VC Perspective – A Vision for Global Investing

Fred Craves, PhD

HEALTHCARE EXPENDITURES AS A PROPORTION OF GDP (%)

USFra

nce

German

yIta

ly UK

Australia Sp

ainBraz

ilJap

anRussi

aChina

India0

4

8

12

16

Government Health Expenditure

Private (out of pocket)

Private (private insurance plans)

Heal

th e

xpen

ditu

res a

s a p

ropo

rtion

of G

DP (%

)

Source: Datamonitor, OECD Statistical Extracts 2009, WHOSIS, 2010, taken from Datamonitor Pharmaceutical Key Trends 2011 – Healthcare System and Drug Regulatory Overview, March 2011, p. 162

The $7 Trillion Complex, Global Healthcare Industry

3

Life Sciences: The Premise

We live in an era of accelerating change.

Healthcare spending is robust in developed countries and growing in emerging economies

Scientific progress is occurring as a factor of advances in biological understanding.

As large pharmaceutical firms continue to struggle with R&D productivity, they are increasingly turning to small firms and universities to create and validate new biological and other scientific insights.

VC can serve as the key liaison to academia and capitalize early-stage companies.

4

Rosling Video

2009 2020 20300

1

2

3

4

5

0%

20%

40%

60%

80%

100%

5

An Emerging Middle Class

Source: OECD Observer – An Emerging Middle Class, June 2013

Global middle class (in billions of people)

% global middle class&

% purchasing powerrepresented by Asia

28%

66%

23%

59%

6Source: US Census Bureau, International database. China Cardiovascular Disease Report 2005.

Increasing Life Expectancy and Chronic Diseases in China

2007 2015 20250

100

200

300

400

500

600

700

800

300380

520

100

130

200

Pop >50 Pop >65

Popu

latio

n (m

illio

ns)

CHINA’S AGING POPULATION

Expanding Healthcare Expenditures in China

7

Source: Goldman Sachs Global Investment Research; Guo Hua Securities Research estimates

2000 2005 2010E 2015E 2020E0

200

400

600

800

1,000

0%

2%

4%

6%

8%

57 108

233

569

884

Healthcare Expenditure Healthcare Expenditure As % of GDP

Heal

thca

re E

xpen

ditu

re ($

US

Bn)

Healthcare Expenditure as % of G

DP

17%CAGR

20%CAGR

High Growth Stage

8

China Pharmaceutical Industry Growth

Source: MOH, Morgan Stanley Research

2004 2005 2006 2007 2008E 2009E 2010E 2011E0

50

100

150

200

10%

15%

20%

25%

30%

China Pharmaceutical Industry Sales (USD) YOY%

US$ (billions)

9

2006 2007 2008 2010

Novartisinvests $1B in Shanghai R&D center

20092005

Pfizer announces opening of new China R&D Center

in Shanghai

AstraZeneca announces $100M R&D investment in China

GSK blueprints $100M Chinese R&D centerand doubles China R&D staff

Pfizer announces opening of New China R&D Center in Wuhan

Merck boosts R&D investment in China

J&J opens R&D center in Shanghai

BMS moves R&D base to China

2011 2012

Novartis launches Galvus

Source: Bay City Capital analysis

Merck announces $1.5B over 5 years to establish new R&D center in Beijing

Boehringer announces plans to double production capacity in Shanghai plant by 2013

Pfizer establishes generics joint venture in China

Multinational companies continue to build infrastructure in China, invest in R&D, and acquire local companies with the expectation that the Chinese market will provide desperately sought after revenue growth

Multinational Pharma’s Increasing Activities in China

Source: Datamonitor R&D Trends 2012

PROPORTION OF EXTERNALLY SOURCED DRUG CANDIDATES IN CLINICAL DEVELOPMENT (%, 2007 vs 2011)

Roche AstraZeneca Pfizer Sanofi0%

20%

40%

60%

80%

100%

65%

21%17%

9%

80%

59%

50%44%

2007 2011

10

Pharma Increasingly External Sourcing of Drug Candidates

Recent advances in sequencing technology will allow for optimization of an individual’s healthcare by tailoring care to his/her unique genetic profile

Innovation’s Impact on the Cost / Care Continuum: Precision Medicine

COST OF HUMAN GENOME NOW ON PAR WITH OTHER DX TESTING

11

Source: Spear, Heath-Chozzi and Hunt: “Clinical application of pharmacogenetics,” Trends in Molecular Medicine, Vol 7 No.5, May 2011

Oncology

Alzheimer's

Incontinence

HCV

Osteoporosis

Migraine (prophylaxis)

Rheumatoid Arthritis

Migraine (acute)

Diabetes

Asthma

Cardiac Arrythmias

Schizophrenia

Depression (SSRI)

Analgesics (Cox-2)

25%

30%

40%

47%

48%

50%

50%

52%

57%

60%

60%

60%

62%

80%

Innovation’s Impact on the Cost / Care Continuum: Targeted Therapy

EFFICACY RATES OF SELECTED DRUGS FOR MAJOR THERAPEUTIC AREAS

12

13Source: Nature Reviews: Drug Discovery, Lessons Learned from the Pharma Industry, December 2009

NME PRODUCTIVITY

Small companies generate higher percent of new molecular entity (NME) approvals, a category once dominated by large pharma

Smaller Companies Generate Higher Number of Approvals

35

19

59

0

20

40

60

Early Mid Late / Marketed

Number of M&A Transactions by Stage of Lead Asset Over Time 2008 - 2011 (1, 2)

Platform(n=19)

(1): Early stage includes Preclinical, Phase 1 and Proof-of-Concept Phase 2; mid stage includes Post-Proof-of-Concept Phase 2 and Phase 3; late staged / marketed includes NDA submitted, FDA approved and commercial assets.

(2): Includes announced transactions of $100M or more; excludes terminated transactions and reverse mergers; excludes transactions where deal value was not disclosed.

10 99

7

2

9

35

17

7

19

16

0

5

10

15

20

2008 2009 2010 2011

Early Mid Late / Marketed

Source: Bay City Capital

BIFURCATION OF EXIT VALUES (SAMPLE FROM 2008-2011)

Acquirers seek early-stage assets to build long-term pipelines and later-stage assets with potential to alleviate potential revenue losses from patent expirations

Early and Later Stage Assets Meet the Needs of Acquirers:Investor Focus Should Reflect Their Needs

14

2007 2008 2009 2010 2011 $(4,000)

$(3,000)

$(2,000)

$(1,000)

$-

$1,000

$2,000 Private Biotech M&A Realizations vs Total Private Biotech Company Financing

Mor

e fin

ancin

gM

ore

M&

A

Source: Bruce Booth, “Venture-Backed Biotech’s 2011 M&A Exits Outpaced Both Investments and Fundraising”, Forbes, January 16, 2012

NET CAPITAL FLOWS

Healthcare Investment Trending Position: M&A Realizations Exceeding Investment

15

Focus on getting the right drug to the right patient at the right time to address both care and cost

Pharma’s dependence on innovation will continue

The imperative to go global: growth will come from outside of the United States

Shifting paradigms and capital scarcity present unique and compelling investment conditions

Implications for Venture Capital Investors

16

17

Ingredients for Success

Leaders in a community should realize that there is robust international competition for preeminence in life sciences.

A strong commitment to collaboration and partnership is a condition precedent.

The Quebec Consortium for Drug Discovery (CQDM) is a good step.

The research commitment from the government to fund basic research must be present.

Canada leads the G7 in per capita funding of public sector research

There must be an active and effective technology transfer capability within leading universities.

University of British Columbia (#14), University of Toronto (#22), and McGill University (#24) all rankamong the top 50 life sciences universities

The most important ingredient to the secret sauce of success in life sciences is access to capital.

Private or venture capital is the central component that is often missing from most life science economic development plans.

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Next Steps

What can be done in Canada and Quebec to improve access to venture or risk capital?

And how can smaller firms more easily secure an opportunity to sell their product or company, or license their invention to a larger entity?

Organizations like CQDM are working to address these issues by fostering partnerships between academia, government, and industry

Working as a consortium with six of the world’s major pharmaceutical companies around the table

Fostering partnerships with organizations across provinces to build out the life sciences community throughout Canada, such as the Ontario-Quebec Life Sciences Corridor initiative

A financial commitment from the private sector is necessary to create a pool of venture money sufficient to create and sustain young Canadian companies.

Examples such as Merck’s collaboration with Lumira Capital, Teralys Capital, and others to provide investment capital to early-stage biotech companies in Quebec.

VC Perspective – A Vision for Global Investing

Fred Craves, PhD