1. An Analyst’s View: The Drug Delivery Opportunity
Ian Sanderson
Managing Director
Senior Research Analyst
Specialty Pharmaceuticals
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2. An Analyst’s View: The Drug Delivery Opportunity
1. What defines drug delivery in the eyes of Wall Street?
2. Where do the opportunities lie in drug delivery?
– the Wall Street perspective
3. Valuing drug delivery development programs
4. Financing drug delivery development
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3. Market perspectives – How we define drug delivery
Old: New:
 Reformulation of an existing  New molecular entities, with
compound – usually off- new PD profile
patent
 Differentiating profiles for
 Mostly oral controlled-release complex molecules
 Out-licensed post POC - or  Site-specific, targeted delivery
earlier - in return for royalty technologies
stream
 Internally developed or
 Once a life-cycle management partnered
strategy, now a generic
development requirement  NME risk and economics
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4. Market perspectives – Where do the opportunities lie?
Investors focused here
MARKET OPPORTUNITY
NARROW BROAD
NME
Targeted Therapies
Ocular Delivery Oral Pegylation
Carrier-Based Depot Injections
Pulmonary Delivery
Sustained Release Implants Injectable Pegylation
REGULATORY
COMPLEXITY
Transdermal
Solubility Enhancement
Transmucosal
Oral Tamper/Abuse Resistance
Oral Controlled Release
505(b)2 NDA/ANDA
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5. Market perspectives – Where do the opportunities lie?
Evolving regulatory and reimbursement landscape
1. Gradual shift toward comparative effectiveness evaluation –
moves U.S. standards closer to E.U. standards
raises regulatory and reimbursement hurdles
raises differentiation standard for development partners
1. Biosimilar regulatory pathway creates opportunities
2. Development/commercial partners: new goals for drug delivery
 fewer lifecycle extension programs
 greater focus on changing/improving therapeutic profile
…driving shift toward NME/NCE development for drug delivery
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6. Market perspectives – Where do the opportunities lie?
Business Models shifting back toward partnership model
EVOLUTION OF THE DRUG DELIVERY BUSINESS MODEL
1980's to early 1990's Mid-1990's to Mid-2000's 2008 to current
Broad technology platforms Companies built around products Technology platforms targeting
rather than technologies complex drug delivery issues
Development partnership, Internal product development Development partnership,
royalty-based model full integration ("FIPCO") royalty-based model
niche commercial capabilities
Standard equity financing Creative, off-balance sheet financing Creative, royalty-based financing
M&A Partner financing
M&A
ALZA, Elan, SkyePharma, etc. ALZA, Elan, Alkermes, Inhale, etc Nektar, ImmunoGen, Seattle Genetics,
etc.
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7. Valuing drug delivery development programs
4 key valuation factors:
1. Targeted patient population and likely penetration
2. Estimated pricing
 Incorporates therapeutic profile/differentiation
3. Discount rate
 Incorporates cost of capital plus hurdle return rate
 We assume positive NPV in our analyses
4. Probability of clinical/regulatory/market success
 Usually a rough estimate based on what we know of clinical
trial design, FDA guidance, and medical need
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8. Valuing drug delivery development programs
INTERNALLY-DEVELOPED PROGRAM
NPV ANALYSIS OF NKTR-102
2011E 2012E 2013E 2014E 2015E 2016P 2017P 2018P 2019P 2020P
Projected Sales $30 $120 $300 $400 $500 $600 $700
COGS $6 $14 $30 $40 $50 $60 $70
Estimated R&D Spending $100 $150 $100 $65 $50 $45 $45 $40 $35 $30
Estimated SG&A Spending $5 $20 $36 $60 $70 $80 $90 $100
Operating Expenses $100 $150 $105 $91 $100 $135 $155 $170 $185 $200
Operating Income ($100) ($150) ($105) ($61) $20 $165 $245 $330 $415 $500
% Of Sales 16.3% 55.0% 61.3% 66.0% 69.2% 71.4%
Net Cash Flow ($100) ($150) ($105) ($61) $20 $165 $245 $330 $415 $500
Discount Rate 20%
Estimated NPV $210
Source: Company reports and Cowen and Company, LLC estimates
PARTNERED PROGRAM
NPV ANALYSIS OF EURX/CEPH'S AMRIX
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Projected Sales $6 $74 $114 $112 $115 $120 $130 $140
Royalties/Mfg Fees to EURX $1 $13 $19 $19 $20 $20 $22 $24
COGS $0 $0 $0 $0 $0 $0 $0 $0
Estimated R&D Spending $30 $25 $5 $3 $0 $0 $0 $0 $0 $0
Estimated SG&A Spending $0 $0 $0 $0 $0 $0 $0 $0 $0
Operating Expenses $30 $25 $5 $3 $0 $0 $0 $0 $0 $0
Operating Income ($30) ($25) ($4) $10 $19 $19 $20 $20 $22 $24
% Of Sales 17.0% 17.0% 17.0% 17.0% 17.0% 17.0%
Net Cash Flow ($30) ($25) ($4) $10 $19 $19 $20 $20 $22 $24
Discount Rate 10%
Estimated NPV $48
Source: Company reports and Cowen and Company, LLC estimates
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9. Valuing drug delivery development programs
Changing Assumptions:
Revenues –
Longer development timelines (larger, longer pivotal trials)
Slower revenue ramps, due to managed care restrictions in U.S.
Higher year 4-8 sales estimates, due to global sales infrastructures
Costs –
Higher development costs (+20-40%, depending on the category)
Lower GPM in competitive U.S. markets and ROW markets
Lower relative promotional/marketing spending (as % of sales)
Terminal multiple:
Discount rate (cost of capital plus risk premium):
Probability of success:
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10. Financing drug delivery development
Options more limited in volatile current market environment
Public market equity financing currently expensive
– if available at all
Debt/Convertible financing more available
– inflexible in a downside scenario
Pharma/Biotech partner financing
– important external validation to investors
– development goals aligned
– usually non-dilutive to equity investors
Royalty-based financing
– available for later-stage programs only
– lower capital costs than equity, less restrictive than debt
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11. INDEXED TO 100
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30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
130.00
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Drug Delivery Index
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
S&P500
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Drug Delivery equity markets = Ugly
Jul-10
Aug-10
PRICE PERFORMANCE: DRUG DELIVERY vs. S&P500 vs. RUSSELL2000
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
Russel 2000
May-11
Jun-11
Jul-11
Aug-11

12. An Analyst’s View: The Drug Delivery Opportunity
Conclusions:
1. Drug Delivery returning to its routes of solving Tx problems
 Platform technologies targeting more complex delivery problems
 Development costs increasing – increased reliance on partnerships
 NPV’s remain positive – aided by good royalty terms
2. Investors again looking for transformative delivery technologies
 High unmet medical needs, strong pricing trends, little managed care
 But…less willing to fund development risks and commercialization
3. …But Pharma companies willing to pay up for novel technologies
in earlier development stages
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13. An Analyst’s View: The Drug Delivery Opportunity
Ian Sanderson
Managing Director
Senior Research Analyst
Specialty Pharmaceuticals
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