Creative financing: Private equity in life sciences

Transcription

1 : Private equity in life sciences The Colonnade Hotel, Boston, MA October 28, 2008

2 Industry trends and implications 2

3 Setting the Stage Overall trends Aging population Emerging market opportunities - access to healthcare Constrained national healthcare budgets requires products focused on reducing costs AND improving outcomes Increased regulatory burden more clinical data; postmarket safety data; economic data; and more restrictions on sales activities Imminent patent cliff in pharma 3

4 Pharma/Biotech Trends and Opportunities Trends Traditional pharma business model under stress all companies are changing strategies with increased focus on biotechnology Aggressive variablizing of costs across value chain ahead of patent cliff Need more R&D shots on goal in P&L efficient way Challenges with internal R&D productivity More willing to share R&D risk/upside Small cap companies squeezed Technology will change the pharma value chain (biomarkers, targeted therapies, etc.) Change in leadership guard at the C-level Opportunities Participate in strategic refocusing and active spin-off of assets from pharma Buy and build opportunities in clinical, regulatory and manufacturing Creative funding structures to access technology in capital constrained biotechs 4

5 Medtech Trends and Opportunities Trends VC funding relatively strong, but public markets closed M&A remains active with new sources of buyers - conglomerates, PE, mid-tier medtech, ex-us buyers High volume of transactions in non-imaging diagnostics Regulatory burden increasing more clinical and economic data required Opportunities Carve-outs of non-core assets Backlog of profitable private companies with limited access to public market Public to private transactions to build/acquire/restructure 5

6 Deal structures

7 Overview of PE activity in life sciences Direct investment VC (Warburg, TPG, others) Equity lines (Invus/Lexicon) Acquisitions of entities Buy-outs (Warburg/B&L, TPG/Axcan) Carve-outs (Avista/ConvaTec, Avista/Navilyst) Asset-based transactions Royalty/revenue interest (TPG-Axon, Paul Capital, many others) Project funding structures (Symphony, TPG-Axon/Lilly, Deerfield/Dynavax) PE / virtual pharma (Celtic) Other possibilities 7

8 Equity line: Invus Group / Lexicon Pharmaceuticals Genentech/Roche without Roche Invus Group Purchase of common stock at a premium Equity / Warrants Equity / Warrants Invus can require Lexicon to initiate two rights offerings over next four years Invus Group gains 40% ownership Potential additional stake Lexicon Pharmaceuticals 8

9 Equity line: Invus Group / Lexicon Pharmaceuticals At signing, Invus receives warrant for 16.5 million shares at market price (205 million) At close, Invus purchases 34.5 million shares at a 46% premium to price at signing (4.50 per share) Invus can require Lexicon to initiate up to two rights offerings (with certain timing constraints) providing all shareholders with pro rata rights to acquire additional common stock worth up to 345 million over the next four years Lexicon has the right to issue common stock before commencement of the rights offerings at a price above 4.50 per share Invus can purchase pro rata share Invus sets price of rights offerings (in range between 4.50 per share and then current market price), participates up to its pro rata portion of offering and commits to purchasing a portion of offering not subscribed for by other stockholders Invus receives three seats on the board of directors initially (out of 9); and possibly more later based on ownership percentage 9

10 Project funding structure: Symphony Capital Equity in New Co New Co Inlicenses IP Funds clinical development Technology rights Symphony Capital Equity / Warrants Buyback option / Sponsor Co Retains right to acquire IP Conducts clinical development RRD International Joint Steering Committee Source: Ernst & Young 10

11 Project funding structure: Symphony Capital Symphony Capital and Sponsor Co form New Co Symphony invests cash (in exchange for equity) and Sponsor Co contributes IP for 3-4 candidates New Co funds clinical development of these in-licensed candidates (trials may be conducted by Sponsor Co and/or third-party CRO) Symphony works with RRD International (a CRO), which serves on JSC and can provide clinical development expertise Sponsor Co issues shares/warrants to Symphony Capital in exchange for option to buy back Symphony s equity in New Co at pre-determined premium (typically ~2-3x, depending on year option is exercised) Symphony may also purchase equity of Sponsor Co If Sponsor Co decides not to exercise its purchase option, New Co (and Symphony) retain the rights to programs 11

12 Project funding structure: TPG-Axon / Eli Lilly TPG-Axon Milestones/royalties Novaquest Milestones/royalties Eli Lilly (2 Alzheimer s Candidates) JV JV Quintiles Clinical services 12

13 Project funding structure: TPG-Axon / Eli Lilly Lilly gets up to 330 million investment through 2014 for clinical development of two Alzheimer s candidates. 90% of the investment comes from TPG-Axon, and 10% from Novaquest, a JV between TPG-Axon and CRO Quintiles. In exchange, TPG-Axon and Novaquest are eligible for milestones of up to 325 million and mid- to high- single-digit royalties for X years. The two clinical candidates are in trials with Quintiles, which will continue to develop them. 13

14 PE/virtual pharma: Celtic Pharma Investors Raising capital Biotech or pharma IP In-licensing IP Late-stage Reformulations / drug delivery / new indications Celtic Pharma and successor fund Celtic Therapeutics Strategic decision making Regulatory interaction Contract negotiations Project supervision Limited infrastructure and employees Products Selling advanced or approved products Pharma or spec pharma Outsourcing CROs and CMOs Services 14

15 Royalty/revenue interest: Several investment funds Future royalties or product revenues Investment fund Up-front payment Optional equity and/or debt investment Portfolio company or academic institution Future milestones 15

16 Royalty/revenue interest: Several investment funds Structures come in various forms including cash advanced for: Current royalty stream from a marketed product (whole or partial) Current/future royalty stream from a "basket" of technology licenses (see Dyax) "Synthetic" royalty in an approved or late stage product Royalties are generally "at risk" i.e., if revenue declines or product removed from market, up-front payment not recovered Can include penalty payments to investor for performance issues (i.e., supply interruptions), or secondary rights to other products Generally treated as a liability by the company receiving cash advance Transactions often include warrant other equity issuances Royalty sunsets after pre-determined return is achieved 16

17 Project funding structure: Deerfield Funds / Dynavax 21M loan commitment Repayment at below-market interest Deerfield Funds 9M loan commitment Repayment contingent upon success Dynavax Milestone-based warrants Commitment fee 17

18 Project funding structure: Deerfield Funds / Dynavax Deerfield Funds agrees to advance a 30 million non-interest bearing loan that can be drawn down over three-year period subject to achievement of specific milestones in relation to the development of certain products in Dynavax s allergy franchise 9 million is earmarked for TOLOMBA program (seasonal allergic rhinitis caused by ragweed) to move into late stage trials If TOLOMBA is discontinued, Dynavax has no obligation to repay Deerfield up to 9 million earmarked for that program (other remaining outstanding principal due in July 2010) Other 21 million, if utilized, will advance Dynavax s peanut and cat allergy programs (in pre-clinical) Deerfield receives 1.25 million warrants upon execution of loan agreement at exercise price of 5.13 per share Deerfield receives an annual 5.9% cash commitment fee as well as milestone-driven payments in the form of warrants issued or issuable at an exercise premium of 20% over average share price in 15-day period prior to achievement of milestone If all milestones are successfully achieved, Deerfield could receive an additional 4.3 million warrants (making for a total of 5.5 million warrants) All warrants issued to Deerfield are exercisable for a term of five and one-half years from the date of issuance 18