Sirtris Pharmaceuticals: Living healthier, longer John Burr Ph.D. Sirtris Pharmaceuticals: Living healthier, longer

Warm-up Question 1 1. According to www.wineinstitute.org, which of the following countries has the highest wine consumption per capita in 2008? A. Switzerland B. United States C. Spain D. United Kingdom

Warm-up Question 1 1. According to www.wineinstitute.org, which of the following countries has the highest wine consumption per capita in 2008? A. Switzerland B. United States C. Spain D. United Kingdom The 1990s and early 21st century saw a renewed interest in the health benefits of wine, ushered in by increasing research suggesting that moderate wine drinkers have lower mortality rates than heavy drinkers or teetotalers.[3] In November 1991, the U.S. news program 60 Minutes aired a broadcast on the so-called "French Paradox". Featuring the research work of Bordeaux scientist Serge Renaud, the broadcast dealt with the seemingly paradoxical relationship between the high fat/high dairy diets of French people and the low occurrence of cardiovascular disease among them. The broadcast drew parallels to the American and British diets which also contained high levels of fat and dairy but which featured high incidences of heart disease. One of the theories proposed by Renaud in the broadcast was that moderate consumption of red wine was a risk-reducing factor for the French and that wine could have more positive health benefits yet to be studied.[6] Following the 60 Minutes broadcast, sales of red wine in the United States jumped 44% over previous years.[7] This changing view of wine can be seen in the evolution of the language used in the U.S. Food and Drug Administration Dietary Guidelines. The 1990 edition of the guidelines contained the blanket statement that "wine has no net health benefit". By 1995, the wording had been changed to allow moderate consumption with meals providing the individual had no other alcohol-related health risk.[8] From a research perspective, scientists began differentiating alcohol consumption among the various classes of beverages – wine, beer and spirits. This distinction allowed studies to highlight the positive medical benefits of wine apart from the mere presence of alcohol. However wine drinkers tend to share similar lifestyle habitats – better diets, regular exercise, non-smoking – that may in themselves be a factor in the supposed positive health benefits compared to drinkers of beer and spirits or those who abstain completely.[9]

Warm-up Question 2 2. Borders Bookstore derived its name from: A. The first store was built in El Paso, Texas, just two miles from the Mexican border. B. Tom and Louis Borders, brothers from Ann Arbor, Michigan C. Borders was originally a place to order books, not buy them...hence the name Book Orders D. Nothing in particular; the founders just thought it sounded interesting

Warm-up Question 2 2. Borders Bookstore derived its name from: A. The first store was built in El Paso, Texas, just two miles from the Mexican border. B. Tom and Louis Borders, brothers from Ann Arbor, Michigan C. Borders was originally a place to order books, not buy them...hence the name Book Orders D. Nothing in particular; the founders just thought it sounded interesting The brothers Borders opened a used book store in 1971, but soon developed an inventory control method that permitted them to have quick access to almost any book in print. In 1994, Kmart acquired Borders, but just one year later, Borders was big enough to buy their way out of Kmart's clutches.

Warm-up Question 3 3. The common, but fallacious story behind the creation of eBay is that Pierre Omidyar's wife had a large PEZ candy dispenser collection, and that he created eBay in 1995 to help her acquire even more containers. Urban myth? Maybe so, but what was the domain name that Pierre originally wanted to use? Collectible.com Shop24.com BuyItHere.com EchoBay.com

Warm-up Question 3 3. The common, but fallacious story behind the creation of eBay is that Pierre Omidyar's wife had a large PEZ candy dispenser collection, and that he created eBay in 1995 to help her acquire even more containers. Urban myth? Maybe so, but what was the domain name that Pierre originally wanted to use? Collectible.com Shop24.com BuyItHere.com EchoBay.com Omidyar created Auction Web in 1995, intending it to be an on-line 'flea market', but soon found out that the name 'auctionweb.com' had already been taken. EchoBay.com, which came from Pierre's Echo Bay Technology Group, was also unavailable, and the closest he could come to it was 'eBay.' The lower-case 'e' was used so that people could pronounce the name properly, and, NO, it is not Pig Latin.

Warm-up Question 4 4. What popular clothing company took its name from a derogatory term often applied to Central American countries? Coconut Country Sugar Shack Mango Mansion Banana Republic

Warm-up Question 4 4. What popular clothing company took its name from a derogatory term often applied to Central American countries? Coconut Country Sugar Shack Mango Mansion Banana Republic Although you might not link 'jungles' and 'bananas' together, Banana Republic founders Mel and Patricia Ziegler thought it a great name for their new (1978) company. During the 1980's, this was THE place for well-dressed 'yuppies' to get their safari jackets, pith helmets, and snakeskin briefcases. When Gap, Inc. acquired Banana Republic in 1983, the fervor for the Tarzan look was waning, but through clever marketing, Banana Republic emerged as a popular source of everyday casual wear.

CBS News 60 minutes: http://www. youtube. com/watch The link used to be: http://www.cbsnews.com/video/watch/?id=4752354n%3fsource=search_video

Sirtris Study Questions Describe the FDA approval process of a new drug application. What are the three major decisions facing the company at the time of the case? At the time Westphal joined Sirtris, what is your assessment of the odds that the company will ever generate substantial revenues? If you were Westphal, would you have left Polaris for Sirtris? Should Sirtris launch SRT501 nutraceutical business? Why or why not?  Should Sirtris do the deal with the pharmaceutical company? Why or why not? If you recommend a deal, which equity stake (20% or 51%) would you prefer?

Sirtris Study Question 1 Describe the FDA approval process of a new drug application.

Sirtris Study Question 4 4. Should Sirtris launch SRT501 nutraceutical business? Why or why not?  Fact: Nearly two-thirds of the American population takes at least one type of nutraceutical health product. Fact: The use of nutraceuticals, as an attempt to accomplish desirable therapeutic outcomes with reduced side effects, as compared with other therapeutic agents, has met with great monetary success.  

Sirtris Study Question 5 Should Sirtris do the deal with the pharmaceutical company? Why or why not? If you recommend a deal, which equity stake (20% or 51%) would you prefer?

Update Sirtris went public at $10/share in May 2007, raising > $60 million. In April 2008, agreed to be acquired by GSK in a $720 million deal (purchased at $22.50/share when it was trading at $12/share, an 80% premium). Westphal stayed on to lead merger integration effort. “This is likely to be the most important thing I do in my life.” His stock options and restricted stock vested out to 2011. A small number of scientists left to launch other start-ups. Sirtris remained a standalone division inside GSK. http://www.xconomy.com/boston/2010/04/21/christoph-westphal-resigns-as-sirtris-ceo-takes-over-glaxos-sr-one-venture-arm/ Christoph Westphal Resigns as Sirtris CEO, Takes Over Glaxo’s SR One Venture Arm Ryan McBride 4/21/10 Christoph Westphal is leaving his CEO job at Sirtris Pharmaceuticals, the Cambridge, MA-based developer of drugs that target genes linked to the aging process, to get back into the venture capital game, according to an e-mail Westphal sent to friends and colleagues as well as Xconomy. Westphal says in his note that he is taking over as head of SR One, Glaxo’s venture capital arm. He’s also working with fellow Sirtris alumni Michelle Dipp and Rich Aldrich on a new Boston venture firm, Longwood Founders Fund, according to the note. (Last week the Boston Globe reported that Glaxo is backing Longwood Founders Fund, which appeared on our radar back in February.)

GSK Abnormal Returns around Acquisition Date In finance, an abnormal return is the difference between the expected return of a security and the actual return. Abnormal returns are sometimes triggered by "events." Events can include mergers, dividend announcements, company earning announcements, interest rate increases, lawsuits, etc. all which can contribute to an abnormal return. Events in finance can typically be classified as occurrences or information that has not already been priced into the market.

GSK Abnormal Returns around Acquisition Date CAAR: cumulative average abnormal return Cumulative abnormal return, or CAR, is the sum of all abnormal returns[2] up to time . If no event occurs then CAR equals zero.

Lesson 1 In some business models: Creating value is about increasing Expected Value, not generating near-term revenue and profits

Biotech – What’s it worth!

Step-downs in risk and funding July 2004 Tatar and Sinclair report resveratrol extends life of roundworms August 2004 Round A -$5 million October 2004 Round A1 - $13 million March 2005 Sinclair started getting data that showed resveratrol extends lifespan in a mammal Round B - $27 million April 2006 Confirmatory results that high doses of resveratrol affect obese mice Round C - $22 million Feb 2007 Reserveratrol increased stamina of mice two-fold Round C1 - $35.9 million

Time zero payoff distribution E(Exit Value) = .9999 * Lose All + .0001 * Make Billions 99.99% Time zero payoff distribution 0.01% Lose All Make Billions

After Christoph joins & science advances E(Exit Value) = .95 * Lose All + .05 * Make Billions 95%% 5% Lose All Make Billions

Q4: Entering Nutraceuticals business E(Exit Value) = .95 * DCF Nutraceuticals + .05 * Make Billions?? 95% 95% 5% ?? Lose All Make Billions

Q5: Adding pharmaceutical deal E(Exit Value) = ?? * Lose All + ?? * (Make Billions / 2) 95%% ?? 5% Lose All Make Billions

Understanding motives for diversification Lesson 2 Understanding motives for diversification

SPILLOVERS ACROSS BUSINESS UNITS IF: Horizontal Scope Decision In what businesses? SPILLOVERS ACROSS BUSINESS UNITS IF: ECONOMIES OF SCOPE CROSS-SELLING BENEFITS INTERNAL MARKETS DIVERSIFY RISK

Diversify Risk Generally, not a good reason Makes sense if Corporate investors can diversify more efficiently themselves Makes sense if Corporation can diversify risk better than external market In “new” markets, there may not be available risk hedging alternatives for investors, so corporations have to diversify for them.

Lesson 3 coming FIPCO’s (fully integrated pharmaceutical companies),[17] expecting to supplant the big pharmaceutical companies. As it became clear that the odds of successfully launching an independently marketed therapeutic product were lower than once expected, many of these firms switched gears to become research powerhouses[18] and adopted multiple alliance strategies to outsource the regulatory, marketing, and distribution tasks that the big pharmaceutical companies were better equipped to handle. Because very few biotechnology companies have achieved profitability,[19] most have funded their R&D operations out of equity capital and proceeds from alliances with pharma or larger biotechnology companies. Both private and public equity have been a fickle source of capital for biotech firms. Although private investment in biotech startups reached $41 billion in 2000, two years later, there was net investment of only $1.9 billion (less than the venture capital investment of 20 years earlier).[20] And since 1990, there have been only three significant public equity financing windows open to biotechnology companies.[21] In a down market, the cost of equity capital can be prohibitively high, assuming that it is available at all. Corporate alliances with pharmaceutical companies and large biotech companies provide an important alternative source of capital, particularly in market down-cycles. In 1998, for example, corporate alliances brought in more capital than did equity deals ($4.5 billion v. $3.5 billion).[22] In addition to providing capital to enable biotech firms to survive long enough to bring products to market, biotech companies seek to enter into alliances with pharmaceutical companies for several other reasons. First, a corporate partner provides validation to the biotech firm and to the outside world that its product development efforts are on the right track—the “willingness of a pharma partner to invest tens of millions of dollars for product rights can be the biotech equivalent of the Good Housekeeping Seal of Approval.”[23] Second, alliance capital can help public biotechs manage the high expectations of the capital markets, allowing them to use alliances to show “breakeven” or marginal profits, well in advance of any product revenues. Third, corporate deals provide the biotech partner with access to a team with decades of experience pushing drugs through the clinical and regulatory process and into the marketplace. Not only can the biotech company benefit immediately from this expertise, but it can also learn from the collaboration and reduce its reliance on outsiders for future projects. There are two points of tension in any collaboration between a pharmaceutical company and a biotech company. For the pharmaceutical company, there is always the danger that it is developing a potential competitor through its collaboration with the biotech. One CEO of a major pharmaceutical company has stated, “I don’t think major pharmaceutical companies have any interest in giving biotech companies the opportunity to become major competitors. It is not in your interest to help them become a full-fledged pharmaceutical company because then you lose them as a partner.”[24] A second point of tension lies in the different time frames under which pharmaceutical and biotech companies operate. As the CEO of a small biotech company recently stated, the big companies “don’t understand that we as a company have two years of cash. Six months to them is not a big deal; six months to us is one fourth of our survival.”[25] Important to think about the incentive structures & Pros and cons of strategic partnerships, especially from the perspective of the smaller partner

Big Pharma Pfizer 5 Johnson & Johnson 0 Merck 7 GlaxoSmithKline 6 Table: Number of New Drugs Released by Top Ten Pharmaceutical Companies, listed in order of market capitalization, from 1998 to 2002 Pharmaceutical company New Drugs Pfizer 5 Johnson & Johnson 0 Merck 7 GlaxoSmithKline 6 Novartis 8 Amgen 0 Eli Lilly & Co. 1 AstraZeneca 2 Abbot Laboratories 3 Wyeth 4 Source: Bryan Bergeron & Paul Chan, BIOTECH INDUSTRY: A GLOBAL, ECONOMIC, AND FINANCING OVERVIEW 58 (2004).

Small Biotech Source of Capital Validation to partners, investors Experienced teams to go through the FDA approval process Tension: Different time frames under which pharmaceutical and biotech companies operate? Tension: Competition?

Feb. 10 Noodles & Company Readings: the case and the assigned article “Franchising” Study Questions for Case: Noodles & Co. What are the challenges faced by Noodles at the time of the case? What’s your evaluation of Noodles’ performance? Compare it to industry competitors such as Panera, Starbucks, and Chipotle. What are the G&A/sales ratios of Noodles (2000-2002)? Use numbers from Exhibits to calculate. High or low compared with industry average? Do you recommend Noodles & Company expand by franchising or company-owned stores? What are the quantitative and qualitative implications of each alternative? What issues would you recommend Kennedy include in his presentation to the board?