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 XenoMouse: Produces antibodies for disease targets  Benefits: Longer therapy, fewer side effects, faster drug development Abgenix & the Xenomouse

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Case Questions
• Which of the three alternatives would you recommend to the company? 1. A Pharmacol “hand-off” deal (who is Pharmacol)? 2. A Biopart “hand-in” deal (who is Biopart)? 3. “Go-it-alone” through Phase II & then decide a development strategy?

• What are the direct financial implications of your answer? • What are the strategic implications of your answer? 2

Abgenix: Key Issues
• Financial assessment
– Option NPVs: Basic approach – I will post more complex examples

• Strategic assessment of Abgenix’s capabilities & needs • Licensing trends

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Option 1: Pharmacol (Aventis?)
D1 Year PHARMACOL OPTION Fees to Abgenix Probability Probability-adjusted fees Sales Royalty (10%) Probability-adjusted royalty (40%) Probability-adjusted fees & royalty Adjusted NPV D2 D3 D4 D5 M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sign P2 P3 FDA 5 1 5 0 $35 $49 5 1 5 0 0 0 0 8 0.75 6 0 0 0 0 10 0.4 4 20 2

$14

70 7

135 14

250 25

330 33

450 45

540 54

620 62

700 70

700 70

Assumptions Discount rate=.13 Approval likelihood=0.4 Probability of 2nd year in P2=.85 "Highly likely" P3 = 0.75 Time to market=5 years D5 costs incurred only if reach FDA approval

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Option 2: Biopart (Immunex)
Year BIOPART OPTION Fees to Abgenix Probability Probability-adjusted fees Costs Abgenix share of costs (.5) Probability Probability-adjusted costs Sales (.8 * Pharmacol) COGS (.10) SGA (.25) Operating contribution (Sales - COGS - SGA) Abgenix share (.5) Probability-adjusted sales share (40%) Probability-adjusted fees, costs, & sales Adjusted NPV 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sign P2 P3 FDA 5 1 5 10 5 1 5 5 1 5 20 10 1 10 $8

($33)

25 35 13 18 0.85 0.75 11 13

35 18 0.4 7

0 $91 $67

0

0

0

0

15 8 0.4 3 16 2 4 10 5

56 6 14 36 18

108 11 27 70 35

200 20 50 130 65

264 26 66 172 86

360 36 90 234 117

432 43 108 281 140

496 50 124 322 161

560 56 140 364 182

560 56 140 364 182

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Option 3: Phase II Alone
Year SOLO PHASE 2 Costs Abgenix share of costs Probability Probability-adjusted costs Sales (.8 * Pharmacol) COGS (.10) SGA (.25) Operating contribution (Sales - COGS - SGA) Abgenix share (.75) Probability-adjusted sales share (40%) Probability-adjusted costs & sales Adjusted NPV 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sign P2 P3 FDA 10 1 1 10 20 1 1 20 25 35 1 0.5 0.85 0.75 21.3 13.1 35 0.5 0.4 7 15 0.5 0.4 3 16 2 4 10 8

($53)

0 $137 $84

0

0

0

0

56 6 14 36 27

108 11 27 70 53

200 20 50 130 98

264 26 66 172 129

360 36 90 234 176

432 43 108 281 211

496 50 124 322 242

560 56 140 364 273

560 56 140 364 273

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Option NPV Summary
Option Pharmacol Biopart Solo Phase II Probabilityadjusted NPV $49 $67 $84 Abgenix responsibility Pharmacol No costs Biopart Half costs Solo Phase II All costs Fees?

But what if EGF doesn’t reach market?
End w/o approval? D3 P3a $8 ($11) ($42) 25% D4 P3b $12 ($19) ($53) 60%

D2 P2 D1, D2, D4 Net gain $8 D1 & D2 only Net gain ($4) none Net gain ($25) Probability 15%

“Solo” = 15% to 25% chance of losing $25 - $42 mln
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Strategic Assessment
• Financial assessment is the beginning. • Now … what are Abgenix’s key capabilities & needs?

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Abgenix priority?

Abgenix Value-Chain
Longer term

Critical: Stronger Phase 2 & Phase 3 Keep skills would make Abgenix No doing a stronger partner this! Organization: Finance, Coordination Discovery Validation Antibody creation

Proc Mkt Preclinical Clinical & Mfg

No

Yes

No
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• Losses, but cash rich Current Abgenix capability? • Limited organizational ability

Option Responsibilities & Learning Opportunities Solo...
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