If You Build It, Will They Come? The Promise and Perils of Investing in Biomanufacturing Capacity

1. If You Build It, Will They Come?The Promise and Perils of Investing in Biomanufacturing Capacity Thomas C. Ransohoff BioProcess Technology Consultants, Inc. 2nd Annual Sanford C. Bernstein Biosimilars Conference New York, NY November 19, 2009

2. Outline • Biopharma Overview • Molecules and Processes • Facilities • Worldwide Capacity Situation • Growth and Distribution • Utilization • Trends • Manufacturing Strategy – Make v Buy • Timeline and Cost for Construction • Make v Buy Decisions

3. Biopharmaceutical Manufacturing Overview

4. Definition of Biopharmaceuticals • Biologic Products are products that are made by or composed of viable organisms or biopolymer analogs • Recombinant Proteins • Monoclonal Antibodies • Natural Hormones and Enzymes • Synthetic Peptides and Oligonucleotides • Antibiotics, Plant & Animal Extracts, Allergens • Vaccines • Gene Therapy Products, Human & Xenogenic Cells & Tissues • Blood & Blood Derivatives, including polyclonal antibodies

5. Biopharmaceutical Blockbuster Products There were 28 biopharmaceutical blockbuster products in 2008 [up from 27 in 2007]: * 10 manufactured in microbial fermentation processes [9] * 18 manufactured in mammalian cell culture processes [18] * 9 monoclonal antibodies/Fc fusion proteins [9]

6. Biopharmaceutical Industry Growth • BPTC database covers 126 commercially marketed biopharmaceuticals as of 2009

7. General Scheme for Biopharmaceutical Bulk Drug Substance Processes Working Cell Bank Intracellular (microbial fermentation) Extracellular (microbial fermentation and mammalian cell culture) Bioreactor Conversion Cell Harvesting Cell Removal “Upstream” Process Cell Disruption/Refold Isolation/Recovery Isolation/Recovery “Downstream” Process Purification Purification Bulk Formulation Bulk Formulation

8. 20,000 L Fermentation Suite Source: Lonza Presentation, “US Operations Overview”

9. Purification – Large-Scale Chromatography Source: Lonza Presentation, “US Operations Overview”

10. Timing of Plant Construction Plant investment decisions must be made long before product approval Clinical Development Timeline (6-7 years) Product Launch Phase I (12 months) Phase II (24 months) • Safety Phase III (24 months) • Dose Finding • First Efficacy Filing & Review (18 months) • Pivotal Trials Lead-Time for Building a Commercial Plant (~4 years) Design (12 months) Construction (24 months) Validation (12 months) Source: P. Seymour, IBC Bench to Clinic 2002

11. Mammalian Cell Culture Facility Costs

12. Industry-Wide Capacity Analysis

13. BPTC Approach to Biopharmaceutical Capacity and Pipeline Analysis • Bottom-up methodology • Plant-by-plant estimation of capacity “supply” • Product-by-product and dose-driven estimation of “demand” • Market segmentation • Focus on recombinant protein and monoclonal antibody products manufactured using • Microbial fermentation • Mammalian cell culture • Commercially marketed products and product candidates in clinical development • Probability weighting factors • Accounting for multiple products targeting same indication • Assumptions for probability of success and time to market • Apply sensitivity analyses (i.e., Monte-Carlo) to quantify probability of predicted outcomes

14. BioProcess Technology Consultants report, December 2008 The State of Mammalian Cell Culture Capacity • Sufficient capacity worldwide to meet current annual production needs • Adequate capacity forecast through 2013 • Increases in product titers and Operational Excellence initiatives improve productivity of existing capacity • Probability of sufficient capacity through next decade is very high • Relatively few new “volume-drivers” forecasted to be approved • Growth of the existing commercial products slowing

15. Existing and Forecast Cell Culture Capacity • Includes equivalent fed-batch capacity for companies using perfusion technology (1 L perfusion ≈ 5 L fed-batch) • Product companies control ~80% of installed capacity

16. Current and Projected Distribution of Capacity Top 10 companies control 80% of total worldwide capacity in 2009 decreasing slightly to 79% in 2014 • By 2014, Merck KgA & AstraZeneca/MedImmune (2014 included in “All Others”) replaced by Celltrion & BMS/Medarex (2009 capacity included in “all others”) in Top 10 A. Roche/Genentech B. Pfizer/Wyeth C. Amgen D. Lonza E. Novartis/Sandoz F. Boehringer Ingelheim G. Lilly/ImClone H. Biogen Idec I. Merck KgA J. AstraZeneca/MedImmune K. Celltrion L. Bristol-Myers Squibb/Medarex M. All Others

17. Distribution of Capacity Worldwide • Figures include • 96 Companies • 21 Countries NOTE: Analysis does not include perfusion capacity. • Capacity expected to increase from ~2.5 Million L in2008 to ~4 Million L in 2013 • In 2008, ~52% total installed capacity utilized; growing to ~73% by 2013 Source: E. Reynolds, IBC BPI 2008

18. Mammalian cell culture demand: Monoclonal antibodies/Fc fusion proteins dominate mammalian cell culture demand for bulk product on a kg/yr basis Growth of existing commercial products remains a driver for capacity demand growth Manufacturing Capacity Demand – Existing Mammalian Commercial Products

19. Pipeline Weighted Towards MAb Products Monoclonal antibodies represent the fastest growing segment of the pharmaceutical industry • 85 – 90% of the mammalian cell culture product pipeline • Approximately 65% of all biopharmaceutical products in development are produced in mammalian cell culture

20. Do We Need 10 Ton Capacity? Demand for all existing commercial products will approximately double from the current 5.8 metric tons to approximately 11.8 metric tons by 2013 Current annual product requirements for each of the top five monoclonal antibody products is 800 – 1,200 Kg each At 5 g/L titer a single large “six pack” facility can make 10 tons of monoclonal antibody (Kelley, 2009) Demand for products currently in development will increase the future demand for cell culture manufacturing capacity The anticipated demand for virtually all products currently in development is expected to be less than 5 metric tons per year Kelley B, “Industrialization of MAb Production Technologies,” MAbs 1:5, Sep/Oct 2009

21. Trends That Will Impact Future Capacity Utilization • Fewer “blockbuster” drugs with greater focus on smaller markets and niche products • Less difference in scale between pilot and commercial facilities • Use of multipurpose plants; potential for continuous production • Mergers and acquisitions, resulting in: • “Volume driver” product candidates moving to product companies with significant capacity -> free up CMO capacity • Redundant facilities in larger organizations (the rich get richer)

22. Trends That Will Impact Future Capacity Utilization • Product company strategic initiatives to offer existing captive capacity on the CMO market • Continued improvement in throughput and utilization of existing facilities, driven by: • Continuing increases in process yields • “Continuous improvement” initiatives, enabled by QbD and other regulatory trends • Increased availability and use of disposable/single-use technologies

23. Driving Forces for Single-Use Technologies Improved return on capital Reduced and deferred capital investment Increased speed of deployment Process control and portability Process and product flexibility Improved ability to manage and implement change

24. The Biopharmaceutical Facility of the Future • Facility design will incorporate high titer (>10 g/L) processes • Facilities of the future will require greater DSP space and capabilities to better handle the high titer bioreactor output • Ratio of bioreactor space to DSP space will decrease • Use of disposable technologies can reduce capital investment by over 50% and operating costs of manufacturing facilities (Roebers, 2009) • Smaller bioreactors will produce similar quantities to today’s larger bioreactors • Smaller facility requirements may enable smaller companies to construct and manage their own facilities more cost effectively Roebers J, “Future trends in biopharmaceutical operations and facilities,” presented at BPI 2009, Raleigh NC

25. The Biopharmaceutical Facility of the Future • Plant has 6 x 2,000 L bioreactors (possibly single use bioreactors) • 12 day fed-batch CHO culture for MAb Production • 2,000 L volume, 10 g/L = 20 Kg MAb in harvest • 80% purification yield = 16 Kg per batch • Harvest every 4 days • 85 harvests/year (340 days) = 1,360 Kg/year • Capital investment < $100M • Overall COGS < $70 per gram

26. Cost-Capacity Chart: Selected Biologics r2=0.96 Log-log linear relationship between 2007 price and volume requirements

27. Manufacturing Strategy:Make v. Buy Decisions

28. Managing Risk Timeline Risk Manufacturing Capacity Product Success/Failure “The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome…” - Bernstein, PL, Against the Gods: The Remarkable Story of Risk, 1998 Risk management tactics • Estimate the range of probable outcomes; not just the “base” case • Develop an organization that can manage change • Utilize options (back-up strategies) • Understand the cost of being wrong • Evaluate parallel paths

29. Developing a Manufacturing Strategy “We will not get this perfectly right” - Art Levinson, Genentech, SF Chronicle 12/21/03 What’s the cost of being wrong? Excess Capacity • Carrying Cost of Facility and Organization: • Estimated carrying cost of a facility operating at 50% capacity: <<$10 M/mon Inadequate Capacity • Cost of Lost Sales • Estimated loss of operating profit (50% shortage): >>$10 M/mon • Does not include other costs (reputation, competition, etc.)  Estimating the range of probable outcomes is important See also: Mallik, A. et al, The McKinsey Quarterly, 2002 Special Edition: Risk & Resilience

30. Make vs. Buy Decision (Risk minimization) Make Make or Buy Primary Driver: Maximizing Control • “Make” strategy during highest risk period to maximize control of supply • “Buy” strategy may make sense once product lifecycle stabilizes, risk decreases, and control less important Product Launch Manufacturing costs set at decision point RISK Development Uncertainty Market Uncertainty Maturity Product Life Cycle • Example: Genentech outsourced Rituxan to prepare for Avastin approval • Easier to transfer mature process • Minimize impact of “know-how leaks” • Retain control of less mature processes

31. Make vs. Buy Decision (Capital conservation) Buy Buy or Make Primary Driver: Conserving Capital • “Buy” strategy during highest risk period to conserve capital • “Make” strategy may be attractive once product lifecycle stabilizes, capital becomes more available, and risk reduced Product Launch Manufacturing costs set at decision point RISK Development Uncertainty Market Uncertainty Maturity Product Life Cycle • Example: Imclone outsourced through clinical supply and launch then switched to in-house production • Outsourcing minimizes capatial expense during risky development phase • Following successful product launch capital is more available to build its own facility and reduce operating costs

32. An Emerging Alternative: Acquiring Existing Capacity • As the biopharmaceutical industry matures, older manufacturing facilities may become available for acquisition. • Advantages: rapid and reduced capital access to needed capacity • Disadvantages: need for renovation likely; facility not optimized for requirement; often available in most expensive locations • Examples: • Genentech acquisition of NIMO from Biogen Idec • Alexion acquisition of Dow facility in Rhode Island • Centocor acquires plant from Wyeth • Plant history: Invitron  Centocor  Chiron  Wyeth  Centocor • Lonza acquires Porrino plant from Genentech • Plant history: Glaxo Wellcome  Genentech  Lonza • Merck acquires Insmed facility in Boulder Colorado • Plant history: Somatogen  Baxter  Insmed  Merck

33. Conclusions • Capacity likely to be available industry-wide, but: • Closely held • Geographical distribution shifting • Product and process innovations resulting in higher yields per batch and lower demand for bioreactor capacity implies: • Investments in manufacturing facilities will continue to slow • Disposable/single-use technologies possible for some commercial supply • Significant price reductions possible with biosimilar products • Make v buy decisions becoming more complex • Acquisition is increasingly an option for capacity • Regulatory, market and technical uncertainties -> poor ability to forecast biopharma capacity requirements accurately • Risk assessment is critical

34. Thank you! BioProcess Technology Consultants, Inc. 289 Great Road, Suite 303 Acton, MA 01720 978.266.9154 (phone) 978.266.9152 (fax) transohoff@bioprocessconsultants.com www.bioprocessconsultants.com