Business Models: Whats Getting Funded

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Business ModelsWhats Getting Funded

• Matthew Plunkett, Ph.D.
• Healthcare Investment Banking

April 2, 2003
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Introduction

• What business models can I choose?
• What business models are getting First-Round
  funding today?
• What business models are receiving Large
  financing today?
• What affects investor interest in business
  models?
• How can I build for the long term?

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Business Models in Biopharma

• How are you going to make money?
• What will you sell?
• Pills (Products)
• Novel biopharma technologies / capabilities
  (Platforms)
• Picks and shovels (2000) or Tools (2003)
• Information
• Software
• How will you fund it?
• Product sales
• Corporate partnerships
• Risk-Sharing
• Venture dollars
• Managing and balancing risk / reward
• Breadth of opportunity vs. pursuing a smaller
  number of things further
• No vs. Late vs. Early partnerships

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Whats Getting Funded?
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Your Idea

• Your Idea A novel approach to determine
  interacting proteins within a cell
• What can I do?
• Sell data to biotech / pharma
• Make an instrument and sell it to biotech /
  pharma
• Develop some promising programs, then partner
  with biotech / pharma
• Advance some programs to clinical development
  stage, then (maybe) partner
• What model should you choose?
• Classifications
• Products (Clinical-stage program RD is mostly
  D) Tercica, Xcel Pharma
• Platforms (Earlier-stage programs) Alexza, Raven
• Tools (Everything else services, data, boxes,
  etc.) Guava, Picoliter

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Whats Getting Funded?

• First-Round Biopharma Investments, 1996-Present

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Whats Getting Funded?

• Biopharma Investments gt 20M, 1996-Present

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Companies
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Why is it Getting Funded?
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Venture Drivers

• Need for a Return
• High multiples (expensive money)
• Need to Put to Work
• Many VC investors have 400-800 M on-hand
• Mandates LARGE investments in LARGE opportunities
• Need for Exit
• Public comparables play into valuation
• IPO vs. MA as exit strategy
• Impact of Public Valuations
• Cannot justify ANY investment when public
  comparables are poorly valued
• What will be in favor in 3-5 years hence?

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Linked Markets Public and Private

• Public Markets
• Signpost for VC Investors
• Horrific drops in valuations
• Negative fund flows most of last two years
• Search for reduced downside risk and near-term
  upside
• Binary risk is Name of the Game
• Private Markets
• Both Lead and Trail public markets
• RNAi investments (may be) ahead of their time
• Valuations lag public markets
• Multiple shots on goal avoid binary risk
• Looking to build and grow a sustainable business

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Public Market Valuations

• Antibody Composite Abgenix, Cambridge Antibody,
  Corixa, Dyax, Genmab, ImClone, Immunogen,
  Immunomedics, Medarex, Protein Design Labs,
  Seattle Genetics, Tanox
• Genomics Composite Celera, CuraGen, Deltagen,
  Human Genome, Incyte, Lexicon, Millenium, Myriad,
  Sequenom
• Late-Stage Companies BioMarin, Cell
  Therapeutics, Icos, ImClone, Neurocrine, Tanox,
  Versicor
• Early-Stage Companies Arena, Dyax, Keryx, Kosan,
  Rigel, Sangamo, Seattle Genetics,
• Tools Companies ABI, Affymetrix, Bruker AXS,
  Bruker Daltonics, Caliper, Gene Logic, Illumina,
  Luminex, Perkin Elmer, Third Wave, Transgenomic,
  Waters

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Business Model Preferences

• Early-Stage Investors
• Partnerships represent non-dilutive financing
• Allows multiple product development programs
• Multiple shots on goal avoid binary risk
• Looking to build and grow a sustainable business
• Public Investors
• CANNOT focus on more than a single product
• Pipeline is a box to be checked, not an asset
  to be valued
• Looking for large and near-term upside

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Public Investors Products

• Old Model
• An era of 25 million IPOs and 100 million
  pre-money valuations
• Unsophisticated investors, unable to evaluate
  quality of pipeline programs
• Pharma partnerships needed to both "validate" and
  fund lead programs
• Consequently, tremendous biotech shareholder
  value sacrificed to Pharma
• New Model
• An era of much larger offerings and market
  capitalizations (100/300)
• Investors are most interested in companies with
  retained marketing rights
• Sophisticated investors seek high-quality
  pipeline programs, which are highly financable
• Second-generation biotech success stories like
  Biogen, Genzyme and Gilead have become profitable
  while marketing their own drugs consequently
  their valuations exceed 5 billion
• In contrast, companies with approved yet
  partnered drugs (Enzon, QLT, Sepracor, and
  Vertex) either remain unprofitable or have only
  become barely profitable, and lag significantly
  behind those peers with retained marketing rights

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Public Investors Tools

• Old Model
• Sell Picks and Shovels to those mining for
  genomic gold
• Revenue growth, not profitability
• Momentum
• New markets will emerge (SNP genotyping)
• Unproven business models and unproven technology
  will work
• New Model
• A cyclical industry, highly susceptible to
  economic downturn
• Large-cap tools companies have been hurt by
  slowdown in capital spending by pharma, biotech,
  academia and government
• However, a perception that profitability
  mitigates downside risk
• Smaller tools companies face challenges due to
  lack of critical mass, competitive threats and
  poor visibility on profitability
• Greater exposure to downside risk
• However, strong revenue growth and earnings will
  always captivate investor interest

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Risk Sharing
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Buy vs. Build vs. Risk-Share

• Partnering
• Allows more diversification of risk
• Access specific discovery, development and sales
  expertise
• Provides funding for discovery and clinical
  trials
• Desirable for "non-core" programs
• Internal Funding
• Control over program remains with biotech company
• Higher reward for successful development, product
  launch
• Greater investor interest in companies with
  marketing rights
• Risk-Sharing
• Shared funding, shared rewards
• Provides access to complementary expertise
• Partner is highly incentivized to succeed

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BioMarin and Genzyme

• The Deal
• A 5050 JV between BioMarin and Genzyme to
  develop and commercialize Aldurazyme
• BioMarin contributes IP, manufacturing for
  Aldurazyme
• Genzyme brings development, sales, marketing
  expertise for enzyme replacement therapies
• Terms
• Costs shared equally throughout development
• Milestone payments to BioMarin
• Sales and marketing by Genzyme
• Observations
• Partner controls clinical trial design,
  decisions, newsflow, etc.
• Does not provide for start of ones own sales and
  marketing presence

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TransForm and Lilly

• The Deal
• Centered about TransForms high-throughput,
  robotic and informatic based approach to new
  forms and formulations of active molecules
• A three-part deal
• Several discovery stage compounds / week ( 500
  experiments per compound)
• Late preclinical / clinical compounds ( 10,000
  experiments per compound)
• An important Lilly compound thwarted by
  solubility issues
• Terms
• Research support and equity investment to
  TransForm
• Milestones and royalties for all three parts
• TransForm will receive 10-50 ownership for the
  rescued compound
• Observations
• Innovating in the Industrys Backwaters -- In
  Vivo

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Medarex and ...

• The Deal
• Generates fully-human antibodies in mice
• Perhaps the most prolific deal-maker in the
  antibody world (gt 40 deals)
• Terms
• Some deals fee-for-service
• Others are 5050 cost and reward splits
• Observations
• Many potential partners view company as
  overcommitted
• Many investors give no credit for a Medarex deal

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Conclusions
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Conclusions

• Financing Environment
• Tulip mania happens once every 400 years
• New venture-funded companies increasingly
  product focused and driven
• Tools companies will not return to vogue
• Platforms must be product focused
• Business Models Early-Stage
• Platform to Products
• Unique and proprietary approach to generate many
  shots on goal
• Partners to share risk / costs, broaden
  opportunity, add expertise
• Business Models Late-Stage
• A few truly exciting products with human safety
  (better, efficacy) data
• Unpartnered products, or substantial retained
  rights