‘Trends in healthcare, biotech and bioIT in Russia & beyond’

13 May 2014: Smart Money Club

Overview:

• A little poetry

• Some financial analysis

• LaunchGurus bent for sector ‘Start-ups’

• Possibly, some words of wisdom for would-be sector investors……..

Global Healthcare is increasingly being driven by the convergence of Drugs, Devices and Technology:

Global Healthcare $6 tn

Global Consumer Electronics

$1 tn

Global IT $3.6 tn

Global Medical Devices $300 bn

Global Pharmaceuticals $880 bn Global Telecoms

$3.4 tn

Global Electronic Medical Records

$1.9 bn

Global mHealth Mobile Apps

$84 m

Currently witnessing a pharma M&A frenzy:

• 01 May 2014, FT: “Pharma deals reach new level of Intensity”:

– $163bn USD healthcare deals in first four months of 2014 • Up 50% with respect to last year

• Over just the last few weeks:

• 08 April 2014, Sun Pharmaceutical’s bid of $3.2bn USD for Ranbaxy • 24 April 2014, Zimmer agrees $13.4bn USD Biomet acquisition • 25 April 2014, Novartis and GSK enter into asset swap

– (GSK will sell its oncology unit for $16bn USD & buy the Swiss group’s vaccine unit for $7bn USD) • 28 April 2014, Shire climbed 15% in a fortnight amid rumours of a rejected take-over offer • 28 April shares of Meda fell after $9bn USD bid from Mylan was rejected • 06 May 2014, Bayer acquires Merck’s consumer business for $14.2bn USD • 09 May 2014, Valeant’s $46bn USD bid for Allergan (Botox maker) • On-going, Pfizer’s $100bn USD bid for Astra Zeneca

- Seeking through acquisition access to:

- Market Share; Economies of Scale; Off-shore Tax Advantages for US corporations; and Innovation Pipeline

- Open Innovation is focused on LARGE sector players, while out-sourced R&D and

smaller acquisitions become almost irrelevant to financial ‘bottom line’.

Pharmaceutical Market in Russia:

• Grew by 13.6% in 2013 to > 1 trillion RUB.

• Para-pharmaceuticals (dietary supplements) increased by 14% to 170 bn RUB

• Segment drugs involved in Drug Reimbursement Program (FRP) grew by only 6 % to 83 bn RUB

• Hospital purchases increased by 17.2 % to 183 bn RUB

Recent trends in Russia: • Interesting pharma JV 25 April 2014:

– AFK Sistema (Binnopharm) & Fresenius Kabi (51%) – Leveraging one another’s strengths to optimise Russia / CIS market expansion

• Expanded product offering for Binnopharm • Localise GMP production • Promote ‘new biotech products’ through marketing and sales network of Fresenius

• Pharma 2020 will force more Pharmaceutical producers on-shore, alone or in

partnership with local players, such as, R-Pharm

• Trend towards local players becoming Fully-Integrated Pharmaceutical Companies, (but a long road to travel):

– Pharmastandard, R-Pharm, Protek *

• Consolidation is supply chain, e.g. 36.6 and A.V.E. Group merger, together they

will operate > 1000 stores

• Unfortunately, we lack US ‘Reimbursement Schedules’ – But so too does the rest of the world

• ………….. ‘A remedy for market turbulence’

• 13% growth y-o-y; consumer demands towards Higher-Priced Drugs; strong cash position, healthy market share 14.5% reimbursed pharmacy sales

- RMG Securities, Ksenia Arutyunova

High Risks and Long Lead-times & High Rewards: • Vioxx, COX-2 inhibitor, October 2004: Merck Corporation lost $24bn USD in 36 hours from its

Market Capitalisation.

• For a current Investee Company, we are looking at TWO years and significant budget just to DESIGN Clinical Trials for use in EU and Russia

– US-FDA will add another 3-5 years on top of EU-compliant clinical testing – In-house GMP probably required, plus a wealth of CAPEX

• Chasing a $30bn - $40bn USD market, for which few solutions currently exist.

• FT: “US biotech stocks suffer sharp slide on Congress letter” (22 March 2014)

– “Biotechnology stocks suffered their sharpest decline since October 2011.”

– Gilead Sciences (Market Capitalisation = $107bn USD) plans to sell the 12-week treatment, Sovaldi (Hepatitis C Drug), for $84,000 USD.

• ‘Will save money in the long-run’

• “These costs are likely to be too high for many patients, both those with public insurance and

those with private insurance. ”

• Hepatitis C is most prevalent among low-income, minority patients, the expense of the drug will saddle state Medicaid programs with steep costs.

Regulatory Hurdles:

• My on-the-ground Russian Experience / Exposure started 2005-2007

– Fruits of this work allowed an understanding of molecular origin COX-2 deleterious

cardiac side-effects

– Pfizer Executive: • “Must go back to First Principles of pharmacology and start again”

• NO SUCH THING as …………. ‘Faster and Cheaper’ medicines………

• CE Mark for Medical Devices and Diagnostics

• CLIA-approved testing facilities – US-centric Hurdle, particularly relevant to advances genetic testing (none in Russia

today)

• US-FDA and EMA (European Medicines Agency)

Medical devices - Russia:

• 20 bn RUB was authorised towards modernisation during 2013, plus another 461bn RUB spent during 2011-2012

• Market Size estimated at $6bn USD, sizable w.r.t. Min. of Health total budget

• 73% is imports

38%

11% 5%

9%

37%

Diagnosting imaging

Consumables

Dental products

Ortopedic andimplantable products

Other

• ‘Lateral Leakage’ remains a serious issue in sector

Some Over-riding trends around the world and in Russia:

• Enabling Systems: – Electronic Medical Records – Molecular Diagnostics, including Compan – POCT, Point-of-Care Testing

• Prevention & Healthy Life-Style Support:

– Disease management, especially for Chronic Disease • Cardiology, Cancer, Respiratory diseases and Diabetes, often under-diagnosed and under-

treated

– Management of Addictions • Smoking, Alcohol & Drugs

– Aging population related illnesses – Well-being support for healthy and less-well, older and younger populations

• Innovative Medicines, more focused on ‘macro-molecules’ – Fruits of the Human Genome Project, a decade on….

Some exciting opportunities inside Russia:

• Without access to technology, Russia cannot afford to modernise its healthcare infrastructure

• Lack of medications • Low Salaries • Insufficient Equipment • The Largest Country in the world

• Expanding private Healthcare sector, linked to a growing middle class

– PPP ‘Bricks and Mortar’ (BOOT) healthcare facilities • Plus technological and logistic support

• Electronic Medical Records

• Ever-expanding CRO activity (Still mostly Drugs developed Off-Shore) due to:

• Rapid recruitment times • Anglo-Saxon ethnicity • Relative Medication Naïve population • Lower costs

• OTC FMGC

• E-health for Federal and Regional Government agencies designed to deliver efficiencies in cost, time and improvements in quality of healthcare delivery

Some exciting new frontiers…….

Synthetic Biology : Life from a test tube Synthetic genome stitched together: "This is the first self-replicating species we've had on the planet whose parent is a computer”, Craig Venter told reporters….

Parent DNA …. Yes; Life …… No

• ‘The Art of Life is, Stopping Life from Stopping’

• Biology does this by :

– keeping the ‘Ingredients of Life’ apart….

– And ….. inheriting Life from its forebears

Living colony of Mycoplasma genitalium

‘The simplest Living thing on our planet’

“To see a World in a Grain of Sand And a Heaven in a Wild Flower, Hold Infinity in the palm of your hand And Eternity in an hour.”

William Blake

New possibilities, but probably a long lead-time before commercial pay-off :

Life is COMPLEX…. ‘Even in its simplest form’

16

Currently, there is healthy appetite for Technology

investing in Russia and elsewhere, particularly in IT

WHY?

17

‘HYPE versus REALITY’

And Twitter today? Why so important?

12 May 2014:

- At close, down 50% so far this year……

- Twitter Inc. (NYSE: TWTR) stock is getting plenty of interest from short-sellers, but ……

- Q1, 2014:

- Ad revenue growth up 125% year-on-year…...

- Mobile ads accounted for 80% of advertising revenue …...

21

Company Start Date Months

to Exit Exit Date Exit Type

Capital

Sourced

(bn USD)

Oculus Rift * Sep 2012 18 25 mar 14 Acquisition

(Facebook) 2,0

Whats App Nov 2009 52 19 feb 14 Acquisition

(Facebook) 19,0

Supercell Jun 2010 40 15 oct 13 Acquisition

(Softbank) 2,1

Waze Dec 2008 43 11 jul 13 Acquisition

(Google) 1,0

Tumblr Feb 2007 76 20 may 13 Acquisition

(Yahoo) 1,1

Instagram Oct 2010 23 08 sep 12 Acquisition

(Facebook) 1,0

Zynga Jul 2007 42 18 dec 11 IPO NASDAQ 1,0

Groupon Nov 2008 33 11 jul 11 IPO NASDAQ 0,7

* "Kickstarter" Crowd funded on 01 Sep 2012 with 9,522 financial backers for $2,437,429 USD; and this against a pledge goal of only $250,000 !!!

Investors’ Dream Scenario №1: High Velocity „Star‟ Exits

Difficult to achieve in Biotech &

Healthcare …..

22

Recent Technology Success Story

App developer Shazam gets $40 million backing from tycoon Carlos Slim “LONDON - Smartphone app developer Shazam has found an unlikely ally in the form of Carlos Slim, one of the world's richest men,

who is investing $40 million to back the development of the start-up best known for helping music fans identify catchy songs. Slim, ranked the world's top billionaire by Forbes magazine with a net worth of $73 billion, was brought in by one of Shazam's venture capital owners, Silicon Valley fund Kleiner Perkins Caufield & Byers.”

Sarah Young July 7, 2013

Shazam has now secured

$72m USD since 2009

23

Investors’ Dream Scenario №2: Technology Development

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

20

15

10

5

0

Revenue

Operating Costs

“Hockey Stick”

24

Expectations

Time

IT Hype Cycle (published by Gartner 21 August 2013)

Plateau of productivity

Revenues > OPEX

Great Time to sell

Peak of Hype Bubble

LUCKY SPECULATION Expectation-driven

Star Performers

25

Recent Great High-Velocity „Stars‟

Published by Gartner

21 August 2013

Exceptions

Reality

Dream №1

3,5 – 4 Years

Dream №1

Dream №2

7 – 8 Years

NOW

26

Dream Scenario №2: Need for Growth Capital and Time

Shazam’s Growth Millions GBP

REALITY, NOT the exception ...

Operational difficulties & Pending bankrupcy …

MANY start-ups FAIL here (due to lack of Growth Capital and an inability to secure sufficient revenues to ensure SURVIVAL)

20 15 10 5 0

Revenue

Operating Loss

Classic «Hockey Stick» inflection point

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

!!!!! Independent of Sector !!!!!

27

REALITY (753 technology companies across multiple sectors and created since 1995):

7 to 8 years is the norm to Exit, i.e. rule rather than the exception

…

All >$25m USD Exits from January 2009 to May 2013;

and all Companies founded post 1995.

Years from Founding to M&A EXIT Years from Founding to IPO

16

14

12

10

8

6

4

2

0 BioPharma Software/

Internet

Broader Tech

Ye

ars

January 2009 to May 2013;

and all Companies founded post 1995

Biotech Software &

Services

MedTech &

Healthcare

services

Tech

Hardware &

Equipment

Semi-

conductors

72 192 307 N = of Companies

55 31 20 17 59 N =

40

35

30

25

20

15

10

5

0

MAX

MIN

25th %

75th %

Median

Ye

ars

A long wait for technology sector investors;

and this is for the SUCCESS STORIES only !!!

In a high-risk sector

MNCs

28

Nature of Biotech & Technology Investing has changed

dramatically since 2008

“Global VC model is BROKEN”

Global venture capital insights and trends 2013

“VC funds are investing

fewer dollars, at a later stage

and on tougher terms”

“VC investment in 2012 fell to its

lowest level since 2009”

“We have met the enemy … and he is

US”, May 2012

Should one abandon early stage VC all together? QUESTION: If one does, then one will LOSE all potential ‘Star Investments’ Thus, one must seek-out an ALTERNATE investment strategy

29

What other major pain is needing to be cured

for Investors in the high-risk Technology Sector ?

‘The need to divorce ROI from

lengthy tech life-cycles’

30

Portfolio-wide Insurance (not one-company-at-a-time) through access to Growth

Capital & rapid Route-to-Market in partnerhsip with multinational giants

„Market

Pull’

opportunities

meeting

pre-determined

INDUSTRY

NEEDS

& thus

rapid

Time to

Market

DANGER still exists !!

Thus, need for pre-assured

access to Growth Capital

Portfolio companies in innovation sector demand access to Growth Capital

Allowing one to catch

a multitude of

Star Performers

31

And lessons from King Digital and “Candy Crush Saga”:

October 2013, Candy Crush is the 3rd most popular free app & the highest grossing app in the Google Play store. King was founded in 2003 and listed on NY Stock Exchange in……… 26 March 2014 and took….. ………….. > One Decade And took ‘a $1bn hit in first day of trading’ , now only worth ……$5bn USD. Angry Birds: - People are currently spending some ‘200 million

minutes of play time every day’ …….. close to the number of minutes that US viewers watch prime-time TV.

32

And m-Health ??? …..

Beginning of 2013 …. > 9,000 m-Health apps for i-phone Kleiner Perkins Caufield & Byers, one world’s Top VCs, is no longer investing in ‘e-commerce’: - Considered ……………….. ‘overly cluttered and increasingly difficult to pick winners’

Thus, Why is m-Health attractive ?

Consumers are driving more decisions about their own health care U.S. health-care system is a primary driver of the U.S. deficit 15% GDP. Thus, pressure is high to reduce costs, both for consumers and for the system overall. Most of today’s health-care data is …. ‘stuck in silos & locked in antiquated systems’.

- Worse in Russia, where Ministry of Health employs in excess of 640 different

non-integrated software systems to administer its annual budget of 323 bn RUB - OPPORTUNITY here is HUGE to DEVELOP ‘Leapfrog’ solutions to implement locally and sell to >140 countries globally desperately in need of modern e-Health

33

KP recommendations for m-Health: 08 May 2014:

1) Find ways to boost revenue for healthcare Providers & / or Payers:

a) HealthCatylst who’s clients operate > 135 hospitals & 1,700 clinics = $130 bn USD revenues

2) Build a revenue model, before you build your service:

a) ‘Freemium’ models can and do work in health care. Practice Fusion with free EHR platform for physicians (critical mass, connectivity, targeted advertisements and data).

3) High-tech and high-touch are not mutually exclusive. Don’t ignore human element in patient care. People get bored with many fitness and tracking apps:

a) Mango Health encourages chronic disease sufferers to take their medications Persuasive Design & Gaming = Engaging product.

4) Tech & Healthcare Entrepreneurs need to join forces (EHR / EMR). Health-care privacy in USA is governed by Health Insurance Portability and Accountability Act (HIPAA).

a) HIPAA-compliant data storage TrueVault b) Teladoc regulatory compliance …….. turning a ‘barrier’ into a ‘competitive advantage’.

Skolkovo RusInnovations: Objectives

• Business model based on Best International Practice – IPO and IVO (LSE Tickers) – Former currently trades at 3.2 times Book Value

• The need to divorce ROI from the lengthy & high-risk technology maturation cycle – Plus access to short-term investor LIQUIDITY via the Public Markets (Not 8 +2 VC Model) – Timely, SPO based on quality of academic alliances and investment partners

• Stimulate a broad-base of Russians to invest in the up-side of commercialising Russian

technologies (ASI-compliant)

– NB: 75% of economic growth of USA since 1945 has been derived from Investments in Technology

• Build upon a track-record of having successfully commercialised Russian technologies

internationally since 23 years to over 130 multinational technology giants – PHLburg Technologies Inc. – ‘Market Pull’ and near-term route to global markets

• Build long-term working relationships with Centres of Technical Excellence with a long

track-record of globally-competitive innovation – 3,600 R&D Institutes – Incubators, Accelerators and Proof-of-Concept centres – ‘Technology Push’

• High-risk early-stage investments:

– Hedged against lower-risk, later-stage, high-growth investments

With thanks for your attention…..

© 2014 Skolkovo RusInnovations (SKRI). All rights reserved.

Ian Humphery-Smith Posledniy Pereulok 17 Moscow, 107045 Russian Federation Office: +7 495 258 6262 Mobile: +7 916 391 5426 E-mail: ianhs@skrirussia.com URL: www.skrirussia.com