Life Science Venture Capital in Turbulent Times

Douglas Fambrough, Ph.D.Oxford Bioscience Partners

Swedish-American Life Sciences SummitStockholm, Sweden

August 21, 2008

• Leader and innovator in life science VC

• Five funds totaling $1B of committed capital

• Based in Boston, MA

• Proven investment performance

• Team of 5 general partners and 5 additional investment professionals

• Investing in biopharma, medical devices, life science research tools, and

select life science opportunities outside of healthcare

• Particular strength in innovative life science technologies such as genomics,

RNAi, bioenergy, etc.

Oxford Bioscience Partners

Biotech has come of age after 2000

$ bi

llion

• Biologics are some of the industry’s biggest sellers

• Pharma is increasingly dependent on these drugs

• A spate marketed biologic

acquisitions:

– 2007: AZ - MedImmune

– 2008: Roche - Genentech

– 2008: BMS - ImClone

• Biotech is fundamental the pharmaceutical industry 2007 WW Revenue of selected biologics

approved in the last decade

Big Pharma is turning into Big BioPharma

The consolidation of all our biologics capabilities from AstraZeneca, Cambridge AntibodyTechnology (CAT) and MedImmune into one unit immediately creates one of the world’slargest biologics pipelines and establishes us as a leader in biotechnology among our pharmaceutical peers.” AstraZeneca Annual Report 2007

We were one of the first pharmaceutical companies to get involved in biotechnology in the 1980s through our relationship with Genentech. Biopharmaceuticals now account for 55% of our revenue Roche Annual Report 2007

…Wyeth [is] the world’s fourth largest biotechnology company by revenue Wyeth Annual Report 2007

Pfizer is committed to establishing itself as a leader in biotherapeutics…Pfizer Annual Report 2007

% Of Revenue At Risk from Patent Expirations 2007-2011

Tremendous pressure on Pharma cash flows

Despite the centrality of biotechnology to

the pharmaceutical industry, the broader

biotech community is struggling

Healthcare spendingexpected to reach $4.3Trillion by 2016!

Healthcare spending was $2.3 trillion in 2007

• Credit crunch and recession crimping markets

• Pharma somewhat sheltered, but biotechs caught in market retreat

• VC also affected, fundraising down 30%

• Rising health care costs suggest future pressures on industry

• Regulators running scared

Global Environment

Healthcare spendingexpected to reach $4.3Trillion by 2016!

Healthcare spending was $2.3 trillion in 2007

• Potential revenue growth in developing markets

• Growing need for biotech outside of healthcare

• Biologic technologies continue to mature

• Genomics moving out of basic research and toward medical practice

Global Environment – It’s Not All Bad

A Transition in the BioPharma Venture Capital Process

Focus on the exit environment

After the bubble:VC in the 2000s

• IPOs are rarer, require more maturity, and are poorly priced

• The rise of the buyside biotech specialist; not an active trader, risk sensitive

• Spitzer settlement (2002) has led to a big decline in sell-side analysis

The “good old days”:VC in the 1990s

• Most IPOs carried a nice premium

• Many non-specialist investors (including retail) providing higher prices and liquidity

• Sell-side analysts well compensated and effective

“We threw an IPO and nobody came”

Wall Street Journal 2002

How bad is it out there?

Number of Nasdaq Biotech IPOs 2001-2008

Birth of the $7 special

A modest number of IPOs mid-decade, now back in the deep-freeze

Capital Raised Prior to IPO vs IPO Pre-Money

Premiums Have Declined Since 2001

$mn

Post-IPO Performance: Current Price vs Offering Price

Few stocks have shown sustained value creation

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f S

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Acquisition and dismantling of specialist sell-side investment banksAlex Brown, H&Q, Robertson Stephens

Is the IPO Decline Temporary and Permanent?

Decline of retail interest in the sectorTrading volumes are meager

Rise of biopharma specialist investorsBiotech Value Fund, MPM Bioequities, etc.

Tightened regulatory environment has increased riskMore clinical ‘implosions’

Could change

Could change

Permanent

Permanent

So what is a VC to do?

“No Exit”

“The Myth of Sisyphus”

“Waiting for Godot”

An Existentialist Market?

“As You Like It”

“Much Ado About Nothing”

“All’s Well That Ends Well”

Or Shakespeare?

High Value M&A Deals Becoming A Favored Route For Exit

M&A deal rate seems fairly stable through current market crisis

Capital Raised Prior to M&A vs M&A Value

Pharma Innovation Trends Suggest M&A Will Continue

% Sales From Internally Discovered DrugsTop 10 Pharmaceutical Companies in 2006

“Closed Loop” Innovation Area

Late Stage Licensing and Mega Merger Area “Open Loop”

Innovation Area

Source: Defined Health

Big Pharma Internalizing Biotech

Pfizer is organizing their new Biotherapeutics and Bioinnovation Center around biotech acquisitions:

BBC is run out of Rinat in SSFCovX operates as a separate facility in SDColey talent running Cambridge RTC facility

“We will preserve the unique cultures of these biotherapeutic organizations … [and] get out of their way.” -- Corey Goodman

GSK CEDDs Structure: Sirtris acquisition feeds a growing Cambridge-based metabolic group

“The CEDDS create the spirit of a small R&D-led team within a very large pharmaceutical organization and allow us to be more nimble, and therefore more productive, in our approach.” GSK Annual Report 2007

Planning an M&A is hard to do

What’s A Venture Capitalist To Do?

• Fund Companies Attractive to Acquirers– Large market focus

– Biologics > Small Molecules

– “Big Pharma” programs, not “Wall Street” programs

– Compelling mechanism of action: HSP90, DPP4, -catenin

– Proprietary Innovation• North America and Europe remain the center of pharma innovation

• Capital Efficiency– Exit values rarely >$500 million; less investment means more ROI

– Outsourcing to save costs: China, India

• Biologics Platform Companies– Propriety technology with unique/scarce capability

– Compelling commercial opportunity enables by the technology

– Compelling team that will transfer the technology

• Moving Genomics from Basic Research to Medical Science

Sirna Therapeutics Case Study

Proprietary biologics platform – RNA InterferenceRNAi opens up new targets to drug development

Commercially compelling programs – HCV, diabetesUnpartnered programs were pre-clinical

Strong team to transfer technologyBackground in antisense, ribozymes and translational medicine

Sirna Illustrated the ‘three-legged stool’ model for successful platform investing

Launched in spring ’03First partnership late ‘05

Acquired for $1.1 billion in late ‘06

The Plummeting Cost of Genetic Info

Genomic Medical Record

The cost of one base of DNA, in dollars, by year

Creates new business opportunities Mol diagnostics, risk assessment, non-healthcare applications

Requires a new generation of tools Sequencing, gene expression, instruments for non-specialists

As costs continue to decline, genomic information will become increasingly important to medical practice. Eventually everyone will have their genome sequenced.

Where is Genomics Going?

The $1000 Genome (or less!)Third-gen sequencers

The Genomic Medical RecordThe most fundamental information

Treating the GenomeDrugs that directly edit the genomic program to cure diseased cells

Genomic Engineering and Meta-Genomics• Designer microbes• Environmental applications

Challenging Areas for VCs

Whenever a small company bears the risk of late-stage clinical success, the numbers will be against them

Taking clinical programs through phase III data exposes VC investors to the full integrated risk of drug development

• Whenever a small company bears the risk of late-stage clinical success, the numbers will be against them– Risk-share deals that generate a strong IPO story often set a

company up for a devastating clinical failure

– Later stage clinical development forces a company is ever larger and more dilutive rounds of financing

• In-licensing, re-purposing, NRDO models, etc.– Seldom are these programs sought for acquisition,

– The clinical track record is poor relative the promise of “de-risked programs” that this model assumes

• Pharma-specific research tools, software, etc– Pharma wants these tools but won’t pay for them

Challenging Areas for VCs

Life Science Venture Capital in Turbulent Times

Douglas Fambrough, Ph.D.Oxford Bioscience Partners

Swedish-American Life Sciences SummitStockholm, Sweden

August 21, 2008