The Inevitability of M&A - Biotechnology Industry Dynamics and Implications for Growth

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“The Inevitability of M&A”



Biotechnology Industry Dynamics and Implications for Growth

November 12, 2004

Washington, DC

Copyright
©

2004

2

Kaufman & Company, LLC

Life Science Investment Banking

Kaufman & Company is an established Boston
-
based investment bank,
serving numerous clients across a range of industries.


Founded in 1978, Kaufman & Company is a private investment banking firm
providing a variety of corporate financial services.


Life science activities include biotechnology, medical device and specialty
pharmaceutical companies along with companies engaged in ancillary activities.


Client base distributed throughout the United States and extends to Canada
and Europe.


Senior banker attention brought to private company financings and advisory
situations


and intimately involved throughout all engagement phases.

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©

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Industry Perspectives

Evolution of Drug Discovery (Intended)

Faith based

Evidence based

Rules based

Traditional Pharmaceuticals

Early Biotechnology

Emerging Discovery Technologies

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Industry Perspectives

Evolution of Drug Discovery (Reality)

Faith based

Evidence based

Rules based

Traditional Pharmaceuticals

Early Biotechnology

Emerging Discovery Technologies

?

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5

0
10
20
30
40
50
60
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
New medicines/vaccines approved

Pharma industry R&D expenditures ($B)

22

28

53

39

30

35

33

32

26

35

R&D Productivity

Pharmaceutical Industry (1994


2003)

Source: PHRMA

Note: Annual R&D expenditures adjusted to reflect 2003 equivalence.

New Drug Approvals

Industry R&D spending

The “innovation gap” continues to plague the pharmaceutical industry.

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Recognition of declining productivity and impending patent expirations.


Trend toward reallocation of resources towards more downstream
activities.


Leverage discovery activities through interactions with the biotech
sector.


Emergence of new discovery technologies combine with promise of
new genomics frontier.

Pharmaceutical Industry Perspectives

Historical Trends


Alliances afford big pharma a more conservative deal structure.

The pharmaceutical industry moved aggressively to formalize
relationships with the biotech sector in the 1990’s.

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Pharmaceutical Industry Perspectives

Partnership vs. M&A Activity (WW)

0.0
150.0
300.0
450.0
600.0
1998
1999
2000
2001
2002
2003
Alliances

Mergers/Acquisitions

Number of transactions

224

243

229

292

373

341

425

334

411

374

384

568

Source: BioWorld, Thompson Financial, BioCentury, PWC

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Productivity in the pharmaceutical industry continues to worsen.


Royalty stacking negatively impacts already reduced profit margins.


Promise of the genomics revolution unfulfilled.


Clinical validation (Phase IIa/IIb) required to attract the interest of
the big pharmaceutical companies.

More recently, the pharmaceutical industry has redirected its
attention towards late
-
stage product opportunities.

Pharmaceutical Industry Perspectives

Current M&A Drivers

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Life Science Sector Review

Segmentation of M&A Activity

Acquiror

Transaction

drivers

Representative deals


Big Pharma


Late
-
stage product
candidates


Scios/JNJ


Esperion/Pfizer


Aton/Merck


Big Biotech


Commercial
competitiveness


Pipeline breadth


Augment capabilities


Immunex/Amgen


Biogen/IDEC


ILEX/Genzyme


Emerging Biotech


Visibility & viability


Transition strategy


Access to cash


Variagenics/Hyseq


GenVec/Diacrin


Access Oncology/Keryx

Distinct and discrete motivations segregate acquisition activity
in the biotechnology industry.

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Life Sciences Sector Review

Capital Market Dynamics


Influence of public market activity.


Venture capital perspectives.


Changing dynamics of the securities industry.

M&A activity in the emerging technology domain is largely driven
by the mandates of the capital markets.

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Life Science Sector Review

Capital Market Influences

Current trends in the capital markets suggests the characteristics
defining viability as an independent company are undergoing
significant change.


Larger market cap likely required to retain viability as a public
company.


Hurdle to access public markets to continue to trend up.


Earlier venture financings likely to trend toward more mature
companies.

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Number of issues


% life science
issues


13.1%


5.1%


4.7%


19.9%


12.5%


9.7%


8.8%

All Industries

Life Science

Life Science Sector Review

Annual IPO Activity: 1997


2004 YTD

199

178

295

287

72

72

80

26

9

14

57

9

7

7

154

34


22.1%

Source: Hoover’s IPO Central, Kaufman & Co

0

100

200

300

400

1997

1998

1999

2000

2001

2002

2003

2004

YTD

Recent public market activity in the life science sector has been robust.

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Life Science Sector Review

Quarterly IPO Activity: 2001


2004 YTD

0

10

20

30

40

50

Number of issues

18

19

11

24

13

30

6

23

5

6

20

49

3

0

2

4

1

5

1

0

0

0

0

7

2002

2003

2001

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Source: Hoover’s IPO Central

36

8

Q1

2004

All Industries

Life Science

55

17

63

9

Q2

Q3

Until the recent public market turn, private life science companies went
begging in the public markets.

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Life Science Sector Review

Securities Industry


Evolving Dynamics

RESEARCH

SALES & TRADING


Research activities separated from banking
activities.


-
disaggregated on P&L

-
compliance “chaperone” needed for joint client
meetings

-
Increasingly viewed as a cost center


Sales and trading desks managed to “profit
neutral”.


-
decreased spreads due to decimalization

-
trading desks required to take larger positions

-
potential for increased volatility

INVESTMENT BANKING


Increased dependence on investment banking fees
.



Economics uncertain for companies < $300 million market cap.

A larger market cap is required to make a comprehensive banking
relationship sustainable.

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©

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Life Science Sector Review

2004 BioPharma IPO Candidates: S
-
1 Filings

Proposed offering size ($mm)

Source: Company SEC filings

$75

$86

$90

$86

$86

$85

$100

$86

$80

$103

$86

$86

$75

$86

$86

$86

Eyetech

GTx

Renovis

Corgentech

Dynavax

Anadys

Memory

Corcept

Barrier

Cytokinetics

Critical

Alnylam

Inhibitex

Metabasis

Indenix

Auxilium

$115

$70

$86

$86

$86

$58

$86

$86

$0.0

$25.0

$50.0

$75.0

$100.0

$125.0

$86 mm avg

Xcyte

Tercica

Santarus

Acadia

Momenta

MannKind

New River

CoTherix

This consideration is evident in S
-
1 filings, where expected offering
size infers a market cap post
-
IPO of > $300 mm.

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Life Science Sector Review

2004 BioPharma IPO Activity

IPO market cap ($mm)


Shares offered/
shares outstanding


17%


12%

0
100
200
300
400
500
Eyetech
Idenix
Mannkind
Corgentech
GTx
Cytokinetics
Barrier
Renovis
Corcept
Santarus
Tercica
Dynavax
Critical
Momenta
Auxilium
Anadys
New River
Memory
Metabasis
Inhibitex
Acadia
Xcyte
Alnylam
CoTherix
$809

$669

$454

$271

$284

$348

$357

$418

$327

$255

$212

$178

$167

$160

$155

$150

$142

$136

$125

$123

$118

$118

$116

$116


19%


23%


22%


22%


23%


23%


22%


21%


23%


25%


25%


22%


27%


29%


24%


26%


28%


29%


30%


28%


26%


26%

$

HAVE’s

HAVE NOT’s

Source: Company SEC filings

The actual post
-
IPO market caps are much more varied.

$300 million market cap

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Life Science Sector Review

Public vs. Private Financings (1997


2004 YTD)

dollars raised ($mm)

IPO financings

VC financings


IPO dollars



Venture dollars


$688



$569


$369



$800


$670



$1,084


$6,490



$2,872

$0.0

$2,000.0

$4,000.0

$6,000.0

$8,000.0

1997

1998

1999

2000

2001

2002

2003


$440



$2,397


$440



$2.688


$453



$2,700

Source: NVCA, Burrill & Co, Kaufman & Co.

The private equity overhang makes the sustainability of traditional
financing models increasingly uncertain.

2004 YTD


$1,891



$4,000

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Life Science Sector Review

Capital Market Implications for M&A Activity

M&A activities will take on an increasingly important role as early
-
stage companies adapt to trends in the capital markets.


Increased activity among public companies to gain increased
critical mass and public market relevance.


Platform
-
centric companies using M&A as a transitional strategy
towards product
-
oriented business model.


Venture
-
backed companies using M&A as primary exit strategy
for current portfolio companies.

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©

2004

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Life Science Sector Review

M&A Activity


Concluding Thoughts


Highly advisable to integrate M&A considerations
proactively into corporate strategy.




Guard against the “ostrich phenomena” strategy of
avoidance.




Take an agnostic position as to which side of a
transaction (buy/sell) is preferred.

Copyright
©

2004

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“The Inevitability of M&A”



Biotechnology Industry Dynamics and Implications for Growth

November 12, 2004

Washington, DC

Biotech Management Institute

Third Annual Meeting on Financing

Benjamin J. Conway

(978) 526
-
4014

bconway@kcollc.com