The Boston Consulting Group

1. LOOKING BEYOND THE DEAL: WHAT YOU SHOULD EXPECT IN EFFECTIVELY INTEGRATING PEOPLE, PROCESSES, AND ASSETS INTO A VIBRANT BUSINESSLSI Biotechnology M&A ConferenceOctober 6, 2006 The Boston Consulting Group The Boston Consulting Group

2. GOALS FOR THIS DISCUSSION • Briefly introduce you to BCG and our relevant capabilities • Share our perspectives on what you can expect in a biotech M&A, and how to ensure success for your own company or your clients • Requirements for success in biotech M&A • Overview of the typical approach and issues you can expect to encounter • Using R&D examples to make it real • Answer your immediate questions

3. THE BAD NEWS: MOST MERGERS AND ACQUISITIONS FAIL TO REALIZE THEIR POTENTIAL • “Our analysis shows that 61% of buyers destroyed shareholder wealth” -- BCG, Business Week • “Many studies of mergers, stretching back to the last century have shown that, despite some successes, the overall record is decidedly unimpressive” --The Economist • “In 57% of these merged companies, return to shareholders lagged behind the average for their industries” -- The Harvard Business Review • While catastrophic failures are rare, the majority of mergers and acquisitions do not achieve their goals • Transaction itself absorbs most of the company's energy • Leadership focused on consummating the deal, not on making the combined business work • Value is created not only in the transaction itself, but in successful implementation

4. THREE FUNDAMENTALLY DIFFERENT OBJECTIVES NEED TO BE MANAGED FOR SUCCESSFUL INTEGRATION The measure of successful integration: "the increase in performance of the combined firm over what the two firms… accomplish as independent firms" 1. Continue to manage the current business 2. Design and build the new organization 3. Ensure expected "synergies" and value opportunities are realized

5. M&A IN THE BIOTECH WORLD BRINGS PARTICULAR CHALLENGES... • For many biotechs, key resources are already stretched in “business as usual” mode • Typical concentration of on-market products and the portfolio pipeline means there is high vulnerability from disruption • Industry is highly networked, with a well-oiled rumour mill and highly mobile top talent • Much valuable intangible knowledge exists, which may be lost if key talent departs • Titles and incentives/compensation structures may be quite different • Cultures are fiercely cherished (at the company level, and in working teams) • Processes on either side may not be scaleable for the new company’s size ...Which means that a rapid, disciplined integration process is critical

6. THE TYPICAL M&A PROCESS HAS MULTIPLE PHASESIllustrative Design and decision making Detailed implementation & progress monitoring Integration planning and data gathering Stage setting Pre-announcement Pre-closing and Month 1 post close Month 2-4 post closing Varying • Read-out of • Integration principles • Team charters • Key dates and milestones • Preliminary read-out of • Budget with synergies • Organization • Integration plan • Site strategy options • Final read-out of • Budget with synergies • Organization • Integration plan • Site strategy Timing of phases varies significantly, not just with size and complexity of deal, but by function and geography

7. CRITICAL CHOICES TO MAKE AND COMMUNICATE UPFRONT TO ENSURE SUCCESS • Make the "philosophy" of the underlying the integration effort explicit • Create a new business, combining the "best of both" • Or, default to a proven, successful formula from one side • Say explicitly if it is a real merger - or, if in some areas, it is a take-over • Define the balance between scope and speed • Focus on critical areas first then move to other fronts later • Or, proceed in parallel on all fronts • Decide how much resource will be focused on integration versus on day-to-day business and customers • Determine the principles of the desired organizations • Clean sheet, brand new • Or, build from one of the existing organizations • Will the feel be a new creation or an evolution?

8. THE TYPICAL INTEGRATION TEAM STRUCTURE IS MATRIXED • Overall integration accountability • Set process, guidelines, timelines and integration focus integration Integration Steering Committee Integration Leadership • Seconded line manager • Day-to-day integration responsibility Functional Platforms e.g., HR, Communications, Finance, Legal, IT Operational Teamse.g., Research, Development, Manufacturing, Sales, Marketing Integration Program Management Office • Drive and co-ordinate the overall integration process and communications Team 1e.g., Research Alliances Team 2 e.g., Development portfolio

9. ILLUSTRATING THE TYPICAL INTEGRATION AGENDA FOR R&D 1 Overall leadership Orchestrating R&D integration Stabilizing functions and “ring-fencing” critical projects (especially in phase III and registration) 2 Synergies Baselining and synergies 3 People and organization Organization & governance model definition Retain key talent & launch culture assessment / alignment 4 Portfolio First review of Research, pre-clinical and clinical programs Re-prioritize and resource specific projects; identify programs to be halted 5 Processes and site model Review alliances and CRO outsourcing Site consolidation scenarios 6 Support Functions Integrate mission critical processes (e.g., adverse event reporting) Develop new “best in class” processes Review and resize support functions

10. THREE PRIMARY RISK AREAS IN BIOTECH R&D Issue Greatest risk area Typical drivers • People retention and motivation • Short-term project delivery/ business stabilization • Longer-term productivity • Departure of key scientists/managers • Broader organizational malaise/cynicism • Delay/derail key late-stage programs • Innovativeness of organization • Uncertainty due to lack of communication, long process, insufficient visibility of leadership • Perceived risk to individual’s role, status, project, career prospects, site • Loss of mentors and personal networks • Disconnect with perceived vision, values of new organization • Integration distracts from senior management focus • Loss of key players • Failure to protect key programs during transition period • Failure to appreciate, reinforce, rebuild internal networks and communities of interest • Miss the right balance between creativity/freedom and process standardization • Overemphasis on cost reduction

11. AN EARLY FOCUS ON THE PEOPLEPROCESSES IS MANDATORYMany Parallel Activities Required, With Clear ComplianceTo Policies & Regulations Redundancy Appointments Leavers Communications Statement of policy Rationale, likely numbers, timing and cost Selection criteria and process Consultation and information process Dispute process • Selection policy, criteria and methods • Objectivity • Announcements • Process and timing • Tracking • Severance policy and timing • Severance terms • Support availability • Community initiatives • Reemployment training • Employee communications policy • Top-down and bottom-up • Code of communications practice • Rules about external communications Stayers Reward strategy Employee relations Statement regarding ‘best of both worlds’ Relocation policy and detail of terms, eligibility, etc Development of values • Statement of main beliefs and directions • Policy on harmonisation • Priorities and timing • Pay, benefits, pensions • Incentives and benefits • Interim measures Statement on employee relations policy Attitudes to employee involvement and representation, unions Policy on learning and development

12. CLEAN TEAMS CAN BE USED TO ENABLE RAPID PORTFOLIO DECISIONS POST-CLOSE (I) Basic legal requirements Business considerations for using clean teams • No merger shall go into effect until regulatory approval is secured • Exchange of commercially sensitive information is prohibited before approval – e.g., specific pricing or costing, detailed plans, R&D pipelines, etc. • No pre-close coordination is allowed that lessens or impairs current or future competition • Unilateral decision making • Management teams must operate their business separately • Likelihood of deal being approved • Greater the likelihood, the more a company can do prior to approval • Commercial sensitivity of pre-close activity • Driven by amount of overlap, other issues • Need to accelerate integration implementation post-close • May require direct line management involvement • Potential resistance of management at acquired company 1 2 3 Clean teams cannot execute decisions & are limited in coordinating outside clean environment 4

13. CLEAN TEAMS CAN BE USED TO ENABLE RAPID PORTFOLIO DECISIONS POST-CLOSE (II) Data Gathering Team vs. Clean Team • Define business principles (e.g. accounting standards, common definitions) • Exchange and validate non-competitive information and assumptions • Design and test transfer of data • Provide links to give functionality "day-one“ • Organize and structure information, systems and processes to be compatible • Secure critical and competitively sensitive data in format that can be quickly interpreted and integrated • Document knowledge, proprietary information, and/or strategic data that is at risk if unexpected attrition occurs • Accelerate risk mitigation through contingency planning for areas over which companies do not have full control until post-close

14. RESEARCH: KEY LESSONS • Do not expect Research to be as data-driven as Development • Definitions/boundaries are blurred • A “program” is often a contract with a promising scientist or an institution, with very broadly defined deliverables • Ultimately senior R&D executives’ views on research strategy will be critical to many decisions • Place them at center of research decision-making from the start • more top-down-driven process than some other areas in R&D • Hard to reach bottom-up consensus in integration time frame • Use a small team to help with the day-to-day work • Scientific discussion can still take place in larger forums • Don’t underestimate the importance of research networks and communities • Maintain productive networks as much as possible • Seek to build new networks where necessary, not just define a new organization chart • Scientists like to talk science – have them sharing science early to foster a sense of community

15. DEVELOPMENT: KEY LESSONS • Early-on, need to create and communicate an objective mechanism for decision making regarding technologies and program/project portfolio for the new entity • Anticipate long lead time before data ready for key project decisions • High degree of complexity and large number of people contributing make this inherently time-consuming • Ensure sufficiently resourced • Protect critical programs, particularly key late-stage drugs • Ensure adequate resourcing/stability • In some cases, be willing to compromise implementation timetable to ensure program delivery • Significant “tail” of activity needs to be planned for as projects move across sites

16. SOME THOUGHTS ON DRIVERS OF SUCCESS FOR INTEGRATING LEGAL FUNCTIONS Key issues and considerations Implications for integration approach Many key legal issues require instant stabilization and control during merger period, hence legal function highly involved with merger Legal staff from each company may have unique knowledge and/or expertise in vital areas (e.g., patents) Legal functions from each company may have different litigation strategies and tolerance for risk, depending on company culture Legal advice may be charged differently by each company (e.g., central cost center versus charge-backs) Each company may have different philosophies on sourcing, and different sets of external vendors Ensure clear separation of ‘platform team’ (focused on integration) from ‘function team’ (focused on nature of post-merger legal function) Factor unique knowledge into decisions regarding personnel retention. Longer term, work to ensure knowledge is codified for ease of transfer Specific attorney team set up to harmonize litigation strategies and approach to risk Harmonize charging policy in accordance with input from finance function and corporate function heads Rationalize sourcing and vendors in accordance with new company philosophy, taking existing commitments into account

17. WHERE YOU WANT TO BE WHEN IT’S DONESigns of Success The synergies estimated during the pre-acquisition planning were confirmed or exceeded The new organization is fully implemented without the loss of key talent The process has been perceived as fair and objective The combined company is operating efficiently There are no major problems with the stakeholders: employees, customers, suppliers etc The process has not lasted longer than expected There are no substantial issues still pending The motivation of employees is even higher than before the acquisition

18. QUESTIONS?