BIOCEO 2004

1
Roger Longman Windhover Information Roger
Longman is a Managing Partner at Windhover
Information Inc., a Norwalk (CT)-based health
care business information company.
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The Dealmaking Landscape
PBIRG San Diego Roger Longman Windhover
Information Norwalk CT 06851 203-838-4401 rlongman
_at_windhover.com May 24, 2004
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Licensing business development are now as
important -- probably more important for
biotech and pharmaceutical success than internal
RD.
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Big Pharma NME LaunchesIn-Licensed vs.
Internally Discovered
Source Windhovers Strategic Transactions
Database
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Licensings Import in Big Pharma
Sales in launch year and three years after
launch

• Cumulative revenues for new product launches,
  1992-2001
• Billions

• Cumulative revenue per product
• Millions

• 1992-1996

• 1997-2001

• Number of externally-sourced products

• 1992-1996

• 1997-2001

• 1992-1996

• 1997-2001

Source McKinsey sourcing database team analysis
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Why?

• Productivity
• Changing commercialization strategies

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The Productivity Problem
Source FDA, http//www.fda.gov/cder/rdmt/NMEapps9
3-02.htm http//www.fda.gov/cder/da/da.htm and
www.phrma.org
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NME DiscoveryIncreasingly Difficult to Predict
Localize

• More speculative targetswhich require
• New chemistries
• Often large, greasy molecules
• The combination of which leads to extreme
  uncertainty
• Most recent example, following Mercks Phase III
  failure, is questions around dual PPARs
• Far stricter entry criteria
• Fail fast mentality now dominant in discovery
  good at picking up drugs companies think they
  know will fail but could also be good at
  killing drugs which could succeed elsewhere
• Big Pharma still fixated as early as
  preclinical on products that can become
  blockbusters

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The Merck Transformation

• Incontestably, most insular pharma 1980-2000
• Duplicate inside any external research programs
  judged critical
• Just two co-promotions between 91-2000one
  failed, the second defensive
• Big changes
• New top management in research
• Pipeline disasters of 2003 (first ph III failures
  in modern memory)

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Merck Dealmaking

• Merck dealmaking more than doubles year over year
• Three of next four drug (not vaccine) launches
  likely to be co-promotions (Vytorin--SGP,
  gaboxadol--Lundbeck, muraglitazar--Bristol)

Number
Detailed Evaluation
Senior Licensing Management Evaluation
Senior Licensing Management Approval
Deals Completed
July, 2001 June, 2002
SOURCE Merck and Windhover
July, 2002 June, 2003
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Changing Commercial Strategies
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The Specialization of Big Pharma

• Move to large molecules
• Growing interest in high-science medical
  specialties
• Oncology, cardiology, neurology, endocrinology

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Strategic Implication 1

• Only way in to many specialist indicationsparticu
  larly those dependent on large molecules--is
  through other companies

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Often, the Only Way in (Particularly via Large
Molecules) Is through Deals

• Pfizer
• Insulinvia Nektar and Aventis
• Recombinant proteins
• via Serono co-promotion
• via Esperion acquisition
• AstraZeneca
• 100mm upfront equity investment in Abgenix (100
  premium) to create broad antibody-based cancer
  program
• UCB
• Publicly transforming from primary care to
  specialist
• Epilepsy drug Keppra now approaching 1 in
  category
• Goes for aptamer-based therapy for allergy
  Dynavax deal
• Acquires Celltech

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Strategic Implication 2

• Specialist commercial economics very different
  from primary care commercial economics
• As Big Pharmas embrace specialty products, they
  will increasingly want development/commercial
  partners for primary-care products, which are
  seen as higher risk

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Bristol is Classic Example

• Greater emphasis on specialty medicines among its
  new products and later-stage portfolio
• Abilify (psychiatry), Reyataz (HIV), Erbitux
  (oncology), entecavir (Hep C), CTLA4-ig (RA, MS,
  other inflamm. diseases)
• Bristols broader view of co-promotion from
  in-liensing tool to risk-reducer on internal
  projects
• From Sanofi the Plavix/Avapro in-licensing
  deals to
• Returning rights to Novartis tegaserod and
  Toyamas gemifloxacin
• To muraglitazar out-licensing co-promotion with
  Merck

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The Value of Discovery-Stage Dealmaking Continues
to Fall
Vertex/Novartis Millennium/Aventis accounted
for 47 of 2000s total
Does not include preclinical deals. Includes
only those deals where we could ascertain any
specific dollar value. Source Windhovers
Strategic Transactions Database
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Late-Stage Deal Values Continue to Increase
Includes deals signed in phase II, III and after
filing for approval (including marketing) and
only those with ascertainable upfront payments.
2001 does not include BMS/ImClone. Source
Windhovers Strategic Transactions Database
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Development vs. Discovery Companies
Apprx. years to IPO

Pre-money valuation
Pre-money IPO step-up
Amount Raised in IPO
Market Cap (as of 5/13)
After-market stock performance (as of 5/13)
Numbers represent the averages for companies
making their public debuts in the 2003-2004 IPO
window. Sources S-1s for each company, Yahoo!
Finance, Hoovers.com, and Windhovers Strategic
Transactions Database.
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Many of the Biggest Pharma/Biotech Deals Are for
Products the Biotech Licensed In

• Alvimopan
• GSK pays 50mm UF, MSs of 220mm to Adolorwhich
  acquired it from Roberts (300K 1.9mm
  MSs)which acquired it from Lilly
• Macugen
• Pfizer pays 100mm UF to Eyetech which acquired
  it from Gileadwhich bought it with NexStar
• Indiplon
• Pfizer paid 100mm upfront, 300mm MSs lots of
  other rights for marketing rights to Neurocrine
  who acquired it from Dov in 1998 (for 500K
  equity investment 3.5 royalties plus MSs)
  which acquired it from Wyeth which got it from
  Lederle

SOURCE Windhovers Strategic Transactions
Database
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Pharmas Often Cant See the Real Value of
DiscoveriesBecause No One Can See Around
Corners(Self-Constructed or Otherwise)

• Cyanamid gives up rights to Medivirs alovudine
  because its no better than AZT
• But in 2003, goes to BI in Phase II for 135mm
  15 royalties
• Glaxo gives back rights to Icos PDE V inhibitors
  because no clear value in cardiovascular or
  inflammation
• Now Lilly/Icos Cialis though actual compound
  was a Glaxo lead (while GSK forced to the much
  more expensive alternative of co-promoting
  Levitra)
• PG gives back rights to Regenerons VEGF Trap
  because no value in muscle-wasting disease
• But in 2003 licensed to Aventis in Phase I for
  80mm upfront only licensable later-stage VEGF
  inhibitor for cancer

SOURCE Windhovers Strategic Transactions
Database, IN VIVO IN VIVO Europe Rx
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And the Dealmaking Continues

• Pfizer acquires Esperion for 1.3bb
• For its stage of development, single biggest
  acquisition of 2003
• Esperion brings 4 products all in-licensed, all
  around same mechanism (three on same target) and
  all large molecules
• Total upfronts 1.08mm
• Total raised 200mm total spent 100mm
• Absolute returns 100 for investors in follow-on
  six months earlier 1400 for average private
  investor
• IRR for last round private investors 68
• Lundbeck/Merck on gaboxadol for insomnia
• 20 yr. old Lundbeck epilepsy compound
• 70mm upfront 200mm milestones Lundbeck gets
  to co-promote in US and has option on Merck CNS
  quid

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One fundamental result of this increasing
recognition of uncertainty

• Jumpstart strategies to discovery
• Start the RD process based on an existing
  molecule.

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Big Pharma Increasingly Interestedin Shortcuts
to Discovery

• Combination product movement Fundamental to Big
  Pharma growth
• Pfizers Lipitor/Norvasc (Caduet)
• Merck/Scherings Zetia/Zocor
• GSKs Advair, Combivir
• New anti-HIV alliances
• Via Alza, JJ is only company to make significant
  companywide commitment to drug delivery/formulatio
  n for new products
• All JJ development projects assessed for ability
  to be improved by formulation/delivery
• Rescue drugs with liabilities in PK, solubility,
  tox to open up the bottom of the funnel
• Topiramate deal with TransForm
• Lillys 400mm acquisition of Applied Molecular
  Evolution
• Protein optimization

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Jumpstart Strategies Dominate Small Company
Business ModelsRe-Formulating, Re-Purposing,
Re-Discovering

• Finding new uses for shelved or existing
  compounds thanks to expertise or new assays dx
  technology
• Xanthus, Bionaut, Hypnion, Avera, Sention
  Saegis in CNS Descartes in pain
• Or mechanistically focused in-licensers--Esperion
  
• New formulation/delivery technologies
• Small molecule companies like Transform,
  CombinatoRx, Amedis, Xenoport, Corus
• Large molecule firms like Compound Therapeutics,
  Ambrx, Momenta (large and small), Diversa,
  Genencor, Neose, Mimeon, Nektar, HGS
• Compromised products
• Compounds many saw rejected
• Eg. The Medicines Co. and Hirulog/Angiomax

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A second fundamental result of this increasing
recognition of uncertainty

• Big Pharma and everyone else should consider
  out-licensing as a major part of an effective RD
  strategy.

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Why Out-Licensing Should Be a Corporate Priority

• Any asset not moving forward is a wasting asset
• In-licensing by out-licensing
• No pharma understands all uses of its compounds
  or all medicinal potential of its failed or
  shelved compounds
• Must create system for allowing additional
  research minds and monies to explore this
  potential
• As part of explicit strategy for in-licensing
  heavily competed-for late-stage products must see
  internal candidates as trading material

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But Out-Licensing Is Extremely Low Priority

• Out-licensing is expensive
• Data scattered in different formats, different
  sites cost to gather data for an older compound
  could be 1mm
• In zero-sum world, outlicensing costs take away
  from in-licensing other RD activities
• Emotional hurdles appear suddenly
• Key to due diligence process is products
  internal champion and he/she doesnt want to
  let the drug go
• The fear of regret
• If someone else wants it, it must be valuable
• Altace

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But of necessity we must rebalance our notion of
RD innovation.
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RD Strategy Must Reflect the Fact that We Dont
Even Know What We Dont Know

• Discovery should be re-defined as stretching from
  what is now called discovery through clinical
  development (both internal development and
  development within other companies)
• Clinical development therefore requires new skill
  sets
• Discovery mentality, external vision
• NME discovery science will remain importantas
  often for validating external work as for
  creating new molecules
• Significant budgetary implications given price
  of late-stage deals, can companies continue to
  spend as if majority of new products will be
  self-invented?
• E.g., Mercks dual PPAR work clearly important to
  its winning BMS dealbut was all of it necessary?