Funding Drug Discovery

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Funding Drug Discovery

• Novartis Venture Fund
• November 2007
• www.venturefund.novartis.com
• Innovation
• Patient Benefit
• Superior Returns

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Significant Deal Activity in India
VC PE deals in India
Value of deals USD Mio
Number of deals

• Source Evalueserve 2007

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But Healthcare still a Small Part
VC PE deals in India for deals gt USD 10 Mio

• Source Evalueserve 2007 But 1H 2007 USD 400
  Mio in healthcare transactions

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Funding Drug Discovery

• Can Include foreign biotech VC investors in
  fundraising, many of them specialize in drug
  discovery and are increasingly interested in
  India
• Start VC relationships early - even if you can
  fund the company through friends and family, it
  is easier to raise subsequent rounds if a VC is
  among the investors
• Know what you are about and find the right
  partner
• Do not defocus your business to please investors
• Complement your companys skills with a strong
  board

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The VC / Biotech Model Can Lead to Higher
Productivity
RD spend ( Mio)
Pipeline ( of projects)
Typical mid-cap pharma
Early-stage VC (NVF)

• Source Nature Biotechnology 2007 (Bruce Booth)
  NVF portfolio analysis

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Novartis Venture Fund

• A mature Venture Capital fund with a single
  Limited Partner
• 550 MM under management
• Independent fund structure with independent
  external board
• 50 portfolio companies
• Superior financial returns
• Typical commitment 10-15MM over the life of an
  investment
• Experienced team with startup and big pharma
  experience
• Offices in Cambridge, MA and Basel, Switzerland

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Typical Investment Process

• Screen 500 companies and proposals per year
• Of the screened companies investments in 1-2 of
  them
• Lead syndicates when appropriate
• Multi-stage due diligence process with investment
  decision vested in the Novartis VC team and
  reviewed by independent board
• Typically initial investments /- 25 stake,
  diluted down to / - 15 in later rounds
  retaining a board seat
• Follow on investments dependent on operational
  performance and financial discipline
• NVF is a long-term partner and enabler in
  developing the company and finding profitable exit

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Lessons Learned - Investment Criteria
Innovation
Management strength
Superior returns
Capital efficiency
Significant patient benefit
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Management Strength
"Nearly every mistake I have made has been
picking the wrong people, not the wrong
idea Arthur Rock (Inventor of Venture
Capital)
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Significant patient / customer benefit

• Serve your patients and future customers and
  value will follow
• Think about selling your future product vs.
  selling your company
• From India for the world, in India for India

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Innovation

• Innovation is not limited to new molecules, it
  can also mean innovative business ideas
• Be pragmatic but disciplined even your best
  ideas will run out of time
• Pick your winners and move them fast proof of
  concept in one compound is better than many in
  the preclinic

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Capital Efficiency Making the Most out of Being
an Indian Biotech

• You are not necessarily better off raising as
  much as possible
• Lower cash burns mean better returns for founders
  and early investors
• Do not build costly infrastructure but outsource
  where possible
• Capitalize on fast decision making ability move
  to proof of concept fast
• Structure compensation to align with companys
  mission higher equity portion, lower cash
  portion

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Money Raised vs. Post IPO Value
Post Value (USD Mio)
R2 0.21
Amount Raised (USD Mio)
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Capital Efficiency Drives Value
Average IRR () vs. money raised (USD Mio)
Average time to exit (yrs)
MA
IPO
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Investment Criteria
Innovation
Management strength
Superior returns
Capital efficiency
Significant patient benefit
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Our Deals Across the Industry

• Acquisitions total 13
• Theravance -- GSK
• Idenix -- Novartis (NVS)
• Syrrx -- Takeda
• KuDOS -- AstraZeneca
• Glycart -- Roche
• Kinetix -- Amgen
• Transform -- JJ
• IPOs total 17
• Xenoport
• Eyetech
• Speedel
• Cytos
• Idenix
• Santhera
• Sirtris
• CombinatoRx
• Acorda

• Licensing agreements (50)
• Infinity -- Amgen, NVS, Medimmune
• Cytos -- Novartis
• Kalypsys -- NovImmune
• Merlion -- Sankyo, Merck
• Paratek -- GSK, Bayer, Merck
• PTC -- Pfizer
• NovImmune -- Serono, Medarex, MerLion
• Polyphor -- Sirtris
• Santhera -- Takeda
• Syrrx -- Biogen, Sankyo, Roche
• TorreyPines -- Eisai
• CombinatoRx -- Angiotech
• Acorda -- Elan

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Geographic Distribution of Our Current Investments
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Focus on Asia Pacific

• Expertise in building companies primarily in EU
  and US well positioned for opportunities in
  Asia
• Solid Novartis network with Asian universities,
  hospitals, investors and biotech
• Supporting promising companies in Asia through
  equity investments.
• Interest in companies in diverse areas of
  healthcare and life sciences with possibility to
  exit through IPO or trade sale
• Investments in syndicates with other Asian and
  international VC funds
• Unique value proposition to Asian companies and
  VC firms through technical and international
  market expertise

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Appendix
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Money raised vs. Returns
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Money raised vs. IRR
IRR ()
Amount Raised (USD Mio)
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Money Raised vs. Multiple

• Source Nature Biotechnology 2007 (Bruce Booth)

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Capital Efficiency drives value
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IPO Market

• Improved over the past years but at a similar
  level compared to 2006
• What is standard for IPO
• 1 phase II, 1 phase I and 2 pre-clinical
• Pricing is in most cases down from the mid-point
• ca. -15
• IPO performance
• mixed with a more negative trend, US vs EU
• Mean amount raised between 50 to 90 mio

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IPO Market

• IPO valuations US
• Phase I 180 mio
• Phase II 230 mio
• Phase III 230 mio
• Phase III filed 280 mio
• Overall trend 2004 2007 311 220 230 300
• EU plus US
• IPO step-ups US
• Phase I 1x
• Phase II 1.4x
• Phase III 2.0x
• Overall 1.6x
• EU higher then US overall 2.2x

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Why go public ?

• Raise money for expansion
• Increase market value
• Acquire others
• Attract and retain people
• Liquidity for stockholders / investors
• Reputation

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Cons of going public

• Cost
• Public scrutiny and liability
• Loss of control
• Public pressure
• Etc.

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What it takes to build a startup

• Talent
• Access to capital
• Entrepreneurial culture

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Entrepreneurial Culture

• Subversion questioning the status quo
• Cutting (the right) corners pragmatic and fast
  but not sloppy and slow
• A perspective towards the future moving on from
  failure
• Individualism the need to belong vs. building
  your own

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Indias base to build drug discovery

• Strength in services - combining services and
  drug discovery does it work?
• Strength in Gx and manufacturing
• Strength in IT
• Chemistry
• Lower cost base, lower dilution for founders and
  early investors

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Drug Discovery

• Plan for long timelines and select your investors
  and partners well
• Focus know what you are about
• Be relentless in operational and financial
  discipline
• Keep your cash burn low
• Pick your winners and move them fast proof of
  concept in one compound is better than many in
  the preclinic

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IRR for Biotech IPO vs. MA
Median cash-in, acquisition value, and IRR for
biotechs acquired by Pharma. 2004-Present, MM
(n29)
Median cash-in, IPO value, and IRR for biotechs
at IPO, 2004-Present MM (n54)
5.5 yrs (avg)
5.3 yrs (avg)
42 IRR
23 IRR
Source VentureSource, Recombinant Capital IRR
calculated by applying change in stock price to
companys market capitalization at IPO, assuming
100 VC ownership at IPO and perfect liquidity
post-IPO, Time (years) average time elapsed
from closing of first professional financing
round to date of IPO Acquisition exit value
greater than 25MM and sale value must be higher
than cash-in
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HURDLES FOR GROWING LIFE SCIENCE COMPANIES
RD productivity

• Portfolio management
• Operational RD productivity

Product/market strategy

• Technology platform vs drug development
• Indications
• Geographic expansion

Licensing partnering

• Ensure funding
• Risk management

Attracting talent

• Business skills
• Job security

Managing growth

• Mgmt processes
• Culture

Funding

• Balance Cash flow
• Investor mgmt

Growth strategy

• Long term strategic goal and related business
  set-up
• Investor mgmt

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Selected Recent Investments

• Novartis Venture Fund
• Biorelix (USA)
• Cellerix (SP)
• Covagen (CH)
• Locus Pharmaceuticals (USA)
• Immune Targeting System (UK)
• Ablation Frontiers (USA)
• Neovacs (FR)
• Novartis Option Fund
• Adenosine (USA)
• Cequent (USA)

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Case Study - Speedel

• Novartis Spin-out
• Invested in first financing
• Investment life 7 years
• Invested 9MM in 3 rounds
• Patient, supportive investor
• Generated significant returns to NVF

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Case Study - Cytos

• Seeded company out of ETH in Zurich
• Served on the board as Chairman
• Invested in all rounds
• Life of investment 7 years
• IPO on Swiss Exchange (CYTN)
• Licensing agreements with Novartis for nicotine
  vaccine (500MM) and Alzheimer vaccine
• NVF sold shares following IPO to a third party
  for a significant gain

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Case Study - Glycart

• Seed funded company from ETH led seed round
• Invested all rounds (7.4MM)
• Life of investment 4 years
• Served as Chairman of the Board
• Sold to Roche for 235MM CHF at attractive return

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Novartis Option FundA Unique Approach

• When the Option Fund invests, we invest twice

Buy equity in company as part of syndicate
Buy non-dilutive limited option on one program
or technology

• License terms at market rate
• Option exercised at discretion of Novartis
  Research
• Strong big pharma validation
• Expanded opportunities / another shot at goal

• Managed by Fund MD
• Follow-on will NOT be dependent on exercise of
  option
• Our equity interests are just like other investors