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Biotechnology in Italy 2007 Blossom Associati

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Report produced with the cooperation of: CrESIT - Insubria State University of Varese University of Pavia


FARMINDUSTRIA

Dipartimento di Ricerche Aziendali R. Argenziano dell’Università di Pavia

We would like to thank the Istituto Commercio Estero for its assistance in the international distribution of this report.

This edition was completed on January 15th, 2007. 2000 and 2,500 copies printed, respectively, of the Italian and English versions. This publication can also be request from our site www.blossomassociati.com. Blossom Associati S.r.l. All rights reserved. AUTHORISATION FOR DIVULGATION All rights reserved for the divulgation and use of the data, information, translation, electronic storage, reproduction, and partial or total adaptation by any means (including microfilm and photocopies). No data and information contained in this report may be used or divulged without prior written authorisation. Blossom Associati may, at its own discretion, authorise such use upon request, on condition that the following source is cited: Report by Blossom Associati – Assobiotec 2007 Data sheets, charts or tables must, instead, state the source indicated within the document. Requests for the reproduction of the data and information contained herein should be made by email to: info@blossomassociati.com Blossom Associati S.r.l. Via della Moscova, 1 20121 Milan - Italy


Biotechnology in Italy 2007 Financial and strategic analysis Blossom Associati - Assobiotec Report


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Biotechnology in Italy 2007 - Financial and strategic analysis

Creating sustainable value

The most important factors in taking the best decisions are market knowledge, and technological and regulatory skills supplemented by accurate economic and financial forecasts and assessments. By virtue of a multi-year programme of investments in expertise and professional skills Blossom Associates can provide the best and most accurate international appraisals for the purpose of maximising the value of pharmaceutical and biotechnological products and assets. Dear Friends and Customers, We have reached the 2007 edition of the Report on biotechnologies in Italy. With the creation of innovative products for improving health and more generally the quality of life, Italian biotechnologies have, once again, demonstrated their capacity to meet the global challenge of the knowledge economy. At the end of 2006 the Italian biotechnology industry was made up of 222 enterprises, of which 87 set up in 2000. There is a strong predominance of companies dedicated to health care (73%) and a net prevalence of small companies (76%). 14,000 employees work within the group of certified companies (with the exclusion of “Pharma Biotech�), of whom about 4,900 engaged in R&D. Sales of innovative biotechnological products and technologies amount to over 4,000 million euros, and the industry’s performance, in general, is outstanding, especially as concerns the small companies, which recorded growth rates of around +24.2% in 2005. Moreover, the industry has invested about 1,300 million euros in R&D for innovative products and technologies. The overall capitalisation of the companies exceeds 2,000 million euros and their net aggregate indebtedness is 2,783 million. These, in a nutshell, are the key data on Italian biotech. They demonstrate that our country now ranks among the top players in the international scenario in both quantitative and qualitative terms and that, thanks to its work pipeline, the industry can look to the future with confidence. However, the companies, investors and institutions should exhibit greater readiness in keeping themselves abreast of international competition. Therefore, in the course of 2007, we expect that innovation, in the general sense of the term, will be implemented in earnest. Innovation cannot, and must not be exclusively associated with products and technologies. There must also be a willingness to develop innovative management, and to do so with ever-greater incisiveness, so that the value of products can be maximised and systems of co-experience for the development new ideas and new intellectual capital effectively managed. Why is it so important to create sustainable value and define governance structures for the creation of value? In the first place because only the creation of sustainable value can guarantee the future development prospects of companies and systems. Secondly, because a management class able to understand the real value of technology can maximise the value of an enterprise. And finally because the creation of value for a company and the objective assessment of technologies will attract capital and resources: and both constitute the ultimate measure of corporate success. International experience demonstrates that to attract resources the industry must found its development upon a network made up of companies, investors and institutions, in which the territorial concept of the nation no longer refers to the physical presence of a set of traditional determinants of corporate development. The challenge posed by the new millennium addresses management's ability to create integrated systems and nodes of attraction. Achieving this end will enable financial means and intellectual capital to be managed in a framework of increasingly extended and multi-faceted value chains, involving different but equally important subjects working for a common objective: i.e. the goal of creating value by developing innovative products and technologies to guarantee real improvement in the quality of life. The recognition of this challenge forms the basis for the new competitiveness of Italian biotechnologies on the global market. Readers are, therefore, referred to the next edition of the Report, forecast for 2008, where we shall evaluate the steps taken by Italian companies, investors and institutions to meet the challenge posed by the knowledge economy. Stefano Milani Managing Director Blossom Associati

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

Italian biotech’s unstoppable growth

The Italian biotech train departed in 2000 and with every year that passes gathers ever-greater speed. It has overcome obstacles that might appear insurmountable and now stands on a par with the leading European countries. The growth of Italian biotechnology industry knows no limits. The data brought to light by the 2007 Report of Blossom Associati are, in many respects, very exciting. 222 companies, over 4 billion euros in revenue, 1.2 billion euros in R&D investment. And still more: over 14,000 employees, of whom almost one third engaged in R&D and a pipeline of over 40 products in an advanced stage of development of which 7 already in phase 3. The Italian biotech train departed in 2000 and with every year than passes gathers ever-greater speed. It has overcome obstacles that might appear insurmountable and now stands on a par with the leading European countries. It is being driven by a system comprising companies, science parks and researchers, all characterised by high doses of dynamism and innovation, although they must still come to grips with numerous problems that suffocate our industry's enormous growth potential. In primis, there is the difficulty of raising sufficient resources. The sector finances itself with limited public incentives, and venture capital, although this is still insufficiently present in the industry. The stock market is noteworthy for its total absence: the shares of the four listed Italian companies were initially placed on foreign capital markets. From numerous points of view, venture capital in a modern financial system plays an essential investment role. As there are operators specialised in financial support for the purpose of creating value, companies can raise capital for start up programmes as well as for growth plans, new strategies, corporate acquisitions and other processes critical for their life, such as the development of new products and technologies, or the reinforcement of corporate financial structure. Within this new structural panorama the dual role of the institutional investor in venture capital comes into play. His support is not limited to the provision of capital but can also be measured in terms of the availability of the managerial expertise made available to the company in order to reach its objectives. This means providing support for international growth through worldwide contacts, cooperation with investee companies in the same or different industries, and proximity to -with consequently high chances of cooperating with - university and private research centres. The lack of these factors in Italy has been the cause of our late entry into the biotechnology market. Nevertheless, we have been able to bridge the gap thanks to the high quality of our research, and notwithstanding the limited capacity to open up channels between the academic and industrial worlds and the long time taken by the national politics to assign a strategically important role to biotechnological research and the specific resources for venture capital investment. Today - as clearly emerges from the 2007 Report the biotechnology industry is becoming increasingly well known and exhibits a growing capacity to attract resources. The present need is to provide incentives for new forms of cooperation between the public and private sector, in addition to the development of new forms of financing that can take account of the industry's characteristics: high levels of investment in R&D and a good measure of initial risk. In conclusion, we must bring our country into line with European legislation by recognising the peculiarities of a "fledgling, highly innovative company" to which special forms of support can be provided through tax policies and contributions to reduce labour costs.

Roberto Gradnik President Assobiotec

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

Attracting investments: the development prospects of the biotech industry

Like many emergent industries, biotech is a "born global sector", in which no consolidated traditions of industrial leadership exist at the level of the nation- system. Consequently, the planetary map of locations that are important for competitive success is undergoing continual redefinition as new points spring up and replace others. At the level of nation-systems the challenge we face is represented by our ability to intercept ever growing investment flows. Our analysis has underlined the important role played by the biotech industry in Italy. However, the data also pose the question of the industry’s potential for development in our country and the factors upon which such development depends. Before dealing directly with the question, it would be useful to outline the characteristics of the competitive factors that affect the industry. In our opinion the industry displays two important features. The first characteristic refers to the close and intense ties between this industry and other industries such as, to mention the most important, pharmaceuticals and chemicals. This is the result of the fact that biotech is not an autonomous sector but rather an aggregate (indicated in the literature with the term "metamarket" or "meta-sector") emerging from a number of other sectors that it, in part, expands upon and overlaps. The introduction to the 2007 Report, in speaking of the "pharma biotech" category (i.e. pharmaceutical companies diversifying into biotech and biotech companies deriving from the pharmaceutical industry), demonstrates the need to come to terms with the growing interpenetration and intersection between sectors; that is, with "grey areas" whose importance is now such that they cannot be overlooked. The second feature of the biotechnological industry refers to its global nature and the global reach of the technology involved. As with many emergent industries, biotech is a "born global sector", in which consolidated traditions of industrial leadership do not apply at the level of nation systems. In addition, the consequence, as described earlier, of having various ties with different sectors, which, in general, are developed and have taken root in various places within the world, leads to the tendency for the industry to develop in a variety of territorial areas. From these characteristics, as summarily described above, we can draw a number of considerations, which - in our view - make a useful contribution to the ongoing debate on the industry's development potential. As in all emergent industries, biotech still does exhibit any definitive hierarchies at the level of national systems. The role at present played by the industry in various countries may undergo rapid and significant changes. Globalisation and the acceleration of technological progress also entail the fast "decline" of factors of competitive advantage. And this applies as much to territorial areas as it does to companies. Consequently, the planetary map of locations that are important for competitive success is undergoing continual redefinition as new points spring up in place of others. This phenomenon, which depends on the continual evolution of competitive factors, obliges companies to continually redesign their value chain and replace sites that are no longer able to make a competitive difference with others that can re-invigorate the companies' competitive capacity. It should also be noted that sources of competitive advantage far from referring exclusively to cost advantages, mainly concern immaterial competitive factors. And of such factors skills and knowledge play an important role and represent fundamental drivers, especially in high-tech sectors, for determining the localisation of activities, as demonstrated by the success and development of biotechnological clusters. However, background environmental conditions, which we can define as the "institutional framework" of each country, play an important role in orientating the localisation decisions of companies. Factors such as the facility of relations with institutions, long-term legislative certainty and labour law can contribute towards attracting investments. Consequently, localisation choices are increasingly less definitive. They tend to change according to what given territorial areas can give in terms of infrastructure, resources and skills. Consequently, companies exhibit a growing aptitude to mobility, as they are willing to move as soon as they realise that by so doing they can reap

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

advantages. Novartis's recent announcement of the opening of a research centre in China, at Shanghai (“The Economist”, November 11th 2006) is but the last example in time of this intense and unceasing process of the evolution of localisation dynamics. At the level of nation-systems the challenge is represented by a nation’s capacity to intercept growing investment flows and, at the same time, counter the phenomenon of de-investment. In other words, each country must create conditions such that, on the one hand, more and more companies will choose it as a location for their operations and investments, and, on the other, already established companies will not change their minds about their location choices. And clearly these conditions are of interest to domestic companies just as much as they are to foreign-owned ones. For Italian biotech companies all the foregoing can be interpreted both as an opportunity and a threat. The analysis of the data has shown that the numerical strength of the biotech industry in Italy depends upon close bonds with the pharmaceutical industry, which in Italy has not only a consolidated presence but also a very important market. And if appropriately leveraged this presence may power the development of the industry. This has been confirmed by numerous companies classified herein as “pharma biotech”, i.e. biotech companies whose business model is based on close ties with pharmaceutical firms as also by the start-ups that have sprung up close to major pharmaceutical companies. On the other hand, there is also the risk that, over time, and in a scenario of intense competition between companies and nation-systems, the reasons for choosing to locate in Italy may lose force or cease to apply. This applies in equal measure to multinationals and Italian companies. As regards the former, we have already noted that the percentage of investment by such companies in Italy (6% of all their global investments) was lower than the revenue posted for the Italian market (8% of consolidated revenue). The interpretation of these data would seem to indicate that multinationals view our country more as a commercial outlet than as a place in which to perform research and development. If this interpretation were true, Italy might risk witnessing a progressive de-localisation of high value-added activities (production and R&D) and finding foreign companies merely operating as commercial branches solely interested in safeguarding their market share. For our own companies, on the other hand, the risk they face is that of finding investment in Italy increasingly costly and increasingly less effective in terms of competitive advantage. In this respect, the factors that can adversely affect the choices of setting up operations in Italy operate at various levels: fiscal, legislative, institutional and financial, to mention but a few. And these factors as they stand, and hence if no corrective action is taken, could entail the delocalisation of activities currently performed in Italy or compromise the start up or development of new entrepreneurial activities in Italy. What are the prospects for biotech in Italy? Our analysis has demonstrated that the right scientific and industrial conditions exist in Italy for the development of the industry. Clearly such conditions should be supported by industrial policies that lay down a legislative and institutional framework favourable to the industry and willing to provide incentives. Specifically, this should favour the patent protection of technologies and substances and, more generally, entrepreneurial activities in Italy. And here we refer to the fiscal and legislative problems and difficulties that prevent companies from moving with celerity and exploiting positions of competitive advantage in terms of the international markets for labour, technology and capital. Alberto Onetti Director CrESIT and Professor at the Insubria State University of Varese

Blossom Associati 2007


Biotecnologie in Italia 2007 - Analisi strategica e finanziaria

Welcome to the 2007 Edition of the Report by Blossom Associati - Assobiotec

Our method is essentially based on the application of a single definition of "the Biotechnological Industry" within the framework of the entire study. Consequently, in order to ascertain the full number of certified Italian biotechnological companies we adopted a selective analytic criterion that laid down the following prerequisites for each company: • The legal body in question must be a company set up for the creation of value and the generation of profits. • The company analysed must undertake research and development within the territory of Italy (albeit not on an exclusive or prevalent basis). • Its R&D activities will concern innovative technologies and products based on biotechnological type platforms. Therefore, enterprises that perform services for the production or distribution of biotechnological products were excluded. The analysis of the structure of the biotechnology health care sector (Red Biotech) has had to extend the radius of its analysis in order to better understand the real weight of the sector in the national economy. Thus in agreement with Assobiotec and Farmindustria it was decided to classify operators by the business models they adopt: • Born Biotech: companies whose business is mainly orientated to R&D with special reference to biotechnology products and technologies or where the percentage of investments in biotechnological platforms or technologies (InvB) with respect to all investments (Inv) is greater than 70% (InvB/Inv>70%). • Pharma Biotech: a) pharmaceutical firms or b) biotechnological companies with a strong pharmaceutical character (businesses created as spin-offs from pharmaceutical firms). Thus we are dealing with companies that are: • in the first case, a) “Pharma Oriented”, i.e. pharmaceutical firms diversifying into the biotechnological industry by introducing a specific R&D activity into Italy within a biotechnological (therapeutic) framework; • in the second case, b) “Biotech Oriented”, i.e. biotechnological companies deriving from the pharmaceutical industry whose core business is connected to research and development activities in a biotechnological framework but with consolidated business models based on strong ties to the traditional pharmaceutical firms, from which they, for the most part, derive.

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

Composition of the research group The company certification process was performed by a scientific committee coordinated by Stefano Milani (Managing Director of Blossom Associati), Alberto Onetti (Director of the Research Centre in Economy Health, Innovation and the Territory - CrESIT of the Insubria State University) and Leonardo Vingiani (General Manager of Assobiotec). The collection and processing of the economic, financial and corporate data for the Report were carried out by Blossom Associati and the Research Centre for Economy, Health, Innovation and the Territory (CrESIT) of the Insubria State University of Varese. The research group was coordinated by Stefano Milani and Alberto Onetti and made up of Alessia Pisoni, Maria Alessandra De Luca, Luca Martignoni, Marco Talaia, Alessia Pellizzari, Elisa Albrigi and Federica Bottazzi.

The following also contributed toward the production of the Report on Biotechnologies in Italy 2007 RESEARCH GROUP Stefano Milani Alberto Onetti Antonella Zucchella Sabine Urban Alessia Pisoni Luca Martignoni Federica Bottazzi Paolo Galfetti Pierfrancesco Maschio Maria Alessandra De Luca Alessia Pellizzari Marco Talaia Elisa Albrigi ASSOBIOTEC Roberto Gradnik Alessandro Sidoli Marco Renoldi Marina Del Bue Maria Luisa Nolli Mario Bonaccorso Sara Gamberini Leonardo Vingiani

Blossom Associati 2007

FARMINDUSTRIA Sergio DompĂŠ Massimo Di Martino Maria Grazia Chimenti Carlo Riccini Massimo Boriero Annamaria Coscarella Alessandro Noseda Paolo Grillo SCIENCE PARKS Marco Baccanti Germano Carganico Fabrizio Conicella Gabriele Gatti Valter Songini ICE Umberto Vattani Gianluigi Liberati Donatella Iaricci IMS HEALTH Bruno Sfogliarini Roberta Ceci


Biotechnology in Italy 2007 - Financial and strategic analysis

Table of Contents

The central role played by Italian biotechnologies in the development of European cooperation and competitiveness - Executive Summary Biotechnologies in Italy 2007 Competitive Positioning - an overall view of the national context Focus on Red Biotech Revenue trend and macro indicators Focus on Red Biotech Biotech investments in Research and Development Focus on Red Biotech Human resources and employment Focus on Red Biotech Geographical regionalg distribution Competitive regional positionin Macro indicators Mane financial data Focus on Red Biotech - Geographic distribution profile

Structure and characteristics of biotech companies in Italy Company size The capital structure - Focus on Red Biotech Research funding: accessing venture capital Accademic spin offs Corporate spin offs and links with the pharmaceutical industry Incubated Biotech companies - Information sheet science and technology parks

Biotech companies: the international framework The principal biotechnological clusters: the views of opinion leader Big Pharma's role in supporting biotech in Italy The trends of the world, European and Italian biotech market Networking to enhance business competitiveness - the role of the Italian Institute for Foreign Trade - ICE Methodological Notes Acknowledgements Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

The central role played by Italian biotechnologies in the development of European cooperation and competitiveness EXECUTIVE SUMMARY Italy’s competitive international positioning is much stronger than usually believed. The Italian (1) biotechnological industry as it appeared on the world stage at the end of 2006 is a case in point. The data on its current situation, which refer to 2005 financial statements, may be summarised as follows: • 222 companies that perform R&D activities in Italy in various biotechnological areas; • 1.3 billion euros in capital investments in 2005 for the development of biotechnological products/processes; • 4,083 million euros in revenue from sales biotechnological product-licensing operations; • 14,023 employees of whom 4,926 engaged in R&D; • an ebitda of 396 million euros and operating profit of 118 million euros; • an overall capitalisation of 2,063 million euros with an overall indebtedness of 2,783 million euros representing a 31% equity/capital ratio and a net gearing of less than 1.4. The data on the 222 companies is extremely interesting, especially in view of the growth trend exhibited in recent years. Almost 60% of the companies surveyed were set up after 1996 and of these 87 (40% of the entire industry) in the period from 2000. The very high growth of the industry, commencing from the start of the new millennium, is also demonstrated by the constant growth in the number of companies making up the industry. From 2000 there has been an average increase of about 15 new companies per year, representing a 7% annual new-company growth rate. If we break the analysis down by area of application, we find an absolute predominance of the health-care biotechnology sector: 162 companies work in the field of health care (the so-called “Red Biotech Companies”), 39 in the field of biotechnologies for animal husbandry and veterinary applications (the so-called “Green Biotech Companies”), 17 in industrial and environmental fields (“White Biotech Companies”) and 13 are orientated to R&D in the field of bioinformatics. It should also be noted that 30 subsidiaries of multinationals figure among the 222 companies. 19 of these subsidiaries belong to the “Pharma-industry” category.

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In employment terms, the biotech industry exhibits a strong propensity to R&D. Our surveys found 4,926 employees (35%) working as researchers in biotech companies. Among the various sectors the percentage of active researchers to all employees breaks down as follows: Green (4%), White (2%), Bioinformatics (3%) and Red Biotech (91%). These figures exclude all R&D workers in the 12 so-called pharma oriented companies. The total number of employees in Italian biotech companies amounts to around 14,000 (representing about 0.1% of the Italian labour force). However, if we also include the 12 so-called pharma oriented companies the overall figure would exceed 24,000 employees. In terms of the total revenue recorded in 2005, the 222 companies surveyed earned 4 billion euros, equivalent to 0.4% of the gross domestic product through the sale and licensing of biotechnology products. These data are very significant if we consider that biotechnologies represent one of the emergent industries, and that, as such, its real development prospects are based more on the pipeline of products under development than upon increases in the sales of existing products. We believe that it would also be useful to supplement the foregoing data with an indication of the overall earnings constituting the aggregate within which biotech revenue is situated. Thus, in terms of total revenue not singling out the biotech component per se), in 2005 the 222 companies in our survey posted revenue for 8.3 billion euros. Obviously the data largely reflect revenue obtained by the 39 red biotech companies, the pharmaceutical derivations of “Pharma Biotech”, which alone accounted for over 6.1 of the 8 billion in question. Our survey also indicated that the industry's structure is characterised by a high preponderance of small companies: 168 of the 222 certified companies (76%) have fewer than 50 employees and revenue of under 10 million euros. Of the remaining companies, 27 (12%) are medium-sized (employing less than 250 employees and with annual revenue of under 50 million euros), while the other 27 (12%) are large companies with more than 250 employees and revenue of over 50 million euros. Thus the large companies, although not numerically prevalent, play a dominant role in terms of revenue and employees. They account for 80% of the revenue

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

of biotech companies in Italy and over 80% of all employees in the industry. However, it must be remembered that they also include the subsidiaries of multinationals in Italy, which account for 50% of overall biotech revenue and employ 50% of the workers in the industry. As concerns the financing necessary for the launch of the companies, we find that 27 companies can be classified as "funded", i.e. investee companies of institutional investors or financial intermediaries. Among such investors a major role is played by investors specialised in private equity biotech (seed and venture capital). 12 of the 27 companies are funded by Italian investment companies (in 4 cases it was found that several investment trusts invested in the same company), 2 companies were investees of both foreign and Italian investors, 4 are companies whose share capital is held by Italian credit intermediaries and 1 company is an investee of several foreign investment trusts. As concerns the size of the shareholding taken out by investors, it should be noted that shareholdings held by investment companies may vary from a minimum of 5% to 100% (in the case of some biotech start-ups wholly funded by seed capital companies). However, the average shareholding is around 60 -70% of share capital. The spin-offs from university institutes (14% of the start- up/spin-off category) number 14, which, as such, represent a growth trend (last year there were 9). This category includes companies invested in by the universities from which they originated. The academic spin-offs are small companies with few employees and average revenue of less than one million euros. The picture that emerges, therefore, is one of companies going through the first phase of their business life cycle. Shareholdings held by universities vary from 7% to 20% of the share capital. As regards spin-offs from corporate organisations we find, among the total companies surveyed, 3 from pharmaceutical companies and 3 from biotech companies. The 3 pharmaceutical spin-offs originated in foreign companies whereas the 3-biotech spin-offs derive from Italian companies. We can also observe that revenue, employee and net equity values are greater among the pharmaceutical spin-offs than among the biotech spin-offs. Companies in the former category

return, on average, revenue of 1.8 million euros and, on average, have 130 employees. The two sectors are closely interrelated and sometimes difficult to distinguish. Among the 222 companies surveyed there are 14 investee companies of Italian pharmaceutical companies and 19 of foreign pharmaceutical companies. 17 represent investees of other Italian biotech companies and 16 are investees of foreign biotech companies. The shareholdings detained by Italian companies are considerably below the shareholdings of foreign companies (about one half), although in all cases the shareholdings are still such as to retain control of the investees. Of the 222 certified companies, 65 are situated in parks and incubators, with a slight increase in respect of the 56 surveyed in the 2006 Report. These are all small and medium-sized companies, and most (38 companies) are start-ups or spin-offs. Shareholdings by institutional bodies in companies is directly correlated to localisation in science parks: all companies in which public bodies have investments are situated in parks. Furthermore, two of the foregoing companies are also investees of the science park in which they are located, while among the shareholders of five companies figure public, territorial or functional bodies such as provinces, regions, local agencies and financial institutions, chambers of commerce and various national bodies designed to promote research (such as the Cnr) or development/innovation. This situation clearly shows that, today, Italian companies are more orientated to control than economic growth. Our analysis also clearly demonstrates that the average productivity level of small Italian companies in which individual shareholders exercise a controlling interest is very low when compared to companies with a much wider shareholder base. Furthermore, if we collate these data with the predominant financial structure of Italian SMEs, we shall find that controlling positions have a cost and that in the medium-to-long term this control does not pay off in terms of productivity and value. What is needed, therefore, to change the direction being taken? In the first place, the maximisation of product value must be guided by the development of strategies based on technological and financial choices, involving DCF analyses of investments in technologies/ projects/ products that

Blossom Associati 2007

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Biotechnology in Italy 2007 - Financial and strategic analysis

constitute the company's core business. Secondly, foreign capital must be attracted and a real integration with international companies pursued. Both may be achieved by implementing governance systems that, on the one hand, maximise the value of the company and financing opportunities and, on the other, guarantee productive development and medium-long term sustainability.

(1) The data contained in the Blossom Associati-Assobiotec Report are based on a "certified" list of companies obtained from the application of rigorous criteria derived from the main international studies. The scrupulous application of the methodological procedure based on a cooperation between the experts of Blossom Associati, CrESIT of the Insubria State University of Varese and Assobiotec has yielded a reliable and objective assessment of the real weight of the biotechnological industry in Italy at both a national and international level

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Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

Biotechnologies in Italy 2007

Summary Companies 222 (2006) R&D employees: 4,926 (2006) R&D investments: € 1,283 million (2005) Revenue: € 4,083 million (2005) Total employees: 14,023 (2006) Capital investments € 2,063 million (2005) Net indebtedness € 2,783 million (2005) Growth in the number of biotech companies (2001-2006)

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Geographical distribution of biotech companies

250

n° companies

200

150

100

50

0 2001

2002

2003

2004

2005

2006

Source: Blossom Associati – CrESIT Insubria State University of Varese

Source: Blossom Associati – CrESIT Insubria State University of Varese

Average values by company type

Start up 0.28 1.7 <6

Biotech turnover (millions of euros) Employees Years

Small 2.03 9 5<y<15

Subsidiary 76.78 413 2<y<100

Medium 19.5 98 10<y<50

Large 119.5 753 10<y<100

Source: Blossom Associati – CrESIT Insubria State University of Varese

Breakdown of biotech turnover by sector (2005) (Financial data in millions of euros)

Breakdown of R&D and total employees – breakdown by sector (2006)

Bioinfo. 0.92% White 0.51%

Green 4.35%

Category Bioinfo Green Red White Overall total

R&D employees 130 184 4,516 96 4,926

Total Employees 144 325 13,412 142 14,023

Red 94.22%

Source: Blossom Associati – CrESIT Insubria State University of Varese

Source: Blossom Associati – CrESIT Insubria State University of Varese

Breakdown of number of companies by sector (2006)

Breakdown of investments in biotech R&D in 2005 by sector

White 17

White 1%

Bioinfo. 13

Bioinfo. 2% Green 11%

Green 30

Red 86%

Red 162

Source: Blossom Associati – CrESIT Insubria State University of Varese

Source: Blossom Associati – CrESIT Insubria State University of Varese

Blossom Associati 2007

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Biotechnology in Italy 2007 - Financial and strategic analysis

Focus on Red Biotech

EXECUTIVE SUMMARY The Italian pharmaceutical market ranks fifth in the world with a level of pharmaceutical spending at ex-factory prices, of $ 19,598 billion. Italy, the third biotechnological market in Europe with a total market spending of $ 1.9 billion, possesses corporate structures and technological know-how rooted in a long-standing tradition and can boast a very interesting pipeline of future products. As confirmation of this situation we need only consider that Italy ranks third in the life sciences among the fifteen European nations in terms of the number of research groups that presented research projects to the VI Framework Programme of the European Union: it comes immediately after Germany and United Kingdom and before France and Spain. This success is surprising if we consider that the number of researchers in our country is about half those in the foregoing countries. The data therefore speak clearly. As a player on the 2006 world scenario the "Red Biotech" sector in Italy’s position can be summarised using the data obtained from the 2005 financial statements: • 162 companies performing R&D activities in biotechnology within Italy; • 1,098 million euros capitalised in 2005 to develop biotechnological products/processes; • 3,847 million euros in revenue posted by companies through the sale of or licensing operations for biotechnological products; • 13,412 employees overall, of whom 4,516 engaged in R&D; • an ebitda of 376 million euros and an operating profit of 110 million euros; • overall capitalisation of 2,026 million euros and a net indebtedness of 2,675 million euros, thus a net gearing of 1.3. The analysis of the business models of the 162 companies enables us to classify them into two macro-segments: “Born Biotech” and “Pharma-Biotech”.

operating profit of 55 million euros. The large companies in the segment posted an average operating profit of 7 million euros, the medium-sized companies an operating loss of 1 million euros and the small companies an operating loss of 92.000 euros. The “Pharma-Biotech” segment, on the other hand, is made up of 39 companies with important ties to the pharmaceutical industry. 27 are “Biotech Oriented”, i.e. companies deriving from pharmaceutical companies, and which primarily focus upon biotechnological technologies. Their business model is mainly or exclusively based on strong ties with pharmaceutical companies from which they generally originated. They account for 50.5% of “Red Biotech” revenue, 32% (equivalent to 1,444) of R&D employees, with investments in biotechnological processes or products for 572 million (52%). Their overall capitalisation is 1,040 million euros with a net financial indebtedness of 915 million euros, yielding a net gearing of less than 1 (0.88), an EBITDA of 125 million euros and an overall operating profit of 50 million euros. The large companies in this segment posted an operating profit of +7 million euros, the medium-sized companies on average broke even while the small companies posted an operating loss of 4 million euros. 11.5% of “Red Biotech's” revenue is generated by 12 “Pharma Oriented” companies, i.e. pharmaceutical firms diversifying into biotechnological technologies by introducing specific R&D activities into Italy, with particular attention to the therapeutic sector. Their investments in biotechnological processes or products total 94 million euros (9%). Their overall capitalisation amounts to 389 million euros and their net financial indebtedness to 908 million euros. The resulting net gearing is 2.3. The overall earnings of the companies in 2005 were as follows: an EBITDA of 151 million euros and an overall operating profit of 55 million euros. The 12 enterprises are classed as large companies and posted an average operating profit of 5.5 million euros.

123 companies belong to the first segment (“Born Biotech Companies”). They are generally small and medium-sized companies strongly orientated to biotech R&D. They account for 38% of “Red Biotech” revenue, 68% of R&D employees (3,071 employees), and record R&D biotechnology investments for 431 million, equivalent to 39% of total investments, an overall capitalisation of 595 million euros and a net financial indebtedness of 852 million euros. The latter values yield a net gearing of over 1.4. The overall earnings of the companies in 2005 were as follows: an EBITDA of 99 million euros and an overall

16

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

Red Biotech in Italy 2007

Summary Companies: 162 (2006) R&D employees: 4,516 (2006) R&D investments: € 1,098 million (2005) Revenue: € 3,847 million (2005) Total employees: 13,412 (2006) Capitalisation: € 2,026 million (2005) Net indebtedness € 2,675 million (2005) Geographical distribution of biotech companies

Breakdown by Red Biotech company category

Biotech Oriented 27

Pharma Oriented 12 Born Biotech 123

Source: Blossom Associati – CrESIT Insubria State University of Varese

Source: Blossom Associati – CrESIT Insubria State University of Varese

Pipeline regarding R&D work performed or coordinated in ITALY (2006) (Internal projects/Licensing) (RED BIOTECH)

Breakdown of italian Red Biotech revenues by category

Pipeline 35 14 21 7 16

PRECLINICAL PHASE 1 PHASE 2 PHASE 3 COMPANY NUMBERS

Born Biotech 39%

Biotech Oriented 52%

Pharma Oriented 9%

Source: Blossom Associati – CrESIT Insubria State University of Varese

Source: Blossom Associati – CrESIT Insubria State University of Varese

Distribution by region

Region

n. empl. n. exclud. n. n. overall Pharma R&D compan. employees Oriented employees

overall revenue (m€ )

Campania Emilia Romagna Friuli Venezia Giulia Lazio Lombardy Piedmont Sardinia Tuscany Veneto Others region Overall total

biotech revenue %

(m€ )

R&D biotech investment %

(m€ )

%

capitalisation (m€ )

%

financial indebtedness (m€ )

%

Average EBIT ( €000 )

6

66

66

56

7.9

0.2%

7.0

0.4%

7.5

1.0%

10.5

0.5%

2.2

0.1%

769.9

8

1,087

414

342

305.6

3.7%

119.9

3.0%

87.5

6.9%

115.3

5.7%

187.9

7.0%

1,234.0

13

105

105

89

26.4

1.4%

23.8

1.6%

20.7

3.4%

8.7

0.4%

20.7

0.8%

22.5

15

9,540

5,067

489

3,328.6

40.3%

1,721.4

42.2%

84.3

6.6%

777.8

38.4%

934.9

34.9%

7,465.5

58

9,693

6,591

2,864

3,077.7

39.3%

1,619.3

43.4%

770.4

69.9%

919.9

45.4%

1,221.9

45.7%

-493.1

18

301

301

252

137.7

1.9%

124.0

3.4%

36.6

4.1%

12.3

0.6%

27.7

1.0%

208.7

10

72

72

60

8.2

0.1%

7.7

0.2%

6.2

0.6%

5.3

0.3%

2.9

0.1%

-177.4

18

2,772

631

240

1,031.6

12.5%

196.0

4.9%

62.5

5.1%

169.1

8.4%

261.7

9.8%

1,811.8

7

117

117

90

22.5

0.3%

20.2

0.5%

16.0

1.4%

5.9

0.3%

11.7

0.4%

200.7

9

48

48

34

8.6

0.3%

7.7

0.5%

6.5

1.0%

0.8

0.0%

3.8

0.1%

140.8

162

23,801

13,412

4,516

7,954.7

100.0%

3,847.0

100.0%

1,098.3

100.0%

2,025.6

100.0%

2,675.4

100.0%

-

Source: Blossom Associati – CrESIT Insubria State University of Varese

Blossom Associati 2007

17


Biotechnology in Italy 2007 - Financial and strategic analysis

Biotechnologies in Italy 2007 Stefano Milani - Managing Director Blossom Associati and Contract Professor at the University of Pavia Alberto Onetti - Director CrESIT and Professor at the Insubria State University of Varese

At the end of 2006 the biotechnology industry in Italy was made up of 222 companies. The data under review are based on a list certified by Blossom Associati and CrESIT. Please refer to the methodological appendix for the selection procedure used. Here we shall limit ourselves to observing that the criteria in question, in line with the methodologies adopted by the most authoritative international studies, are restrictive insofar as they exclude pharmaceutical companies that do not perform activities that may be defined as biotech, as also biotech companies that do not perform R&D within Italy. Interesting information can be obtained from the growth in the number of companies over time. The Italian biotechnological industry is, by and large, a recent development. Of the 222 companies almost 60% were set up or located in Italy in the last ten years and of these 87 (40% of the entire universe) were only founded in the last six years. There has been a constant growth in the number of companies in the industry, especially since 2000 when the rate of development began to accelerate dramatically. On average, 15 new companies are registered per year (representing an annual new-entrant rate of about 7%). However, alongside the new companies there is also a group of companies with a long history and tradition. 60 companies were founded prior to beginning of the 1990s, and 20 before 1970. These are companies whose consolidated market positions were achieved through the development of traditional technologies and which, in recent years, have demonstrated a tendency to diversify into the new biotech-derived technologies.

Number of biotech companies in Italy: growth over time 250

200

n° companies

Competitive Positioning - an overall view of the national context -

150

100

50

0 Before 1970

19721975

19761980

19811985

19861990

19911995

19962000

20012006

Source: Blossom Associati – CrESIT Insubria State University of Varese

This heterogeneous situation reveals the different ways in which the biotech industry is emerging in Italy. The strong technological know-how found in the country, together with the fact that Italy is the fifth most important pharmaceutical market in the world, with a pharmaceutical expenditure, at ex-factory prices, of $ 19,598 million (2005 Data: Source Farmindustria), once again reveals Italy's true potential. This empirical evidence shows that the development strategy of the Italian biotechnological market is based on two growth factors: • on the one hand, development is the result of companies specifically set up to work in this sector (“born biotech” companies). This is the case of companies set up in recent years and applies to industrial or academic startups/spin-offs; • on the other hand, the industry's growth is fuelled by the diversification strategies of important pre-existing companies, generally operating in correlated sectors (mainly pharmaceutical). This model fits most of the companies set up prior to the 1990s.

Blossom Associati 2007

19


Biotechnology in Italy 2007 - Financial and strategic analysis

Number of newly-set up biotech companies: growth over time (2001 - 2006) 250

n° companies

200

150

100

50

The analysis of the 222 companies shows that 162 work in the health care area (the so-called “Red Biotech Companies”), 30 in the field of biotechnologies for agricultural, animal husbandry and veterinary applications (the so-called “Green Biotech Companies”), 17 in industrial and environmental fields (“White Biotech Companies”) and 13 are orientated to R&D in the field of bioinformatics. It should also be noted that 30 subsidiaries, of multinationals, figure among the 222 companies. 19 of these subsidiaries belong to the “Pharma-industry” category. In numerical terms, therefore, the industry reveals the prevalence of Italian-owned companies. Breakdown by sector of the number of biotech companies in Italy

0 2001

2002

2003

2004

2005

2006

White 17

Source: Blossom Associati – CrESIT Insubria State University of Varese

Bioinfo. 13 Green 30

In terms of numbers, the Italian industry is mainly made up of small companies. No less than 168 of the 222 certified companies (76%) employ fewer than 50 employees and record total revenue of less than 10 million euros. 27 of the remaining companies (12%) are medium-sized enterprises (i.e. employing less than 250, with annual revenue of less than 50 million euros) and 27 (12%) are large companies employing over 250, with an annual revenue of over 50 million euros. Breakdown by size of biotech companies in Italy.

Red 162

Large 12%

FSource: Blossom Associati – CrESIT Insubria State University of Varese

Medium - Sized 12%

Small 76%

Source: Blossom Associati ��� CrESIT Insubria State University of Varese

20

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

Focus on Red Biotech - Competitive positioning -

Revenue trend and macro indicators

As concerns Red Biotech Companies the analysis of the business models of the 162 companies enables us to classify them into two macro-segments: “Born Biotech” and “Pharma-Biotech”. 123 companies belong to the first segment (“Born Biotech Companies”). They are generally small and medium-sized companies strongly orientated to biotech R&D. The “Pharma-Biotech” segment, on the other hand, is made up of 39 companies with important ties to the pharmaceutical sector. Specifically: • 27 are “Biotech Oriented”, i.e. companies originating in pharmaceutical companies that primarily focus upon biotechnological technologies: these companies tend to have a business model mainly or exclusively based on strong ties with pharmaceutical firms, from which they mainly derive; • 12 are “Pharma Oriented” companies, i.e. pharmaceutical firms diversifying into biotechnological technologies by introducing specific R&D activities into Italy, with particular attention to the therapeutic sector. Breakdown by category of Red Biotech Companies Focus on Red biotech -

In the 2007 Report, apart from estimating the overall figure of the economic value created by the industry, we are also in a position to quantify overall corporate revenue generated from the sale of biotech-derived products. This figure constitutes a subset of the aggregate revenue posted by the 222 certified companies and was obtained by applying a percentage representative of the share of revenue from the sales of biotechnological products in Italy and on international markets, to the revenue of each company.(2) The overall amount of Italian biotech revenue from the sale of biotechnological products or the licensing of biotechnological products is estimated at 4 billion euros, equivalent to 0.4% of GDP. In 2003 overall revenue was 3,797 million euros, which grew by 12.4% in 2004 (4,268 million euros) and stabilised in 2005 at 4,083 million euros. The industry therefore displays a slow-down by the large companies, mainly attributable to the results of a limited number of companies, which, in part, is offset by the growth of both small companies, with a substantial growth rate of about 24.1%, and medium-sized companies, with a growth rate of about 4.8%. The overall two-year historic trend of the biotech revenue posted by companies in Italy reveals an average growth of 7.5%.

Biotech Oriented 27

Pharma Oriented 12 Born Biotech 123

Source: Blossom Associati – CrESIT Insubria State University of Varese

Although this figure is important, and per se ranks Italy among the leading European countries, it should be stressed that revenue is certainly not, today, the principal indicator for assessing the development potential and growth opportunities of the industry. The analysis of the investments and the pipeline allows us to determine the potential future of the business, which, in view of the extreme volatility of the industry, can undergo strong (positive) variations from one year to another. This is the case of the small companies that, thanks to the development of innovative products, have been able to increase their market share in the space of a few years until they reached a position of global leadership with levels of capitalisation on a par with those of the main multinational companies operating in traditional sectors.

Blossom Associati 2007

21


Biotechnology in Italy 2007 - Financial and strategic analysis

Focus on red biotech - revenue trend and macro indicators -

Breakdown of biotech revenue by area (2005) Bioinfo. 0.92% White 0.51% Green 4.35%

We have already noted that 94% of the 4,083 million euros (i.e. 3,847 million) is accounted for by the 162 companies operating in the “Red” sector. This figure, on the basis of the methodological approach a dopted in the Report, may be further broken down into three sub-categories: • 35.8% of the revenue is produced from the sales or licensing operations of the 123 “Born Biotech” companies in the health care sector; • 47.6% is accounted for by 27 companies originating in the pharmaceutical industry with a primarily biotech orientation (Biotech Oriented);

Red 94.22% Source: Blossom Associati – CrESIT Insubria State University of Varese

94% of the foregoing 4,083 million euros is accounted for by the “Red”, sector. The remaining 6% is produced by companies operating in other areas, with a clear predominance of the “Green” sector. We believe that it would also be useful to supplement the foregoing data with some indications regarding the overall earnings making up the aggregate within which the foregoing biotech revenue in situated. In terms of total revenue (thus not singling out the biotech component) recorded in 2005 the 222 companies surveyed posted revenue for over 8.3 billion euros.(3). The data are significantly influenced by the revenue generated by the 39 Red Biotech companies, the pharmaceutical derivations of “Pharma Biotech”, which alone account for over 6.1 of the 8 billion in question. The overall capitalisation of the 222 companies that comprise the industry amounts to 2.1 billion euros and their overall net indebtedness to 2.8 billion euros. These values correspond to an equity/capital ratio of 31% and a net gearing of less than 1.4. An assessment of the earnings posted in 2004 by the companies surveyed reveals an EBITDA of 396 million euros and an overall operating profit of 118 million euros.

22

• the remaining 10.9% of operating revenue is produced by the sale of biotechnological products produced by 12 pharma-oriented companies ("Pharma Orientated"). Breakdown of Italian Biotech revenue by category (2005)

Born Biotech 39%

Biotech Oriented 52%

Pharma Oriented 9% Breakdown of Italian Red Biotech revenue by category (2005)

In 2003 overall revenue was 3,604 million euros, which grew by 12.8% in 2004 (4,062 million euros) and stabilised in 2005 at 3,847 million euro. However, the industry, despite the flattening out of the growth trend of some large groups, shows strong overall growth, especially as concerns the small and mediumsized companies. Thus small companies record growth rates of around 11.4% and the medium-sized companies are growing (2005 data) at a rate of +10.1%.

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

The historical analysis of the development of revenue, on a two-year basis, confirms the strong growth of small "born biotech” companies (+22.6% on a twoyearly basis) and small companies deriving from the pharmaceutical industry (+18.2% on a two-yearly basis). The same trend is found for medium-sized companies. And of these the “born biotech”, or more strictly biotech companies, show a 16.8% growth rate (on a two-yearly basis), while those that originated in the pharmaceutical industry reveal a +57.6% growth rate (on a two-yearly basis). The growth of the large companies, on the other hand, at +3.9% was more limited in 2005 and tended to reabsorb the strong growth registered in 2004 (+12.8%). The analysis of the large so-called “born biotech” companies reveals a positive 11.5% trend, whereas the large companies that originated in the pharmaceutical industry whether pharma oriented or biotech oriented - only registered a +1% growth rate. The capitalisation of the 162 Red Biotech companies amounts to 2,026 million euros with a net indebtedness of 2,675 million euro. The values yield a net gearing of 1.3. An assessment of the earnings posted in 2005 by the companies surveyed reveals an EBITDA of 376 million euros and an overall operating profit of 110 million euros. The overall level of earnings would seem to suggest that the sector has now gone beyond its first development cycle. However, in order to make such an assessment the three "ideal types" that comprise the universe of certified companies should be considered separately insofar as they generally diversify their assets between consolidated and emergent businesses and between traditional and innovative products in different ways:

• the 27 biotech oriented companies, of pharmaceutical derivation, with an overall capitalisation of 1,040 million euros and a net indebtedness 915 million euros, have an average net gearing of less than 1 (0.88), an EBITDA of 125 million euros and an operating profit of 50 million euros. The large companies of this group posted an average operating profit of 7 million euros, the medium-sized companies broke even and the small companies registered an operating loss of 4 million euros; • the remaining 12 companies classified as pharma oriented have a capitalisation of 389 million euros and a net indebtedness of 908 million euros, with a net gearing of 2.3. The overall earnings of the companies, as stated for the 2005 fiscal year, are as follows: an EBITDA of 151 million euros and an operating profit of 55 million euros. The 12 firms are classed as large companies and posted an average operating profit of 5.5 million euros.

• the capitalisation of the 123 Red Biotech companies amounts to 595 million euros with a net indebtedness of 852 million euro. These values yield a net gearing of over 1.4. The overall earnings of the companies in 2005 are as follows: an EBITDA of 99 million euros and an overall operating profit of 55 million euros. The large companies in the segment posted an average operating profit of 7 million euros, the mediumsized companies an operating loss of 1 million euros and small companies an average operating loss of 92,000 euros;

Blossom Associati 2007

23


Biotechnology in Italy 2007 - Financial and strategic analysis

Biotech investments in R&D The overall size of R&D investments in biotechnological technologies and processes in 2005 in Italy has been estimated at 1,283 million euros: of which 1,098 million (over 86%) invested in Red biotech, 144 million euros (11%) in the Green are and the remaining 41 million (3%), in the White and Bioinfo sector. Breakdown of R&D investments in biotech activities in 2005 by area Bioinfo. 2% White 1% Green 11%

especially the 12 "Pharma Oriented” companies, i.e. companies with a propensity to invest in traditional technology and products.

Focus on Red Biotech - R&D investments If we limit our attention to the Red sector, which constitutes the largest segment, we find that of the total investments for 1,098 million, 431 million (39%) come from "born biotech" companies, while 667 million (the remaining 61%) are investments made by companies originating in the pharmaceutical industry. As regards the latter, the contribution made by “biotech oriented” companies is predominant. In comparison with “their oriented” investments of 572 million (52%) in biotechnological processes or products, “pharma-oriented” companies’ contribution to investments in biotechnological products was much smaller: only 94 million euros (9%). Breakdown of R&D investments - Red Biotech - in 2005 by class of company

Born Biotech 39% Red 86% Source: Blossom Associati – CrESIT Insubria State University of Varese

These findings once again confirm the underestimate usually attributed to Italian industrial research by the leading, international studies. The principal reason for this is to be found in the difficulty of procuring and identifying pertinent data for analysis. As stated in the methodological notes, the foregoing data on the size of biotech investments are solely based on the values of R&D investments in technology and processes carried out by the 222 companies comprising the industry that refer to biotechnological type platforms. However, to supplement the foregoing figures, it would be useful to provide data on the overall volumes of investments in R&D (and thus not just limited to biotech activities). In 2005, the 222 certified companies made investments for over 2,524 million euros in R&D. The data, however, is strongly influenced by the size of investments made by companies deriving from the pharmaceutical sector,

24

Biotech Oriented 52%

Pharma Oriented 9% Source: Blossom Associati – CrESIT Insubria State University of Varese

Extremely interesting considerations emerge from the comparison between the data on R&D investments in biotechnological processes and those referring to overall investments in technologies and products, for an total value of 2,302 million euros. It was found that 48% of all investments recorded for our list of certified companies is concentrated in the biotech sector. Furthermore, if we concentrate our analysis on “born biotech” companies the proportion increases

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

significantly, reaching over 76%, while as regards biotech-oriented companies the indicator is about 52%. Of these investments 35% (388 million euros) was made by the 30 multinational subsidiaries. Further analysis revealed that the foregoing subsidiaries of multinationals, on average, earmark 6.2% of their global investments to the Italian market while the revenue produced by the Italian market amounts to about 8.2% of consolidated global revenue. The survey, based on a widespread qualitative analysis, shows that R&D undertaken in Italy has given rise to an extremely interesting pipeline. In Italy there are 35 projects in the preclinical phase, 14 projects in phase 1, 21 projects in phase 2, and 7 projects in phase 3. Altogether, therefore, development activity comprises 42 projects distributed in the various phases. And these data are even more significant if we take account of the fact that the activities performed by the R&D centres of the multinationals operating in our country has not been considered. An excellent example is Novartis Vaccines (ex Chiron), set up in Tuscany, following the acquisition of the production facilities of Sclavo, that includes some of the most advanced research laboratories in the area of vaccines in the world.

Pipeline referring to biotechnological R&D undertaken or coordinated in Italy (2006) Internal Projects /Licensing - Red Biotech

PIPELINE PRECLINICAL

35

PHASE 1

14

PHASE 2

21

PHASE 3

7

COMPANY NUMBERS

16

Source: Blossom Associati â&#x20AC;&#x201C; Assobiotec

If we examine all R&D activities (also including "discovery" activities), the analysis reveals that a very high proportion of overall investments is made in therapeutic areas (92%), especially oncology (19%), cardiology (12%) and infectious diseases (10%), with the remaining 8% addressed to diagnostic areas. These data are of enormous importance in future terms, and also because 70% of the technologies developed is the property of the companies (only 30% is developed for third parties).

Blossom Associati 2007

25


Biotechnology in Italy 2007 - Financial and strategic analysis

Technologies adopted for Pipeline development – including the discovery phase (2006) Internal Projects /Licensing - Red Biotech

Technologies Monoclonal Recombinant Antibodies proteins

Peptides

Cellular therapy

Genic therapy

Vaccines

Other

N° of projects in discovery phase

18%

21%

6%

0%

1%

13%

7%

34%

N° of projects in the preclinical phase

16%

25%

11%

4%

5%

25%

0%

14%

N° of projects in phase 1

14%

43%

5%

0%

0%

29%

0%

10%

N° of projects in phase 2

22%

26%

13%

4%

0%

22%

0%

13%

N° of projects in phase 3

17%

50%

8%

4%

0%

8%

0%

13%

N° of approved products

5%

55%

0%

0%

0%

15%

0%

25%

21%

7%

0%

0%

0%

0%

0%

71%

N° of portfolio patents granted at a consolidated level Source: Blossom Associati

Areas of interest - R&D operations undertaken or coordinated in Italy on biotechnological projects/products – including discovery phase (2006)

DIAGNOSTICS

8%

THERAPEUTICS Cardio

12%

Cancer

19%

Infectious diseases (Incl. Aids)

10%

Urology

1%

Diabetics

4%

Dermatology

4%

Bone/Muscles

11%

Neurology

9%

Metabolic diseases

5%

Others Total investments Biotech

18% 100%

Source: Blossom Associati

26

Fermentative products

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

Technologies - Processes Developed in Italy – Discovery phase included (2006)

Technologies TECHNOLOGIES FERMENTATION PURIFICATION M-Ab

70%

Third parties

30%

7% 12% 9%

CELLS/TISSUES C.

10%

REC DNA

11%

REC PROTEIN

8%

FLUORESCENCE

7%

NEW PLATFORM

12%

LAB ON A CHIP

4%

ASSAY SET UP

13%

OTHERS

Property

7%

Fonte: Blossom Associati

Human resources and employment an overall view of the national context The overall number of employees performing R&D activities amounts to 4,926 (35% of all employees surveyed in the framework of biotech companies). These data take account of researchers working in Green (4%), White (2%), Bioinformatics (3%) and Red Biotech (91%) companies. With regard to the latter, we included the Red Biotech companies and “Biotech Oriented” companies deriving from the pharmaceutical industry in the analysis, but excluded R&D employees in the so-called pharma oriented companies. Therefore, the foregoing data specifically refer to biotech employees of the 222 enterprises making up our list of certified companies, net of the 12 companies classified as “pharma oriented”.

appropriately referred to as Red Biotech but also the “Biotech Oriented” companies stemming from the pharmaceutical industry. However, it excludes the employees of the so-called pharma oriented companies. If we were to take account of the latter, the total number of employees in our list of companies would rise to over 24,000 employees (about 0.1% the Italian labour force - Source: Istat).

If the analysis is extended to cover all employees of Italian biotechnological companies, the resulting figure is 14,000 employees, which includes all the employees of Green (2%), White (1%), Bioinformatics (1%) and Red Biotech (96%) companies. The latter two categories include not only companies

Blossom Associati 2007

27


Biotechnology in Italy 2007 - Financial and strategic analysis

Breakdown of R&D and total employees – subdivision by sector

Category

R&D employees

Total employees

Bioinfo

130

144

Green

184

325

4,516

13,412

96

142

4,926

14,023

Red White Overall total Source: Blossom Associati – CrESIT Insubria State University of Varese

The data used (number of employees stated by the companies either through qualitative analysis or through the analysis of the notes to the financial statements) nevertheless tend to underestimate the size of the industry. Thus it can be presumed that the industry also includes, especially in the case of smaller companies, a significant number of self-employed professional workers and other freelancers.

If the large companies generally assign 19% of their personnel to R&D, the medium-sized companies appear much more focused. They declare that 73% of all employees are engaged in R&D work, while the small companies declare an even higher proportion: 78% of all employees.

Geographical regional distribution Human resources and employment - Focus on Red Biotech We have already noted that 91% of the 4,926 employees dedicated to R&D (i.e. 4,516 employees) work for 162 of the certified companies belonging to the “Red” sector. However, we can break this figure down still further into three sub-categories on the basis of the methodological approach indicated in this Report: • 68% (or 3,071 workers) is accounted for by 123 biotech companies operating in the health care field; • the remaining 32% (or 1,444 employers) is employed by the 27 "biotech oriented" companies deriving from the pharmaceutical industry. A more in-depth analysis reveals that 43% of the total number of R&D employees work for large companies, 40% for medium-sized companies and 17% for small companies. These figures illustrate the enormous importance played by medium and small companies in the employment of research workers.

28

Competitive regional positioning territorial distribution The Italian biotechnological sector is characterised by a strong geographical concentration. While, on the one hand, almost all the regions (16) of our country host companies belonging to the industry, at present only a few have managed to attract significant concentrations of such companies in numerical and economic terms. These are Lombardy, where 72 companies are situated (32% of the total), Piedmont with 32 companies (14% of the total), Tuscany, with 23 (10% of the total), Friuli Venezia Giulia, with 18 (8% of the total), followed by Lazio with 15 (7% of the total) and Sardinia with 13 (6% of the total). 77% of all Italian biotechnological companies are concentrated in these six regions. Furthermore, strong territorial concentration also emerges at the sub-aggregate level. Thus biotech companies, apart from polarising in a limited number of regions (Lombardy, Piedmont, Tuscany and Friuli Venezia Giulia), also tend to concentrate in certain specific territorial areas within these regions. We can take the case of Tuscany to illustrate this

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

phenomenon. Thus instead of being evenly spread throughout Tuscany, the companies are concentrated in the areas around Florence, Siena and Pisa, where all the basic factors for their development can be found.

• incubators and parks (both public and private) with a strong professional and managerial vocation as concerns biotechnologies and able to set up systems of co-experience receptive to new ideas and new intellectual capital;

Geographical distribution of biotech companies in Italy (2006). Friuli Venezia Other regions 22% Giulia 8%

• national and foreign investors.

Lazio 7% Tuscany 10%

Investors

Services Providers

Venture CapitalistsBanks Banks Stock Market Business Angels Istutional Investors

Advisory Financial Legal Human Resources Fees

Capital

Cluster Interest, dividends

Sardinia 6% Lombardy 33%

Institutions

Professional Services

Biotechnology Nanotechnologies

Human Resources

Legislative Support

Fundamental Research

Know How Fees

UE National

Piedmont 14% Source: Blossom Associati – CrESIT Insubria State University of Varese

The data confirm the findings documented in the previous edition of the Report: namely that the localisation of the biotech industry is directly related to the co-presence of a series of different factors industrial and institutional (the presence of pharmaceutical companies, research centres and structures, science/technology parks and incubators, hospitals and clinics, and also investors) - which by functioning together as a system stimulate the development of new companies. Hence. once again. we have ascertained how the industry can only exhibit growth prospects when the following elements co-exist, and where strong mutual relations obtain between them:

Local Industrial Associations

Economic Development Enployment

Investments

Companies

Foreign Subsidiaries National/local Related Companies Applied Companies

Universities, Consortia Hospital Science Park Bio-incubator

Source: Blossom Associati – CrESIT Insubria State University of Varese

Empirical evidence shows that on account of the extreme volatility of the sector and the ease with which intellectual capital and financial resources can be transferred, foreign companies tend to invest financial capital and attract intellectual capital where the prospects of advantageously establishing a functional system and the creation of value are demonstrated by competitive success, and consolidate their positions and relations on a pan-world basis.

• italian and foreign pharmaceutical companies; • biotechnological companies strongly interested in developing external relations with a technological, managerial and financial characte; • high-quality clinical research facilities as part of the health structures; • universities and research centres (both public and private) strongly orientated to the development of new companies and technological transfer;

Blossom Associati 2007

29


Biotechnology in Italy 2007 - Financial and strategic analysis

Macro indicators - Territorial distribution As regards the analysis of the 222 companies, net of the 12 pharma-orientated companies, the foregoing reflections on growth prospects are fully confirmed, also in employment terms, although the relative importance of the factors may be slightly different in Italy. At a national level the number of employees engaged in R&D amounts to 4,926 and the overall number of all employees of biotechnological companies making up the industry is around 14,000. The geographical distribution of all employees in the industry and R&D employees (2006). 8.000

Lombardy clearly occupies a leading position. 6,705 employees work in the region, of whom 2,956 engaged in R&D (48% of the national total and 61% of all employees in the industry on a national basis). The second most important region, in terms of total (including R&D) employees, is Lazio, where the number of Big Pharma or large biotech orientated companies is very high. These regions are followed by other regions with a strong propensity towards investment such as Piedmont, with 4% of all the industry's employees and 6% of all R&D employees on a national basis, Emilia Romagna with 4% of all employees and 7% of employees engaged in R&D, on a national basis, Tuscany and Friuli Venezia Giulia. Geographical distribution of total R&D employees (2006).

Other 8%

7.000

Friuli Venezia Giulia 3%

6.000

Piedmont 6% 5.000

Emilia Romagna 7%

4.000 3.000

Tuscany 5%

2.000 1.000

Lazio 10% Others

Sardinia

Campania

Friuli Venezia Giulia

Piedmont

Emilia Romagna

Tuscany

Lazio

Lombardy

0

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT Insubria State University of Varese

all biotech employees R&D biotech employees Source: Blossom Associati â&#x20AC;&#x201C; CrESIT Insubria State University of Varese

30

Lombardy 61%

The strong territorial concentration of the sector, which we underlined earlier, now appears even more pronounced. The first six regions that account for 77% of all Italian companies also employ over 94% of all employees and over 85% of all employees engaged in R&D.

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

Data on the biotech sector in Italy – Geographical distribution of employees by region

tot. employess exclud. Region

n. companies

total employees

Pharma Oriented

n° R&D employees

8

185

185

167

EMILIA ROMAGNA

12

1,099

426

353

FRIULI VENEZIA GIULIA

18

200

200

144

LAZIO

15

9,540

5,067

489

LOMBARDY

72

9,807

6,705

2,956

PIEDMONT

32

373

373

310

SARDINIA

13

91

91

71

TUSCANY

23

2,896

755

263

VENETO

11

132

132

103

OTHERS REGION

18

89

89

68

222

24,412

14,023

4,926

CAMPANIA

Overall total

Source: Blossom Associati – CrESIT Insubria State University of Varese

The study of the distribution of revenue as between the various Italian regions emphasises the territorial polarisation mentioned earlier. Two regions (Lombardy and Lazio), while demonstrating profoundly different orientations and characteristics in respect of company structure, by themselves account for 80% (in almost equal proportions) of national revenue. If we turn our attention to the other regions, we will notice an important contribution made by Tuscany (which accounts for 5% of biotech revenue), followed by Emilia Romagna and Friuli (which jointly account for another 5%).

(4%) and Friuli (3%); • Lazio remains an important and significant component in terms of revenue and the size of the companies situated in the region.

The analysis of biotech investments in R&D brings out a partially different picture, which tends to correspond to the map of company distribution. In this case the following aspects emerge: • Lombardy plays an absolutely predominant role, with 70% of all investments carried out in Italy in biotechnological R&D; • the importance of Tuscany with 5% of all investments in the Italian panorama remains confirmed; • the role played by Emilia Romagna (7%) is also important as also those played by Piedmont Blossom Associati 2007

31


Biotechnology in Italy 2007 - Financial and strategic analysis

Main financial data of the biotech industry in Italy – Geographical distribution (2006)

Region

n° companies

Total revenue ( m€ )

biotech revenue %

( m€ )

%

Biotech R&D investments

Capitalisation

Financial indebtedness

( m€ )

( m€ )

( m€ )

%

%

%

Average EBIT ( €000 )

8

16.5

0.2%

15.6

0.4%

12.8

1.0%

10.6

0.5%

23.9

0.9%

560

EMILIA ROMAGNA

12

306.4

3.7%

120.6

3.0%

88.6

6.9%

115.6

5.6%

190.2

6.8%

755

FRIULI VENEZIA GIULIA

18

119.0

1.4%

63.9

1.6%

44.2

3.4%

11.8

06%

28.5

1.0%

249

LAZIO

15

3,328.6

40.3%

1,721.4

42.2%

84.3

6.6%

777.8

37.7%

934.9

33.6%

7,466

LOMBARDY

72

3,248.3

39.3%

1,772.8

43.4%

896.2

69.9%

945.2

45.8%

1,278.6

45.9%

-318

PIEDMONT

32

154.2

1.9%

138.8

3.4%

53.1

4.1%

18.8

0.9%

37.7

1.4%

111

SARDINIA

13

10.8

0.1%

10.0

0.2%

7.6

0.6%

5.4

0.3%

4.2

0.2%

-126

TUSCANY

23

1,034.4

12.5%

198.4

4.9%

65.3

5.1%

170.2

8.2%

265.5

9.5%

1,371

VENETO

11

24.0

0.3%

21.6

0.5%

17.4

1.4%

6.0

0.3%

12.5

0.4%

144

OTHERS REGION

18

21.8

0.3%

19.6

0.5%

13.3

1.0%

2.3

0.1%

7.1

0.3%

39

2,783.2 100.0%

-

CAMPANIA

Overall total

222

8,263.8 100.0%

4,082.8 100.0%

1,282.9 100.0%

2,063.6 100.0%

Source: Blossom Associati – CrESIT Insubria State University of Varese

The analysis of the asset structure of the companies making up the industry reveals a net competitive position as regards each of the Italian regions. • Lombardy is the region with the highest concentration of R&D activities. It also exhibits a uniform distribution of large, medium and small companies, all of which sharing the same strong vocation for innovation and investment in technologies and products. The capitalisation of the companies, 945 million euros (45% of the overall capitalisation of the nation- system), their net financial indebtedness, 1,278 million euros, an average operating loss, and the highest concentration of pipeline products with respect to the national total, clearly demonstrate a strong orientation towards innovation, which is also coupled with the evident managerial and financial capacity of the companies based in the region. In addition, the system includes the presence in the territory of not only science parks such as, for example, Science Park Raf (as described in detail below) but also internationally important universities, clinics with a strong vocation for trials, and investors (the latter favoured by the proximity of Milan, the most

32

important national stock exchange). Furthermore, these forces are supported by local institutions, committed to sustaining the development of biotechnologies and attracting foreign investments. And to achieve these purposes they have set themselves the objective of simplifying bureaucratic formalities, in order to assist company growth, and developing specific packets to support and generate new companies and intellectual capital. • Tuscany has a mature system made up of 23 companies within a territory characterised by a strong R&D vocation for biotechnological research (such as, for example, Novartis Vaccines ex Chiron) and important investments made within the territory by pharmaceutical companies. For example, there are national pharmaceutical companies (such as Abiogen Pharma or Menarini), small biotech companies strongly orientated to innovation, as well as scientific parks such as the Toscana Life Sciences (see following data sheet), universities orientated to the setting up of academic spin-offs such as the University of Florence, clinical institutes with professional expertise in product trials and institutional investors

Blossom Associati 2007


Biotechnology in Italy 2007 - Financial and strategic analysis

willing to support the industry (Fondazione del Monte dei Paschi).

the Science Park Area in Friuli and the science and technological park in Sardinia), that act as reference points for the sector in the single territorial areas.

• Piedmont, Friuli, Sardinia and other regions are still addressing the challenge of innovation. There are a number of small companies on their territories with a strong vocation for innovation and a keen orientation towards innovation in biotechnological R&D. It should, moreover, be noted that for years regional institutions have been supporting the creation of systems and structures able to host new innovative biotechnological companies with a strong international character. This is demonstrated by the science parks – which will be discussed in further detail below (Bioindustry Park del Canavese in Piedmont,

• On the other hand, Lazio reveals a strong predilection for mature companies, predominantly interested in production and sales, as confirmed by the high concentration of employees, and significant levels of revenue but also by the average operating profit posted by the companies situated in the region (+7,466 million euros), which is a sure sign of operational maturity.

Focus on Red Biotech – Geographic distribution profile Geographical distribution – Main indicators (2006) Red Biotech

Region

n. empl. n. exclud. n. n. overall Pharma R&D compan. employees Oriented employees ( m€ )

Campania Emilia Romagna

%

overall revenue ( m€ )

biotech revenue %

R&D biotech investment

( m€ )

%

( m€ )

capitalisation %

financial indebtedness ( m€ )

%

Average EBIT ( €000 )

6

66

66

56

7.9

0.2%

7.0

0.4%

7.5

1.0%

10.5

0.5%

2.2

0.1%

769.9

8

1,087

414

342

305.6

3.7%

119.9

3.0%

87.5

6.9%

115.3

5.7%

187.9

7.0%

1,234.0

Friuli Venezia Giulia

13

105

105

89

26.4

1.4%

23.8

1.6%

20.7

3.4%

8.7

0.4%

20.7

0.8%

22.5

Lazio

15

9,540

5,067

489

3,328.6

40.3%

1,721.4

42.2%

84.3

6.6%

777.8

38.4%

934.9

34.9%

7,465.5

Lombardy

58

9,693

6,591

2,864

3,077.7

39.3%

1,619.3

43.4%

770.4

69.9%

919.9

45.4%

1,221.9

45.7%

-493.1

Piedmont

18

301

301

252

137.7

1.9%

124.0

3.4%

36.6

4.1%

12.3

0.6%

27.7

1.0%

208.7

Sardinia

10

72

72

60

8.2

0.1%

7.7

0.2%

6.2

0.6%

5.3

0.3%

2.9

0.1%

-177.4

Tuscany

18

2,772

631

240

1,031.6

12.5%

196.0

4.9%

62.5

5.1%

169.1

8.4%

261.7

9.8%

1,811.8

Veneto

7

117

117

90

22.5

0.3%

20.2

0.5%

16.0

1.4%

5.9

0.3%

11.7

0.4%

200.7

Others region Overall total

9

48

48

34

8.6

0.3%

7.7

0.5%

6.5

1.0%

0.8

0.0%

3.8

0.1%

140.8

162

23,801

13,412

4,516

7,954.7

100.0%

3,847.0

100.0%

1,098.3

100.0%

2.025.6

100.0%

2,675.4

100.0%

-

Source: Blossom Associati – CrESIT Insubria State University of Varese

Blossom Associati 2007

33


Biotechnology in Italy 2007 - Financial and strategic analysis

Geographical distribution – Main indicators (2006) “Born Biotech”

Region

n. empl. n. exclud. n. n. overall Pharma R&D compan. employees Oriented employees

overall revenue (m€ )

Campania Emilia Romagna Friuli Venezia Giulia Lazio

%

biotech revenue (m€ )

R&D biotech investment %

( m€ )

%

capitalisation (m€ )

%

financial indebtedness (m€ )

%

Average EBIT (€000 )

5

61

61

51

7.4

0.4%

6.7

0.5%

7.0

1.6%

6.0

1.0%

3.5

0.4%

946.6

6

358

358

301

70.3

3.9%

64.3

4.4%

40.7

9.4%

42.4

7.1%

44.8

5.3%

-1,350.1

13

105

105

89

26.4

1.5%

23.8

1.6%

20.7

4.8%

8.7

1.5%

20.7

2.4%

22.5

3

240

240

202

34.2

1.9%

30.8

2.1%

15.8

3.7%

10.2

1.7%

14.3

1.7%

-499.7

Lombardy

40

4,144

4,144

1,829

1,478.8

81.5%

1,154.6

79.1%

262.0

60.7%

494.0

82.9%

717.2

84.2%

184.4

Piedmont

18

301

301

252

137.7

7.6%

124.0

8.5%

36.6

8.5%

12.3

2.1%

27.7

3.2%

208.7

Sardinia

10

72

72

60

8.2

0.4%

7.7

0.5%

6.2

1.4%

5.3

0.9%

2.9

0.3%

-177.4

Tuscany

12

175

175

164

21.3

1.2%

20.3

1.4%

19.9

4.6%

10.2

1.7%

5.5

0.6%

57.6

Veneto

7

117

117

90

22.5

1.2%

20.2

1.4%

16.0

3.7%

5.9

1.0%

11.7

1.4%

200.7

Others region Overall total

9

48

48

34

8.6

0.5%

7.7

0.5%

6.5

1.5%

0.8

0.1%

3.8

0.4%

-16.6

123

5,621

5,621

3.071

1,815.4

100.0%

1,460.1

100.0%

431.4

100.0%

595.7

100.0%

852.1

100.0%

--

Source: Blossom Associati – CrESIT Insubria State University of Varese

Geographical distribution – Main indicators (2006) “Biotech Oriented”

Region

n. empl. n. exclud. n. n. overall Pharma R&D compan. employees Oriented employees

overall revenue (m€ )

Lazio

%

biotech revenue

R&D biotech investment

(m€ )

%

%

(m€ )

%

financial indebtedness (m€ )

%

Average EBIT (€000 )

8

4,827

4,827

287

2,127.9

74.2%

1,528.2

78.6%

57.0

9.9%

699.8

67.3%

657.0

71.9% 17,392.8

14

2,447

2,447

1,035

540.1

18.8%

309.1

15.9%

467.7

81.1%

303.8

29.2%

122.5

13.4%

Tuscany

3

456

456

76

127.2

4.4%

55.8

2.9%

5.0

0.9%

30.7

3.0%

60.5

6.6%

439.8

Others region

2

61

61

46

72.8

2.5%

50.9

2.6%

46.0

8.0%

5.6

0.5%

74.3

8.1%

-196.7

27

7,791

7,791

1,444

2,868.0

100.0%

1,944.0

100.0%

572.7

100.0%

140.0

100.0%

914.9

100.0%

-

Lombardy

Overall total

Source: Blossom Associati – CrESIT Insubria State University of Varese

34

( m€ )

capitalisation

Blossom Associati 2007

-5,238.6


Biotechnology in Italy 2007 - Financial and strategic analysis

Geographical distribution – Main indicators (2006) “Pharma Oriented”

Region

n. empl. n. exclud. n. n. overall Pharma R&D compan. employees Oriented employees

overall revenue (m€ )

biotech revenue %

(m€ )

%

R&D biotech investment

capitalisation

( m€ )

(m€ )

%

%

financial indebtedness (m€ )

%

Average EBIT (€000 )

Lazio

4

4,473

n.d.

n.d.

1,166.5

35.7%

162.4

36.7%

11.6

12.3%

67.8

17.4%

263.0

29.0%

Lombardy

4

3,102

n.d

n.d

1,058.8

32.4%

155.7

35.1%

43.7

46.4%

122.1

31.3%

382.2

42.1% 13,974.1

Tuscany

3

2,141

n.d

n.d

883.1

27.0%

119.8

27.1%

37.6

39.9%

128.2

32.9%

195.7

21.5% 10,886.5

Others region

1

673

n.d

n.d

163.0

5.0%

5.0

1.1%

1.3

1.4%

71.7

18.4%

67.5

7.4% 14,881.7

442.9

100.0%

94.2

100.0%

389.9

100.0%

908.4

Overall total

12

10,389

3,271.3

100.0%

n.d.

100.0%

-

Source: Blossom Associati – CrESIT Insubria State University of Varese

(2) This percentage was calculated in the course of a qualitative analysis of the information provided by the companies. (3) The figure for aggregate revenue constitutes a proxy for the economic value generated by the biotech industry. However, it should also be noted that this value will necessarily be an over- or an under-estimate, as it cannot take account of situations that may sometimes have a significant impact upon the results presented. A frequent case concerns the spin-offs or subsidiaries of foreign companies that have reached marketing agreements with their parent companies. In these circumstances revenue also includes revenue from R&D operations conducted outside Italy. A similar consideration applies to diversified companies that operate in markets other than the biotech market through the same corporate identity. In these circumstances revenue should be adjusted to exclude the part referring to other business. Consequently, in all such cases an analysis that limits itself to the figure for the revenue of Italian companies will be structurally inclined to over-estimate the size of the industry. However, on the other hand, there may be subsidiaries of foreign companies dedicated to R&D whose products are marketed by other companies of the group. In this case the revenue data would not reflect the actual value of the operations performed in our country. An analysis conducted at an aggregate level must accept these simplifications, although, at the same time, it requires us to use great circumspection in evaluating the results.

Blossom Associati 2007

35


Biotechnology in Italy 2007 - Financial and strategic analysis

Structure and characteristics of biotech companies in Italy Stefano Milani - Managing Director Blossom Associati and Contract Professor at the University of Pavia Alberto Onetti - Director CrESIT and Professor at the Insubria State University of Varese Alessia Pisoni - CrESIT - Insubria State University of Varese This paper describes the features of the biotech companies making up the list of certified biotech companies at year-end 2006. The companies comprising the industry were analysed from various quantitative and qualitative standpoints. In particular, the parameters used to illustrate the characteristics of certified companies refer to:

• Company size. For the purpose of this analysis the companies were broken down into small, medium-sized and large companies (according to the EU definition in force as from January 1st, 2005). Moreover, given the peculiarities that characterise them, it was deemed appropriate to analyse not only the multinational subsidiaries separately from the foregoing three categories but also the start-ups that are still in the initial phases of their business life. Successively, an in-depth analysis was conducted on the types identified in order to create typical profiles, which, in their turn, provided indications on the average revenue of the companies in each segment and their respective employment levels and degrees of operational maturity.

• Relations with research institutes and especially universities. It was held appropriate to gather such data by considering academic spin-offs, i.e. those companies started up by university researchers and professors. In addition to the economic aspects of this phenomenon, we also studied the various features of the governance structure of these companies by analysing their shareholding structure and, more importantly, the stakes detained by the universities.

• Relations with the Italian and foreign pharmaceutical industry and ties with other national and international biotech companies. The analysis of these relations was conducted by examining the equity relations between the industries in question as indicated in the shareholding structure of the companies in our list.

• Role of Private equity. The analysis of the shareholding structure of the certified companies reveals which companies benefited from the capital invested by institutional and financial investors (the company category

defined as “funded”).

• Incubated biotech companies. From this point of view, our investigations took two directions. On the one hand, we examined the size of incubated biotech companies and, on the other, the types of equity relations that characterise them.

• Governance structure. It was deemed appropriate to investigate the make-up of the share capital of each of the certified companies in order to ascertain their governance structure and the existence of any controlling shareholders.

Company size From the point of view of company numbers, there can be no doubt that small companies prevail in the Italian biotech industry. Small companies account for 76% of the certified companies (168 out of 222). They are defined as companies posting revenue of less than one million euros and employing fewer than 50 workers. Medium-sized companies, which represent 12% of the certified companies (27 out of 222), employ fewer than 250 employees and post revenue of less than 50 million euros. There are 27 large companies (over 250 employees and revenue over 50 million euros), which account for 12% of the certified companies. As concerns the analysis of the distribution of revenue by company size, 80% of overall biotech revenue recorded in 2005 was produced by large companies, although, in terms of numbers, their category was not prevalent. This category also employs 80% of the workers recorded as employed in the industry. Medium-sized companies account for 13% of biotech revenue and 11% of all employees, while small companies generate no more than 8% of revenue and employ only 6% of all workers. Nevertheless, we should remember that these c ategories include the subsidiaries of multinationals operating in Italy, which alone account for 50% of biotech revenue and 50% of all employees in the industry.

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Biotechnology in Italy 2007 - Financial and strategic analysis

Breakdown of biotech operating revenue by type of company (2005) Financial data in millions of Euros Small (342) 8%

Breakdown of all employees by type of company

Small (1,438) 6%

Medium (527) 13%

Medium (2,648) 11%

Large (3,214) 79%

Large (20,327) 83%

Source: Blossom Associati – CrESIT Insubria State University of Varese

Source: Blossom Associati – CrESIT Insubria State University of Varese

The clear numerical predominance of small companies calls for further analysis of the category. We find included therein start-ups as well as academic and corporate spin-offs. The latter two categories represent over 50% of the small-size certified companies. On average, start-ups generate revenue for about 300 thousand euros, against the approximately 2 million posted, on average, by small companies: but the number of employees

in start-ups, is twice as high as the number found for small companies as a whole. However, a methodological observation would be in order here. The figure in question is artificially high on account of their being some pharmaceutical spin-offs within the start-up category employing considerably higher numbers of workers than the average (around 5/6 employees for company).

Average values by company type

Start up

Small

Medium

Subsidiary

Large

Biotech revenue (millions of euros)

0.28

2.03

19.5

76.78

119.5

Employees

1.7

9

98

413

753

Years

<6

5<y<15

10<y<50

2<y<100

10<y<100

Source: Blossom Associati – CrESIT Insubria State University of Varese

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Biotechnology in Italy 2007 - Financial and strategic analysis

The analysis, moreover, reveals that medium-sized companies post operating revenue 10 times greater than small companies and that each, on average, employs 100 workers. Regarding the operational maturity of the medium-sized companies, we find that, on average, they cover a range of 10 to 50 years of activity (the average age of 80% of small companies is 10 years). On average, large companies post revenue of 120 million euros, have 40 years of business life behind them (although there are companies in our list with over 100 years of business life) and employ over 700 employees. Moreover, the data referring to employees merited further analysis. Among the large companies, those that employ the largest share of employees originated in the pharmaceutical industry. More than 80% of all workers employed by the large companies are employees of pharmaceutical firms. With regard to the cohort represented by multinational subsidiaries (a group of 30 companies) we should point out that the types of company within this category vary. Thus there are small subsidiaries (7 out of 30), medium-sized subsidiaries (8 out of 30) while the remaining 15 subsidiaries (the greater part) are large companies. For this reason we should not be surprised to find that average revenue for each company is about 800 million euros, and nor to find that the average payroll per company is over 400 employees.

Focus on Red Biotech - The capital structure of Italian biotech companies This section sets forth the results of the analysis into the capital structure of those companies among our group of certified companies whose 2005 financial statements were available for analysis. We intend to provide some assessments on the level of capitalisation of the companies and their degree of indebtedness in relation to their size and to offer an interpretation on the type of investments carried out. The analysis was just limited to the Red Biotech sector, therefore excluding Pharma Biotech, in order to derive findings indicative of the profile of this specific sector. Commencing from the analysis of the asset structure, it can be noted that fixed investments

account for 21% of all investments for large companies but tend to reach values of around 50% for the medium-sized and small companies. The difference is due to the greater incidence that working capital has as revenue increases. The value of liquid assets in large biotech companies is very high in comparison to small and medium-sized companies where such values are much lower. The comparison between capital uses and sources yields a substantially positive value for capital assets, which increases as the company becomes larger. The data indicates that the industry has the capacity to weather adverse market conditions, and at the same time has the possibility of carrying out investments. As concerns shareholders' equity, biotech companies reveal a good level of gearing (even if slightly reduced in comparison to last year) varying from 35% of invested capital for large biotech companies to 41% for the small companies. Consequently, the exposure towards the financial system remains within absolutely sound financial limits. Financial liabilities, on average, constitute 48% of invested capital, which corresponds to a 1.43 gearing ratio. It can, therefore, be inferred that the biotech industry enjoys and will enjoy an assured funding capacity, which for this industry more than any other, is very important in terms of growth prospects. We must, however, bear in mind that as these companies are, in general, small and medium-sized enterprises operating in the context of a highly volatile business, their corporate development must be largely financed by venture capital. Consequently, it is of the utmost importance that ties between biotech companies and national and international private equity markets be consolidated. As mentioned in the 2006 Report, it should be emphasised that obtaining funds from institutional investors calls for a different cultural approach (in premis the willingness to allow third parties to take out stakes) and an enhanced managerial competence to formulate an individual strategy and translate it into a coherent business plan. It is not by chance that biotech companies originating in the pharmaceutical industry (i.e. which we indicate as Pharma Biotech Orientated) exhibit a higher number of shareholders per company and greater financial solidarity. The equity/capital ratio of such companies is 36% (against a figure of 34% for the companies discussed earlier) and, above all it has a

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Biotechnology in Italy 2007 - Financial and strategic analysis

Asset structure of Red Biotech companies in Italy Small Red Biotech Companies

53%

35%

Medium-sized Red Biotech Companies

39%

49%

49% 79%

24%

47%

Large Red Biotech Companies

41%

24% 51%

37%

Working Capital Fixed Assets ST Liabilities MLT Liabilities Equity

Working Capital Fixed Assets ST Liabilities MLT Liabilities Equity

16%

21%

35%

Working Capital Fixed Assets ST Liabilities MLT Liabilities Equity

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT Insubria State University of Varese

lower gearing (the debt/equity ratio is 0.88 against 1.43 as stated earlier).

Research funding: accessing venture capital In this section we set out to identify the presence of biotech companies, among the list of certified companies, that benefit from seed, venture or private equity contributions. After identifying these companies, which we termed "funded" (investee companies of institutional investors specialised in private equity or of financial intermediaries), we set ourselves the objective of verifying the types of company that had made the greatest use of this kind of financing and the economic benefits that were obtained. A first analysis found that 27 (12%) of the 222 certified biotech companies fall into the funded category. Furthermore, these 27 companies all come within the category of small companies, or within the group we defined as start-ups and spin-offs. Thus it emerged that 14% of the 168 small companies are investees of specialised investors. More specifically, 16 are start-ups or spin-offs (16% of the total in question), while 11 are small companies set up before 2000. Institutional investors appear to be primarily

40

interested in recently founded companies (start-ups and spin-offs) or small companies with a high growth potential rather than larger and more established companies. As concerns the types of investor, the dominant role is played by investors specialised in private equity (seed and venture capital): 12 of the 27 companies were funded by Italian investment companies (in 4 cases more than one financier had invested in the same company), 2 companies show stakes being held by both Italian and foreign investors, 4 are companies whose shareholders include Italian credit intermediaries and, finally, 1 is an investee company of a number of foreign investors. As concerns the proportion of the shareholding, it should be noted that the stakes taken out by investment companies vary from a minimum of 5% to 100% (this is the case of Italian biotech companies, which are wholly funded by seed capital companies). The average investment is, however, between 60-70%. Another interesting aspect of the survey refers to the assessment of the effects of venture capital investments. It was, in particular, found that both start-ups and small companies whose share capital is funded by investors outside the company, on average, post higher levels of revenue than companies of the same category but financed either internally or by their founding partners. The revenue of the small funded companies was actually double, and funded

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Biotechnology in Italy 2007 - Financial and strategic analysis

Structural features of funded companies (Average values in millions of euros)

Biotech revenue 2005 (millions of euro) Employees

start-ups/ spin-offs

of which funded

small

of which funded

0.28

0.98

2.3

4.91

17

16

9

15

Source: Blossom Associati – CrESIT Insubria State University of Varese

start-ups almost triple, that of companies in their same category

Academic spin-offs There are 14 spin-offs originating in universities (14% of the spin-off/ start-up category into which they were included), which represents an increase in comparison to the preceding year (when 9 were recorded). We decided that companies in which the originating universities detain some part, at least, of the share capital should be included in this category. However, this number does not include any biotech companies founded by university researchers on their own account and in which a university holds no institutional stake. It may, therefore, be suggested that the number indicated here underestimates the real importance of this type of company in the biotech industry. Characteristics of academic spin-offs (Average values in millions of euros)

academic spin-offs Biotech revenue 2005 Employees Average % Shareholding

0.98 13 14.50%

Source: Blossom Associati – CrESIT Insubria State University of Varese

The academic spin-offs are microenterprises with few employees and average revenue of less than one million euros. The picture that emerges, therefore, is one of companies going through the first phase of their business life cycle. Spin-offs are geographically spread throughout Italy. A case in point is a group of academic spin-offs (4 to be precise) set up at theinitiative of some researchers from the University of Florence. The shareholding of the university is between 7 and

20%. The other shareholders include: in 1 case the presence of a financial intermediary, in 2 cases the involvement of local functional bodies (a chamber of commerce), in 1 case the participation of local territorial bodies (provincial governments), in 2 cases other types of agency such as Sviluppo Imprese Centro Italia and the Ente per l’Innovazione e lo Sviluppo, whose mission is to support entrepreneurship and innovation.

Corporate spin offs and links with the pharmaceutical industry As concerns corporate spin offs, our list of certified companies included 3 with a pharmaceutical derivation and 3 with a biotech derivation. The three pharmaceutical spin-offs were spun off from foreign companies, while those with a biotech derivation were spun off from three Italian companies. However, we should also note that the values in terms of revenue, employees and capitalisation are higher in pharmaceutically derived spin-offs than in biotech spin–offs, which is an important qualification to make prior to setting forth indicative average values for the category of corporate spin-offs seeing that the latter category, on average, posts revenue of 1.8 million euros and an average payroll of 130 employees. Another aspect of the survey concerns the analysis of ties between the biotech and pharmaceutical industries. The two industries are closely interrelated and sometimes hard to distinguish. Among the 222 companies surveyed 14 are investee companies of Italian pharmaceutical companies and 19 of foreign pharmaceutical companies. 17 are investee companies of other Italian biotech companies and 16 are investees of foreign biotech companies.

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Biotechnology in Italy 2007 - Financial and strategic analysis

Structural characteristics of corporate spin offs (Average values in millions of euros)

corporate spin-offs

of which biotech

of which pharmaceutical

N° corporate spin offs

6

3

3

Biotech revenue 2005

1.78

0.96

2.59

Employees

132

9

255

Shareholders' equity

7.42

2.53

12.32

Source: Blossom Associati – CrESIT Insubria State University of Varese

Equity relations between biotech companies and pharmaceutical firms

investee companies investee companies of Italian biotech of foreign companies biotech companies N° biotech companies Average % shareholding

investee companies of italian pharma

investee companies of foreign pharma

17

16

14

19

42%

84%

58%

88%

Source: Blossom Associati – CrESIT Insubria State University of Varese

The shareholdings generally held by Italian companies are far inferior to those detained by foreign companies (in the case of biotech companies the shareholdings are 40%; and in the case of pharmaceutical companies the shareholdings are 30%). Nevertheless, these shareholdings are still sufficient to secure the control of the company. It should, however, also be pointed out that these data - i.e. shareholders detained by foreign companies may be conditioned by there being 30 companies in our list which were set up with multinational investments.

Incubated Biotech companies

In all cases these are small and medium-sized companies, with a clear prevalence (38 companies) of start-ups and spin-offs. Shareholdings by institutional bodies is strictly correlated to the company being situated in science parks: all investee companies of public bodies are situated in parks. Furthermore, two of the foregoing companies are investees of the science park in which they are located, while among the shareholders of five companies we find public bodies, (territorial or functional), such as provinces, regions, local agencies and financial institutions, chambers of commerce together with various national bodies dedicated to promoting research (such as the CNR) or development/innovation.

Many of the companies we recognised for inclusion in our list are situated inside science parks, and usually constitute initiatives promoted or sponsored by territorial administrative bodies. Of the 222 certified companies, 65 are situated in parks and incubators, indicating a slight increase with respect to the 56 recorded in the 2006 Report. This increase could, on the other hand, be ascribed to two sets of reasons: new start-ups or the direct consequence of an increase in the list of certified companies.

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Biotechnology in Italy 2007 - Financial and strategic analysis

Information sheet on Italian science and technology parks with a strong vocation for the development of new innovative companies in the framework of biotech R&D (2006) Namee Area Science Park

Bioindustry Park Canavese

Parco Tecnologico Padano

Parco Scientifico e Tecnologico della Sardegna.

Science Park Raf

TLS Science Park

Territory Friuli

Piedmont

Lombardy

Sardinia

Lombardy

Tuscany

Research area

Technologies

Research organisation

N° companies

Technological platforms available: vascular cardiology; neurosciences; oncology; hepatology; regenerative medicine.

nd

nd

Technological platforms available: Bioinformatics, Structural Biology, Molecular Biology, Chemistry, Proteomics, Imaging.

Presence of the University of Turin, Politecnico of Turin, Insubria, CNR-ISPA, CIRCMSB. Scientific cooperation agreements with CNR-IBB, University Federico II, Uniroma, UNITO, etc. Agreements with 2 university consortia, 6 Universities.

7 companies in Discovery incubator, 17 companies operating in life sciences area helped in start up since 2000. 35 organisations operating in the park in areas linked to the life sciences.

Green Biotech Bioinformatics

Standard equipment and instrumentation for molecular biomedical laboratories such as: PCR, refrigerated centrifuges, biorepository -80°C, -20°C, cold rooms +4°C, Growth rooms (phytotrons), radio-isotope laboratory - Platforms: Genomic Platform.

CERSA (Centro Ricerche e Studi Agro-alimentari) which cooperates with other centres in the Cluster, especially: University of Milan (Depart.of Agriculture Instit. Entomology, Instit. Vegetable Pathology, Instit. animal breeding) Catholic University - Piacenza Faculty of Agriculture (Department of animal breeding); Ospedale Veterinario; Istituto Sperimentale Lazzaro Spallanzani; CNR Institute of Agricultural Biology and Biotechnology; Istituto Zooprofilattico Sperimentale della Lombardia e dell’EmiliaRomagna- Lodi section.

7 companies operating in agri-biotechnology and present in incubator.

Bioinformatics Red Biotech

Platforms: ICT, bioinformatics, Genotyping and gene expression profiling, Pharmacology, Prototyping High Throughput Screening, DTV. Laboratories, Food Technologies & Microbe Biotechnologies, Proteomic Biotechnologies, NMR Spectrometry and chemical analysis.

Presence of researchers of Universities of Cagliari & Sassari and of CNR; agreements with university depts and with CNR; scientific and technological agreements with hospitals and science parks.

44 localised companies, 21 operating in the Life Sciences.

All the principal technological platforms necessary for biomedical research typical of a large research centre are available to researchers of the foundation and to host companies/organisations and upon request also foreign researchers.

Approx. 500 researchers belonging to IRCSS Fondazione San Raffaele Monte Tabor, and various universities, charities and Italian and foreign research centres, organised into 50 research units, & approx 250 employees of the 7 tenant companies. New laboratory space (74,000 sq.m) under construction, which will double the capacity for basic& industrial research.

7 companies, of which 2 part-owned by Science Park Raf SpA.

Platforms available in the Campus: Computational Biology and Chemistry, Confocal microscopy, DNA synthesis and sequencing, Genomics, HTS, Mass Spectrometry, NMR, Proteomics, Small molecules drug design and synthesis, Vaccine R&D and Production.

5 Tuscan universities, Siena University Hospital Board, Centro Ricerche Novartis Vaccines.

Molteni Therapeutics and Toscana Biomarkers.

Red Biotech

Red Biotech, White Biotech

Red Biotech, biomedicals

Life Sciences, biomedical

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Biotechnology in Italy 2007 - Financial and strategic analysis

Information sheet on Italian science and technology parks with a strong vocation for the development of new innovative companies in the framework of biotech R&D (2006)

44

Area Science Park

Area Science Park is certified as one of the leading Italian multi-sector science and technology parks. The park covers 55 hectares and contains over 80,000 sq. m of equipped laboratories, offices and service structures situated in two campuses close to Trieste, on the Karst plateau in the region of Friuli Venezia Giulia. The technological district is an â&#x20AC;&#x153;investment in new ideas and new knowledge", a network-based system for territorial development comprising a set of advanced technological, scientific, economic and industrial activities. AREA hosts over 80 national and international organisations, including public research institutions, private R&D and innovation centres, and companies operating in high-tech areas. Altogether, 1800 persons work in the park. The scientific and technological sectors that constitute AREA are: the life sciences, physics, material science, nanotechnologies, information technology, electronics, telecommunications, energy and the environment. The Technological District of Molecular Biomedicine of Friuli Venezia Giulia, set up in October 2004, works in the area of biotechnologies applied to medicine, but especially therapeutic areas with great worldwide importance: vascular cardiology, neurosciences, oncology, hepatology and regenerative medicine. The objectives of the Technological District are to give greater leverage to intellectual property and research findings, provide equipped laboratories, infrastructures, and high-quality resources, attract leading companies and create innovative enterprises.

Bioindustry Park Canavese

Bioindustry Park is a science park that promotes and develops R&D by hosting companies and organisations that work in sectors allied to the life sciences. Thirty-five of such companies and organisations (as of 2006) are operating in the park, but additional space is still availabler. LIMA - Laboratorio of Metodologie Avanzate (Laboratory of Advanced Methodology) - offers a series of scientific and research services, through the presence of the University of Turin, the CNR and other universities and research centres, primarily addressed to the molecular biology, biotechnologies, chemical, imagining, bio-informatics and proteomics sectors. Bioindustry Park also offers a complete set of services such as, for example, patent support, initiative tutoring, marketing, project management, company incubation, shared structures and resources, etc. The park also carries out research projects in the field of human health, either autonomously or on commission from companies. The system of aid for company start-ups takes the form of Discovery, an initiative aimed at supporting biotechnological fledgling companies. It includes an incubator, a complete packet of support services and a partnership agreement with one of two international companies: Eporgen Venture or Venture Capitalist. Bioindustry Park together with Adebag (Grenoble - France) and Bio Alps (Switzerland Romanda), is the founder of the Transalpine Biocluster, which aims to produce a transalpine biotechnological cluster. The park is a member of the CEBR (Council of European Bioregions) network and participates in the European projects NetBioclue and PASSPORT.

Parco Tecnologico Padano

The Parco Tecnologico Padano (PTP) was set up in 2000 as an initiative of the Lombardy region and with the support of the Lodigiano territorial administrative bodies. It has attracted important university institutes, private research centres, a company incubator and a business park and is now setting itself the task of becoming a driving force for the development of the territory and the agro-biotechnological cluster of Southern Europe. PTP's mission is the creation of a research network able to: (i) promote dialogue on the needs of the territory, (ii) carry out top-level research in favour of agricultural development, (iii) favour the creation of start-ups and spin-offs by offering equipped areas, services and scientific and managerial skills. The Casa dell'Agricultura is especially important for the success of the mission of the Lodi Cluster where technological transfer initiatives are being created thanks to an ongoing dialogue between the researchers of the park and associations of livestock breeders and farmers. The PTP has its own specific research department: the Centro Ricerche e Studi Agroalimentari (CERSA) which operates in synergy with the University of Milan and the University Cattolica, the Istituto Spallanzani and the Istituto Zooprofilattico, which are all represented in the Cluster. The main lines of research concern: resistance to pathologies, genetic improvement, food safety, traceability, safeguarding food typicity and biodiversity. Recently it inaugurated a genomic platform dedicated to the agro-food sector that is unequalled anywhere in Italy. The PTP, moreover, is also a protagonist in various processes of clustering at both a national and international level. In particular, it coordinates the ABC-Network project that brings together the various European agro-biotechnological clusters and is creating opportunities for sharing resources between the various Italian agro-food parks affiliated to APSTI.

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Biotechnology in Italy 2007 - Financial and strategic analysis

Science Park Raf

Science Park Raf SpA is the company set up to leverage the assets of the San Raffaele biomedical scientific park of Milan. Apart from the largest Italian private hospital (with 1400 beds with NHS reimbursability and 250 clinical trials per year), the park hosts the San Raffaele Vita-Salute University (the medical faculty, including a degree course in biotechnology, and the faculties of psychology and philosophy), the Istituto Scientifico San Raffaele (about 500 researchers, 666 publications, 3412 impact factors) and 7 biotech and pharmaceutical companies and in two of these (Molmed and Telbios) Science Park is the reference shareholder. Science Park Raf manages the spaces, the cost-sharing schemes, the congresses, the research investments, and technological transfer (77 patents, 22 licensing contracts, and 250 research contracts with 100 companies, most of which foreign). The science park is currently undergoing expansion: 74,000 sq. m of laboratory and teaching facilities which will be ready in 2008, for a total investment of 150 million, and of which at least 10,000 sq. m will be earmarked for biotech and pharma companies wishing to pursue research in the park in cooperation with the researchers and clinicians.

TLS Science Park

TLS, the principal project of the Fondazione Toscana Life Sciences, is situated inside the campus of Torre Fiorentina (Siena), which hosts many bodies working in the field scientific research and pharmaceuticals such as the Novartis Vaccines research centre, Siena Biotech and various departments of the University of Siena. The campus hosts over 350 researchers and constitutes a reference centre for national and international biomedical research. The science park is also equipped with a modern bio-incubator to house up to 8 new companies: one for each module, and each fully equipped to meet the needs of individual companies. Two companies are currently established here and another six are scheduled to arrive in 2007. With the forecast expansion of the spaces dedicated to biotech company incubation, in the first months of 2007 a new invitation to tender will be issued for the selection of new projects.

Source: Science Park, adapted by Blossom Associati â&#x20AC;&#x201C; CrESIT Insubria State University of Varese

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Biotechnology in Italy 2007 - Financial and strategic analysis

Biotech companies: the international framework Antonella Zucchella, Professor at the University of Pavia, Vice-President of the Centre for Innovation and Technological Transfer ITT of the University of Pavia. The recent publication of the OECD data on the biotech industry constitutes an occasion for reviewing the positioning of the various nations and the development of biotech companies over the last ten years in the international scenario. Some primary considerations emerge from the analysis of these data: • biotechnologies are progressively becoming a very important component part of national economies and exhibit very high rates of growth in various countries around the world. However, their role cannot be appropriately expressed - as in other industries - by employment or revenue data but by indicators such as R&D investment, licences/patents obtained, and the progress of R&D pipeline projects;

• biotechnology is increasingly emerging as a scientific and technological platform rather than an industry in the traditional sense. This is not only confirmed by the foregoing considerations concerning the indicators specific to the sector, but also by the difficulty of identifying a common definition at an international level based on output characteristics. The most widely used definitions of the industry typically refer to input characteristics, such as research and development activities performed in a country within defined environments and with given technologies for the purpose of mapping the presence of companies in a geographical context;

• its positioning in relation to the various countries is strongly conditioned by the uncertainty surrounding the definition to be used and by the various methods of classifying biotech companies. In particular, the most significant difference in the OECD data refers to the distinction between biotech core firms and biotech companies in general. Some countries only report the former, others only the second, which represent a much wider set, and some (but few) still provide both data sets;

• the relative positioning of the various countries, moreover, is influenced by the existence of some cases of transnational biotechnological

clusters. This question was amply commented upon in the preceding report and is of special interest to Europe, where some of the principal technological clusters, such as Biovallée and Medicon Valley cross the political and administrative boundaries of various nations. The OECD's definition of biotechnology refers to “the application of science and technology to living organisms, as well as parts, products and models thereof, to alter living or non-living materials for the production of knowledge, goods and services”. A list of technologies and application contexts is also applied. The OECD's definition gives the reader the idea of a branch, or an area of research and trials where the usual concept of an industry is hard to apply because too limited. More appropriately, biotechnology should be viewed a scientific and technological platform that provides new knowledge to a series of downstream sectors. Moreover, the OECD definition lets us understand the essence of biotechnological companies - the production of knowledge by means of knowledge applied to research and development processes. In particular core biotechnology firms are defined as companies that undertake research and development in biotechnology, which constitutes their principal activities. In many cases the application of this definition would entail whittling down the field to firms with less than 500 employees. The analysis of the relative positioning of the various countries is made much more difficult by there being different definitions and data-collection procedures. With this reservation in mind, it can be noted that the overall number of biotech companies (core and non core) in the EU exceeds three thousand, and this is a much greater figure than that recorded for the USA (just over two thousand). The biotechnological world scenario is becoming more and more variegated and not only highlights European growth but also the important role played by other parts of the world such as Asia (Japan and Korea in primis), as well as the emergence of China (the data available refer to Shanghai, where the number of biotech companies comes close to that in Italy and Israel), Australia and New Zealand, which together equal the United Kingdom and Canada, the but not forgetting the confirmation of Israel's emergence and the growth of South Africa.However, viewed from a

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Biotechnology in Italy 2007 - Financial and strategic analysis

different perspective, the relative positions change significantly: if we consider the data referring to R&D investment, employment and revenue, the USA takes pride of place, surpassing not only the aggregate European data but also those referring to the rest of the world. The US biotech platform, therefore, is found to be the most "mature", having a consolidated tradition behind it, the most significant output levels and the highest degree of corporate specialisation. The data regarding the size distribution of biotech companies are extremely partial and do not allow for complete international comparisons. However, a ten-country sample showed that the percentage of biotech companies employing less than 50 workers in South Africa, Israel and Germany was over 85%. The United States and Korea, on the other hand, exhibited a high incidence of large-size companies. At present US biotechnology at present adopts a corporate model at variance with Europe's model, insofar as it is principally orientated to company growth in terms of size. Therefore, size in terms of the employment levels and revenue of US biotechnology is not only the result of theindustry's long tradition but also of a growth-oriented corporate model, which, for that matter, is typical of US industry in general, where private equity plays a central role as a vehicle for financing start-ups and developing innovative companies. Besides the role played by private finance, there also the question of the role of public investments and here significant differences also emerge as concerns the involvement of the state and public bodies in the development of the biotechnological industry. Not infrequently, especially where private equity is an important factor such as in the USA, public investment does not play an incisive role. Private expenditure (by companies) in biotech R&D in the USA amounts to 66% of all corporate investments in biotech research in the 17 countries surveyed by the OECD. However, some countries that have seen biotechnologies take off, even in the presence of less developed private equity markets, demonstrate a high level of public intervention. This is the case of Norway, where over 75% of biotech research is carried out by the public sector, Spain (about 70%), New Zealand (over 60%) and Korea (almost 60%). In this context an uncertain picture emerges for countries in which not only private equity but also public intervention in the industry is

48

under-developed. The peculiar characteristics of the financial cycle of many biotech companies, where the phase of investment and research precedes (in some cases by several years) the earnings phase and where the need for long-term, dedicated financial resources (patient capital) are important, make the role of private and public equity determinant for the development of the industry.

â&#x20AC;&#x153;I always dreamed to associate Italy to a Centre-West European biotech clusterâ&#x20AC;?

President of the Institut pour the Promotion du Lien social of Strasburg former President of Bio Valley,

A further element of reflection regarding the positioning of the various countries and the growth prospects of their biotechnological industry concerns the presence of "specialisations" or national vocations in respect of biotechnology. The US data are remarkable but they refer to a vast and variegated national economy where various industries are found of equal or even greater importance. In other countries, with smaller economies and less florid public and private financial circuits, biotechnology may constitute a precise choice, at the level of public and private policies, for prioritizing limited resources. This is the case of Iceland, where the share of corporate R&D in biotechnology with respect to the total of private investments in R&D, exceeds 50%, New Zealand (21%), and Denmark (24%), against a figure of only 7% for the USA. Furthermore, New Zealand also exhibits - as indicated earlier - a strong commitment to the industry by public research bodies. From this point of view, it must be remembered that biotech companies tend towards "clustering", that is the concentration in limited geographical areas, thus giving rise to biotechnological districts or clusters. It follows that the evaluation of the biotechnological

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specialization of a nation also depends upon the presence of one or more important biotechnological clusters. As mentioned earlier, these clusters can, not infrequently, cross national boundaries thereby making the comparison between various nations less meaningful. As the biotechnological cluster represents the authentic locus of the activities of biotechnological vertical integration (universities, research centres, health institutions, biotech companies, service companies, public agencies, private equity companies), they call for further analysis, above all as concerns the main European clusters that are spearheading the European development of the industry. While the 2006 Report set out a quantitative analysis of the main European clusters, this edition proposes an analysis from within the clusters themselves, through interviews with opinion leaders.

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The principal biotechnological clusters: the views of opinion leader Interview with Sabine Urban, Emeritus Professor, Robert Schuman University of Strasburg The Biovalley cluster is especially focalised on the life sciences. Internally the cluster is made up, of areas of further specialisation, with strong ties to other parts of the cluster as well as to other parts of the world. The Strasburg area, in particular, has acquired distinctive skills in immunology and associated therapeutic innovations. This centre of biotechnological skills is of enormous interest to Italian industry by virtue of its geographical proximity to our country, as it runs along a strategic backbone commencing in central Europe, at the French-German boundary (Strasburg Freiberg), and extending up to Switzerland. The cluster is a crucible for complex interactions between the subjects hosted by the centre (local government agencies, universities, companies, banks and venture capital companies) but at the same time these subjects also have strong external ties in terms of public and private research and marketing partnerships. Philippe Poindron, a former President of Bio Valley and now President of the Institut pour the Promotion du Lien social of Strasburg once stated, “I have always dreamed of associating Italy to a Centre-West European biotech cluster”. This important statement leads us to make a highly positive evaluation of the developmental level of Italian biotech and its potential, as well as of the opportunities for integration/ cooperation with the other main European centres in the sector. 1. What is BioValley in Alsace and what does it mean for local and national development? BioValley is an example of positive returns on cultural and economic cooperation, at an international level, over a long period of history (the Roman-Germanic Empire and the early period of industrialisation). This area in the Upper-Rhine valley has, for many centuries, been characterised by the cross-border integration of peoples, trade and, industrial and scientific activities. Hence the endowment, in the 1990s by a Swiss entrepreneur, Georg Herbert Endress, of industrial equipments to the pharmaceutical industry, was immediately seen as a promising initiative. In 1996 the first tri-national (Swiss/ Baselian area, Germany/ South Western part of Baden-Württemberg, France/Alsace) Life Sciences Network was created in Europe, initially as a social network, but later it soon transformed itself in a cluster.

For the Alsace BioValley membership means being a partner of a tri-national network (unique to Europe), with more than 500 companies (of which 300 companies in the field of life sciences), global players as well as small start-up’s, research institutions, technology transfers centres, public institutions for economic development, bankers, venture capital companies, and services. The development of this tri-national region has been boosted not only by major pharmaceutical firms (Roche, Novartis, Syngenta, Aventis/Sanofi, Lilly, Transgene, Millipore, Dow, Johnson-Johnson, Pfizer, Altana,…) but also by large universities and public research centres Université Louis-Pasteur (Strasbourg), Upper Alsace University, Universities of Freiburg and Basel, Max Plnak and Frauenhofer Institutes, CNRS, and INSERM. This gives a critical mass to the entire, interconnected, “region” for basic and goal oriented research, as well as an attractive environment and substantial bargaining power (negotiation with the French government of Alsace “Competitiveness Centre for Therapeutic Innovations”, July 2005 for example. 2. What are the strengths of the Alsace Bio-Valley (Strasbourg) model? The BioValley cluster management provides network members with a package of services: an international database, publications, a regular Newsletter, www.biovalley.com Bio Valley Extranet, an economic intelligence platform, scientific and partnering conferences, friendly meetings, an umbrella for participating in trade fairs and exhibitions (tri-national presentations), collective project management (bringing together structures for development and high-performance transfers), and general public information. BioValley is an excellent demonstration of the positive impact of cooperation between industrial, scientific and political players, all involved and united by the objective of developing powerful activities for the future, within an attractive area, endowed with favourable externalities (infrastructures, education, quality training, scientific and industrial experience and learning facilities…). Industries are set up wherever ideas turn into internally renowned cases of economic development. In many ways working

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together is a commitment to efficiency that entails the creation of new sustainable jobs. The main factors of BioValley’s success are first, the high quality of higher education and research establishments (mainly public institutions) with a high density of life-science related scientists, second a high number of leading life- science private companies, third favourable economic conditions (governmental and local support, facilities for biotech companies, regional seed and risk-capital funds, big pharmas support). Alsace (the French part of the tri-national life sciences cluster) is the smallest French region but the second biotech region in France in terms of scientific publications, cooperation with industry, quality of research and patents. As a cluster it is able to drive the dynamic behaviour of scientific actors. The scientific excellence in Alsace BioValley is supported by 2,600 public researchers, 40% in life sciences, 18 research federations and 120 laboratories. The fields of activities are molecular biology and genetics, pharmacology, oncology, chemistry/biology interface, green biotech, diabetology, haematology, and neurosciences. BioValley was (2004-2005) a major coordinator in the creation of the “Competitiveness Centre for Therapeutic Innovations”. A competitiveness centre may be defined as the combination, on a given geographical area, of businesses, training centres and research units involved in partnerships aiming at promoting the synergies inherent in innovative joint projects and processing the critical mass necessary to have an international profile. This competence centre, now (2006) officially recognized, is boosting the competitive spirit of the cluster and is considered a driving force for the local and French economy in forthcoming years. The ambition of Alsace is to become an international leader in tomorrow’s medical world, giving priority to a global approach to healthcare, by placing the patient at the centre of the healthcare system. The centre for “Therapeutic innovation” with a high profile in emerging new technologies, will increase Alsace’s potential for attracting businesses and research laboratories involved in this field and will

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encourage new industrial developments (spillovers and externality effects; spin-off projects; intersection of ideas, concepts, cultures: the so-called “Medici effect”). Nanobiotechnologies have been identified as one of BioValley’s “future stars” in the study on centres of excellence conducted by CapGemini in 2004: the Swiss University of Basel plays a leading role in this respect but several projects are being developed in partnership with other BioValley Universities: Freiburg (Baden-Württemberg), Mulhouse (Alsace) and Strasbourg University Louis Pasteur (Alsace), as well as the outstanding German Universities of Karlsruhe and Heidelberg, in the nearby Upper Rhine area. The centre of “Therapeutic innovations” brings together all players involved in the sectors of medical and pharmaceutical technologies. Alsace has set itself the objective of becoming a cradle of therapeutic innovation and, for 2015, the target of generating 5,000 new jobs by creating 90 new companies, establishing 45 companies, and doubling partnerships between the public and private sectors. Alsace is already characterized by the most internationalised environment in France after Paris (international institutions, multinational companies) and intends to further increase its international character (1 employee out of 4 in the private sector is working in a foreign-capital firm, in 2006). 3. What are the common traits –if any- of French (Alsace BioValley) firms and their perspectives? In Alsace, the life sciences sector represents a total amount of about 135 companies and 9,500 employees. 75% of them directly involved in the field of life sciences, 25% of them involved in subsidiary fields like financing, consulting, computer science and information technology (information related to surgery knowledge and know-how, sharing surgical procedure at a distance, telesurgery, for example), photonics etc. It is of course difficult to define the ‘common traits’ of such diverse firms but one can refer to their being united by a common spirit in the quest for excellence, interdisciplinary and international orientation, cross border cooperation and open-mindedness. Science

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has no borders and science is needed to develop and implement new ideas. Alsace has an excellent reputation also in recognition of the fact that since 1990 5 researchers, working in the BioValley area, were awarded Nobel prizes for chemistry and medicine. They are influential in the governance and monitoring of the system. Quality is one of the common key words: it applies to the sphere of new therapeutic molecules and innovative tools for medicine (medical devices), medical and surgical imaging and robotics, and the search for an appropriate interface between research, industrial development and medical applications. The hospital fabric is efficient and well known in many specific fields. Most contracts managed by the University Louis Pasteur/ Strasbourg (one of the 100 top universities in the world according to the Shanghai ranking) have been signed by laboratories included in the competitiveness centre “Therapeutic innovations”. Strasbourg University is the centre of much European, multi-disciplinary research and training networks. Strasbourg also hosts CEIPI (Centre for International Industrial Property Studies) as well as IEEPI (European Institute for Companies and Intellectual Property). All this means close links with industry and engendering factors for economic development. Innovative tools for medicine, for instance, constitute a sector with a rapidly growing market. The same applies to drugs and innovative therapies, especially in a context of the aging populations of Europe, Japan, Russia, and China… A real “network spirit” is emerging, creating new innovative dynamics.

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Big Pharma's role in supporting biotech in Italy Sergio DompĂŠ, President of Farmindustria In recent years an important structural change has been taking place in the international scenario of the life sciences. This has taken the form of the multiplication in the number of partnerships (in various forms such as cooperation, co-promotion and co-development) between pharmaceutical companies and the biotechnology industry. And among the motors driving this "revolution" there is the ongoing need to pursue innovation, which is the hallmark of the life sciences. In the face of the reduction in the number of active principles discovered in recent years and the growth in the expenditure necessary to achieve them (the development of innovative drugs can, in some cases, exceed one billion dollars), biotechnologies can constitute an important factor of pharmaceutical innovation. The ever-closer relations between biotechnologies and pharamaceutical companies are the product of synergies that can give greater leverage to their respective strengths: from biotech the capacity to explore new research paths and meet therapeutic needs that still have to be satisfied; from the drug companies the availability of resources for clinical development, in addition to the complex functions, facilities and industrial know-how necessary to make innovation a practical proposition. Biotech, in synergy with the pharmaceutical companies, can make innovative products available not only for the more widespread pathologies but also for rare diseases and in this sense it represents an important opportunity for scientific, economic and social development. Biotechnology marks a radical change in the scenario. Whoever, in the immediate past, had the largest amount of skills and resources, came out on top. Today, instead, the decisive factor is competitiveness as represented by the international network. Even companies with a minimal critical mass can participate but on condition that they have valid ideas and the capacity for interconnection with the wider international network. This framework opens up new prospects for Italy, which has demonstrated that it has every right to participate in the international research network. The health-orientated biotechnologies (Red Biotech) have 35 projects in the pipeline in the pre-clinical phase and 42 in the clinical development phase. Moreover, the diffusion of biotech medicines in Italy is growing rapidly. At present it constitutes 25% of

pharmaceutical spending in hospitals, which is the environment where principal use is made of highly innovative products. And, we can also note also a significant growth in these products in terms of clinical trials: 123 biotech products, a fifth of all medicinal products, underwent trial in Italy in 2005. These are important results, which mainly derive from the contribution of a large number of pharmaceutical companies, and although differing in terms of size, nationality and specialisation, they all share the same growing commitment to research and production. Alongside these companies, there are numerous small companies, authentic start-ups, which in a short space of time have conquered the front pages of prestigious international scientific journals, attracted investments into Italy and reached cooperation agreements with large companies. These are companies such as Philogen, from which Schering AG acquired the development and marketing rights for a new anticancerogenic molecule; Newron which reached an agreement with Serono for the development of products for Parkinson's and Alzheimer's disease; Gentium, which very active in the field of orphan drugs, was recently listed on NASDAQ; NicOx, listed on Euronext, which reached agreements with Pfizer and Merck Sharp & Dohme; Bioxell, listed at Zurich; Molmed; and Layline Genomics, the spin-off of the Scuola Internazionale Superiore di Studi Avanzati (SISSA) in Trieste. Our country can be one of the top ranking protagonists in international competition because it has an extraordinary potential. Italy possesses a solid industrial platform for pharmaceutical production, it is the third country in Europe and fifth in the world in terms of employees, and has a growing Red biotech sector, comprising over 160 companies and more than 13 thousand employees. In addition, Italy hosts many outstanding public biomedical research centres in which some of the most prestigious international names work. Another competitive advantage is constituted by the ability of our researchers who have earned worldwide recognition for their productivity, flexibility and creativity; such skills will always remain important qualities. And to these factors we should add the positive characteristics of our country: a widespread and innovative entrepreneurial spirit, particularly suited

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for small and dynamic companies, which often begin life as start-ups; solid skills and a long industrial tradition; highly qualified personnel and skilled

management; top-quality allied industries, which, by often providing personalised products and services, constitute a factor of competitive advantage.

Biotech-drug company synergies are changing the life sciences scenario Biotechnological research

Drug companies

• Less critical mass needed

• Economic of scale and drive to specialisation

• Capacity to explore new research paths and satisfy therapeutic needs that are not still satisfied

• Aviability of resources for clinical development, as well as of complex functions, industrial plant and knowhow to correctly exploit an innovation

The need to grow Excellent environment to grow new skills that recognises and rewards abilities and attracts resources for the development of new drugs

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Fuels the pipelines with innovative products in the face of ever-higher research costs

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As the Blossom Report indicates, the success of the biotech industry is closely related to the co-presence of companies, research centres and structures, science and technology parks and incubators, hospitals and clinics and institutional investors, which by operating as a functioning system act as a motor for the development of new companies. Important clusters are being consolidated in the life sciences. We witness this taking place in Lombardy, the second chemical-pharmaceutical region in Europe, with a network of excellence in public and private research; in Lazio, which hosts the productive and research operations of some of the most representative Italian and international companies; in Tuscany, whose traditional pharmaceutical industry is now flanked by one of the most important biotechnological clusters; and also in Veneto and Emilia Romagna, which can boast strong pharmaceutical activities, especially as regards R&D, as also, albeit to a lesser degree, can the regions of Sicily, Campania, Piedmont, and Friuli Venezia Giulia. In conclusion, it is fundamental that Italy, where important biotech operations flourish, should consolidate its positions in such a vital area for the knowledge economy and the country's development.

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The trends of the world, European and Italian biotech market Bruno Sfogliarini, Consulting Director – IMS Health IMS has delimited the biotechnology sector to 127 molecules, according to the definition of the “biotech product” as a drug or vaccine produced through recombinant DNA technology. Proteins derived from plasma are not included, as they are not synthesised through recombinant techniques. The world biotech market is estimated to be worth (at ex-factory prices) 58 billion dollars (based on a 52week year finishing in June 2006), with an average annual growth rate of +16.9%. This growth is primarily generated by increases in demand volumes (+12.2%), rather than by price increases or new product components (+2.2% on each account). The rate of growth in 2006 constitutes a slight slow-down with respect to the estimate of about +20% in the five-year period 2000-2005. The geographical area that accounts for the highest share of the world market is North America, at 62%, followed by Europe (29%, and growing), while Japan's relative importance is declining (from 10% in 2001 to 6%). Inside Europe, Germany and France (each with 6%, respectively 3.6 and 3.2 billion dollars) have the largest shares, followed by the trio Italy, Spain and the United Kingdom (3% each, 1.9, 1.8 and 1.5 billion dollars respectively).

the result of a series of factors that are, in part, favourable and, in part, disadvantageous, and which can be listed as follows: • emergent countries are being progressively opened up to biotech; • the demarcation lines between Big Pharma and Biotech firms are being increasingly blurred; • increasing resort is being made to targeted the rapies; • the pressures for the containment of pharmaceutical spending now also applies to biotechnologies; • biosimilars are entering the market (e.g. the launch of Humatrope in Australia and Procrit in Croatia; the approval of Omnitrope by the FDA); • the regulatory framework is becoming increasingly stringent.

IMS' forecasts for 2007 estimate a world biotech market of over 70 billion dollars, with an annual growth of between 13 and 14%. In conclusion, therefore, there is a scenario of further growth by the industry, which, at the same time, is also beginning to show the first signs of maturity.

Italian biotech has been growing in the last twelve months at a rate of +19.3% in value, which is second only to the Canadian market in the panorama of the largest markets. Growth is generated for +13.4% by increases in the volume of demand and for +6.7% by new products, while the price component impacts negatively, albeit in a very limited manner. The most significant therapeutic areas for the world biotech market are erythropoietins (13 billion dollars, +9%), insulins (8 billion dollars, +15.7%), special antineoplastics (7.4 billion dollars, +59.9%), interferons (6 billion dollars, +8.8%) and special antirheumatics (5.7 billion dollars, +31.5%). Other classes that have helped significantly towards the overall growth of the industry are immunostimulatory and immunosuppressant agents. All these figures demonstrate that biotech is still a very dynamic segment with respect to the overall panorama of the pharmaceutical market. The continuing double-digit growth of recent years is Blossom Associati 2007

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Networking to enhance business competitiveness - the role of the Italian Institute for Foreign Trade - ICE Ambassador Umberto Vattani, President Italian Institute for Foreign Trade I am particularly pleased that ICE has contributed to this prestigious Report. It has immediately established itself as required reading for those wishing to gain a comprehensive view of the biotechnology industry in Italy. We are well aware of the potential that biotech holds for the Italian economy and that is why we at ICE are stepping up our efforts in this field. The Italian Institute for Foreign Trade promotes commerce, industrial and technological co-operation, and inward and outward direct investment through its network of 111 offices in 84 countries and 16 Regional branches throughout the country. Italian biotech companies can rely on ICE’s support in acquiring market intelligence and in establishing and consolidating their presence abroad. Our activities encompass over 1000 promotional events worldwide, targeting 20,000 companies. Services rendered to Italian firms and their foreign counterparts yearly amount to 100,000. A special Action Plan funded by the Ministry for International Trade enables Italy’s biotechnology offering to develop and expand. Through a yearly Promotional Programme, ICE organises the participation of Italian companies in the major international Forums and Conventions, helping to pave the way for commercial agreements and acquisitions involving Italian and foreign companies. Activities are planned in conjunction with Italy’s national Association of biotechnology companies, Assobiotec, and with the Members of the Biotechnology and Biosafety Committee, in order to establish common strategies. Italian Hi-Tech companies, especially biotech companies, can avail themselves of the specific services offered by some of ICE’s main overseas offices: Los Angeles, New York, Toronto, Paris, London, Tokyo, Berlin, Dubai and Shanghai, whose specialised task is to promote trade in technology and attract foreign investment. Truly a “network within a network”, soon to be boosted by a new service for the protection of intellectual property rights offered by 11 of our offices operating in China, India, United Arab Emirates, Brazil, the United States, Russian Federation, South Korea and Turkey. Their task will be to safeguard the “Made in Italy” image abroad, with particular emphasis on providing Italian companies with specific support in the field of IPRs. ICE will soon be launching biotechinitaly.com, a specialised Web site that will bring foreign companies directly in touch with Italy’s technology market; what

is more, they will have the opportunity to benefit from an online matchmaking service, which we are confident will foster technological, commercial and industrial cooperation between Italian biotech companies and prospective partners overseas. To encourage mutual contacts among businesses and the scientific and academic world is essential to our mission in this field. We strongly believe that biotech is a fast-growing sector in our country and that the interaction between production and research is fundamental to the development of a competitive and successful industry. The ability to network with the scientific and academic world is of strategic importance to the development of innovation capabilities. This is especially true of the biotechnology industry. Italian biotech typically comprises not only the “BigPharmas”, but a large number of technologically sophisticated start-ups, as well, along with Universities and research Centres. Such a composite structure requires the backing of public institutions, enabling the creation of networks of excellence and international co-operation projects. No longer an objective in its own right, competitiveness has taken on a social purpose. The promotional activities of ICE thus contribute to fostering technology transfer between research Centres and businesses, and the creation of innovative products, processes and services. Both through its own networks and by entering into strategic alliances with international Bodies and Organisations, the Italian Institute for Foreign Trade offers a range of information and services that contribute to the creation of value added, thus underscoring the vital importance of knowledge in a world in which the emphasis is shifting from the production of material goods to the provision of related services. The ensuing relationship with SMEs allows ICE to offer them its support at every stage of their growth and expansion in the international marketplace.

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Methodological Notes

Our method is essentially based on the application of one single definition of "Biotechnological Sector" within the framework of the entire study. Blossom Associati, in agreement with the Research Centre for Economy, Health, Innovation and the Territory (CrESIT) of the Insubria State University decided to adopt a single methodology so as to guarantee valid comparisons between national and international findings. An analysis of the main national and international studies showed that all too often the different methods used produced analyses that cannot be compared to one another and which are sometimes misleading on account of the objectives that were set for them. Therefore, for the purpose of minimising any of the differences that we encountered, it was decided to dedicate our attention to all the main methodologies adopted in the framework of the various international studies in order to winnow out the best in each. Thanks to this work of analysis and cooperation Blossom Associati and CrESIT are today a national and international reference point, able to provide and represent all the key data of the Italian sector according to specific requirements. Whenever it may be necessary to modify some criteria of analysis, enlarge or modify the objectives of our enquiry, we can reclassify and re-analyse the data provided by deploying all the key data of the national sector while remaining faithful to the underlying principle based on the adoption of a single, reliable and certified database. In order to determine the list of certified Italian biotechnological companies we adopted a selective analytical criterion that requires the adoption of the following prerequisites for each company: • the legal body in question must be a company set up for the creation of value and the generation of profits; • the company analysed must undertake research and development within the territory of Italy (albeit not on an exclusive or prevalent basis). • the R&D activities concern innovative technologies and products based on biotechnological type platforms - (Bio)Pharmaceuticals & Gene/Cell/Immuno therapy, (Stem) Cell research & Tissue Engineering, Transgenic Plants & Animals, Molecular Pharming, "Biotech-related" Tools (biochips, gene transfer, etc.), Genomics, Proteomics & Gene sequencing / mapping / synthesis; basic research, Bioinformatics, etc. • Therefore, enterprises that perform services for the production or distribution of biotechnological products were excluded - Contract Manufacturing – biopharmaceuticals etc. With respect to the preceding report, the 2007 Report contains some novelties. And two aspects are worthy of special mention. In order to better understand the real weight of the industry in the national economy we decided to extend the radius of our analysis into the structure of the biotechnology health care sector (Red Biotech) by classifying operators on the basis of an analysis of their business models: • Born Biotech: companies whose business is mainly orientated to R&D with special reference to biotechnology products and technologies or where the share of investments on biotechnological platforms or technologies (InvB)

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with respect to all investments (Inv) is greater than 70% (InvB/Inv>70%); • Pharma Biotech: a) pharmaceutical firms or b) biotechnological companies with a strong pharmaceutical character (businesses created as spin-offs from pharmaceutical firms). In more detail: a) pharmaceutical firms carrying out diversification processes in the biotechnological sector by introducing a specific R&D activity into Italy in a biotechnological (therapeutic) framework; b) biotechnological companies deriving from the pharmaceutical industry whose core business is connected to research and development activities in a biotechnological framework but with consolidated business models based on strong ties to traditional pharmaceutical firms, from which they, for the most part, derive.

For Pharma Biotech companies, a further segmentation was envisaged on the basis of the ratio of investments in platforms or biotech technology (InvB) to total investments (Inv). In detail, if the ratio InvB/Inv is greater than 40% of the investments the company is “Biotech oriented”, while if the ratio InvB/Inv ranges from 5% to 40% the company is “Pharma Oriented”. Some additional considerations may help to qualify the methodology applied. Science parks and incubators. In this edition we have introduced a significant novelty by choosing some science and technology parks that, on the basis of a selective and independent criterion, meet the following pre-requisites: • a strong propensity to support start-ups by sustaining not only managerial development but also the development of a technical, scientific and regulatory know-how of international importance; • a strong propensity to sustain, manage and promote technological transfer at an international level; • a strong propensity to sustain and promote ties with big pharma, biotech companies, professional and managerial service companies investors, universities, research centres, hospitals and clinics orientated to research and trials at a national and international level; • presence of structures, technologies and highly qualified researchers and personnel. Universities. The main universities have been analysed and identified that exhibit a strong propensity for leveraging their know-how and which over time have been able to sustain and successfully bring about the spin-off of at least one or more of the biotech companies that meet the foregoing requisites and of which they are shareholders. Clinical research. For purposes of identifying research centres and structures, account was taken of the data and information drawn up by Aifa. However, it should be noted that the pipeline set forth in the 2007 Report takes account of not only the clinical trials conducted in national hospitals and clinics but also of trials involving biotech projects and products for which R&D was undertaken in Italy, although the subsequent trials were performed outside Italy.

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Service companies. We have not taken into account the companies and professional firms, the software houses and in general all the companies that provide consultancy or perform services in support of biotechnology and companies. The use of this methodology does not allow us to estimate the aggregate value of all activities correlated to the industry, which - as may be imaged - are far wider than the specifically biotech system.

Data and criteria for size segmentation The selection of companies refers to the year 2006. The data reported refer to the year indicated in the pertinent tables. For the classification by size of the companies, we used the community definition of a company that came into force on January 1st, 2005, introduced by recommendation 361 of 2003, which replaced 96/280/EC with an updated text. In this regard, the following definitions are used: • a small company, refers to a company with less than 50 employees and annual revenue or budget of no more than 10 million euros (the most favourable figure is used); • a medium-sized company refers to a company with less than 250 employees and annual revenue of no more than 50 million euros or an annual budget of no more than 43 million euros; • a large size company refers to a company with more than 250 employees and annual revenue of over 50 million euros or annual budget of more than 43 million euros (the least favourable figure is taken).

The research areas: segmentation criteria The companies analysed in this report have been classified according to their areas of activity: • Healthcare (red biotech) for the production of diagnostic and therapeutic products by the adoption of technologies such as, for example, the genome, proteomics, biotransformation, enzymology and biocatalysis and recombinant DNA. • Industry and the Environment (grey or white biotech for the industrial production of vitamins, amino acids, enzymes, etc. as well as for waste disposal, the treatment of polluted waters and the identification of toxic substances in the land, air and water. • Agriculture (green biotech), veterinary and animal husbandry. • Bioinformatics, companies with a significant orientation towards the development of biotech information technology platforms.

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As already mentioned, this research does not intend to survey companies engaged in services, regulatory, legal and financial consultancy and generic biomedical production.

The process of recognising biotechnological companies In order to guarantee that the analysis be fully comprehensive and thus able to include the maximum number possible of companies that meet the foregoing requisites, a far-reaching and in-depth analysis was conducted throughout the national territory, based upon the following approach. a) Identifying the companies. The identification of the first set of companies meeting the minimum requisites was based upon a thorough analysis conducted company by company, by means of which information was acquired directly from the companies, within the ambit of official national/regional databank data, ministerial web sites, agencies, universities, incubators, science parks, companies, etc. The research was successively conducted by analysing chamber of trade records and financial statements. Final verification took place by making direct contact with the company. b) Selecting the companies. The selection of the companies was the most complex phase as it called for special attention in determining whether or not companies met the methodological requisites as formulated. An initial selection of the companies was made by gathering information from the financial statements of the individual companies, the acquisition of supplementary data on the single firm through qualitative questionnaires and the entering of essential information within a database designed by Blossom Associati and CrESIT. Each company was later analysed for a preliminary inclusion or exclusion assessment, which turned upon whether the requisites defined by a scientific committee made up of Blossom Associati, Assobiotec and CrESIT had been met. In order to guarantee total independence and professionalism in our work, the final selection for definitive approval remained the prerogative of Blossom Associati and CrESIT which, on the basis of all the information acquired, ratified the decision to consider a company as part of the industry or, alternatively, to exclude it. c) Data collection. The collection of the data on the financial statements was prepared by CrESIT on the basis of the indications agreed upon with Blossom Associati. The data was collected by acquiring the financial statements and chamber of commerce records on the companies chosen and of all the principal documents referring to the industry, in line with the methodology of analysis proposed. The numerical evidence set forth in the Report is the product of statistical analyses by CrESIT and Blossom Associati on data and information from the following sources: â&#x20AC;˘ Financial statements and notes to the financial statements filed with the chambers of commerce, for the years 2005, 2004, 2003 and 2002; â&#x20AC;˘ Chamber of commerce records (both ordinary records and records on shareholding structure) conducted in the period November - December 2006.

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The soliciting and collection of qualitative information, which was forthcoming from the companies thanks to the use of a specially prepared questionnaire, was managed by Blossom Associati, Assobiotec and Farmindustria. The companies replied in a full and exhaustive manner to the questionnaire issued them. The reply rate was amply above the 10% figure obtained by the best international surveys (Harzing, 1997). In detail it may be noted that the rate of reply for large companies was around 77%, and that for medium-sized around 52%. For the small companies of pharmaceutical derivation the rate was around 78%, but for the small companies of biotechnological derivation (which are extremely fragmented throughout the territory) the rate fell to around 39%. Of the White Biotech Companies 39% replied , while the reply rates of Green Biotech and Bioinformatics Companies were, respectively, 5% and 45%. On average we can state that 90% of the most important companies in the industry replied, and that the average reply rate was 73%.

The data collection process was concluded on January 15th, 2007 The rigorous application of the methodology developed, as also the result of the independence and professionalism of Blossom Associati and CrESIT in their evaluation of individual cases, led to the exclusion of many companies, entities and actors that have, in many cases, been included in numerous other studies and databases. Obviously, given the importance of the work we cannot, a priori, exclude that companies or parks may have been omitted that, vice versa, should have been included in the list of certified companies. Any companies and parks not included in our list that consider they satisfy the requisites indicated, should request a qualitative analysis form from Blossom Associati in order to furnish information necessary for the 2008 edition of the Report. On the other hand, those companies that consider they do not meet the requisites defined in the methodology but find themselves included among the certified companies may request removal from the list by providing Blossom Associati with appropriate information as well as the grounds for the cancellation.

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Biotechnology in Italy 2007 - Financial and strategic analysis

Acknowledgements

In the course of time Blossom Associati and Assobiotec have consolidated a relationship of cooperation founded on the shared objective of enhancing international awareness on the performance of Italian biotechnologies. For the purpose of analysing the reasons for the scarcity of investments in the biotechnology industry in Italy and bringing to light the distinctive elements of the relations between Italian biotech and international venture capital, a survey was published in 2005 entitled â&#x20AC;&#x153;Il mercato del biotech italiano: quale interesse per gli investitori istituzionaliâ&#x20AC;? (the Italian biotech market: the opportunities for institutional investors) , which was presented to the Milan Stock Exchange, in the presence, inter alia, of the Ministry of Health and the managing director of Borsa Italiana S.p.A. The salient fact to emerge was that 53% of international private equity had no knowledge of the Italian biotechnological market and the associated investment opportunities. This finding gave rise to the need for a greater integration between the biotech market in general and international private equity in particular, which induced Blossom Associati and Assobiotec, with the assistance of the Insubria State University of Varese and the University of Pavia, to undertake a strategic financial study of the Italian biotechnology industry in order to define the Italian bioscience system. This project has been developed through the application of our knowledge to the competitive forces that characterise innovative sectors in general and biotechnologies in particular by implementing a rigorous analytic methodology, which is not only independent, but also coherent with the principal models of international analysis. In this context the 2006 Report on biotechnologies in Italy pursued the objective of analysing the strategic and financial dynamics of the industry by construing the academic, scientific, industrial association, managerial, financial and professional world as a functioning system. The survey was used as a tool for promoting the system of Italian biotechnologies on the occasion of the principal initiatives of national and international promotion, among which we can mention the annual meeting of Assobiotec in which the Minister for Community Policies and International Trade and the President of the Committee for Productive Activities of the Chamber of Deputies took part, and the 2006 edition of Bio-Europe, one of the most important international congresses of the biotechnological industry, which took place in DĂźsseldorf at the beginning of November. The Report, which was distributed to all Italian members of Parliament and representatives of various local government bodies, achieved considerable media exposure, with over one hundred mentions in the national and international press, including the trade journals. In fact, the Report is unanimously held, and at various levels, to be the most authoritative source of data on the current state of biotechnologies in our country. This success persuaded us to continue further down the path on which we had set out by drafting the new 2007 Report on biotechnologies in Italy , which consolidates the work of accrediting the Italian biotechnological industry in various international contexts by virtue of the strategic and financial information that will enable international stakeholders to appreciate the enormous progress made by the Italian biotech industry in recent years. In brief, we decided to produce an instrument specifically prepared for the international financial and Blossom Associati 2007

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Biotechnology in Italy 2007 - Financial and strategic analysis

industrial community that will facilitate the understanding of the competitive strength of the national industry thus enabling Italian companies to acquire a global visibility and underlining the interesting inward investment opportunities offered by our country. The Report on biotechnologies in Italy, planned and produced by Blossom Associati and Assobiotec, in addition to the cooperation of the Insubria State University of Varese, in the person of Alberto Onetti, Director of CrESIT, and the University of Pavia, in the person of Antonella Zucchella, Vice-President of the Centre for Technological Innovation and Transfer, ITT, of the University of Pavia, also benefited in 2007 from the contribution of Farmindustria in the persons of Sergio DompĂŠ (President), Massimo Di Martino, Maria Grazia Chimenti and Carlo Riccini and ICE (the Institute for Foreign Trade) in the person of the Ambassador Umberto Vattani (President) and Gianluigi Liberati (Manager for the Area of Capital Equipment, Technology and Services). We would also like to express special thanks to Roberto Gradnik (President Assobiotec), Alessandro Sidoli, Marco Renoldi, Marina Del Bue, Maria Luisa Nolli, and Leonardo Vingiani (General Manager). We would also like to thank IMS Health in the person of Bruno Sfogliarini. And our warm thanks are also due to the information officers of the main Italian biotechnological science parks: Marco Baccanti (Raf Science Park), Germano Carganico (Tuscany Life Sciences), Fabrizio Conicella (Bioindustry Park Canavese), Gabriele Gatti (Area Science Park ) and Valter Songini (Sardinia Science Park). In conclusion, we would like to pay tribute to the help given us by the Chamber of Commerce of Varese whose contribution and support in the collection of corporate information proved invaluable.

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Blossom Associati 2007


"A Real "Network Spirit" is emer ging, cr eating new innovative dymamics" Sabine Urban Emeritus Pr ofessor,Rober t Schuman University of Strasbur g


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Blossom Associati thanks to its strategic alliance with Bioselenia and APR is the reference Advisor in Europe for the internationally based, value maximisation of Licensing & Asset Management activities in the framework of the strategic development and M&A operations of our corporate customers. In order to maximise value on a global scale of both products and companies within the framework of Licensing & Asset Management activities we may leverage our integrated expertise: financial skills, a twenty-year knowledge of the market, unequalled technological and regulatory know-how and access to all the latest and most up-to-date international industry data .

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Biotech in italy 2007 strategy & financial