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VC Perspective – A Vision for Global Investing Fred Craves, PhD. The $7 Trillion Complex, Global Healthcare Industry. HEALTHCARE EXPENDITURES AS A PROPORTION OF GDP (%).

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slide2

The $7 Trillion Complex, Global Healthcare Industry

HEALTHCARE EXPENDITURES AS A PROPORTION OF GDP (%)

Source: Datamonitor, OECD Statistical Extracts 2009, WHOSIS, 2010, taken from Datamonitor Pharmaceutical Key Trends 2011 – Healthcare System and Drug Regulatory Overview, March 2011, p. 16

slide3

Life Sciences: The Premise

  • We live in an era of accelerating change.
  • Healthcare spending is robust in developed countries and growing in emerging economies
  • Scientific progress is occurring as a factor of advances in biological understanding.
  • As large pharmaceutical firms continue to struggle with R&D productivity, they are increasingly turning to small firms and universities to create and validate new biological and other scientific insights.
  • VC can serve as the key liaison to academia and capitalize early-stage companies.
slide5

An Emerging Middle Class

% global middle class&% purchasing powerrepresented by Asia

Global middle class (in billions of people)

66%

59%

28%

23%

Source: OECD Observer – An Emerging Middle Class, June 2013

slide6

Increasing Life Expectancy and Chronic Diseases in China

CHINA’S AGING POPULATION

Source: US Census Bureau, International database. China Cardiovascular Disease Report 2005.

slide7

Expanding Healthcare Expenditures in China

High Growth Stage

20%CAGR

17%CAGR

Source: Goldman Sachs Global Investment Research; GuoHua Securities Research estimates

slide8

China Pharmaceutical Industry Growth

US$ (billions)

Source: MOH, Morgan Stanley Research

slide9

Multinational Pharma’s Increasing Activities in China

  • Multinational companies continue to build infrastructure in China, invest in R&D, and acquire local companies with the expectation that the Chinese market will provide desperately sought after revenue growth

2005

2012

2006

2007

2008

2009

2010

2011

Merck announces $1.5B over 5 years to establish new R&D center in Beijing

Novartisinvests $1B in Shanghai R&D center

BMS moves R&D base to China

Pfizer announces opening of new China R&D Center in Shanghai

AstraZeneca announces $100M R&D investment in China

GSK blueprints $100M Chinese R&D centerand doubles China R&D staff

J&J opens R&D center in Shanghai

Pfizer establishes generics joint venture in China

Novartis launches Galvus

Merck boosts R&D investment in China

Pfizer announces opening of New China R&D Center in Wuhan

Source: Bay City Capital analysis

Boehringer announces plans to double production capacity in Shanghai plant by 2013

slide10

Pharma Increasingly External Sourcing of Drug Candidates

PROPORTION OF EXTERNALLY SOURCED DRUG CANDIDATES IN CLINICAL DEVELOPMENT (%, 2007 vs 2011)

Source: Datamonitor R&D Trends 2012

slide11

Innovation’s Impact on the Cost / Care Continuum: Precision Medicine

  • Recent advances in sequencing technology will allow for optimization of an individual’s healthcare by tailoring care to his/her unique genetic profile

COST OF HUMAN GENOME NOW ON PAR WITH OTHER DX TESTING

slide12

Innovation’s Impact on the Cost / Care Continuum: Targeted Therapy

EFFICACY RATES OF SELECTED DRUGS FOR MAJOR THERAPEUTIC AREAS

Source: Spear, Heath-Chozzi and Hunt: “Clinical application of pharmacogenetics,” Trends in Molecular Medicine, Vol 7 No.5, May 2011

slide13

Smaller Companies Generate Higher Number of Approvals

  • Small companies generate higher percent of new molecular entity (NME) approvals, a category once dominated by large pharma

NME PRODUCTIVITY

Source: Nature Reviews: Drug Discovery, Lessons Learned from the Pharma Industry, December 2009

slide14

Early and Later Stage Assets Meet the Needs of Acquirers:

Investor Focus Should Reflect Their Needs

  • Acquirers seek early-stage assets to build long-term pipelines and later-stage assets with potential to alleviate potential revenue losses from patent expirations

BIFURCATION OF EXIT VALUES (SAMPLE FROM 2008-2011)

Platform(n=19)

Number of M&A Transactions by Stage of Lead Asset Over Time 2008 - 2011 (1, 2)

  • (1): Early stage includes Preclinical, Phase 1 and Proof-of-Concept Phase 2; mid stage includes Post-Proof-of-Concept Phase 2 and Phase 3; late staged / marketed includes NDA submitted, FDA approved and commercial assets.
  • (2): Includes announced transactions of $100M or more; excludes terminated transactions and reverse mergers; excludes transactions where deal value was not disclosed.

Source: Bay City Capital

slide15

Healthcare Investment Trending Position:

M&A Realizations Exceeding Investment

NET CAPITAL FLOWS

Private Biotech M&A Realizations vs Total Private Biotech Company Financing

More M&A

More financing

Source: Bruce Booth, “Venture-Backed Biotech’s 2011 M&A Exits Outpaced Both Investments and Fundraising”, Forbes, January 16, 2012

slide16

Implications for Venture Capital Investors

  • Focus on getting the right drug to the right patient at the right time to address both care and cost
  • Pharma’s dependence on innovation will continue
  • The imperative to go global: growth will come from outside of the United States
  • Shifting paradigms and capital scarcity present unique and compelling investment conditions
slide17

Ingredients for Success

  • Leaders in a community should realize that there is robust international competition for preeminence in life sciences.
  • A strong commitment to collaboration and partnership is a condition precedent.
    • The Quebec Consortium for Drug Discovery (CQDM) is a good step.
  • The research commitment from the government to fund basic research must be present.
    • Canada leads the G7 in per capita funding of public sector research
  • There must be an active and effective technology transfer capability within leading universities.
    • University of British Columbia (#14), University of Toronto (#22), and McGill University (#24) all rankamong the top 50 life sciences universities
  • The most important ingredient to the secret sauce of success in life sciences is access to capital.
    • Private or venture capital is the central component that is often missing from most life science economic development plans.
slide18

Next Steps

  • What can be done in Canada and Quebec to improve access to venture or risk capital?
  • And how can smaller firms more easily secure an opportunity to sell their product or company, or license their invention to a larger entity?
  • Organizations like CQDM are working to address these issues by fostering partnerships between academia, government, and industry
    • Working as a consortium with six of the world’s major pharmaceutical companies around the table
    • Fostering partnerships with organizations across provinces to build out the life sciences community throughout Canada, such as the Ontario-Quebec Life Sciences Corridor initiative
  • A financial commitment from the private sector is necessary to create a pool of venture money sufficient to create and sustain young Canadian companies.
    • Examples such as Merck’s collaboration with Lumira Capital, Teralys Capital, and others to provide investment capital to early-stage biotech companies in Quebec.