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Strategic and funding outlook for growing healthcare companies
2008 Health Care Forecast Conference, University of California, IrvineFebruary 22, 2008
George Bickerstaff, Managing DirectorCRT Capital Group LLC
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This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This material is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. This material is based on information obtained from sources believed to be reliable but is neither guaranteed to be accurate nor intended to be a complete statement or summary of the securities, markets or developments referred to in the material. Recipients should not use this material as a substitute for the prudent exercise of their own judgment. Any opinions expressed in this material are subject to change without notice and CRT is under no obligation to update or keep current the information contained herein. CRT and/or its directors, officers and employees may have or may have had interests or long or short positions in, and may at any time make purchases and/or sales as principal or agent, or may have acted or may act in the future as market maker in the relevant securities or related financial instruments discussed in this material. CRT may rely on informational barriers such as “Chinese Walls” to control the flow of information situated in one or more areas within CRT into other units, divisions or groups within CRT.
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Legal Disclosure
Agenda
Situation overview
Key market drivers
Growth challenges
Financing alternatives
Company implications
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Situation Overview
The aging population, higher disposable incomes and improved technologies are driving the demand for healthcare products and services
This accelerating demand has resulted in the rapid creation of new healthcare companies domestically and abroad, particularly in the biotechnology and medical device fields
Many emerging and developing companies lack the necessary capital to respond quickly in this dynamic marketplace
The global capital markets, and particularly the US capital markets, are providing financial support for these companies through a variety of funding alternatives
Key market drivers
Aging and older population
Increased access to healthcare services
Improved economic standards and ability to pay
Scientific and medical innovation
Consumer and patient targeting
International expansion
Access to global capital
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Global pharmaceuticals: $700 billion market
Global Pharmaceutical Sales
$578$619
$663 $700$740
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2004 2005 2006 2007E 2008E
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CAGR 6.5%
* World-wide gross domestic product estimated at $50.4 trillion for 2007, a 5.7% increase over 2006.Source: IMS Health; CIA Fact Book
5% - 6%
Global pharma sales are growing at a rate faster than the growth rate of world-wide gross domestic product*, driven by the emerging markets.
Pharmaceutical market geography
2008 Estimated Market Size - $740 Billion
41%
20%9%
12%
18%
30%
USA Top 5 Europe Japan "Pharmerging" Market ROW
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Source: IMS Health
The smaller and emerging (“Pharmerging”) markets are expected to grow at nearly twice the rate (8% - 13%) of the larger countries (< 5%) in 2008.
Key growth areas
Specialist driven products (~ 15% growth)• Oncology
• Anti-Diabetes
• Anti-Psychotics
• Respiratory agents
Biotechnology (~ 10% growth)
Generics (~ 15% growth)
Traditional medicines• China
• India
• Indonesia
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Growth challenges
Generics, price competition and cost containment• Generics are generally 25% to 75% less expensive than branded products
Products coming off patent, coupled with intellectual property challenges• On average $20 billion of big pharmaceutical revenue needs to be replaced every year as old products
come off patent
• This accelerates in the next few years (e.g., Lipitor)
Slow down in innovation and timing of regulatory approvals• The number of new chemical entities (NCE) launched globally has declined 27% in the past five years
to an average of 33 per year from 44 per year during the prior five years
Increasing costs for product development and distribution
Access to affordable capital
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Sources of capital for growth companies
Private EquityPrivate EquityVenture CapitalVenture Capital
Hedge FundsHedge Funds
Marketplace Evolution
Company MaturityCompany Maturity
~$1,810 billion
~$300 billion~$90 billion
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Pro and cons of funding sources
Venture capital and private equity are one source of capital• Often has stringent management and board controls
• Relatively high cost of capital (generally 25% to 50% IRR target)
• Lacks the public currency for growth
Hedge funds provide an alternative source• Generally a lower cost of capital (typically 15% to 25% IRR target)
• Provide greater liquidity and investor base
• Broader range of financing tools
Strategic partners• Provides management resources in addition to capital
• Generally offers highest return to sellers
• Often slow in negotiating and closing deals
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$368 $375$456 $491 $539
$626
$820
$973
$1,105
$1,460
$1,810
$0
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$2,000
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
As
se
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ge
me
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($b
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Hedge fund growth
Source: Hedge Fund Research
Hedge fund assets have grown at a 17% CAGR over the past 10 years
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The initial public offering market (IPO) has changed significantly
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Avg. Gross Proceeds ($mm) Number of IPOs
Initial public offering trends
Source: Securities Data Corporation and Thomson Financial
(1)
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The IPO market for small companies* is virtually closed
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Gross Proceeds ($bn) Number of IPOs < $50mm
Small company IPO trends
Source: Securities Data Corporation and Thomson Financial* IPOs for companies raising less than $50 million
(1)
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0
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'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
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Os
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Am
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d ($
bn
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Number of Venture Backed IPOs Amount Raised
Venture backed exits
Venture backed companies have been forced to look for exit alternatives
Source: VentureOneNote: 2007 data is as of 6/30/07
0
70
140
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'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
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&A
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bn
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Number of Venture Backed M&A Deals Amount Raised
Venture Backed IPOs Since 1997 Venture Backed M&A since 1997
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Financing considerations
Cost of capital• Interest rate
• Equity
• Terms
Operating flexibility and covenants• Management and boards
• Measurement hurdles
• Governance
Other• Execution risks
• Timing
• Follow-on deals
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Some financing tools
Private equity and venture capital
Public offerings• Initial and secondary public offerings
• Reverse mergers and special purpose acquisition companies (SPACs)
Private offerings• Private investments in public entities (PIPE)
• Rule 144a transactions
Other• Debt and high yield
• Convertible securities
• Royalty buy-outs
• Licensing and milestones
• Acquisitions/divestitures
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Financing implications
Position the company operationally• Innovation, operational excellence, and talent
• Sustainable advantage – “better, quicker, cheaper”
Ensure good governance and financial controls• Qualified, independent board of directors
• Accurate, timely and transparent reporting
• Full disclosure
Hire, retain or develop access to the best talent• Board of directors and advisors
• Accounting, audit, consulting and legal
• Investment banking and investor relations
Look for and evaluate all the alternatives
Summary
Healthcare markets should continue to grow ahead of GDP• Demographics
• Access and affordability
Competitive advantages can be achieved• Innovation, speed and quality
• Cost of capital
Capital markets play an important role• Venture capital and private equity
• Hedge funds and public markets
Know your alternatives
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CRT Overview and Healthcare Practice
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Overview of Capabilities
CRT Capital Group is a client-focused investment bank and securities trading firm that provides creative, idea-driven advice and solutions delivered by experienced professionals
Serving the middle market in healthcare by providing tailored advice and capital solutions to companies and investors
One of the largest employee-owned investment banks in the United States focusing on middle market transactions
Has the experience and the scale to provide value-added financial services to the healthcare sector
Operates on the leading edge of the financial markets, with the capability to structure and trade the latest, most innovative financial instruments
Unparalleled relationships with the hedge fund community
Founded in 1989
165 Fulltime Professionals
Stamford, CT & San Francisco, CA
Employee-owned
Corporate Finance• Convertible &
Preferred Securities
• PIPEs• Public Equity
Strategic Advisory
Mergers & Acquisitions
Restructuring
Investment Banking
New Issues• Common Equity• PIPEs• Convertible Debt• High Yield
Secondary Trading• Equity• Convertible Debt• High Yield
Market Making
Capital Markets
Published Research• Public Equity• Convertible Debt• High Yield• Special Situations
CRT BioMed Product Evaluations
• Development• Licensing• End-use
Opportunities
Research
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Comprehensive, Research-DrivenCoverage of the
Healthcare Sector
CRT’s Dedicated Healthcare Client Team
Firmwide commitment to the biotech sector with 19 dedicated senior professionals
Investment Banking
Charles Baltic
George Bickerstaff
Jim Hesburgh
Michiel McCarty
Olivier Saidi
Rob Gibson
Research
Christopher Young
Leah Hartman
Sheryl Skolnick
Joy Polefrone
CRT BioMed
Stuart Mushlin, M.D.
Erik Alexander, M.D.
Jonathan Coblyn, M.D.
Wolfram Goessling, M.D., Ph. D.
Capital Markets
Michael Vaughn
Ray Rivers
John Ward
Evan Collins
Jed Stevens
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Representative Transaction Experience
Vion Pharmaceuticals, Inc.
$60,000,0003
Convertible Offering
The undersigned acted asSole Underwriter
Healthcare Investment Banking Team
CRT’s healthcare investment banking team has deep experience in the sector and is dedicated to providing high quality advisory and capital raising services to healthcare companies and their investors
George Bickerstaff
Managing Director Former CFO of Novartis Pharma Formerly with Workscape, IMS
Healthcare and GE Rutgers University, B.S., B.A.
Michiel McCarty
Managing Director, Head of Investment Banking Group
28 years of investment banking experience
Formerly with Gleacher Partners, SG Warburg and Dillon Read
Vanderbilt University, B.A. University of Pennsylvania, M.B.A.
Rob Gibson
Associate Formerly in the Healthcare
Investment Banking Group at Bear Stearns
Amherst College, B.A.
Charles Baltic
Managing Director Formerly with Wachovia
Securities, Cowen & Company and Dewey Ballantine LLC
Georgetown University, B.A., J.D. University of Pennsylvania, M.B.A.
Olivier Saidi
Advisory Director Formerly CEO 5 Gems Strategic
Advisory Co-Founder Aureon Labs Worldwide CTO of JCDecaux La Sorbonne, Masters in
Econometrics La Sorbonne, Doctorate degree in
“Patterns, Optimixation and Algorithmic Complexity”
Cell Therapeutics, Inc.
$82,000,000
Convertible Offering
The undersigned acted as Sole Manager
Oracle Healthcare Acquisition Corp.
$120,000,000
Initial Public Offering
The undersigned acted as Sole Manager
American Oriental Bioengineering, Inc.
$60,000,000
Equity Offering
The undersigned acted asCo-Placement Agent
Jim Hesburgh
Managing Director Formerly head of Healthcare
Services banking at Cowen & Company with additional coverage responsibilities in Healthcare Information, Medical Technology, Biotechnology and Pharmaceuticals
University of Notre Dame, B.A. UCLA, M.B.A.
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Healthcare Research Team
Independent
Exclusive attention to the company and the situation,
not CRT’s relationship with
the issuer
Deep experience in investment and scientific research
Leah Hartman
Joined CRT in 1991
Formerly with SBCI Swiss Bank Corporation and Drexel Burnham Lambert in corporate finance and M&A
B.S., in Economics and Finance, Indiana University
J.D., Indiana University School of Law
M.B.A., University of Chicago
Selected CRT Healthcare Research Coverage Universe
Sheryl Skolnick
Joined CRT in 2006
Formerly with Fulcrum Global Partners and Head of Healthcare Research at Robertson Stephens
Masters in Economics, Washington University
Ph. D. in Economics, Washington University
Joy Polefrone
Joined CRT in 2007
B.S. in Chemistry, James Madison University
Ph.D. in Chemistry, University of Virginia
Julie Chen
Joined CRT in 2007
Formerly with Brean Murray Carret & Co., New York Global Securities, and C.E. Unterberg Towbin.
B.A. in Mathematics, California State University
Masters in mathematics, Claremont Graduate School
M.B.A., Fordham University
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CRT believes that investment research in healthcare often requires experience and expertise not generally available in institutional securities firms
CRT BioMed brings the ability to analyze biomed and pharmaceutical products with unique insight and deep comprehension, including:
• Development
• Licensing
• End-use opportunities
CRT BioMed LLC Overview
Relationship with CRT BioMed was established to broaden the reach of CRT’s investment research efforts into companies active in biotechnology, pharmacology and related areas
Erik Alexander, M.D.
• Instructor in Medicine, Harvard Medical School
• Associate Physician in Endocrinology and Neuroendocrinology, Brigham and Women’s Hospital
Jonathan Coblyn, M.D.
• Associate Prof. of Medicine, Harvard Medical School
• Senior Physician in Rheumatology, Immunology and Allergy, Brigham and Women’s Hospital
Wolfram Goessling,M.D.,Ph. D.
• Instructor in Medicine, Harvard Medical School
• Fellow in Gastroenterology, Mass. General Hospital
• Fellow in Hematology / Oncology, Dana-Farber Cancer Institute
Stuart Mushlin, M.D.
• CRT BioMed Team Leader
• Assistant Prof. of Medicine, Harvard Medical School
• Senior Physician in Rheumatology and Internal Medicine, Brigham and Women’s Hospital
BIOMED LLC
CRT Contact Information
George BickerstaffManaging Director
CRT Capital Group LLC252 Harbor DriveStamford, CT 06830
Tel: (203) 569-6826Fax: (203) 569- 6886
www.crtllc.com