Views from Venture Capitalists

Nancy Harrison&

Jennifer Hamilton

Venture Capital Investments in Biotech

0% 2% 4% 6% 8% 10% 12% 14% 16%

Canada

US

Percentage Invested in Biotech

1998

1999

2000

1997

1998

1999

2000

1997

2001

2001

Canadian VCs Support Industry

60%

70%

80%

90%

100%

110%

120%

28-Sep-2001 16-Nov-2001 8-Jan-2002 26-Feb-2002 17-Apr-2002 6-Jun-2002

IndexedPrice

NASDAQ Biotech / S&P 500 NASDAQ Biotech / NASDAQ NASDAQ Biotech / DJIA TSE Pharm & Biotech / S&P TSX

Where is the Bottom?!

The Bad News

• Blair/Clinton comments• September 11th• Enron• Elan• Dov • Pharma downturn • Series of poor data, FDA rejections• ImClone

Are There Public Market Safe Havens?7 Stocks Lose $62B in 6 Months

12/31/01 6/12/02 Mkt Cap Change Mkt Cap %

Amgen $59.2B $42.2B -$16.8B -28%

Genentech $28.6B $17.4B -$11.2B -39%

Immunex $15.8B $12.4B -$3.3B -21%

Elan $15.4B $2.6B -$12.8B -83%

Serono $14.3B $10.2B -$4.0B -28%

Genzyme $12.7B $4.0B -$8.7B -68%

Idec $10.5B $5.0B -$5.5B -52%

Total $156.4B $94.1B -$62.4B -40%

Source: BioCentury June 24,2002

What Constitutes a Tier I Company?

March 2000: 41 of 81 companies have products

Today: 33 of 36 companies have products

Source: BioCentury June 17, 2002

US Money Raised by Biotech Companiesin 2002 YTD

$ YTD $ 2001

IPOs $239.6M $400M

Follow-ons $592.4M $4B

Venture capital $1881.9M $4.2B

Other $5247.5M $7.4B

Total $7961.5M $16B

Source: BioCentury June 24, 2002

Where are the institutional investors?!

Canadian Public Market Financings are Dead

$275

$1,366

$1,564$1,647

$79

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1998 1999 2000 2001 2002 Q1

(CD

N $

mln

)

Source: Yorkton Securities

Money Raised in Public Canadian Biotechnology Companies

Private Deals Done in BC – not many -

• Last half 2001– Protiva - $14.5m

• First half 2002– Oncogenex - $3.6m

• Other deals – follow-ons – Grants - Genome Canada

BC Companies are Still Not on the Radar Screen of Foreign Investors

Foreign VC's in Canadian Biotech Deals in BC

$ 0

$ 10,000

$ 20,000

$ 30,000

$ 40,000

$ 50,000

1996 1997 1998 1999 2000 2001

0

1

2

3

4

5

$ Invested

# of Investments

The New Reality

• Internal rounds (Series B-2) closing a year after Series B

• Lack of lead investors• Debt financing• Lay-offs and downsizing/prioritizing• Mergers• VC’s supporting their own companies• VC’s having a hard time getting excited about the

“old” model - Disillusioned• Numbers don’t work anymore

Angiotech Model

• Go public on TSE (stepping stone/capital)• Then go to NASDAQ (liquidity)• Luck element - public markets closed

Big Corporate Partnership Model

• Sign a big deal and get credit (Inex)• Doesn’t always work that way anymore (StressGen)

Top Quartile VC IRR’s above 30 %

US Venture Capital Net Returns to LPs by Fund Vintage Year

(40.0)

(20.0)

-

20.0

40.0

60.0

80.0

100.0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

An

nu

al IR

R

Lower quartile Median Upper quartile

What are VC’s doing to Get Returns?

• Focussing on companies with on products, revenues and profits

• Avoiding concept deals• Doing fewer deals – more money per deal• Watchful waiting• Investing in NRDO’s e.g. Salmedix

What are VC’s doing to Get Returns?

• Investing in Superhero CEO’s– Affinity raised $70m Series B – June 24

• Investing at lower valuations (40%)– Especially for Class of 2000 companies

• Letting companies go under – not throwing good money after bad

• Investing in relatively cheap publics versus private companies

Creative Financing Alternatives

• Cut Burn– e.g. Geron

• Let go 1/3 of work force to refocus on later stage programs – June 2002

• “In the current financing climate companies that are well managed make tough calls…early.” Alex Barkas, Chairman

• Slice and Dice Market– e.g. Angiotech - masters of this

• Lean and Mean– Angiotech never more than 50 people

Creative Financing Alternatives

• Strategic M&A– e.g. ImmGenics

– Don’t wait until out of money

• Deals to cut burn, increase chances of success– e.g. Active Pass/Neogenesis

• Buy versus Build– e.g. Active Pass

• Spinouts– e.g. Inex/Protiva

Summary

• The world has changed – forget the past• Lots of money out there

– For Right story - at Right Valuation

• Time is the enemy: Financing and M&A take a long time – don’t get pushed up against the wall

• Remember what drives investors – returns! – build into pitch

• Be flexible on model and exit• Founders make money when shares are sold, not on

company financings.