance McKee
Business of Biotech 8
What is a Business Plan?
•
Proxy for future value
•
•
•
•
•
Estimates for market size & market opportunity
Estimates risk (amount of $ to product vs amount of potential revenue)
Patents
How much can you expect to sell vs competitors’ products?
Proxy for reality
•
•
•
•
•
March-April 2010
Has team done *it* before? (developed this kind of product)
Have other companies tried to address this problem before? Did they fail?
Have other investors made money in this sector? With this business model?
What are the “comparables” (value of deals done in this sector)?
What are the “comparable exits” (value of deals in this sector that were acquired
by other companies, or went public)
14
Constance McKee
Business of Biotech 8
> 800 Drugs in Development for Cancer
Know your competitive landscape
Only 50% trials complete due to failure to enroll patients (includes 500 biologics)
March-April 2010
www.PhRMA.org
2008 data includes overlapping trials
15
Constance McKee
Business of Biotech 8
WW Pharma Revenues (in US$ BN)
14% Growth in Brazil, Russia, India, China, South Korea, Mexico, Turkey
Growth in the U.S. in 2008 – 1.0%
Region
US
BRICs
Biologics
Generics
Biosimilars
Other
March-April 2010
2008 Revenues
$
300.0
$
100.0
$
125.0
$
69.0
$
0.7
$
155.3
Growth
1.0%
14.0%
20.0%
11.0%
89.0%
16
Constance McKee
Business of Biotech 8
Pharma WW is growing at 3%-5%
Growth in cancer biologics & biosimilars is off the charts
89% biosimilars
(WW CAGR 2014)
48% cancer biologics
(US CAGR 2009)
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1980
March-April 2010
1985
1990
1995
2000
2005
2010
2015
Pharma WW
Pharma US
Pharma China
Generics WW
Generics US
Biologics US
2020
17
Constance McKee
Business of Biotech 8
Industry patent cliff in 2012: $67 billion
Received
FDA
approval
G lobal sales,
3Q 2007 (in
m illions of
dollars)
Brand name
Company
Generic name
Uses
Estimated
patent
expiration
Actos
Eli Lilly / Takeda
Pioglitazone
Type 2 diabetes
2011
1999
$180
Advair/Seretide
GlaxoSmithKline
Fluticasone,
propionate+salm eterol
Asthm a
2010
1998/1999
$1,721
Aprovel
Sanofi-Aventis /
Bristol-Myers
Squibb
Irbesartan
Hypertension (high
blood pressure)
2011
1998
$392
Aricept
Pfizer / Eisai
Donepezil HCI
Alzheim er’s
2010
1996
$100
Avandia
GlaxoSmithKline
Rosiglitazone
Type 2 diabetes
2012
1999
$463
Cozaar
Merck
Losartan
Hypertension (high
blood pressure)
2010
1995
$814
Crestor
AstraZeneca
Rosuvastatin
Cholesterol
2012
2003
$691
Diovan/CoDiovan
Novartis
Valsartan+
hydrochlorothiazide
Hypertension (high
blood pressure)
2012
1996
$1,267
Levaquin
Johnson &
Johnson
Levofloxacin
Antibiotic
2010
1996
$366
Lexapro
Forest
Laboratories/ H.
Lundbeck
Escitalopram
Antidepressant
2012
2002
$559
Lipitor
Pfizer
Atorvastatin
Cholesterol
2011*
1996
$3,170
Plavix
Sanofi-Aventis /
Bristol-Myers
Squibb
Clopidogrel
Anticoagulant
2011
1998
$1,250
Seroquel
AstraZeneca
Quetiapine
Antipsychotic
2011
1997
$1,055
Singulair
Merck
Montelukast
Asthm a
2012
1998
$1,018
Symbicort
AstraZeneca
Budesonide+formoterol
Asthm a
2012
2000
$371
Taxotere
Sanofi-Aventis
Docetaxel
Cancer
2010
1995
$694
Xalatan
Pfizer
Latanaprost
G laucom a
2011
1995
$402
Zometa
Novartis
Zoledronic acid
Cancer
2012
2001
$318
Zyprexa
Eli Lilly
Olanzapine
Antipsychotic
2011
1996
$1,166
*Lipitor may face patent expiration in 2010, not 2011.
Sources: Datamonitor; Dolphin; W SJ.com research
March-April 2010
18
Constance McKee
Business of Biotech 8
Global competitive forces
•
Revenues: down as patients stop taking Rx in economic downturn
•
Revenues: US revenues flatlined in 2009 – growth is ex-US
•
Generics: 60% of Rx in America are generics – new Rx must show significant
clinical benefit (no more “me-too” products)
•
Generics: biosimilars legislation expected in 2010
•
R&D costs: China’s & India’s investment in education paying off now as they
attract pharma’s drug discovery & clinical trials (future)
•
Competition: regenerative medicine competing directly against small molecule
approach (example: AMD – Pfizer)
•
Funding: collapse of historical funding mechanisms for innovation
•
Funding: rise of philanthropic organizations to fund innovation
•
Pricing: healthcare reform in U.S. should increase competition
•
Regulatory: FDA hypercaution in evaluating risk:benefit ratios
March-April 2010
19
Constance McKee
Business of Biotech 8
Only 4 IPOs in 2009 in the US
But pre-IPO financings rebounded in 2009
March-April 2010
20
Constance McKee
Business of Biotech 8
Will Venture Capital Ever Invest in Early-Stage
Biotechnology Again?
•
•
•
•
•
Total US VC 2009: $17.7BN
(worst since 1997)
1 biotech IPO in 2008 ($5 million)
1 biotech IPO in 2009 (Omeros)
Total US deals in 2009: 2,795
* 37% decrease in dollars
* 30% decrease in deals
Biotech Q4 2009 in Silicon Valley
* 25 deals
* Total $133.5 million
* 5 deals < $ 1 million
* 1 pharma deal < $ 1 million
March-April 2010
21
Constance McKee
Business of Biotech 8
Early-Stage Funding Gap
March-April 2010
Source: Signals Mag; Alzheimer’s Drug Discovery Foundation www.alzdiscovery.org
22
Constance McKee
Business of Biotech 8
Bioinvestment Capital Food Chain
Can ‘strategic capital’ fill the preclinical funding gap?
Sources of
Capital
Discovery
In vivo
POC
Preclinical
Phase I/II
Phase
III/NDA
Market
NIH
Strategic = interest in
product, jobs, cost
savings
Military
State funds
Philanthropy
Angels
Venture capital
Financial = interest in ROI
Private equity
Hedge funds
March-April 2010
23
Constance McKee
Business of Biotech 8
Opportunity for Philanthropic Capital
Hint: go where the money is…..
March-April 2010
24
Constance McKee
Business of Biotech 8
Tuesday
Managing Risk in Clinical Development: Focus on Pharma
• What is the FDA-driven development path?
• What is a decision tree?
• What is the decision tree for clinical development?
• What are key strategies to manage development risk?
• What’s a business model and why is that important?
• What does “venture fundable” mean?
March-April 2010
25
Constance McKee
Business of Biotech 8
Clinical Development
7.5 Years - $750 Million
Gene
“HIT”
Library
Medicinal Chemistry
Rationale Drug Design
Compound identification
Research
$500M
Clinical Trials
$250M
Lead Candidate
Cell-based assays
In vitro - primary culture
In vivo - non-mammalian
In vivo - knockout
In vivo - clinically predictive
In vivo - not clinically predictive
March-April 2010
26
Constance McKee
Business of Biotech 8
What risks, over what period of time?
What kind of risks do your investors understand?
Clinical risk
Market risk
Science risk
Regulatory risk
Financial risk
Lead Candidate
Cell-based assays
In vitro - primary culture
In vivo - non-mammalian
In vivo - knockout
In vivo - clinically predictive?
IND application
March-April 2010
27
Constance McKee
Business of Biotech 8
Decision tree analysis: in-house discovery or license in
from university?
Product #1 - Costs
Research
Preclinicals
Phase 1
Phase 2
Phase 3/4
File IND - FDA Approval
Market Launch
$
$
(500)
(10)
(25)
(50)
(50)
(10)
(55)
(700)
Prob %
Rev in $
Revenues
Millions
Product #1
10% $
500 $
50
40%
250
100
50%
100
50
Less, costs to develop
Decision tree analysis - do not develop
$
$
$
200
(700)
(500)
Scenario - license in from university
Product #2 - Costs
Research
Preclinicals
Phase 1
Phase 2
Phase 3/4
File IND - FDA Approval
Market Launch
Prob %
Revenues
$
$
$
$
$
$
$
(10)
(25)
(50)
(50)
(10)
(55)
(200)
10% $
40%
50%
Rev in $
Millions
500 $
250
100
Less, costs to develop
Decision tree analysis - need > $200M revenues
March-April 2010
Product #2
$
$
$
50
100
50
200
(200)
-
28
Constance McKee
Business of Biotech 8
Decision Tree for Clinical Development
50%
40%
50%
50%
.01%
Develop 20
compounds
(invest $500M)
Do not develop
March-April 2010
Complete
preclinicals
(invest $20M)
Failure (50%)
Complete
Phase I
(invest $25M)
Complete
Phase II
(invest $25M)
Complete
Phase III/IV
(invest $50M)
FDA
approval
(launch $50M for
ramp-up)
Don’t market
(competition)
Failure (50%)
Failure (60%)
Failure (50%)
Restructure R&D
(invest - $200M)
Divest division (sell + $50M)
PhRMA; (Brealey & Myers)
29
Constance McKee
Business of Biotech 8
Spread Portfolio Risk
Venture Investors & Pharma Measure Success as “IRR”
•
•
•
•
IRR = internal rate of return (complex calculation for both cash invested and
time until investment pays off)
ROI = return on investment (used interchangeably to express increase in
value of original investment, adjusted by time)
For pharma & VCs alike, “shots on goal” - home runs make up for strike-outs
For pharma – known mechanism of action; clinically relevant models
shortens development time & lowers risk
IRR
Product 1
Product 2
Product 3
Product 4
Product 5
Totals
March-April 2010
-12%
83%
68%
23%
YR1
$
(8)
$
(2)
$
(0)
$
(0)
$
(0)
$
(10)
YR2
$
(8)
$
(8)
$ (20)
$
(8)
$
(8)
$ (52)
YR3
$ (20)
$ (20)
$ (20)
$
(8)
$
(8)
$ (76)
YR4
$ (25)
$
$
$
$
(25)
(10)
(10)
(70)
YR5
$
$
$
$
(25)
25
25
25
YR6
$
$
$
$
25
50
50
125
YR7
$
$
$
$
25
75
50
150
YR8
$
$
$
$
75
25
100
YR9
$ $ $
10
$
75
$ $
85
30
Constance McKee
Business of Biotech 8
What is a Business Model?
Lemonade Stand Revenue Model, Price & Customers
•
•
•
•
•
Are you selling the end product? Or intermediates?
What is the cost of the materials in your product?
What is the price per unit, less the cost of materials per unit?
How much $$ does it take to develop your product & launch it?
How much $$ does it take to keep your business going?
Revenue
Lemons, sugar, H20
Gross revenue
Gross margin
Salaries - Research
Salaries - Management
Offices, plant & equip
Sales, General & Admin
NET REVENUES
NET EARNINGS
March-April 2010
Income
$
100
Income- PerCent
Expense Revenue
$
$
$
$
$
(10)
90
100
35
22.8
$
$
$
$
$
(10)
(2)
(3)
(40)
(65)
90%
-10%
-2%
-3%
-40%
35%
35%
31
Constance McKee
Business of Biotech 8
What is a Business Model?
Life Sciences Sector Overview
•
•
•
•
Key risk is time & money until you get to product revenue
Trade-offs between make-it-yourself and license-it-out models
Best scenario – shortest time & money, biggest payoff
Venture capital now only rarely funding drug development
Type of Business Model
Drug Disovery - Genomics
Tools cf HuMAb mouse
Drug delivery technology
Reformulate generics
Develop NMEs
* Blockbuster
* Average new drug
* Orphan Drug
License in
* New indication, old drug
* Complete clinical trials
* Already approved drug
March-April 2010
Years to
Develop
2-3
2-3
2-3
2-3
Cost to
Number of
Cash or Years to
Develop Customers Royalties?
$$
Market Potential
$
20
50 Royalties
10 3 yrs to HITS; +7 yrs to drug
$
20
50 Royalties
7 3 yrs to IND; + 5 yrs to drug
$
15
50 Royalties
7 3 yrs to IND; +5 yrs to drug
$
15
1 - 100M
Cash
5 3 yrs to IND; + 2 yrs to drug
3-5 $
3-5 $
2-3 $
$
0 $
2-3 $
0 $
500
500
20
20
20
40
-
1 - 500M
1- 500M
1- 200,000
Cash
Cash
Cash
7 $ 1 BN+ revenue potential
7 $50M - $500M revenue potential
3 Acceleate IND - FDA approval
1 - 100M
1 - 100M
1 - 100M
Cash
Cash
Cash
3 Years for new clinical trials
3 Years for new clinical trials
1
32
Constance McKee
Business of Biotech 8
Genzyme
Period Ending:
12/31/2009
12/31/2008
12/31/2007
Total Revenue
$4,515,525
$4,605,039
$3,813,519
Cost of Revenue
$1,386,076
31%
$1,148,562
25%
$927,330
24%
Gross Profit
$3,129,449
69%
$3,456,477
75%
$2,886,189
76%
$865,257
19%
$1,308,330
28%
$737,685
19%
$1,494,180
33%
$1,338,190
29%
$1,187,184
31%
Operating Expenses
Research and Development
Sales, General and Admin.
Non-Recurring Items
$0
$2,036
$106,350
Other Operating Items
$266,305
$226,442
$201,105
Operating Income
$503,707
$581,479
$653,865
$40,026
$46,059
$90,024
$543,733
$629,956
$747,821
$0
$4,418
$12,147
Earnings Before Tax
$543,733
$625,538
$735,674
Income Tax
$121,433
$204,457
$255,481
Minority Interest
$0
$2,217
$3,932
Equity Earnings
Unconsolidated Subsidiary
$0
$201
$0
Net Income-Cont. Operations
$422,300
$421,081
$480,193
Net Income
$422,300
Add'l income/expense items
Earnings Before Interest and
Tax
Interest Expense
Net Income Applicable to
March-April 2010
Common Shareholders
$422,300
9%
$421,081
$421,081
9%
$480,193
13%
$480,193
33
Constance McKee
Business of Biotech 8
Affymax
Period Ending:
12/31/2009
12/31/2008
12/31/2007
#
Total Revenue
$114,899
$82,851
$44,336
#
Gross Profit
$114,899
100%
$82,851
$44,336
100% #
$157,125
137%
$137,492
$69,398
157% #
$36,716
32%
$34,090
$24,075
54% #
($78,942)
($88,731)
($49,137)
#
$1,105
$3,112
$11,439
#
($77,837)
($85,619)
($37,698)
#
$105
$609
$14
#
($77,942)
($86,228)
($37,712)
#
($1,411)
$282
$5,357
#
Net Income-Cont.
Operations
($76,531)
($86,510)
($43,069)
#
Net Income
($76,531)
($43,069)
-97% #
Operating Expenses
Research and
Development
Sales, General and
Admin.
Operating Income
Add'l income/expense
items
Earnings Before Interest
and Tax
Interest Expense
Earnings Before Tax
Income Tax
Adjustments to Net
Income
-67%
($86,510)
-104%
$0
$0
$0
#
($76,531)
($86,510)
($43,069)
#
Net Income Applicable to
Common Shareholders
March-April 2010
34
Constance McKee
Business of Biotech 8
Medtronic
Period Ending:
Total Revenue
Cost of Revenue
Gross Profit
4/24/2009
4/25/2008
4/27/2007
$14,599,000
$13,515,000
$12,299,000
$3,518,000
$3,446,000
$3,168,000
$11,081,000
76%
$10,069,000
75%
$9,131,000
74%
Research and
Development
$1,355,000
9%
$1,275,000
9%
$1,239,000
10%
Sales, General and Admin.
$5,152,000
35%
$5,143,000
38%
$4,153,000
34%
Non-Recurring Items
$1,555,000
Operating Income
$3,019,000
Operating Expenses
Add'l income/expense
items
Earnings Before Interest
and Tax
$875,000
21%
$2,776,000
$166,000
21%
$3,573,000
($208,000)
$109,000
$170,000
$2,811,000
$2,885,000
$3,743,000
$217,000
$0
$228,000
$2,594,000
$2,885,000
$3,515,000
$425,000
$654,000
$713,000
Net Income-Cont.
Operations
$2,169,000
$2,231,000
$2,802,000
Net Income
$2,169,000
Interest Expense
Earnings Before Tax
Income Tax
15%
$2,231,000
17%
$2,802,000
29%
23%
Net Income Applicable to
$2,169,000
$2,231,000
$2,802,000
Common Shareholders
March-April 2010
35
Constance McKee
Business of Biotech 8
Qiagen N.V.
Period Ending:
12/31/2009
12/31/2008
12/31/2007
Total Revenue
$1,009,825
$892,975
$649,774
Cost of Revenue
$342,752
$293,285
$216,227
Gross Profit
$667,073
66%
$599,690
67%
$433,547
67%
Research and
Development
$107,900
11%
$97,331
11%
$64,935
10%
Sales, General and Admin.
$360,747
36%
$341,344
38%
$236,622
36%
Operating Expenses
Non-Recurring Items
$0
$985
$48,857
$18,221
$14,368
$0
Operating Income
Add'l income/expense
items
Earnings Before Interest
and Tax
Interest Expense
$180,205
$145,662
$83,133
$21,766
$11,151
$24,048
$201,971
$156,813
$107,181
$29,641
$37,527
$31,455
Earnings Before Tax
$172,330
$119,286
$75,726
$34,563
$29,762
$25,555
$0
($491)
($49)
$137,767
$89,033
$50,122
Other Operating Items
Income Tax
Minority Interest
Net Income-Cont.
Operations
Net Income
$137,767
14%
$89,033
10%
$50,122
8%
Net Income Applicable to
$137,767
$89,033
$50,122
Common Shareholders
March-April 2010
36
Constance McKee
Business of Biotech 8
What is ‘Venture Fundable’?
Venture Investors Seek Least Risk, Highest Upside
•
•
•
•
Start-ups usually begin after discovery completed in universities
So VCs focus on the $250M cost of development
Big pharma addresses large, chronic conditions
VCs focus on smaller markets, clear clinical endpoints
Number of
Patients
Preclinicals
Prepare & file IND
Phase 1
Phase 2
Phase 3/4
File IND - FDA Approval
Market Launch
Totals
Cumulative
March-April 2010
YR1
$
(8.0)
$
(2.0)
100
500
2,000
YR2
$
YR3
YR4
YR5
(25.0)
$
(50.0)
$ (100.0)
$
(10.0) $
$
(25.0) $
(35.0) $
$ (10.0)
$ (55.0)
(50.0) $ (100.0) $ (65.0)
(85.0) $ (185.0) $ (250.0)
37
Constance McKee
Business of Biotech 8
Wednesday
1 – Valuations
2 - Sources of strategic capital: defense research grants
•
What is a valuation? for companies? for products?
•
Why is this important to founders?
•
How are valuations determined in the private (venture) market and in
the public markets?
•
To what quantitative factors are valuation models sensitive?
•
Founders make money when….
•
Founders lose money when….
•
Wounded warriors & veterans – unmet clinical need & funding gap
March-April 2010
38
Constance McKee
Business of Biotech 8
Valuation Determined by (1) Value of Latest
Round of Financing & (2) Market Conditions
•
•
If 25% is worth $1 million, then 100% is worth $4 million
($1 divided by 25% = 4)
25% valued at $1 million
Current
March-April 2010
New Financing
39
Constance McKee
Business of Biotech 8
Pricing Rounds
Venture Valuations Affect Founders’ Ownership (“Dilution”)
•
•
•
•
Begins with pre-money valuation
Pre-money valuation driven by
• (1) absolute amount of cash needed and
• (2) target post-money valuation
New price-per-share calculated as (valuation/new $$ required = price/sh)
New price/sh calculate as (# new shs issued = % owned) = “dilution”
Shares Outstanding
Pre-Money Price Per
Share
Pre-Money Valuation
(No. Shs X Price)
New $$ Required
New Price Per Share
March-April 2010
No. New Shares Issued
New Shs % Total
New Valuation $
3,000,000
$
0.33
$ 1,000,000
$ 1,000,000
$
0.75
1,333,333
31%
4,333,333
$ 3,250,000
40
Constance McKee
Business of Biotech 8
Valuations
Market Drives Pre-Money Valuations
•
•
•
•
•
Model sensitive to time to exit (acquisition, IPO, product launch)
Model sensitive to cash required for each milestone
Pre-money valuation is whatever investors believe & insist on
Pre-money valuation + funds in = post-money valuation
Next round of investors want a “step up” (assumes you meet your
milestones & your technology is now worth more)
March-April 2010
Low Valuation Scenario
A Pre
$
0.3
A New $
$
0.5
A Post
$
0.8
Step-up X
B Pre
$
B New $
$
B Post
$
Step-up X
C Pre
C New $
C Post
Step-up X
EXIT
Total $
In
2
1.7
5.0
6.7
$
$
$
3
20.0
20.0
40.0
$
0.5
$
5.0
$
20.0
2
$ 80.0 $
25.5
41
Constance McKee
Business of Biotech 8
Valuations
Exit Assumption Drives Pre- & Step-Up Valuations
But “Liquidity Preference” Dominates Cash Paid At Exit
New
funds
Series A
Pre =
Post =
New funds
(5)
2
$
5 $
15
Series A
Series B
(10)
3
$
10 $
40
Series C
(40)
3
$
20 $
Mezzanine
(60)
2
$
$
Exit
Project ROI
Total invested
$
Step-up
(x)
$
275
Series A
$
1 $
6
Series B
(10)
1
$
5 $
15
140
Series C
(40)
2
$
10 $
90
40 $
160
Mezzanine
(60)
2
$
20 $
140
275 $
275
Exit
$
275 $
275
10
Total invested
$$ at Exit
% Owned
ROI
3%
13%
Series A
Series B
19
7%
24%
Series C
28
10%
165
60%
March-April 2010
$
$
275
61%
$
(115)
6
$$ at Exit
8
Mezzanine
$
Post =
1
Project ROI
$ (115)
Pre =
(5)
61%
$
Step-up
(x)
$
% Owned
ROI
5
2%
-1%
Series B
8
3%
-6%
-17%
Series C
14
5%
-41%
175%
Mezzanine
165
60%
175%
$
42
Constance McKee
Business of Biotech 8
Founders Make Money When…
Valuations Are High & Keep Ratcheting Up to Exit
Investor Class
Pre-Money
New Funds
Post-Money
Total $ in Deal
A
$ 2
$ 2
$ 4
$ 4
A%
A
Value
2.0
VC 1
$ 1 25% $ 1.0
VC 2
$ 1 25% $ 1.0
VC 3
VC 4
VC 5
VC 6
Public investors
Founders
$ 2 50%
Total Funds In
$ 2.0
Total Ownership
100%
March-April 2010
B
$ 8
$ 4
$12
$ 8
$ 2
$ 2
B%
B
Value
3.0
12.5%
12.5%
25%
25%
C
$ 36
$ 16
$ 52
$ 24
$ 1.5
$ 1.5
$ 3.0
$ 3.0
$ 8
$ 8
C%
2.0
4.2%
4.2%
8.3%
8.3%
33%
33%
C
Sale
Value or IPO
$ 104
$ 15
$ 119
$ 39
$ 2.2
$ 2.2
$ 4.3
$ 4.3
$17.3
$17.3
$ 15
$ 2
25%
$ 6.0
100%
8.3% $47.7
$22.0
100%
IPO%
12.6%
Exit
Value
$
15
2.6% $ 3.1
2.6% $ 3.1
5.1% $ 6.1
5.1% $ 6.1
20.5% $ 24.4
20.5% $ 24.4
38.5% $ 45.8
5.1% $ 6.1
$ 37.0
100.0%
43
Constance McKee
Business of Biotech 8
Founders Lose Money When…
Valuations Remain Low, Exit Is Low…
….and Later-Stage Investors Have Liquidity Preference
Investor Class
Pre-Money
New Funds
Post-Money
Total $ in Deal
A
$ 2
$ 2
$ 4
$ 4
A%
A
Value
2.0
VC 1
$ 1 25% $ 1.0
VC 2
$ 1 25% $ 1.0
VC 3
VC 4
VC 5
VC 6
Public investors
Founders
$ 2 50%
Total Funds In
$ 2.0
Total Ownership
100%
March-April 2010
B
$ 8
$10
$18
$14
$ 5
$ 5
B%
B
Value
3.0
7.1%
7.1%
36%
36%
$
$
$
$
C
$ 54
$ 40
$ 94
$ 54
1.3
1.3
6.4
6.4
$ 20
$ 20
C%
2.0
1.9%
1.9%
9.3%
9.3%
37%
37%
C
Sale
Value or IPO Sale %
$ $ 10 100.0%
$ 10
$ 69
$ 1.7
$ 1.7
$ 8.7
$ 8.7
$34.8
$34.8
$ 15
$ 2
14%
$12.0
100%
3.7% $90.5
$52.0
100%
1.4%
1.4%
7.2%
7.2%
29.0%
29.0%
21.7%
2.9%
Exit
Value
$
10
$ 0.1
$ 0.1
$ 0.7
$ 0.7
$ 2.9
$ 2.9
$ 2.2
$ 0.3
$ 62.0
100.0%
44
Constance McKee
Business of Biotech 8
What’s a Valuation ‘Comparable’?
Similar business model, similar products
•
•
•
•
Valuations of venture-backed companies
Subscription-services
• (1) Venture One
• (2) The Venture Capital Analyst
• (3) your lawyers (without naming companies….”we’re seeing deals like
this right now at valuations of etc”)
• (4) your friends
Small cap public companies
• Valuations may be affected by major investors’ portfolio concerns, may be
unrelated to company’s future – or inside information? (PTIE)
• Valuations may be affected by global market conditions (MAKO)
Similar class of drugs progressing through clinical trials
• Pfizer torcetrapib failure
March-April 2010
45
Constance McKee
Business of Biotech 8
Product Valuation: ‘Expected Future Earnings’
Public Company Valuations Fluctuate with Price
•
•
•
•
For public companies, investors buy on future expected value of earnings
Torcetrapib failed in Phase 3
• Pfizer spent $850M to develop the drug to that point
• Conducted trials in 20,000 patients
On 4 December 2006, stock price dropped from $27.88 per share to $23.00
per share (x 7.2 billion shares, from $201 BN to $166 BN total company value)
Means investors removed value of future earnings from stock price
March-April 2010
46
Constance McKee
Business of Biotech 8
What happened on October 7?
Venture investors Montreux & Skyline do $60M PIPE on
October 29, 2008 at $6.25 per share*
Montreux bid $6 per share in
2006 in a venture round before
MAKO went public, but were
outbid by hedge funds. MAKO
later went public at $10 per
share, has received FDA
approval and started marketing
its products. Montreux invests
later in the company’s
development with minimum
science, clinical and market risk
in a PIPE (Private Investment in
Public Entity)…but what is VC
doing investing in public
companies….?
March-April 2010
47
Constance McKee
Business of Biotech 8
Change the Math for Early-Stage Investment
Strategies to Accelerate Exit & Minimize Dilution
Shorten Time to Market
Minimize VC Equity
•
•
•
•
•
•
•
•
License in later-stage compound
Acquire later-stage product
Re-engineer generic compound
Reformulate marketed compound
NIH & NCI
Venture philanthropies
DARPA
Partner with large pharma or medtech
• Pursue product with shorter test period
• Pursue disease with smaller patient
size for smaller clinical trial size
• State funds: CT Innovations, Pennsylvania
• Country funds: Scotland’s Co-Investment
Fund; France’s Premier Jour @ Genopole
• Partner with large pharma or medtech
University funds
• Stanford’s Birdseed Fund
• Elm Street Ventures, Yale
March-April 2010
48
Constance McKee
Business of Biotech 8
Sources of Funding for Early-Stage and
Translational Medical Projects
•
U.S. Army Medical Research & Materiel Command (USAMRMC)
•
•
•
•
Congressionally Directed Medical Research Programs (CDMRP)
•
•
•
•
•
1992 – 2009 ~ $4.8BN in programs www.cdmrp.mil
Limited funds for military medical research - $300M for TBI & PTSD (2007 only)
FY09 - $374M total
Defense Related Medical Research Program - $235M ($92M 2008)
Department of Defense (DOD)
•
•
•
•
•
Small business $524M (FY08)
Telecommunication and Advanced Research Center (TATRC) www.tatrc.org
Broad Agency Announcement (BAA)
Small Business Innovation Research (SBIR)
Defense Advanced Research Projects Agency (DARPA) www.darpa.mil
Biomedical Advanced Research & Development Authority (BARDA) www.hhs.gov
Defense Threat Reduction Agency (DTRA) www.dtra.mil
Armed Forces Institute of Regenerative Medicine (AFIRM)
•
•
March-April 2010
Two consortia fully funded at $300M
AFIRM 2? - “fully intend to renew”
49
Constance McKee
Business of Biotech 8
Where Our Wounded Warriors and Veterans
Are Cared For
•
•
•
•
Combat casualties – advance medical teams assigned to combat units
• “Far forward” mobile field hospital
• Aeromedical staging facility (aircraft adapted to mobile intensive care unit)
Landstuhl Regional Medical Center
• Contingency Aeromedical Staging Facility (100,000 patients as of Nov 2009)
• Ramstein Air Base, near Kaiserslautern, Germany
• Other Mobile ASFs (aeromedical staging facilities)
Rehabilitation
• Walter Reed Medical Center (Washington DC)
• William Beaumont Army Medical Centers (near El Paso, TX)
Veterans Administration (1)
• ~ 25 million veterans of all conflicts (2008)
• 5 million received care from the VA (2008)
• 1 million claims processed, pension & benefits to 3.8 million veterans (2009)
• Estimated total spend $93.4BN (2009)
• 26,000 employees
• 54 hospitals & 171 medical centers
• > 350 community clinics, 126 nursing care units, 35 domiciliaries
• 4,000 housing partners to reduce homelessness (PROGRESS !)
March-April 2010
(1) http://www1.va.gov/opa/fact/vafacts.asp
50
Constance McKee
Business of Biotech 8
Many Veterans’ Injuries and Conditions are Neurological
Only treatments are care & therapy
Conflict
Neurological condition
Vietnam War (1965-1973)
Exposure to Agent Orange
• Parkinson’s disease (PD)
% total
served
n=
Treatable?
185,000
no
yes
yes
• Prostate cancer, B cell lymphoma
• Coronary artery disease
Gulf War (1990-1991)
Gulf War Illness
30%
Gulf War ALS
OIF/OEF (2003 –
100
no
50%
950,000
~ 50%
Pain – treated with opiates
45%
430,000
~ 50%
360,000
no
Vision impairment (% TBI)
75%
270,000
no
Post traumatic stress disorder
35%
665,000
no
58,000
yes
30,000
no
Hearing impairment
March-April 2010
no
Pain
TBI (traumatic brain injury)
All conflicts
210,000
Spinal cord injury (% total US)
20%
Sources: Golomb BA (2008) PNAS; DVBIC; CDC; USA Today; VA;
51
Institute of Medicine: “Veterans and Agent Orange: Update 2008”
Constance McKee
Business of Biotech 8
What’s Good for the Taxpayer Isn’t Always The
Best Incentive For Private Sector Investment
March-April 2010
52
Constance McKee
Business of Biotech 8
Thursday
More on Sources of Capital: Pharma As Source of Capital
• Why biotech does deals with pharma
• VCs in public markets & private equity
• Why pharma sets up venture capital funds
• Angel investors aren’t always (angelic)
• M&A (mergers & acquisitions) as an exit strategy
• Closing comments….are we at a point of inflection in the
industry?
March-April 2010
53
Constance McKee
Business of Biotech 8
Why Biotech Does Alliances
Access to Capital & Validation
•
Discovery companies lack core competency in
•
•
•
Biotech lacks core competency in
•
•
•
•
Biological validation
Clinical development
Clinical development
CMC, GMP & manufacturing scale-up
Navigating FDA approval
Venture investors place enormous value on industry deals
•
•
•
March-April 2010
Validate technology
Proxy for product value ~ proxy for financing valuation
Capital that VCs don’t put at risk themselves
54
Constance McKee
Business of Biotech 8
Cashflow model for “Big Jersey Pharma & PGx” case
What assumptions are you making for each deal point?
Revenues - disease target #5
Revenues - disease target #4
Revenues - disease target #3
Revenues - disease target #2
Revenues - disease target #1
Market launch
FDA approval
File NDA
Phase 3
Phase 2b
Phase 2a
Phase 1
Prepare IND
Preclinical studies - tox
Preclinical studies - model
Lead candidate development
What year were patents filed?
When could they first issue?
In what countries will they be valid?
DATE
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
YEAR
Cash invested by BJP to develop
Deal milestones paid by BJP to PGX
Aggregate revenues earned by BJP
Royalties paid to PGX (on net 35%) 2%
Net period payment to PGX
ROI BJP
ROI PGX
March-April 2010
-
1
-
2
-
3
-
4
-
5
-
6
-
7
-
8
-
9
-
-
-
-
-
-
-
11
12
13
14
15
16
2026
2027
2028
2029
17
18
19
20
-
-
-
-
-
-
10
-
-
-
-
-
-
-
-
55
Constance McKee
Business of Biotech 8
Pharma As Source of Capital
Biotech-Pharma Deals: Credibility, Cash & Expertise
March-April 2010
56
Constance McKee
Business of Biotech 8
Valuation Comparables
“Must-Have” Source: Recombinant Capital
March-April 2010
57
Constance McKee
Business of Biotech 8
Case Study: Pain (PTIE) & King (KG)
How the Market Reacted to FDA News on Remoxy
PTIE – 1 year as of 05/23/2009
March-April 2010
KG – 1 year as of 05/23/2009
58
Constance McKee
Business of Biotech 8
Why Pharma Does Venture Capital
Fills the Funding Gap & Strategic Focus
•
•
•
•
•
•
•
•
•
•
Amgen, Genentech, Pfizer all have corporate investment funds located in, and active in investing in
California.
EMD Serono invests an early-stage fund alongside a strategic fund allied with the MS Society, “Fast
Forward” – blends corporate & philanthropic strategies
The Pfizer Incubator www.thepfizerincubator.com combines funding with access to laboratory facilities
in San Diego, with another facility mentioned for the Bay Area and one for Philadelphia. The funding
commitment is $50 million.
Since 2005, Takeda has operated a well-respected venture fund located in Palo Alto that invests from
the Takeda R&D budget.
Merck does not have a fund per se, but has a licensing group that is active in the Bay Area.
Baxter (Chicago) is rumored to be considering a corporate venturing fund.
Lilly Ventures operates out of Indianapolis.
Roche Venture Fund (Basel) has invested in 25 companies in ten countries.
Biogen Idec launched its venture fund in Boston in 2004 with a commitment of $100 million.
With a commitment of $2 billion, Novartis Venture Fund (Cambridge, MA and Basel)
http://www.venturefund.novartis.com/ is one of the largest corporate venture investors, with
investments in over 50 companies as of 2008.
March-April 2010
59
Constance McKee
Business of Biotech 8
Venture Capital vs Private Equity
Capital market conditions are blurring boundaries
•
•
•
•
•
Venture capital buys stock – key bet is increased value of equity
Fundamental assumption – value of equity mirrors value of underlying asset
But value of equity can be affected by
• (1) capital market conditions, including global economic crises
• (2) exit to make private shares liquid is Initial Public Offering (IPO)
• (3) performance of similar biotech companies at & after IPO
Venture train wreck scenario – increased value in asset, as milestones met &
risks decline, not reflected in stock price
Private equity buys assets – key bet is good management increases value
• (1) value of deals *relatively independent* of capital market conditions
• (2) exit most often sale to another company (“trade sale”)
• (3) exit can be IPO
March-April 2010
60
Constance McKee
Business of Biotech 8
Why Venture Capital Invests in PubliclyTraded Companies
“While investors largely steered clear of biotech and specialty pharma IPOs in 2009, they enthusiastically
embraced stock offerings by already-public companies. Over the course of the year, there were 57 underwritten
follow-on stock offerings, which together raised more than $5.9 billion in new funds. That’s far superior to 2008’s
totals (12 follow-on offerings raised about $1.2 billion) and even better than 2007’s totals (35 follow-on offerings
raised nearly $3.4 billion in new funds).” – www.recap.com
March-April 2010
61
Constance McKee
Business of Biotech 8
What happened to PTIE on March 2?
Largest investor Eastbourne sells 1M (of 11M) shares
Owner Name
Select a name below for more information.
March-April 2010
Date
Shares Held
Change
(Shares)
% Change
(Shares)
Value
($1000)
EASTBOURNE CAPITAL M...
12/31/2008
11,075,874
0
0.00%
$46,851
BARCLAYS GLOBAL INVE...
12/31/2008
2,162,241
(19,604)
(0.90%)
$9,146
RENAISSANCE TECHNOLO...
12/31/2008
1,508,787
151,200
11.14%
$6,382
VANGUARD GROUP INC
12/31/2008
1,212,731
676,190
126.03%
$5,130
DIMENSIONAL FUND ADV...
12/31/2008
1,028,069
(88,530)
(7.93%)
$4,349
62
Constance McKee
Business of Biotech 8
Angel Investors Aren’t Always (Angelic)
The Good, The Bad & The Ugly
•
Good angel investors
•
•
•
•
•
Bad angel investors
•
•
•
•
Typically invest $50K - $100K
Anticipate that VCs will follow on – meaning, their terms anticipate VC terms
Understand they will be diluted
Have “deep pockets” – meaning, they can keep putting cash in
Demand terms that VCs will choke on later
Don’t understand your technology, your financing targets & waste HOURS of
time asking for explanations
Leave you hanging when you need more capital
Ugly angel investors
•
March-April 2010
Sure you want to know……?
For more reading on angel investors: http://www.nature.com/bioent/2004/041201/full/bioent839.html
http://wistechnology.com/article.php?id=4340
http://wsbe2.unh.edu/center-venture-research
63
Constance McKee
Business of Biotech 8
Opportunities for Exit
IPO Market Slammed Shut in 2008 – But Not M&A
30
25
20
15
10
5
0
2007 2008 2008 2008 2008
IPOs IPOs M&A - M&A - M&A Mx
Dx
Rx
Total Raised
March-April 2010
Average Deals
Billion$ Deals
64
Constance McKee
Business of Biotech 8
Mergers & Acquisitions 2008
Investors’ Only Exit Opportunity in 2008
Transaction
Ann. Date
4/7/08
7/17/08
2/1/08
9/10/08
6/11/08
7/6/08
6/11/08
4/7/08
6/14/08
7/31/08
2/13/08
9/1/08
5/22/08
7/23/08
5/30/08
4/11/08
7/15/08
7/21/08
6/8/08
6/1/08
3/4/08
7/9/08
7/25/08
6/4/08
1/22/08
2/6/08
6/4/08
7/10/08
3/28/08
11/23/08
2/20/08
3/31/08
4/25/08
9/18/08
2/25/08
8/25/08
8/4/08
6/16/08
Target
Alcon Inc.
Barr Pharmaceuticals Inc.
Millennium Pharmaceuticals Inc.
Imclone Systems Inc.
Applied Biosystems Inc.
APP Pharmaceuticals, Inc.
Ranbaxy Laboratories
LifeCell Corp.
Ranbaxy Laboratories Ltd.
Alpharma, Inc.
Toyama Chemical Co. Ltd.
Sciele Pharma Inc.
Chugai Pharmaceutical Co. Ltd.
Vital Signs Inc.
Leiner Health Products Inc.
Sirtris Pharmaceuticals, Inc.
Lev Pharmaceuticals, Inc.
Symbion Pharmacy & Consumer Businesses
Third Wave Technologies Inc.
Laboratório Americano de Farmacoterapia S.A.
Enturia, Inc.
Speedel Holding AG
Acambis plc
Protez Pharmaceuticals, Inc.
Cogenesys, Inc.
Alpharma AS
Tercica Inc.
Speedel Holding AG
Del Pharmaceuticals, Inc.
Omrix Biopharmaceuticals, Inc.
Encysive Pharmaceuticals Inc.
Bentley Pharmaceuticals Inc.
Innogenetics NV
Protherics plc
CollaGenex Pharmaceuticals Inc.
Optimum Nutrition, Inc.
Valeant (Europe)
LipoSonix, Inc.
Acquiror
Novartis AG
Teva Pharmaceutical Industries
Takeda Pharmaceutical Co. Ltd.
Eli Lilly & Co.
Invitrogen
Fresenius Kabi AG
Daiichi Sankyo Company, Limited
Kinetic Concepts Inc.
Daiichi Sankyo Company, Limited
King Pharmaceuticals Inc.
FUJIFILM Holdings Corporation
Shionogi & Co. Ltd.
Roche Holding AG
General Electric Co.
NBTY, Inc.
SmithKline Beecham Corporation
ViroPharma Inc.
Sanofi-Aventis Australia Pty Ltd.
Hologic Inc.
Hypermarcas SA
Cardinal Health, Inc.
Novartis AG
Sanofi Pasteur SA
Novartis AG
Teva Pharmaceutical Industries Ltd.
3i Group plc
Ipsen S.A.
Novartis AG
Church & Dwight Co. Inc.
Johnson & Johnson
Pfizer Inc.
Teva Pharmaceutical Industries Ltd.
Solvay Pharmaceuticals S.A.
BTG plc
Galderma Laboratories, L.P.
Glanbia plc
Meda AB
Medicis Pharmaceutical Corp.
Industry
Medical Devices
Pharmaceuticals
Biotechnology
Biotechnology
Diagnostics and Tools
Pharmaceuticals
Pharmaceuticals
Medical Devices
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Medical Devices
Pharmaceuticals
Biotechnology
Biotechnology
Pharmaceuticals
Diagnostics and Tools
Pharmaceuticals
Pharmaceuticals
Biotechnology
Biotechnology
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Biotechnology
Biotechnology
Pharmaceuticals
Biotechnology
Biotechnology
Pharmaceuticals
Biotechnology
Biotechnology
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Medical Devices
Value ($mm)
38,579.8
8,920.4
7,798.0
6,198.0
6,158.1
5,644.1
2,243.9
1,716.1
1,588.3
1,273.5
1,273.0
1,262.7
913.8
882.9
794.0
619.8
576.1
545.8
538.4
536.6
490.0
476.3
466.3
400.0
400.0
395.0
385.4
381.8
380.0
352.2
346.8
339.2
326.1
321.1
320.8
315.0
300.1
300.0
Premium
1 Day Prior
1 Week Prior
(3.5%)
42.0%
64.8%
10.0%
12.9%
29.1%
31.4%
18.2%
30.0%
60.8%
39.5%
60.9%
11.6%
28.6%
68.0%
50.2%
7.1%
95.1%
65.2%
111.3%
93.7%
18.2%
117.6%
7.9%
73.8%
41.8%
31.4%
-
0.7%
50.9%
70.7%
8.6%
7.6%
43.2%
42.0%
21.3%
45.4%
50.0%
31.2%
64.3%
13.0%
26.3%
73.2%
45.5%
6.0%
107.5%
71.2%
114.8%
107.0%
37.5%
200.5%
7.2%
62.5%
25.1%
31.4%
-
45.1%
50.5%
March-April 2010
1 Month Prior
6.1%
60.9%
54.4%
9.2%
9.3%
64.6%
49.1%
25.8%
49.0%
61.0%
14.6%
63.3%
39.1%
32.1%
116.4%
51.8%
32.7%
64.6%
61.0%
82.9%
67.9%
69.5%
245.6%
(0.1%)
63.3%
0.8%
41.3%
-
65
Average
53.2%
Constance McKee
Business of Biotech 8
What Happened to 2009-2010 IPO Debuts?
(100% = IPO share price)
•
Omeros Thera (OMER) – Ph 3
•
Cumberland Pharma (CPIX) – marketed
•
Talecris Biothera (TLCR - Bayer spin-out)
raised $550M – marketed
•
China Nuokang Bio-Pharma (NKBP)
•
CorMedix (25 Mar 2010 - CRMD/U) raised
$12.5M – “re-purposed” clinical
•
AVEO Pharma (11 Mar 2010 - AVEO) raised
$81M – completed Ph 2
•
Anthera Pharma (1 Mar 2010 -ANTH) raised
$42M – entering Ph 3
•
Ironwood Pharma (2 Feb 2010)– IRWD) raised
$216M – Ph 3
March-April 2010
66
Constance McKee
Business of Biotech 8
Omeros current market cap: $127M
IPO Valuation: 6.82 million shs @ $10/sh: $250M
Company started in 1994: should they have exited via M&A instead?
March-April 2010
67
Constance McKee
Business of Biotech 8
Why I Think 2010 Is A “Point of Inflection”
• IPO window re-opening – but for mature companies
• FDA - REMS
• Congress - biosimilars
• Sources of capital & financing structures
• Personalized medicine - Medco announcement to reimburse
genetic tests for Rx
• BioCON speaks at JPMorgan
• “Faster Cures”
• www.essentialmedicine.org
March-April 2010
68
Constance McKee
Business of Biotech 8
The Unregulated Financial Market Changes The
Game for Everyone
March-April 2010
69
Constance McKee
Business of Biotech 8
Yale’s Contributions to Medicine
March-April 2010
70
Constance McKee
Business of Biotech 8
Constance McKee
Constance McKee is co-founder, President & CEO of Manzanita Pharmaceuticals, Inc (2007-present). Manzanita is the restart of Asilomar Pharmaceuticals, Inc., an early-stage biotechnology company which filed for bankruptcy in June 2006. She
was a Co-Principal Investigator under the DARPA grant that kickstarted Manzanita’s precursor . Other current activities are:
With Dr. Jay A. Levy of UCSF, she is a co-founder of California Antiviral Foundation, a start-up nonprofit 501(c)3 organization
to develop new therapies based on the CAF innate immune response in HIV/AIDS patients.
www.californiaantiviralfoundation.org
She is a part-time consultant to The Clearity Foundation, www.clearityfoundation.org, which provides molecular profiling to
patients with ovarian cancer. Constance volunteers at the Veterans Administration in Palo Alto in the neurology research unit
(Building 7).
From 1990-1994, Constance was Chief Executive of Cambridge Quantum Fund I, a seed venture fund investing in
technologies from Cambridge University (Cambridge, UK). From 1994-1995 she was co-founder and Chief Executive of
SynGenix Limited, a portfolio investment of Cambridge Quantum Fund. From 1996-2001 she worked in the corporate
venture capital group and in General Counsel’s office at Philips Semiconductors.
She was a co-founder in 2001 of BioE2E., Inc., a non-profit organization that presents programs to bioentrepreneurs in the
San Francisco Bay Area. She served as Board member from 2001-2009, and served as President and Treasurer. From
2007-2008 she served as Co-Executive Director of Americans for Cures Foundation, a 501(c)3 organization dedicated to
supporting advocates for stem cell research. www.americansforcures.org
In 1986-1987 she was a recipient of a Bosch Fellowship (Bosch III) which supported internships in corporate finance in
Germany. She holds an MBA from Yale University School of Management,. While at Yale, she also studied voice with Dr.
Richard Lalli. She holds an MM from San Francisco Conservatory of Music and BA with distinction from Stanford University.
March-April 2010
71
Constance McKee
Business of Biotech 8
Acknowledgments & Sources - 1
•
•
Matt Plunkett & Rob Weir, Oppenheimer & Co (Menlo Park) - M&A statistics
Howard Palefsky, Montreux Equity Partners (Menlo Park) – MAKO case study
•
Mark Edwards, Recombinant Capital www.recap.com & online publication
“Signals” www.signalsmag.com
• Statistics on deals & deal trends
• Article on venture philanthropies
•
Cynthia Robbins-Roth – books & columns
• From Alchemy to IPO
• Alternative Careers in Science
• BioWorld Today www.bioworld.com
•
www.clinicaltrials.gov
• NIH database for clinical trials, current and closed
• Reference for trial design, numbers of patients
•
www.nasdaq.com
• Pricing & valuations for many biotechnology, tools & diagnostics companies
March-April 2010
72
Constance McKee
Business of Biotech 8
Acknowledgments & Sources - 2
•
Online reading
• Fierce Biotech
• GEN (Genetic Engineering News)
• BioBrief, RPM Report
•
In Vivo publications
• Roger Longman is one of industry’s longest-serving & most insightful analysts
•
Patient advocacy organizations
• Statistics on patient populations
• Current news on experimental therapies, clinical trials
•
NIH - information on diseases & disorders; SBIR & other grants programs
•
Merck Online www.merck.com/mmpe/index.html
• Current information on diseases & disorders
• Standard-of-care drug therapy, mechanism of action of drugs
•
SEC filings www.sec.gov
• Company websites for annual reports (10-Q), quarterly reports (10-K)
• Information on failed trials is usually buried in quarterly or interim (8-K) reports
March-April 2010
73
Constance McKee
Business of Biotech 8
Additional Slides
March-April 2010
74
Constance McKee
Business of Biotech 8
Term Sheets
An Outline of Key Terms
When to use?
• To focus minds, accelerate decision-making process
• To announce publicly, to drive up value or share price
• Present to Boards to approve “definitive documentation”
Contents
• Key terms of deal
• Scope, territory, grant of rights
• Payments
Responsibilities
•
•
•
•
Letter of Intent
• Alternative approach
• Can be binding as to time, payment, exclusivity
• Useful to buy time without losing exclusivity
• Payments usually credited against deal payments
• Can have option or license as exhibit
March-April 2010
What’s involved in due diligence, and who pays for it
Authorizes costs of deal (legal, patent, industry consultants)
Typically each side pays for costs, included failed deals
May require confidentiality
75
Constance McKee
Business of Biotech 8
Due Diligence
Confirm Ownership, Data & Guesses
IP Ownership
•
•
•
•
•
Does company own its own patents?
Were patents licensed in properly? Fees up to date?
Did employees assign rights to IP they invent?
Did advisors & consultants assign rights to IP they invent?
Do Board members assign rights to IP they invent?
Data
•
•
•
•
•
“Rights in data” when data obtained with CRO or university
Restrictions on publication?
Already published so cannot be protected with patents?
Scientifically rigorous or b******t? Control data?
Full disclosure of toxicity (example – Rinat Neuroscience)
Operating
compliance
• Paid taxes?
• Filed hazmat paperwork with local authorities?
Governance
• Who makes decisions?
• Are they dysfunctional?
Value
• Deal comparables for deal points
• Guesstimates for future market value
March-April 2010
76
Constance McKee
Business of Biotech 8
Deal Structures
Option
agreement
• May be used when licensing in a university technology (can
biotech raise $$ to develop)
• May be used in cases of clinical uncertainty (BioMarin –
La Jolla Pharmaceuticals case study)
Non-exclusive
Exclusive
• Usually enabling IP integrated into multiple products
• Most valuable since effectively confers monopoly
Development or • Describes which party/-ies carry out development
collaborative
• Who pays for, who manages patent prosecution
agreement
• Who has responsibility for clinical trials
• Who has responsibility for preparing NDA with FDA
• Payments may be milestones &/or cover development costs
Co-marketing
agreement
• Allows licensor to keep $$ from product revenues
• Usually appears as part of ‘strategic alliance’
Acquisition
• Asset purchase or stock purchase
• Stock purchase assumes residual-hidden liabilities
• Rights to key technologies may be lost in licenses
March-April 2010
77
Constance McKee
Business of Biotech 8
Valuation Comparables
Develop Internal Model – Compare To External Sources
Process
•
•
•
•
•
Methods
• Deal comparables
• Discounted Cash Flow (DCF), “replacement (buy it new again)”
Sources
•
•
•
•
•
•
Discipline
• Most deals fail - have the courage to walk away from bad deals
• Remember Harvard Business School option: “Do nothing”
• Does your management understand likelihood of failure?
March-April 2010
Develop internal model based on best & rigorous practices
Compare with multiple external sources
Reality check #1: example - Philips investment deal
Reality check #2: can you afford this deal?
Is Board experienced in valuations & disappointments?
Recombinant Capital DeLoitte (subscription)
IN VIVO (subscription), Fierce Biotech, Genetic Engineering News
Your law firm (larger firms keep internal databases of deal terms)
Merchant & investment banks, analysts
Competitors’ public disclosures
SEC filings: Pain-King transaction
78
Constance McKee
Business of Biotech 8
Licenses – Grant of Rights
Adaptable to parties’ needs & positions
Assignment
License
• Outright transfer (sale) of rights
• Grant only of specific rights, specific terms, specific scope
Exclusive
Nonexclusive
• Grants to only one licensee (more valuable ~ monopoly)
• Grants to multiple parties (strategic or enabling IP)
Scope
•
•
•
•
Payments
• Upfront and/or milestone payments
• Payments that support developed ie $250K/yr for x FTEs
• Fully-paid up (no royalties) or royalties (% net profit)
Revocable?
Sub-licensable?
Patents?
Publication?
Termination
• Or irrevocable, means cannot be changed or terminated
• Can be sublicensed to 3rd parties, usually non-exclusives
• Who’s responsible and who pays for them?
• Who’s responsible for publishing & protecting confidentiality?
• Who owns the data when things crash? When patents expire?
March-April 2010
Describes only technology to be licensed
Can limit disease targets ie auto-immune only
Territory – specific geographies ie US or India only or WW
Restricted to geographies where IP is enforceable
79
Constance McKee
Business of Biotech 8
Market – Not Progress on Milestones - Drives PreMoney Valuations
•
•
•
•
•
Model sensitive to time to exit (acquisition, IPO, product launch)
Model sensitive to cash required for each milestone
Pre-money valuation is whatever investors believe & insist on
Pre-money valuation + funds in = post-money valuation
Next investors want a “step up” (your technology is now worth more)
Low Valuation Scenario
A Pre
$
0.3
A New $
$
0.5
A Post
$
0.8
Step-up X
B Pre
$
B New $
$
B Post
$
Step-up X
C Pre
C New $
C Post
Step-up X
EXIT
March-April 2010
Total $
In
2
1.7
5.0
6.7
$
$
$
3
20.0
20.0
40.0
$
0.5
$
5.0
$
20.0
2
$ 80.0 $
25.5
80
Constance McKee
Business of Biotech 8
Valuation Based on Estimates of Future Revenues
Exubera®: analysts predicted $1 billion drug
•
•
•
•
Exubera ™ = inhaled insulin for diabetes (control blood sugar)
Analysts predicted this would be a $1 billion drug
Key assumptions of future revenues
• Offered significant clinical benefit vs standard-of-care (injected insulin)
• Offered lower risk than standard-of-care
• Patient-friendly – diabetics have strong feelings about injecting insulin
• Clinical trials data appeared robust
• Device was easy-to-use for patients
• Pricing was reasonable, 3rd-party payors would reimburse
• Pfizer as marketing partner would market very effectively
Competitors developed competitive products, therefore must be real
• Lilly
• Novo Nordisk
• sanofi-aventis
March-April 2010
81
Constance McKee
Business of Biotech 8
Biotech v Pharma
Different risks reflected in distinct stock performances
March-April 2010
82
Constance McKee
Business of Biotech 8
CDMRP Funding History (1992 – 2009)
Research Topic Areas – DRMRP (2008)
•
blood safety and blood products
•
final development of medical devices for use in
theater (including portable suction machines
and EKGs for theater hospitals)
•
injury prevention
•
TBI and psychological health (including PTSD)
•
trauma treatment and rehabilitation (including
face, visual/ocular and nerve damage, dental,
and auditory systems)
•
wound infection and healing
•
wound infection vaccines
March-April 2010
83
Constance McKee
Business of Biotech 8
Biotech IPOs – Canaries in Capital Markets?
the venture capital industry is not investing….
March-April 2010
84
Constance McKee
Business of Biotech 8
Licenses – Nonexclusive Examples
Stanford: “download, sign here & return”
Technology Type
(link to all techs of this type)
Stanford Docket
Technology Title
(link to abstract)
License Type
(link to license)
Available
via
Google
Checkout
Bioinformatics
97-072
GENSCAN software
Non-exclusive license
Yes
Cell Lines
96-139
Phi-Nx Helper-free Retrovirus
Producer Lines
Non-exclusive license (biological
material)
97-079
293T Cell Line
Non-exclusive license (biological
material)
05-164
Cell-based assay for Wnt signaling
Non-exclusive license
07-069
Reporter cell line for TGFbeta
signaling
Non-exclusive license
March-April 2010
Yes
http://otl.stanford.edu/industry/resources/rts.html
85
Constance McKee
Business of Biotech 8
Exubera®: the $1BN valuation error
March-April 2010
86