BUSINESS OVERVIEW • Net cash of $352 million and “net net” current

Facet Biotech develops oncology therapeutics, focusing on assets of $257 million at the end of the first quarter.
tumor biology and antibody engineering. The company has • Net cash equals 139% of market value.
four antibodies in the clinical stage of development. It also
has several investigational compounds for the treatment of INVESTMENT RISKS & CONCERNS
cancer and immunologic disease in various stages of • Cash-burning operations. The company used $20
development with partners Biogen and BMS. million of cash in operating activities in 1Q09,
down from cash usage of $57 million in 1Q08, as
SELECTED OPERATING DATA revenue rose from $4.7 million in 1Q08 to $9.6
FYE December 31 2006 2007 2008 1Q09 million in 1Q09. Headcount declined y-y.
Revenue growth 72% -48% -32% 105%
Selected items as a % of revenue: • Customer concentration. The company sourced
R&D 390% 731% 828% 251% 82% of revenue from Biogen and BMS in 2008.
SG&A 71% 169% 254% 107% • Results volatile due to dependence on deals with
EBIT -363% -845% -876% -301% other drug companies. Revenue fell 48% in 2007
D&A 58% 113% 111% 41%
Capex 62% 346% 21% 1% and 32% in 2008, as termination of a collaboration
% of revenue by geography: agreement with Roche in 2005 resulted in the
U.S. 40% 72% 100% n/a elimination of royalties on sales of Zenapax.
Europe 60% 28% 0% n/a
• Drug development pipeline may not produce
% of revenue by major customer:
Biogen Idec 35% 65% 47% 21% marketable products, potentially leaving
BMS <10% <10% 35% 54% shareholders with little value. Facet is expected to
Roche 60% 27% <10% <10% consume much of its cash in R&D efforts.
EKR Therapeutics <10% <10% <10% 18%
• Shareholder Roderick Wong’s demand for a $15
∆ diluted shares out (avg) 0% 0% 0% 0%
Source: Gridstone Research, Company filings, Manual of Ideas analysis.
per-share cash dividend and sale of assets was
rebuffed by the company. While we generally favor
INVESTMENT HIGHLIGHTS companies paying out excess cash, a liquidation of
• Spun-off from PDL BioPharma in December. Facet may have shortchanged shareholders, as the
PDL contributed $405 million or $17 per Facet company owns material drug development assets.
share in cash to the company. Facet believes it has
sufficient resources to fund expenses through 2012. COMPARABLE PUBLIC COMPANY ANALYSIS
P/ This Next
• Products in development include two Phase 2 MV EV EV /
Tang. FY FY
drugs, Daclizumab for multiple sclerosis and ($mn) ($mn) Rev.
Book P/E P/E
Volociximab for solid tumors (partner: Biogen) and RHHBY 114,720 99,620 2.4x 4.4x n/a n/a
two Phase 1 drugs, Elotuzumab for multiple ABT 67,910 77,920 2.6x 296x 12x 11x
myeloma (partner: BMS) and PDL192 for solid BMY 39,660 37,390 1.8x 5.4x 10x 9x
tumors. The collaboration agreement with Biogen LLY 39,460 44,430 2.2x 10.2x 8x 8x
includes co-promotion rights, while under the BMS FACT 230 -90 n/m .6x n/m n/m
deal, Facet is entitled to royalties based on net sales.
• Revenue rose 105% to $9.6 million in Q1, driven MAJOR HOLDERS
primarily by revenue from the BMS collaboration. CEO Hasnain <1% │ Other insiders 1% │ Baupost 18%* │
• New business strategy: focus research efforts in Iridian 13% │ Barclays 4% │ BVF 4% │ Visium 4%
oncology, advance existing pipeline, expand the
pipeline, and refine protein engineering platform. RATINGS
• Restructuring underway. Facet intends to cut VALUE Intrinsic value materially higher than market value? ¶¶¶
employees from 372 at yearend 2008 to 200 by MANAGEMENT Capable and properly incentivized? ¶¶¶
3Q09, a 46% reduction. Facet is also consolidating FINANCIAL STRENGTH Solid balance sheet? ¶¶¶¶¶
operations into one of two leased facilities. MOAT Able to sustain high returns on invested capital? ¶¶¶
• CEO Faheem Hasnain (50) previously served as EARNINGS MOMENTUM Fundamentals improving? ¶¶
President and CEO of PDL. Before PDL, he was an MACRO Poised to benefit from economic and secular trends? ¶¶
EVP at Biogen, president of oncology therapeutics EXPLOSIVENESS 5%+ probability of 5x upside in one year? ¶¶¶
at BMS and VP of ebusiness at GlaxoSmithKline. * To view Seth Klarman’s thesis on Facet, visit the following webpage and
fast-forward to 26 minutes and 30 seconds into the presentation:
www.bengrahaminvesting.ca/Resources/Video_Presentations/Klarman.htm

THE BOTTOM LINE

In March, large shareholder Seth Klarman articulated the downside protection afforded investors by stating that Facet “has
about $16-$17 per share in cash… So you could clearly liquidate that, stop all discovery activities and probably mail out $10
or $12 or $14 per share back to the holders.” As there are no plans to liquidate Facet and cash is being consumed in drug
development, investors must assess the company’s pipeline in order to judge the intrinsic value of the shares.