Campbell Alliance: Strategy. Results.

THE 2012 DEALMAKERS INTENTIONS SURVEY

Campbell Alliance thought leadership report prepared by Jeff Stewart

Introduction
In 2012, in-licensers are pushing risk down the food chain to out-licensers. Supply and demand is skewed heavily toward in-licensers demanding de-risked, late-stage assets in the most established therapeutic areas. However, the number of de-risked assets is relatively lacking, making the 2012 licensing environment a scary one. Discount rates have been rising, which is driving the in-licensers to chase late-stage assets. For those who can accept a long investment horizon in the face of these pressures, a relative surplus of early-stage oncology assets may exist, representing true buying opportunities. Buying opportunities in off-the-beaten-path asset

classes may also exist, especially for those in development stages. In short, safety will be expensive in 2012. The Dealmakers Intentions Survey conducted by Campbell Alliance provides a unique perspective on these trends. By surveying business development professionals from pharmaceutical and biotechnology companies of all sizes, we are able to generate forward-looking insights based on dealmakers general expectations for activity in the coming year. The following discussion reviews results for the 2012 Dealmakers Intentions Survey and presents conclusions that are critical to leaders developing strategies for their licensing organizations.

Summary Results From the 2012 Dealmakers Intentions Survey

n

Expectations for DealmakingGeneral Optimism

Survey respondents on both sides of the table generally anticipate 2012 will be a better year than 2011 for dealmaking. This is true for phase I, phase II, and in-line assets. That is, many more respondents anticipate an increase rather than a decrease in deals at these stages. For example, more than half of out-licensers and in-licensers believe that there will be more preclinical and phase I deals in 2012 than in 2011, while a negligible share (4%) of out-licensers and no in-licensers believe there will be a decrease in deal activity for these early-stage assets (Figure 1). Similarly, dealmakers on both sides of the licensing table anticipate increases in deals for phase II assets and for marketed products. We believe that dealmakers are in the best position to anticipate trends in the industry. Thus, we anticipate a generally optimistic outlook for 2012 in terms of dealmaking activity.

The outlook for phase III assets is less clear, however. Anticipations for phase III assets are in conflict in an unusual way. We have not seen this much of a difference in outlook in the previous three years of the Dealmakers Intentions Survey. On one side of the table, inlicensers anticipate an increase in dealmaking for phase III assets. On the other side of the table, out-licensers anticipate an essentially flat outlook for phase III assets in 2012. One might have expected in-licensers to be more pessimistic, but this is not the case. What is going on? There are several potential explanations. First, in-licensers may be more aware of how bad a market 2011 was for licensing phase III assets, so even modest expectations for 2012 would be an improvement. Alternatively, out-licensers may be more in tune with their own willingness to out-license de-risked assets. That is, in-licensers may be hoping for phase III assets to in-license, but out-licensers plan instead to retain their de-risked assets. This is consistent with the general observation that the patent cliff and dry late-stage pipelines may be making in-

Overall, survey respondents are optimistic that 2012 will be a better year for dealmaking than 2011. Out-licensers, however, are relatively pessimistic about phase III deals, which may indicate that de-risked assets are not available for license. Oncology leads the therapeutic areas where inlicensers anticipate doing deals. For most therapeutic areas, the supply/demand balance is tipped heavily toward late-stage assets (high relative demand) and against early-stage assets (low relative demand). Higher discount rates imply dealmakers perceive increased risk. We conclude that in-licensers will continue to attempt to push risk down to outlicensers, and this will lead to a sellers market for derisked assets and a buying opportunity for high-quality, early-stage assets.

THE 2012 DEALMAKERS INTENTIONS SURVEY

Figure 1

N=41 In-Licensors N=71 Out-Licensors

Out-Licensers Expectations

In-Licensers Expectations

Expectations for Preclinical and Phase I Deals

4% 54% Expect an Increase

0% 51% Expect an Increase

Expectations for Phase II Deals

6%

39% Expect an Increase

5%

44% Expect an Increase

Expectations for Phase III Deals

17%

19% Expect an Increase

2%

39% Expect an Increase

Expectations for Deals for Marketed Products

4%

17% Expect an Increase

2%

39% Expect an Increase

The outlook for phase III assets is unusual in that while in-licensers anticipate an increase in dealmaking for phase III assets, out-licensers anticipate an essentially flat outlook for phase III assets in 2012.
Source: Campbell Alliance Dealmakers Intentions Survey 2012. Includes respondents who described their role as either exclusively or mostly on one side of the negotiating table (i.e., excludes those who reported an even mix of in-licensing and out-licensing or did not answer).

licensers desperate. Also, development-stage companies with assets sold by a targeted, specialty sales force are in a better position to go-it-alone. (For more on how emerging companies are beginning to step out of the laboratory and into the world of independent sales and marketing, see the article Biotechs Declaration of Independence and What Pharma Needs to Do About It in the January 2012 issue of In Vivo.) Thus, we believe that 2012 will generally be a sellers market for de-risked phase III assetsperhaps the best selling opportunity for phase III assets in recent history. Figure 2 shows the trend in respondents expectations for phase III deals over the past four years of the Dealmakers Intentions Survey.

Figure 2

Phase III Expectations Over Time

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Out-Licensors In-Licensors

2009 2010 2011 2012

Share of Respondents Anticipating an Increase in Deal Activity

Source: Campbell Alliance Dealmakers Intentions Surveys 2009, 2010, 2011, 2012.

Campbell Alliance: Strategy. Results.

Supply and Demand

A total of 57 respondents indicate that their company is likely or very likely to conduct an in-licensing program for at least one asset in 2012. The therapeutic areas and stages of development for these assets provide a window into the demand side of the licensing equation. Oncology and immunology are associated with the highest level of demand (Figure 3). Interestingly, in-licensers anticipate making the largest number of deals for preclinical and phase I assets for both of these therapeutic areas. This is in contrast with all other therapeutic areas, with the exception of vaccines.
Figure 3

More than one third of in-licensers, for example, indicate they are likely or very likely to conduct an in-licensing program for an early-stage oncology asset in 2012. Meanwhile, 30% of in-licensers anticipate conducting a program to partner-in a phase II oncology asset, 25% anticipate attempting to in-license a phase III oncology asset, and 15% anticipate the same for in-line oncology assets. A few examples of phase II demand bias exist, most notably in pain, where 17.5% of respondents indicate that they believe they will conduct an in-licensing program for a phase II asset, which is more than twice the share of respondents who indicate they will be conducting a program to in-license a pain

asset at any other stage of development. We can compare the share of in-licensers seeking to in-license each asset with the share of out-licensers currently conducting an out-licensing program for each asset at that stage. This allows us to compare proxies of supply and demand to determine the relative areas of potential price premiums (high demand, low supply) and price discounts (low demand, high supply). A total of 101 respondents indicate that they are seeking to out-license at least one asset. Immediately, we can see that there are areas where many out-licensers are seeking to partner (e.g., early-stage oncology) and areas where there is relatively less supply, such

Therapeutic Areas Where My Company Is Likely or Very Likely to Conduct an In-Licensing Program in 2012

40% 35% Share of Respondents 30% 25% 20% 15% 10% 5% 0%

CNS (excl pain) Immunology

Preclinical/Phase I Phase II Phase III Marketed

Source: Campbell Alliance Dealmakers Intentions Survey 2012. Includes answers from 57 respondents who indicated their company was likely or very likely to in-license for at least one therapeutic area for at least one stage of development.

Womens Health

Respiratory

Antibiotics

Metabolics

Dermatology

Oncology

Anti-Virals

Other

Pain

GI

Vaccines

CV

THE 2012 DEALMAKERS INTENTIONS SURVEY

Figure 4

Assets My Company Is Currently Seeking to Out-License

Preclinical/Phase I Phase II Phase III Marketed

40% 35% Share of Respondents 30% 25% 20% 15% 10% 5% 0%

CNS (excl pain) Immunology

Source: Campbell Alliance Dealmakers Intentions Survey 2012. Includes answers from 101 respondents who indicated their company is seeking to out-license at least one asset.

as phase III immunology (Figure 4). When we compare the share of out-licensers with in-licensers on an asset-by-asset basis, we can see the areas of highest and lowest relative demand:

By comparing supply and demand in this way, we expose what is common knowledge in the industrythe greatest imbalance in supply and demand is for de-risked, latestage assets (Figure 5). We anticipate that these assets will continue to demand a

premium. A glut of early-stage assets exists, even in areas such as oncology, where there is a great deal of demand but relatively more supply. The main counterexamples are metabolic disease, respiratory disease, and antibiotics, where the demand may be relatively large for preclinical and phase I assets. Also of note are the phase II assets where the highest relative demand exists, namely in pain, immunology, and cardiovascular. We also asked survey respondents to list hot areas for licensing in 2012, and the clear winner was follow-on biologics (Figure 6). Its telling that the hottest technology is in the most de-risked of asset classes. The other hottest areas are in personalized medicine and a variety of oncology technologies such as antibody-drug conjugates, selective tyrosine kinase inhibitors, and cancer vaccines.

Highest Relative Demand

Oncology, phase III and marketed CV, phase III Metabolic, phase III and marketed CNS (excluding pain), phase III and marketed Respiratory, phase III and marketed Pain, phase II GI, marketed

Lowest Relative Demand

Oncology, preclinical/phase I Other, preclinical/phase I and phase II Vaccines, preclinical/phase I CNS (excluding pain), preclinical/phase I Womens health, phase III CV, preclinical/phase I Pain, preclinical/phase I

Womens Health

Metabolics

Respiratory

Antibiotics

Dermatology

Oncology

Anti-Virals

Other

Pain

GI

Vaccines

CV

Campbell Alliance: Strategy. Results.

Figure 5

A Demand Index Identifies the Areas of the Highest Mismatch Between Supply and Demand

Relative Demand (share of in-licensers minus out-licensers)

0.3 0.2 0.1 0.0

CNS (excl pain) Immunology

-0.1 -0.2 -0.3 -0.4

Preclinical/Phase I

Phase II

Phase III

Marketed

Source: Campbell Alliance Dealmakers Intentions Survey 2012. Includes answers from 101 respondents who indicated their company is seeking to out-license at least one asset (supply) and 57 respondents who indicated their company is likely or very likely to in-license for at least one therapeutic area for at least one stage of development (demand). Relative demand is indicated as share of in-licenser likely or very likely to conduct a program to in-license an asset minus share of out-licensers currently seeking to out-license an asset.

Figure 6

Hot Areas for Licensing in 2012

60% Share of Respondents 50% 40% 30% 20% 10% 0%

Anitbody-drug conjugates Oral protein delivery Personalized medicine Broad-spectrum TKi Orphan diseases Nanoparticles Follow-on biologics Cancer vaccines DNA vaccines Gene therapy Selective TKi Stem cells Other RNAi

Source: Campbell Alliance Dealmakers Intentions Survey 2012. Includes answers from 67 respondents. Respondents could select multiple areas. Orphan diseases and gene therapies were write-ins.

Womens Health

Metabolics

Respiratory

Antibiotics

Dermatology

Oncology

Anti-Virals

Other

Pain

GI

Vaccines

CV

THE 2012 DEALMAKERS INTENTIONS SURVEY

Best Practices in Business Development

We asked survey respondents about their standard practices in evaluating business development opportunities. Overriding the responses is the reality that successful in-licensing is done with known parties or those who have been referenced in by trusted advisors (Figure 7). This underscores for out-licensers the importance of obtaining personal contacts with in-licensing professionals. The deals reported to be more successful than average come in through Business Development or through the executive team (Figure 8). While survey respondents indicate that a significant share of deals is sourced through R&D, these deals are less
Figure 7

likely to proceed to a signed collaboration. Once a deal is initiated, the out-licenser provides non-confidential disclosures. However, in-licensers perceive these non-confidential data packages to be deficient in one or more ways (Figure 9). The most commonly cited deficiency is in pricing and market access. A full two thirds of in-licensers indicate they need more pricing and market access data in the non-confidential data packages they receive. It is no doubt a sign of the times that assets need not be first in class to be in-licensed. First three in class is, however, a much more commonly cited absolute requirement. Naturally, the mechanism of action must be established, and in-licensers agree that the MOA must be one being sought by the in-licensing organization.

In addition, financial hurdles often remain well understood within the in-licensing organization. These investment hurdles are typically focused on NPV and peak US revenue estimates. Respondents report that NPV of $125 million is the practical minimum for consideration, and peak US revenue must be between $150 million and $200 million as a minimum hurdle. Similarly, the rNPV must be about $50 million, IRR must be about 18%, and peak global revenue must be $300 million to $350 million. At the same time, almost 30% of in-licensers indicate that they do not have minimum investment hurdles within their organizations. Naturally, it is in the out-licensers best interests to understand the particular investment hurdles required by each in-licensing organization. When conducting due diligence, more than

How Deals Get Done

As a practical matter, for all successfully completed licensing deals we previously knew the out-licensor or the deal was referred to us by a known third party

5.4

An unsolicited non-confidential presentation received through e-mail may well lead to a successfully completed deal

4.5

1 Disagree

5 Agree

Source: Campbell Alliance Dealmakers Intentions Survey 2012. Includes answers from 95 respondents who answered this question. 1 = completely disagree, 7 = completely agree.

Campbell Alliance: Strategy. Results.

Figure 8

Source of Initial Awareness

All Deals Successful Deals

60%
Share of Respondents

50% 40% 30% 20% 10% 0%

R&D Marketing/commercial Other Board member Executive leadership Less Successful Than Average More Successful BD

Source: Campbell Alliance Dealmakers Intentions Survey 2012. Includes answers from 95 respondents.

Figure 9

Quality of Non-Confidential Materials In-Licenser Feedback

Pricing and Market Access
30% 37% 39% 51% 6% 49% 34% 56% 11% 0% 20% 59% 40% 60% 80% 67% 61% 57% 48% 45% 44% 43% 29% 100%

Need Much More Info

Clinical Plan Manufacturing Clinical Info Financial Unmet Need

Need Not as Much More

IP Fit With Company

Need Less

About Right

Need More

Share of Respondents

Source: Campbell Alliance Dealmakers Intentions Survey 2012. Represents 106 respondents who answered the question and expressed an opinion.

THE 2012 DEALMAKERS INTENTIONS SURVEY

Figure 10

Prior to an important in-licensing deal, my organization conducts or commissions the following due-diligence study(s)

Physician interviews (qualitative) Pricing and market access study Physician surveys (quantitative) None of the above
0% 10% 19% 42% 57%

81%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Source: Campbell Alliance Dealmakers Intentions Survey 2012. Includes answers from 77 respondents. Respondents could select multiple entries (other than none of the above).

Figure 11

Valuation Methods Used

Comparable Deals rNPV Peak Revenue NPV Real Options Other No Formal Method
0% 2% 1% 5% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 49% 46% 72% 76%

Median Discount Rate Out-Licensers 15% In-Licensers 13%

Source: Campbell Alliance Dealmakers Intentions Survey 2012 . Includes answers from 91 respondents. Respondents could select multiple entries (other than no formal method).

80% of respondents indicate that they commission qualitative interviews of physicians in order to establish the market potential of the product (Figure 10). More than half of respondents also perform a pricing and market access study. In past Dealmakers Intentions Surveys, we reported the most commonly used valuation methods in the industry. Again, the methods reported as the most commonly used (more

than 70% of respondents) are comparable analysis and rNPV (Figure 11). Just under half of respondents use NPV or peak revenue as a valuation method. Real options remain a fringe methodology (2% of respondents, which is smaller even than the share with no formal method). Importantly, the discount rate has risen among respondents. In the 2011 Dealmakers Intentions Survey, we reported that in-licens-

ers used a discount rate of 11%, while outlicensers used discount rates of about 13% to 14%. In the 2012 survey, median discount rates have risen by about 200 basis points to 13% for in-licensers and 15% for out-licensers. The increase likely indicates that companies as a whole may perceive additional risk in the industry (or the potential for inflation) and are thus more risk-averse than they were in 2011.

Campbell Alliance: Strategy. Results.

Strategic Implications
In-licensers report that partnering is neither a fast nor a high-yield process. The typical in-licenser may only convert 7% of opportunities considered into a deal with an up-front payment, and the process may take more than 10 months (Figure 12). The strategic implication for 2012 is clear for out-licensers. They must be prepared to prove they have de-risked their assets. This

will likely include a pricing and market access study as part of the non-confidential data package along with the requisite physician interviews. The good news is that investment hurdles in the form of minimum revenue requirements are far below $1 billion. An asset with at least $150 million in US revenue may well receive serious consideration if the asset is de-risked. Those who are able to communicate their assets are de-risked may anticipate a sellers

market in 2012. For in-licensers, it will be easy to overpay for de-risked assets in this market. Instead, in-licensers should actively rationalize their own early-stage pipelines so that resources may be freed up to acquire the high-quality, early-stage assets that are now on the market. 2012 may be one of the best buyers markets in years for early-stage assets, and in-licensers will have to prioritize long-term returns in their asset portfolios.

Figure 12

50-60 Opportunities Considered in 2011

CDA

Stage conversion rate 46%

Binding Offer

Stage conversion rate 28%

Completed Transaction

Stage conversion rate 61%

Four Deals With Up-Front Payment

Stage conversion rate 93%

Average shortest deal time = 7.8 months Average time from CDA to binding offer = 3.6 months Average time from binding offer to completed transaction = 7.0 months

Source: Campbell Alliance Dealmakers Intentions Survey 2012. Includes answers from 56 respondents who answered this question.

Cumulative Conversion Rate 7%

THE 2012 DEALMAKERS INTENTIONS SURVEY

Survey Respondents
We surveyed 160 licensing professionals in the first quarter of 2012. Survey respondents are mostly senior company officers. Forty-one percent report their title as Senior Vice President or above, and another 21% report their level at Vice President. The remaining survey respondents are Director level (27%) and Manager level (11%). (See Figure 13.) Survey respondents are equally split among Business Development (33%), C-

suite excluding CFOs (30%), and Corporate Development (27%). The remainder is in Finance (5%) or other organizational roles (6%). Survey respondents are 2:1 divided between out-licensing and in-licensing. This includes those who report they exclusively in-license (2.1%) or mostly in-license (26%) and those who exclusively out-license (9.6%) or mostly out-license (39.7%). The remaining 22.6% report they equally inlicense and out-license. Respondents are mainly from North

America. A full 60% of respondents are from the US, and another 11% are from Canada. The remaining respondents are from the EU (21%), Japan (4%), and other countries (4%). (See Figure 14.) Respondents are from companies across the development spectrum. These companies represent a range of market capitalizations (with just under half at >$500 million), a split between private (46%) and public companies (54%), and annual revenue ranging from zero (53%) to more than $5 billion (16%).

Figure 13

Respondent Characteristics
Title 100%
Business Development Mostly Out-License Executive (CEO, COO, President) Equally In- and Out-License Director Corporate Development Finance Other

Corporate Role

Licensing Role
Out-License

80% Share of Respondents

Sr. Vice President and Above

60%
Vice President

40%

20%

Mostly In-License In-License

Manager

0%
Source: Campbell Alliance Dealmakers Intentions Survey 2012.

N=160

Campbell Alliance: Strategy. Results.

Figure 14

Characteristics of Respondents Companies

Headquarters 100%
ROW Japan Europe

Market Cap

Funding

Revenue
>$5B $1B to $5B

Share of Respondents

80%

>$500M

Public $0 to $1B

Canada

60%

40%

Sr. Vice President and Above

$100M to $500M Development State

20%
< $100M

Private

0%
Source: Campbell Alliance Dealmakers Intentions Survey 2012. N=160

Campbell Alliance: Strategy. Results.

Contact
RESULTS. Its a pretty simple word thats used a lot in the business world, but what does it really mean? When you cut through all the clutter, results means performing beyond expectations, eradicating challenges, and achieving your business goals. It means not just dreaming it. But actually doing it. Campbell Alliance is purpose-built to help biopharmaceutical and medical technology companies achieve results. Whether its seizing the leadership position in a new market, solving seemingly impossible challenges, or developing innovative approaches for success, we dont quit until the desired results are delivered. We offer the insight to help leaders develop powerful strategies, as well as the knowledge to ensure theyll work in the real world. And through our relationship with inVentiv Health, we bring the global implementation capabilities needed to put even the most ambitious plans into action. Delivering results is what we do. Lets get to it.

Jeff Stewart Associate Practice Executive (919) 844-7100 x7170 jstewart@campbellalliance.com Contact Jeff Stewart to request an on-site presentation of the full survey results. www.campbellalliance.com/dealmakers

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Campbell Alliance: Strategy. Results.

Campbell Alliance: Strategy. Results. www.campbellalliance.com Headquarters Address 370 Lexington Avenue, Suite 1100, New York, NY 10017 Telephone: 919.844.7100 | Fax: 646.805.0351 | Toll Free: 888.297.2001