PHARMA M&A REPORT 2018 - kurmannpartners.com

1 PHARMA M&A REPORT . 2018. 2017 challenges PHARMA 's way of doing business . Pricing, the opioid crisis, and marketing practices of originators spurred a broad debate about PHARMA 's role in society. The outcome may have a profound impact for the future. Will CAR-T cell thereapies mark the beginning of a new era? . Even though the results of CAR-T therapies are stunning, intrinsic limitations may lower the high hopes of cancer patients. Playing big acquiring products from Global PHARMA companies . Strategy, process and pitfalls of product acquisition. CDMOs thrive amid consolidation . These two deals are salient examples of two trends: First, the ongoing consolidation among CDMOs. Second, the entrance of new players into the market. How the GDUFA influence the US generic consolidation . The introduction of a user fee structure may further drive consolidation and expose the Agency to counter effects such as increased risk of shortage or drug price rises.

2 KURMANN PARTNERS 2018. Partners Dr. Christoph Bieri Peter Degen Michel Le Bars Bernard Pellereau Managing Partner Managing Partner Managing Partner Partner @ @ Professionals Tim Hoaen Anjuman Gupta Linda Kl ppel Camille Ch telat Marko Stjepandic Project Leader Senior Analyst Analyst Analyst Analyst Senior advisors Prof. Dr. Marco Gorgas Markus L mmler Thomas Dressend rfer Dr. Mauricio Gir n Bernhard Kutscher Alex Scheffler Hans-J rgen Kromp Alfredo Granai Ronaldo Valentini Ricardo Montenegro 3 EDITORIAL. Dear reader We are pleased to present our seventh annual We also have a look at some of the indirect ef- review of M&A activity and major trends fects of the evolving PHARMA industry: CDMOs in the PHARMA industry. As in previous editions, are thriving amidst a wave of consolidation we strive to go beyond mere statistics and (see page 14). As always when significant changes to describe some of the events and stories which take place, there are also opportunities which we believe will shape the industry and drive can be reaped by those who are ready: On page future strategic transactions.

3 And while 2017 was 17, we comment on how regional champions calmer than other years in terms of M&A activity can position themselves to acquire products (see page 4), it was remarkable in respect of rights and portfolios from large players. how strategic drivers developed. We hope you enjoy reading the REPORT . The year was heralded a break-through As always, we are glad to receive your comments year for Biotech because it saw the marketing and suggestions. approval of several truly innovative treatments, such as CAR-T cell cancer therapies (see page Yours truly 12). These biomedical advances are encouraging. However, the pricing of the new therapies, and the ways how PHARMA in general is conduct- ing business, was intensely debated (see page 7), exposing fundamental issues of regulation and of reimbursement models. As an example of regulations defining a Christoph Bieri market, we analyze how the generic drugs Managing Partner segment in the US has been fundamentally re- shaped by FDA's GDUFA (see page 10).

4 4 YEAR 2017 IN REVIEW. Large buy-outs by Private Equity drive M&A deal volume in 2017. While deal activity in 2017 was slightly higher than in 2016, a substantial amount of the cumulative deal value was generated by Private Equity deals. The acquisition of Actelion and Gilead's huge bet on CAR-T were two of the most talked about deals of the year. tech company. Back in 2011, activist investor Elliott tried to push Actelion's management to in- itiate a sale process, when the company was trading at around 45 CHF per share. In January 2017, after a long and very public courtship in the second half of 2016 (with Sanofi stepping in and out of the process), J&J agreed to pay CHF 280 per share. The valuation is perceived as very high, corresponding to 12 times revenues and 30 times EBIT. But not only did Actelion's founders, Jean- Paul and Martine Clozel, realize a very attractive price for their shareholders, they also managed to carve-out Actelion's pipeline and R&D outside the PAH indication into a new company, Idorsia.

5 In June 2017, the new company was floated on the Swiss stock exchange, and at the end of 2017. already had a market capitalization of more than USD 3bn. Without doubt, Actelion is one of the most Globally, deal activity in 2017 was at a compara- successful Biotech stories in Europe to date. ble level to 2016, and significantly lower than in 2014 and 2015. We counted 323 transactions Big bets on cancer (2016: 345), with cumulative deal values of A substantial amount of M&A funds in the USD 120bn (2016: USD 95bn). In comparison, PHARMA industry is spent on so-called pipeline in 2014 and 2015, there were 440 to 490 trans- deals , when large PHARMA companies acquire actions with cumulative deal values of approx- small innovators with development programs imately USD 225bn. We believe that the earlier or innovative products. The substantial prices paid years were exceptional, and that the 2016/2017 in these transactions are based on the expecta- level likely reflects normal rather than subdued tion of future profits which quite often are elusive.

6 M&A activity. the deals are veritable billion-dollar bets. While global transaction numbers And PHARMA is betting on oncology. Gilead remained stable, the pattern shifted: As shown acquired Kite PHARMA for USD 10bn, just before in FIGURE 1, there were fewer acquisitions in- the latter's CAR-T cell therapy against a form volving targets based in the USA, but significantly of B-cell cancer was approved (see also page 12). greater activity from bidders in emerging markets, In January, Takeda paid USD 5bn for Ariad PHARMA - when compared to 2016. ceuticals to get Ariad's blood cancer drug and its lung cancer drug candidate. In December, The end of a long courtship for Actelion Novartis offered USD to secure the rights The largest transaction in 2017 was J&J's acqui- for AAA's endocrine cancer treatment. And just sition for USD 30bn of Actelion (see FIGURE 2), before the year-end, Roche purchased Ignyta the Swiss-based specialist in Pulmonary Arterial for USD to take on a program of drug candi- Hypertension (PAH), and Europe's largest Bio- dates against specific solid tumors.

7 Roche | Ignyta AMRI Buy-out 5 YEAR 2017. Mallinckrodt IN REVIEW. | Sucampo Sawai | Upsher-Smith Originator Pipeline CRO/CDMO Generics FIGURE 1 Target region 2017 Target region 2016. Western Other Western Other Europe and developed Emerging Europe and developed Emerging USA Canada markets markets USA Canada markets markets Buyer region USA. 61 22 8 5 72 24 1 5. Western Europe and Canada 20 72 1 5 37 80 1 11. Other developed markets 8 4 10 2 5 4 5 5. Emerging markets 15 10 5 76 2 6 7 80. USD 50bn # Number of Transactions Continuing consolidation Private Equity Groups (PEGs) have been among CMOs and CROs shaping of the CMO and the CRO industries. Interestingly, five of the transactions with deal PEGs seem to have continued confidence in the values greater than USD 1bn involved companies sector, increasing the value of their individual which provide services to the PHARMA industry, bets. The CROs PPD and Parexel and the CDMO.

8 Rather than PHARMA companies themselves AMRI were acquired in billion-dollar transactions, (see FIGURE 2). In the CMO space, former serial a clear sign that financial investors believe that acquirer Patheon was taken over by Thermo- more consolidation is coming, and that operation- Fisher, the provider of R&D technology and al improvements can be achieved. PHARMA services, for USD 7bn. In the same period, Lonza completed the acquisition of Cap- Renewed deal activity in generics sugel (announced in 2016, not in FIGURE 2) Three transactions announced in 2017 with deal for USD values greater than USD 1bn involved generic In 2016, the merger of IMS Health and drug firms. Akorn was acquired for USD by Quintiles (now trading as IQVIA) created a com- Fresenius Kabi: with the deal, Fresenius expanded pany providing services from early-stage research its portfolio of generics from sterile injectables through to commercialization.

9 In 2017, INC and to other difficult-to-make formulations. The other InVentiv Health followed suit in a merger valued large deal in the US was Amneal's acquisition of around USD , with the stated claim to IMPAX, a deal which was seen as a defensive step become another end-to-end service provider in the context of the evolving crisis in the generics for the industry. market in the USA (see also page 10). 6 YEAR 2017 IN REVIEW. FIGURE 2 Deal Value, USD. USD bn bn 0 5 10 15 20 25 30. J &J | Actelion Gilead | Kite Private Equity | PPD. Thermo Fisher | Patheon Originator Private Equity | STADA. Private Equity | Parexel Pipeline Takeda | Ariad Fresenius | Akorn CRO/CDMO. ICN | InVentiv Merger Novartis | AAA. Generics Amneal | Impax Roche | Ignyta Private Equity | AMRI. Mallinckrodt | Sucampo Sawai | Upsher-Smith Originator Pipeline CRO/CDMO Generics In Europe, STADA, one of Europe's largest Shortly after Merck's announcement, generic drugs providers, was bought out by a pfizer informed that they are seeking a buyer for consortium of investors for US$ 6bn.

10 The protrac- their consumer health business. With revenues ted and highly public transaction process involved of USD and a purchase price of up to some drama, including the involuntary departure USD 15bn, pfizer 's proposed deal is much larger. Target region 2017 Target region 2016. of the CEO and CFO of STADA, and the alleged There are few obvious buyers for these installation of electronic surveillance equipment portfolios. In March, GSK will have to decide Western Other Western Other in the car of the CEO. Europe and developed Emerging whether to buy out Novartis Europe and from theirEmerging developed JV. USA Canada markets markets Bayer USA is still digesting Canada its huge acquisition markets of markets More deals expected after tax overhaul OTC products from Merck & Co, and Reckitt Buyer region The end of 2017 brought a big tax overhaul in Benckiser keen to expand its OTC business.