Pharma Industry Outlook Highlights Cash‑Rich Companies Pursuing Acquisitions of Development‑Stage Biotech Firms

development stage companies as an important source of innovation and new products to supplement R&D pipelines and drive future growth. Strong growth potential is critical for these companies to support their valuation metrics, especially in light of expected patent expirations on their commercial products. In total, over $290 billion of revenue is at risk from patent expirations between now and 2018.29 The large and mid-sized companies are addressing this strategic need to a large extent through increased acquisitions and partnerships with development stage companies that have maturing assets. The Fund Managers expect this dynamic to increase competition between the larger strategic players in the industry as they vie for the most interesting companies with maturing development stage assets. The development stage companies should have strong negotiating leverage in these deal discussions, which should drive premium valuations on acquisitions and attractive terms on partnerships. The increased strategic need for acquisitions and partnerships comes at a time when the large and many of the mid-sized companies in the industry are in a strong financial position to complete high value deals. The top ten pharmaceutical companies have a total of $140 billion in cash on their balance sheets today and have a combined market capitalization of over $1.3 trillion.*° A relatively new set of well funded potential acquirers and/or partners has emerged over the last decade, as many of the mid-sized biotech companies have seen their commercial businesses thrive, and now have strong revenue and profit growth. Since 2002, the number of public biotech companies with annual profit (EBIT) over $100 million has doubled to 16, and the combined annual profit of these companies has increased 4.5 times to $16.6 billion.*!_ This has significantly increased the number of companies in the industry with the financial wherewithal to complete large cash transactions. At the same time, the industry’s R&D productivity has been disappointing in terms of new products generated by massive internal R&D budgets. To address the gaps created in their R&D pipelines, most large and mid-sized players have shifted a large percentage of their R&D budgets away from internal R&D projects and have increased investment in “externalizing” a large portion of their R&D. These companies have slashed internal R&D budgets, closed major R&D facilities, and made large cuts to headcount. It is estimated that the pharmaceutical industry cut R&D spending by 5.7% in the U.S. and 2.2% globally in 2012 alone,*? and this trend has continued in 2013. Most large and mid-sized biopharmaceutical companies now have large internal groups that include a combination of business and scientific resources that are dedicated exclusively to external search and evaluation, and are tasked with finding opportunities for mergers, acquisitions, and partnerships that will bring in new technology. Some have taken this strategy even further and have set up their own internal venture capital investment groups with the belief that by co- investing with more experienced institutional venture investors they can improve their visibility into the latest innovations and improved access to the best opportunities. The Fund Managers believe that this combination of financial strength and strategic need to source more products than internal R&D efforts can produce will lead to a significant increase in deal activity, creating a strong exit environment for smaller development stage companies for the foreseeable future. 29 eValuatePharma 3° Burrill Biotech 2012 Report " New Leaf Analysis of public company financial data as provided by Bloomberg » Battelle R&D Magazine Annual Global R&D Funding Forecast 37 CONTROL NUMBER 257 - CONFIDENTIAL HOUSE_OVERSIGHT_024048