Cell Therapy

Senior Analysts: Matthew Sgrignari

Junior Analysts: Ian Ronda, Preyaa Docu, Nicholas Chiarelli, Tuquyen Pham, Roshni Mahbubani, Yaojie Chen, Dom Tarantino, Marco Buchmayer, Elizabeth Sakhnovsky, Denis Visnjic, Jack Zheng, Mohaira Osman

Finance & Investment Club Healthcare SectorTeam 1

Fall 2014

Downside Potential:RegulationVolatilityNon-Receptive Market

Upside Potential:High Anticipated GrowthNew ProductsIncreasing Investment

Industry OverviewIndustry Life Outlook: Neutral

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

500

1000

1500

2000

2500

3000

Cell Therapy Revenue Projection

Years

Reve

nue

in M

illio

ns

Industry Statement:The cell therapy industry is expected to grow rapidly from 2015-2019, however this growth is difficult to quantify and highly volatile making the industry an overly risky investment in the next 2 years

Index

Industry Definition:

The cell therapy industry researches, develops, and manufactures therapies using engineered human tissue for regenerative medicine and human cytotherapy.

The industry is very new, marked by the regular implementation of bone

marrow transplants in 1990. Cell therapy is currently being watched for its massive growth potential with dozens of new therapies in development.

Procedures include cancer cell therapy, musculoskeletal cell therapy, as well as mainstream medicine (transfusions) and alternative medicine (stem cells). Companies consist of mainly small startups with heavy backing from big pharma.

NASDAQ:OFIX

NASDAQ:DNDN

NASDAQ:NUVA

NASDAQ:SHPG Private

IBIS World, S&P Capital Index

Industry Breakdown:

Healthcare$2595B100.0%

Pharma/Therapies

262B10.9%

Cell Therapy1.048B.04%

Industry Breakdown by Revenue (US) Cell Therapy Market Share (US)

Dendreon31%

Shire Regenera-tive15%

Organogensis11%

Nuvasive6%

Orthofix17%

other20%

0

5

10

15

20

25

Price Weighted Index

IBIS World, S&P Capital, Investext Index

Business Model: Cell Therapy

3-Step Process Research

Processing & Manufacturing

Treatment

Creation Process

Distribution Process

Funding

Discovery

+

Therapies Engineered from Non-

Human Cell Matter

Therapies Direct from

Human Cellls

Hospitals and

Treatment Facilities

Completion

FDA Interaction

Patients

Other Manufacture

rs

IBIS World, S&P Capital Index

Revenue Generation

Discovery Manufacturing Distribution

Testing in Vitro

Animal Testing

Phase I: Safety

Phase II: Sick Patients

Phase III:Longer Periods

Larger GroupsNew Therapy Application

Approval

Therapy Designing

Raw Materials

Harvesting/Synthesis

Engineering

Final Products Ready

S&P Capital, IBIS World ,Company 10-Ks

Cell Harvesting

Allogenic Autologus

Products Preseverved

Therapy Prepared

Treatment Facility

Injections to Patients

Final Therapy

in Progress

Index

Industry Competitive Landscape

Barriers to Entry: Moderate-Significant Regulatory Barriers-Low Capital Intensity-High Availability for R&D Financing-Very Skilled Talent Pool Required-High Wage Costs

Power of Suppliers: Low-Short Term Supplier Contracts-Industry Harvests Many Inputs

Threat of Substitutes: Low-Patent Protection for Periods of Time-Regulatory Requirements Discourage Replication -Treatments Targeted at Previously Unaddressed Illnesses

Power of Buyers: Moderate

-External Options Threaten Therapies-Health Insurance Limits Products Eligible-Highly Fragmented Market -Low bargaining power

Industry Rivalry

Moderate-Well Integrated Firms Still Subject to Industry Risks-Small Firms Can Enter With Promising Products-Difficulty to establish long term product superiority

Porter’s Five Forces Analysis

S&P Capital IBISWorld, Company 10-Ks, Bloomberg Index

Developing Therapy Pipeline Decrease in PHE Overcoming Wage

Costs

Trends

Index

Trend 1: Developing Therapy PipelineCell therapy firms have an expected 8-15 year drug timeline that started at the industries formal inception around 2000

The FDA’s Safety and Innovation Act (2012) created a fast track for “break through therapies” to expedite phases II&III of clinical trials

Based on industry revenue projections revenue is expected to grow at a CAGR of 17.3% from 2014 to 2017 based on the expectation of 26 successful new products.

Dermatology

Enodocrine

Musculoskeletal

Oncology

Cardiovascular

Gastro

Central Nervous

Other

0 2 4 6 8 10 12 14 16 18 20

Products in Pipeline 2013

Expected Passing Products

Phase II & III

Phase I

Number of Products

0100020003000

Cell Therapy Revenue Projec-tion

Years

Reve

nue

in M

illio

ns

IBIS World, S&P Capital, FDA, CT Coalition Index

Trend 1: Cont.

5.0% 15.0% 25.0% 35.0% 45.0%0.0%

10.0%20.0%30.0%40.0%50.0%60.0%70.0%

Revenue Growth Sensitivity to Product Success

%of Products Completed by 2017

Reve

nue

Grow

th 2

014-

2017

20 60 80 100 1200.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Revenue Growth Sensitivity to Revenue/Product

Revenue per Product (M)

Reve

nue

Grow

th 2

014-

2017

Analysts currently project cell therapy revenue to reach 2.07B by 2017, a projection based on the release of 27% of therapies in the pipeline generating about 40M per therapy

These two variables:-Product Completion-Revenue per ProductsAre the key determinants of industry revenue growth and are both subject to high degrees of volatility

If the industry does not deliver on the number of products estimated or the public does not take to the therapies then the industry revenue will sink

IBIS World, S&P Capital, FDA, CT Coalition Index

Developing Therapy Pipeline Decrease in PHE Overcoming Wage

Costs

Trends

Index

Trend 2: Decreasing Growth in Private Expenditure

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180.4

0.45

0.5

0.55

0.6

Private Expenditure as % of Total Healthare Expenditure

Year

PE %

of H

E

2005 2006 2007 2008 2009 2010 2011 2012 2013-5.00%0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%50.00%55.00%60.00%

Y/Y Growth of CT Revenue vs. PHE

Cell Therapy Revenue Private Health Expenditure US

Year

% A

nnua

l Gro

wth

Correlation 0.705225993

High development costs for cell therapy treatments lead to high costs for patients. Patients pay private insurance/out of pocket

Strong correlation between growth of CT revenue and private health expenditure (2011 Provenge)

ACA Expected Growth: Healthcare 2014 7.4%2015-2018 CAGR 6.2% Private 2014 5.2% (Insurance 6.8%) 2015-2018 CAGR 4.39%

Slow relative growth in private healthcare expenditure and shift towards public plans can harm CT revenues in the next 5 years

IBIS World, S&P Capital, ACA, World Bank Index

Developing Therapy Pipeline Decrease in PHE Overcoming Wage

Costs

Trends

Index

Trend 3: Overcoming Wage Costs

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

500

1000

1500

2000

2500

Revenue vs. Wages Wages

Revenue

Mill

ions

$0.00

$20,000.00

$40,000.00

$60,000.00

$80,000.00

$100,000.00

$120,000.00

$140,000.00

$160,000.00

$180,000.00Revenue/Employee

CAGR 18.09%

The average salary for workers in CT was $107,422 in 2013, primarily PHDs & researchers

Wage expenses in 2013 exceeded revenue by $193.7 million (118.5% of revenue)

Research consolidation and efficiency have allowed the industry to generate more revenue per employee, up to $90,700 in 2013.

1 to .07 ratio of labor to capital expenditures

If revenues exceed wages in 2015 the industry will have overcome its largest internal cost

IBIS World, S&P Capital, FDA, CT Coalition Index

Industry Risks & Challenges:

Losses in Funding Industries• Much of the funding in the industry comes from Pharma and Biotech companies

leasing and investing in products.• If these companies faces losses in upcoming patent cliffs they may choose to cut

funding in projects not generating revenue.External Solutions• Other areas of medicine are exploring ways to cure many of the currently incurable

conditions that cell therapy looks to address• If these firms are successful patients will quickly transition to these treatments if they

are covered by insurance or recommended by physicians Failure to Survive Periods of Loss• The industry is currently facing yearly losses• Companies have been entering and exiting the industry based on this lack of

profitability and products can only be seen to fruition of companies can survive long enough to complete them

Primary Risks to Cell Therapy Industry

IBIS World, S&P Capital, FDA, CT Coalition Index

Industry OverviewIndustry Outlook: Neutral

TrendsDecrease in Private Health

Expenditure

Developing + Volatile Drug Pipeline

Decreasing Wage Costs/Increasing Revenue

RisksLosses in FundingExternal SolutionsFailure to Survive Losses

Industry Statement:The cell therapy industry is expected to grow rapidly from 2015-2019, however this growth is difficult to quantify and highly volatile making the industry an overly risky investment in the next 2 years

2013 2014 2015 2016 2017750

1000

1250

1500

1750

2000

2250

Cell Therapy Projected Revenues

Analysts Estimate 15% Product Success 20m Per New Product

Year

Reve

nue

in M

illio

n

Index

Key FinancialsCompany

Mkt Cap (m)

% of 52 Week High Closing P/E Ratio EPS EV/EBITDA

Total Debt/EBITD

A ROER&D/Op

Exp

NUVA 2067.0 96.85% 43.93 NEG -0.40 30.20 5.10 -3.00 0.07

DNDNQ 22.0 3.92% 0.14 NEG -1.06 NEG NEG - 0.13

OSIR 451.0 71.43% 13.15 NEG -0.08 NEG NEG -82.90 0.24

OFIX 514.0 75.66% 27.92 2792.00 0.01 37.80 1.40 -7.90 0.09

NBS 141.0 47.53% 3.94 NEG -1.84 NEG NEG -113.10 0.42

BLUE 1188.0 94.03% 41.23 2.30 18.01 NEG 0.00 -17.80 0.69

High 2067.0 96.85% 43.93 2792.00 18.01 37.80 5.10 -3.00 0.69

Low 1188.0 3.92% 0.14 2.30 -1.84 30.20 0.00 -113.10 0.09

Median 59.5 73.55% 20.54 1397.15 -0.24 34.00 1.40 -17.80 0.19

Mean 730.5 64.90% 21.72 465.72 2.44 11.33 1.08 -37.45 0.27

Investext, Bloomberg, Company 10Ks Index

IndexIndustry OverviewIndustry DefinitionIndustry BreakdownBusiness ModelRevenue GenerationIndustry Competitive Landscape

Trend 1: Developing Therapy PipelineTrend 2: Decreasing Growth in Private ExpenditureTrend 3: Overcoming Wage Costs Industry Risks & Challenges ClosingKey Financials

Index