Funding & Commercialization Strategies for Regenerative Medicine Companies

Gregory A. BonfiglioProteus Venture PartnersNovember 15, 2011

Agenda

I. The RM Market Is Entering A New Era RM Has Made Great Progress But Serious Commercialization Challenges Remain

II. New Economic Realties A Fundamental Shift in Biotech Economics The Valley of Death Is Expanding A New Capital Efficient Model Is Required

II. The Role of RM Translation Centers Enabling Capital Efficient RM Technology Development Facilitating Collaborations in RM Technology Development The RMC: An International Coalition of RMTCs

CONFIDENTIAL 2

Gartner’s Hype Cycle of Emerging Technologies

CONFIDENTIAL 3

Technology Trigger

Peak of Inflated Expectations

Trough of Disillusionment

Slope of Enlightment

Plateau of Productivity

Time

Visibility

RM Market: On 2nd Half of the Gartner Curve

Stage of Development

Visibility

Technology Trigger

Peak of Inflated Expectations

Trough of Disillusionment

Slope of Enlightment

Plateau of Productivity

1980 Early TE research (MIT)

1986 ATS and Organogenesis founded

1988 SyStemix founded

1992 Geron founded

1997 First FDA approved cell therapy (Carticel)

1997 Dolly the sheep

1998 Human ESCs first derived

1999 First FDA approved TE product (Apligraf)

1999 TE bladders in clinic

2000 Time Magazine:TE No. 1 job

2001 Bush “partial ban” on HESCs

2001 Dermagraft FDA approved

2001 Ortec FDA approved

2001: 3300 jobs, 73 firms, mkt cap > $2.5B

2002 ISSCR Founded

2002 ATS + Organogenesis file Chapter 11

Time

2009 Obama Ends Ban on hESCs

2007 iPS Technology Developed

2005 CIRM Founded

2003 UK Stem Cell Bank Formed

CONFIDENTIAL 4

2010 Dendreon’s Provenge Approved

2010 Cephalon & Mesoblast $2B Deal

Nov 2008 Genzyme-Osiris $1.25B Deal

2011 Shire Acquires ABH -$750M

2007 Apligraf - 200,000 Patients Treated2006 Carticel - 10,000 Patients Treated

RM Is Entering A New ERA

RM Market is Maturing: Key Metrics Rapidly Expanding Market:• $1.6B in 2010• $20.0B in 2025 • CAGR of 18.34%

Dramatic Revenue Growth• $130M in 2001• $1.6B+ in 2010

Worldwide funding for research Increasing• $2.5B Now• $14B in 10 Years

Clinical Programs • Over 3600 Clinical Trials• Over 400 ex-Oncology

Commercial Products • 400 on Market (Mostly Skin, Tools Media,

& Devices); – 900+ in Development

• 44 Cell Therapies on Market– $1B Revenues– 400 in Development– 28 in PIII/Pivotal Trials

1.2M+ Patients Treated with RM Products.

• 320K+ Cell Therapy Patients

RM Companies• 600+ Co’s involved in RM • 50+ Public Co’s;

– $8.7B Total Market Cap • 225+ Private Co’s

CONFIDENTIAL 5

RM Market: Expanding Rapidly

CONFIDENTIAL 6

Cell Therapy Industry: Billion Dollar Global Business With Unlimited Potential; Regenerative Medicine; Chris Mason, David Brindley, Emily J Culme-Seymour & Natasha L Davie

Dramatic Cell Therapy Revenue Growth

CTI Revenues: $410M (2008) - $5.1B (2014)

Global Company Distribution

5%

Asia32 firms

3%

Canada24 firms

56%

USA386 firms

14%

Europe (ex. UK)93 firms

UK133 firms

19%

2%

Middle East17 firms

600+ RM companies worldwide!

CONFIDENTIAL 7

RM Has Made Great Progress, but… ….Challenges Remain

R&D

Creation And Characterization Of Optimal Cells For Therapy

– Controlling Differentiation Pathways

Standards For The Field

– What is an iPS Cell? …or MSC?

Contaminant Free Cell Lines

Safe & Reliable Expansion

Track Cell Migration & Engraftment

- Imaging Technology And Biological Markers

Immune Modulation

Manufacturing

Technologies For Scale-up

- Safe & Reliable Expansion

- Sterility Testing & Validation

- Process Control & Reproducibility; Consistent Lots

- Closed Systems

Product Characterization

– Safety; Identify; Potency

Process Control : Process Is The Product

– COGS; QC; & cGMP

Centralized Vs. Point Of Care

CONFIDENTIAL 8

…A Few More Challenges

Regulatory& IP Landscape

Regulatory Environment Needs Clarity- Standards & Guidelines Are Evolving

- Characterization

- Safety / Efficacy / Consistency

- Cross Border Inconsistencies

IP Landscape Is Treacherous : “Patent Thicket”

- Fragmented Ownership;

- Patents Proliferating Rapidly : 25% GAGR

- Inconsistent & Competing Patents: Invites Litigation

- Need “Freedom To Operate” Opinions

Business Issues Business Model Questions

- Capital Efficient R&D

- Product V. Service Models

- Autologous V. Allogeneic

Reimbursement Issues

- Cost Savings Justification

Sales & Marketing

- Complex Channel Arrangements

- Define Marketable “Product”

- Educate Consumers Re: New Treatment Paradigms

CONFIDENTIAL 9

RM Business Models: Autologous v. Allogeneic

Autologous Model

Patients Own Cells/Tissue• Personalized Medicine

Advantages: • Easier Regulatory Path

(GTP)• No Immune Response

Challenges: • Difficult to Scale • High COGS

Allogeneic Model

Universal Cells in a Bottle• Big Pharma “Drug Model”

Advantages: • Scalable • Low COGS

Challenges: • More Difficult Regulatory

Path• Immune Response

CONFIDENTIAL 10

Service vs. Product

• Autologous Treatment for Prostate Cancer Using Dendritic Cells

-Centralized Processing • $93K per Treatment

-$1B+ Projected Revenues • $5.0B Market Cap (Until Aug 3, 2011)

Agenda

I. The RM Market Is Entering A New Era RM Has Made Great Progress But Serious Commercialization Challenges Remain

II. New Economic Realties A Fundamental Shift in Biotech Economics The Valley of Death Is Expanding A New Capital Efficient Model Is Required

II. The Role of RM Translation Centers Enabling Capital Efficient RM Technology Development Facilitating Collaborations in RM Technology Development The RMC: An International Coalition of RMTCs

CONFIDENTIAL 11

New Economic Reality

Coming Out (?) of the Worst Financial Crisis in 75+ Years

CONFIDENTIAL 12

Dendreon is a Success Story, But….

CONFIDENTIAL 13

…Also a Cautionary Tale

August 3, 2011

Dendreon plunges 67% on slow sales, plans 'across the board' layoffs

Dendreon slashed its sales forecast for 2011 Wednesday after reporting lower than expected second-quarter net revenue of $49.6 million.

August 18, 2011

Biotech Stocks Battle The ‘Dendreon Effect’ Company’s Troubles With Provenge Chill Fellow Drug Makers

Basic & DiscoveryResearch

Preclinical Research

Venture InvestmentsGrants to Universities & Research Institutes,

IPO & Partnering Deals

TherapeuticCandidate

Product Release

Proof of Concept.

PI$10-15MM

Probability: 66%

Probability: 70%

Probability: 40%

Preclinical Development

Clinical Phase I

Clinical Phase II

Clinical Phase III

Market

1-3 years 1.4-1.8 year 2.5-3.8 years

PII$20-25MM

PIII$50-75MM

IND Safety Efficacy

Biotech Product Development IsDependent on External Funding

Probabilityof success

Steps

Outcome

InvestmentAmount

Actors

$5-10MM $75=100MM

CONFIDENTIAL 14

Key Metrics:

• Average Time to Market: 10-15 Years

• Average Costs: $1B

• Failure Rate: @90%

• Less than 30% of approved drugs recoup development costs

Venture Capital: VCs Want “Pristine Deals”

Proprietary Commercial Technology Great Science ≠ Great Business Proof Of Concept Established Phase II Clinical Data

Strong Management Team Board SAB

Solid Intellectual Property Position Freedom To Operate Defensible IP (Patents & Trade

Secrets)

Large Market Opportunity Target markets > $1B/year

Defensible Business Model Capital Efficient Tech Development Application Engines Project Based Models Virtual Operations

Differentiation How Is Your Approach Different? Why Is It Better?

Exit Strategy M&A: Attractive Products For Acquirer Realistic Timeframe

Acceptable Risk/Return Profile Multiple Chances To Win

CONFIDENTIAL 15

Public Capital Markets: Financing Alternatives

Discussion Materials8

Equity

SEC Registration

Required Upfront

Follow-On(Fully

Marketed)

Company sells registered shares under an effective shelf registration statement (or a specific registration statement) to public investors after a traditional 2 to 5 day roadshow

At-the-Market(ATM)

Company sells registered shares under an effective shelf registration statement to investors into the general trading market over an extended period of time

Underwritten Registered

Direct(URD)

Company sells registered shares under an effective shelf registration statement to public investors after a 1 to 3 day confidential roadshow

Registered Direct(RD)

Company sells registered securities under an effective shelf registration statement to a targeted group of institutional investors on a confidential basis

No Upfront SEC

RegistrationRequired

Common StockPIPE

Company sells unregistered shares to a targeted group of institutional investors in a private placement and files to register the securities typically within 30 days after the offering

ConvertiblePreferred/

Debt

ConvertiblePIPE

Company sells unregistered convertible preferred stock/convertible debt to a targeted group of institutional investors in a private placement and files to register the securities typically within 30 days after the offering

Rule 144AConvertible

Debt

Company sells unregistered convertible debt securities to institutional investors in a Rule 144A offering and files to register the securities typically within 90 days after the offering (public style execution)

Public Transactions

Private/Quasi-Public Transactions

CONFIDENTIAL 16

Key Strategies: IPO - 2ndary - Shelf Registration - PIPE

[Source: Robin Smith – NeoStem]

The Old “Relay” Model Is Very Capital Intensive

Business Models: • “Platform” Company

• Develop technology horizontally across many therapeutic applications• High research cash burn • Large R&D staff

• “Product” Company (Specialty Pharma)• Apply technology to specific therapeutic applications• Multiple clinical programs• Large clinical trial burn rate

IPO Metrics: • Lead Program in late stage development • Additional “shots on goal” (earlier clinical programs, or platform technologies) • Substantial infrastructure (“bricks & mortar” & staff)

CONFIDENTIAL 17

Strategy: Build Company Toward An IPO

Pre-IPO Capital: @$90M

The New Economic Reality

Public Markets: Closed? • Biotech IPO Performance: Very Poor

• 2003-2007 Window: 77 Companies• Average VC Return = 1.9X • Oct 2007 (Market Peak): 59% trading below initial PPS • June 2009: 79% trading below initial PPS• 69% Trading Below Total Invested Capital

• Only 13 Biotech IPOs in the last 24 months; All Performed Poorly* (Reduced Capital Raised; Reduced Offering Price; Trading Below IPO price)

Private Equity: Dramatically Reduced • Venture Investments in Biotech are Down 45+%

• Back to pre=1990s level of capital (PWC Survey)

• VCs have fled Early Stage investments • First-Time Financings at Some of the Lowest Levels in 40 Years

CONFIDENTIAL 18

Traditional Capital Sources Are Unavailable

Global Biotech IPOs: 2002 - 2010

CONFIDENTIAL 19

Source: Nature Biotechnology 29, 585–591 (2011)

GLOBAL BIOTECH FINANCING

CONFIDENTIAL 20

Source: Nature Biotechnology 29, 585–591 (2011)

Funding Sources: Government Funds

UK & EU Development Funds: MRC; Framework 7; European Research Council

Traditional US Government Funding Increasing NIH Funding & DARPA

Non-Traditional US Government Funding Is Available DoD RM Initiate: AFIRM (Armed Forces Institute of Regenerative

Medicine) HHS Initiative: BARDA (Biomedical Advanced Research and

Development Authority)

State RM Funds: CIRM Actively Funding ($1.2BM); Many Other US States

Other Regional Development Funds: Singapore EDB/Bio*One Fund; UK Matching Grants; Gulf; India Tech Transfer; Develop Biotech Industry

CONFIDENTIAL 21

RESEARCH DEVELOPMENT CLINICAL TRIALS(Phase 1 and 2)

2-3 years 2-3 years 3-4 years

Institutional Funding Is Not Readily Available

Until Phase 2 Trials

“Valley of Death”Grants & Seed Money

VC InvestmentsAvailable

The Valley of Death Is Expanding

CONFIDENTIAL 22

“It’s a Very Tough Environment”

25% of All Biotech Companies have Failed since 2007

Delistings & Bankruptcies in 2008 • 22 Public Companies were Delisted from NASDAQ

• 214% increase over 2007 (7 Companies) • 6 Public Companies filed for Bankruptcy

• 200% increase over 2007 ( 2)

Biotech Casualties in 2009: • 44 Public Companies Lost (Delistings; M&A; BKs)

Cash Shortfalls (Oct 2010) • 25% (73) Public Companies have less than 6 months cash

• Better than Dec 2008: 45% of Public Co’s Had Cash Shortfall

CONFIDENTIAL 23

Many Biotech Companies in Peril

Future Losses: @5% will Fail in Next 12-18 months

“It’s a Very Tough Environment”

CONFIDENTIAL 24

November 14, 2011

Geron Halting Stem Cell Research, Laying Off Staff, Stem Cell Pioneer Exits Field

Geron exiting such research, laying off staff, to focus on cancer drug testsMENLO PARK, Calif. (AP) -- Money troubles have forced the first company doing a government-approved test of embryonic stem cell therapy to discontinue further stem cell programs and lay off much of its staff.

>>>>>>>In a statement, the company said the decision to narrow its focus "was made after a strategic review of the costs, ... timelines and clinical, manufacturing and regulatory complexities associated with the company's research and clinical-stage assets.".

GERON hESC Program: “POST-MORTUM”

• Geron’s Went Public in 1996 Thru an IPO

• Primary Funding Strategy: Shelf Registration (ATM)o A Few PIPEs o Raised Over $500M in Cash

• 52 Week Market Range o Stock Price: $6.12 -- $1.82 o Market Cap: $790M -- $239M

@70% Drop in Value

• Cash Position: $142M o Monthly Burn: $6.5M

• Halting Programs in Diabetes, Cardio, Cartilage & Immunotherapyo Eliminating 65+ Jobs

CONFIDENTIAL 25

Geron: Key Metrics

Relationship With CIRM:

• Terminated $25M Funding Agreement

• Halted SPI Trial (4 Pts Treated)

• Returned $6.4M

WHAT CAN WE LEARN FROM GERON?

• Being 1st To The Clinic Isn’t Necessarily A Win

• A Public Market Financing Strategy Can Be Effective If: o The Company Can Access the Public Markets Thru a Credible Vehicle

IPO; Reverse Merger (?) o The Stock is Highly Liquid

Large Trading Volumeso The Stock Price Remains Above $3.00o Utilize A Shelf Registration To

Maintain Cash Reserves

• A “Walled Garden” Commercialization Strategy Does Not Work

o Cross The Valley of Death With Friendso Collaborate & Share Resources

CONFIDENTIAL 26

Lessons Learned:

A New Model Is Required: Capital Efficiency Is Critical

CAPITAL EFFICIENCY: DO MORE WITH LESS

Extend Technology Development In Academic Setting• Thru Phase II

Pursue Alternate Funding Sources• Government Grants (NIH, DARPA, BARDA; Regional Development Funds;

Foundations & Disease Advocacy Groups; Partner with Pharma/Big Bio

Focus & Conserve Resources• Focus On Core Business & Projects• Reduce Infrastructure & Staffing• Outsource Clinical Development (CRO; RMTs) & Manufacturing (CMO )

Collaborate & Share Resources• Open Innovation Model • Share Facilities, Technologies, Staff & IP Resources

CONFIDENTIAL 27

A New Model Is Required: Capital Efficiency Is Critical

CAPITAL EFFICIENT BUSINESS MODELS

Virtual Company

• Outsource Clinical Development To RMTC or CRO

• Outsource Manufacturing To CMO

• Reduce Infrastructure & Staffing

• Project Based - POC Model

• Fund Specific Projects/Clinical Programs - Focus On Most Compelling Therapeutic Application

• Create & Fund Company Post-POC Data

• Partnering Model

• Collaborative R&D

• Shared Facilities, Staff, IP, and Other Resources

CONFIDENTIAL 28

Agenda

I. The RM Market Is Entering A New Era RM Has Made Great Progress But Serious Commercialization Challenges Remain

II. New Economic Realties A Fundamental Shift in Biotech Economics The Valley of Death Is Expanding A New Capital Efficient Model Is Required

II. The Role of RM Translation Centers Enabling Capital Efficient RM Technology Development Facilitating Collaborations in RM Technology Development The RMC: An International Coalition of RMTCs

CONFIDENTIAL 29

The Role of RM Translation Centers: Enabling Capital Efficient Technology Development

RM Translation Centers Offer

• State of the Art Facilities- cGLP & cGMP Compliant - Focused on Specific RM Technologies

• Access Deep Domain Knowledge in RM – Core Expertise in Associated Academic Institution– History of Collaboration

• Clinical Development Expertise– Preclinical Thru Phase II

• Experienced Support Services – Incubator/Accelerator

CONFIDENTIAL 30

The Role of RM Translation Centers: Enabling Capital Efficient Technology Development

New RM Venture- Virtual Co

- POC Project

- Application Engine

Funding Sources

• Profit• Non-Profit• Government

RM Translation Centers

• GLP/GMP Facilities• RM Expertise • Clinical Development

Experience

Pharma• Clinical Development • Manufacturing• Marketing• Reimbursement

CONFIDENTIAL 31

Collaborative Research Leveraging Shared Resources

Open Innovation, Henry Chesbrough , Harvard Business School Press, 2006

RM Translation Centers

The Role of RM Translation Centers: Enabling Capital Efficient Technology Development

CONFIDENTIAL 32

RM Translation Centers

The Role of RM Translation Centers: Enabling Capital Efficient Technology Development

CONFIDENTIAL 33

UCI Stem Cell Research Center

Clinical Cell and Vaccine Production Facility

USC & UCSF RM Centers

Regenerative Medicine Coalition: A Coalition of RM Translation Centers

Mission of the RMC

• Accelerate The Commercialization of Regenerative Medicine Technologies

• Enable the Capital Efficient Development of RM Technologies

• Facilitate Collaborative Development Projects• Reduce by the Costs and Time Involved in Early

Stage Clinical Development of RM Technologies• Share Advances in Enabling/“Platform Technologies”:

o Scale-Up, Controlling Lot-Lot Variations; Safety & Efficacy Standards; Delivery Mechanisms; etc

CONFIDENTIAL 34

Regenerative Medicine Coalition: A Coalition of RM Translation Centers

RMCCore Members: RM Translation Centers

Associate Members: -Pharma -Biotech -Emerging RM Companies -Funding Agencies

CONFIDENTIAL 35

Regenerative Medicine Coalition: Charter Members

CONFIDENTIAL 36

Regenerative Medicine Coalition: Finance & Industry Support

CONFIDENTIAL 37

CONFIDENTIAL 38

The Final Word

CONFIDENTIAL 39

APPENDIX

CONFIDENTIAL 40

Proteus: An Investment and Advisory Firm Focused on RM

Proteus, Inc.

Proteus Management, LLC

(Fund Management)

Proteus Insights, LLC

(Consulting Services)

Proteus Advisors, LLC

(Investment Banking Services)

Funding Sources: Corporate & Non-Profit

Philanthropic Foundations & Disease Advocacy Groups Provide Funding JDRF; Michael J. Fox Foundation, CNS Foundation Stowers Institute

Corporate Venture Groups

JJDC (Tengion; NovoCell) Pfizer; NovoNordisk; GE Healthcare; Genzyme

Creative Sources of Funds: Out license non-core technology Provide consulting or lab services to generate cash flow Work with a strategic partner

Biotech, Pharma & Device Companies Merge with a cash rich company that is tech poor

CONFIDENTIAL 41

RM IP Landscape: A Patent Thicket

Key Patent Metrics (1980-2005)

Substantial Activity • Patent Applications: 10,000+• Patents Granted: 2,200+

Dramatic Increase in Filings Since 2000 • Over 25% Annual Growth Rate

Geographic Patent Distribution: US Dominates

• US: Over 50% of Patents• UK, Canada, Germany: @4% Each• Australia, Japan, China, Israel: @3%

Each

Top 50 Patents Cover Core Technologies • Cell Lines; Media; Differentiation

CONFIDENTIAL 42

RM Patents Granted

US: 51%

UK: 4%

Canada: 4%

Germany: 4%Australia: 3%

RM IP Landscape: A Patent Thicket

Key US RM Patent Metrics

CONFIDENTIAL 43

Unusual Patent Distribution- 44% Public Sector Entities - 56% Private Sector

Fragmented Ownership- No Company Owns More Than

3% of Granted Patents

Pharma & Big Bio Are Key Holders - Amgen, Novartis, Pfizer &

GSK

Osiris, STEM, & Geron Have Large Estates

*Only 3% of All USPTO Patents Are Held By Public Entities