Beyond Borders Global biotechnology report 2008 Vancouver, Canada 29 October 2008

Headlines: the big picture

Beyond Borders3 Strong growth in 2007  Record deals  Booming financings  Improved profitability  All-time high, led by mega-mergers  VC sets new record of US$7.4 billion  US publicly traded industry’s net loss reaches record low

Beyond Borders4 Emerging challenges  Safety concerns  Regulatory challenges emerge  Public equity markets cool late in year  Several new black box warnings  Lowest FDA NME approvals in 25 years  CMS, NICE decisions  Credit crunch drives flight to safety

Beyond Borders5 A challenging landscape in 2008  Credit crisis, global recession fears drive risk-averse public investors  Companies focus on efficiency, survival  VC, alliances, M&A remain strong  Market cap decline, IPO drought, debt offerings down  Restructuring, bankruptcies up  Activity on par with recent years

Beyond Borders6 Reinventing drug development  Pharma’s patent productivity challenges drive change  Short-term: cost cutting, stock buybacks, late- stage acquisitions  Long-term: platform deals, restructuring R&D (smaller teams, networked, more autonomous)

Americas overview: the road lengthens

Beyond Borders8 US financial performance Net loss (US$b) -95% R&D expense (US$b) +6% Revenues (US$b) +11% Employees (000) +3%

Beyond Borders9 Behind the numbers: acquisitions and black box warnings Acquisitions and black box warnings dented revenue growth in 2007 Source: Ernst & Young

Beyond Borders10 Behind the numbers: net loss in context US publicly traded industry historically close to profitability Source: Ernst & Young Less than 0.5% of revenues

Beyond Borders11 Current public market turmoil in the US Biotech stock market performance, 2007

Beyond Borders12 Current public market turmoil in the US Biotech stock market performance, 1 Jan – 15 Oct 2008

Beyond Borders13 US financing US financing reaches second-highest total on record Source: Ernst & Young, BioCentury, BioWorld and VentureOne

Beyond Borders14 US financing: public equity Public equity markets are challenging for biotech companies Source: Ernst & Young, BioCentury, BioWorld and VentureOne ? Genomics bubble Recovery The “end of windows” Financial market uncertainty

Beyond Borders15 US financing: regional distribution Capital raised by leading US regions in 2007

Beyond Borders16 US deals: mergers and acquisitions Source: Ernst & Young, BioWorld, Recombinant Capital and Windhover

Beyond Borders17 US deals: mergers and acquisitions adjusted for mega deals Source: Ernst & Young, BioWorld, Recombinant Capital and Windhover

Beyond Borders18 US deals: alliances Source: Ernst & Young, BioWorld, Recombinant Capital and Windhover

Beyond Borders19 Behind the numbers: shrinking IPO returns More money in … Source : Ernst & Young analysis of company financial statements Recovery ( ) "End of windows" ( ) US$m Avg pre-IPO investment

Beyond Borders20 Behind the numbers: shrinking IPO returns More money in … and relatively less money out Source : Ernst & Young analysis of company financial statements Recovery ( ) "End of windows" ( ) US$m Avg pre-IPO investmentAvg pre-money preferred stock valuation at IPO

Beyond Borders21 Behind the numbers: shrinking IPO returns More money in … and relatively less money out Source : Ernst & Young analysis of company financial statements Recovery ( ) "End of windows" ( ) US$m Avg pre-IPO investmentAvg pre-money preferred stock valuation at IPO 2.16x1.60x1.55x

Beyond Borders22 Behind the numbers: the valuation gap CompanyAcquirerValue (US$ million) AgensysAstellas537 AdnexusBMS505 RinatPfizer478 DomantisGSK454 IllypsaAmgen420 GlycofiMerck400 AvidiaAmgen380 IllumigenCubist341 AlantosAmgen300 Average value of “IPO-ready” company acquisitions: $425 million Average pre-money IPO valuation: $ million Selected acquisitions of private “IPO ready” companies, Source: Ernst & Young

Beyond Borders23 US financing: creative financings Symphony Capital NewCo ► Inlicenses IP ► Funds clinical development IP Funding clinical development Symphony Capital $$ Portfolio Company ► Retains right to acquire IP ► Conducts clinical developmt License to IP $ IP Future option to re-acquire IP at pre-negotiated premium Shares / warrants RRD International Clinical development assistance (optional) Source: Ernst & Young

Beyond Borders24 US public policy: a changing environment Legislative issues strike at heart of biotech’s risk-reward model Upward pressure on risk ▲FDAAA and REMS ▲Drug safety concerns ▲Patent reform Downward pressure on reward ▼Pricing pressures ▼MMA negotiations ▼Follow-on biologics Source: Ernst & Young

Beyond Borders25 Canadian overview: sustainability?

Beyond Borders26 Canadian financial performance – Public Companies Revenues (US$ B) R&D Expense (US$ B) %+1% Employees (000) % Net Loss (US$ B) %

Beyond Borders27 Canadian financing Source: Ernst & Young, BioCentury, BioWorld and VentureOne

Beyond Borders28 Financing public companies – IPOs ► None to date in 2008 ► 1 in $5 million. ► 2 in $9 million. ► Not a significant source of funding for Canadian companies since 2004 and 2005 when $85 million and $160 million raised. ► Canada did not follow U.S. trend in 2007.

Beyond Borders29 Canadian financing by province Canadian census 2007 Source: Ernst & Young

Beyond Borders30 Canadian public company financing by quarter $M

Beyond Borders31 BC public company financing by quarter $M

Beyond Borders32 VC funding – Canada $M

Beyond Borders33 VC funding – British Columbia ($M)

Beyond Borders34 Number of VC financings and average value Avg. $USM 17

Beyond Borders35 Canadian financial performance Market Capitalization (US$ B)

Beyond Borders36 Ernst & Young’s survival index for Canadian public companies – 2007

Beyond Borders37 Canadian private biotech companies

Beyond Borders38 Number of companies Canadian census 2007 Source: Ernst & Young

Beyond Borders39 Canadian financing by leading clusters Capital raised by leading Canadian biotech clusters in 2007

Beyond Borders40 Distribution of Canadian companies Drug deliveriy Advanced materials Environment Diagnostics Genomics / BioInformation Ag / Aq Bio Therapeutics % 4% 6% 9% 15% 57% 100%

Beyond Borders41 Distribution of Canadian companies Drug deliveriy Advanced materials Environment Diagnostics Genomics / BioInformation Ag / Aq Bio Therapeutics % 5% 8% 10% 8% 19% 47% 100%

Beyond Borders42 Major Canadian Transactions in 2008 ► Axcan Pharma acquired by TPG Capital - $1.3 billion ► Aspreva Pharmaceutical acquired by Galencia Group - US$900 million. ► Draxis Health Inc. acquired by Jubilant Organosys - $255M ► Arius Research Inc. acquired by Roche - $191 million

Beyond Borders43 BC Transactions in 2008 ► Tekmira Pharmaceuticals Corporation and Protiva Biotherapeutics Inc. (share deal worth approx. $32M per Tekmira Q2 FS) ► OncoGenex Technologies Inc. reverse takeover of Sonus Pharmaceuticals, Inc. (share exchange deal worth about US$11M per Sonus proxy) ► Medigen Biotechnology Corporation planned reverse takeover of Pacgen Biopharmaceuticals Corporation (per Pacgen October 24 press release) ► Angiotech?

Beyond Borders44 European overview: growing strengths

Beyond Borders45 European financial performance Net loss (€ b) 108% R&D expense (€ b) +7% Revenues (€b) -6% Employees (000) +6%

Beyond Borders46 Behind the numbers: the Serono acquisition The Serono acquisition had a huge impact on biotech financial results Source: Ernst & Young, BioCentury, BioWorld and VentureOne RevenuesNet loss 100% 120%

Beyond Borders47 European financing: IPOs Source: Ernst & Young, BioCentury, BioWorld, VentureOne and company news (through NewsAnalyzer)

Beyond Borders48 European financing: follow-on and other Source: Ernst & Young, BioCentury, BioWorld, VentureOne and company news (through NewsAnalyzer)

Beyond Borders49 European financing: regional distribution Capital raised by major European countries in 2007

Beyond Borders50 European deals: mergers and acquisitions Source: Ernst & Young, Windhover, BioWorld, Recombinant Capital and company news (through Newsanalyzer)

Beyond Borders51 European deals: alliances Source: Ernst & Young, Windhover, BioWorld, Recombinant Capital and company news (through Newsanalyzer)

Beyond Borders52 European pipeline by phase European pipeline shows strong growth, particularly in Phase II Source: Ernst & Young and company websites

Outlook: the year ahead

Beyond Borders54 Rules of the road Look forRules of the road Deals ► Increasing urgency around big pharma pipeline issues ► Stiff competition for biotech assets ► High valuations, more negotiating power for biotechs “Bargaining power matters” ► Dual-tracking preserves options for private companies ► Creative deal structures can retain flexibility, capture greater share of value Financing ► Sustained strength in venture investments ► Challenging public equity markets ► New, creative financing options ► Restructuring “Stay lean, mean and focused” ► Capital efficiency for leaner times ► Alternative sources of capital Products & regulatory ► Increased safety scrutiny, including post-marketing ► Higher bar from payors, pay-for- performance ► Continued focus on sales/mktg. “Show me the value” ► Articulate value props early in R&D ► New reimbursement / pricing approaches Source: Ernst & Young

Long-term outlook: reinnovation and reinvention

Beyond Borders56 Is a pattern emerging? Big pharma companies announce layoffs, restructurings Stock buybacks Safety concerns take bite out of product sales Velcade gives NICE an unprecedented money-back guarantee FDA NME approvals fall to lowest level in over 25 years more pricing pressures emerging Product safety incidents in the rising China market Big pharma’s search for pipeline productivity propels a booming deal environment Biotech companies retain more rights in deals The mega deal… is back π?π? 8% Government negotiation of drug prices under MMA returns to public policy debate FIPNETs FIPNETs Creative deal structures ► ► ► ► ► ► M&A REMSREMS FDAAAFDAAA ► $►€►¥►£$►€►¥►£ R&DR&D ► ? ? ? ? ? ►

Beyond Borders57 Reinvention Big pharma companies announce layoffs, restructurings Stock buybacks Safety concerns take bite out of product sales Velcade gives NICE an unprecedented money-back guarantee FDA NME approvals fall to lowest level in over 25 years more pricing pressures emerging Product safety incidents in the rising China market Big pharma’s search for pipeline productivity propels a booming deal environment Biotech companies retain more rights in deals The mega deal… is back π?π? 8% Government negotiation of drug prices under MMA returns to public policy debate FIPNETs FIPNETs Creative deal structures ► ► ► ► ► ► M&A REMSREMS FDAAAFDAAA ► $►€►¥►£$►€►¥►£ R&DR&D ► ? ? ? ? ? ► The drug industry is being reinvented by three sweeping trends: ►R&D productivity ►Personalized medicine ►Globalization

Beyond Borders58 These drivers will fundamentally change the business of drug development ► Approaches to research and development ► Business models ► The value chain ► Deal structures ► Balance of power between biotech and big pharma ► Partnerships between western companies and companies in emerging markets

The first driver of reinvention: R&D productivity

Beyond Borders60 The problem: patent expirations Projected sales losses from patent expirations to reach US$67b by 2012 Source: Sanford C. Bernstein & Co.

Beyond Borders61 Big companies need sustainable solutions Buying pipeline assets ► High prices  lower upside potential ► Limited reserves of cash Cutting costs ► Short-term gains Boosting EPS ► Short-term gains ► Limited reserves of cash Companies need sustainable solutions to fix the real problem: low R&D productivity Source: Ernst & Young

Beyond Borders62 The inertia of size Small companiesConduct and performanceLarge companiesConduct and performance Structure ► Small ► Individuals have more control over outcomes ► Large ► Poor sense of ownership ► Flexible ► Encourages creativity and collegiality ► Rigid ► Centralized, bureaucratic processes ► Risk-aversion over time ► Cash-starved ► Driven to raise capital ► Lean operations, sometimes cut corners ► Strong cash flow ► Not as “hungry” or driven to succeed Incentives ► Stock-based compensation is a strong incentive ► Direct financial tie to performance ► Stock-based compensation is not meaningful ► Less tied to outcomes ► Less passion ► Private investors with longer horizons ► Less focused on short- term financial performance ► Public investors demanding quarterly results ► More sensitive to short- term impact of long- term decisions Structure and incentives drive conduct and performance Source: Ernst & Young

Beyond Borders63 Emulating biotech Creating small, autonomous R&D units Emulate Large monolithic big pharma company Preserving entities after acquisitions Adopting networked structures Pay-for-performance tied to small-team milestones culture of small biotech companies Source: Ernst & Young

The second driver of reinvention: Personalized medicine

Beyond Borders65 Personalized medicine: why now? Safety concerns ► Targeted approaches ► Less misdiagnosis, fewer adverse events Pricing pressures ► Smaller clinical trials ► Cheaper drug development R&D productivity ► More efficient identification and development of drug targets Move from efficacy to efficiency in drug development and healthcare delivery Source: Ernst & Young

Beyond Borders66 Challenge 1: end of the blockbuster model Old modelNew model ► Large clinical trials ► Pharma’s Phase III abilities a key strength ► Smaller trials for targeted drugs ► Scale less relevant ► Large-scale manufacturing for high volumes of blockbuster drugs ► Smaller volumes, but more complex manufacturing ► DTC advertising, armies of sales reps for poorly-differentiated drugs ► Drugs better differentiated, compete on merits ► Scale less relevant in sales ► Reimbursement based on efficacy ► Pay-for-performance requires greater allocation of resources to demonstrate value Source: Ernst & Young

Beyond Borders67 Challenge 2: making the numbers work Source: Ernst & Young ► Targeted therapeutics for more efficient treatment of disease ► More efficient drug development with smaller, cheaper clinical trials Rx ► Diagnostics for more efficient: ► Prediction ► Diagnosis ► Dosing ► Monitoring ► Lower healthcare costs from new efficiencies Dx3x ► Incentives and metrics to support the economics and ROI for investors: ► Better pricing for diagnostics ► Reimbursement based on value ► Measures across healthcare system

The third driver of reinvention: Globalization

Beyond Borders69 Drivers and limitations DriverShort-term playLong-term play Outsourcing clinical trials and manufacturing ► Cost cutting for western companies ► Sources of revenue for emerging market companies ► Limited window as cost advantages get eroded ► Emerging market companies looking to develop innovative pipelines ► Goals become more competitive, less complementary Selling drugs to rapidly-growing emerging markets ► Tremendous opportunity as emerging middle classes, rising prosperity create markets that can afford western drugs Source: Ernst & Young ?

Beyond Borders70 Globalization: the challenge of the next billion consumers Source: Ernst & Young and International Finance Corporation (IFC) US$20,000 US$3,000 “The unserved base” US$30b market US$65b by b patients 6b patients by b patients 1.5 b patients Mature markets with slow growth potential Per-capita income thresholds:Market size/potential: “The next billion” Emerging markets with high growth potential

The shape of the future

Beyond Borders72 Changing business models Personalized medicine changes the nature of competition Source: Ernst & Young Present state

Beyond Borders73 Changing business models Personalized medicine changes the nature of competition Source: Ernst & Young Future state

Beyond Borders74 Changing business models Personalized medicine redistributes value in the value chain Source: Ernst & Young Research Early development Late development Manufacturing Sales and marketing 0% 20% 40% 60% 80% 100% Current stateFuture state - personalized medicine Value accrues to innovation

Beyond Borders75 The need for new models R&D Source: Ernst & Young Operations Capital formation & efficiency Deals Pharma ► Boost productivity Biotech ► Remain innovative ► Adapt to smaller scale ► Variabilize fixed costs ► Tap networks ► Value chain specialization / non-FIPCO models ► Efficient allocation & deployment of capital ► Access capital with less dilution ► Minimize burn rate ► Portfolio approach ► Manage risk ► Retain control & rights ► Higher share of value

Beyond Borders76 Opportunities for companies Biotechs gaining more bargaining power More flexibility Greater share of value produced Source: Ernst & Young Pharma’s imperative to fix R&D product- ivity Greater rights retention Minimize P&L impact of investments Creative deals Accept more risk to increase potential upside Acquire culture, not just pipeline BiotechPharma

Beyond Borders77 Models of the future Source: Ernst & Young ► Leaner FIPCOs: less infrastructure required ► Value-chain specialization ► Becoming FIPCOs less imperative with higher royalties, co- promotion rights Biotech ► Some successfully reinvent R&D ► New Models: ► More risk accepting in R&D ► Leaner sales ► More networked Pharma 1Pharma 2 ► For those that don’t succeed at reinvention: ► Core strengths are lower-margin ► Competition from emerging markets ► De facto CROs or CMOs?

Beyond Borders78 Big pharma’s challenge: maximize the portfolio ObjectivesConstraints Supplement pipeline, more shots on goal ► Increasingly expensive in competitive dealspace ► Impact on current earnings Boost R&D productivity ► Structures and incentives often not aligned innovation and speed ► Difficult to acquire and maintain “culture” Mature product strategy: invest to protect the base to harvest? ► Capital-constrained environment ► More focus on developing new products Variabilize costs / reduce infrastructure ► More risk and complexity dealing with third parties ► Change in culture to be more external

Beyond Borders79 Biotech’s challenge: survive and retain options ObjectivesConstraints Access capital ► Constrained public capital markets ► More selective VCs ► Less liquid equity in small caps Retain downstream rights and ability to forward integrate ► Bargaining leverage ► Adds costs, risk and complexity Stay flexible for M&A exit ► Collaborations fill funding gap in constrained public capital markets but encumber assets Accelerate pipeline development ► Increasing cost of drug development

Beyond Borders80 US products and public policy DevelopmentsImplications Product regulation ► Lowest NME product approvals in over two decades ► New black box warnings ► Plan for longer development cycles, ongoing safety monitoring PDUFA renewal ► Most sweeping changes to drug regulation in 40 years ► New REMS approach for risk mitigation ► Anticipate possibility of REMS requirements post-approval ► Plan for new safety requirements during development process Pricing pressures ► Follow-on biologics debate continues ► Consideration of allowing HHS to negotiate drug prices ► Focus on innovative products and consider value proposition earlier in R&D process Patent reform ► Most comprehensive changes to Patent Act of 1952, driven by needs of IT companies ► Debate continues ► Could fundamentally alter IP landscape for biotech companies, making patent challenges easier Source: Ernst & Young

Beyond Borders81 Solution 1: buying pipeline assets Company Platform / phase AstraZenecaMedImmuneCommercial AbbottKOSCommercial EisaiMGI PharmaCommercial TakedaMillenniumCommercial MerckSiRNAPlatform + Phase II GlaxoSmithKlineDomantisPlatform - preclinical Bristol Myers SquibbAdnexusPlatform + Phase I PfizerRinatPhase II GlaxoSmithKlineSirtrisPlatform + Phase II Selected big pharma acquisitions, Source: Ernst & Young and company reports

Beyond Borders82 Solution 2: cutting costs CompanyJob reductions announced Anticipated cost savings Pfizer10,000US$2 billion AstraZeneca7,600US$ 900 million Merck & Co.7,000US$2.3 billion Bristol-Myers Squibb4,300US$1.5 billion Johnson & Johnson3,600-4,800US$ billion Novartis3,760US$1.6 billion GlaxoSmithKlineNot disclosedUS$ 1.4 billion Amgen2,200-2,600US$ billion Schering-Plough1,100US$100 million Selected job reduction announcements by large drug companies Source: Ernst & Young and company announcements

Beyond Borders83 Solution 3: boosting EPS Propping up EPS: dividends and stock buybacks since 2002 Source: Ernst & Young and company financial statements. Dividends and buybacks (US$b) Change in market cap Change in market cap (US$b)

Beyond Borders84 Thank you Stay tuned: ey.com/biotech ey.com/beyondborders Reinnovate. Reinvent. You in?