the life sciences report - wilson sonsini goodrich & rosati · bausch & lomb,...

By David Hoffmeister, Partner (Palo Alto), Lee-Anne Mulholland, Associate (Palo Alto),and Nema Milaninia, Associate (New York)

On February 14, 2012, Attorney General EricHolder and Department of Health and HumanServices (HHS) Secretary Kathleen Sebeliusreleased a report on the government’shealthcare fraud prevention and enforcementefforts. The report showed that the federal

government recovered nearly $4.1 billion infiscal year (FY) 2011 as a result of theseefforts—the highest amount ever recovered ina single year. With healthcare fraudenforcement proving to be a cash cow for acash-strapped government, we can onlyexpect increased criminal and civilenforcement of healthcare-related offenses.

The government’s Health Care Fraud andAbuse Control Program Report showed notonly record revenues from enforcement, butalso a record volume of enforcement. Asreflected in Figure 1, the number of companies

and individuals charged with fraud-relatedhealthcare crimes in 2011 reached an all-timehigh of 1,430. This historic high wassignificantly more than in prior years.

The uptick in enforcement was not limited tocriminal cases. As depicted in Figure 2, theDepartment of Justice’s (DOJ’s) Civil Divisionin 2009 and 2010 reported (then-record-breaking) highs of 942 and 886 newinvestigations, respectively. 2011 saw an all-time high of 977 new civil investigations.During this period, the HHS’s Office ofInspector General (OIG) also excluded 2,662individuals and entities from participating inMedicare and Medicaid programs.

These trends are destined to continue:Statements by DOJ and HHS representativesmake it clear that the Health Care FraudPrevention & Enforcement Action Team (HEAT),announced by Attorney General Holder andSecretary Sebelius in May 2009, is getting theresources and attention needed to

New Procedures for ChallengingPatent Validity

By Jim Heslin, Partner, and Doug Portnow,Associate (Palo Alto)

For many years, U.S. patent attorneys haveeither craved or dreaded implementation ofa U.S. Patent and Trademark Office (USPTO)procedure similar to opposition proceedingsin Europe. European oppositions are usedby companies to narrow the claims of theircompetitors’ patents when they believethat those claims are either invalid oroverly broad. The procedure works verywell in Europe, where more than 10percent of all granted patents historicallyhave been opposed, and where theavailability of oppositions is likely onereason (among many) why patent litigationis far less prevalent than in the United States.

The Life Sciences ReportSPR ING 2 0 1 2

Aggressive Healthcare Fraud Enforcement Likely to Continue in 2012

Continued on page 2...


In This Issue

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Figure 1

PROSECUTIONS FOR HEALTHCARE FRAUD

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NEW CIVIL HEALTHCARE FRAUDINVESTIGATIONS

Figure 2New Procedures for Challenging Patent Validity ................................, 10

Aggressive Healthcare Fraud EnforcementLikely to Continue in 2012 ...............Page 1-4

Life Sciences: The Rodney Dangerfield ofVenture Capital..................................Page 5-7

Life Sciences Venture Financings forWSGR Clients........................................Page 8

Government Funding for Large and SmallMedTech Companies .....................Page 9-10

Recent Life SciencesHighlights ............................................Page 11

Life Sciences Events .........................Page 12

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aggressively investigate and enforce federalhealthcare laws. In addition, the Health CareFraud and Abuse Control Program Reportshows the likelihood of a record-breakingnumber of convictions and penalties goingforward. In FY 2011, the DOJ opened 1,110new criminal healthcare fraud investigationsinvolving 2,561 potential defendants. The DOJcurrently has 1,873 criminal healthcare fraudinvestigations pending that involve 3,118potential defendants. With 1,069investigations currently pending, the civilenforcement trend is also up.

The statistics for 2011 provide a clue as toHEAT’s future focus. In mid-2011, high-levelofficials from the DOJ and HHS stated publiclythat they would be focusing their attention onviolations of anti-kickback and anti-briberylaws by medical device and pharmaceuticalcompanies. Those laws in the domesticcontext primarily include the Anti-KickbackStatute, Civil Monetary Penalties Law, andStark Law, which provide civil and criminalpenalties for remunerations, including bribesand kickbacks, paid to doctors or hospitals inreturn for referrals or purchases reimbursableunder government healthcare programs. Theseare enforced by the DOJ’s criminal and civildivisions and OIG. Penalties for violations caninclude large fines and disbarment fromparticipating in federal healthcare programs.

As pharmaceutical and medical devicecompanies have increased their internationalbusiness, the government has used theForeign Corrupt Practices Act (FCPA) topenalize bribery on the international stage.The FCPA prohibits offers or payments to“foreign officials” (which the DOJ interpretsas broadly defined and could includephysicians who work for state-owned orpartially state-owned entities) for the purposeof securing an improper advantage or to obtainor retain business. The FCPA is enforcedcriminally by the DOJ and civilly by the U.S.Securities and Exchange Commission. FCPAviolations can subject companies to bothcriminal and civil penalties, including largefines, disgorgement of associated profits,onerous reporting requirements, and federalmonitors.

As the below summary of recent kickback andbribery settlements with medical device andpharmaceutical companies describes, multiplepublic and private companies already havebeen targets of the government’s focus onanti-kickback and anti-bribery enforcement,facing hefty fines, significant disgorgement,and the government’s routine use of five-yearcorporate integrity agreements that includethe appointment of an independent revieworganization. This focus on anti-kickback andanti-bribery enforcement actions is set to

increase in 2012, with at least 19 other lifesciences companies currently reportingongoing investigations, including AstraZeneca,Bausch & Lomb, Bristol-Meyers SquibbCompany, Eli Lilly and Company,GlaxoSmithKline, Merck & Co., and Pfizer.

In light of the government’s aggressive efforts,companies should ensure that they have aproperly designed and enforced complianceprogram that includes, among other things: (1)standards and procedures to prevent anddetect unlawful conduct; (2) a person who hasactual responsibility for ensuring thatprohibited payments are not made; (3)oversight by the company’s governingauthority; (4) reasonable efforts to excludeindividuals engaged in illegal or unethicalconduct from positions of substantialauthority; (5) reasonable steps to communicatethe company’s standards and procedures to itsemployees; (6) reasonable steps to ensure thatthe compliance and ethics program isfollowed; (7) promotion of the compliance andethics program consistently throughout thecompany; and (8) reasonable steps to respondappropriately after unlawful or unethicalconduct has been detected. Without taking theproper measures to develop and bolstercompliance policies and procedures,companies risk facing the wrath ofincreasingly aggressive governmentenforcement in 2012.

Aggressive Healthcare Fraud Enforcement Likely to Continue in 2012

No. Case Name Date Institution Payment/Bribe Settlement

1 Medtronic, Inc. 12/12/11 Medical DeviceCompany

The company used physician payments related to post-market studies and device registries as kickbacksto induce doctors to implant the company’s pacemakers and defibrillators. In each case, the companypaid participating physicians a fee ranging from approximately $1,000 to $2,000 per patient.

$23.5 million

2 Serono LaboratoriesInc., EMD Serono Inc.,Merck Serono S.A.,and Ares Trading S.A

5/4/11 PharmaceuticalCompany

The companies paid healthcare providers kickbacks in the form of hundreds of speaker training meetingsand programs, as well as payments for attending consultant, marketing, and advisory board meetings,all at upscale resorts and locations. The payments were to induce the providers to promote or prescribeRebif, a recombinant interferon injectable that is used to treat relapsing forms of multiple sclerosis.

$44.3 million

3 Cardinal Health, Inc.. 4/21/11 PharmaceuticalCompany

The company paid $440,000 to a pharmacy consultant in exchange for an agreement that he purchaseprescription drugs from the company for his pharmacies.

$8 million

4 Johnson & Johnson 4/8/11 PharmaceuticalCompany

The company’s subsidiaries, employees, and agents made improper payments to publicly employedhealthcare providers in Greece, Poland, and Romania to induce the purchase of medical devices andpharmaceuticals manufactured by its subsidiaries. The company also paid kickbacks on behalf of itssubsidiary to the former government of Iraq under the U.N. Oil-for-Food Program to secure contracts toprovide humanitarian supplies.

$70 million and DeferredProsecution Agreement (DPA)requiring federal monitor for 3years

SUMMARY OF RECENT KICKBACK AND BRIBERY SETTLEMENTS WITH MEDICAL DEVICE AND PHARMACEUTICAL COMPANIES

3



5 St. Jude MedicalInc.

1/20/11 Medical DeviceCompany

The company used post-market studies and a registry to pay kickbacks to induce physicians to implant itspacemakers and defibrillators. Each participating physician received a fee of up to $2,000 per patient.

$16 million

6 Exactech, Inc. 12/8/10 Medical DeviceCompany

From 2002 to 2008, the company used consulting agreements with physicians as vehicles for kickbacks toinduce physicians to purchase the company's products. These arrangements included fee-for-servicecontracts, fixed-fee contracts, and product development contracts.

$3 million, 5-year CIA, IROrequired, and DPA requiringfederal monitor for 12months

7 KosPharmaceuticals


Kos offered and paid doctors, other medical professionals, physician groups, and managed care organizationsillegal kickbacks in the form of money, free travel, grants, honoraria, and other valuable goods and services inviolation of the Anti-Kickback Statute to get them to prescribe or recommend Niaspan and Advicor.

$41 million and DPA

8 Ameritox Ltd. 11/16/10 Medical DeviceCompany

From 2003 to 2006, the company made cash payments to physician clients to induce referrals and offered labtesting services at no cost to the lab’s physician clients to induce referrals from 2003 to 2010.

$16.3 million, 5-year CIA,and IRO required

9 ELA Medical 11/1/10 Medical DeviceCompany

From 2004 to 2007, the company paid doctors $2,500 - $4,000 per patient enrolled in a study, although thepatients were unaware of their participation. The company also provided kickbacks in the form of gifts,meals/entertainment, tickets to sporting events, travel to conferences, travel to Costa Rica, fishing andboating trips, cash payments to a physician-owned foundation, and travel expenses for spouses.

$9.2 million, 5-year CIA, andIRO required

10 Wright Medical 9/30/10 Medical DeviceCompany

From 2002 to 2007, Wright Medical used consulting agreements to induce surgeons to purchase and use thecompany's artificial hip and knee reconstruction and replacement products. The arrangements included fee-for-service contracts, fixed-fee contracts, and product development contracts. The government alleged thatthe remuneration paid under these arrangements was improper.

$7.9 million, 5-year CIA, IROrequired, and federal monitorfor 12 months pursuant toDPA with DOJ

11 NovartisPharmaceuticals

Corp.


In addition to illegally promoting a drug for uses that were not medically accepted, the company paidkickbacks to healthcare professionals to induce them to prescribe Trileptal and five other drugs, Diovan,Zelnorm, Sandostatin, Exforge, and Tekturna.


12 Forest Laboratories 9/1/10 PharmaceuticalCompany

The civil complaint alleges that Forest used illegal kickbacks to induce physicians and others to prescribeCelexa and Lexapro. Kickbacks allegedly included cash payments disguised as grants or consulting fees,expensive meals, and lavish entertainment.

$313 million, 5-year CIA, IROrequired, and plea of guiltywith DOJ

13 General Electric 7/27/10 Medical DeviceCompany

The company's subsidiaries paid kickbacks to the Iraq Ministry of Health in the form of after-service fees andin-kind payments. In return, the company's subsidiaries obtained contracts for the supply of disposableelectrodes, transducers, fetal monitors, and other injectable agents used for MRI and X-rays.

$23.4 million

14 United ShockwaveServices, UnitedUrology Centers,

and United ProstateCenters


The OIG alleged that United and certain physician-investors (PIs) used their ability to control patient referralsto obtain contract business from various hospitals. United threatened to refer patients to competing hospitalsif the hospital did not agree to a contract with United, and promised additional referrals to hospitals that didcontract with United. The relationships between United's PIs and the hospitals raised Stark concernsregarding the financial relationships between United's PIs and the hospitals to which they made referrals.Also, United sold more shares to physicians who produced referrals or other business for the company.United had processes for having physicians divest if they did not use United's services sufficiently andoffered huge returns on investment with virtually no business risk.

$7,359,500, 5-year CIA, andIRO required

15 St. Jude Medical,Inc.


The company, a heart-device manufacturer, paid kickbacks that included alleged rebates that were retroactiveand based on a hospital’s previous purchases of the company’s heart-device equipment, as well as rebatesfor purchases of heart-device equipment sold by the company’s competitors to induce purchases of similarequipment from the company in the future.

$3,898,300

16 Cochlear Americas 6/3/10 Medical DeviceCompany

The company paid various forms of illegal remuneration to physicians who prescribed the use of theirmanufactured implant system for Medicare and Medicaid patients.

$880,000 and stay of DOJproceedings

17 Garden StateImaging (GSI)


The company entered into a verbal agreement with two owners of a medical center. Under the terms of theverbal agreement, the company agreed to provide mobile diagnostic imaging and related services to therecipient’s patients and to split 50 percent of the net proceeds that were generated.

$83,000

18 ArtriCure, Inc. 2/2/10 Medical DeviceCompany

The company paid clinic-physicians between $10,000 and $24,000 for consulting work. The clinic-physiciansalso were granted stock options and received royalties for devices that they helped the company to develop.


19 Cardiac MonitoringServices, LLC


Not available $2.2 million, 5-year CIA,and IRO required

Summary of Recent Kickback and Bribery Settlements . . .

4

Summary of Recent Kickback and Bribery Settlements . . .



20 St. Jude Medical,Inc.


The company paid kickbacks of up to $2,000 per patient to help market its products, including through theuse of fake research studies on the company’s devices.

$16 million

21 Boston ScientificCorporation


An entity acquired by the company used post-market surveys to pay physicians $1,000 and $1,500 for eachstudy to induce them to purchase its products.

$22 million, 5-year CIA, and IROrequired

22 Bayer Healthcare 11/28/08 Medical DeviceCompany

The company allegedly paid Liberty Medical Supply Inc., one of the largest direct-to-patient diabeticsuppliers, approximately $2.5 million to convert its patients to the company’s supplies. The allegedkickbacks were based on the number of patients that Liberty successfully converted to the company’ssupplies and were disguised as payments for advertising. In addition, the company allegedly paid kickbacksof approximately $375,000 to 10 other diabetic suppliers to convert patients to Bayer supplies.


23 AGA MedicalCorporation


The company, a high-ranking officer, and other company employees agreed to make corrupt payments todoctors in China employed by government-owned hospitals and caused those payments to be made throughthe company’s local Chinese distributor. In exchange, the doctors directed the government-owned hospitalsto purchase the company’s products rather than those of its competitors. In addition, the company soughtpatents on several of its products from the People’s Republic of China State Intellectual Property Office. Asa part of this effort, the company and a high-ranking officer agreed to make payments through their localChinese distributor to Chinese government officials employed by the State Intellectual Property Office tohave the patents approved.

$2 million and DPA

24 Merck & Company 2/7/08 PharmaceuticalCompany

The company had approximately 15 different programs used by its sales representatives to inducephysicians to use its many products. These programs primarily consisted of excess payments to physiciansthat were disguised as fees paid for “training,” “consultation,” or “market research.” The governmentalleged that these fees were illegal kickbacks intended to induce the purchase of the company’s products.

$650 million, 5-year CIA, and IROrequired

25 Akzo Nobel N.V. 12/21/07 PharmaceuticalCompany

Two of the company’s subsidiaries authorized and made $279,491 in kickback payments in connection withtheir sales of humanitarian goods to Iraq under the U.N. Oil-for-Food Program. The kickbacks werecharacterized as “after-sales service fees,” but no bona fide services were performed. The kickbacks werepaid by third parties to Iraqi-controlled accounts in Lebanon and Jordan.

$2.9 million

26 Zimmer, Inc. 9/27/07 Medical DeviceCompany

The company entered into financial arrangements with orthopedic surgeons, including fee-for-servicecontracts, fixed-fee contracts, and product development contracts.

$169.5 million, 5-year CIA, IRO,and retention of federal monitorpursuant to DPA

27 CIA Biomet, Inc. &Biomet Orthopedics,

Inc.


The company entered into consulting agreements with orthopedic surgeons to use joint reconstruction andreplacement products.

$27 million, 5-year CIA, IROrequired, and retention of federalmonitor pursuant to DPA

28 DePuy Orthopedics,Inc.


The company paid orthopedic surgeons to be consultants and to use their products exclusively. Hospitalsand patients, however, were not informed of the arrangement.


29 Smith & Nephew,Inc.


The company and three others paid tens or hundreds of thousands of dollars to individual surgeons andprovided them with trips and other perks. The physicians did little or no work for the financial inducements,merely agreeing to exclusively use the paying company's products.

$28.9 million, 5-year CIA, IROrequired, and retention of federalmonitor pursuant to DPA

30 AdvancedNeuromodulationSystems, Inc. (ANS)


The company paid physicians $5,000 for every five new patients tested with its product. The company alsoprovided physicians with tickets to sporting events, free trips and dinners, grants, and other gifts.


Lee-Anne Mulholland(650) [email protected]

Nema Milaninia(212) [email protected]

David Hoffmeister(650) [email protected]

5

By Bruce Booth, Partner, Atlas Venture, and Bijan Salehizadeh, Managing Director,NaviMed Capital

Most venture capitalists think that IT andInternet investments have been the bestsource of top venture returns—which is why,in the past few years, unprecedented amountsof capital have poured into Facebook, LinkedIn,Twitter, Zynga, and the like. They may becorrect now and in the future—especially withthe recent IPOs of several of thesecompanies—but at least over the pastdecade, they’ve been wrong. In the2000s, venture capital investments inhealthcare and life sciences outperformedventure investments in tech.

The venture business is now 12 years into aslump in returns that has discouraged even themost enthusiastic investors and limitedpartners in the space. Indeed, a look at thedata shows that even the top quartile ofventure capital firms in aggregate have notreturned more than 100 percent of investedlimited partner capital since the 1998 vintage.Yet over the past two years, hope has sprungeternal among IT and Internet ventureinvestors, driven largely by a daily barrage ofblog and news headlines covering theexponential growth and dramatic returnsprospects of a small handful of social-networking and gaming companies. Thegrowth among this small handful of companiesis indeed spectacular.

Left behind by this good news is the lifesciences and healthcare venture capitalindustry, which, according to PwCMoneyTree/NVCA data, accounted for nearly30 percent of the $28 billion invested inventure-backed companies in 2011.

Widely held notions among GPs, LPs, andentrepreneurs are that life sciences andhealthcare venture investments are toochallenging, that they have underperformedrelative to IT and Internet investments over the

past decade, and that they only will continueto do so.

Nothing could be further from the truth. Itseems that, like Rodney Dangerfield,healthcare venture gets no respect. Asoutlined in a paper in the July 2011 issueof Nature Biotechnology, healthcare ventureinvestments dramatically outperformed ITventure investments over the past decade.

Our study is likely the first widely published,peer-reviewed look at the actual venturereturns data for the 2000s comparing tech andlife science performance, which we took fromthe NVCA Benchmarking Database poweredby Cambridge Associates. This is the mostrobust database of its kind, covering returnsfrom nearly 1,300 firms over the past 30 yearsof venture capital investing. To focus ouranalysis on actual returns, we primarily lookedat companies that achieved first investmentand realized an exit in the pastdecade. Importantly, we looked at theaggregate of individual investments rather

than funds, since sector-specific anddiversified venture funds exist.

Our analysis yielded thousands of data pointsand unearthed two critically important factorsthat are widely misunderstood or unknown by

the VC ecosystem: the limited partners in theasset class and the media that covers it.

1. Life Sciences Realized Returns (IRR)Dramatically Outperformed IT

Overall, life sciences/healthcare venturerealized a gross pooled mean IRR of 15.0percent for the past decade. This is in contrastto 5.5 percent for all venture capital, 3.0percent for IT, and 4.1 percent for software.

In fact, every single subcategory of healthcareventure showed at least 2x-to-3x betterrealized IRRs than its IT counterparts.Including unrealized exits (or the value ofcurrently active deals) makes the differenceless profound, but healthcare’soutperformance of IT still persists.

(Definitions: “Realized” deals are actual exits,“pooled” data is the aggregate of the fulldecade into one data set, “means” arearithmetic means, and “gross” returns are notnet of the fees or incentive compensation.)

2. Life Sciences Had a Lower Loss Rateand Higher Frequency of 5x+ Returns

There’s a perception that many healthcareventure deals lose money. It’s true. Fifty-eightpercent of healthcare venture deals returned

Life Sciences: The Rodney Dangerfield of Venture Capital

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1.5 1.5-7.5-4.5

5.84.3

3.04.2

2.5 2.84.1 3.7

5.54.4

Realized

Realized + unrealized

Sector


6

less than their invested capital. Butsurprisingly, the failure rate for IT companiesis much higher. Almost 75 percent of IT-relatedinvestments realized a return of 1x or less inthe past decade. Furthermore, the frequency of5x or greater returns is higher in lifesciences—8 percent, versus 4 percent forIT. The tech distribution curve surely extendsmuch further out at the top end (reflecting thelikely 100x-to-1000x returns of a small handfulof companies), but the data set didn’t allowfor that analysis (e.g., the top 1 percent of ITdeals almost certainly have higher multiplesthan the top 1 percent of healthcare deals).

We would bet that only a small percentage ofGPs and LPs in venture capital actually areaware of healthcare’s outperformance of IT inthe past decade, and we think that greatertransparency around the actual returns data inthe venture industry is a good thing.

But, as one would expect, not all of the newsfor healthcare is rosy.

Life Sciences IPO Performance Is PoorCompared to IT

As of mid-2011, nearly 60 percent of lifesciences IPOs from the past four years aretrading below their issue price versus roughly30 percent of tech IPOs. Also, post-IPOperformance has been dramatically better in ITthan it has been in life sciences. IT companies

that go public tend to bemore mature businesses withrevenues and, often,significant earnings; inbiotech, most of thecompanies remain cash-burning for the foreseeablefuture.

This difference in IPO resultsis important and is a big partof the negative perception ofthe life sciences sector. IPOsare media darlings, and they

help createbuzz about specific sectors. Inhealthcare, we aren’t likely tohave that type of buzz anytimesoon.

This data and analysis do havesome shortcomings. Forinstance, they are based on alook backward over the pastdecade and do not include therecent 2011 class of tech IPOs,which will surely improve ITreturns—perhapssignificantly. However, it hasbeen shown by others that therecent web high-flyers mostly

are concentrated in the portfolios of a smallgroup of venture firms, so they may have aless profound impact on the overall techventure landscape.

Some questions arise from an examination ofthis data:

Would the Results Differ if We ExcludedDot-Com Bubble-Era Data?

As illustrated in the table above, excluding theyear 2000 (the year the dot-com-era bubblepopped) from our analysis does not change theresults with respect to realized exits, which isthe best measure of performance. Lifesciences and healthcare continue to show asizable lead over IT, and unrealized returns areequivalent.

If one excludes 2001 as well, realized returnscontinue to favor healthcare and life sciences,but the inclusion of unrealized investmentsgives a slight edge to IT due to the fact thatunrealized healthcare holdings (i.e., currentactive portfolio companies) are not valued ashighly as unrealized IT holdings.

As was outlined in the Nature paper,significant mark-ups from round to round tendnot to occur in healthcare companies. Instead,even well-performing healthcare companiestend to be held at or near cost until an exitoccurs, leading to punitively low unrealizedhealthcare IRRs. IT companies that performwell, however, can get large round-to-roundmark-ups, which help significantly in drivingthe value of an unrealized tech portfolio.

Why Is This Data Different thanCambridge Associates’ QuarterlyBenchmark Data by Sector?

First, the quarterly Cambridge Associates datacombines realized and unrealized returns; thebiggest differences noted in our analysis are inthe realized exits. Second, our analysis is forU.S. VC firms’ investments in U.S.companies. It is believed that CambridgeAssociates includes U.S. VC firm investmentsin all companies (including companies housedoutside the U.S.). Adding internationalinvestments by U.S. firms, especially recentinvestments in China, does improve theunrealized and realized venture returns in all



0.0x 1.0x 2.0x 3.0x 4.0x 5.0x

Investment multiple

Technology

Life sciences

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20

0

30

16

58

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88 92

96949185

75

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)

Life SciencesTech

20.5%7.9%

- Life Sciences includes Biotech, Pharmaceuticals, Medtech, Medical Software, and Health Services- Tech includes Consumer, Electronics, Hardware, IT, Media, and Software- US Venture Capital into US Companies with initial investment years in the time period- Data as of 9/30/2010

Realized

8.5%8.1%

-0.6%5.8%

Gross Pooled Mean IRRs Excluding Bubble Vintage

2001-2010Realized + Unrealized Unrealized

Life SciencesTech

26.3%12.2%

Realized

8.5%10.4%

-0.5%7.0%

2002-2010 Unrealized

7

sectors, but particularly in tech. Third, andmost importantly, by pooling 2000 through2010, our analysis attempts to eliminatevintage-year anomalies that the quarterlyCambridge data can show when looking atindividual vintage years. This pooling clearlyweights the analysis toward years with morefinancings and away from those years withfewer financings.

With these realized returns relative totechnology venture capital, why has such anegative perception of healthcare VC emergedin the past few years? We think that there areseveral reasons:

1. Complexity: Healthcare and biotech inparticular are inherently complex sectors,and investing in venture-stage companies inthis space requires a blend of deep scienceand medical understanding, plus a strongstomach to withstand the ups and downs ofproduct development. It’s not revenues andmargins, but long-term value creation. Andit’s only getting more complex—headlinesaround tightening regulations at the FDA,the impact of healthcare reform, andreimbursement cuts at Medicare can bescary if not put in proper context.

2. It’s the cycle, stupid: Ten to twelve yearsago during a prior IT bubble period, therewas a lot of talk about how lackluster aninvestment area healthcare was relative toIT. In fact, several high-profile firms ditchedtheir healthcare practices during thattime. Much of that talk seems to have madea comeback in recent months, driven by theperception that healthcare is a laggard, andmultiple firms have shuttered or scaled backtheir healthcare investing efforts. It’s déjà vu.

3. No 100x’ers: Unlike the IT sector, in which100x returns are possible and have drivengreat outcomes in companies like Skype andGoogle, life sciences never will have these

wild “Black Swan” outliers. These 100x’ersare the companies that draw pressattention, new talent, and more capital intothe IT space.

4. It takes money to get to an answer:Healthcare companies usually require moremoney to get to an answer than IT (andparticularly Internet) companies. The dogmain IT VC these days is that funding leanstart-ups is the right way to go.Despite exciting new efforts by a few firmsto build asset-light bio-pharma companies,it will never be as capital-efficient todevelop a drug, a diagnostic, or a newmedical device as it is to build a mobile appor a web service.

5. Poor marketing: Our IT brethren are muchsavvier marketers, in terms of promotingtheir new investments and getting glowingpieces about their latest and greatest newinvestments into mainstream media. This isnot the case in healthcare, where only asmall handful of VCs and an even smallergroup of CEOs use social media or leveragethe press effectively. And, of course, mosthealthcare and life sciences companiesdon’t translate as well in widely read pressoutlets such as Forbes or TechCrunch.

In conclusion, we think that IT and lifesciences venture investing are fundamentallydifferent businesses. However, these sectorsactually complement each other quite wellwithin a single venture firm or limited partnerportfolio, providing much-neededdiversification within the asset class.

IT venture investing is all about the hunt forthe Black Swan: It’s about getting a highmarket share of top-quality deal flow andworking with only the best syndicates. Placingmany small, seed-stage bets createsoptionality and allows firms to double-downon those achieving real scalability and market

traction. Step-ups in valuation between roundsoccur with regular frequency in winningcompanies, and the tantalizing possibility of a100x return in a short period of time is alwaysthere when you invest in an early-stagecompany.

Healthcare, on the other hand, has been asteadier business, with a lower failure rateand a higher frequency of 5x+ returns. Because of the nature of the healthcareventure market and the capital intensity inbiotech, differential venture performance isnot really about the market share of new dealflow, as most syndicate formation isn’tcompetitive. It’s about thoughtful scientificand clinical risk assessment, coupled withdisciplined titration of capital and activegovernance, and can lead to very attractiveinvestments over time.

*This article originally was co-written as ablog post by Bruce Booth and BijanSalehizadeh, who co-authored an article in theJuly 2011 issue of Nature Biotechnologydetailing the differences in returns betweenlife sciences and IT investing. Portions of theoriginal post have been modified for clarity.

Bruce Booth is a partner in the life sciencesgroup at Atlas Venture and focuses on novelbiopharmaceutical products, therapeuticplatforms, and biomedical technologies. Hehelped build the Pharma R&D practice atMcKinsey after studying HIV as a MarshallScholar. Bruce blogs at www.LifeSciVC.com.

Bijan Salehizadeh is a managing director atNaviMed Capital and focuses on investmentsin commercial-stage companies in healthservices, healthcare IT, and medical productsand technologies. Prior to co-foundingNaviMed, Bijan had several years of operatingand clinical experience in healthcare. Bijanblogs at www.thebij.com.


8

By Scott Murano, Partner (Palo Alto)

The table below includes data from 2011 lifesciences transactions in which Wilson SonsiniGoodrich & Rosati clients participated.Specifically, the table compares—by industrysegment—the number of closings, the totalamount raised, and the average amount raisedper closing across the first and second halvesof 2011.

The data generally demonstrates that venturefinancing activity declined marginally duringthe second half of 2011 compared to the firsthalf. Specifically, the total number offinancings completed across all industrysegments during the second half of 2011decreased by approximately 2.8 percentcompared to the first half, from 108 closingsto 105 closings. More significantly, the totalamount of money raised across all industrysegments during the second half of 2011decreased by more than 6.2 percent comparedto the first half. The medical device industrysegment, which represented more than 65percent of all life sciences closings in 2011,

suffered the only decline in total amountraised during the second half of 2011compared to the first, decreasing byapproximately 36 percent, from $571.96million to $363.5 million. Other industrysegments showed strong gains in financingactivity during the second half of 2011,including biopharmaceuticals, whichrepresented more than 15 percent of all lifesciences closings in 2011, and diagnostics,which represented more than 9 percent of alllife sciences closings in 2011. The totalamount raised by biopharmaceuticalcompanies during the second half of 2011increased by approximately 60 percent overthe first half, from $147.14 million to $235.91million, while the total amount raised bydiagnostics companies increased by 118percent, from $27.11 million to $59.36 million.

In conclusion, the data indicates that overallaccess to venture capital for life sciencescompanies declined somewhat in the secondhalf of 2011 in relation to the first half. Themedical device industry segment suffered theonly loss in terms of total amount raised by a

life sciences industry segment, while otherindustry segments—notablybiopharmaceuticals and diagnostics—realizedgains. Although the fundraising environmentremains difficult for all companies, lifesciences companies should take comfort in thefact that our data indicates that life sciencesremained the most attractive industry forinvestment during both halves of 2011. Duringthe first half of the year, the life sciencesindustry represented 27.9 percent of closingsacross all industries, followed by the softwareindustry at 19.2 percent and clean technologyand renewable energy at 11.7 percent.Similarly, during the second half of the year,the life sciences sector represented 25.2percent of closings across all industries,followed by the software industry at 23.9percent and clean technology and renewableenergy at 11.2 percent.

Life Sciences Venture Financings for WSGR Clients

Life Sciences Industry Segment

1H 2011

Number ofClosings

1H 2011

Total AmountRaised ($M)

1H 2011

Average AmountRaised ($M)

2H 2011

Number ofClosings

2H 2011

Total AmountRaised ($M)

2H 2011

Average AmountRaised ($M)

Biopharmaceuticals 19 $147.14 7.74 15 $235.91 15.73

Diagnostics 9 $27.11 3.01 11 $59.36 5.40

Genomics 2 $2.81 1.40 2 $18.28 9.14

Healthcare Services 1 $3.02 3.02 2 $8.45 4.22

Medical Devices 71 $571.96 8.06 69 $363.50 5.27

Medical InformatonSystems 5 $22.28 4.46 5 $38.96 7.79

Miscellaneous 1 $1.03 1.03 1 $2.90 2.90

Total 108 $775.35 105 $727.36

Scott Murano(650) [email protected]

9

By William S. Baron, Ph.D.

The government’s research and developmentbudget is accessible to medical technologycompanies at all stages of development.Federal support for research and developmentis available through a variety of fundingmechanisms that are used by a wide range offederal agencies, each with their own mission.The below update provides a brief review ofselect federal funding mechanisms that areavailable to “small businesses” andcompanies that are not eligible for “smallbusiness” status, including major corporationsand start-up companies that are majorityowned by venture capital, hedge fund, orprivate equity firms.

Grants versus Contracts

Broadly speaking, government funding isawarded via either contracts or grants. Afundamental difference between the twomechanisms is who initially defines theproject—the government or the business.

Companies considering contracts shoulddetermine how their research anddevelopment goals align with governmentsolicitation topics, since contracts generallycall for a highly focused, product-orientedproject.

Grants, on the other hand, typically aredefined by the investigator via the grantapplication. Because the company is initiatingthe project definition, grant projects are easilyaligned with a company’s business andtechnology objectives. To optimize multipleaward funding opportunities, care is needed indefining the scope of each application.Companies should submit grant applicationshaving non-overlapping project goals in orderto qualify for multiple awards.

All federal agencies use both grant andcontract funding mechanisms, but theemphasis varies substantially among agencies.The National Institutes of Health (NIH) usesboth grants and contracts, with an emphasison grants, while the Department of Defense(DOD) emphasizes contracts, even whenfunding investigator-initiated projects.

The federal government has been working toaggregate its grant and contract solicitationsinto a few sites: www.grants.gov for grants,www.fbo.gov for contracts, and www.SBIR.govfor small business grants and contracts.Browsing these sites can yield a quick idea ofthe breadth of funding opportunities sponsoredby various federal agencies.

Army Medical Research and MaterielCommand

The DOD funding mechanism operated by theUnited States Army Medical Research andMateriel Command (USAMRMC) as describedin the DOD’s Broad Agency Announcement forExtramural Medical Research, BAA 12-1,which was released in October 2011, meritsspecial attention by medical technologycompanies. This solicitation invitesinvestigator-initiated projects that areresponsive to a very broad range of immediatemedical technology military needs as well asplatform technologies to support futurebreakthroughs. The stage of projectdevelopment can range from proof-of-conceptto field/clinical testing.

In fiscal year 2011, awards under thissolicitation were capped at $5 million and fiveyears. There is no budgetary cap in the FY2012 solicitation, although the five-yearproject period remains. Funding through BAA12-1 is available to both for-profitorganizations other than small businesses aswell as small businesses. Non-domestic ornon-profit entities also may apply.

Research funding for BAA 12-1 is primarilymanaged through seven programs. The scopesof the individual program missions are definedaround: infectious diseases, combat casualtycare, operational medicine research, clinicaland rehabilitative medicine, medical biologicaldefense, medical chemical defense, andtelemedicine and advanced technology. Aspecial projects program oversees projectsthat fall outside the scope of these sevendefined research programs when such projectsare relevant to health-related issues formilitary personnel, military dependents,veterans, and the American public in general.

These include projects relating to health caredelivery; the detection, diagnosis, control, oreradication of specified diseases, conditions,or syndromes; or the advancement of militarymedical interests.

Pre-proposals for BAA 12-1 are accepted on arevolving basis—i.e., there are no submissiondeadlines while the solicitation is open.Unless instructed otherwise, organizations arerequired to explore USAMRMC interest in aspecific idea or project by submitting apreliminary research proposal. A pre-proposalof interest to USAMRMC is followed by aninvitation to the company to submit a fullformal proposal requesting funding. Pre-proposal topics are kept in a database thatcan be searched by military personnel at laterdates, when needs may change USAMRMC’sfunding priorities.

A major advantage to working with the DOD isthat the agency may become a large firstcustomer for the developed product.

SBIR/STTR Funding Programs

The Small Business Innovation Research(SBIR) and Small Business Technology TransferResearch (STTR) funding mechanisms areattractive due to their structured applicationprocesses and multiple awards. Although thelegislated award guidelines for the SBIR/STTRprograms are $1,150,000 for a base Phase I/IIaward path, the actual awards, when justified,can be higher. The average NIH funding for aSBIR Phase I/II award path in FY 2011 wasnearly $1.6 million.

The SBIR/STTR programs were funded in 2009with approximately $2.5 billion in legislatedset-aside monies.

Historically, when programs grow, awards andaward rates increase.

On December 31, 2011, the SBIR/STTRprograms were reauthorized for an additionalsix years. In the coming months, the fundingagencies are expected to issue guidelinesimplementing the provisions of the newlegislation. The new legislation includeshigher award amounts, larger set-asides, and

Government Funding for Large and Small MedTech Companies


Last year, as part of the America Invents Act,Congress leapfrogged the European PatentOffice by creating two different post grantprocedures: post grant review (PGR) and interpartes review (IPR). While similar in manyrespects, each of these procedures fits adifferent niche and will be useful underdifferent circumstances.1

PGR is most similar to the European oppositionprocess in that it must be filed within ninemonths of the patent grant date and allows awide variety of invalidation arguments,including prior art, lack of support, and claimoverbreadth. In fact, PGR may be institutedupon any showing that it is more likely thannot that at least one claim challenged isunpatentable. PGR will be performed by thePatent Trial and Appeal Board (PTAB), a newentity within the USPTO that is replacing theBoard of Patent Appeals and Interferences(BPAI), and a final decision is supposed to bemade within one year. The PGR procedureallows for discovery related to the particularassertions raised in the PGR request and thepatentee’s response. The decision made bythe PTAB raises “estoppel,” which preventsthe party requesting the review from raisingarguments that were relied on or couldreasonably have been relied on during the PGRproceeding. Thus, while defendants may stillraise invalidity and other defenses insubsequent litigation, those defenses cannotbe the same as those that were—or could orshould have been—raised in PGR.

IPR complements PGR, as it becomes availablenine months after a patent’s issue date. IPRalso may be requested following thetermination of a prior PGR, but would have toraise new grounds that were not and could nothave been raised in PGR. The scope ofdiscovery is broader with IPR, particularly as itallows the deposition of witnesses who havesubmitted affidavits (much like presentinterference proceedings). Other differenceswith PGR include a threshold determination bythe USPTO that the requesting partydemonstrate “a reasonable likelihood ofprevailing” and grounds for invalidation thatare limited to prior art consisting of patentsand printed publications, and therefore do notinclude scope and enablement.

As with present-day re-examinationprocedures, PGR and IPR often will be utilizedwhen a party is faced with threatened oractual litigation. Since PGR must be requestedwithin nine months of a patent grant date, theprocedure likely will be used preemptivelymore often than after litigation has started. Incontrast, because IPR can be requested at anytime after the close of the PGR request periodor the termination of a PGR procedure, IPRlikely will be used more often by defendants inpatent litigation. IPR must, however, be filedwithin one year of the patent infringementcomplaint being served and before anydeclaratory judgment action is filed by therequestor.

Recently, the USPTO has proposed rules toimplement both PGR and IPR. Most notableamong the rules is the cost. Unlike theEuropean oppositions, where the cost isnominal, the cost of filing both PGR and IPR issignificant and based on the number of claimschallenged. The basic filing fees for PGR andIPR are $35,800 and $27,200, respectively.These fees, however, can escalate by tens ofthousands of dollars in cases where manyclaims are challenged. While this cost issubstantial, it is certainly much less thantypical patent litigation costs, so it still may bea bargain in many cases. Nonetheless, costlikely will reduce the number of trivial or proforma PGRs filed, which has been ashortcoming of European oppositions.

The USPTO continues to collect feedback onthe proposed PGR and IPR rules, which shouldbe finalized soon.

10

provisions for funding companies that aremajority owned by venture capital, hedgefund, or private equity firms.

The NIH issued nearly $700 million worth ofSBIR/STTR awards in FY 2010, almostexclusively for medical technology. The DODpaid out roughly $1.24 billion in SBIR/STTRawards in 2009, sponsored by various DODcomponents: the Department of the Army, theDepartment of the Navy, the Department ofthe Air Force, the Defense Advanced Research

Projects Agency, the Defense Threat ReductionAgency, the Missile Defense Agency, theNational Geospatial-Intelligence Agency, andthe Office of the Secretary of Defense; manyof the awards were for medical technologyprojects. Other agencies funding medical-technology-related projects include theNational Science Foundation (NSF), theDepartment of Energy (DOE), the Departmentof Transportation (DOT), and the United StatesDepartment of Agriculture (USDA).

In summary, federal funding for medicaltechnology research and development is aliveand well, with attractive portals available toall companies, regardless of their investorportfolio.

William Baron has been helping companiesraise government funding for over 20 yearsand can be reached at Vision Metrics, Inc., inMenlo Park, California, at (650) 328-8149 [email protected].

Government Funding for Large and Small MedTech Companies


New Procedures for Challenging Patent Validity Continued from page 1...

1 PGR will not be available on patents filed before March 16, 2013, except for some business method patents. As patent applications filed after that date will take some time before they grant, it is likely that few, ifany, PGRs will be filed before 2014. IPR, in contrast, will become available on September 16, 2012.

Jim Heslin(650) [email protected]

Doug Portnow(650) [email protected]

11

Par Pharmaceutical, Generic DrugMakers Obtain Federal Circuit VictoryOn February 9, 2012, the Federal Circuitaffirmed a December 2010 ruling by theDistrict of Delaware that dismissedAstraZeneca Pharmaceuticals’ case againstApotex Corp. and several other generic drugcompanies, including Par Pharmaceutical. Inits decision, the court held that a brand-namedrug company can’t sue generic drugcompanies for patent infringement if thegenerics ask the government to approve onlynon-patented uses for the drug. WSGRrepresented Par in connection with this matter.To read the firm’s WSGR Alert on the decision,please visit http://www.wsgr.com/WSGR/Display.aspx?SectionName=publications/PDFSearch/wsgralert-method-of-treatment-patents.htm.

Heartflow Raises $75 Million in Series CFunding RoundOn January 20, 2012, Redwood City,California-based cardiovascular diagnosticscompany Heartflow completed a raise of $75million in Series C financing. Heartflow’sFractional Flow Reserve (FFR) technology isused to determine whether patients withcoronary artery disease require treatment withballoons, stents, or coronary artery bypassgrafts. Wilson Sonsini Goodrich & Rosatiadvised Heartflow in connection with thefinancing. To learn more about the company,please visit http://heartflow.com/.

Acutus Medical Raises $5.4 Million inSeries A FinancingOn January 20, 2012, Acutus Medical, amedical technology company based in SanDiego and Zurich, announced that it has raised$5.4 million in Series A financing. Thefinancing round was led by investors IndexVentures and Advent Life Sciences. AcutusMedical is developing an electrophysiologicalreal-time 3D imaging and novel mappingsystem to optimize the treatment of cardiacarrhythmias and will use the initial funding todevelop prototypes and perform first-in-manstudies with its novel system. WSGR advisedAcutus in connection with the financing. Formore information, please see the Acutus press

release at http://www.acutusmedical.com/advent-life-sciences-invests-acutus-medical-acutus-medical-expands-senior-management-team/.

Extend Health Files for Proposed IPOOn January 6, 2012, San Mateo, California-based Extend Health announced that it hasfiled for an initial public offering of itscommon stock. The offering could raise up to$75 million for the health-benefit managementservices provider. Wilson Sonsini Goodrich &Rosati is advising Extend Health in connectionwith the offering. Additional information canbe found in the company’s press release athttps://www.extendhealth.com/about/press-center/extend-health-files-registration-statement-with-sec-for-an-initial-public-offering.

Intellikine to Be Acquired by TakedaOn December 20, 2011, small-molecule drugdeveloper Intellikine announced that it hasentered into an agreement to be acquired byTakeda America Holdings for $190 million incash and up to $120 million in additionalpotential clinical development milestonepayments. Wilson Sonsini Goodrich & Rosatiadvised Intellikine on the intellectual propertyaspects of the transaction. To read Intellikine’spress release, please visithttp://www.intellikine.com/pdf/Intellikine_PressRelease_Dec20_2011.pdf.

ForteBio Announces Acquisition by PallCorporationOn December 19, 2011, ForteBio, a producer ofadvanced analytical systems that acceleratethe discovery and development of biotechdrugs, announced that it has entered into adefinitive agreement to be acquired by PallCorporation, a leader in fluid filtration,separation, and purification. WSGRrepresented ForteBio in connection with theacquisition. To read ForteBio’s press release,please visit http://www.fortebio.com/press_details.html?id=41.

HMS Holdings to AcquireHealthDataInsights for $400 MillionOn December 16, 2011, leading cost-containment-solutions provider HMS Holdings

and HealthDataInsights, a technology-enabledhealthcare services company, announced thatHMS has completed its acquisition ofHealthDataInsights for approximately $400million in considerations, of which roughly$386 million was in cash. Wilson SonsiniGoodrich & Rosati representedHealthDataInsights in the acquisition. Moreinformation can be found inHealthDataInsights’ press release athttp://www.healthdatainsights.com/company/december-16-2011-hms-completes-acquisition-healthdatainsights-inc.

Mylan Announces Settlement Agreementfor its Generic Version of Vivelle-DotOn November 21, 2011, drugmakers Novartisand Mylan Pharmaceuticals settled patentlitigation over Mylan’s bid to produce ageneric version of Novartis’ estrogen-therapydrug Vivelle-Dot. Under the settlementagreement, Novartis will drop its lawsuits andMylan will receive a patent license to beginselling generic versions of the product onDecember 16, 2013, or earlier under certaincircumstances. Mylan was represented in thismatter by Wilson Sonsini Goodrich & Rosati.Mylan’s press release on the settlement isavailable at http://investor.mylan.com/releasedetail.cfm?ReleaseID=625473.

Alchemia Completes $15 MillionPlacement of New Shares On November 7, 2011, biotechnology companyAlchemia Limited announced that it has raised$15 million in Australian dollars through aninstitutional placement of approximately 62.5million new shares in both Australia and theUnited States. The placement was finalized onDecember 21, 2011. Wilson Sonsini Goodrich& Rosati acted as U.S. legal counsel toAlchemia in this matter. To read Alchemia’spress release, please visit http://www.4-traders.com/ALCHEMIA-LIMITED-6496737/news/ALCHEMIA-LIMITED-$15m-Placement-SPP-and-proposed-De-merger-13876986/.

Recent Life Sciences Highlights

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THIS PUBLICATION IS PROVIDED FOR YOUR INFORMATION ONLY AND IS NOT INTENDED TO CONSTITUTE PROFESSIONAL ADVICE AS TO ANY PARTICULAR SITUATION.

Upcoming Life Sciences Events

Casey McGlynn (650) [email protected]

Elton Satusky(650) [email protected]

Scott Murano(650) [email protected]

Casey McGlynn, a leader of the firm’s life sciences practice, has editorial oversight of The Life Sciences Reportand was assisted by Elton Satusky and Scott Murano. They would like to take this opportunity to thank all ofthe contributors to the report, which is published on a semi-annual basis.

Wilson Sonsini Goodrich & Rosati’sMedical Device ConferenceJune 20-21, 2012The Palace HotelSan Francisco, Californiahttp://www.wsgr.com/news/medicaldevice

Wilson Sonsini Goodrich & Rosati’s 20thannual Medical Device Conference, aimed atprofessionals in the medical device industry,will feature a series of panels anddiscussions addressing the critical businessissues facing the industry today.

rEVOLUTION SymposiumOctober 3-5, 2012The St. Regis Washington, D.C.Washington, D.C.http://www.wsgr.com/news/revolution

rEVOLUTION 2012 will mark the seventhannual symposium for chief scientificofficers focused on drug R&D issues. Theevent will examine the organization andmanagement of R&D to uncover new modelsto accelerate the discovery and developmentof new drugs.

Phoenix 2012: The Medical Device andDiagnostic Conference for CEOsOctober 11-14, 2012Montage Laguna BeachLaguna Beach, Californiahttp://www.wsgr.com/news/phoenix

Phoenix 2012 will serve as the 19th annualconference for chief executive officers andsenior leadership of medical device anddiagnostic companies. The conference willprovide an opportunity for top-levelexecutives from large healthcare and smallventure-backed companies to discussfinancing, strategic alliances, and otherindustry issues.

WSGR Ranked No. 1 for 2011 Issuer-Side Venture Financings, Biotech and Pharma Licensing Agreements

Dow Jones VentureSource’s recent legal rankings for issuer-side venture financing deals in 2011 placed Wilson Sonsini Goodrich & Rosati aheadof all other firms by the total number of rounds of equity financing raised on behalf of clients. The firm is credited as legal advisor in 325 rounds offinancing, far outdistancing its nearest competitor, which advised in 226 rounds of financing. Of particular relevance to The Life Sciences Report,WSGR is ranked No. 1 nationally for issuer-side deals in the healthcare1 and medical device industries.

In addition, the firm ranked No. 1 on numerous biotechnology and pharmaceutical league tables published by BioPharm Insight based on the valueand volume of its licensing agreements in 2011. Select rankings include:• Ranked No. 1 by global volume and No. 2 by global value of biotech and pharma licensing agreements• Ranked No. 1 by volume and No. 2 by value of biotech and pharma licensing agreements in North America• Ranked No. 1 by volume of biotech and pharma licensing agreements in the Asia-Pacific region

1 Healthcare consists of the biopharmaceutical and medical devices/equipment subsectors.

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