BiopharmaceuticalsFinance & Investment ClubHealthcare SectorFall 2014Senior Analyst: Roman TrenkaJunior Analysts: Connor Astwood, Ardian Idrizi, Andrew Liang, Hannah Gordon, Shan Qin, Ethan Zhou, Leon Stempert, Rhea Colaso

Industry Definition

Portola Pharmaceuticals(NASDAQ: PTLA)

Halozyme Therapeutics (NASDAQ: HALO)

Ligand Pharmaceuticals(NASDAQ: LGND)

Anacor Therapeutics(NASDAQ: ANAC)

Companies primarily engaged in the research, development, manufacturing and/or marketing of products based on genetic analysis and genetic engineering. Includes companies specializing in protein-based therapeutics to treat human diseases. Excludes companies manufacturing products using biotechnology but without a health care application.

Nektar Therapeutics (NASDAQ: NKTR)

INSYS Therapeutics (NASDAQ: INSY)

PCT Therapeutics (NASDAQ: PTCT)

Biopharmaceuticals Sector Breakdown/RevenuesHealthcare

61,122B100%

Biotechnology10,076B16.5%

Medical Biotechnology

6,372.1B

10.4%Biopharmaceuticals

5,682.4B

9.2%

Small-Cap Biopharmaceuticals

543.6

.9%

Industry Breakdown by Market Cap $

11%

3%

11%17%7%

20%30%

Breakdown by 2013 Revenue ($M)

Industry Information / Projections

41.5%

6.1%6.1%

6.3%

6.6%

6.9% 7.3%

Market Category % Share

Other pharmacetical products In-Vitro Diagnostic substancesAntidiabetics Lipid RegulatorsRespiratory agents Medicinal & Botanical productsOncologica Products

Company Market Cap ($)

PTLA 1.37B

LGND 1.05B

HALO 1.08B

ANAC 1.43B

PTCT 1.52BINSY 1.29BNKTR 2.1B

Revenue ($B) 98.5

Annual Growth 5.5%

Exports ($B)

Businesses 1,913

Revenue ($M) 167,800

Annual Growth 9.1%

Exports ($B) 9.5

Businesses 1,832

7.7

Expected Values For 2014

Projected Values By 2019

Business Model

Pre-Clinical Research &

Development Phase

• Company researches potential new compounds to treat targeted diseases.

• Once compound has been identified and refined it is tested in animals and living tissue.

Application for FDA Approval

Phase IApprox. 1 year

• Treatment tested on <100 humans to assess reactions & tolerance.

Phase IIApprox. 2 years

• Test to see short-term effects and if drug actually works.

Phase IIIApprox. 3 years

• Large scale study of the effectiveness and side effects of the drug in a larger population.

FDA Approval

Commercial launch / revenue

realization

Royalties• Income from licenses to use

the company's technology or sell its products in overseas markets.

Contracts• Income from joint ventures or

contracts made with other companies to undertake part of the development of a new product.

Product Sales• Revenue from selling

treatment to Hospitals / health insurance providers and wholesalers.

Increased M&A Activity

and Big Pharma

Presence

Increasing Biotech Drug Prevalence

Rising Research &

Development Costs

Rising Research & Development Costs

2010 2011 2012 2013 2014e 2015e 2016e0

10

20

30

40

50

60

70

80

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Average Biotech R&D Costs/Returns

R&D Cost R&D IRR

$ M

illio

ns

% R

&D

IRR

86% of firms reported losses in 2013. Average losses were $65 million.

2010 2011 2012 2013 2014e 2015e 2016e0

102030405060708090

Biotech Average Losses$

Billi

ons

Research and development (R&D): 21% of revenue for average firm.

Average R&D grew at a CAGR of 8.5%, expenditures reached $56.5 million in 2013.

Average internal rates of return (IRR) of treatment research fell to around 4.8% in 2013 from 10.5% in 2010 .

Despite revenue growth overall, rising R&D costs will cut into short-term profit margins for Biotech. Smaller firms will suffer most, due to weaker revenue streams.

Increased M&A Activity

and Big Pharma

Presence

Increasing Biotech Drug Prevalence

Rising Research &

Development Costs

Increasing Biotech Drug Prevalence

20062007

20082009

20102011

20122013

2014e2015e

2016e2017e

2018e2019e

2020e0%

10%

20%

30%

40%

50%

60%

Biotech % of Top 100 Drugs

Biotech drugs are forecasted to account for 52% of the top 100 drugs in 2020, up from 45% in 2013 and 39% in 2006.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

20406080

100120140160180

75.479.5 83.9 88.5

93.4

98.5

107.5117.3

128139.6 152.4

Biotech Industry Total Revenue ($ Billions)

Biotech drugs accounted for 7% of revenues among the top 10 selling treatments in 2001, but up to 71% in 2013. Over the same period, biologics in clinical studies rose 155%, with Big Pharma companies involved in about 40% of all biotech products in development in 2013.

The Industry is witnessing robust revenue growth, driven by mass-market use of drugs offered by major players.

Revenue has grown an annualized 5.5% to $98.5 billion from 09-14. It is expected to grow at a CAGR of 9.1% to $152.4 billion in 2019.

Increased M&A Activity

and Big Pharma

Presence

Increasing Biotech Drug Prevalence

Rising Research &

Development Costs

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

10

20

30

40

50

60

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

3034

53

33

43 4440

3035

39

26

Worldwide Pharma Sales at Risk From Patent Expirations

Sales at Risk ($B) (left scale) % of Prescription market (right scale)

$ Bi

llion

sIncreased M&A Activity and Big Pharma

Presence

Global biopharmaceutical companies are at risk of losing more than $259 billion in revenues due to patent expirations between 2014 and 2020.

Due to these projected losses, large pharmaceutical companies are expected to concentrate on developing drugs for smaller, more targeted patient populations.

This makes smaller companies with pipelines focused on rare diseases more attractive.

Increased M&A Activity and Big Pharma Presence Cont.

2012 2013 2014 2015 2016 (40)

(20)

-

20

40

60

47 20 33 37 22

(26) (33) (17) (24) (27)

Patent Expiry Exposure and Impact ($ Bil-lions)

Pre-Expiry Spending Spending lost to generics

1995-2000 2001-2005 2006-2010 2011-20130%

10%20%30%40%50%60%70%80%90%

100%

19%40%

75%60%

81%60%

25%40%

Biotech VC-Backed Exit Routes (>$250M)

M&A IPO

Only 8 of the 27 new drug approvals in 2013 were secured by the originating company.

Over 50 Pharmaceutical drugs patents will expire between 2014-2015 alone.

As they prepare to face the upcoming patent cliff of 2015, larger firms have been engaging in M&As to broaden their product lines in order to replace revenue lost to patent expiration.

In the five years to 2019, the number of industry operators is expected to remain nearly flat, declining by just 0.9% per year on average to 1,832.

Big Pharma and established Biotech companies will increasingly turn to M&A as a means of maintaining and improving their product pipeline.

RisksBiosimilars

cut into

existing

market

• Unlike generic chemical-based drugs, biopharmaceutical generics (biosimilars) are not truly identical and therefore will require a different regulatory process than pharmaceutical generics.

• Once biosimilar legislation is established the biotechnology will be subject to many of the patent restrictions currently detracting from profitability in Big Pharma.

Tougher

regulatory environment

• The US Food and Drug Administration is becoming more reluctant to grant initial approval for new drugs in the face of numerous recalls and growing safety concerns among the public.

• Governments in virtually all of the developed countries are pushing cost-cutting measures, including increased use of generic medications, mandatory price cuts for brand-name drugs and elimination of rebates.

Revenue

Volatility

• The Biotechnology industry, still in the growth stage of its economic life cycle, has a moderate level of revenue volatility.

• The industry is similarly vulnerable to changes in investor sentiment; many firms are reliant on shareholders and venture capital.

Index Analysis

1-Nov-11

1-Jan-12

1-Mar-1

2

1-May-12

1-Jul-1

2

1-Sep-12

1-Nov-12

1-Jan-13

1-Mar-1

3

1-May-13

1-Jul-1

3

1-Sep-13

1-Nov-13

1-Jan-14

1-Mar-1

4

1-May-14

1-Jul-1

4

1-Sep-14

1-Nov-14

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

Normalized Comparison of % Increase

Small-Cap Index NASDAQ Index

Industry OverviewPositive

Overall rating for biopharmaceuticals:

Research & Development costs are currently increasing, but will not prevent growth in the current industry environment and will also lead to greater long-term returns.

Industry revenue is expected to grow at a CAGR of 9%, primarily concentrated in the hands of well established, larger corporations.

Upcoming patent expirations will force large Pharmaceutical firms to acquire new specialized products through M&A.

Investment StrategiesTwo possible investment alternatives:

Invest in Small-Cap

Invest in specialized, small-cap stocks.

A corporate acquisition usually comes with a generous premium paid to shareholders. Successfully released treatments cause stock price to skyrocket.

This strategy involves much more risk, as there is no guarantee that the company will be acquired or profitable in it’s own right.

Invest in Large-Cap

Invest in well-established, large-cap stocks.

These stocks are virtually guaranteed to be stable and are highly likely to experience growth in the coming years. As the industry consolidates, profit will increasingly amass for larger players on the industry.

This strategy involves less risk, but there is still the possibility of new acquisitions / products backfiring and causing losses, at least in the long-term.

End

Thank you for listening.1. Industry Description2. Sector Breakdown3. Business Model4. Trend 1: Rising R&D Costs5. Trend 2: Increasing Biotech Drug Prevalence6. Trend 3: Increased M&A Activity7. Risks8. Indexes9. Overview/Recommendation10. Investment Strategies