Life Sciences / Pharma Industry Outlook 2012 Texas Life Science Venture Forum March 8, 2012

New York London

Securities and Investment advisory services offered exclusively through Torreya Capital, a division of the Financial West Investment Group, Inc., a SEC-registered investment advisory firm, member FINRA/SIPC.

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Outlook for global pharma / healthcare industry

Outlook for financing / M&A market

Agenda for Today’s Talk

Boutique investment bank with a focus on the life sciences sector.

25 person team, including 14 at the Principal level.

Global footprint with key offices in London, New York and Tokyo.

A commitment to good advice, discretion, objectivity and quality work.

60+ successful advisory roles since 2007.

Over $1bn in deal volume in 2011 across 18 transactions.

Very active player by M&A / licensing deals completed in transactions

under $500mm in size.

Advised on eight royalty sale or acquisition deals in last 12 months.

Active in Texas. Advised on four transactions in recent years. Active on a

number of current assignments.

PHARMA / HEALTHCARE INDUSTRY OUTLOOK

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K A Little History

In the 1920s… The combined market cap of the pharma

sector was less than a half billion dollars.

Penicillin had not been invented…

Insulin was extracted from pig bladders.

The leading treatment for CNS was lobotomy.

Leeches were still widely used in medical practice.

U.S. consumers spent less than 5% of their income on healthcare and less than 1% of their income on pharmaceuticals.

Merck and Wyeth were small chemical companies in New Jersey. Eli Lilly laboratories geneally closed for the winter.

Eli Lilly worker operating machine for producing insulin by grinding pig pancreases.

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K Today

The market cap of global pharmaceutical companies is over $1.4 trillion

Mortality and morbidity rates from major diseases including heart disease, cancer and stroke are down dramatically.

Devastating mental illnesses are more easily controlled.

Most drugs on the market have proven efficacy / safety

Widespread reliance on evidence in medicine

U.S. consumers spent nearly a fifth of their income on healthcare and more than 3% of their income on pharmaceutical products.

The pharma business has globalized

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Mar

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Cap

($

bill

ion

s)

Market Cap of 20 Largest Publicly Traded Global Pharma Companies,

2012 ($billions)

BiogenIdec

Allergan

Celgene

Gilead

Teva

Takeda

Bayer

Eli Lilly

Amgen

BMS

NovoNordisk

AstraZeneca

Abbott

Sanofi

Merck

GSK

Novartis

Roche

Pfizer

J&J

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K Current Concerns About the Pharmaceutical Industry

There is increasing price pressure on commoditized drugs in the Western World and greater incursion of generics. Broad concern about industry decline. There is a widespread view that the pharmaceutical industry faces a difficult future outlook…

“…the pharmaceutical

industry, which has been

responsible for bringing

such drugs to the

market, is passing

through its own crisis.

Research and development

(R&D) is spluttering,

earnings have weakened,

its public image is

tarnished.”

The pharmaceutical industry's

outlook is negative because of

low growth, and because of

"significant patent expirations

in the years 2010 through 2013, a

tougher regulatory climate

resulting in a slower rate of new

product approvals, as well as

global cost-containment efforts

that may target pharmaceutical

pricing or access."

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K Torreya Partners Outlook for the Industry Future

Torreya Partners takes an optimistic view of the future of the pharma sector due to two long-term trends: The result of improving wealth and survival rates is likely to be disproportionate growth in spending on pharmaceuticals. Other positive secular trends include an increasingly efficient system for the delivery of medicine (busy hospitals and doctors) and tremendous innovation (e.g., new treatments for melanoma).

Growing Wealth

Longer Lifespans

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K Growing Wealth

Society’s budget for pharmaceutical products is determined primarily by wealth.

Pharmaceutical demand has historically risen disproportionately with income.

This is because life saving treatments are in greater demand once basic needs such as food and shelter are paid for.

The world will become wealthier over time due to technological progress and improving productivity. This trend has now lasted for more than 200 years.

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K Longer Lifespans

Life expectancies have lengthened dramatically over the last 50 years as the result of improving public health, vaccinations, diagnostics and medical interventions.

This is particularly true in areas like infectious disease and cardiovascular disease.

The trend towards longer life spans will not change in the future, particularly in light of continued innovation in interventions to treat cancer, heart attacks and stroke.

As persons live longer their demand for pharmaceutical interventions will only increase.

Initially, persons will survive disease states that were previously fatal such as cardiovascular disease. Demands for chronic disease therapies will likely increase substantially over time.

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K U.S. Medical Care Spending Has Increased Disproportionately With Income…

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1,500

2,000

2,500

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007

Me

dic

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are

Sp

en

din

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urr

en

t $

bill

ion

)

GD

P (

Cu

rre

nt

$ b

illio

n)

GDP Medical Care Spending

1930 1940 1950 1960 1970 1980 1990 2000 2010

HC / PCE 3.9% 3.9% 4.1% 5.9% 8.5% 10.8% 14.7% 15.8% 19.5%

0%

5%

10%

15%

20%

25%

Medical Care Spending / Total Consumer Spending, 1930 - 2010

The U.S. Consumer Has Spent an Increasing Fraction of Wallet on Medical Care. Healthcare has an income elasticity of demand above one. Or put another way, once the consumer has covered the basics of food, shelter and transportation he directs the marginal consumption

dollar to superior goods such as investment in life extension (medical care).

Source: Bureau of Economic Analysis, National Income and Product Accounts.

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K …as Has Spending on Drugs

The fraction of the consumer’s wallet that is spent on pharmaceutical products has gone up by more than 400% since 1930. The proportion of total spending that goes to pharmaceutical products has accelerated since 1990. This likely reflects the advent of breakthroughs for diseases like cancer, particularly biologics and the greater available of employer and government reimbursement for pharmaceutical product expenditures.

1930 1940 1950 1960 1970 1980 1990 2000 2010

PHARMA % 0.71% 0.84% 0.78% 1.05% 1.13% 1.07% 1.54% 2.33% 3.23%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

Pharma Spending / Total Consumer Spending, 1930 - 2010

Source: Bureau of Economic Analysis, National Income and Product Accounts.

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K Pharma Spending Is Higher in Higher Income Countries

There is a strong positive nonlinear relationship between Pharma expenditures / Capita in 2007 and Log GDP / Capita in the same year. This cross-sectional pattern is consistent with the longtitudinal data from the United States which show income elasticity of demand for pharmaceutical products over one.

Source: OECD Health Data; Torreya Partners calculations.

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201

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401

501

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1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80

Ph

arm

a Sp

en

d /

Cap

ita

Log (GDP / Capita)

Denmark

Mexico

Poland

U.S.

Norway

Hungary

Germany

Ireland

New Zealand

Czech Rep Korea

Slovenia

Portugal

Slovakia

Greece Canada

France

Italy

Spain

Belgium Japan

Switzerland

Austria Australia

Sweden

UK

Iceland Finland

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K Forecast Growth in Pharmaceutical Consumption

Source: Torreya Partners pharma demand model based upon relationship between pharma demand and GDP. GDP baseline growth estimates from WEFA.

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000

Australia

Turkey

Spain

Canada

India

Italy

United Kingdom

Korea (South)

France

Brazil

Mexico

Germany

China

Japan

US

Country Pharmaceutical Consumption ($ millions)

Total Pharmaceutical Revenue by Country, 2004 - 2020

2020

2010

2004

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K Longer Life Expectancies and the Survival Trend

Source: OECD Health Statistics, 2011.

0 5 10 15 20 25 30

Australia

Germany

Ireland

Korea

Poland

Sweden

Turkey

Change in Expected Years of Life

Change in Life Expectancy at Birth, 1960 - 2009

Country 2009 2039

Australia 81.6 87.2

France 81.0 88.4

Germany 80.3 88.6

Ireland 80.0 88.5

Japan 83.0 90.4

Poland 75.8 81.2

Spain 81.8 89.2

Sweden 81.4 87.6

Switzerland 82.3 89.5

United States 78.2 82.8

Average 80.5 87.3

Life expectancy at Birth in Ten Selected Countries in 2009 and 2039 (projected)

Note: The projected life expectancy for 2039 was made by assuming the percentage change in average life expectancy in the 30 years prior to 2009 would continue in the 30 years after 2009. When considering whether this assumption is reasonable It is important to note that improvements in life expectancy have been accelerating over the last 50 years.

As persons live longer in industrialized countries their lifetime demand for pharmaceutical products will likely rise rapidly. In decades past a person may not have survived their first chronic disease whether it be cardiovascular disease or HIV. As therapies continue to come online to treat these disease states, persons are increasingly likely to face second, third and fourth line chronic disease states – particularly diseases of the aged such as Alzheimer’s disease, Parkinson’s disease, cancer and chronic wounds.

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K Summary

The global pharmaceutical industry will face continued revenue growth at a rate that is likely higher than the average future overall growth rate of the economy.

This does not mean that many companies will face declines in value due to failure to innovate, competitive entry or patent expirations.

While the social budget for pharmaceutical products will grow dramatically over time …

… the rapid pace of innovation will mean that there may be more treatments arriving in the future than society can afford.

As a result, the pressures being felt today to control pharmaceutical prices and ration access to life-saving therapeutics may become more intense.

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K Strong Future for Biopharma Industry

We believe that there will be a number of different types of winners from the long-term boom in the life sciences. Many innovators will be richly rewarded.

We are particularly bullish about the future of Diagnostics companies Nutritionals companies Generic drug companies Pharma companies focused on the aged Companies in emerging markets.

Companies that introduce products that meaningfully benefit consumers

whether through price, improved access to medicine or better patient outcomes are likely to earn substantial profits and generate outsized investor returns.

We are highly bullish on the long-term prospects for the biopharma industry

PHARMA M&A AND FINANCING MARKET OUTLOOK

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Biotechnology Indices: Strong Gains in the Last 3 Months

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15.00

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25.00

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35.00

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45.00

50.00

$600.00

$700.00

$800.00

$900.00

$1,000.00

$1,100.00

$1,200.00

$1,300.00

$1,400.00

$1,500.00

Feb 11 May 11 Aug 11 Nov 11 Feb 12

Nasdaq Russell 2000 AMEX Bio

Major Biotech and Small-Cap Indices: LTM Nasdaq Russell AMEX

3 Month 28.1% 24.2% 31.0%

3 Month Performance

After a steep drop off in mid-year of 2011, the market took three months to stabilize

The past three months have shown strong gains in three major indices showing an accumulation of Biotech and Small-Cap stocks

This upward momentum has been driven by 1) a general perception of an improved global economy; 2) robust Biotech M&A at lofty valuations; 3) a renewed appetite for high risk / higher return prospecting amidst dismal yields from more conservative asset classes

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LTHC

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S Healthcare IPOs: Follow on Performance LTM

The last three months have seen a significantly improved investor reaction to newly public healthcare entities

Pricing Date Issuer SectorProceeds

($M)

Pre-Money

Value ($M)

% Change Price

File/ Offer

A/B/W

Range% Secondary

% Change Offer to

Current

2/8/2012 ChemoCentryx Inc Life Sciences 45.0$ 330.3$ -33.3% B 0.0% 7.6%

2/3/2012 Cempra Inc Life Sciences 50.4 71.1 -50.0% B 0.0% 6.5%

2/1/2012 Greenway Medical Tech Services 66.7 219.8 -16.7% B 19.8% 50.5%

1/26/2012 Verastem Inc Life Sciences 55.0 151.0 0.0% W 0.0% 15.8%

11/15/2011 Clovis Oncology Life Sciences 130.0 159.3 -7.1% W 0.0% 80.0%

11/10/2011 NewLink Genetics Corp Life Sciences 43.4 113.3 -36.4% B 0.0% 8.9%

10/18/2011 ZELTIQ Aesthetics Med Tech 91.0 334.9 -13.3% B 4.4% -14.0%

7/28/2011 Horizon Pharma Inc Life Sciences 49.5 126.6 -18.2% B 0.0% -58.7%

6/21/2011 Vanguard Health Systems Services 450.0 932.2 -18.2% B 0.0% -42.5%

4/19/2011 Sagent Pharmaceuticals Life Sciences 92.0 354.7 6.7% W 0.0% 37.4%

4/1/2011 Tranzyme Life Sciences 54.0 41.1 -66.7% B 0.0% 17.3%

3/9/2011 HCA Holdings Services 3,786.0 13,906.8 5.3% W 30.5% -13.5%

2/10/2011 AcelRx Pharmaceuticals Life Sciences 40.0 63.0 -61.5% B 0.0% -40.0%

2/10/2011 Kips Bay Medical Med Tech 16.5 111.8 -11.1% W 0.0% -82.3%

2/9/2011 Fluidigm Corp Diagnostics 75.0 200.3 -6.9% W 0.0% 17.0%

2/4/2011 Endocyte Inc Life Sciences 75.0 97.9 -57.1% B 0.0% -37.7%

2/4/2011 MedQuist Holdings Inc Services 36.0 389.0 -27.3% B 33.3% 34.4%

2/3/2011 BG Medicine Diagnostics 35.0 109.0 -50.0% B 0.0% 14.3%

2/2/2011 Pacira Pharmaceuticals Life Sciences 42.0 87.6 -53.3% B 0.0% 45.9%

2/2/2011 Tornier NV Med Tech 166.3 570.3 -5.0% W 0.0% 13.0%

Last 3-Months 9-Months Prior

1st Quartile 7.9% -39.4%

Median 12.4% -0.3%

Mean 28.2% -7.8%

3rd Quartile 41.8% 17.2%

Post Offer Performance

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S IPO Market Outlook

Historically the IPO market picks up after heavy follow on activity.

Positive post offering performance is an important bellwether of the market

The public markets are hungry for deals but are looking for later stage assets and want bargains.

We expect to see a strong pickup in activity this year that will likely be sustained for the next 24 months.

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CMPOs and Registered Stock Offerings: Cumulative 3-Month Totals

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Follow on Equity Offerings are Up Dramatically this Quarter

Investors have put nearly $1.1 billion of capital into registered deals over the past 3 months. The demand public healthcare investing is the strongest it has been since the market collapse in 2008.

$1.07 billion in follow-ons from December 1 through Feb 21

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Av size $208m $285m $238m $278m $316m $158m $175m $75m

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Life Sciences M&A Activity: 2011 Ended Strongly Globally

Sources: Bloomberg (01/03/2012) with Torreya Partners’ analysis. Note: Deal dates refer to the date of announcement. Transactions in biotech, pharmaceuticals and med tech

Only deals that were completed or still pending have been included in the analysis

Global M&A Activity

M&A Activity in Europe

Av size $196m $488m $271m $380m $194m $209m $268m $39m Av size $271m $314m $303m $364m $518m $185m $217m $92m

M&A Activity in North America

131

190 192 184 190 142

181

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2005 2006 2007 2008 2009 2010 2011 2012YTD

# deals ($bn)

30

74

50 52

24 38

54

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2005 2006 2007 2008 2009 2010 2011 2012YTD

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85 101 120 114 153

84 111

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Life Sciences M&A Activity – Concentration and Sector Trends

Source: Various. Note: Select transactions highlighted. The year of the transaction corresponds to the announcement date.

Percentage of total value is calculated compared to total value for the relevant year $350m Celgene acquisition of Avila does not include upto $575m in additional milestones

2010

Acquiror Target

Value ($m)

Target Geography

Target Sector

Novartis Alcon

25,851 USA Specialty Pharma

Sanofi Genzyme

19,641 USA Specialty Pharma

Merck KGaA Millipore

6,806 USA Med Tech

Teva Ratiopharm

4,942 Germany Generics

Pfizer King Pharmaceuticals

3,312 USA Biotechnology

Astellas OSI Pharmaceuticals

3,259 USA Biotechnology

Grifols Talecris

2,954 USA Biotechnology

Celgene Abraxis

2,733 USA Biotechnology

Covidien Ev3

2,490 USA Med Tech

Johnson & Johnson Crucell

1,737 Netherlands Biotechnology

2011

Acquiror Target

Value ($m)

Target Geography

Target Sector

Johnson & Johnson Synthes

19,358 Switzerland Med Tech

Takeda Pharmaceutical Nycomed

13,733 Switzerland Specialty Pharma

Gilead Pharmasset

11,012 USA Specialty Pharma

Teva Cephalon

6,155 USA Specialty Pharma

Thermo Fisher Scientific Phadia

3,533 Sweden Med Tech

Endo Pharmaceuticals American Medical Systems

2,667 USA Med Tech

Terumo Caridian BCT

2,625 USA Med Tech

TPG Capsugel

2,375 USA Specialty Pharma

Fresenius Medical Care Liberty Dialysis

1,700 USA Med Tech

TPG Capital Immucor

1,646 USA Med Tech

Total Value of Top Deals $74bn

% Total Value 52%

Total Value of Top Deals $65bn

% Total Value 36%

2012 YTD

Acquiror Target

Value ($m)

Target Geography

Target Sector

Roche Illumina

5,700 USA Med Tech

BMS Inhibitex

2,579 USA Biotechnology

Amgen Micormet

1,200 Germany Biotechnology

Watson Ascent Pharmahealth (Strides)

392 Asiapac Specialty Pharma

Celgene Avila

350 USA Biotechnology

Total Value of Top Deals $10.2bn

% Total Value 68%

We are seeing more larger biotech deals this year versus med tech in 2011.

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Source: CapitalIQ and Torreya Partners Analysis

Globalization of Deal Activity

Eight years ago, U.S. buyers handled more than 65% of deal activity.

In 2010 approximately 50% of deals over $50 million involved a non-U.S. buyer.

In 2011 58% of deals involved a non-U.S. buyer.

Characteristics of More activity from

consolidators such as Teva, Shire and Valeant

Some activity from royalty players, particularly Royalty Pharma

U.S. 42%

Europe 21%

Canada 5%

Israel 10%

Japan 11%

China 11%

Distribution of Buyer Countries, 2011 Transactions over $50 million in Size

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Overview of Recent M&A Activity by Largest Consolidators

Sources: MedTrack, Bloomberg and Capital IQ. Note: Companies profiled are for example only with a limited number of their most recent M&A deals highlighted

Company Key Acquisitions Transaction

Date Therapeutic area Value ($m)

Excaliard Capsugel King Pharmaceuticals Wyeth Encysive Pharmaceuticals

12/2011 04/2011 10/2010 10/2009 06/2008

Dermatology Pharmaceutical and dietary supplements manufacturing CNS, infectious diseases, animal health and allergy Inflammation, vaccines, neurology and women’s health Inflammation and vascular diseases

316 2,375 3,313

64,234 324

Genzyme TargeGen Chattem

08/2011 07/2010 02/2010

Genetic disorders, oncology and metabolic disorders Inflammation and vascular diseases OTC healthcare products

19,641 560

2,121

Illumina Anadys PVT Labs System Marcadia

02/2012 10/2011 03/2011 02/2011

Medical diagnostics in genetic analysis research Hepatitis C Clinical laboratory automation systems Diabetes and cardiovascular

5,700 250 119 537

Alcon Zhejiang Tianyuan Bio-Pharma Oriel Therapeutics

04/2011 03/2011 04/2010

Ophthalmology and medical devices Vaccines Respiratory disease

25,851 125 330

Taiyo Cephalon Theramex Ratiopharm Barr Pharmaceuticals

07/2011 05/2011 01/2011 08/2010 12/2008

Pharmaceutical products manufacturing CNS, oncology, inflammation and regenerative medicine Women’s health Generics Generics

934 6,155

369 4,942 8,833

Inspire Pharmaceuticals SmartCells Schering-Plough

05/2011 12/2010 03/2009

Ophthalmology Diabetes (with a focus on insulins) CNS, cardiovascular, women’s health, animal health and OTC

329 138

47,147

Avid Radiopharmaceuticals Alnara Pharmaceuticals ImClone

12/2010 07/2010 10/2008

Radiopharmaceutical products Metabolic diseases Oncology

836 380

5,985

Synthes Crucell Cougar

04/2011 02/2011 07/2009

Human and animal skeleton and soft tissue regeneration Vaccines Oncology

19,358 1,737

990

iNova Pharmaceuticals Afexa Life Sciences Sanitas Ortho Dermatologics

11/2011 08/2011 08/2011 07/2011

OTC and prescription drugs Immunology Generics Dermatology

703 78

457 345

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E Key Trends Going Forward

Big Pharma will remain active

Big Pharma using option programs much more (lower upfronts)

China and Japan will be more active

Emerging Consolidators will become more important. These are: Jazz Pharma Meda Shire Teva Valeant

Emerging Consolidator characteristics

Focus on total cost control Focus on buying cash flow Focus on using low tax jurisdictions