FINANCING OPTIONS

FOR SYNTONIX PHARMACEUTICALS

AGENDA

 Team Intro
 Executive Summary
 Brief Background
 Option 1 Analysis: Buyout by Biogen
 Option 2 Analysis: VC Financing (Series C)
 Our Recommendation
 R&D Strategy for Non-Hemophilia Application
 Final Thoughts and Discussion of Risks

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 TEAM INTRODUCTION

Scott Gillard Jie Lei Rohit Behera Prateek Mittal Anna Babinets
scott.gillard@gatech.edu jie.lei@gatech.edu rohit.behera@gatech.edu prateek.mittal@gatech.edu anna.babinets@gatech.edu

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RECOMMENDATION - EXECUTIVE SUMMARY
 Based on our analysis of possible financing options, we recommend Syntonix to accept Biogen
buyout bid within a range of $100 – 150 million
 Above Payout might be structured as $30 to $40 million upfront payment and rest paid out,
contingent upon successful completion of Phase 1 clinical trials of Syntonix’s Hemophilia drug
delivery technology
 We used real-options valuation method in arriving at our recommended price range.
 We used risk-adjusted DCF and Decision trees as alternative valuation methods in our analysis.
 Risk Adjusted DCF: $155M NPV for the next 20 years till 2026 and calculated the terminal
value of future cash flow after year 2026 using 5% growth rate.
 Decision Trees: $146 million NPV (most likely scenario) with growth and FDA approval
dynamics similar to risk adjusted DCF methodology, with additional project abandonment option
 We reviewed minimum ROI required by Syntonix shareholders to arrive at the asking price floor
of $100M

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COMPANY & CASE INTRO:
SYNTONIX OPTIONS

Option I - Accept Biogen Buyout

Option II – VC Financing, Series C
Offer
 Potential funding amount
 Fair value of Syntonix
 Impact on founder/employee
 Acceptable buyout price range
ownership and management
 Expected Payout structure from decision
Biogen  Consideration of future
 Effect on founders, financing needs
shareholders, management,
and employeesWe recommend to accept Biogen
buyout offer at a price range of $100 -
150 Million.
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REJECTION OF VC FINANCING OPTION (SERIES C)

 Opportunity
 Venture Capital investment in the biotech industry is at the peak during 2000-2006.
Dollar amount investments tripled since 2000.
 Risk
 Need to raise funds at the stretch valuation of $1.4B
 Insufficient funds will lead to future struggle with working capital management
 VCs may not want to continue funding Syntonix
 Cease of developing anemia product (EPO:Fc) after Phase I clinical trial shows
management’s insufficient capabilities and inexperience
 Given industry trend of biotech and VC investments, VCs may consider many other
investing opportunities more attractive

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 BUYOUT BY BIOGEN:
VALUATION METHODOLOGY
 Real-options Valuation (Exhibit A)
 With abandonment option
 2 years for Phase 1, 2 for Phase 2 and 3 for Phase 3 and 1 year for FDA review and 1 year
for Market launch.
 Conservative Risk Neutral Probability of 43% (up-state) and 57% (down-state)
 Volatility of Sales Peak: 30%, with conservative initial target market size of $750 million
 Scenario designed to simulate the uncertainty around successful completion of phase 1

 Risk Adjusted DCF

 Best Case Scenario – 6 years to Market Launch
 Most Likely Scenario – 8 years to Market Launch
 Worst Case Scenario – 13 years to Market Launch

 Decision Tree Analysis

 Measurement Criteria: Probability of Successful progress to next phase after 1 st failure
in a phase  We took a wide valuation range since Syntonix is early stage
bio-pharma start-up.
 Best Case: Probability is 70%
 Narrower range of valuation is expected contingent upon
 Most Likely: Probability is 40%
completion of Phase 1.
 Worst Case: Probability is 10%
Price Range: $40 to $130 million
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ASSUMPTION 1:
MARKET SIZE AND GROWTH RATE

We projected cash flows from two hemophilia

products
 Explicit interest from Biogen due diligence
team
 All other projects are in discovery or pre- Our assumptions of market size, market growth rate, and thus
clinical stage the FCF firm growth rate are consistent with market
forecast.

Estimated market size of > 2.5 billion as of 2006

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 ASSUMPTION 2:
DISCOUNT RATE
Industry discount rates, 2004-2005
Company Discount rate “While a start-up … that is still in discovery stage faces a
Lilly 18.75% high cost of capital of over 20%, a clinical stage company
Arpida 18% can use a lower discount rate. When a company has a
project on the market the cost of capital usually is close to
Jerini 15%
a large pharmaceutical company discount rate of 8-10%”.
Actelion 15% “Valuation in life sciences” report dd. Jan’ 08
Schering 14.25%
MEDIAN:13.38%
CAT 12.50%
MedImmune 11.30% + 2% risk premium for uncertainty
MEAN:12.39%
of a pioneer drug company
Berna Biotech 9.90%
AstraZeneca 8% ST.DE 3.87%
V:
Merck KgGaA 7.60%

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ASSUMPTION 3:
CO-DEVELOPMENT WITH BIOVITRUM
 We focused on North America markets due to сo-development commitment to Biovitrum on
Hemophilia drugs
 All costs and revenues are shared with Biovitrum
 Biovitrum is responsible for international markets
 Post-deal possible scenarios:
 Scenario 1: Biogen will honor agreement with Biovitrum  Most likely scenario
 Syntonix’s Transceptor delivery mechanism is yet to prove its efficacy, adding to considerable risk for Biogen
 Presence of Biovitrum will allow Biogen to pool the R&D risk

 Scenario II: Biogen will dissolve the agreement with Biovitrum by paying them off
 Unlikely in near term
 Allows Biogen to capture full revenue in case Syntonix’s technology achieves significant adoption outside of
North American market

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 ASSUMPTION 4:
TIMING OF CASH FLOWS AND OTHER CONSIDERATIONS
Discount Factor: 14%
Peak Sales: $270 million in Year 1 sales growing at 5% CAGR till 2026 (6 to 8% Market
penetration)
Operating Expenses: 30% of annual revenue
Phase 1: Annual Expenses: $9 million (63% of probability of success)
Phase 2: Annual Expenses: $22 million (42% of probability of success)
Phase 3: Annual Expenses: $80 million (75% of probability of success)
FDA Approval & Review: Annual Expenses: $3 million (95% of probability of success)
Clinical Trials & FDA Clinical Trials & FDA Clinical Trials & FDA
Approvals completed by Approvals completed by Approvals completed by
2012 2014 2017

Launched in Market: 2013 Launched in Market: 2015 Launched in Market: 2018

Risk Adjusted NPV: $155 Risk Adjusted NPV: $98 Risk Adjusted NPV: $47
million million million

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SUMMARY OF REAL-OPTIONS VALUATION

Possible Payout Structure

 Cash to be paid at deal closing: $30 to $40
million
 Amount to be paid at Phase 1 completion:
 $100 to $120 million

 Amount to be paid at Phase I1 completion:

 $150 to $400 million

 Amount to be paid at Phase 1II completion:

 $300 to $900 million

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PRICE FLOOR:
SHAREHOLDERS’ EXPECTED RETURN ON BUYOUT
 Price floor of $100 M determined
Shareholde Amount Expecte Year Minimum
based on the ROI expected by
rs invested, d return s expected
$M return, $M shareholders
Angel 1.5 25% 7 7.2  Syntonix should not accept a lower
Investor bid
VC – Round1 12.5 20% 5 32  A higher bid will expedite deal closing
VC – Round 34 20% 3 59 and increase founders’ commitment
II to integration with Biogen
Founders 0.1 15%Floor:
Price 9 1
$ 100M

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R&D STRATEGY FOR SYNTONIX’S OTHER PRODUCTS
(NON HEMOPHILIA APPLICATION)

 Syntonix has many licenses and applications, while Biogen seems to be only
interested in hemophilia application in the outright purchase offer
 Strategies to manage R&D of non-hemophilia applications and treatments

Licensing patents and Autoimmune Rheumatoid

technology to existing or new Diseases Arthritis
partners - Prevalence: 9.4% - Prevalence: 1.3%
- Agreement w/ - Expected sales:
Enter profit-sharing agreements Dyax $13bn
Continue
with other companies to co- R&D
develop products Multiple Fertility
Sclerosis Treatment
Seek potential buyers and sell
- Prevalence: 0.04% - Agreement w/
out non-hemophilia application - Agreement w/ Serono
portion Serono

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FINAL THOUGHTS AND RISK

 We believe that Biogen’s offer is attractive one. Give the financial condition of Syntonix, we
recommend a slightly lower than average asking price, indicated by the valuation range. A lower than
average asking price will be,
 Compelling enough for Biogen to stay on course with negotiations and not walk off from the deal
 Ensure reasonable return on investments for Syntonix’s shareholders

 Syntonix’s existing agreement with Biovitrum, probably will have an impact on transaction offer price
 Decrease in Expected Offer Price: If Biogen dissolves the agreement by paying off Biovitrum immediately
 Expected Offer Price will remain the same, although we cannot rule out the possibility of later
dissolution. In either case, our valuation considers North American market only (conservative market size
estimate).

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QUESTIONS ?
EXHIBIT (A) DECISION TREE ANALYSIS

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EXHIBIT (A) DECISION TREE ANALYSIS (CONT’D)

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