Novel Approaches to Financing Growth Opportunities Presentation to the New York Pharma Forum April 12, 2010 1
Table of Contents � Introduction � Financing options � Revenue interest financing � Royalty m onetization � Conclusions 2 2
Paul Capital Healthcare Overview � Market Leader in Healthcare Product Financing – Focus on royalty and revenue interest-based investments – Flexible and creative alternative financings � Diversified Portfolio – 40 investments in more than 70 products across 22 therapeutic areas – Geographically diversified in U.S. and Europe � Investm ent Expertise – Paul Capital is one of the largest dedicated healthcare investors ($1.6B of equity and debt capital under management) – Healthcare team includes 13 full-time professionals in New York, San Francisco and London with over 150 years of collective healthcare industry and healthcare investment experience 3 3
The Growing Need to Finance Healthcare Investm ent Opportunities 4 4
Areas of Investment � Research and developm ent � Com m ercialization activities � Manufacturing/ sourcing � Acquisitions Products – Companies – 5 5
R&D Costs Are Large and Still Growing Worldwide R&D spend by top 500 pharmaceutical and biotech companies 2002-2014E Source: UBS, December 2009
Partnering is the Predominant Source of Capital Biotech Funding by Source 1999-2009* Source: UBS. December 2009
The Challenge There are num erous opportunities to develop and com m ercialize new products and expand m arket share… But realizing these opportunities m ay require substantial capital investm ents 8 8
Financing Options 9
Traditional Equity Financing � Attractiveness depends on m arket conditions and stock valuation and corporate perform ance � Attractive for com panies with strong stock perform ance and favorable valuation � Negative im pact of dilution, especially for com panies with low valuations, which m ay out-weigh benefits 10 10
Traditional Debt Vehicles � Non-dilutive to equity � Restrictive covenants m ay lim it future strategic transactions or fundraising efforts � May be difficult to align the com pany’s and debt provider’s goals and interests � Long-term downside m ay outweigh near-term benefit 11 11
Product Out-licensing � Enables shared cost, raises capital and provides additional intellectual expertise and infrastructure � Non-dilutive to equity � Requires sacrifice of all or part of the licensed program ’s revenue realization and long-term upside potential � Potential for reduced visibility of the licensed program � May result in loss of control of the product/ program � Risk that licensee will lose interest in the program due to future changes in com petitive landscape or internal priorities � May com plicate future strategic transactions, especially if license involve a platform technology � Out-licensing early in developm ent m ay result in decreased royalty rates com pared with later-stage deals � Royalty incom e m ay be valued by investors at a lower m ultiple than revenues from sales of a product the innovator controls 12 12
Revenue Interest Financing 13 13
Healthcare Product Revenue Interest Financing SELLER � An investm ent transaction that involves the creation of Revenue Interest a synthetic royalty on Sales Less product sales $$$ Investment Capital Closing Securities � Applicable to com panies with existing or near-term product revenue Agreed-upon Product Sales Joint Account � Closing securities will Revenue Interest include a structured royalty (Synthetic Royalty) $ payable to the Buyer, and can also include other securities or form s of consideration BUYER 14 14
Revenue Interest as Alternative Capital � Com parison with equity – Non-dilutive – Lower cost of capital – Overall public market indicators and total company valuation play less significant role � Com parison with debt – Financing terms not dependent on current credit market conditions – Less restrictive operating or financial covenants 15 15
Seller’s Motivations to Use Revenue Interest Financing � Provides funds now for a broad range of uses � Risk m itigation � Flexibility to license all or part of a present or future revenue stream � Innovative deal structures enable sellers to retain upside revenue potential � Com patible with and com plem entary to subsequent financing efforts (public/ private equity, debt, other) � Buyers and sellers have shared interest in the success of the product underlying the transaction � Revenue interest can be repurchased 16 16
Revenue Interest Potential Downsides � Discount over the life of the product – Also true for out-licensing – Balance against reward of potential return from applying proceeds to new investments and strategic initiatives � Perception that sale indicates lack of confidence in the product – Not if you effectively communicate the rationale, use of proceeds and near- and long- term benefit, mitigation of risk – Buyer’s due diligence process may provide additional validation for the product and the underlying intellectual property asset � Potential encum brance of product IP ― Also true for senior debt structures ― Deal structure can be tailored to remove any possible issues 17 17
Valuing the Investment � Size of product revenues � Market and com petition � Regulatory risk � Patent life term 18 18
Revenue Interest Financing Enables Companies to Achieve a Broad Range of Goals � Expand a sales force to increase com m ercial com petitiveness or m arket potential of an existing product � Acquire a new product that allows additional revenue generation from an existing sales force � Offset R&D and/ or com m ercial launch expenses � Fund clinical developm ent of pipeline products as a way to defer partnering until product valuation is increased � Extend a product’s life cycle by funding line extensions, new indications and re-form ulations of established brands � Advance/ expand a product pipeline � Unlock the value of an asset that is un(der) appreciated by investm ent bankers and traditional investors 19 19
Acquire a New Product or Company Situation Situation � European specialty pharma company seeking capital to finance the launch of three products and acquire the European rights to a revenue generating product � Mix of capital allowed the company to minimize dilution while accessing sufficient growth capital Buyer % of SpePharm � Portion of funds provided at revenues and equity closing in the form of a revenue interest, with the potential to draw additional up to €18.5 MM funds should certain commercial milestones be achieved � Equity investment made at closing Result SpePharm used the financing to: � – Acquire the European rights to revenue generating products – Build out its commercial infrastructure 20 20
Expand a Sales Force Situation Situation � Biotech company conducting Phase III trials on pipeline product in multiple sclerosis and planning IPO to fund ongoing development spend � Actively marketing Zanaflex through small sales force � Additional funding needed to expand sales force and supplement pre-IPO balance sheet without dilution of ownership stake Buyer % of Zanaflex Sales � Purchased a portion of Acorda’s future Zanaflex net revenues (additional Up to $25 MM milestones for performance) � Worked closely with bankers to ensure proper disclosure during IPO process Result Financially strong pre-IPO position � Successful IPO 2 months after close of revenue agreement � Agreement seen as a validation of Zanaflex commercial potential � 21 21
Delay a Partnership to Maximize Value Situation Situation � Drug delivery company in need of commercial partner for DepoDur and $30MM of capital to fund Phase III trials � Preference was to partner upon approval, rather than during clinical development, in order to maximize license economics Buyer % of Product Revenues � Purchased a hybrid royalty/revenue interest in $30 MM four products: DepoCyt, DepoDur, Solaraze, and Xatral OD Result Investment allowed SkyePharma to defer partnering until late stage trials for DepoDur � were completed $30MM investment translated into >$200MM in total upfront and future milestone � payments to SkyePharma and royalty rate of up to 60% 22 22
Offset R&D Expenses Situation Situation A research-led Indian pharmaceutical company pursuing U.S. market entry � Financing sought for clinical development of 16 dermatological products for U.S. market � Buyer % of Product Revenues � Investment funded to match actual clinical development expenses Up to $27MM � Purchased a blended royalty on the 16-product portfolio Result Non-dilutive financing enabled Glenmark to offset its generic drug development expenses while building � its U.S. franchise for a dermatological market which today includes several FDA-approved products
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