LBO Proposal – Biopharmaceutical Sector

Etienne MontagutIndividual Project

Developed for the sole Purpose of eMBA Assignment – PEEF

March 2010

Executive Summary

The Target company is OSI Pharmaceuticals, a US based biopharma company• A a blockbuster in oncology and strong pipeline with late stage compounds• A strong culture of partnership and asset optimization

OSI Pharmaceuticals position itself between mid- and large-cap biopharmaceutical companies. The business model selected is to not de focus the company efforts from R+D, which is the most adding value stage of the biotech value chain. The commercial presence shall remain focus on the oncology field and in the US only. Collaborations with third parties should help to decrease the risk related to late stage R+D programs and leverage the oncology commercial platform in the US. This business model offers OSI the capacity to increase the number of drug projects and share risk among a broader portfolio of product and across larger geography, so increase the shareholder value.

EV 2009: US$ 2,710,515EBITDA (2009): US$ 164.5 millions

Debt financing (see Graph)- 3 tranches of Senior Debt for 54% of the EV - 1 tranche of Mezzanine Debt for 10% of the EV

Exit Scenario: IPO (fallback: trading)- Year: 2015- Multiple: 6.5x- Expected IRR: +47.6%

17%

83%Debt

Equity

30%

14%

10%10%

36%

Pre- and Post – transaction Capital Structure

Therapeutic focus: Oncology, Diabetes & ObesityOSI is previously known as Oncogene Science, Inc. and changed its company name in 1997Notable M&A Acquisitions:

Acquired Eyetech in Nov05 for $935m and subsequently divested Macugen (eye disease business) in 2008Acquired Cell Pathways in Feb02 for $32m

The diabetes R&D programs are conducted mainly through Prosidion Limited (U.K. subsidiary)OSI has facilities in Colorado, New Jersey and the UKTarceva (Lead product) is approved in 94 countries for advanced NSCLC and 70 countries for

pancreatic cancer. It achieved global sales of over $1.2bn in 2009. In Nov09, OSI announces that Tarceva is to be reviewed by the FDA as First-Line Maintenance in advanced NSCLCo-promotes Tarceva with Roche/Genentech in the US (50/50) and receives royalties (21%) outside the US from Roche

OSI Pharmaceuticals – Company Snapshot

Source: OSIP website, 2009 Annual Report, Yahoo Finance, Thomson One

Financial Overview (millions US$)Business Overview

Key Marketed Products

Genentech/RocheCo-promotion in USLicensing out outside the US

$358.7m (include royalty payments)Pancreatic cancerTarceva

(erlotinib)

Out licensed to 12 companies

$69m from royaltiestype II diabetes and related indications

DPIV estate royalties

Genentech/RocheCo-promotion in USLicensing out outside the US

Partner2009 Revenues

2nd and 3rd Line NCSLC

Indication

Tarceva (erlotinib)

Name

Source: Thomson, Broker reports

Sales Breakdown (A2009)

Income Statement Revenue 375.70 341.03 379.39 428.15 Gross Margin (%) 78.91 97.83 97.54 97.95 EBIT -21.60 99.43 133.31 152.65 Operating Profit -21.60 99.43 133.31 152.65 EBITDA 5.70 109.33 146.51 170.39 Pre-tax Profit -20.90 103.30 133.14 133.28 Net Income -21.10 100.57 129.97 76.00

Cash Flow Capital Expenditure 10.40 4.33 4.98 32.30 Per Share Data Cash Flow per Share NA NA 2.080 3.380

Balance Sheet Net Asset Value 28.95 138.96 571.55 706.81 Net Debt 54.03 102.26 142.01 -315.36

Valuation ROA (%) -4.61 18.01 11.89 14.20 ROE (%) -72.89 72.38 22.74 26.49

2006A 2008A2007A 2009A

-$215mNet Debt

1983Year Founded

500# of Employees

Melville, NY, US Location

EVP - Pharm Devt & ManufacturingRobert L. Simon

Chief Financial Officer, EVP TreasurerPierre Legault

Chief Executive Officer, DirectorColin Goddard

Chairman of the BoardRobert A. Ingram

TitleName

OSI Revenues Breakdown A2009

50%

34%

16%

Net Revenue fom JointBuisness TarcevaRoyaties from Tarceva Salesoutside USDPIV Royalties andmilestones

OSI current Shareholders

Top Institutional Shareholders (% Ownership)

Wellington Management Company 13.4% Federated Investors 7.2%

Sectoral Asset Management 5.4%

Price (T.Rowe) Associates 5.4%

Westfield Capital Management Company 5.3%

Barclays Global Investors 5.0%

Janus Capital Management 4.4%

Vanguard Group 3.9%

FMR 3.8%

Source: Yahoo Finance

STRENGTHS

• Profitable mid cap biotech company

• Blockbuster product, Tarceva

• Fully‐integrated Oncology franchise

• Well furnished Pipeline with leads in oncology and Diabetes/Obesity

•Late stage products e.g. OSI 906

• Proven Platform/Technology 

WEAKENESSES

• Revenues depends on one product and on one partner (Roche) for the time being

• Limited commercial capacity in oncology

• No critical size to commercialize the Diabetes/Obesity leads which are still under development

OPPORTUNITIES• Launch OSI 906 independently in the US to cash in all the value of the asset• Get revenues from the Diabetes/Obesity pipeline to finance growth in the Oncology field• High value for late stage leads in low R&D productivity in biopharma sector

THREATS

• New competitor to Tarceva• Fall prey to a Big pharma (..)

SWOT Analysis

Business Model and Investment Thesis

Leveraging the Company Strengths

• OSI has a great track record in R&D, also OSI has demonstrated a know-how and skills to acquire high value early stage assets

• There is much more added value in investing in R&D than in commercial asset in this industry.

Proposed Business Model

• New business model is to remain a R&D / Biotech company focusing assets optimization through partnerships to decrease the risk and being able to keep high investment rate in R&D. Partnership with VC and other Funds are considered from R to D e.g. Axon-TPG

• OSI will reinforce the current commercial platform in the US only to promote Tarceva and OSI 906, but no commercial expansion outside the US and/or outside the Oncology field. From 2013, the company will consider acquiring a third product to optimize the commercial platform in oncology (US).

• OSI will partner the assets which are non strategic commercially i.e. the Diabete/Obesity franchise. Divestment will be done not before Proof of Concept. For reference, the cost of Phase III in Type 2 Diabetes like PSN821 is around US$300mn. So probably a very risky journey investment for OSI..

OSI’s Pipeline Assets

OSI Pharmaceuticals Pipeline Optimization

Phase IIIOvarian and Colorectal Cancer

To commercialise IndependentlyPhase IIIAdrenocortical carcinoma

Genentech / Roche

NDA1st line NSCLC (SATURN study)

HER 1/EGFR InhibitorErlotinib Tablets

Ovarian cancer

Oncology

Diabetes and Obesity

Adjuvant NSCLC

Targeted Indication

To commercialise IndependentlyPhase I/II

IGF-1R InhibitorOSI-906

Phase ITORC1/TORC2 InhibitorOSI 027

To commercialise IndependentlyPhase Ic-kit/KDROSI-930

Find a partner to support R&D costs and commercializationPhase IIGPR119 AgonistPSN821

Out-licensed to Eli Lilly for WW ex AsiaPhase IIGlucokinase Activator (GKA)PSN010

Find a partner to support R&D costs and commercializationPre-ClinicalFatty liverOSI-541

Phase III

Partner / Strategic IntentStatus MoAName

Source: Company website and presentation 2010

Very rich R&D portfolio with few potential blockbusters (peak sales over $1bn)Business model is about financing high potential R&D programs from partnership revenues e.g. royalties on Tarceva sales outside the US

Competition OverviewTarceva

StatusCompaniesProductsMechanism of actions

Indications

Experimental use’ / Abraxis’ Abraxane (paclitaxel protein-bound particles for injectablesuspension), in combination with gemcitabin

Pancreaticcancer

NSCLC

Amgen MillenniumPfizerOnyx/Bayer

AstraZeneca

Eli Lilly, Sanofi-Aventis,

Under Development

Vectibix (panitumumab),Velcade (bortezomib)Stutent (sunitinib malate) Nexavar (sorafenib)

MAbProteasome inhibitorMultikinase inhibitor

MarketedIressa (gefitinib)EGFR tyrosine kinase inhibitor

MarketedAlimta, Taxotere, Gemzar(gemcitabine)

chemotherapies

‘

Key Milestones and Proposed ActionsBiopharma, a R&D driven industry

Tarceva - Launch of 1LT NSCLC in US

Tarceva - Launch of 1LT NSCLC incl. $65mn milestone for rights outside US

OSI-906 - $100mn Upfront payment for the rights outside the US

DPIV - growth rate of 45%, 10% lower than last 9mths sales growth

Drop of non strategic R&D programs

PSN 821 –Upfront payment of $50mn

OSI 906 –Launch in the US (directly)

2010 2011 2012 2013

Revenue drivers Through Alliances

Sales Drivers

Tarceva – Launch in Ovarian Cancer

OSI 906 – Launch milestone Q4 2012 (royalties not included) OSI 906 – first

royaltiesPSN 821 –Launch Milestone payment, 14% royalties

We assume that OSI acquire Technologies and early stage Compounds from 2012 onwards for approximately $30mn per year (included in the R&D costs).

As development of a product in the biopharma field lasts around 10 years, no impact on the sales and revenues is considered in our model. Nevertheless, the acquired and newly developed assets will increase the value of the company at exit

2014 - 15 2018-19

Seek for an acquisition to fuel the company

pipeline

2016-17

Revenue Forecast

At Exit, the portfolio of products will be much more balanced among the two Disease Areas in terms of revenues. The decrease of the dependence from the Oncology franchise (Tarceva mainly), diversifies away the risk of ‘one product company’.The launch of OSI-906 (AAC) will help the optimize the commercial platform in the US. 0

200

400

600

800

1,000

1,200

1,400

1,600

2008A 2009A 2010E 2011E 2012E 2013E 2014E

Revenues from Diabetes/Obesity franchise

Revenues from Oncology franchise

RevenuesMillions US$

EBITDA will benefit from the cleaning up of the Portfolio of products, mainly with the partnership of OSI-906 outside the US and the drop of secondary R+D programs.In 2014, the Licensing Out of PNS-821 (Type 2 Diabetes) generates an upfront payment of US$ 50mn.

EBITDA

0

100

200

300

400

500

600

700

800

900

1,000

2008A 2009A 2010E 2011E 2012E 2013E 2014E

• OSI-906 Upfront

• Tarcevamilestones

• PNS-821• UpfrontPayment

Millions US$

2008A 2009A 2010E 2011E 2012E 2013E 2014ENet revenue from unconsolidated joint business for Tarceva 196.1 211.4 257.1 368 413 457 471

Royalties and milestones on sales of Tarceva 138.6 147.3 226.6 218 266 288.9 339Diabetes related royalties and milestones revenues 44.7 69.4 101 146 193 247 308

OSI 906 (US) 22 93 228

Other Royalties and Milestones 100 80 42 114

Total revenue 379.4 428.1 684 732 974 1,127 1,460growth 11% 13% 60% 7% 33% 16% 30%

Cost of goods -9.3 -8.8 -11.4 -13.6 -21.5 -29.5 -34.5% of Sales -5% -4% -4% -3% -3% -3% -3%

R&D -135.3 -151.8 -141 -138 -194.8 -221.7 -243.2% of total Revenues -36% -35% -21% -19% -20% -20% -17%

SG&A -94.9 -103 -102.1 -136.6 -181.5 -218.8 -235.2% of total Revenues -25% -24% -15% -19% -19% -19% -16%

EBITDA 139.9 164.5 430 444 576 657 947% Sales 37% 38% 63% 61% 59% 58% 65%

Investment Income 13 8.1 8.8 11.5 15.3 19.4 19.9Income tax rate - full provision 38% 43% 40% 38% 37% 37% 37%

Amortization (intangibles mainly) -2.5 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9

EBIT 137.4 163.6 428.9 442.8 574.9 656.5 946.4

Income Statement

Cash Flow Statement – Focus on Capex2008A 2009E 2010E 2011E 2012E 2013E 2014E

Sale (purchase of Marketable securities) -99,790 0 0 0 0 0 0Capital Expenditures -4,977 -6,422 -3,347 -3,161 -2,326 -2,032 -1,552growth 59.9% 7.0% 33.0% 15.8% 29.5%% of Net Income -1.31% -1.50% -0.49% -0.43% -0.24% -0.18% -0.11%

Selected Trading Comparables

Selected Mid-cap Biotech Trading Peers

Selected Large-cap Biotech Trading Peers

Selected Precedent Biopharma M&AsIncluding only Targets with Marketed products

TY: Year of Transaction

We took in our assumptions a multiple of 6.03x, a conservative assumption considering - in this exercise - that the Company is private.

Product(s) Equity EnterpriseDate Target Buyers Status Value Value Fields

Jul-08 ImClone Systems

Bristol-Myers Squibb

Marketed 4,500 4,303 7x 6.41x 5.49x Oncology

Jan-08 Millennium Takeda Marketed 8,631 7,667 15x 15x 13x Oncology, Inflammation

Feb-08 CollaGenex Galderma Marketed 411 354 6x 6x 5x Dermatology

Dec-07 Orphan Holdings Pty Ltd

Sigma Pharmaceutic

Marketed 130 130 4x 3x NA Various

Dec-07 MGI Pharma Eisai Co Marketed 4,038 3,847 10x 9x 7x Oncology

Dec-07 Adams Respiratory

Reckitt Benckiser

Marketed 2,267 2,201 6x 6x 5x Respiratory

Nov-07 Axcan Pharma TPG Capital Marketed 1,324 1,015 3x 3x 3x Gastroenterology

Nov-07 Reliant Pharmaceuticals

GSK Marketed 1,650 1,681 4x 4x NA Cardiovascular

Nov-07 Pharmion Corp. Celgene Corp. Marketed 2,861 2,603 10x 10x 7x Hematology, Oncology

Oct-07 Bradley Nycomed Marketed 358 342 2x 2x 2x GI, dermatology

Oct-07 Recip AB Meda AB Marketed 487 487 5x 5x 4x Autoimmune Disorders

Sep-07 Orphan Europe Recordati S.p.A.

Marketed 191 191 4x NA NA Autoimmune Disorders

Sep-07 Esprit Pharma, Inc

Allergan Inc. Marketed 370 370 NA 8x NA Gyne+urology

Jul-07 Medpoint Meda AB Marketed 793 793 3x NA NA Respiratory, pain

Median 793 793 4.8x 5.8x 4.6x 5.1xMean 1,890 1,754 6.03x 7.4x 5.7x 6.3x

High 8,631 7,667 14.5x 17.9x 13.4xLow 130 130 2.4x 2.3x 2.1x

OncologyMay-07 Bioenvision, Inc.

Genzyme Corp.

Marketed 345 324 6xNA 18x

As a Multiple of Revenue

LTM TY TY + 1

Enterprise Valuemn US$

Investment Analysis

Fees

Purchase Price

2,581 

LTC, 271

Mez, 271

OS

LTA,

813

LTB,379

SH

976

Sources of Funds Uses of Funds

100%LBO level

5%Transaction Costs

64%Percentage Debt to Equity

6.03xPurchase price Multiple (x Revenues)

Entry Assumptions

Equity$10mn

Sensitivity Analysis

Because the company will shift from Private to Public company at Exit (IPO), considering the Mid-Cap Biopharma trading multiple, we assume a multiple at exit of 6.5x.

–DSCR on Exit year: 44.9x

2009PF 2010E 2011E 2012E 2013E 2014E 2015ETerm Loan A 813,155 521,548 317,191 54,376 0 0 0Term Loan B 379,472 379,472 379,472 379,472 139,231 0 0Term Loan C 271,052 271,052 271,052 271,052 271,052 58,027 0Mezzanine 271,052 284,604 298,834 313,776 329,465 345,938 363,235

Debt repayment occurs before Exit (in 6 years time). In case of opportunity that would justify a M&A, the LT loans mature after year 7.

Debt repayment (base case)

IRR 6.0x 6.5x 7.0x 8.0x 9.0x 10.0x

5.5x 45.7% 47.2% 48.6% 51.3% 53.8% 56.1%

6.0x 43.3% 44.8% 46.2% 48.8% 51.2% 53.5%

6.5x 41.1% 42.6% 44.0% 46.7% 49.2% 45.4%

7.0x 39.1% 40.6% 42.0% 44.7% 47.1% 43.7%

7.5x 37.2% 38.7% 40.1% 42.8% 45.2% 47.4%

EXIT

ENTR

Y

6,132975,785Equity Value

8,421,036 2,710,515Enterprise Value

6.5x6.03xMultiple

1,104,472164.5EBITDA

1,810,610428.1Revenues

Exit - 2015Entry – 2010(in million US Dollars)

Valuation

813379271

363 

271

976

1,926 

0.01

6,132 

OS

SH

Mez

LTC

LTB

LTA

IRR

47.6%

Terms 1/2This summary of terms and conditions is preliminary and subject to change. Furthermore, this summary of terms and conditions is not intended to define or describe all the terms and conditions of the proposed transaction described herein. The parties recognize that neither party shall have any liability or obligation to the other as a result of this summary of terms and conditions, it being understood that only such provisions as shall be set forth in the final documents shall have any legal effect. Each party acknowledges that certain information provided in connection with the transaction is confidential. Each party agrees that it will not disclose such information to any other party except as required for the completion of the transaction described herein or as required by law, regulatory requirements, a court order or discovery procedures.

US$ 379,472 millions (14%) senior B term loan facility Part II

US$ 271,052 millions (10%) Mezzanine facility Part IV

US$ 271,052 millions (10%) senior C term loan facilityPart III

US$ 813,155 millions (30%) senior A term loan facility Part I

The indicative Terms and Conditions of the Debt Facilities set out the terms and conditions of

63% Debt Financing, % Equity FinancingCapital Structure:

US$Target Valuation:

100% Leverage BuyoutInvestment Type

INVESTMENT STRUCTURE

IPOExit Mechanism:

5 years since the Closing of the transactionInvestment Duration:

HSBC Bank Plc BranchSecurity Trustee:

HSBC Bank Plc BranchMezzanine Facility Agent

HSBC Bank Plc BranchSenior Facility Agent:

HSBC Bank Plc as selected for Senior Facilities and for the Mezzanine FacilityOriginal Leader:

HSBC Bank PlcBlockrunner:

HSBC Bank Plc BranchUnderwriter:

HSBC Bank PlcMandated Lead Arranger:

EM partner CapitalBorrower:

OSI PharmaceuticalsTarget:

Funds are advised by EM partner CapitalInvestor:

PARTIES AND FACILITIES

Terms 2/2

A Clean-up Period (duration to be agreed) shall apply to Events of Default following the Completion Date provided that:[i] Such event of Default is not one of the following:-Any amendment to any investment document have been made in breach of the facilities document;-Insolvency of any member of OSI Pharmaceuticals;-Change of control of EM Capital-No Material Adverse Effect is likely to occur; or[ii] No Event of Default has been procured by EM Capital;[iii] An Event of Default will not be deemed to be cured by the expiry of the Clean-up Period.

Clean-up Period:

Each Obligor shall give representation and make undertakings (in respect of itself and, as applicable, in respect of each member of the Group) and each Facility shall be subject to Events of Default, in each case, as its customary for facilities of this nature and in form and substance satisfactory to EM Capital. Repeated representations on the date of each drawdown request and on the drawdown date to be agreed. No payment of shareholder loan interest or principal until total Debt has been amortised in full.

Representations, Undertakings and Events of Default:

Hedging Agreements for at least 75% of the outstanding term debt for a period of at least three years are to be entered into by OSI Pharmaceuticals within 120 days after completion.

Hedging:

Loans outstanding under the Senior Terms Facilities may be prepaid on the last day of the interest period relating thereto in whole or in part (minimum amount to be agreed). Any such prepayments may not be redrawn. Any mandatory or voluntary prepayment shall be made with accrued interest on the amount prepaid and shall be subject to breakage costs.

Voluntary Prepayment:

Agency fees in amounts and on terms to be agreed with the Facility and Security Agent.Agency Fess

Interest is payable on the last day of each Interest period and in the case of Interest periods of longer than six months, on the date falling at six monthly intervals after the first day of interest period.

Payments of Interest on Loans

The aggregate of the applicable:[i] Margin;[ii] LIBOR (set by reference to Reuter); and[iii] Mandatory cost if any;

Interest on Loans:

One, two, three or six months or any other period agreed between relevant Borrower and all the Lenders under the relevant facility ending on or before the relevant Termination date.

Interest periods for loans:

Certain funds will be provided in relation to acquisition advances to be agreed, taking into account the conditions of the definitive sale and purchase agreement.

Certain Funds:

Unconditional and Irrevocable guarantees to the extend legally possible to be provided by:[i] EM Capital, OSI Pharmaceuticals[ii] any wholly owned non dormant member of the Group time to time;Subject to agreeing security coverage test and materiality of guarantor thresholds;

Guarantors:

First priority security over the issued share capital of each obligor and first priority asset security from all Obligors where permitted having regard to the potential benefit of the lenders and the cost to EM Capital

Security:

Terms between Senior Lenders and the Mezzanine lenders will be set out in an inter-creditor agreementRanking:

Documentation shall be based on this Term Sheet and otherwise based on terms and conditions customary for facilities of this nature and in form and substance acceptable to each of the Original Lenders

Documentation

ManagementManagementColin Goddard, Ph.D (CEO AND Chairman of the Board)Dr. Colin Goddard was appointed Chief Executive Officer of OSI in October 1998. Dr. Colin Goddard has led the transition of OSI from a technology platform services company into today’s profitable fully integrated biopharmaceutical organization. Before, Dr. Goddard spent four years at the National Cancer Institute in Bethesda, Maryland. Dr. Goddard trained as a cancer pharmacologist in Birmingham, U.K. and received his Ph.D. from the University of Aston, Birmingham, U.K. in 1985. He was honored as a D.Sc. from the State University of New York in 2003 and Hofstra University in 2005.

Jonathan Rachman, M.D., Ph.D. Senior Vice President and Head of Diabetes/Obesity R&DDr. Jonathan Rachman joined OSI as Vice President Clinical Development in April 2005. Now approaching thirteen years careers, began with Pfizer in the UK. He started as Clinical Project Manager, and following leadership of projects in several therapeutic areas, he progressed to Director, Early Therapeutic Area Leader within tissue repair. He joined Eli Lilly & Co. in July 2001 as Clinical Research Physician and Medical Advisor in diabetes. Then Leaded Clinical Research Physician for endocrinology and diabetes within the UK.

Pierre Legault (CFO)Mr. Legault is Executive Vice President, Chief Financial Officer and Treasurer of OSI Pharmaceuticals. Mr. Legaulthas over 20 years of senior management experience in the pharmaceutical industry including several senior positions at Sanofi‐Aventis and Aventis, most notably Worldwide President of Sanofi‐Aventis Dermatology and Senior Vice President and Chief Financial Officer of Aventis Pharmaceutical North America.

Anker Lundemose, M.D., Ph.D. and D.Sc. Executive Vice President of Corporate Development and Strategic Planning, OSI Pharmaceuticals, Inc. Managing Director, OSI Investment Holdings GmbHDr. Lundemose is co‐founder of several companies including Prosidion Limited and Symphogen A/S. Previous positions include CEO at Pantheco A/S till August 2002; Director, Business Development, Novo Nordisk from 1997 to 1998; Manager, Business Development, Novo Nordisk from 1996 to 1997 and Head of Diabetes Biology, Novo Nordisk from 1994 to 1995. 

Acknowledgements and References

Acknowledgements (for providing industry leverage benchmarks)• Etienne Hairy, VP Leverage Debt Capital Market, Deutsches Bank (London)• Caroline Valldecabre, Equity Research Analyst Pharmaceuticals, Société

Générale (London)

References- Company website and 2009 Annual Report- Morgan Stanley March 2010 report- Thomson Reuter Pharma- Capital IQ- Canaccor Adams estimates (2009)- Yahoo Finance- Thomson One- BCIQ