Bob12 v5 Final 4 30march2014

Constance McKee Yale MBA 1986 President & CEO, Manzanita Pharmaceuticals, Inc.
Business of Biotechnology 12
Yale Healthcare & Life Sciences Club 31 March 2014 1-3 April 2014
Constance McKee Business of Biotech 12
The Business of Biotech 12

A Non-Credit Seminar for Yale & the Biohaven Community
Week of 31 March, 1 3 April 2014 Yale School of Medicine (Room HOPE 216) 315 Cedar Street, New Haven
Constance McKee
Yale School of Management, MBA 1986 Manzanita Pharmaceuticals, Inc. www.manzanitapharmaceuticals.com Force Care Foundation www.forcecarefoundation.org i2 Grants Associates www.i2grantsassociates.com 2995 Woodside Road Suite 400, PMB 380 Woodside, CA 94062 constance@manzanitapharmaceuticals.com m 408.348.3191
April 2014
Introduction
Course approach part quantitative concepts, part case studies
First hour - basic concepts in start-ups Modular OK if you cant attend all week Second hour micro case studies from entrepreneurs, investors & industry Speakers talk about making decisions and how it *really* turned out Whats the opportunity? Whats the opportunity worth? How do we founders & investors make money? In the current environment, where *is* the money? Business concepts apply to devices, tools & diagnostics companies But decision-making process similar for devices & tools
Key questions

Emphasis on biopharmaceuticals

Appendix 1 on social entrepreneurship
April 2014
Course Outline & Speakers

Case Studies in Decision Making
Case studies in life sciences deal-making (Monday, 31 March 2014) Rob Bettigole, Yale MPPM, founder & Managing Partner, Elm Street Ventures (New Haven) Jane Wasman JD, President, International & General Counsel, Acorda, Inc. (New York) Case studies in life sciences product development (Tuesday, 1 April 2014) Vincent Pieribone, PhD, President, Affinimark Technologies, Inc. (New Haven) Alan Carr PhD, equity analyst Needham & Co (New York) Case study in life sciences decision-making (Wednesday, 2 April 2014) Erika Smith, Deputy Director, Yale Entrepreneurial Institute Mark Leuchtenberger, Yale MBA, President & CEO, Acusphere, Inc. Networking at Archie Moores following the class Evolving corporate and social bio-innovators (Thursday, 3 April 2014) (via Skype) Alan C. Hu, founder, QuantumLeap Healthcare Collaborative Eric T. Olson, Global Disease Leader, MPS I & Niemann-Pick, Sanofi-Genzyme (Cambridge)
April 2014
Monday
Modeling BioValue: Cost-Revenue-Risk-Time
Whats a venture-fundable deal? What is Return on Investment (ROI)? Cashflow models: what they are, where they come from Risk (probabilities of success) Time What is a business plan? (a plan, not reality) What is a business model? Decision trees: combining cost, revenue & risk
April 2014
Return on Investment
Solving for x: values for investment capital, timelines, and exit
Exit or liquidity (or valuation)
How much capital does it take until you generate enough cash?
Product milestones
X=
How long before you get your money back?

April 2014
Product milestones
ROI Examples: Key Quantitative Elements

Applies Equally to Pharma, Venture Capital/Wall Street & Angels Formula: cash invested time risk expected ROI
ROI 31% 1 -1 2 0 3 0 4 0 Exit 50% 1 -1 2 0 3 0 4 0 5 5 6 7 5 Exit 1 19% 2 3 -25 4 0 5 0 6 0 Exit 1 59% 2 3 4 -25 5 0 6 0 7 100 4 7 50 2 5 0 6 0 Exit 7 5 Multiple 5
April 2014
How ROI Drives Financial Investors Decisions Why and How Capital Risk Dominates Clinical Risk
Pharma Example Applies to MedTech & Diagnostics At What Point in Development is There Proof of Clinical Value?
Clinical proof Discovery Preclinical Phase 1 ROI-1 ROI-2 -5% $ 15% $ (50) $ (50) $ ROI-3 ROI-4 (5) $ (5) $ Phase 2 Phase 3 FDA Revenue approval (50) $ (15) $ 150 (50) $ (15) $ 300 (50) $ (50) $ (15) $ (15) $ 150 300
(10) $ (10) $ 12% $ 49% $
(50) $ (50) $ (50) $ (50) $
April 2014
Key Quantitative Inputs to your ROI Model:

Should We Invest? or Should I Take A Job There? Costs (its all risk until its real)
Development costs (variable) Development & other costs (fixed) Time (how long it takes you to develop your product until it starts to sell, and product revenues keep you going cashflow positive) Capital (how much of the company do you have to sell to attract investors or non-equity diluting capital Risks: science, team: whats the chance you can translate data into product? Risks: macro competitive forces
Ca$hflow (upside or reward)

Revenues ($ per unit x number of units sold aka turnover ex-US) Less, cost of the specific materials needed to produce that product (gross margin) Less, cost of everything else (net margin) = Net cashflow Estimates of how much you will continue to sell (future earnings)
April 2014
Modeling ROI for Pharma

Cost time expected revenues benchmark ROI
Stage of Development Discovery Preclinical - file IND Phase 1/2 Phase 3 FDA approval - launch Total cost to develop Revenues - 1 Revenues - 2 Revenues - 3 Cost * Risk Y1 Y2 Y3 Y4 Y5 Y6 ($250) ($250) ($25) ($25) ($50) ($50) ($75) ($75) ($100) ($100) ($500) 0% $ 500 ROI $ 35 $ 1,600 ROI 20% $ 100 $ 2,250 ROI 26% $ 100 Y7 Y8 Y9 Y10
$ 50 $ 200 $ 200
$ 75 $ 250 $ 350
$ 150 $ 450 $ 600
$ 190 $ 600 $ 1,000
April 2014
www.clinicaltrials.gov - data source for most pharma modelling Number of patients x number of sites x length of study Number varies usually determined by statistical significance See also clinical literature published reports of clinical studies Clinical endpoints = time/length of clinical trials = cost: do you know right away (treating pain), or does it take time? Examples (1) cancer trials to survival (Progression Free Survival = PFS) or (2) how long does it takes to observe whether an Alzheimers drug reduces the rate at which dementia advances ?
Modeling ROI for MedTech/Devices

1/10th the capital, shortened time to clinical proof but lower upside
Stage of Development Prototype Preclinical - file IND Phase 1/2 FDA approval - launch Total cost to develop Revenues - 1 Revenues - 2 Revenues - 3 Cost * Risk ($2) ($3) ($5) ($15) ($25) 0% $ 25 ROI $ 75 ROI 26% $ 180 ROI 55% Y1 ($2) Y2 ($3) ($5) ($15) $ 2 $ 3 $ 10 $ 5 $ 5 $ 15 $ 5 $ 12 $ 30 $ 5 $ 20 $ 50 $ $ $ 8 35 75 Y3 Y4 Y5 Y6 Y7 Y8 Y9
www.medicaldevicestoday.com , www.sec.gov , www.fiercemedicaldevices.com Number of patients x number of sites x length of study Number varies usually determined by statistical significance See also clinical literature published reports of clinical studies
April 2014
10
Adding Risk to the Pharma (Investment) Model

Pharmaceutical industry probabilities of success at each stage of development ~ relatively constant over last 30 years Certain drugs classes eg anti-cancer, neurology drugs have even longer timelines, lower probabilities of success But only15% of all approved drugs are blockbuster ($1BN revenues) Means: .01% (1/10,000) chance of reaching $1BN after discovery completed
April 2014
Sources: (1) ~125 $1BN drugs (LEK data); (2) 850 total approved 2000-2011) (Fierce PPMFA report data) 15%
11
Clinical Development 7.5 Years - $750 Million

Gene HIT Library Medicinal Chemistry Rationale Drug Design Compound identification
Research $500M
Clinical Trials $250M
Lead Candidate Cell-based assays In vitro - primary culture In vivo - non-mammalian In vivo - knockout In vivo - clinically predictive In vivo - not clinically predictive
April 2014 12
Only 30% of new drug launches are successful
April 2014
http://www.mckinsey.com/insights/health_systems_and_services/the_secret_of_successful_drug_launches? 13
What risks, over what period of time?

What kind of risks do your investors understand?
Financial risk
Regulatory risk
Science risk
Clinical risk
Lead Candidate Cell-based assays In vitro - primary culture In vivo - non-mammalian In vivo - knockout In vivo - clinically predictive? IND application
April 2014 14
Market risk
What is a Business Plan? = ROI + Risk Estimates capital required, timelines to development and cashflow positive and explains why the team can manage expected risks
Many elements shared in for- and nonprofit plans Proxy for future value
Estimates for market size & market opportunity Estimates risk (amount of $ to product vs amount of potential revenue) Patents How much can you expect to sell vs competitors products?
Proxy for reality

Has team done *it* before? (developed this kind of product) Have other companies tried to address this problem before? Did they fail? Have other investors made money in this sector? With this business model? What are the comparables (value of deals done in this sector)? What are the comparable exits (value of deals in this sector that were acquired by other companies, or went public)
15
April 2014
What is a Business Model? Businesses with Similar ROI, Similar Risks

Describes the costs, time-to-product (including capital requirements), and revenue expectations (royalties? Products? Milestone payments?) Trade-offs between make-it-yourself and license-it-out models Venture capital now only rarely funding drug development Pharma shrinking internal drug development functions
Years to Develop 2-3 2-3 2-3 2-3 3-5 3-5 2-3 0 2-3 0 Cost to Develop $ 20 $ 20 $ 15 $ 15 $ $ $ $ $ $ $ 500 500 20 20 20 40 Number of Customers 50 50 50 1 - 100M 1 - 500M 1- 500M 1- 200,000 1 - 100M 1 - 100M 1 - 100M Cash or Years to Royalties? $$ Royalties 10 Royalties 7 Royalties 7 Cash 5 Cash Cash Cash Cash Cash Cash 7 7 3 3 3 1 Market Potential 3 yrs to HITS; +7 yrs to drug 3 yrs to IND; + 5 yrs to drug 3 yrs to IND; +5 yrs to drug 3 yrs to IND; + 2 yrs to drug $ 1 BN+ revenue potential $50M - $500M revenue potential Acceleate IND - FDA approval Years for new clinical trials Years for new clinical trials
Type of Business Model Drug Disovery - Genomics Tools cf HuMAb mouse Drug delivery technology Reformulate generics Develop NMEs * Blockbuster * Average new drug * Orphan Drug License in * New indication, old drug * Complete clinical trials * Already approved drug
April 2014
16
Unmet clinical need: pharma revenue model

Number of Patients X Cost of Under-treatment
Example: 25 million Americans with chronic pain No drug of choice many classes of Rx prescribed, but only 30% effective Direct cost - $1,000 per patient per year Rx relatively inexpensive, but patients keep going back to the doctor: means the unmet clinical need is matching drug therapy to patient US Army - $340 BN total cost of treating pain in returning veterans from Operation Enduring Freedom, Operating Iraqi Freedom
Chronic pain Number of patients % drugs effective Number untreated Cost of treatment Cost of unmet need UNMET CLINICAL NEED ECONOMIC BURDEN
April 2014
Number 25 30% 18 $ 1,000 $ 500 $ $ 18,000 9,000
Unit or Description million NSAIDs, tricyclics, gabapentin million Per year, Rx plus cost of office visits Per year, indirect costs (loss of work) In US$ billions - direct costs (one year) In US$ billions - indirect costs (one year)
17
Quantitative Model: Revenue - what is a market?

Can describe both place & total value sold
Place = pharmacy, stock exchange, flea market, souk, eBay Total value = number of units sold X price per unit Drug market = number of scrip written X price paid by patient Example: Exubera (inhaled insulin developed by Nektar, marketed by Pfizer) TRx = total prescriptions; NRx = new prescriptions written Exubera sold $14 million after it was launched Merck sells Januvia for $4.86 per tablet (100 mg 1X 7 days) x (22,475+48,685) = $2 million per week, $125 million per year just weeks after launch Pfizer pulled Exubera from the market in October 2007 Depends on who can afford Rx, who actually takes their meds Doesnt quantify potential Rx with better effectiveness that addresses unmet need
Exubera NRxs 5/11/2007 5/18/2007
April 2014
Exubera TRxs 1,179 1,307 1,659 1,816
Januvia NRxs 22,475 28,416
Januvia TRxs 48,685 56,243

18
http://seekingalpha.com/article/50788-pfizer-four-lessons-from-the-exubera-failure
Royalties Percentage of Cash from Products Sold

Wait years until product developed & finally sold Industry standard 2% of net revenues of Rx Royalties increase as drug price increases, number of patients increases
90% Percent of Revenue $ (10) 10% Science - cost of R&D $ (2) 2% Management Offices, plant & equip $ (3) 3% Cost to operate, not build Sales, General & Admin $ (40) 40% How concentrated? NET REVENUES $ 35 35% (earnings before income taxes) NET EARNINGS $ 35 35% (who pays income taxes?) EARNINGS PER SHARE = EPS = Net earnings / number of all shares outstanding
April 2014 19
Revenue Cost-of-Goods Gross revenue Gross margin Salaries
Income/Expense $ 100 $ (10) $ 90
% Revenue
Notes Units x price Raw materials
Decision tree analysis for portfolios:

Discover in-house or license in?
Prob % Revenues 10% $ 40% 50% Rev in $ Millions Product #1 500 $ 50 100 250 50 100
Product #1 - Costs Research Preclinicals Phase 1 Phase 2 Phase 3/4 File IND - FDA Approval Market Launch
(500) (10) (25) (50) (50) (10) (55) (700)
Less, costs to develop Decision tree analysis - do not develop Scenario - license in from university Product #2 - Costs Research Preclinicals Phase 1 Phase 2 Phase 3/4 File IND - FDA Approval Market Launch Prob % Revenues $ $ $ $ $ $ $ (10) (25) (50) (50) (10) (55) (200) 10% $ 40% 50% Rev in $ Millions 500 250 100
$ $ $
200 (700) (500)
Product #2 $ 50 100 50
Less, costs to develop Decision tree analysis - need > $200M revenues
$ $ $
200 (200) -
April 2014
20
Adding Risk to the Cost-Revenue Model

Stage of Development Discovery Preclinical - file IND Phase 1 Phase 2 Phase 3 NDA - FDA approval Total cost to develop Cost * $ (50) ($5) ($10) ($20) ($50) ($15) $ (150)
* = capital needed to develop
Probability of Success 0.01% 0.4% 50% 50% 40% 50%
Y1
Y2
Y3
Y4
Y5
Y6
Y7
Y8
Y9 Y10
-10 -10 -10 -10 -10 -5 -10 -20 -50 -15
April 2014
21
Reducing Risks In the Model

Probability of Y1 Highest Y2 Y3 risk Y4 Y5 Success
Y6
Y7
Y8
Y9 Y10
greatest cost
-10 -10
0.01% 0.4% 50% 50% 40% 50%
-10 -10
-10 -5 -10 -20 -50
Least risk least cost -15
April 2014
22
Why Do Venture Investors Demand High Upside?

Solve for X to Compensate for 90% Failure Rate (which btw is pharma ~ industry success rate > IND)
Model VC Portfolio: Swinging for the Fences (10% success rate) Yr3 Yr4 Yr1 Yr2 (10) (10) $ (20) $ Investment #1 $ (40) $ (20) Investment #2 (20) (15) (30) (10) Investment #3 (70) (10) (10) Investment #4 (25) (5) (20) Investment #5 (20) (30) Investment #6 (30) (15) (30) (15) Investment #7 (25) Investment #8 (25) (20) Investment #9 (20) (10) (10) Investment #10 (20) (125) $ (80) (20) $ (60) $ Net Capital $ (300) $ Average per deal $ (30) (80) (60) $ (125) $ Net Cashflows $ (20) $ ROI breakeven 1% (60) $ (125) $ (80) ROI VC benchmark 20% $ (20) $ (In US$ millions) Yr5 Yr6 Yr7
(15)
$ $ $
(15) $ (15) $ (15) $
$ $ $
315 625
April 2014
23
Medtech slowdown #1 (February 2014)

Life sciences venture capital funding lagged behind other industries, declining 10% in 4Q13 and 1% in 2013 over last year
http://www.pwc.com/us/en/health-industries/publications/life-sciences-money-tree.jhtml
April 2014 24
Medtech slowdown #2 (February 2014)

Life sciences venture capital funding lagged behind other industries, declining 10% in 4Q13 and 1% in 2013 over last year
April 2014
http://www.pwc.com/us/en/health-industries/publications/life-sciences-money-tree.jhtml
25
[Healthcare Funding] VC slowdown (March 2014)
April 2014
http://www.nutter.com/files/Uploads/Documents/HealthcareVenture_StateoftheIndustryUpdate_JonNorris.pdf
26
Why is Life Sciences Venture Capital largely inactive and shrinking?
April 2014
Source: RESI Conferences Aug 2013
27
Voila! the Translational Funding Gap *

Why you need a fundraising strategy that includes non-equity diluting capital Why Venture Capital chases the Genzyme model Why big pharma partners with universities
April 2014
* Please do not use the term Valley of Death. (November 1969)
28
Question: Competition for Capital
If a venture capital investor can invest $5M in a later-stage company with no clinical risk, why would s/he invest $5M in an earlystage company with no evidence that the drug/technology will work?
April 2014
29
Tuesday
Macro & Micro Forces: Global Pharma & Global Capital
Global growth in pharma Which countries are investing in pharmas future? Generics & biosimilars Competition for capital affects big pharma & BioHaven start-ups Scale of capital: the case for successful early-stage investing
April 2014
30
The most exciting phrase to hear in science, the one that heralds new discoveries, is not Eureka but That's funny Isaac Asimov (19201992)
April 2014
31
Global competitive forces

April 2014
Revenues: down as patients stop taking Rx in economic downturn Revenues: US revenues flatlined in 2009 growth is ex-US Generics: 84% of Rx in America are generics new Rx must show significant clinical benefit (no more me-too products) Generics: biosimilars legislation now enacted (2010) awaiting regulations R&D costs: Chinas & Indias investment in education paying off now as they attract pharmas drug discovery & clinical trials (future) Competition: regenerative medicine competing directly against small molecule approach (example: AMD Pfizer) Funding: collapse of historical funding mechanisms for innovation Funding: rise of philanthropic organizations to fund innovation Pricing: healthcare reform in U.S. should increase competition Regulatory: FDA is now addressing & rebalancing risk:benefit ratios
32
Innovation is no longer the sole driver of value in the pharmaceutical industry
April 2014
http://www.mckinsey.com/insights/health_systems_and_services/a_wake-up_call_for_big_pharma 33
Growth in WW Pharmaceutical Markets Lies Outside the US & EU

(Revenue & Year-on-Year Growth - 2008/2009; GSK/IMS Health Data 2011)
US: $300BN - 1% 60% generics
EU 3%
China 15% $24BN
India1 : $21BN - 20% $11BN generics 17% Brazil ~ 17%
April 2014
http://www.ibef.org/artdispview.aspx?art_id=27443&cat_id=116&in=52 India Brand Equity Foundation, Dec 2010; GSK Annual Report 2011 34
GSK: Positioning Assets for Global Growth (or not) Events
USA
Europe
Emerging Markets
April 2014
35
GSK 2013 Portfolio
April 2014
36
Excerpts from GSK 2013 Pipeline
April 2014
37
Global funding for life sciences China, India, Brazil & South Africa: mostly non-VC $$
China, India, Brazil & South Africa: 20002012 VC investments in LS about $1.6BM (weighted heavily in China and India). Compare to US VC $1.1BN in Q3 2011 China, India, Brazil, South Africa - big Pharma companies, local drugmakers and governments invest ~ $14BM into R&D ($100M-$150M from VC). China gets less than 2% of its biopharma R&D from VC groups (compare to 10% = WW average VC share of national R&D spending)
April 2014
38
Industry patent cliff in 2012: $67BN

As Viehbacher aptly put it during Sanofis fourth quarter call on Feb. 8: 2012, Ive said on numerous occasions, is a year that Ive had circled in red in my diary for three years. (In Vivo Blog, 10 February 2012)
Brand name Actos Advair/Seretide Aprovel Company Eli Lilly / Takeda GlaxoSmithKline Sanofi-Aventis / Bristol-Myers Squibb Pfizer / Eisai GlaxoSmithKline Merck AstraZeneca Novartis Johnson & Johnson Forest Laboratories/ H. Lundbeck Pfizer Sanofi-Aventis / Bristol-Myers Squibb AstraZeneca Merck AstraZeneca Sanofi-Aventis Pfizer Novartis Eli Lilly Generic name Pioglitazone Fluticasone, propionate+salm eterol Irbesartan Uses Type 2 diabetes Asthm a Hypertension (high blood pressure) Alzheim ers Type 2 diabetes Hypertension (high blood pressure) Cholesterol Hypertension (high blood pressure) Antibiotic Antidepressant Estimated patent expiration 2011 2010 2011 Received FDA approval 1999 1998/1999 1998 G lobal sales, 3Q 2007 (in m illions of dollars) $180 $1,721 $392
Aricept Avandia Cozaar Crestor Diovan/CoDiovan Levaquin Lexapro
Donepezil HCI Rosiglitazone Losartan Rosuvastatin Valsartan+ hydrochlorothiazide Levofloxacin Escitalopram
2010 2012 2010 2012 2012 2010 2012
1996 1999 1995 2003 1996 1996 2002
$100 $463 $814 $691 $1,267 $366 $559
Lipitor Plavix
Atorvastatin Clopidogrel
Cholesterol Anticoagulant
2011* 2011
1996 1998
$3,170 $1,250
Seroquel Singulair Symbicort Taxotere Xalatan Zometa
Quetiapine Montelukast Budesonide+formoterol Docetaxel Latanaprost Zoledronic acid Olanzapine
Antipsychotic Asthm a Asthm a Cancer G laucom a Cancer Antipsychotic
2011 2012 2012 2010 2011 2012 2011
1997 1998 2000 1995 1995 2001 1996
$1,055 $1,018 $371 $694 $402 $318 $1,166
April 2014
Zyprexa
39
*Li it
ti
i 2010
t 2011
Constance ConstanceMcKee McKee Business Business of of Biotech Biotech 12 11
84% of Rx in US Are Generic As of 2013 What Does That Mean for Industry Dynamics?
WW Generics US$225BN (2011) Emerging Market Growth ~ 15.1% US Generics $73BN (2011)
April 2014
http://www.nytimes.com/2013/10/06/sunday-review/why-the-bad-rap-on-generic-drugs.html?_r=0 http://www.uspharmacist.com/content/s/253/c/41309/ 40
While Congress Is Fighting Over Healthcare Reform in America..

In April 2009, the Chinese government committed US$124 billion to develop the countrys healthcare system. The plan is to create a solid platform for universal healthcare access for all by 2020. There are two phases for this plan; Phase 1 from 2009 to 2011 and Phase 2 from 2011 to 2020. Revenues of RMB599.1 billion ($91BN) in 2007, of which exports were $64 BN. China is expected to represent the worlds 3rd largest pharma market by 2013.
April 2014
http://www.chinaknowledge.com/Business/CBGdetails.aspx?subchap=3&content=12 41 USD 1: 6.6 CNY (Chinese Yuan Renmimbi) 31Jan11
About That US Federal Budget Deficit.

2009 Estimate March 2014 Estimate
Projected Ten-Year Deficits Have Shrunk by Nearly $5 Trillion Since 2010
April 2014
42
State & Federal Policy:

Q: Pork or good investment ? (A: If every public $1.00 generates $3.70 in economic impact)
http://blogs.umb.edu/vdc/2012/06/18/where-biotech-is-better-off-than-anywhere-else/
April 2014 43
New Haven is on the US Bio Start-up Map (March 2014)
April 2014
44 http://www.fiercebiotech.com/story/top-15-cities-biotech-venture-funding/2014-03-06
Explosive Growth in Biosimilars

$243 Mio (2010) - $3.7BN (2015)
Sources: Datamonitor 24Mar2011; GSK Annual Report 2011 www.gsk.com

April 2014 45
The Current Market for Oncology Drugs Biologics Are Priced Between $30,000 - $400,000/Year
The top 20 cancer therapy brands in 2009 accounted for around 75% of the total cancer therapy market ($30.4 billion). The sales of the top 20 cancer therapy brands are forecast to reach about $35.8 billion in 2019 but this will represent only 63% of the total cancer therapy market. The targeted therapies and immunotherapies class was the leading class of cancer therapies in 2009 with sales of $19.5 billion dollars in the seven major pharmaceutical markets. Over the period 2009-2019 the targeted therapies and immunotherapies class is forecast to grow at a CAGR of 6.6%. Roche dominated the cancer therapies market in 2009, with combined seven major market sales of $11.4 billion. Roche's targeted therapies and immunotherapies portfolio is forecast to perform well over the period 2010-2019 and Roche looks set to consolidate its leading position in the oncology market. Three Roche drugs -- Avastin, MabThera and Herceptin -- were the top-selling oncology drugs in the U.S. last year, generating $6.81 billion in revenue, according to IMS. Taxotere, sold by Paris-based Sanofi, was fourth, with $1.18 billion in sales, IMS said. Roche caps Avastin costs at $57,000 a year for patients who enroll in the companys subsidy program, said Kent Lieginger, a senior vice-president at the companys Genentech unit in South San Francisco, California.
Sources: Datamonitor, Sept 2010 Bloomberg, UnitedHealth Alters Pay Rules on Cancer Treatments, 20 Oct 2010 April 2014 46
981 Drugs & Vaccines in Development for Cancer

(includes 500 biologics) Understand your competitive landscape Only 50% trials complete due to failure to enroll patients
April 2014
www.PhRMA.org
2012 data includes overlapping trials
47
Scale of capital = scale of earnings for 20% ROI (2012 Revenues for Ipsen = $1.6BN, for Pfizer = $59BN) (Too big to succeed?)
April 2014
48
Scale of Capital/Risk: Early-Stage Pharma Is Feasible If (1) Capital is Leveraged & (2) Build for Sale (Phase 2)
Pharma ROI: 25.6%
$250M in 5 yrs > FDA approval sales reach $1B (cumulative $ 2.25B)
Early-stage Pharma ROI: 26.4%

$25M in 5 yrs > FDA approval sales reach $35M (assumes exit value $75M)
$1,000 $35 $30 $25 $20 $15 $10 $5 $$(5) $(10) $(15)
Y1 Y2 Y3 Y4 Y5 Y6 Y8 Y82 Y9
$800 $600 $400 $200 $$(200) $(400)
Y1
Y2
Y3
Y4
Y5
Y6
Y7
Y8
Y9
Y10
April 2014
49
Exubera: the $1BN valuation error
April 2014
50
Given current market conditions and current valuations, how likely is it that a venture valuation will be $625 million?
April 2014
51
Wednesday Pharma as a source of deal & equity capital Why valuations & investor terms make a difference How Wall Street affects you
Why and how pharma views innovative biomedical companies What are valuations, where do you find them, and who cares? How Wall Street sets valuations & how venture investors tie market capitalizations for publicly-traded companies to valuations for privately-traded companies (solve for x) Whats a term sheet for a venture investment?
April 2014
52
Constance McKee Business of Biotech 12 11
Deals: Trading Values & Assets
Big Pharma Products Strategic IP Spin Out Non-Core IP
Emerging Biotech Products
Strategic IP Spin Out Non-Core IP
Universities NIH Biomedical Foundations
April 2014
53
Pfizer Actively Manages Its Product Pipeline
April 2014
54
Why Biotech Seeks Alliances Access to Capital & Validation

Emerging trend: Medical Research Foundations as source of capital, validation & core technical skills
Discovery companies lack core competency in
Biological validation Clinical development
Biotech lacks core competency in

Clinical development CMC, GMP & manufacturing scale-up Navigating FDA approval
Venture investors place enormous value on industry deals

Validate technology Proxy for product value ~ proxy for financing valuation Capital that VCs dont put at risk themselves
55
April 2014
Pharma Depends on Biotech: Licensed Deals Contribution to Revenues (% as of 2007)
April 2014
56
Pharma As Source of Capital Biotech-Pharma Deals: Credibility, Cash & Expertise
April 2014
57
A Sellers Market for Phase 2 Pharmaceutical Assets in 2012: Median Upfront Cash for Major Market* Rights by Stage at Signing (in USM$)
2012 2007-2001 $50.0 $35.0 $35.7 $37.6 $20.0 $8.7 $8.4 $6.9 $3.2 $8.3
Lead & Preclinical n=8 n=56
$30.0 $25.0
Discovery 2012 n=11 2007-2011 n=77

April 2014
Phase 1 n=6 n=44
Phase 2 n=16 n=101
Phase 3 n=6 n=73
Marketed n=3 n=29
58 Source: Deloitte Recap LLC January 22, 2013; * = US, EU, Japan, India
Whos funding bio-innovation in America?....

Biotech venture finding that peaked at almost $6.2 billion in 2007 fell to $3.9 billion in 2011. (VentureSource)
Source of capital Institutional capital in life sciences - 2011 Venture capital all life science Corporate venture capital all life science Venture capital early-stage (incl. specialty pharma) Venture capital discovery (preclinical) only Non-equity diluting capital in life sciences - 2011 MRFs (ESTIMATE) NIH competing SBIRs only NCI competing SBIRs only (incl Bridge) NCI Bridge only (Phase III) USA MRMC small business (incl. 143 SBIR/STTR) Total grants capital only
April 2014
Number of ELSCs funded 785 551 37 19
Equity invested $7.5BN $2.3BN $ 665M $ 337M
Grants funding in 2011
?? 902 40 2 3,196
(1)
$ 12.2M
$ 200M $ 311M $ 115M $ 4M $ 484M $ 914M

59
Competitive Field of Capital for- and non-profit players

Low - Financial motivation - High
Venture capital Hedge funds Angel Investors
Corporate investors
NIH/NCI US MRMC
States
Medical Research Foundations
Patients & Families
Low - Strategic motivation high

April 2014 60
Medtech slowdown #3 (March 2014)

Start-ups have to share the $717M with venture-funded companies
$717M for NIH
April 2014
61
Venture & Industry Valuations

Where they come from, why they matter, and when they are not relevant
How Wall Street affects your venture valuation Where venture valuations come from Why nonprofit biotechs (hint: ROI is negative.) ?
April 2014
62
Private Company Valuations Determined by (1) Value of Latest Round of Financing & (2) Market Conditions
If 25% is worth $1 million Then 100% is worth $4 million ($1 divided by 25% = 4)
25% valued at $1 million
Current
April 2014
New Financing
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Market Not Progress on Milestones Drives Pre-Money Valuations

Model sensitive to time to exit (acquisition, IPO, product launch) Model sensitive to cash required for each milestone Pre-money valuation is whatever investors believe & insist on Pre-money valuation + funds in = post-money valuation Next investors want a step up (your technology is now worth more)
Low Valuation Scenario A Pre $ 0.3 A New $ $ 0.5 A Post $ 0.8 Step-up X B Pre $ B New $ $ B Post $ Step-up X C Pre C New $ C Post Step-up X EXIT Total $ In $ 2 1.7 5.0 6.7 $ $ $ 3 20.0 20.0 40.0 0.5
5.0
$ 2 $ 80.0 $
20.0
April 2014
25.5
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Private Company: Pricing Rounds

Company Valuations Affect Founders Ownership (Dilution)
Begins with pre-money valuation Pre-money valuation driven by (1) absolute amount of cash needed and (2) target post-money valuation New price-per-share calculated as (valuation/new $$ required = price/sh) New price/sh calculate as (# new shs issued = % owned) = dilution
Shares Outstanding Pre-Money Price Per Share Pre-Money Valuation (No. Shs X Price) New $$ Required New Price Per Share No. New Shares Issued New Shs % Total New Valuation $ 3,000,000 $ 0.33
$ 1,000,000 $ 1,000,000 $ 0.75 1,333,333 31% 4,333,333 $ 3,250,000

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April 2014
Private Valuations
Exit Assumption Drives Pre- & Step-Up Valuations But Liquidity Preference Dominates Cash Paid At Exit
New funds Series A Series B Series C Mezzanine Exit Project ROI Total invested Series A Series B Series C Mezzanine $ $ $ (5) (10) (40) (60) 275 61% $ (115) $ 10 $$ at Exit 8 19 28 165 % Owned 3% 7% 10% 60% ROI 13% 24% -17% 175% Series A Series B Series C Mezzanine $ Step-up (x) 2 3 3 2 $ $ $ $ $ Pre = 5 $ 10 $ 20 $ 40 $ 275 $ Post = 15 40 140 160 275 Series A Series B Series C Mezzanine Exit Project ROI Total invested $ $ New funds $ (5) (10) (40) (60) 275 61% (115) $ 6 $$ at Exit 5 8 14 165 % Owned 2% 3% 5% 60% ROI -1% -6% -41% 175% Step-up (x) 1 1 2 2 $ $ $ $ $ Pre = 1 $ 5 $ 10 $ 20 $ 275 $ Post = 6 15 90 140 275
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Market Capitalization = Valuation

Number of shares outstanding x share price = total value of company Shares capture future expected value (will drug be effective? Be approved? Start-ups are compared to public companies - venture investors compare your future prospects to the successes & failures of public companies
Xenoport restless drug syndrome Rx approved XNPT $327.9M Market cap (9Apr2011)
Orexigen diet drug fails to win FDA approval OREX $142.7M Market cap (9Apr2011)
April 2014
http://seekingalpha.com/article/252196-diet-pill-maker-faces-cloudy-future-after-fda-rejection?source=nasdaq http://seekingalpha.com/article/262512-xenoport-waiting-for-the-post-approval-dust-to-settle
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How Are 2010 Biotech IPOs Faringand why this is important to you (30 WW IPOs in 2010 selected 14 of18 total in US)
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Spread Portfolio Risk Venture Investors & Pharma Measure Success as IRR
IRR = internal rate of return (complex calculation for both cash invested and time until investment pays off) ROI = return on investment (used interchangeably to express increase in value of original investment, adjusted by time) For pharma & VCs alike, shots on goal - home runs make up for strike-outs For pharma known mechanism of action; clinically relevant models shortens development time & lowers risk
IRR Product 1 Product 2 Product 3 Product 4 Product 5 Totals
-12% 83% 68% 23%
YR1 $ (8) $ (2) $ (0) $ (0) $ (0) $ (10)
YR2 $ (8) $ (8) $ (20) $ (8) $ (8) $ (52)
YR3 $ (20) $ (20) $ (20) $ (8) $ (8) $ (76)
YR4 $ (25) $ $ $ $ (25) (10) (10) (70) $ $ $ $
YR5
YR6
YR7
YR8
(25) 25 25 25
$ $ $ $
25 50 50 125
$ $ $ $
25 75 50 150
$ $ $ $
75 25 100
YR9 $ $ $ 10 $ 75 $ $ 85
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Whats a Valuation Comparable? Similar business model, similar products

Valuations of venture-backed companies Subscription-services (1) Venture One (2) The Venture Capital Analyst (3) your lawyers (without naming companies.were seeing deals like this right now at valuations of etc) (4) your friends Small cap public companies Valuations may be affected by major investors portfolio concerns, may be unrelated to companys future or inside information? (PTIE) Valuations may be affected by global market conditions (MAKO) Similar class of drugs progressing through clinical trials Pfizer torcetrapib failure
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April 2014
Valuation Comparables
Must-Have Source: Recombinant Capital www.recap.com
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Venture Capital vs Private Equity Capital market conditions are blurring boundaries
Venture capital buys stock key bet is increased value of equity Fundamental assumption value of equity mirrors value of underlying asset But value of equity can be affected by (1) capital market conditions, including global economic crises (2) exit to make private shares liquid is Initial Public Offering (IPO) (3) performance of similar biotech companies at & after IPO Venture train wreck scenario increased value in asset, as milestones met & risks decline, not reflected in stock price Private equity buys assets key bet is good management increases value (1) value of deals *relatively independent* of capital market conditions (2) exit most often sale to another company (trade sale) (3) exit can be IPO
April 2014
72
Thursday Cancer: changing the game for clinical trials Genzyme model: changing the math for investment
Whats a biomarker? Whats a cross-over or adaptive clinical trial? What role are corporate investors playing in todays early-stage investment ecosystem? What is the Genzyme model?
April 2014
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Term Sheets
An Outline of Key Terms
When to use? To focus minds, accelerate decision-making process To announce publicly, to drive up value or share price Present to Boards to approve definitive documentation Key terms of deal Scope, territory, grant of rights Payments Whats involved in due diligence, and who pays for it Authorizes costs of deal (legal, patent, industry consultants) Typically each side pays for costs, included failed deals May require confidentiality
Contents
Responsibilities
Letter of Intent
Alternative approach Can be binding as to time, payment, exclusivity Useful to buy time without losing exclusivity Payments usually credited against deal payments Can have option or license as exhibit
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April 2014
Founders Make Money When Valuations Are High & Keep Ratcheting Up to Exit
Investor Class Pre-Money New Funds Post-Money Total $ in Deal A $ 2 $ 2 $ 4 $ 4 A% A Value B $ 8 $ 4 $12 $ 8 B% B Value C $ 36 $ 16 $ 52 $ 24 C% C Sale Value or IPO $ 104 $ 15 $ 119 $ 39 $ 2.2 $ 2.2 $ 4.3 $ 4.3 $17.3 $17.3 $ 15 $ 2 25% $ 6.0 100% 8.3% $47.7 $22.0 100% IPO% 12.6% Exit Value $ 15
2.0
3.0
2.0
VC 1 $ 1 25% $ 1.0 VC 2 $ 1 25% $ 1.0 VC 3 VC 4 VC 5 VC 6 Public investors Founders $ 2 50% Total Funds In $ 2.0 Total Ownership 100%
$ 2 $ 2
12.5% 12.5% 25% 25%
$ 1.5 $ 1.5 $ 3.0 $ 3.0 $ 8 $ 8
4.2% 4.2% 8.3% 8.3% 33% 33%
2.6% $ 3.1 2.6% $ 3.1 5.1% $ 6.1 5.1% $ 6.1 20.5% $ 24.4 20.5% $ 24.4 38.5% $ 45.8 5.1% $ 6.1 $ 37.0 100.0%
Pharmasset founder owned 4% of company when it was sold to Gilead for $10.8 BN. http://www.reuters.com/article/2011/11/22/us-pharmasset-founder-idUSTRE7AL2ES20111122 April 2014 75
Founders Lose Money When Valuations Remain Low, Exit Is Low .and Later-Stage Investors Have Liquidity Preference
Investor Class Pre-Money New Funds Post-Money Total $ in Deal A $ 2 $ 2 $ 4 $ 4 A% A Value B $ 8 $10 $18 $14 B% B Value C $ 54 $ 40 $ 94 $ 54 C Sale C% Value or IPO Sale % $ $ 10 100.0% 2.0 $ 10 $ 69 1.9% 1.9% 9.3% 9.3% 37% 37% $ 1.7 $ 1.7 $ 8.7 $ 8.7 $34.8 $34.8 $ 15 $ 2 14% $12.0 100% 3.7% $90.5 $52.0 100% 1.4% 1.4% 7.2% 7.2% 29.0% 29.0% 21.7% 2.9% 100.0%
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Exit Value $ 10
2.0
3.0
VC 1 $ 1 25% $ 1.0 VC 2 $ 1 25% $ 1.0 VC 3 VC 4 VC 5 VC 6 Public investors Founders $ 2 50% Total Funds In $ 2.0 Total Ownership 100%
April 2014
$ 5 $ 5
7.1% 7.1% 36% 36%
$ $ $ $
1.3 1.3 6.4 6.4 $ 20 $ 20
$ 0.1 $ 0.1 $ 0.7 $ 0.7 $ 2.9 $ 2.9 $ 2.2 $ 0.3 $ 62.0
Constance McKee 11 Business of Biotech 12
Play to Win: Change the Math for Early-Stage Investment Strategies to Accelerate Exit & Minimize Dilution
Shorten Time to Market
License in later-stage compound Acquire later-stage product Re-engineer generic compound Reformulate marketed compound
Minimize VC Equity
NIH & NCI Venture philanthropies DARPA Partner with large pharma or medtech
Pursue product with shorter test period Pursue disease with smaller patient size for smaller clinical trial size Orphan Drug Act Partner with large pharma or medtech
State funds: CT Innovations, Pennsylvania Country funds: Scotlands Co-Investment Fund; Frances Premier Jour @ Genopole University funds Stanfords Birdseed Fund Elm Street Ventures, Yale
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April 2014
Social Entrepreneurship
If its a negative ROI, it may be a nonprofit play www.californiaantiviralfoundation.org BUT non-dilutive capital a biomedical research foundation can improve the ROI (get to clinical proof) Differences between for-profit & nonprofit corporations Appendix 1 Announcing YHLC & Force Care Foundation Yale/TAC (The Anlyan Center) 9 November 2012 Defense Health: Clinical Needs & Funding Opportunities for Small Businesses www.forcecarefoundation.org (coming soon..)
April 2014 78
Constance McKee Business of Biotech 12 11
Key Differences Between Nonprofits & For-Profit Companies Both Can License In/Out, Own & Create Patents
For-profit company
Purpose: make money, serve the shareholders Corporate entity: file with the Secretary of State Sources of funding: investment capital, sales of products
Nonprofit organization
Purpose: serve the public Corporate entity: file with the Secretary of State, note key paragraphs stating nonprofit goals Sources of funding: public donations, grants, foundations, some sales of products (can be partly self-funding) Oversight: Internal Revenue Service grants 501(c)3 status so that public donations are charitable deductions Primary fiduciary responsibility of the Board: serve the public Ownership: the public
Oversight: Board of Directors negotiates terms of investors capital
Primary fiduciary responsibility of Board members: serve their investors, then the company Ownership: private individuals, private investors and private investment groups
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Alan C. Hu Co-founder QuantumLeap Healthcare Collaborative
http://video.pbs.org/video/1858042837/ Potential Breakthroughs in Breast Cancer (2nd section) Aired on PBS 03/25/2011 http://www.quantumleaphealth.org/spy-2-trial-graduates-2-new-drugspress-release/ (veliparib from Abbvie; neratinib Puma Biotechnology)
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Constance ConstanceMcKee McKee Business Businessof ofBiotech Biotech11 12
Whats a Biomarker?
Goals of the Biomarkers Consortium (Foundation for the NIH)
Facilitate the development and validation of biomarkers using new and existing technologies Help qualify these biomarkers for specific applications in diagnosing disease, predicting therapeutic response, or improving clinical practice Generate information useful to inform regulatory decision-making Make consortium project results broadly available to the entire scientific community
Example, for the I-SPY trial:

Primary endpoint of the trial: pathological Complete Response for each treatment arm Up to 12 new Phase II agents will be tested Patients will be assigned to an agent based on specific biomarker signatures As each patient moves through treatment, their response feeds back to the probability of the next patient who enters the trial (adaptive design)
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We Know A Lot About Biomarkers for Breast Cancer
April 2014
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Biomarkers Could Change Treatment of Ovarian Cancer. But Which Biomarkers?

If Drug X worked for 22S, it might work for me. My profile shows that the same targets are overexpressed, and to the same degree.
April 2014
Source: Clearity Foundation, AACR 2010 Poster, with permission 84
Not all diagnostic tests cut costs for payers

(McKinsey analysis 2010)
April 2014
http://www.mckinsey.com/insights/health_systems_and_services/the_microeconomics_of_personalized_medicine 85
Why Pharma Invests As Venture Capital Fills the Funding Gap & Strategic Focus
Sanofi-Genzyme BioVentures are based in Boston, but invest globally. Janssen just launched a new bioincubator in San Diego. Tenants are not captives. Amgen, Genentech, and Pfizer are active equity investors. EMD Serono invests an early-stage fund alongside a strategic fund allied with the MS Society, Fast Forward blends corporate & philanthropic strategies Since 2005, Takeda has operated a well-respected venture fund located in Palo Alto that invests from the Takeda R&D budget. Merck does not have a fund per se, but has a very active licensing group. Baxter (Chicago) now has a corporate venturing fund. Lilly Ventures operates out of Indianapolis. Roche Venture Fund (Basel) has invested in 25 companies in ten countries. Biogen Idec launched its venture fund in Boston in 2004 with a commitment of $100 million. With a commitment of $2 billion, Novartis Venture Fund (Cambridge, MA and Basel) http://www.venturefund.novartis.com/ is one of the largest corporate venture investors, with investments in over 50 companies as of 2008.
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2012 ~ $2.5BN in Corporate VC Funds
April 2014
http://www.nutter.com/files/Uploads/Documents/HealthcareVenture_StateoftheIndustryUpdate_JonNorris.pdf
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Scale of Capital: Modeling ROI for Genzyme Model

1/5th the capital, shortened time to clinical proof but higher upside
Stage of Development Phase 1/2 Phase 3 FDA approval - launch Total cost to develop Revenues - 1 Revenues - 2 Revenues - 3 Cost * Risk Y1 Y2 Y3 Y4 ($10) ($10) ($15) ($15) ($25) ($25) ($50) 0% $ 48 ROI $ 2 $ 150 ROI 21% $ 2 $ 420 ROI 47% $ 2 Y5 Y6 Y7 Y8 Y9 Y10
$ 5 $ 10 $ 20
$ 10 $ 20 $ 50
$ 15 $ 40 $ 100
$ 18 $ 80 $ 250
$ $ $
Annual cost of treatment: $100K/yr - $400K/yr (and $1M/year) In this model, if treatment is reimbursed at $300,000 per year, Scenario 1 = 160 patients, Scenario 2 = 500 patients, Scenario 3 = 1,400 patients Companies: BioMarin, UltraGenex, Genzyme Sanofi Venture capital can be leveraged through federal funding from Orphan Drug Act of 1983 & TRND Rare and Neglected Diseases Number of patients may be so rare that clinical trials are small (10 patients) - clinical endpoint is clinical significance, not statistical significance Patients easier to recruit often at risk of death otherwise; patient advocacy groups are in touch with many/most patients who might benefit
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April 2014
The Genzyme Model

Drug Name Soliris Elaprase Naglazyme Cinryze Fotolyn ACTH Myozyme Kaledyco Arcalyst Ceredase Cerezyme Fabrazyme Aldurazyme
April 2014
Number of Patients Treated 8,000 500
Disease paroxysmal nocturnal hemoglobinuria Hunter syndrome
Cost per year ($ actual) $ 409,500 $ 375,000 $ 365,000 $ 350,000 $ 360,000 ($115,000/mo) $300,000 $ 294,000 $ 250,000 $ 200,000
Maroteaux-Lamy syndrome
Hereditary angioedema T-cell lymphoma Infantile spasms (Genzyme) 1,200 Pompe disease (thank you, John Crowley) Cystic fibrosis (g15D gene) (Vertex) Familial Cold Auto-inflammatory Syndrome Muckle-Wells Syndrome (Genzyme) (Genzyme) (Genzyme) Gaucher disease Fabry disease Hurler syndrome
$ 200,000 $ 200,000
89
http://www.medicalbillingandcoding.org/blog/the-11-most-expensive-medicines-in-america/.
Yales Contributions to Medicine (as of March 2014)
April 2014
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Acknowledgments & Sources - 1

PwC (PriceWaterhouse Coopers) Moneytree publications Mark Edwards, Recombinant Capital www.recap.com & online publication Signals www.signalsmag.com Statistics on deals & deal trends Article on venture philanthropies Cynthia Robbins-Roth books & columns From Alchemy to IPO Alternative Careers in Science BioWorld Today www.bioworld.com www.clinicaltrials.gov NIH database for clinical trials, current and closed Reference for trial design, numbers of patients www.nasdaq.com Pricing & valuations for many biotechnology, tools & diagnostics companies
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April 2014
Acknowledgments & Sources - 2

Online reading Fierce Biotech GEN (Genetic Engineering News) BioBrief, RPM Report In Vivo publications Roger Longman is one of industrys longest-serving & most insightful analysts Patient advocacy organizations Statistics on patient populations Current news on experimental therapies, clinical trials NIH - information on diseases & disorders; SBIR & other grants programs Merck Online www.merck.com/mmpe/index.html Current information on diseases & disorders Standard-of-care drug therapy, mechanism of action of drugs SEC filings www.sec.gov Company websites for annual reports (10-Q), quarterly reports (10-K) Information on failed trials is usually buried in quarterly or interim (8-K) reports
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April 2014
Thank you
April 2014
93
Constance McKee Yale MBA
Constance McKee is co-founder, President & CEO of Manzanita Pharmaceuticals, Inc (2007-present). www.manzanitapharmaceuticals.com Manzanita is the re-start of Asilomar Pharmaceuticals, Inc., an early-stage biotechnology company which filed for bankruptcy in June 2006. She was a Co-Principal Investigator under the DARPA grant that kickstarted Manzanitas precursor . Other current activities are: In late 2010 she founded i2 Grants Associates www.i2grantsassociates.com , a consulting firm to identify sources of nonequity diluting capital and provided services to review and prepare grants for military, NIH, and foundation funding. In 2012 Constance co-founded Force Care Foundation www.forcecarefoundation.org a nonprofit to connect emerging biomedical companies to sources of information about and funding opportunities to support innovation to improve military health. Constance volunteered at the Veterans Administration in Palo Alto in the neurology research unit (Building 7). From 1990-1994, Constance was Chief Executive of Cambridge Quantum Fund I, a seed venture fund investing in technologies from Cambridge University (Cambridge, UK). From 1994-1995 she was co-founder and Chief Executive of SynGenix Limited, a portfolio investment of Cambridge Quantum Fund. From 1996-2001 she worked in the corporate venture capital group and in General Counsels office at Philips Semiconductors. She was a co-founder in 2001 of BioE2E., Inc., a non-profit organization that presents programs to bioentrepreneurs in the San Francisco Bay Area. She served as Board member from 2001-2009, and served as President and Treasurer. From 2007-2008 she served as Co-Executive Director of Americans for Cures Foundation, a 501(c)3 organization dedicated to supporting advocates for stem cell research. www.americansforcures.org In 1986-1987 she was a recipient of a Bosch Fellowship (Bosch III) which supported internships in corporate finance in Germany. She holds an MBA from Yale University School of Management. While at Yale, she tudied voice with Dr. Richard Lalli. She holds an MM from San Francisco Conservatory of Music and BA with distinction from Stanford University.
April 2014 94
YHLC & Force Care Foundation to be rescheduled at Yale
April 2014
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Many Veterans Injuries and Conditions are Neurological

OIF/OEF: Approx. 2.4 million have served 50 years - $500 billion in costs: currently few/no drug therapies
Conflict Vietnam War (1965-1973) Disease / condition Exposure to Agent Orange Parkinsons disease (PD) Prostate cancer, B cell lymphoma Coronary artery disease Gulf War Illness Gulf War ALS OIF (2003 2011) (OEF (2001 Pain Pain treated with opiates TBI (traumatic brain injury) Vision impairment (% TBI) Post traumatic stress disorder Hearing impairment All conflicts
April 2014
% affected
n= 185,000
Treatable?
(March 2012) yes Yes 30% 210,000 100 50% 45% 950,000 430,000 360,000 75% 35% 270,000 665,000 58,000 20% 30,000 no no ~ 50% ~ 50% no no no yes no
Gulf War (1990-1991)
Spinal cord injury (% total US)
Sources: Golomb BA (2008) PNAS; DVBIC; CDC; USA Today; VA; 96 Institute of Medicine: Veterans and Agent Orange: Update 2008
Appendix 1: Social Entrepreneurship
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Table of Contents
What is social entrepreneurship? Incorporation & the Internal Revenue Service Writing your strategic plan: what is a sustainable business model? Fundraising: strategies & plans Metrics & milestones: return on social investment Governance Resources & further reading Appendices: data on charitable & nonprofit sector in US
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What is social entrepreneurship?
April 2014
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For-profit company
April 2014
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Examples of Charitable Organizations: .orgs

How are they scalable? sustainable?
Feeding America Bill & Melinda Gates Foundation Partners in Health Mdcins san Frontiers Kiva World for Good Save the Children Oxfam Grameen Bank Ashoka Foundation Michael J. Fox Foundation Lance Armstrong Foundation Project Hired Wounded Warrior Homes Disabled American Veterans Paralyzed Veterans of America Iraq & Afghanistan Veterans of America Natl Center on Addiction & Substance Abuse www.feedingamerica.org www.gatesfoundation.org www.pih.org www.msf.org www.kiva.org www.worldforgood.com www.savethechildren.org www.oxfam.org www.grameenfoundation.org www.ashoka.org www.michaeljfox.org www.livestrong.org www.projecthired.org www.woundedwarriorhomes.org www.dav.org www.pva.org www.iava.org www.casacolumbia.org
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April 2014
Writing your strategic plan: what is a sustainable business model?

Your social entrepreneurship plan As detailed as any for-profit plan and more Makes a compelling case for need and opportunity Defines exactly what your service or product is Draws a straight line between mission strategy workplan You will need this for grants, donors & the Internal Revenue Service Competitive landscape Must be completely unique exhaustive research among 1 million US nonprofits Try to resemble established groups Donors do not like to fund duplication of fixed costs Nonprofits can make some money from products or services Tickets? T-shirts? profit is not the mission Are you a double bottom-line organization No one in the organization profits from any money you make (~ shareholders) Sustainability: make the case that you can raise money year after year
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April 2014
Incorporation & the Internal Revenue Service

Set up a corporation File Action by Incorporator in your state Articles of Incorporation specify that you are a non-profit organization Bylaws specify that you are a non-profit organization Prepare & submit your Form 1023 to the Internal Revenue Services Mission, plans for operation, Board members.. They ask for your business plan (so maybe you write this first?) This is a public document Any questions? Pick up the phone and call them You will need a Post Office and a fax machine IRS Determination Letter IRS determines that you are a 501(c)3 organization Section of the U.S. Treasury regulations Confirms that you can take donations, donors get a tax deduction All foundations ask for this, all donors expect it
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April 2014
Example of an IRS Determination Letter
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Governance 1: in the public eye

Everything you do is public Your federal tax returns are public documents Some organizations post their federal tax returns (990s) online Your website is very important professionalism, standard content There are publicly-available standards Established standard-keepers Charity Navigator www.charitynavigator.org Guidestar www.guidestar.org In an online world, the public is your standard-keeper Financial standards (x% spent on overhead, y% spent on programs) Governance standards (accounts must be audited each year ~ $7,000)
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Governance 2: Board responsibilities

Legal & fiduciary responsibility Includes fundraising responsibilities Details on Donor Source www.donorsource.org Oversight Includes supervision of chief executive Strategic planning Public face of the organization Outreach and advocacy Incorporate constituent perspectives & viewpoints Board recruitment possibly your most difficult challenge Decide on mix (financial expertise, fundraising contacts, sector knowledge) Interview first in public forum like conference Interview informally, with other friends and Board members Some % should have previous non-profit experience
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April 2014
Fundraising strategy 1: sources

15% foundations make 50% of all grants
Foundations: ~ 1 million foundations in US
Family foundations Community foundations Corporate foundations Corporate matching programs & workplace giving (volunteer hours funds) Corporate sponsorships
Businesses

April 2014
Federal & state grants Individual donors

Major/transformational giving (over and above ~ 5x an individuals annual gift, >$25,000) Annual giving (regular giving at any $ level, generally < $5,00 from direct mail, special events)
Events Planned giving Income

Performances (arts organizations) Goods (tickets, museum stores, t-shirts)
Religious sources Associations of individuals (Rotary)

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Metrics & Milestones: Return on Social Investment (ROSI)

Return on Social Investment: number of lives changed per $$ raised Ask donors to help you meet your milestones Building capacity ? Launch programs ? Sustain or expand programs? Examples of metrics Number of names in your contact database Amount of money youve raised Number of times your organization has been on TV or in the media Examples of milestones Reached x number of students Provided services to x number of mothers Shipped drugs to x number of countries
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April 2014
Fundraising strategy - 2: asset inventory

Values, Vision and Mission 1 What values do you hold that you associate with your organization? 2 How would the world be different on the day that you could say that your mission is accomplished? 3 What is the mission of your organization? Accomplishments 4 What are your ongoing core projects or programs and what are the results or outcomes that you can point to as a result of these efforts? 5 What are the core competencies (eg skills and abilities) that enable your organization to succeed in these efforts-personal or organizational or both? 6 How do you endeavor to measure your effectiveness? (eg statistics; letters of appreciation, testimonials, assessments by outside bodies, awards and honors, etc) 7 Do you attract any media visibility? If yes, in which media outlets? Board and Staff History 8 What are some of the key qualifications and talents of your past and current board members and staff? 9 Have any board or staff members received any recognition of their talents and contributions? 10 What percentage of your board members make financial contributions to your organization? Organizational History 11 How long has your organization been in existence? 12 What distinguishes your past work from that of similar organizations? List the specific ways in which your work differs from theirs. 13 What recognition has your organization as a whole received since its inception? (eg invitations to speak at conferences, workshops, public rallies, and legislative hearings; certificates of commendation; quotations in scholarly or popular journals and magazines; letters of appreciation; etc.) Funding History 14 Name the institutions that support your work: Foundations Corporations and businesses Religious sources Associations of individuals Others (local or national businesses, governmental agencies, etc) 15 How many individuals pay dues, make contributions, or do both to support your work? What percentage renew their support each year? 16 How diversified is your financial base? For example, how many different sources extend support to you? What percentage of your total income does each comprise? April 2014 109
Fundraising strategy 3: online fundraising

Integrate with your real-world world Website? or only Facebook (seriously) Many free & excellent resources already exist Best practices now known & taught Need to be expert but you can learn everything Resources Network for Good www.networkforgood.org Constant Contact ($15/month) Donate button strategies Implement your own depends on your bank Outsource payment Outsource payment & management
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Metrics & milestones: return on social investment

Return on Social Investment: number of lives changed per $$ raised Ask donors to help you meet your milestones Building capacity ? Launch programs ? Sustain or expand programs? Examples of metrics Number of names in your contact database Amount of money youve raised Number of times your organization has been on TV or in the media Examples of milestones Reached x number of students Provided services to x number of mothers Shipped drugs to x number of countries
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April 2014
For-profit company
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Are you a social entrepreneur?

from www.ashoka.org
What is a Social Entrepreneur? Social entrepreneurs are individuals with innovative solutions to societys most pressing social problems. They are ambitious and persistent, tackling major social issues and offering new ideas for wide-scale change. Rather than leaving societal needs to the government or business sectors, social entrepreneurs find what is not working and solve the problem by changing the system, spreading the solution, and persuading entire societies to take new leaps. Social entrepreneurs often seem to be possessed by their ideas, committing their lives to changing the direction of their field. They are both visionaries and ultimate realists, concerned with the practical implementation of their vision above all else. Each social entrepreneur presents ideas that are user-friendly, understandable, ethical, and engage widespread support in order to maximize the number of local people that will stand up, seize their idea, and implement with it. In other words, every leading social entrepreneur is a mass recruiter of local changemakersa role model proving that citizens who channel their passion into action can do almost anything. Over the past two decades, the citizen sector has discovered what the business sector learned long ago: There is nothing as powerful as a new idea in the hands of a first-class entrepreneur. Why "Social" Entrepreneur? Just as entrepreneurs change the face of business, social entrepreneurs act as the change agents for society, seizing opportunities others miss and improving systems, inventing new approaches, and creating solutions to change society for the better. While a business entrepreneur might create entirely new industries, a social entrepreneur comes up with new solutions to social problems and April then 2014 implements them on a large scale.
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Resources

April 2014
Foundation Center Global Social Venture Competition Draper Richards Foundation Skoll Foundation Social Venture Network Partnering for Cures TED local events Network for Good Constant Contact Board Source Muckety Prospect Research Online The Center on Philanthropy at Indiana University Oregon Entrepreneurs Network (for-profit)
www.foundationcenter.org www.gsvc.org www.draperrichards.org www.skollfoundation.org www.svn.org www.partneringforcures.org www.ted.com/tedx www.networkforgood.org www.constantcontact.org www.boardsource.org www.muckety.org www.iwave.com www.philanthropy.iupui.edu www.oen.org
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Further Reading
Small Change, Big Payoff STANFORD Magazine Nov/Dec 2007 http://www.stanfordalumni.org/news/magazine/2007/novdec/features/kiva.html World of Good Inc Sells Brand and Related Assets to eBay World of Goods Press Release Feb 2010 http://www.worldofgoodinc.com/ An Overview of the Nonprofit and Charitable Sector, Congressional Research Service Nov 2009 http://www.fas.org/sgp/crs/misc/R40919.pdf Palestinian Olive Oil at Whole Foods Bloomberg News 25Jan2010 http://www.bloomberg.com/news/2011-01-20/palestinian-olive-oil-at-whole-foods-helpsancient-trade-prosper.html Demystifying Major Donor Fundraising Grassroots Fundraising Journal Magazine: http://www.retrieverdevelopment.com/pdf/Nurturing%20Relationships%20ARTICLE%2 0KJ.pdf A $10 Mosquito Net is Making Charity Cool, New York Times 2 June 2008 http://www.nytimes.com/2008/06/02/us/02malaria.html The D.I.Y. Foreign Aid Revolution, New York Times 20 Oct 2010 http://www.nytimes.com/2010/10/24/magazine/24volunteerism-t.html Helping Veterans Trade Their Swords for Plows, New York Times 5 Feb 2011 http://www.nytimes.com/2011/02/06/us/06vets.html?_r=1&src=me&ref=general
115

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1 - Charitable & Nonprofit Sector in US (2009)
Source: Congressional Research Office, Nov 2009, page 3 http://www.fas.org/sgp/crs/misc/R40919.pdf

April 2014 116
April 2014
Source: Congressional Research Office, Nov 2009, page 10 117 http://www.fas.org/sgp/crs/misc/R40919.pdf
April 2014
April 2014
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April 2014

Charitable organizations employ more than 7% of the U.S. workforce Nonprofit sector employs 10% of the US workforce In 2009, the charities filing Form 990 with IRS reported approximately $1.4 billion in revenue and reported holding nearly $2.6 billion in assets Nonprofit institutions serving households (largely charities) constituted more than 5% of GDP in 2008
April 2014
Source: Congressional Research Office, Nov122 2009, http://www.fas.org/sgp/crs/misc/R40919.pdf
Additional Slides
April 2014
123
Where Our Wounded Warriors and Veterans Are Cared For

Combat casualties advance medical teams assigned to combat units Far forward mobile field hospital CSH = Combat Surgical Hospital Aeromedical staging facility (aircraft adapted to mobile intensive care unit) Landstuhl Regional Medical Center Contingency Aeromedical Staging Facility (100,000 patients as of Nov 2009) Ramstein Air Base, near Kaiserslautern, Germany Other Mobile ASFs (aeromedical staging facilities) Rehabilitation & Reset our Wounded Warriors Walter Reed Medical Center (Washington DC) closed 2011 William Beaumont Army Medical Centers (= BAMC near El Paso, TX) Center for the Intrepid Veterans Administration (1) Almost 2.4 million have served in OIF/OEF ~ 25 million veterans of all conflicts (2008) 5 million received care from the VA (2008) 1 million claims processed, pension & benefits to 3.8 million veterans (2009) Estimated total VA spend $93.4BN (2009) 26,000 employees 54 hospitals & 171 medical centers > 350 community clinics, 126 nursing care units, 35 domiciliaries 4,000 housing partners to reduce homelessness (PROGRESS !)
(1) http://www1.va.gov/opa/fact/vafacts.asp 124
April 2014
Sources of Funding for Early-Stage and Translational Medical Projects for Troops, Wounded Warriors & Veterans
U.S. Army Medical Research & Materiel Command (USAMRMC)
Small business $524M (FY08) - $494M (FY11) Telecommunication and Advanced Research Center (TATRC) www.tatrc.org Broad Agency Announcement (BAA) 1992 2009 ~ $4.8BN in programs www.cdmrp.mil Limited funds for military medical research - $300M for TBI & PTSD (2007 only) FY09 - $374M total Defense Related Medical Research Program - $235M ($92M 2008) Small Business Innovation Research (SBIR) Defense Advanced Research Projects Agency (DARPA) www.darpa.mil Biomedical Advanced Research & Development Authority (BARDA) www.hhs.gov Defense Threat Reduction Agency (DTRA) www.dtra.mil Two consortia fully funded at $300M AFIRM 2? - fully intend to renew
125
Congressionally Directed Medical Research Programs (CDMRP)

Department of Defense (DOD)

Armed Forces Institute of Regenerative Medicine (AFIRM)

April 2014
http://dctd.cancer.gov/ProgramPages/dtp/default.htm
NCIs Contributions to Cancer Treatment
April 2014
126
What is the Early-Stage Funding Gap? Low Return-on-Investment for Early-Stage Investment
April 2014
Source: Signals Mag; Alzheimers Drug Discovery Foundation www.alzdiscovery.org
127
Only 19 US preclinical deals were venture funded in 2011 but there were < 4,000 submissions to SBIR/STTR in 2011
April 2014
Source: BioWorld Today, Biotech Series A Up, But Not Synonymous with Innovation, Special Report 6 March 2012
128
Key Quant Elements in the Venture Capital Model

Formula: fees time to next fund failure rate - benchmark ROI
Fee % Capital 2.5% 50 50 50 50 50 50 1.3 1.3 1.3 1.3 1.3 1.3 Total capital available to invest (in $Mio) Venture partnership fees (in $000s) Partner salaries & benefits x 7 3 250 Office, comms, financial services x 7 Travel, conferences x 7 3 Costs of due diligence on deals (patent, legal) PLUG Return 20% to Partners > principal returned (in $Mio) 300 300 300 300 300 300 7.5 7.5 7.5 7.5 7.5 7.5 Total capital available to invest (in $Mio) Venture partnership fees (in $000s) Partner salaries & benefits x 7 6 400 Office, comms, financial services x 7 Travel, conferences x 7 6 Costs of due diligence on deals (patent, legal) PLUG Return 20% to Partners > principal returned (in $Mio)
April 2014
50 $ 1.3 $ 32.5% $ 120 15 $ $ 300 $ 7.5 $ 32.5% $ 500 100 $ $
50 (8.8) 41 6,956 840 315 689 8,800 41 300 (52.5) 248 22,260 3,500 4,200 22,540 52,500 248
129
Return Capital 2.5%
$1.2BN in Medical Research Foundations (2009)
Source: http://www.nature.com/news/2011/110720/full/475275a.html
April 2014
130
CDMRP Funding History (1992 2009)

Research Topic Areas DRMRP (2008)
blood safety and blood products final development of medical devices for use in theater (including portable suction machines and EKGs for theater hospitals) injury prevention TBI and psychological health (including PTSD) trauma treatment and rehabilitation (including face, visual/ocular and nerve damage, dental, and auditory systems) wound infection and healing wound infection vaccines
April 2014
131
Competition for capital: if a venture capital investor can invest $5M in a later-stage company with no clinical risk, why would s/he invest $5M in an early-stage company with no evidence that the drug/technology will work?
For the biotechnology share of sector investment, early-stage funding declined by 38 % from the fourth quarter of 2009 to $364 million, while late-stage funding contracted by an equal percentage over the same period to $321 million. Compared to the third quarter of 2010, early-stage funding decreased by 22 %, while late-stage funding declined by 26%. - PWC
April 2014
Source: PwC MoneyTree Report Feb 2011 www.pwc.com Taking a Tumble
132
The Unregulated Financial Market Changes The Game for Everyone
April 2014
133
Due Diligence
Confirm Ownership, Data & Guesses
IP Ownership Does company own its own patents? Were patents licensed in properly? Fees up to date? Did employees assign rights to IP they invent? Did advisors & consultants assign rights to IP they invent? Do Board members assign rights to IP they invent? Rights in data when data obtained with CRO or university Restrictions on publication? Already published so cannot be protected with patents? Scientifically rigorous or b******t? Control data? Full disclosure of toxicity (example Rinat Neuroscience)
Data
Operating compliance Governance Value
Paid taxes? Filed hazmat paperwork with local authorities? Who makes decisions? Are they dysfunctional? Deal comparables for deal points Guesstimates for future market value
134
April 2014
Deal Structures
Option agreement May be used when licensing in a university technology (can biotech raise $$ to develop) May be used in cases of clinical uncertainty (BioMarin La Jolla Pharmaceuticals case study) Usually enabling IP integrated into multiple products Most valuable since effectively confers monopoly
Non-exclusive Exclusive
Development or Describes which party/-ies carry out development collaborative Who pays for, who manages patent prosecution agreement Who has responsibility for clinical trials Who has responsibility for preparing NDA with FDA Payments may be milestones &/or cover development costs Co-marketing agreement Acquisition Allows licensor to keep $$ from product revenues Usually appears as part of strategic alliance Asset purchase or stock purchase Stock purchase assumes residual-hidden liabilities Rights to key technologies may be lost in licenses
135
April 2014
Valuation Comparables
Develop Internal Model Compare To External Sources
Process Develop internal model based on best & rigorous practices Compare with multiple external sources Reality check #1: example - Philips investment deal Reality check #2: can you afford this deal? Is Board experienced in valuations & disappointments?
Methods Sources
Deal comparables Discounted Cash Flow (DCF), replacement (buy it new again) Recombinant Capital DeLoitte (subscription) IN VIVO (subscription), Fierce Biotech, Genetic Engineering News Your law firm (larger firms keep internal databases of deal terms) Merchant & investment banks, analysts Competitors public disclosures SEC filings: Pain-King transaction
Discipline
Most deals fail - have the courage to walk away from bad deals Remember Harvard Business School option: Do nothing Does your management understand likelihood of failure?
136
April 2014
Licenses Grant of Rights

Adaptable to parties needs & positions
Assignment License Exclusive Nonexclusive Scope Outright transfer (sale) of rights Grant only of specific rights, specific terms, specific scope Grants to only one licensee (more valuable ~ monopoly) Grants to multiple parties (strategic or enabling IP) Describes only technology to be licensed Can limit disease targets ie auto-immune only Territory specific geographies ie US or India only or WW Restricted to geographies where IP is enforceable
Payments
Upfront and/or milestone payments Payments that support developed ie $250K/yr for x FTEs Fully-paid up (no royalties) or royalties (% net profit) Or irrevocable, means cannot be changed or terminated Can be sublicensed to 3rd parties, usually non-exclusives Whos responsible and who pays for them? Whos responsible for publishing & protecting confidentiality? Who owns the data when things crash? When patents expire?
137
Revocable? Sub-licensable? Patents? Publication? Termination

April 2014
Valuation Based on Estimates of Future Revenues

Exubera: analysts predicted $1 billion drug
Exubera = inhaled insulin for diabetes (control blood sugar) Analysts predicted this would be a $1 billion drug Key assumptions of future revenues Offered significant clinical benefit vs standard-of-care (injected insulin) Offered lower risk than standard-of-care Patient-friendly diabetics have strong feelings about injecting insulin Clinical trials data appeared robust Device was easy-to-use for patients Pricing was reasonable, 3rd-party payors would reimburse Pfizer as marketing partner would market very effectively Competitors developed competitive products, therefore must be real Lilly Novo Nordisk sanofi-aventis
138
April 2014
Licenses Nonexclusive Examples

Stanford: download, sign here & return
Technology Type (link to all techs of this type) Stanford Docket Technology Title (link to abstract) License Type (link to license) Available via Google Checkout
Bioinformatics
97-072
GENSCAN software
Non-exclusive license
Yes
Cell Lines
96-139
Phi-Nx Helper-free Retrovirus Producer Lines
Non-exclusive license (biological material)
97-079
293T Cell Line
Non-exclusive license (biological material)
Yes
05-164
Cell-based assay for Wnt signaling
07-069
Reporter cell line for TGFbeta signaling
April 2014
http://otl.stanford.edu/industry/resources/rts.html
139
How Ownership Arises Why Yale Owns Your Ideas

Under US law, the employer owns the ideas of employees
Terms of Yale employment includes faculty, graduate students Yale Office of Cooperative Research http://www.yale.edu/ocr/ You can consult to your own start-up Most universities permit this, but your consulting agreement either (1) continues to allow Yale to own your ideas while consulting, but licenses any discoveries to your start-up, or (2) grants ownership of ideas generated during consulting period to the start-up
Document who & where invention occurs

Complicated with multiple academic collaborators Complicated by multiple granting sources Expect multiple co-inventors on patent application
April 2014
140
Yale Licenses Rights To Start-Up How Legal Rights Are Transferred

License is a legal agreement
Yales ownership gives it right to confer some or all of its rights, over time In exchange for grant of rights, Yale may get rights to % of future product value Future product value milestones or % of sales (royalties) If things go wrong, Yale still owns patents Start-up licensee usually pays for patent prosecution Start-up licensee usually obligated to use best efforts to develop Years before Yale (and you, the discoverer) makes any money
Important concept transfers rights, not ownership

Flexible concept
May have low or no upfront fee May include milestones for key development steps May include royalties (% sales) when product launched
141
April 2014
Patents
What is a patentable invention?

Patents are issued by US Patent & Trademark Office, European Patent Office and patent offices of respective countries Must show your idea is novel and not obvious & that it works (data) When issued, confers the right to sue if an infringer sells a product in the marketplace based on your idea
What is intangible intellectual property that can be protected?

Copyright software, drawings Know-how protocols for synthesis of a small molecule drugs Also known as trade secrets (secret sauce) Almost always key to real value in the product, never disclosed in a patent application
April 2014
142
Why Are Patents Important?
Worthless unless a product made from it, sold & making $$

Does not keep others from stealing your ideas Just gives you the right to sue them if they do steal Formidable barrier to entry if you succeed In pharmaceuticals, can charge a premium price
Confers exclusivity
Means youre the only one legally authorized to sell product Can be US only, EU only, ROW only or combination When patent expires for pharmaceuticals, generic drug makers take over & premium-priced drug revenues decline ~ 60% in one year post-expiry Strong patents are enormously valuable to pharma
April 2014
143
April 2014
144
U.S. bio-innovators at capital disadvantage: IPO Market Sizzles in China ($6.1 BN July 2009-2010)
U.S. venture capital raised: 2Q 2000 $38BN 2Q 2010 - $ 2BN Number of new venture capital funds in U.S.: 2000 749 2009 - 170 Shrinking IPO exits in U.S.: 2000 263 2007 - 86 2010 26 (July)
Sources: IPO Market Sizzles in China, 2 Aug 2010, The Burrill Report, Greg Scott Venture capital could shrivel away, Wall Street Journal, July 20, 2010 US Venture Capital Expected to Shrink Wihile Emerging Markets Grow, Deloitte, US Venture Capital Assn, July 19, 2010 Number of venture capital firms expected to drop, Pensions & Investments, July 14, 2010 April 2014 145
Wall Street Journal: Venture capital shrinking from poor returns. Shifting to less risky, later-stage deals.
Angel Investors Arent Always (Angelic)

The good, the Bad & the ugly Emerging (good) trend: family offices
Good angel investors
Typically invest $50K - $100K Anticipate that VCs will follow on meaning, their terms anticipate VC terms Understand they will be diluted Have deep pockets meaning, they can keep putting cash in
Bad angel investors

Demand terms that VCs will choke on later Dont understand your technology, your financing targets & waste HOURS of time asking for explanations Leave you hanging when you need more capital
Ugly angel investors

Sure you want to know www.thefunded.com ?
For more reading on angel investors: http://www.nature.com/bioent/2004/041201/full/bioent839.html http://wistechnology.com/article.php?id=4340 http://wsbe2.unh.edu/center-venture-research 146
April 2014
Adding Risk to the Cost-Revnue Model

Probability of Success 0.01% 0.4% 50% 50% 40% 50%
Y1
Y2
Y3
Y4
Y5
Y6
Y7
Y8
Y9 Y10
-10 -10 -10 -10 -10 -5 -10 -20 -50 -15
April 2014
147
Is the blockbuster business model still valid?
April 2014
148
Return on Investment (ROI): the Math

Fundamental Quantitative Concept Captures Time, Cost & Expected Earnings Can Compare Disparate Projects, Products & Business Models
If an investment may be given by the sequence of cash flows then the IRR is given by
Year () 0 1 2 3 4
April 2014
Cash flow () -4000 1200 1410 1875 1050

http://en.wikipedia.org/wiki/Internal_rate_of_return 149
The answer is 14.3%.
Genzyme
Period Ending: Total Revenue Cost of Revenue Gross Profit Operating Expenses Research and Development Sales, General and Admin. Non-Recurring Items Other Operating Items Operating Income Add'l income/expense items Earnings Before Interest and Tax Interest Expense Earnings Before Tax Income Tax Minority Interest Equity Earnings Unconsolidated Subsidiary Net Income-Cont. Operations Net Income
12/31/2009 $4,515,525 $1,386,076 $3,129,449 31% 69%
12/31/2008 $4,605,039 $1,148,562 $3,456,477 25% 75%
12/31/2007 $3,813,519 $927,330 $2,886,189 24% 76%
$865,257 $1,494,180 $0 $266,305 $503,707 $40,026 $543,733 $0 $543,733 $121,433 $0 $0 $422,300 $422,300
19% 33%
$1,308,330 $1,338,190 $2,036 $226,442 $581,479 $46,059 $629,956 $4,418 $625,538 $204,457 $2,217 $201 $421,081
28% 29%
$737,685 $1,187,184 $106,350 $201,105 $653,865 $90,024 $747,821 $12,147 $735,674 $255,481 $3,932 $0 $480,193
19% 31%
9%
$421,081
9%
$480,193
13%
Net Income Applicable to
$422,300
$421,081
$480,193
April 2014
Common Shareholders
150
Affymax
Period Ending: Total Revenue
12/31/2009 $114,899
12/31/2008 $82,851
12/31/2007 $44,336
# #
Gross Profit Operating Expenses Research and Development Sales, General and Admin.
$114,899
100%
$82,851
$44,336
100% #
$157,125 $36,716
137% 32%
$137,492 $34,090
$69,398 $24,075
157% # 54% #
Operating Income Add'l income/expense items Earnings Before Interest and Tax Interest Expense Earnings Before Tax Income Tax Net Income-Cont. Operations
($78,942) $1,105 ($77,837) $105 ($77,942) ($1,411) ($76,531)
($88,731) $3,112 ($85,619) $609 ($86,228) $282 ($86,510)
($49,137) $11,439 ($37,698) $14 ($37,712) $5,357 ($43,069)
# # # # # # #
Net Income Adjustments to Net Income Net Income Applicable to Common Shareholders
($76,531) $0
-67%
($86,510) $0
-104%
($43,069) $0
-97% # #
($76,531)
($86,510)
($43,069)
April 2014
151
Medtronic
Period Ending: Total Revenue Cost of Revenue Gross Profit Operating Expenses Research and Development Sales, General and Admin. Non-Recurring Items Operating Income Add'l income/expense items Earnings Before Interest and Tax Interest Expense Earnings Before Tax Income Tax Net Income-Cont. Operations Net Income
4/24/2009 $14,599,000 $3,518,000 $11,081,000 76%
4/25/2008 $13,515,000 $3,446,000 $10,069,000 75%
4/27/2007 $12,299,000 $3,168,000 $9,131,000 74%
$1,355,000 $5,152,000 $1,555,000 $3,019,000 ($208,000) $2,811,000 $217,000 $2,594,000 $425,000 $2,169,000
9% 35%
$1,275,000 $5,143,000 $875,000
9% 38%
$1,239,000 $4,153,000 $166,000
10% 34%
21%
$2,776,000 $109,000 $2,885,000 $0 $2,885,000 $654,000 $2,231,000
21%
$3,573,000 $170,000 $3,743,000 $228,000 $3,515,000 $713,000 $2,802,000
29%
$2,169,000
15%
$2,231,000
17%
$2,802,000
23%
Net Income Applicable to $2,169,000 Common Shareholders $2,231,000 $2,802,000
April 2014
152
Qiagen N.V.
Period Ending: Total Revenue Cost of Revenue Gross Profit Operating Expenses Research and Development Sales, General and Admin. Non-Recurring Items Other Operating Items Operating Income Add'l income/expense items Earnings Before Interest and Tax Interest Expense Earnings Before Tax Income Tax Minority Interest Net Income-Cont. Operations Net Income
12/31/2009 $1,009,825 $342,752 $667,073 66%
12/31/2008 $892,975 $293,285 $599,690 67%
12/31/2007 $649,774 $216,227 $433,547 67%
$107,900 $360,747 $0 $18,221 $180,205 $21,766 $201,971 $29,641 $172,330 $34,563 $0 $137,767
11% 36%
$97,331 $341,344 $985 $14,368 $145,662 $11,151 $156,813 $37,527 $119,286 $29,762 ($491) $89,033
11% 38%
$64,935 $236,622 $48,857 $0 $83,133 $24,048 $107,181 $31,455 $75,726 $25,555 ($49) $50,122
10% 36%
$137,767
14%
$89,033
10%
$50,122
8%
Net Income Applicable to $137,767 Common Shareholders $89,033 $50,122
April 2014
153
Why Venture Capitalist Firms Invest in Publicly-Traded Companies: Because They Can & Because Its Less Risky
While investors largely steered clear of biotech and specialty pharma IPOs in 2009, they enthusiastically embraced stock offerings by already-public companies. Over the course of the year, there were 57 underwritten follow-on stock offerings, which together raised more than $5.9 billion in new funds. Thats far superior to 2008s totals (12 follow-on offerings raised about $1.2 billion) and even better than 2007s totals (35 follow-on offerings raised nearly $3.4 billion in new funds). www.recap.com [in 2010 64% of the total was]other offerings by public companies [is] a catchall category, and includes private placements, registered direct offerings, rights offerings, exercise of warrants, and most importantly convertible debt offerings. (Signals 18Jan2011 www.recap.com )
April 2014
154

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Constance McKee Yale MBA 1986 President & CEO, Manzanita Pharmaceuticals, Inc.

Constance McKee Business of Biotech 12

The Business of Biotech 12

Constance McKee Business of Biotech 12

Appendix 1 on social entrepreneurship

Constance McKee Business of Biotech 12

Course Outline & Speakers

Constance McKee Business of Biotech 12

Constance McKee Business of Biotech 12

Exit or liquidity (or valuation)

How long before you get your money back?

Constance McKee Business of Biotech 12

ROI Examples: Key Quantitative Elements

Constance McKee Business of Biotech 12

(10) $ (10) $ 12% $ 49% $

(50) $ (50) $ (50) $ (50) $

Constance McKee Business of Biotech 12

Key Quantitative Inputs to your ROI Model:

Ca$hflow (upside or reward)

Constance McKee Business of Biotech 12

Modeling ROI for Pharma

$ 150 $ 450 $ 600

$ 190 $ 600 $ 1,000

Constance McKee Business of Biotech 12

Modeling ROI for MedTech/Devices

Constance McKee Business of Biotech 12

Adding Risk to the Pharma (Investment) Model

Constance McKee Business of Biotech 12

Clinical Development 7.5 Years - $750 Million

Clinical Trials $250M

Constance McKee Business of Biotech 12

Only 30% of new drug launches are successful

Constance McKee Business of Biotech 12

What risks, over what period of time?

Constance McKee Business of Biotech 12

Proxy for reality

Constance McKee Business of Biotech 12

What is a Business Model? Businesses with Similar ROI, Similar Risks

Constance McKee Business of Biotech 12

Unmet clinical need: pharma revenue model

Number 25 30% 18 $ 1,000 $ 500 $ $ 18,000 9,000

Constance McKee Business of Biotech 12

Quantitative Model: Revenue - what is a market?

Exubera TRxs 1,179 1,307 1,659 1,816

Januvia NRxs 22,475 28,416

Januvia TRxs 48,685 56,243

Constance McKee Business of Biotech 12

Royalties Percentage of Cash from Products Sold

Revenue Cost-of-Goods Gross revenue Gross margin Salaries

Income/Expense $ 100 $ (10) $ 90

Notes Units x price Raw materials

Constance McKee Business of Biotech 12

Decision tree analysis for portfolios:

(500) (10) (25) (50) (50) (10) (55) (700)

200 (700) (500)

Constance McKee Business of Biotech 12

Adding Risk to the Cost-Revenue Model

Probability of Success 0.01% 0.4% 50% 50% 40% 50%

-10 -10 -10 -10 -10 -5 -10 -20 -50 -15

Constance McKee Business of Biotech 12

Reducing Risks In the Model

Probability of Y1 Highest Y2 Y3 risk Y4 Y5 Success

0.01% 0.4% 50% 50% 40% 50%