1 Biotechnology Industry IR Presentation template [SA, JA, sector] Healthcare Sector - Fall 2016 Senior Analyst: Austin Gasparini Junior Analysts: Donavon Young, Marlon Li, Josh Zins
Industry Definition and Key Players Biotechnology The exploitation of biological processes for industrial and other purposes Companies in this industry primarily use living organisms or molecular and cellular techniques to provide chemicals, food and services that meet human needs AbbVie Inc. NYSE: ABBV Market Cap.: $101.48B Amgen Inc. NASDAQ: AMGN Market Cap.: $118.62B Gilead Sciences NASDAQ: GILD Market Cap.: $98.04B Monsanto Company NYSE: MON Market Cap.: $44.68B Biogen, Inc. NASDAQ: BIIB Market Cap.: $63.69B Celgene Corporation NASDQ: CELG Market Cap.: $76.67B Sources: IBISWorld, S&P Global Equity Research Report March 2016 2
Industry Summary Key Facts Life Cycle: Growth Revenue: $108.8bn Profit: $9.8bn Genentech, Major Companies Monsanto, Other, Annual Growth: (11-16 ) = 1.79% (16-21e ) = 4.11% Characteristics: Low revenue volatility Medium capital intensity High competition AbbVie, Amgen, Gilead, Industry Rating: POSITIVE Aging US population drives growth in human health technologies Pharmaceuticals remains the largest market for biotechnology companies Specialty drug costs continue to rise Oncology spending keeps increasing Sources: IBISWorld, FiercePharma 3
Product Segmentation 8.6% Industrial technologies 11.7% Agricultural and aquacultural technologies Industry Products as a Percentage of Revenue 5.7% Environmental remediation and natural resource recovery 5.6% Animal health, marine and terrestrial microbial technologies 68.4% Human health technologies Human Health Technologies Biologic pharmaceuticals, pharmacogenomics, gene therapy, and gene testing Biologics are medicinal products (vaccines, somatic cells, blood and blood components, etc.) that are created by biological processes Agricultural and Aquacultural Technologies Genetic manipulation of a highly developed crop variety to impart yieldenhancing traits Soybeans, corn, cotton, and canola are the most modified crops Industrial Technologies A new approach to pollution prevention, resource conservation and cost reduction Companies use specialized techniques to find and improve enzymes based on their ability to assist industrial processes Environmental Remediation and Resource Recovery Application of life science and genetics research to manufacturing Enzyme-catalyzed processes are generally more efficient than chemical processes because input yields are higher and fewer steps are involved Animal health, marine and terrestrial microbial technologies Discovery and creation of therapeutic products (proteins, antibodies, enzymes), diagnostic tools and preventive measures Investigation of marine and terrestrial organisms with extreme adaptations Sources: IBISWorld 4
Value Chain Overview 1 2 3 4 Discovery Development Manufacturing Sales Identification/ Validation Pre-clinical Trials Purification/ Formulation B2B/B2C Marketing Screening/ Optimization Clinical Trials Patent Application FDA Submission Sources: North Carolina in the Global Economy, S&P Global Equity Research Report March 2016 5
Trend #1-Global Oncology Spending Fuels Revenue Growth 6 Global Oncology Spending Continues to Grow Specialty Drug Costs Outpace Inflation Aging U.S. Population
Trend #1-Global Oncology Spending Fuels Revenue Growth Revenue Number of Diagnoses $106 $104 $102 $100 $98 Correlation: Industry Revenue-Global Oncology Costs (US$BN) R² = 0.6779 $96 $80 $85 $90 $95 $100 $105 $110 Oncology Costs New Cancer Diagnoses Per Year in US 3,000,000 Cancer treatments comprise 44% of the biotechnology pipeline Global spending for cancer treatment reached $100 billion in 2014 Market for cancer drugs to reach $147 billion by 2018 Cancer is a disease of aging Further contributions include: 18% of US adults still use cigarettes, and obesity rates remain at approximately 33% 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2015 2020 2025 2030 2035 Years Global cancer spending is projected to increase over the next 20 years, providing revenue growth opportunities throughout the industry Sources: IMS Institute Global Oncology Report 2015, Beyond Borders: Global Biotechnology Report 2014, IBISWorld, Cancer Progress Report 2015, NIDDK 2010 Report 7
Trend #2-Specialty Drug Costs Outpace Inflation 8 Global Oncology Spending Continues to Grow Specialty Drug Costs Outpace Inflation Aging U.S. Population
Trend #2-Specialty Drug Costs Outpace Inflation Spending PMPY Specialty Drug Spending Per Member Per Year (PMPY) $400 $300 $200 $100 $- 2009 2010 2011 2012 2013 2014 2015 Years Total Spending on the Top Specialty Drug Categories (2014) Specialty drugs represent ~33% of drug spending per member per year (PMPY) and account for <1% of drug prescriptions Three specialty classes (inflammatory conditions, multiple sclerosis, cancer) accounted for a majority of specialty spending in 2014 Rising cancer and Hepatitis C costs are primarily responsible HIV, Hepatitis, Other, Multiple Sclerosis, Cancer, Inflammator y Conditions, Specialty drugs account for ~33% of total drug spending PMPY despite accounting for <1% of drug prescriptions and costs continue to increase Sources: Specialty Drug Trends Reports 2009-2015, S&P Global Equity Research Report 2016 9
Trend #3-Aging US Population 10 Global Oncology Spending Continues to Grow Specialty Drug Costs Outpace Inflation Aging U.S. Population
Trend #3-Aging US Population Population (millions) US Population Projections (in millions) 450 400 350 300 250 200 150 100 50 0 13.0% 16.1% 19.3% 20.0% 20.2% 2010 2020 2030 2040 2050 Years Age Distribution of Low vs. High Spending Groups >65 Years <65 Years Adults 65+ years old are growing both as a percentage of the total US population and as a total population in the US Result of the Baby Boomers that began turning 65 in 2011 Highest healthcare spenders are typically older and have chronic conditions Top 5% of healthcare spenders account for nearly 50% of healthcare spending 100% 4.1% 80% 60% 40% 20% 19.5% 41.8% 34.5% 38.2% 39.9% 38.3% 39.3% 17.2% 13.2% 65+ 45-64 19-44 0-18 An aging population will increase overall healthcare spending, as a large portion of the highest healthcare spenders are aged 65+ 0% 6.3% 7.6% Lowest 50% Top 5% Top 1% Sources: CMS.gov, Administration for Community Living 2010 Report, An Aging Population: The Older Population in the United States 2014, National Institute for Healthcare Management 11
Industry Risks There are three major risk factors to the biotechnology industry: Negative Public Perception of the Drug Industry Various drug pricing scandals have dominated the news cycle (Epipen and Daraprim) Public outrage could fuel the passage of heavy regulations in retaliation Potential Reformation of the Food and Drug Administration The current President-elect has expressed a desire to reform the FDA in the future Drug and human health technology approval could be backlogged if reformation measures go through New approval pathway could be stricter and slower in the future Potential Reform of the U.S. Healthcare System With a Republican controlled government, there is a high likelihood of a repeal/replacement of Obamacare Loss of coverage for millions of Americans could result in significantly less prescription drug spending/healthcare spending in general Sources: FierceBiotech 12
13 CompCo Analysis Ticker Name Price 2 52-Week High NLNK NewLink Genetics Corp. 52-Week Low Equity Value Enterprise Value Debt/Equity EV/Sales Price/Sales $11.46 $38.92 $9.23 $332.15 $288.84 0.12 4.22 4.85 MGNX MacroGenics Inc. $27.48 $36.11 $14.84 $873.91 $534.91 0.15 5.30 8.67 ARRY Array BioPharma Inc. $8.23 $7.27 $2.38 $1,176.59 $1,266.80-5.46 9.19 8.53 AGEN Agenus Inc. $4.35 $7.49 $2.61 $340.22 $317.82 0.41 12.82 13.72 BLCM CLDX Bellicum Pharmaceuticals, Inc. Celldex Therapeutics Inc. 1 in millions of USD, except per share data 2 Prices as of 11/29/16 $19.16 $23.84 $7.24 $504.80 $442.82 0.06 1570.29 1790.07 $4.02 $18.62 $2.85 $390.15 $100.25 0.16 18.29 71.19 High (Excluding Outliers) 0.41x 23.61x Mean (Excluding Outliers) Median (Excluding Outliers) 76.51x 0.18x 11.68x 23.11x 0.15x 7.64x 9.36x Low (Excluding Outliers) 0.06x 5.11x 5.74x
14 Summary Recommendation Industry Rating POSITIVE Global Oncology Spending is Increasing New cancer diagnoses and cancer spending is projected to increase Provides revenue growth opportunity for biologic drug manufacturers Specialty Drug Costs are Significant and Rising Specialty drugs demand a premium price and constitute a larger and larger share of drug spending each year Most biologic drugs are specialty drugs Aging U.S. Population Spurs Healthcare Spending The percentage of adults aged 65+ is projected to grow continuously over the next few decades Healthcare spending increases significantly as people age