Nutter McClennen & Fish LLPAttorneys at Law

Jeremy HalpernPartner, Nutter McClennen & Fish LLP

MTTC Early-Stage Life Sciences Technology Conference IX

Life Science Venture InvestingTrends and Thoughts

› Nutter, McClennen & Fish, LLP - Partner; Director of Biz Dev, Emerging Companies Team

• Full service law firm• Top tier life science practice

› MTDC– Director & Investment Committee Member

• The Venture Arm of the Commonwealth-- catalyzing innovation in Massachusetts by providing seed and early stage venture funding to high growth technology startups.

› The Capital Network – Director; Past Chairman

• Providing education, resources and community to high growth entrepreneurs and angel investors as they navigate the early stage capital process.

› Tufts University; Adjunct Professor of Entrepreneurial Leadership

• Educating students in the art and science of leading ventures with limited resources.

› Entrepreneurial Experience

› UC Berkeley, B.A. (Go Bears!); UCLA School of Law, J.D.

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Jeremy HalpernBiography

Nutter’s Emerging Companies Group

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As a full service firm with a dedicated team of lawyers in the Emerging Companies Group, Nutter supports ventures across the innovation economy:

• Biomedical Devices• Biotechnology• Pharmaceuticals• Life sciences • Software• Hardware• Information Technology

• Cleantech• Mobile• Consumer Products• Analytics• New Media • Robotics

We provide entrepreneurs will the full spectrum of support that they need to build their businesses and realize their visions:

• Entity Formation• Founders Agreements• Financing Strategy and Key Introductions• Angel & Venture Capital • Debt Financing• Private Equity• Initial Public Offerings• Private Placements• Strategic Partnering• Mergers & Acquisitions

• Employment support• Equity Compensation• Tax Strategy• Litigation• Licensing• Distribution• Manufacturing• Supply Agreements• Electronic Commerce• Patent and Trademark Strategy & Prosecution

Numbers that matter: National 2012

VCs invested $26.5b into 3,698 deals

= 10% decrease in $; 6% decrease in deals

VCs invested $4.1b into 466 deals in Biotech

= 15% decrease in $; flat on volume

VCs invested $2.4b into 313 deals in Medical Devices

= 13% decrease in $; 15% decrease in deals

VCs invested into 135 new companies in 2012

= lowest level since 2005

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Numbers that matter: New England Q4 2012›Seed: $16m in 7 deals (all verticals)

›Early Stage: 339m in 54 deals (all verticals)

›Biotech: $207m in 28 deals (down from $386m in 28 deals)

›MedDevice: $138m in 11 deals

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National Trends: 2012

›Seed stage deals declined 31% in $ and 38% in deals

›Early stage deals decreased 11% in $; but increased 5% in deals

= more deals with less capital per deal coming at a later stage

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Contributing Factors - Biotech

› Gross revenues and margins are declining on products

› Development costs for biotech/pharma continue to rise – Average cost = $1b

› Phase II success rate declined to 22% for trailing 5 years (a 12% drop)

› Increased pressure from generic therapeutics

› Increased regulatory pressure from FDA around comparative effectiveness

› 2nd and 3rd world markets declining to protect patent status thereby reducing margins and penetration

› Uncertainty around ObamaCare impact and implementation

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Contributing Factors - MedTech

› Continued regulatory uncertainty from FDA around comparative effectiveness (2012: 48 devices approved; a 5% decline from 2011)

› Uncertainty around ObamaCare impact and implementation

› Acquisitions happening later in venture life cycle (post market adoption and sales traction) › Reduces exit volumes

› Reduces capital efficiency and creates the assumption of capital compression

› Increases execution risks

› Fewer acquirers reduces auction environment which depresses exit prices – lowering ROI expectations for investors

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Is there Hope – Biotech?

› FDA product approvals for biotech at 16 year high:

39 new molecular entities

› Most venture deals were uprounds in 2012

› iShares Dow Jones U.S. Medical index continued to climb from ~$34 in 2009 to $76 in 2013

› Increased price pressure for therapeutics will drive acquirers to favor cost saving technologies

› Acquirers looking to fill pipeline and stay competitive

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Is there Hope – MedTech?

› Big Data + Health IT + MedTech producing an entirely new category of diagnostic and data products

› Companies using new business models to increase adoption and create early and recurring revenues.

› Costs of building MedTech infrastructure continue to decline (incubators, IT infrastructure, prototyping, talent etc.)

› Existing mobile platform technologies are decreasing costs and increasing adoption

› Overhang from 2008 VC investments may be ending

› Acquirers looking for high margin products that will still save payers long term costs

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Investment Trends: Biotech – Single Asset

›Supporting single asset virtual development with a capped investment amount › Typically not more than $20m (thinly capitalized at all

moments)

› Outsourced talent and CROs

› Red Light/Green Light milestones: Research, In-Vitro POC, In Vivo, (Veterinary), Preclinical, Phase Trials

› 2011: Exit at Phase II (or IIb) for Upfront + Milestone payments

› 2012: Some appetite for earlier exists at lower prices (allowing investors to distribute upfront $ and “play with house money”)

› Unclear if this will replace robust B rounds

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Investment Trends: Biotech – Platform

›Platform Development› Repeatable and scalable ability to produce drug

candidates

› Larger infrastructure including full management team

› Disruptive technology

› Larger and unfixed capital raising strategies

› First product identified and in progress to market

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Investment Trends: Terms

›Fewer deals tranched to milestones

›Nearly all lifesci deals have weighted average anti-dilution rather than full-ratchet

›Participating preferred is on the rise, but many deals have caps resulting in an effective price adjustment

›Lower Seed/A Round Values may better position a company for success

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Investment Trends: Crowdfunding… sigh

› Crowdfunding may supplement seed/angel/micro VC deals

› Cause Marketing tie-in (“finding a cure for ________”)

› Cannot replicate or replace the experience, judgment and relationships brought by traditional angel investors.

› May damage ability to get follow on financing

› Massive risk of lifesci investing may not be a good fit for crowd

› Increased risks of litigation

› Even worse ability of investors to diligence LifeSci investments

› Mechanisms and Portals still not approved

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Nutter McClennen & Fish LLPAttorneys at Law

Jeremy HalpernPartnerDirector of Business DevelopmentEmerging Companies TeamNutter McClennen & Fish LLPT: (617) 439-2943M: (617) 905-1893jhalpern@nutter.com@startupboston www.linkedin.com/in/jdhalpern

MTTC Early-Stage Life Sciences Technology Conference VIII:

Life Science Venture Investing Trends and Thoughts