Option Based Deals BusDevForum

Deal or No Deal?
:
Option Based Partnering Deals
& other Risk-Modified Dealmaking Trends
AusBiotech Business Development Forum

3 March 2011
Prepared & Presented by:

Ms Robin Coleman
Principal, PharmBio Deals
rcoleman@pharmbiodeals.com
www.pharmbiodeals.com
Risk-Modified DealMaking Trends in 2010

- Agenda
Pharma-Biotech dealmaking is still highly active
Risk/Reward Share: A new era for Deal Structuring
Options, CVRs, Structured Deals
Pros & Cons
Case Study: Peplin Ltd
Options: Contracting Tips & Traps
Conclusions & Discussion
BusDev Forum 3Mar11

About me
11 years with GlaxoSmithKline, London

5 years in Global Finance Roles
6 years to 2006 as Transactions Director, WorldWide Business Development
Global licensing deal valuation, structuring, negotiation
5 years in Australian pharma-biotech industry

Principal, PharmBio Deals business devlopment consultancy
Business Development Director, Advent Pharmaceuticals
Fellow, Institute of Chartered Accountants
BusDev Forum 3Mar11

Pharma/Biotech Dealmaking
- Recent Trends
BusDev Forum 3Mar11

Pharma Industry Key Strategic Issues
Generic competition (2011/12 patent cliff)
Intense competition on few targets
Increased regulatory hurdles
Globally dispersed talent pools
Medicine Pricing and Access Issues
Novel R&D approaches
Shift to personalised medicines
Increasingly externalised innovation
Source: Sanofi Aventis Acadamie de Pharmacie Feb10

BusDev Forum 3Mar11
Rate of R&D Externalisation increases

- Deal Value average declines
Lehman
Brothers
collapse
6
BusDev Forum 3Mar11
Big Pharma highly active: up to 3 in-licensing deals a month
Source: Datamonitor Pharma Licensing Overview report Mar10

7
BusDev Forum 3Mar11
Late Stage/Launched Pharma Deals are still a Sellers Market
Three very different trends.

Japanese co. springboard to West with smaller pharma co. acquisition
Kyowa Hakko Kirin ProStrakan
Takeda Millenium
Dainippon Sumitormo Sepracor
U.S. company is buying a drug-development firm for access to a potential new
med (Forest Clinical Data $1.2bn acquisitoin)
Emerging market expansions (MEA on hold due to political unrest)
Source: FierceBiotech 22Feb11
BusDev Forum 3Mar11

Cephalon strikes record $2B stem cell pact with Mesoblast 7Dec10
In exchange for exclusive world-wide rights to commercialize specific products* based on
Mesoblast's proprietary adult stem cell technology platform, Cephalon will make an upfront
payment to Mesoblast totaling US$130 million (US$30 million upon Mesoblast shareholder
approval) and regulatory milestone payments of up to US$1.7 billion. Mesoblast will be
responsible for the conduct and expenses of certain Phase IIa clinical trials and commercial supply of
the products. Cephalon will be responsible for the conduct and expenses of all Phase IIb and III
clinical trials and subsequent commercialization of the products. Mesoblast will retain all
manufacturing rights and will share significantly in the net product sales.
In addition, under the terms of a Stock Purchase Agreement and a Subscription Deed, Cephalon will
make an equity investment to purchase a 19.99% stake in Mesoblast at A$4.35 per share,
totaling approximately US$220 million. (Update 14Feb11Mesoblast today raised an additional
$139m cash raised through the issuing of 24.7 million shares to Cephalon. This brings Mesoblast's
cash reserves to around $280 million.). This price represents a 45% premium to the last 30 days'
volume weighted average price for Mesoblast shares.
Mesoblast has done an outstanding job of developing Phase II clinical data in congestive heart
failure and hematopoietic stem cell transplants, plus preclinical data in acute
myocardial
infarction.
* ie certain indications retained by Mesoblast
9
BusDev Forum 3Mar11
Lilly/Acrux ink $335M deal for Ph3 underarm testosterone therapy 16Mar10
Lilly will licence exclusive worldwide rights to commercialize AXIRON.
Acrux will receive:
an upfront payment of $50 million
plus $3 million on the transfer of manufacturing assets.
$87 million upon the issuance of marketing authorization by the FDA
up to $195 million in potential commercialization milestones , and
royalty payments on future global sales if AXIRON is successfully commercialized.
Late Stage Deals

- Risk Reduced, Short Supply & High Demand
(only Late Phase Medicines Can Help Address 2011/12 Patent Cliff)
10
BusDev Forum 3Mar11
10 years of Pharma-Bio DealMaking

Good Old Days
2000-2007
Global Fin. Crisis

2008-2009
Whose
Market?
Sellers
Deal
Trends
High rate of deals, especially

clinical stage.
Brave New World

2010 20??
Buyers
Buyers
(except for Ph3 and later medicines)
(except for Ph3 and later

medicines)
Fewer deals.
Deal rate recovering;

trend to preclinical and
post Ph2 deals.
Hostile, backloaded M&A.

Licensing dominates.
Strong upfronts & near term
milestones.
Licensee achieves product
quid and/or
commercialisation
participation.
Risk
Capital
Plentiful VCs strong and

IPO frenzy
Big pharma distracted by

consolidation
(Roche/Genentech;
Pfizer/Wyeth;
Merck/ScheringPlough)
VCs reserving funds for followon investments.
Options & heavily

backloaded (if <Ph3 )
deals. (structured
deals). Use of CVR*s
for public company
acquisitions.
Public risk capital

markets thawing, USled
Public risk capital in deepfreeze

*Contingent Value Right
BusDev Forum 3Mar11
11
Option-Based Deals
& other Risk-Modified Deal Structures
BusDev Forum 3Mar11

12
Risk Modified Deals
What is a Risk Modified Deal Structure?
Any deal structure which acknowledges potential barriers to the assets

downstream maximum success.
Typical Risk Modification Deal Tools in Pharma/Biotech
Licensing with structured rewards (eg R&D, commercial, timely success

points)
Early/opportunistic M&A
Strategic Alliances, Joint Ventures
Option-to-Licence
Structured acquisitions
Contingent Value Rights
Frequent use since 2010,

in prePh3 deals
BusDev Forum 3Mar11

13
Trending Risk Modification Tools
Option-to-Licence/Acquire
Buyer/licensee invests in exclusive right, but not obligation, to transact on an

underlying asset on (typically) predetermined terms, when certain future
conditions are met.
Seller/licensor is obligated to fulfil the transaction, if requested by the
buyer.
Structured Deal/ CVRs
Structured Deal an acquisition where value flows across a small number of key
milestones (eg 3 key events in 5 years)
CVRs Contingent Value Rights: public company acquisition tool to boost selling
shareholders return upon long-term downstream success. Tradeable right.
BusDev Forum 3Mar11

14
Example:
Plain Vanilla Option-to-Licence from Research Collaboration
Lundbeck-Genmab Research Collaboration & Option to Licence 13Oct10
Lundbeck will have access to Genmab's antibody creation and development

capabilities, ... Furthermore, Lundbeck will have an option to take selected
antibodies into clinical development at its own cost and subject to the
payment
of
milestones
and
single
digit
royalties
to
GenmabAdditionally, Genmab will have a similar option to take selected
antibodies into clinical development for certain non-CNS indications at its
own cost and subject to the payment of milestones and single digit
royalties to Lundbeck. Under the terms of the agreement, Genmab will
receive an upfront payment of EUR 7.5 million (approximately DKK 56
million). Lundbeck will fully fund the development of the antibodies. If all
milestones in the agreement are achieved, the total value of the agreement to
Genmab would be approximately EUR 38 million (approximately DKK 283
million), plus single digit royalties
Source: FierceBiotech
15
BusDev Forum 3Mar11
Example: Plain Vanilla Option-to-Ph2 Licence

Novartis options Quark program in $680M pact 18Aug10
Underscoring the rich potential of new siRNA therapeutics, Novartis has

agreed to pay Quark Pharmaceuticals up to $680 million to nail the
licensing rights to a new therapy for kidney-related diseases.
Quark will get $10 million upfront for an option on QPI-1002, which is
currently in Phase II for kidney-related conditions. If Novartis decides to
pull the trigger on the option, it will pay out up to $670 million more in fees
and milestones. The drug is being developed for acute kidney disease and
delayed graft function in kidney transplantation. The therapy targets the
p53 gene, saving cells that could be killed by ischemia and other stressrelated conditions.
BioBucks
-Upfront is <2% of total
(potential) deal value
-(6 weeks later, Quark
announced $20m IPO)
16
BusDev Forum 3Mar11
Example of Double-Dipping: Option-to-Acquire...Twice!
Incline Therapeutics lands $43M round, option to sell for up to $228M 22Jun10
Incline Therapeutics has landed a $43m Series A to back the development of a pain
med delivery system and landed a $3.5 million upfront for an option to sell the
company to Cadence Pharmaceuticals. Cadence gets the right to buy Incline for
$135 million during the first option period, with the price rising to $228 million
in the second option period--plus a $57 million bonus if the FDA approves its
pain delivery technology.
Incline is developing Ionsys, a needle-free delivery device for opioid meds that was
originally advanced by Johnson & Johnson. Approved by the FDA four years ago,
Ionsys was never marketed and Incline is adding new patient safety features to the
technology.
17
BusDev Forum 3Mar11
Turning the Tables: Licensor Opt-Back-In

Genmab, Seattle Genetics ink cancer research deal 14Sep10
Genmab and Seattle Genetics have signed an antibody-drug conjugate (ADC)

research collaboration agreement. Under the agreement, Genmab has rights to
utilize Seattle Genetics' ADC technology with its HuMax-TF antibody. . Genmab
is responsible for research, manufacturing, preclinical development and Phase I
clinical trials of ADCs. Seattle Genetics received an undisclosed upfront
payment and can opt into an ADC product at the end of Phase I development.
18
BusDev Forum 3Mar11
One that got away..

- Did Buyer try to negotiate Option for this asset?
Durect's pain drug fails to clear key hurdle in PhIIb 17Jun10
7Jun10 -- Hospira and DURECT announced a licensing for DURECT's POSIDUR

in Phase III clinical trials. .. Hospira will make an upfront payment of $27.5
million, with the potential for up to an additional $185 million in performance
milestone payments based on the successful development, approval and
commercialization of POSIDUR. ..
17Jun10 - 10 days after signing, Durect reports that its pain drug Posidur-..failed to
demonstrate an ability to reduce patients' use of rescue opioids.
19
BusDev Forum 3Mar11
Pros & Cons of an Option Deal

- Buyers/Licensees Perspective
Pros
Cons
Minimises investment until a key technical

outcome is known. (Try before you buy).
Weaker offer than an option-free structure;

may lose out in negotiations.
Assists multiple shots on goal strategy
Less immediate influence on program than if

seller had direct licence
Enables buyer to influence optiondependent outcome (eg advises clinical trial

design)
Deal terms set before option trigger outcome

is known (overpaid?)
Locks out competitors in option period.
Deal terms set before option trigger event

outcome known (got a bargain?)
BusDev Forum 3Mar11

20
Pros & Cons of an Option Deal

- Sellers/Licensors Perspective
Pros
Cons
Immediate capital injection - Partners option

fee
Partners commitment (of sorts)
Partners resources to help you achieve

option condition (possibly)
No long-term commitment (possibly) to

partner or program
The deal you took because you couldnt get

an option-free deal
Exclusive tie-in, with (possibly) no
commitment long-term future
Losing the Upside
Risk of non/slow program/ company
recovery if partner does not exercise
option
Peplin case study
If research collaboration, and option not

exercised on some compounds, may leave
some preclinical assets for further internal
development/other partnering
BusDev Forum 3Mar11

21
Structured Deal simple example

Gilead Sciences to Acquire Calistoga Pharmaceuticals for $375 M 22Feb11
Gilead Sciences, Inc. (Nasdaq:GILD) and Calistoga Pharmaceuticals, Inc., a

privately-held biotechnology company focused on the development of
medicines to treat cancer and inflammatory diseases, today announced the
signing of a definitive agreement pursuant to which Gilead will acquire
Calistoga for $375 million. Calistoga could earn up to an additional $225
million if certain milestones are achieved.
22
BusDev Forum 3Mar11
Structured Deal how they preserve cash, manage risk

ADVENTRX Signs Definitive Agreement to Acquire SynthRx Inc 14Feb11
"The all-stock, milestone-based deal structure is a win for ADVENTRX and its
stockholders in that it allows us to retain our cash for development activities
and, other than a modest upfront equity payment, ensures we pay only as the
188 program achieves success. I'm pleased that we would have the data from
the planned phase 3 study in-hand while having paid less than 25% of the
total deal consideration."
All-stock transaction (assuming stockholder approval)
-- Over 95% of merger consideration based on milestone achievement
-- Over 75% of merger consideration based on NDA acceptance/approval
23
BusDev Forum 3Mar11
CVR example (9 year upside track)

Sanofi Genzyme Merger - $20.1bn plus CVRs 16Feb11
Sanofi-Aventis sealed its $20.1 billion purchase of Genzyme Corp at $74 share
cash plus CVRS of up to $14 a share for an unapproved multiple sclerosis drug.
..Based on realistic assumptions, the cash-plus-CVR-payout will end
up being $78 per share.
Genzyme stockholders will receive CVRs that entitle them to payments if the
experimental MS drug, Lemtrada, wins U.S. approval and reaches sales
projections... The CVR will be publicly traded on the Nasdaq... Investors may
need to hold these shares until 2020 to earn full value.
even if you get all those payments, $14 within the next 10 years is not worth $14
today, for sure.
24
BusDev Forum 3Mar11

Sanofi Genzyme Merger - $20.1bn plus CVRs 16Feb11
Extract from Sanofis press release
Terms of the CVR agreement call for additional cash payments under certain
circumstances. The agreement is structured such that the economic upside at
each milestone is shared between sanofi-aventis and Genzyme shareholders.
The CVR terminates on December 31, 2020 or earlier if the fourth product sales
milestone has been achieved. The one-time milestones and payments can be
summarized as follows:
$1.00 per CVR if specified Cerezyme/Fabrazyme production levels are met in 2011
$1.00 per CVR upon final FDA approval of LemtradaTM for multiple sclerosis (MS)
$2.00 per CVR if net sales post launch exceed an aggregate of $400 million
$3.00 per CVR if global net sales exceed $1.8 billion
25
BusDev Forum 3Mar11

Forest to acquire Clinical Data for $1.2bn 22Feb11
Forest will promptly commence a cash tender offer to purchase all of the
outstanding shares of Clinical Data common stock for $30.00 per share in
cash
and the non-transferable contractual right that could deliver up to an
additional $6.00 per share in cash if U.S. net sales of Viibryd over four
consecutive fiscal quarters commencing from the date of the closing of the
transaction reach or exceed
$800 million within the first 5 years ($1.00 per share),
$1.1 billion within the first 6 years ($2.00 per share) and
$1.5 billion within the first 7 years ($3.00 per share).
26
BusDev Forum 3Mar11
Risk Modified Deals
What is a Risk Modified Deal Structure?
Any deal structure which acknowledges potential barriers to the assets

downstream maximum success.
Typical Risk Modification Deal Tools in Pharma/Biotech
Licensing with structured rewards (eg R&D, commercial, timely success

points)
Early/opportunistic M&A
Strategic Alliances, Joint Ventures
Option-to-Licence
Structured acquisitions
Contingent Value Rights
Frequent use since 2010,

in prePh3 deals
BusDev Forum 3Mar11

27
Case Study:
Peplin Ltd
Dr Joshua Funder
GBS Venture Partners
28
BusDev Forum 3Mar11
Peplin History
1998 Peplin founded by Dr James Aylward
1999 - Restructure prior to ASX listing seed investors in pre-IPO round
2000 - IPO on ASX
2001 - Lead compound identified
2002 - Dermatology applications licensed to Allergan in US
2004 - INDs filed for AK & BCC, Allergan license terminated
2006 - Established US operations
2007 - Redomiciled to US, US IPO prospectus (NASDAQ), US$15m GE loan
2008 - US prospectus pulled, Tom Wiggans CEO, Phase III trial, GBS invests
2009 Dual M&A / Equity raise process initiated Feb 09,
Merger Agreement signed 2 Sept
BusDev Forum 3Mar11

Getting Together: $23m Biodollar Deal
In November 2002, Peplin licensed PEP005 Topical, its proprietary product

for the treatment of actinic keratosis (AK) and non-melanoma skin cancer to
Allergan, Inc. of Irvine California.
Peplin kept rights to other indications

US$1m upfront
US$22m additional in development fees and milestones
IND
Ph III
NDA filing
NDA approval
Low royalty rate on net sales
30
BusDev Forum 3Mar11
Breaking Up: Its About You, Not Me
IRVINE, Calif. -- Allergan, Inc. (NYSE:AGN) and Peplin Ltd. have agreed to
discontinue their collaboration for the development and commercialization of skin
cancer products in North and South America based on Peplin's proprietary and novel
anti-cancer compound PEP005. Allergan continues to believe that Peplin's lead
investigational product PEP005 Topical has potential in the large, growing and
under-served market for treating non-melanoma skin cancer.
"Allergan maintains a disciplined portfolio planning process that seeks to ensure a

focus on core programs that project the highest return and is concentrating resources
on high potential products with approvals expected between now and 2008,"
explained Dr. Scott Whitcup, Executive Vice President, Research and Development.
"PEP005 was one of the technologies which did not make the funding list for 2005.
However, the Company remains committed to the skin care business through its
strong presence in the dermatology market with BOTOX(R) Cosmetic and the
tazarotene franchise."
31
BusDev Forum 3Mar11
Give Back, Take Back

Peplin Got:
US$1.3m outstanding obligations paid to Peplin
US IND for Actinic Keratosis, Basal Cell Carcinoma
Commitment to complete Ph I study underway
All IP to proprietary development program
Scientific data and regulatory filings returned
Allergan Got:
Option for Allergan to re-license in 2006 (if PEP005
remains unlicensed)
On relicense Peplin to pay Allergan 25% of
pre-commercialization payments up to US$3m
On relicense 25% of post commercialization royalties
and revenue up to a cap of US$4m (inc $3m above)
If Peplin itself markets PEP005 Topical in the
Americas, pay Allergan 10% royalty up to US$4m
32
BusDev Forum 3Mar11
Happy Ending
Peplin: sold for $350 million
Thursday, 3 September 2009
Nick Evans
PEPLIN has become the latest latestage Australian biotech to be
bought out, announcing early this
morning it has entered a definitive
merger agreement with privately
owned Danish pharmaceutical
company LEO Pharma.
33
BusDev Forum 3Mar11 www.pharmbiodeals.com
Conclusions
Pharma-Biotech Dealmaking remains highly active
GFC and increased Externalisation of R&D Engine have driven buyers/licensees

need for more risk-modified deal structures
Late stage medicines are still in a sellers market
Option-based deals and other modified risk structures will remain as deal structure
templates for pre Proof of Concept medicines
Licensor/Seller should negotiate terms that maximise their interests in all scenarios!
34
BusDev Forum 3Mar11
Panel Discussion:
Are Option-Based Deals a Deal or No Deal?
35
BusDev Forum 3Mar11
Panel Themes
Are option deals non-deals until the option conditions vest?
Are option deals best avoided by seller/licensor if possible?
What creates a good option deal for the seller/licensor?
How do you value the option price?
How will the market react to and value an option deal?
36
BusDev Forum 3Mar11

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Deal or No Deal?

AusBiotech Business Development Forum

Prepared & Presented by:

Risk-Modified DealMaking Trends in 2010

Pharma-Biotech dealmaking is still highly active

Risk/Reward Share: A new era for Deal Structuring

Options, CVRs, Structured Deals

Pros & Cons

Case Study: Peplin Ltd

Options: Contracting Tips & Traps

Conclusions & Discussion

BusDev Forum 3Mar11

11 years with GlaxoSmithKline, London

5 years in Australian pharma-biotech industry

Fellow, Institute of Chartered Accountants

BusDev Forum 3Mar11

BusDev Forum 3Mar11

Pharma Industry Key Strategic Issues

Generic competition (2011/12 patent cliff)

Intense competition on few targets

Increased regulatory hurdles

Globally dispersed talent pools

Medicine Pricing and Access Issues

Novel R&D approaches

Shift to personalised medicines

Increasingly externalised innovation

Source: Sanofi Aventis Acadamie de Pharmacie Feb10

Rate of R&D Externalisation increases

Big Pharma highly active: up to 3 in-licensing deals a month

Source: Datamonitor Pharma Licensing Overview report Mar10

Late Stage/Launched Pharma Deals are still a Sellers Market

Three very different trends.

Source: FierceBiotech 22Feb11

BusDev Forum 3Mar11

Late Stage/Launched Pharma Deals are still a Sellers Market

Late Stage/Launched Pharma Deals are still a Sellers Market

Late Stage Deals

10 years of Pharma-Bio DealMaking

Global Fin. Crisis

High rate of deals, especially

Brave New World

(except for Ph3 and later medicines)

(except for Ph3 and later

Deal rate recovering;

Hostile, backloaded M&A.

Plentiful VCs strong and

Big pharma distracted by

VCs reserving funds for followon investments.

Options & heavily

Public risk capital

Public risk capital in deepfreeze

BusDev Forum 3Mar11

Risk Modified Deals

What is a Risk Modified Deal Structure?

Any deal structure which acknowledges potential barriers to the assets

Typical Risk Modification Deal Tools in Pharma/Biotech

Licensing with structured rewards (eg R&D, commercial, timely success

Frequent use since 2010,

BusDev Forum 3Mar11

Trending Risk Modification Tools

Buyer/licensee invests in exclusive right, but not obligation, to transact on an

Structured Deal/ CVRs

BusDev Forum 3Mar11

Lundbeck-Genmab Research Collaboration & Option to Licence 13Oct10