Biotech in italy 2008 strategy & financial by Stefano Milani

Biotechnology in Italy Italian Association for the Development of Biotechnology

The Financial Perspective

2008

Blossom Associati - Assobiotec Report

MANAGE INNOVATION

Leadership Finance Management Companies and Individuals Development Milan - Italy

Federica Bottazzi

blossomassociati.com

Managing Director

+39-02-80 50 50 11 fbottazzi@blossomassociati.com

BIOTECHNOLOGY IN ITALY 2008

Blossom Associati - Assobiotec Report

BIOTECHNOLOGY IN ITALY 2008

Massimo Boriero Maria Adelaide Bottaro Federica Bottazzi Agostino Carloni Maria Grazia Chimenti Marina Del Bue Maria Alessandra De Luca Sergio Dompé Rita Nunzia Fucci Laura Gatto Roberto Gradnik Gianluigi Liberati Corrado Maggi Alessandra Mancia Luca Martignoni Nello Martini Stefano Milani Francesca Mondello Maria Luisa Nolli Celeste Martina Penati Alessia Pisoni Alberto Onetti Marco Renoldi Deryck Rhodes Carlo Riccini Federica Rovida Alessandro Sidoli Marco Talaia Umberto Vattani Leonardo Vingiani Antonella Zucchella

This handbook 2008 is available online: www.blossomassociati.com Blossom Associati srl. 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 2008 Data sheets, charts or tables must, instead, state the source indicated within the document.

Acknowledgements: AIFA Assobiotec Blossom Associati CCIAA Varese

info@blossomassociati.com

CIBIE (Center for Research in International Business and Economics) University of Pavia

Object: request for the reproduction - Biotechnology in Italy 2008

CrESIT Università dell’Insubria di Varese

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Farmindustria ICE

Innovating the concept of business Dear Friends and Customers, 2008: the Italian biotechnological sector is consolidating a phase of successful development, thus demonstrating its capacity to meet the challenge posed by the knowledge economy. The sector is in a rare state of ferment and pursuing a clear strategic objective: integrating biotechnological and pharmaceutical companies, financial institutions and research institutes; a phenomenon taking place in Italy, as elsewhere in the world, and which could give rise to one of Europe’s leading biotechnological clusters.

Stefano Milani CEO Blossom Associati Alberto Onetti Director CrESIT

At the close of 2007, the sector comprised 228 companies, of which no less than 24 – meeting Blossom Associati-CrESIT’s methodological selection criteria – were accredited in that sole year. The sector remains dominated by companies dedicated to health care (74%). The overall turnover of accredited companies exceeded 10 billion euros, of which 4.8 billion generated by biotechnological products, representing a 11% growth rate in 2007. Biotechnological R&D investments totalled 1.3 billion - a 9% year-on-year increase. The employees of accredited sector companies numbered more than 26,000 (14,543 if we exclude accredited Pharma companies) of which over 6,600 in R&D. Overall, equity capital rose 56%, while at 213% the sector posted a particularly strong EBIT growth. In conclusion, financial indebtedness decreased 30%, shrinking to 1.6 billion euro. All these indicators point to there being real growth prospects for small companies (75% of the accredited companies). However, the overriding factor is the interest shown in the sector by medium-sized and large companies, which generate 97% of the entire Biotech sector’s sales and are responsible for 84% of R&D biotechnological investments.

Blossom Associati

2008

To achieve a better understanding of the future potentialities of biotechnologies in Italy, the most obvious course of action is to analyse the foundations upon which the so-called Italian challenge to the knowledge economy rests. As sector operators appreciate, Italy ranks among the leading countries in the international arena of the life sciences. Its total pharmaceutical sales (pharmacies + hospitals) at ex-works prices amount to E 16.5 billion (2006 data, source IMS). The overall value of the pharmaceutical market (at ex-works prices denominated in Euro) shows that Italy is the third market in Europe, after Germany and France and the fifth in the world, with the USA and Japan occupying the first two positions (source IMS). In terms of employment, the sector has over 70,000 workers on its payroll (June 2006), of whom over 6000 occupied in R&D. 599 clinical studies were conducted in Italy between 2001 and 2007 on biotechnologically derived drugs (source AIFA, National Observatory on clinical trials), of which the main part was Phase II (42.2%) and Phase III (49.8%) with the remaining trials in Phase IV (7.46%). In terms of numbers, the first three therapeutic areas of clinical trials are oncology (34.4%) immunology and infective diseases (10.8%) and haematology (9.4%). Total CT involving drugs of biotechnological origin Year 2001 2002 2003 2004 2005 2006 2007 Total

N. CT 2 10 20 87 130 195 155 599

% 0.3 1.8 3.4 14.5 21.7 32.5 25.8 100.0

Source: AIFA

As regards the operations of private equity and venture capital in Italy as a whole, the market has now reached a consolidated maturity in terms of the investment operations conducted, although there is still a significant delay as concerns investments in the specific sector of biotechnologies, especially in comparison with the other main European countries. However, the delays have been compensated in Italy by the bank foundations, which, in part, play the role that venture capital plays outside Italy. TT Venture owned by the Fondazione Cariplo and Toscana Innovazione belonging to Monte Paschi di Siena are two examples of bank-owned funds recently set up in Italy.

The first has the objective of raising E 150 million for investment in technological transfer, the weakest link in the value-creation chain of the Italian economy. The second fund, on the other hand, has E 45 million of its own funds thanks to the involvement of the Tuscan banking system and is focusing on biotechnologies for the development of innovative start-ups. Alongside these funds, there is the Fondo Next, considered the best European practice as regards equity funds, which was set up thanks to the support of Finlombarda and the Lombardy Region. The fund has raised E 37 million and invested the money in three biotechnology companies. Listed Italian biotech companies, all situated in Lombardy: > NicOx: Listed in November 1999 - France (Nouveau Marché - Euronext) > Cell Therapeutics: Listed in January 2004 - Italy (Italian stock exchange) > Gentium: Listed in June 2005 - US (NASDAQ, American stock exchange) > BioXell: Listed in June 2006 - Switzerland (BXLN.SW, ZÜRICH), > Newron Pharmaceuticals: Listed in December 2006 - Switzerland (SWX, ZÜRICH) > Cosmo Pharmaceuticals: Listed in March 2007 - Switzerland (COPN.SW, ZÜRICH), > DiaSorin: Listed in July 2007 - Italy (Italian stock exchange) > MolMed: Listed in March 2008 - Italy (Italian stock exchange) In addition, there are the companies Biosearch and Novuspharma. The first is a biopharmaceutical company set up as a spin-off by the managers of the Lepetit Research Centre. In 1998, the fund 3i invested E 13.5 million in the company and took out 39% of the company's share capital. In July 2000, Biosearch was listed on the New Market with an equity capital of about E 350 million.

In December 2003, Biosearch merged with Versicolor, a Californian company listed on Nasdaq and the resulting company was called Vicuron, a fully integrated, global, pharmaceutical company that was subsequently taken over by Pfizer in September 2005. Novuspharma, instead, started life as a biopharmaceutical company specialised in R&D on antitumour drugs. The group Boehringer Mannheim sold it as a spin-off from its Monza division. The fund 3i invested E 18 million in the company together with two other investors and the management and employees of Novuspharma became shareholders in the company through a stock option plan. Roche continued to act as strategic partner to the company, guaranteeing the transfer and licensing of important research project patents on which it retained option rights. In November 2002, it was listed on the New Market with a pre-money capital valuation of about E 360 million and raised around E 160 million in capital subscriptions. In June 2003, the company merged with the American Cell Therapeutics.

In Italy, the science and technological parks in which biotechnologies operate constitute an important asset in terms of scientific, technological and organisational skills. Moreover, the network provided by such parks performs a fundamental role in the development of the innovation supply chain. According to the latest analyses conducted by Blossom Associati, there are 7 science parks in Italy where biotechnologies are operative: the AREA Science Park, the Canavese Bioindustry Park, the Parco Tecnologico Padano, the Raf Science Park, the TLS Science Park, Sardina Ricerche and the Insubrias Biopark of Gerenzano. SERVICES PROVIDERS

INVESTORS Venture Capitalists Banks

Advisory

Stock Market Business Angels Istitutional Investors

Biosearch Novuspharma Cell Therapeutics Gentium

Year of Listing 1999 2000 2000 2004 2005

BioXell

2006

Newron

2006

Cosmo

2007

DiaSorin MolMed

2007 2008

Stock exchange France - Nouveau Trademarks Euronext Italian stock exchange Italian stock exchange Italian stock exchange USA - NASDAQ American stock exchange Switzerland SWX Zurich Switzerland SWX Zurich Switzerland SWX Zurich Italian stock exchange Italian stock exchange

Profile: Blossom Associati Corporate Finance

That these are particularly exciting times for Italian biotech companies is also demonstrated by the international agreements they have entered into. Examples of these developments are the agreement reached between Nerviano Medical Sciences and the American Genentech for 316 million euros, the acquisition of Hunter-Fleming by Newron and the merger between Amgen and Dompé which will lead to a biotech company with a strong research orientation and investments in 2008 estimated at E 10.5 million.

Professional Services

Interest, dividends

Legal Human Resources

Fees

CLUSTER

Listed Italian biotech companies (up to 2008) Company NicOx

Financial

Capital

Biotechnology companies Human Resources

Legislative Support

ISTITUTIONS European Union Istitutions

Fees

Economic Development Employment

Universities Consortia

Local Istitutions Industrial Associations

FUNDAMENTAL RESEARCH

Know how

Investments

Hospital Science Park

COMPANIES

Bio-incubator

Related Companies Applied Companies Source: Blossom Associati - CrESIT

The data confirm the findings documented in the previous edition of the Report: i.e. that the localisation of the biotech industry is directly related to the co-presence of a series of different industrial and institutional factors – pharmaceutical companies, research centres and structures, scientific and technological parks and incubators, hospitals and clinics, and also investors – which by functioning together as a system stimulate the development of new companies. Pipeline Italy 2008

Discovery 99

Preclinical 63

Phase I Phase II Phase III 33 35 16

Source: Blossom Associati - Assobiotec

Blossom Associati

2008

Furthermore, the sector’s characteristically strong territorial concentration is also a local phenomenon. Thus, biotech companies apart from polarising on a limited number of regions (Lombardy, Piedmont, Tuscany and Friuli Venezia Giulia), also tend to concentrate in certain specific territorial areas within them. If we limit ourselves to the case of Lombardy alone, we find that accredited companies are principally situated in the area of Milan, with ramifications in Como, Varese, Lodi and Pavia, although all are situated within a maximum radius of 50 kilometres from the regional capital. If we consider international empirical analyses, on the one hand, and, on the other, our accumulated experience of cooperation with many companies as strategic advisor, we can illustrate some features that characterise the managerial DNA of all the companies that we can define as “emergent companies”: > they invest in business ideas and products that do not set limits upon their own growth potential or value (Business Innovation); > they sustain the implementation of new ideas – innovation understood as the task of all persons within the organisation (Corporate Innovation); > they demonstrate managerial capacity through the adoption of strategic options and financially sustainable exit strategies (Managerial Innovation). Finally, we would like to emphasise three structural problem areas that in, our opinion, call for serious remedy, in Italy as elsewhere: > Corporate renovation to be understood as a crucial phase in the innovation of not only products, processes and systems but also corporate objectives and missions in order to guarantee the attractiveness and ongoing advantage of companies if they are to be able to compete at a global level (The Innovation of the Business Concept, Corporate Innovation, and Managerial Innovation). > Certainty of the timeline to obtain authorisations and clinical trial permits, which can be achieved by borrowing the systems and operating arrangements in use in other European countries. > Rigour and the application of selective sector models in the provision of financing while bearing in mind the universal need for a new class of financial advisors and operators, as they have the capacity to interpret and valuate such new business types. These are the considerations that we would recommend our readers remember when they read the 2009 edition of the Report evaluating the operations conducted in the course of the year and describing the performances of the best-accredited “emergent companies”.

The growth and consolidation of Italian biotech The fourth edition of the report “Biotechnologies in Italy” provides experts with an updated overview of the sector and a chance to critically appraise the developmental process of the Italian biotech industry in recent years. The phases through which the industry has developed as well as the objectives hitherto reached in terms of the critical mass of companies, employees and sales testifies to the fact that the sector – comprising companies, scientific parks and research centres – has by now acquired the characteristics of a mature industry. The process is well known as other countries have passed through the same phases. Italian biotechnologies are undergoing a specific developmental phase characterised by the ongoing growth of new corporate ventures but also, and more importantly, by the consolidation of established companies, and the elimination of the weakest. The undeniable maturity of the biotech sector is also demonstrated by a series of important factors. First the sector’s capacity to produce value has been reinforced, as testified by its sizeable pipeline, which, in a pharmaceutical context, translates into a constant increase in the number of products undergoing clinical development (Phases I-II-II), and which are all the result of Italian research. The number of such products has practically tripled in only two years, rising from 30 in March 2006 to 84 in March 2008 (a 280% growth rate). In particular, of the 84-biotech products undergoing clinical development, 33 are in Phase I, 35 in Phase II, and 16 in Phase III. Moreover, 8 have received “orphan drug designation” (3 by EMEA and 5 by both EMEA and the FDA). These are mainly products for use in the field of oncology. The remaining products refer to cardiovascular applications. Italian biotech research, furthermore, can boast 63 products at a pre-clinical developmental phase and 99 molecules at a discovery phase, which altogether constitute a solid foundation for the sector in the coming years. A second element demonstrating the maturity of the sector is the progressive capitalisation of the companies. A strong growth in capitalisation goes hand-in-hand with the increase in companies’ project development activities. Similarly, R&D investments are increasing and some important agreements can be read in the light of these investments, as they bring Italian companies and international partners increasingly closer together.

Roberto Gradnik President Assobiotec

In conclusion, there is the contribution made by the stock exchange. In a six-year period, since 2001, five Italian biotechnological companies achieved a listing on the principal international markets. In March 2008, a sixth company managed to be listed on the Milan stock exchange. This is not an insignificant achievement if it is considered that the first listings – and for considerable time the only listings – go back to the period 1999-2000, the time of the ‘new economy’ boom. Certainly, the path is still long and major investments in biotechnological innovation, which has shown itself capable of generating wealth, jobs and wellbeing, is still necessary. In terms of the national economy the challenge is, therefore, to sustain and realise the potentialities of the Italian sector through strong and strategic industrial policy decisions, in both the medium and the long term, capable of attracting ever-higher investment flows. In the same manner, it is necessary to support whoever has an original idea and transform it into a corporate reality. For this purpose, Assobiotec has launched “Sportello Biotech”, (the Biotech Desk) a new area of its internet site, offering free information for the creation of start-ups and spin-offs in the biotechnology sector. Similarly, we also promoted the exhibition BioInItaly (April 2008), where fifteen companies (chosen from about 30 applicants) were able to present their research projects to over forty international financial investors. Now it is necessary to improve the country’s capacity to attract investment – for whoever has an original idea and for whoever wants to invest. Therefore, it is necessary that the Finance Act fully implements all the tax facilities for “new innovative companies”, and increases tax relief on corporate R&D expenditure from 10 to 20%.

Blossom Associati

2008

The Life Sciences in Italy: the pharmaceutical companies’ biotech effort Within a fast changing framework characterised by increases in R&D spending and the reduction in the number of active principles discovered each year, biotechnologies have long since come to play an important and integral role in the life sciences. Ever-closer relationships between pharmaceutical companies and the new technologies (in various forms such as co-operation, co-promotion, and co-development) mean that many advanced scientific paths can now be explored to meet hitherto unsatisfied therapeutic needs. Furthermore, through closer working relations the necessary skills, resources and instructions are forthcoming for the development of the molecules and expertise that will make the new therapeutic instruments available. Thanks to possessing a number of unique qualities, Italy has demonstrated its leading international role in the life sciences (the third country in Europe and the fifth in the world in terms of employees), and its capacity to attract foreign capital. Furthermore, Italy has acquired an international specialisation in the pharmaceutical field as demonstrated by its foreign trade surplus in pharmaceuticals (E 1,229 million in 2007). The intensity of research and development is growing in the sector, as proxied not only by the ratio of researchers to total employees (which rose from 8.3% in 2006 to 8.7% in 2007) but also by the ratio of R&D investment to turnover (which grew from 9.4% to 10.1%). The biotechnologies deployed for health care are making an important contribution towards such results.

by Sergio Dompé President Farmindustria

At present 147 projects are being conducted by Red Biotech in Italy, of which 63 in the pre-clinical phase and 84 in the clinical development phase. Total R&D investments are rising as well as the value of red biotechnological production (estimated at E 4.6 billion), corresponding to 20% of the total value generated by the pharmaceutical sector as a whole. Apart from large Italian-and foreign owned companies, the companies dedicated to biotech research in Italy are becoming ever more numerous: 42 pharmaceutical companies have recently oriented their R&D effort towards the new technologies. These include those start-ups that in short space of time conquered the front pages of prestigious international scientific journals, attracted investments into Italy and reached cooperation agreements with large companies. Gentium, which is specialised in research activities, especially in the field of orphan drugs, is the only Italian company to be listed on NASDAQ; Axxam works in the San Raffaele Scientific Park; Nerviano Medical Science has commenced cooperation with Bristol Myers Squibb for the development of oncological drugs; Layline Genomics, a spin-off from the Scuola Internazionale Superiore di Studi Avanzati (SISSA) in Trieste, is part of a network with BioXell for the development of a monoclonal antibody; MolMed has been recently listed on the Milan stock exchange; Newron has reached an agreement with Merck Serono for the development of products for Parkinson’s and Alzheimer’s disease; Philogen, from which Bayer-Schering AG has acquired the development of marketing rights for a new anticancerogenic molecule will soon be listed on the Milan stock exchange; NicOx, listed on Euronext, has reached agreements with Pfizer and Merck & CO. That Italy offers numerous competitive advantages is a fact recognized by the managers who work here. Such advantages include the presence of many outstanding public biomedical research centres, in which some of the most prestigious international names work, highly qualified personnel and a skilled management, the productivity, flexibility and creativity of the human resources, solid skills and a long industrial tradition and a widespread and strongly innovative entrepreneurial spirit.

Moreover, this salient position has been further consolidated in recent years by incentives provided for sector companies: the programmatic agreements to promote investment in production and R&D in Italy; the fund for the promotion of research and advanced training in biotechnologies and, very importantly, tax credits for research activities. And nor should we forget the 0.5 percent allocation, a mechanisms that allows the taxpayer to earmark a part of his or her income tax towards associations that undertake socially relevant activities (non-profit, scientific and health-care research). Moreover, we can also cite other forms of assistance: the EUâ&#x20AC;&#x2122;s 7th framework programme, the reduction in the Ires (corporate income tax) rate, and financing from bank foundations. These measures have created the premises for an ever closer co-operation between companies and public centres of excellence, for example in the field of rare illnesses â&#x20AC;&#x201C; a particular field of biotechnological application â&#x20AC;&#x201C; which are indispensable if significant results are to be achieved. Genetic engineering and pharmaceutical/ biotechnological research constitute the main contributions for the cure of rare illnesses while many of the orphan drugs are, in fact, biotech drugs. Such pathologies (which are mostly genetic in origin) call for a new approach on account of their complexity in therapeutic and ethical terms; an approach that can bring public and private skills together in the name of social solidarity and the observation of the principle of subsidiarity. The commitment of companies to the research network on rare diseases needs the support of an ad hoc network created for information and training. This was the premise that led to the agreement on the protocol of understanding between Farmindustria and the UNIAMO Association. The protocol is a tool aimed at promoting the adoption in Italy of legislative instruments designed to encourage the development of orphan drugs by providing financing for research and improving the welfare and social assistance aspects of such pathologies.

The network of research, information and training

Pharmaceutical and Biotech companies

Public R&D: istitutions and universities

Information, prevention, diagnosis, and treatment

New and more-focused therapies

Patient and non-profit associations

Circulation of intellectual resourses and information

Incentives for R&D and networking

Commitment to industrial research

The biotech sector is an extremely high value industry in terms of its therapeutic potentiality and high innovative profile. Italy has been able to participate successfully in this process thanks to its mix of industrial skills, the excellence of its research and the entrepreneurial vitality exhibited by the biotechnological sector, which is generating not only important scientific results but also ever larger numbers of companies and, consequently, overall sector growth. Blossom Associati

2008

Biotechnologies in Italy 2008 228

Number of biotech companies in Italy: temporal growth

by Stefano Milani, Alberto Onetti, Federica Bottazzi, Federica Rovida Blossom Associati Management Consulting CrESIT - University of Insubria of Varese

132 94

2001 - 2007

1996 - 2000

1991 - 1995

1986 - 1990

1971 - 1975

1981 - 1985

1976 - 1980

before 1970

63 40

Source: Blossom Associati - CrESIT 2008

178

199

223

228

159

211

149

2001

2002

2003

2004

2005

2006

2007

Number of newly set up biotech companies: temporal growth (2001-2007)

Source: Blossom Associati - CrESIT 2008

Breakdown of Italian biotech companies by size

Large 13%

Medium 12%

Small 75%

Source: Blossom Associati - CrESIT 2008

At the end of 2007, the sector comprised 228 companies, of which 24 accredited in that year insofar as they met the Blossom Associati-CrESIT methodological selection criteria. The sector remains dominated by companies dedicated to healthcare (74%). The overall turnover of accredited companies exceeded 10 billion euros of which 4.8 billion generated by biotechnological products whose 2007 growth rate was 11%. Biotechnological R&D investments totalled 1.3 billion, which represents a 9% increase on the previous year. The employees of accredited sector companies numbered over 26,000 (14,543 if we exclude accredited Pharma companies) of which over 6,600 active in R&D. Equity capital rose overall by 56%, with a strongly growing EBIT of 213%, and a 30% decline in financial debt, which shrank to 1.6 billion euro. Although the Italian biotechnological industry is, largely, a recent development, interesting information can be obtained from the growth in the number of companies over time. 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 total) were only founded in the last six years. The number of companies in the industry has grown constantly, especially since 2000 when the development rate intensified significantly. Since 2000, the average annual registration rate of new companies has been 13 (representing an approximate annual new entrant rate of 10%) However, alongside the new entrants there are a group of companies with a long history and tradition. 63 companies were founded prior to beginning of the 1990s, and 20 before 1970. These are companies whose consolidated market positions were achieved by developing traditional technologies and which have tended to diversify into new biotech-derived technologies in recent years. Numerically, the Italian industry is mainly made up of small companies. 170 of the 228 certified companies (75%) employ fewer than 50 employees and generate total sales of less than 10 million euros. 27 of the remaining companies (12%) are medium-sized concerns (i.e. employing less than 250, with annual sales of less than 50 million euros) and 30 (13%) are large companies employing over 250, whose sales exceed 50 million euros.

Classification of biotech companies in Italy by area of application

An analysis of the 228 companies shows that 168 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”), 19 in industrial and environmental fields (“White Biotech Companies”) and 11 are oriented to R&D in the field of bioinformatics. It should also be noted that 31 subsidiaries, or branches of multinationals, figure among these 228 companies, of which 18 belong to the “Pharma- industry” category. In numerical terms, therefore, the industry reveals a prevalence of Italian-owned companies. Apart from estimating the overall economic value created by the sector, we are also in a position to quantify the revenues generated by companies from the sale of biotech-derived products. The figure constitutes a subset of the aggregate revenues posted by the 228 recognised 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 markets1 – to the revenues of each company. Although this figure is important, and now places Italy among the leading European countries, it should be stressed that, today, sales revenues are certainly not the principal indicator for assessing the development potential and growth opportunities of the industry. The analysis of investments and pipelines allows us to determine the potential future of the business, which, in view of the extreme volatility of the sector, can undergo strong (positive) variations from one year to another. This is the case of certain small companies that, thanks to the development of innovative products, were able to increase their market share within the space of a few years until they reached a position of global leadership with levels of capitalisation on a par with the main multinational companies operating in traditional sectors. 95% of the foregoing 4,805 million euros is accounted for by the “Red” sub-sector. The remaining 5% is produced by companies operating in other areas, with a clear predominance of the “Green” sub-sector.

White 9%

Bioinfo 5%

Green 13%

Red 73%

Source: Blossom Associati - CrESIT 2008

Breakdown of biotech turnover by area Bioinfo 0,07% White 0,54%

Green 4,04%

Red 95,36%

Source: Blossom Associati - CrESIT 2008

Breakdown of R&D investments in biotech activities by area White 1,60%

Bioinfo 0,36%

Green 11,76%

Red 86,28%

Source: Blossom Associati - CrESIT 2008 This percentage was calculated in the course of a qualitative analysis of the information provided by the companies. 1

Blossom Associati

2008

It would also be useful to supplement the foregoing data with information on the aggregate sales of which the foregoing biotech revenues form part. In terms of total turnover (thus not singling out the biotech component) in 2006 the 228 companies surveyed posted revenues of over 10.8 billion euros2. Obviously, the data largely reflect the revenues obtained by the 42 red biotech companies with a pharmaceutical derivation, which alone accounted for over 7.9 of the 10,8 billion in question. The overall size of the investments in R&D in biotechnological technologies and processes in 2006 in Italy has been estimated at 1,331 million euros: of which 1,149 million (over 86%) invested by Red companies, 155 million euros (12%) by companies in the Green area and the remaining 26 million (2%), in the White Biotech sub-sector. The significance of these data once again demonstrates the underestimates of the research effort of Italian industry by most studies with an international circulation. The principal reason for this under-estimate is to be found in the difficulty of procuring and identifying pertinent data during analysis. As stated in the methodological notes, the foregoing data concerning the size of biotech investments are based solely on the values of R&D investments in technology and processes referring to biotechnological type platforms carried out by the 228 companies making up the industry. However, it would be appropriate to supplement the foregoing figures with data on the overall volumes of investments in R&D (and thus not just limited to biotech activities). In 2006, the 228 recognised companies made investments for over 2,345 million euros in R&D. The data, however, are strongly influenced by the value of investments referring to companies from the pharmaceutical sector that mainly tend to invest in traditional technology and products, especially the 14 “Pharma Oriented” companies.

Aggregate sales data proxy the economic value generated by the biotech sector. However, it should be noted that this value is necessarily an over- or under-estimate as it not possible to “map” situations that sometimes can have a major impact on the results presented. A frequent case is that of spin-offs or branches of foreign companies with marketing agreements for the products of their parent companies. In this case, the sales data refer to R&D activities performed outside Italy. However, the same argument applies to diversified companies that occupy markets other than biotech. For this reason, the turnover should be rectified to exclude sales referring to other business. In all these cases, an analysis that takes account of the sales data of Italian companies is structurally inclined to over-estimate the size of the sector. On the other hand, there are subsidiaries of foreign companies dedicated to R&D whose products are marketed by other companies of the group. In this case, their operating revenue will not reflect the actual value of the operations performed in our country. However, such simplifications are unavoidable in an analysis on aggregate data. Nevertheless, they also mean that we should make a careful and prudent use of the results presented. 2

The overall number of employees performing R&D activities is 6,652 (57% of all employees surveyed in the framework of biotech companies). The data take account of researchers active in Green (3%), White (2%), Bioinformatics (3%) and Red Biotech (92%) companies. If the analysis is extended to cover all the employees of the 228 Italian biotechnological companies (of which 14 are the direct expression of the pharmaceutical industry) the resulting figure is 26,157 employees, hence all the employees of Green (3.3%), White (1.2%), Bioinformatics (1.4%) and Red Biotech (94%) companies. The latter two categories include not only authentically red biotech companies but also pharmaceutically derived companies. Breakdown of R&D employees and overall totals by area Scope of application Bioinfo Green Red White Overall total

Total employees 205 477 25,303 172 26,157

R&D employees 162 149 6,233 108 6,652

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT 2008

The data used (number of employees declared by the companies and found by qualitative analysis or by analysing the notes to the financial statements) nevertheless tend to underestimate the size of the industry. Thus, it can be presumed that the industry includes, especially in the case of smaller companies, a significant number of self-employed professional workers and other freelancers. In terms of territorial location, the Italian biotechnological sector is characterised by its strong geographical concentration. If, on the one hand, almost all the regions (17) of our country host biotech companies, at present only a few have attracted numerically and economically significant concentrations of companies. The regions that exhibit strong concentrations are Lombardy, where 78 companies are situated (35% of the total), Piedmont with 31 companies (12% of the total), Tuscany with 22 (10% of the total), Friuli Venezia Giulia with 16 (7% of the total) followed by Lazio with 15 (6% of the total) and Sardina with 13 (6% of the total). 76% of the Italian biotechnological companies are concentrated in these six regions. Furthermore, strong territorial concentrations also emerge when we examine each region. Thus, biotech companies apart from being concentrated in a limited number of regions (Lombardy, Piedmont, Tuscany and Friuli Venezia Giulia), also tend to cluster in certain specific territorial areas within them. We can take the case of Tuscany to illustrate this phenomenon. In this region, the companies are not evenly distributed throughout the region but localised in areas around Florence, Siena and Pisa, where all the basic factors for their development can be found.

Blossom Associati

2008

Empirical evidence shows that the extreme volatility of the sector and the facility of transferring intellectual capital and financial resources, means that foreign companies tend to invest financial capital and attract intellectual capital where the prospects of a functional system and the creation of value have already been found to operate, in terms of internationally consolidated positions and relations. If we reflect on the analysis of the 228 companies, net of the 13 Pharma oriented companies, we find confirmation of the foregoing considerations, and also as regards employment data, even though their national ranking in this respect may be slightly different. At a national level, the number of employees engaged on R&D amounts to 6,652 while the overall number of all employees of biotechnological companies (including the data on accredited pharmaceutical companies) is around 26,157. The geographic distribution of all employees in the industry and R&D employees 8000 7000 6000 5000 4000 3000 2000

Altre

Sardegna

Veneto

Friuli Venezia Giulia

Campania

Piemonte

Emilia Romagna

R&D EMPLOYEES

Toscana

Lazio

ALL EMPLOYEES

Lombardia

1000

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT 2008

Lombardy certainly detains a leading position. 11,555 employees work in the region, of whom 3,472 engaged in R&D (44% of the national total and 52% of all employees in the industry engaged on R&D, on a national basis). In terms of total and R&D employees, Lazio emerges as the second most important region, where there is a strong prevalence of Big Pharma or large biotech oriented companies. After these we find regions with a strong propensity towards investment such as Piedmont, with 9,5% of all the industry's employees and 8,7% of all R&D employees on a national basis, Emilia Romagna with 1,5% of all employees and 4,5% of employees engaged on R&D on a national basis, followed by Tuscany and Friuli Venezia Giulia.

The strong territorial concentration of the sector, which we underlined earlier, now appears even more pronounced. The first six regions that account for 76% of all Italian companies employ over 96% of all employees and over 79% of the employees engaged on R&D. Geographical distribution Region

# Companies

Campania Emilia Romagna Friuli Venezia Giulia Lazio Lombardy Piedmont Sardinia Tuscany Trentino Alto Adige Veneto Other Total

9 14 16 15 78 31 13 22 4 11 15 228

# R&D employees 212 581 135 1,069 3,472 299 75 637 7 98 66 6,652

# Overall employees 265 2,500 206 7,721 11,555 385 93 3,169 40 138 85 26,157

Biotech Turnover 9,314,027 174,589,188 37,712,805 1,685,686,182 2,386,039,818 130,489,461 2,384,617 315,197,226 42,020 52,210,292 12,215,073 4,805,880,708

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT 2008

An analysis of the distribution of turnover by region underlines the territorial polarisation mentioned earlier. Two regions (Lombardy and Lazio) alone account for 76% (in almost equal proportions) of national sales, while demonstrating profoundly different orientations and morphological characteristics with respect to company structure. An examination of other regions reveals important contributions from Tuscany (which accounts for 11% of biotech operating revenue), Emilia Romagna and Friuli (which jointly account for another 7%) The analysis of biotech investments in R&D reveals a partially different picture, which tends to correspond to the map of the distribution of the companies. In this case, the following aspects emerge. Lombardy plays a predominant role, with 73% of all investments carried out in Italy in biotechnological R&D. However, the importance of Tuscany in the panorama of the Italian market diminishes as it accounts for only 2% of all investments. On the other hand, the contributions of Emilia Romagna (8%) and Piedmont (4%) are found to be significant, as well as that of Friuli (3%). Lazio, on the other hand, has a much more limited R&D role (6%) in relation to the foregoing indicators. The analysis of the asset structures of biotech companies reveals a very clear competitive position attributable to each of the Italian regions.

Blossom Associati

2008

Lombardy is the region with the highest concentration of R&D activities, as well as displaying a uniform distribution of large, medium-size and small companies, all sharing the same strong vocation for innovation and investment in technologies and products. In addition, the system includes the presence in the territory of not only scientific parks such as, for example, Science Park Raf (as described in detail below), but also internationally important universities, clinical institutes with a strong vocation for experimentation and attracting investors (the latter favoured by the proximity of Milan, the nationâ&#x20AC;&#x2122;s most important financial centre). In addition, to these advantages there is the support provided by local institutions. These are increasingly committed to sustaining the development of biotechnologies and attracting foreign investments by streamlining bureaucratic formalities for company growth and developing specific packets to sustain intellectual capital and help set up new companies. Tuscany possesses a mature system made up of 22 companies characterised by a strong R&D vocation for biotechnological research (such as, for example, Novartis Vaccines ex Chiron) while important investments are being carried out within the territory by pharmaceutical companies. For example, we find national pharmaceutical companies (such as Abiogen Pharma or Menarini), small biotech companies strongly oriented to innovation, as well as scientific parks such as the Tuscany Life Sciences (see following data sheet), universities oriented to the setting up of academic spin-offs such as the University of Florence, clinical institutes oriented to experimentation and institutional investors willing to support the sector (the Monte dei Paschi Foundation). Piedmont, Friuli, Sardinia and other regions are meeting the developmental challenge by an increased commitment to innovation. Although the number of companies on their territories is still small, they exhibit a strong vocation for innovation and a strong orientation towards innovation in biotechnological R&D. Moreover, it should 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 scientific parks to be discussed in further detail below (the Canavese Bioindustry Park in Piedmont, the Science Park Area in Friuli and the Scientific and Technological Park in Sardinia), that function as reference points for the sector in each territorial area. On the other hand, Lazio shows that its vocation is to host mature companies with a predominant interest in production and sales, as confirmed by the high concentration of employees, and significant levels of turnover as also by the average EBIT posted by the companies situated in the region, which is a sure sign of operational maturity.

Competitive Positioning. An overall view of the national context. By the end of 2007, the segment of the Italian biotechnology industry specialised in biotech for health care comprised 168 companies. The data presented are based on a list certified by Blossom Associati and CrESIT. For further information, readers are referred to the methodological appendix for the sample selection procedure. However, we would like to point out that, in line with the methodologies adopted by the most authoritative international studies, the most rigorous criteria were followed in our selection procedure. Thus, we excluded pharmaceutical companies that do not perform in- house R&D activities on biotechnological platforms within Italy.

2008: Red biotechnologies in Italy by Stefano Milani, Alberto Onetti, Federica Bottazzi Blossom Associati Management Consulting CrESIT â&#x20AC;&#x201C; University of Insubria of Varese

Although the Italian biotechnological industry is a quite recent development, some interesting information emerges on the numerical growth of companies over time. Of the 168 companies almost 58% were set up or located in Italy in the last ten years and of these 70 (42% of the total) were only founded in the last six years. The particularly intense development that the Red biotech sub-sector has been experiencing since the start of the new millennium is also reflected in the constant growth in its numbers within the sector. Last year, 24 new Red biotech companies were accredited, as they were found to comply with the criteria used for inclusion in the biotech sector, while 18 were removed from the sector, as required by the application of the rigorous Blossom Associati-Cresit methodology. Alongside these recently established companies, there is a group of pharmaceutical companies with a long history and tradition: 42 pharmaceutical companies that in recent years have been directing research and development towards biotechnologies. These are national and multinational companies that have been able to consolidate their market positions by developing and/or marketing traditional technologies and which in recent years intend to diversify their pipeline with the new products derived from biotechnologies.

Blossom Associati

2008

Number of Red Biotech companies in Italy: temporal growth

168

It should also be noted that of the 168 companies, 29 are subsidiaries (the reduction in their number with respect to 2007 – minus 30 subsidiaries – is mainly due to important acquisitions and mergers). 18 of these subsidiaries belong to the “Pharma-industry” category. In numerical terms, therefore, the industry reveals a prevalence of Italian-owned companies.

98 71 52

Source: Blossom Associati - CrESIT 2008

163

168

2007

145

152

2006

Number of newly set up biotech companies: temporal growth (2001-2007)

2005

2002

2004

115

2003

108

2001

128

Source: Blossom Associati - CrESIT 2008

2001 - 2007

1996 - 2000

1991 - 1995

1986 - 1990

1981 - 1985

1976 - 1980

1971 - 1975

before 1970

Numerically, the Italian red biotech sub-sector is made up of small companies. 114 of the 168 accredited companies (68%) employ fewer than 50 employees and their total annual sales are less than 10 million euros. Of the remaining companies, 26 (16%) are medium-sized concerns (i.e. employing up to 250 with annual sales of under 50 million euros) and 27 (16%) are large companies employing over 250 with sales of over 50 million euros.

From the analysis of the business models of the 168 companies, we can classify them as belonging to one of the following two segments: > a “Born Biotech” segment that accounts for 126 companies. These are mainly small to medium-sized companies with a strong orientation to research and development within a biotechnological environment; > “Pharma-Biotech” a macro-segment, made up of 42 companies with important ties to the pharmaceutical sector. These 42 break down as follows: – 28 are “Biotech Oriented” companies, in other words, companies with a pharmaceutical derivation but whose operations are mainly focused upon biotech R&D activities. These companies tend to have a business model mainly or exclusively based on strong ties with pharmaceutical firms, from which, as stated, they mainly derive. Good examples are, first, Biosearch, created as a spin-off by the managers of the Lepetit research centre and, second, Novuspharma, a spin-off from a division of the German Boehringer Mannheim Group. – 14, instead, are “Pharma Oriented” i.e., Italian or multinational pharmaceutical companies that, in line with their own strategic plans are investing in R&D in order to extend their own pipelines with innovative products, which, inter alia, enable them to extend the period of patent protection.

Revenue trend and macro indicators The overall value of biotechnological production (referring to the sole area of health care) is estimated at E 4.6 billion, or 20% of the total value of the production generated by the pharmaceutical sector, with a 12% year-on-year growth rate. Broken down into its component parts, the value of Italian biotechnological production derives 34% from 126 “Born Biotech” companies, and 47% from 28 pharmaceutically derived companies that focus primarily on biotech (“Biotech Oriented”). The remaining 19% of biotechnological production value is produced by 14 “Pharma Oriented” companies. The market share of the 32 foreign-capital companies amounts to 77%.

Breakdown of Red Biotech companies in Italy by size

Large 16%

Small 68%

Medium 16%

It would be useful to supplement the foregoing data with information on the financial aggregate of which the foregoing biotech revenues form part. We have determined that total turnover (thus not singling out the biotech component) in 2006 of the 168 companies surveyed amounted to over 9.8 billion euros3. An historical analysis of sales trends shows that after a reduction in biotech production values in 2005, a strong recovery (+12%) took place in 2006. The growth in production revenue was mainly attributable to the 28 pharmaceutically derived biotechnological companies (+15%) which accounted for E 2.2 billion. This performance was matched – in percentage terms – by the 14 pharmaceutical companies (+14%) that generated E 0.9 billion in sales while the born biotech companies, with a +8% growth generated 1.5 billion in sales revenues from biotechnological derived products. If we analyse the companies by size we that find a strong sales increase took place in the past year as regards 54 large and medium-sized companies (+13%), while the 112 small sized-companies, after a 55% growth in 2005, recorded a drop-off in sales (- 14%) in 2006.

Source: Blossom Associati - CrESIT 2008

Breakdown of Red Biotech companies by category

Pharma 25%

Biotech 75%

Aggregate sales data proxy the economic value generated by the biotech sector. However, it should be noted that this value is necessarily over- or under-estimated as it not possible to “map” situations that can sometimes have a major impact on the results presented. A frequent case in point is that of the spin-offs or subsidiaries of foreign companies that have marketing agreements for products of the parent company. In this case, the sales data refer to R&D operations conducted outside Italy. However, the same argument applies for diversified companies that occupy markets other than biotech. For this reason, the turnover should be rectified to exclude sales referring to other business. In all these cases, an analysis that takes account of the sales data of Italian companies is structurally inclined to over-estimate the size of the sector. 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, their operating revenue will not reflect the actual value of the operations performed in our country. Such simplifications cannot, unfortunately, be eliminated at an aggregate level analysis. Nevertheless, they counsel us to consider the results presented with due prudence. 3

Source: Blossom Associati - CrESIT 2008

Blossom Associati

2008

The 168 red companies have a total market capitalisation of E 2.2 billion with R&D biotech investments for E 1.1 billion and significant growth performance with respect to the preceding year (+11%). The companies' net indebtedness amounts to E 1.6 billion. This is a major reduction (-30%) with respect to the preceding year and demonstrates a significant increase in their net worth (+79%), mainly through important capitalisation operations; mainly more capital injections. And, in fact, the most common form of financing, for all companies, is constituted by major capital contributions from shareholders. In 28% of the cases, banks intervened in the operations to provide an additional guarantee for the success of the operations, but almost exclusively on behalf of medium-sized and large companies. A central role is played by programmes co-financed by the public sector (mainly functioning as seed and pre-seed money, otherwise virtually absent from the national financial market) which – through mostly national and regional financial schemes – intervened in 61% of the operations and mainly to support small companies, which are normally more exposed to enterprise risk. Local programmes, on the other hand, offered only marginal assistance. Venture capital, mainly originating outside Italy, accounted for 19.5% of the capitalisation operations of accredited companies, which is an index of the dynamism in the sector and the interest it arouses. The contribution from Business Angels was practically nil as they are virtually absent from the sector. Our analysis has shown only one case of their having operated in Italy. It should be emphasised that the limited impact of this type of operation reflects the virtual absence of such operators from the Italian market. An assessment of the companies’ 2006 operating margins shows an operating income (EBITDA) of E 768 million, of which 142 million accounted for by biotech companies, with the remaining E 626 million generated by Pharma companies. Furthermore, after a breakdown by size, the analysis uncovers a strong diversification in relation to the maturity and sustainability of the business of biotech companies. Thus if, on the one hand, the overall level of operating income would seem to indicate that the sector has grown beyond the first development stage, on the other, we must distinguish three different “moving spirits” that ideally comprise the totality of the accredited biotech companies covered by this analysis, if we are to comprehend the nature of the growth.

An EBIT analysis (i.e. net of the depreciation charges on investments) yields an overall figure of over E 338 million for the 168 accredited biotech companies, which break down as follows: > 114 small companies that against overall investments of E 158 million posted a negative EBIT in 2006 of E 69 million; > 26 medium-sized companies that against E 578 million in overall investments posted an EBIT of slightly over E 12.5 million; > 28 large companies that against overall biotech investments of just over E 403 million posted an EBIT in excess of E 395 million. The performance of the 29 subsidiaries of foreign companies is significant. These invested slightly less than E 250 million in biotech technology (22% of total national investment) and posted an EBIT of almost E 250 million. In making international comparisons we must always bear in mind that the real potential of the Italian pharmaceutical market (which is one of the main drivers for the future development of the biotech market) puts Italy in the fifth position among world markets with total pharmaceutical sales (pharmacies + hospitals), at ex works prices, of E 16.5 billion (2006 data: Source IMS). The global value of the pharmaceutical market (expressed in Euro at ex-works prices) confirms that Italy is the third largest market in Europe, after Germany and France and the fifth in the world, with the USA and Japan occupying the first two places (Source IMS). Biotech investments in R&D The overall size of R&D investments in biotechnological technologies and processes in 2006 in Italy was estimated at 1.149 million euros (an 11% year-on-year growth rate). The size of such investment confirms that significant R&D activities are taking place in Italy directed at both the development of authentically original products (research conducted in Italy, but largely under the auspices of foreign multinationals) and the development of products able to improve the clinical effectiveness of known molecules by the development of innovative release applications and/or systems. As stated in the methodological notes, the foregoing data concerning the size of biotech investments are solely based on the values of R&D investments in technology and processes referring to biotechnological type platforms carried out by the 168 accredited companies that meet the selection criteria of Blossom Associati-CrESIT.

Breakdown of R&D investments Red Biotech by size

Grandi 36% Medie 50%

Piccole 14%

Source: Blossom Associati - CrESIT 2008

Blossom Associati

2008

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 2006, the 168 accredited red biotech companies made investments for over 2,160 million euros in R&D. These data directly eflect the value of investments made by the 14 companies classified as pharmaceutical, which mainly make investments in innovative technologies and products (53% of the overall value of the investments).

Breakdown of R&D investments Red Biotech by class of company Pharma 7%

Of the E 1,149 million in total investments in biotech technologies and processes, E 413 million (with a 14% year-on-year growth rate) were accounted for by large companies, while 578 million (with a 7% year-on-year growth rate) were made by medium-sized companies. Small companies made overall investments for 158 million (representing a 16% year-on-year growth rate).

Spin off pharma 45%

Biotech 48%

Source: Blossom Associati - CrESIT 2008

Table 1 - Pipeline referring to the R&D activities conducted in Italy (2008) Discovery Preclinic Phase I Phase II Phase III

99 63 33 35 16

Source: Blossom Associati - Assobiotec 2008

Chart 1 - Pipeline referring to the R&D activities conducted in Italy (2008) Phase III 7%

Phase II 14% Discovery 40%

Phase I 13%

Moreover, extremely interesting considerations emerge from the analysis of the origin of the investments. Thus of the E 1,149 million in total investments, 555 million (with a 31% year-on-year growth rate) were accounted for by biotech derived companies, while 517 million stemmed from biotech companies with a pharmaceutical derivation. In conclusion, traditional pharmaceutical companies tended to limit their internal investments and only accounted for a modest 67 million (representing a 22% year-on-year decrease). In general, instead of internal development such companies prefer a risk diversification strategy aimed at the setting up of Newco Biotechs which they can endow with capital, licensing contracts and expertise. Of such investments, the 29 branches of multinationals accounted for 250 million (22%). Biotech products under development in Italy * by Assobiotec Research & Development taking place in Italy has given rise to an extremely interesting pipeline. The principal area of activity, in which 74% of the Italian biotech companies operate, is pharmaceuticals. Thus, in Italy there are, overall, no less than 147 biotechnological products under development, the results of research being carried out by 35 companies. Of these 147 products, 63 are in the preclinical development phase while 84 are already in the clinical phase (Phases I-II-III). In particular, of the 84-biotech products undergoing clinical development, 33 are in Phase I, 35 in Phase II, and 16 in Phase III. Italian biotech research, furthermore, can boast 63 products at a pre-clinical developmental phase and 99 molecules at a discovery phase, which altogether constitute a promising foundation for the sector in the coming years.

Preclinic 26%

Fonte: Blossom Associati - Assobiotec 2008

If we consider all R&D activities (therefore also including molecules in the discovery phase), the analysis shows a strong orientation of overall investments towards the area of oncological therapy (33%), the central nervous system (15%) and the areas of dermatology (3%) and antimicrobials for systemic use (3%). Moreover, these data are even more significant if we take account of the fact that the activities performed by R&D centres of the multinationals operating in our country have not been considered.

Chart 2 - Biotechnological R&D conducted in Italy (2008): analysis by therapeutic area

The foregoing data reflect the undeniable maturity of the Italian biotechnological sector, which in recent years has shown a major improvement in its capacity to produce value. A further important element refers to the increase in the capacity of Italian research to invest in project development activities. The number of products under development has practically tripled in only two years, passing from 30 in March 2006 to 84 in March 2008 (a 280% growth rate). As regards the classification of the products under development, 14 therapeutic areas were identified, and among these the following are conspicuous for their critical mass: antineoplastics and immune modulators (accounting for 42% of the products), the central nervous system (10% of the products) and the gastrointestinal and cardiovascular areas (both 8% of the products). On the other hand, if we consider the products “under discovery”, the greater part of these refer to the areas of antineoplastics/immune modulators (23%) and the central nervous system (20%) while, in third position, we find the area of antimicrobials for systemic use (14%). The biotech products under development refer to more than one therapeutic area. Consequently, the total set forth in table 3 does not refer to the number of products indicated in table 1. Among the technologies most frequently found in the biotech sector, there is a strong predominance of the use of recombinant protein (16%), monoclonal antibodies (14%) and peptides (9%). However, a good 51% of the technologies utilised do not belong to any of the foregoing categories (i.e. other): a large part of these products concerns “small molecules”, clearly developed through biotechnological technologies. Of the 84 products under development, 8 have been given “orphan drug designation” (3 by EMEA and 5 by both EMEA and the FDA). These are mainly products for use in the field of oncology. The remaining products are for cardiovascular use.

Genit-urinary and sexual hormones 1% Antiparasitics 1% Sense organs 2% Blood and haematopoietic organ 3%

Other 9%

Respiratory 2% Hormones (excluding sexual hormones) 3%

Antineoplastic and immune modulators 32%

Skeletal muscle 4%

Gastrointestinal and metabolism 6%

Cardiovascular 6%

Central nervous system 15%

Antimicrobials for systemic use 8% Dermatological 8%

Source: Blossom Associati - Assobiotec 2008

Table 3 - Biotechnological R&D conducted in Italy (2008): analysis by therapeutic area by development phase Gastrointestinal and metabolism Blood and haematopoietic organ Cardiovascular Dermatological Genit-urinary and sexual hormones Hormones (excluding sexual hormones) Antimicrobials for systemic use Antineoplastic and immune modulators Skeletal muscle Central nervous system Antiparasitics Respiratory Sense organs Other

Discovery Preclinical 5 6 1 0 6 5 11 8 0 1 8 0 17 3 28 32 6 3 25 6 2 0 2 0 2 2 11 4

Phase I 2 1 3 1 1 2 0 19 1 5 0 0 1 2

Phase II 3 2 2 3 1 0 0 15 0 3 0 3 0 7

Phase III 3 3 3 0 0 0 1 4 1 2 0 0 0 3

Some products could be applied to different therapeutic fields. Source: Blossom Associati - Assobiotec 2008

Blossom Associati

2008

Chart 4 - Biotechnological R&D conducted in Italy (2008): analysis of biotechnological technologies

Human resources and employment. An overview of the national context The overall number of employees performing R&D activities is 6,233 (25% of all employees surveyed in the framework of biotech companies)*.

Recombinant Protein 16%

However, we can break this figure down still further into two sub-categories based on the methodological approach indicated in this Report.

Monoclonal Anti 14%

Other 51%

> 50% (equivalent to 3,133 employees to R&D operations) is accounted for by 126 companies that can be described as authentically biotechnological.

Peptides 9%

> The remaining 50% (equivalent to 3,100 employees) refers to 42 pharmaceutical companies or spin offs from pharmaceutical companies.

Cell Therapy 7% Vaccines 1%

A more in-depth analysis reveals that 58% of the total number of R&D employees is employed by large companies, 29% by medium-sized companies and 13% by small companies. These figures illustrate the enormous importance played by medium-sized and small enterprises in the employment of research personnel. If the large companies generally assign 16% of their personnel to R&D, the medium-sized and small companies appear much more focused, declaring 66% of all employees engaged on R&D work.

Gene Therapy 1% Fermentation 1%

Fonte: Blossom Associati - Assobiotec 2008

Table 5 - Biotechnological R&D conducted in Italy (2008): analysis of biotechnological technologies by development phase

Discovery Preclinic Phase 1 Phase 2 Phase 3

Monoclonal Recomb. Anti Protein 5% 6% 3% 4% 3% 2% 2% 3% 1% 1%

Pept. 5% 1% 0% 2% 1%

Source: Blossom Associati - Assobiotec 2008

Cell Gene Therapy Therapy 2% 1% 2% 0% 1% 0% 1% 0% 1% 0%

Vacc. 1% 0% 0% 0% 0%

Fermentation 0% 1% 0% 0% 0%

Other 22% 14% 6% 7% 2%

The data used (number of employees disclosed by the companies through either qualitative analysis or 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 includes, especially in the case of smaller companies, a significant number of self-employed professional workers and other freelancers. Competitive regional positioning Territorial distribution For many years, the Blossom Associati-Cresit methodology has been pursuing the objective of defining a unique and objective approach for determining the comparative importance of biotechnologies as between the Italian regions. With respect to 2005, the biotech companies performing R&D operations within Italy display a high level of geographical clustering.

* The overall number of R&D employees in Italy in the life sciences amounts to 9,383 of whom 3,133 accounted for by biotech companies, 3,100 by pharmaceutical companies that invest in biotechnologies and a further 3,150 by traditional pharmaceutical companies. 24

Although almost all the regions (14) of our country host companies from this sector, at present only a few have attracted economically and numerically significant concentrations of companies. These are: Lombardy, where 64 companies are situated (38% of the total), Piedmont with 17 companies (10% of the total), Tuscany with 17 (10% of the total), Piedmont with 17 (10% of the total), Lazio with 11 (8% of the total) and Friuli Venezia Giulia with 11 (7% of the total) followed by Emilia Romagna with 10 and Sardinia with 10. These seven regions account for 85% of the Italian biotechnological companies. The analysis of the 168 companies shows that the foregoing considerations also apply to employment data, even though their actual national ranking may differ slightly. The overall number of employees performing R&D activities at a national level, and employed by the accredited companies, is 6,233. Lombardy certainly detains a leading position. 11,294 employees work in the region, of whom 3,398 engaged in R&D (45% of the national total and 55% of all employees in the industry engaged on R&D, on a national basis). In terms of total employees and R&D employees Lazio emerges as the second most important region, with a strong Big Pharma presence and important pharmaceutically derived biotech oriented companies employing 7,714 employees of whom 1,065 dedicated to R&D activities. The other regions with a strong innovative propensity are Piedmont, with 4% of total employees in R&D Emilia Romagna with 9% of total employees in R&D and Tuscany with 10%. Geographical distribution Red Biotech Region

# Companies

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

6 10 11 14 64 17 10 17 7 12 168

# Overall employees 70 2,487 105 7,714 11,294 304 74 3,045 122 88 25,303

# R&D employees 56 571 85 1,065 3,398 252 63 614 87 42 6,233

Biotech turnover 5,179,505 173,982,633 20,220,158 1,685,221,761 2,251,047,836 121,859,191 662,763 308,787,222 12,501,057 3,187,616 4,582,649,741

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT 2008

Blossom Associati

2008

The strong territorial concentration of the sector, which we underlined earlier, now appears even more pronounced. The first seven regions, where 85% of Italian biotechnological companies are situated, employ over 97% of the total employees dedicated to R&D operations. The analysis of the distribution of turnover by region demonstrates the territorial polarisation mentioned previously. Two regions (Lombardy and Lazio), while demonstrating profoundly different orientations and morphological characteristics in respect of company structure, alone account for 86% of national sales of biotechnological products for health care with growth rates of, respectively, 16% for Lombardy and 9% for Lazio. If we turn our attention to the other regions, we can identify an important contribution from Tuscany (which accounts for 7% of biotech sales with a 3% year-on-year growth rate) followed by Emilia Romagna (4% with a 9% year-on-year growth rate) and Piedmont (3% and substantially stable with respect to the preceding year). The analysis of biotech investments in R&D reveals a partially different picture, which tends to correspond to the map of the distribution of the companies. In this case, the following aspects emerge: > Lombardy plays a predominant role, accounting for 73% of all investments carried out in Italy in biotechnological R&D and biotech processes for health care; > With 9% of all investments Emilia Romagna's new and important role in the Italian panorama is confirmed; > Lazio at 7% confirms its position in the national panorama, while also characterised by a strong propensity on the part of companies to localise headquarters and marketing offices in the region, as well as important production facilities. > At 3% of all overall national investments in Tuscany plays a less important role in the Italian scenario; > On the other hand, the contribution made by Piedmont (4%), as also that of Friuli Venezia Giulia and Veneto (3%) is important.

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Structure, characteristics and developmental dynamics of biotech companies in Italy by Alberto Onetti, Stefano Milani, Alessia Pisoni and Marco Talaia CrESIT - University of Insubria of Varese Blossom Associati - Management Consulting The 2008 Report contains an important novelty. By processing the data collected for the preparation of the reports in past years, we are now able to trace out the sector's historical developmental trend. We have dedicated special attention to the growth of the sector in the three-year period 2003-2006 by making reference to turnover growth rates and new entrants/leavers (following the start-up of new companies or the winding up of existing ones).

The developmental trends of the biotech sector in Italy

In addition, thanks to the qualitative information collected through questionnaires we were able to indicate the “sentiments”, i.e. the evaluations of biotech companies concerning the development prospects of the sector in the immediate future.

> the medium-term, represented by average turnover growth rate in the three-year period 2003-2006;

Some companies are located in science and technological parks. For these reasons, we have chosen to provide detailed studies designed to fathom the characteristics of these different categories of company and the different corporate structures and performance capacities that connote them.

> a more recent standpoint, focusing upon variations in turnover in the last year of our historical data series (2006). Figure 1 - Developmental growth matrix

Average turnover growth rate in the three-year period 2003-2006

Information on the trends and developmental dynamics of the sector was subsequently supplemented by a qualitative analysis designed to highlight the specific features of the biotech companies comprising the reference population at the end of 2007. The sector is made up of different “moving spirits” in terms of not only size and strategic positioning, but also corporate governance and relationships with institutional actors; a sector in which small, medium-sized and large companies are all active. These companies include the subsidiaries of multinationals as well as start-ups and spin-offs, with either academic or corporate origins.

In this section, we would like to make some considerations regarding the developmental dynamics of the turnover exhibited by biotech companies in the period 2003 -2006. Therefore, we have reconstructed the historical developmental trends of the turnover of the companies in our sector from two temporal, but complementary, standpoints:

Average

Variations in turnover in the last year of our historical data series (2006)

Source: Blossom Associati - CrESIT 2008

Blossom Associati

2008

Based on the cross-classification of the foregoing data it was possible to construct a matrix (see Figure 1) and thus represent the developmental pattern of biotech companies for the period in question. Each company is identified in the matrix by a dot that represents its annual average growth in the three-year period and in the last fiscal year considered. Hereinafter we propose the principal keys with which to read the matrix of the development dynamics of the biotech sector. > The companies in the top right quadrant of the matrix (quadrant A) were those that grew in the period in question and whose growth propensity was confirmed in the last year examined. These are companies that exhibit stable and lasting signs of development and which can reasonably be seen as constituting the backbone of the biotech sector. > The companies in the bottom right quadrant (quadrant B) despite exhibiting a positive average growth in the three-year period in question, recorded a sales slowdown in the last year (2006). For such companies our evaluation, albeit positive, remains suspended. In other words, we must understand if 2006â&#x20AC;&#x2122;s slowdown is to be attributed to external economic circumstances and therefore likely to be reversed or if it represents the signal of a possible company crisis. > The companies situated in the top left-hand quadrant (quadrant D) are companies that despite having undergone a negative trend in the three-year period were able to recover in the last year under examination. Consequently, also for them our judgement remains suspended. It must be determined if the growth exhibited constitutes a structural inversion in the sales trend or simply a temporary phenomenon. > The companies situated in the bottom right quadrant (quadrant C), on the other hand, are companies undergoing structural decline. They exhibited a decline in sales in both the threeyear period and in the last year studied. It is not unrealistic to expect that all these companies will disappear from the sector in the near future.

However, these evaluations must take account of the positioning of the dots within the single quadrants. > For companies situated near to the origin of the axes the foregoing trends are clearly less pronounced. Consequently, the evaluation of a company in quadrant A, situated close to the axes although positive must obviously be qualified. Similarly, for those companies in quadrant C and D, the negative evaluations expressed need to be qualified in the event that the dots are situated near to the axis of the abscissas. > The further from the axes the more marked the situations of growth or decline become. In such cases, evaluations are more definitive in either a positive or a negative sense. In order to give objective references to the evaluations we have also indicated average sector values within the matrix in figure 1 (represented by broken lines). Thus, the biotech companies exhibited a 10.4% average annual growth three-year period 2003-2006, while in 2006 (the latest year with an available data) they recorded an annual growth of 24.2%. Such values should be regarded as proxies; a help to the analyst in his or her evaluations of the performance of individual companies. > Companies situated to the right and above the broken lines are companies, which can be defined as over-performers, insofar as their average growth is greater than the sector average with reference to both the three-year period and the latest year examined. > On the other hand, companies to the left of or below the broken lines are, instead, underperformers. They exhibit more pronounced reductions than the average of the companies in the sector. > Companies situated near to the point where the two broken lines intersect can be defined as neutral as their performance is in line with the sector average. > Clearly, as already stated above, our judgements tend to become more emphatic the further the dots stray from the broken lines expressing average values.

Before discussing the specific data on the sector and attempting to formulate evaluations upon them, some preliminary considerations are necessary.

> We have excluded start-ups from our analysis. This decision was taken for two main reasons. In the first place, the turnover of recently set up companies tends to be a variable of limited importance, especially in sectors such as biotech where the introductory phase can be extremely long. Secondly, it is normal for companies in an early stage of development to have extremely volatile results, and this clearly makes them unsuitable for an analysis based upon variations in turnover. Given that these companies are extremely important if we are to understand the development prospects of the sector, we have dedicated a sector entry/exit analysis to them in the following paragraph. In figure 2, we have mapped all the companies included in the sector onto a matrix. The data provide some extremely interesting indications for helping us to outline and understand the developmental dynamics of the Italian biotech sector. > In the first place, the analysis of the matrix shows a large spread of companies among the four quadrants. This finding clearly expresses the strong volatility that typifies emerging sectors with high rates of innovation and investment. > Most of the biotech companies are found clustered around the sector average, therefore within or next to the central rectangle formed by the intersection between the origin of the axes and the two broken lines that intercept the axes at the sector's average value points. These companies can be defined as “stayers”, whose developmental dynamics are in line with sector averages.

Figure 2 - Turnover growth trend in the three-year period 2003-2006

Average turnover growth rate in the three-year period 2003-2006

> The analysis conducted is handicapped by being based upon turnover and not upon investments and pipelines. The peculiarity of companies that belong to this sector is that they carry out considerable investments in the initial phases of activities or study/trials on new products. Such investments can rarely have an immediate return in terms of sales. Therefore, an analysis based essentially on turnover growth may underestimate and incorrectly map the real development dynamics of a sector characterised by a high rate of investment, a relatively limited history and a pipeline whose potential has been indicated earlier.

Average

Variations in turnover in the last year of our historical data series (2006)

Source: Blossom Associati - CrESIT 2008

> Then there are companies which overperform with respect to sector averages. These are situated in quadrant A, above and to the right of the broken lines. Such companies, which can be defined as “rumping up”, have above-average growth trends. Within this group there is a subgroup corresponding to the concentration of dots in the extreme right angle of the matrix. These are small companies whose development cycle began quite recently and which, consequently, have only recently begun to record sales revenue. Therefore, the apparently extraordinary growth trend that distinguishes them can be explained by the absence or limited nature of preceding results. Nevertheless, it is an interesting group of companies that having overcome the “pre-revenue” phase and from whose midst may be found the sector's short or medium term protagonists.

Blossom Associati

2008

> There are a small number of companies in quadrant B, that experienced a positive growth trend in the three-year period but which encountered difficulties in 2006. We have defined these companies as “slowing down” in order to report their current slow down. A qualitative analysis can help us understand if the fall back experienced represents a temporary phase linked to the economic cycle or if, on the other hand, it represents the onset of a structural crisis. > Quadrant C accommodates companies with a negative growth trend in both the three year period and in 2006. Here we must distinguish between companies represented by dots near to the axes and those indicated by dots in the bottom left-hand angle. The former with a limited sales downturn may still be able to recover. The second (referred to as “tumbling down”), which are characterised by significant sales downturns, will, in our opinion, be unable to remain within the sector. > The fourth quadrant contains the “improving” companies, i.e. companies that recorded a negative sales growth in the three-year period but a positive sales growth in 2006. This positive growth could prelude a recovery and their subsequent shift towards quadrant A.

Sector entry and exit dynamics: new entrants and leavers In this section, the analysis of sector dynamics will be supplemented by a study on the numerical variation that took place in the population of biotech companies over the last three years. The analysis considers not only new entrants (newly set up companies, spin-offs originating from the diversification processes of chemical or pharmaceutical companies, etc.) but also of leavers (companies wound up or currently being wound up). There were 27 new entrants in the last three years and 9 leavers. As regards the former, most of these (21 out of 27) belong to the red division and are mainly based in northern Italy. The regions that recorded the highest number of new entrants were as follows: Piedmont (12 companies), Lombardy (5) and Sardinia (4). In addition, of these 27 companies, 16 were set up in scientific parks. 8 in the Canavese Bioindustry Park in Piedmont, and 4 in the Polaris scientific park in Sardinia. The data seem to confirm that parks or incubators act as a stimulus for the setting up of companies. By making available laboratories and equipment to newly-constituted companies, the parks/incubators can limit start-up costs and therefore facilitate new entrepreneurial initiatives to take root. As regards the new entrants, it can be noted that 10 are spin-offs: 9 of them had an academic origin and 1 was a corporate spin off (a pharmaceutical company). The 9 academic spin-offs are concentrated in the north but the universities from which they originated are more widely dispersed. For the period in question, the leavers amounted to nine: 6 were in liquidation, 2 had only recently begun bankruptcy proceedings and 1 was discovered to have already been wound up. These companies were mainly based in the north: (7 out of 9). 8 belonged to the red division and 1 was a bioinformatics company. The average life of these companies (calculated as the average of the difference between the year of bankruptcy or liquidation and the year of constitution) amounted to 5/6 years. Considering their brief life cycle, it is quite likely that they were start-ups that were unable to survive the initial business phase, which, as is known, requires considerable capital investments and can rarely generate enough cash flow to cover the operating costs.

Developmental prospects of the sector: the analysis of sentiments We can supplement the findings of the quantitative analysis on sector dynamics with a survey of evaluations and sentiments, i.e. the prospects that the companies themselves express in questionnaires returned to us on future sales trends. This is a very important qualitative analysis as it enables us to supplement the results of the foregoing historical analysis with an account of the prospective dynamics of the sector. Our analysis shows that only a small percentage of these companies (8%) forecast a decline in sales in the immediate future. Most companies (51%) expect sales to grow while another 37% believes that they will remain stable. It can therefore be concluded that over one half of the companies are destined to shift to the superior quadrants (A and D) of the matrix, assuming that they have not already done so. It is similarly likely that over one third of the remaining companies-those companies that expected their sales to remain stable-will situate themselves near to the axis of the abscissas, while the 8% that expected their sales to decline will fall into the lower quadrants (B and C). In addition, the analysis of disaggregated data (set forth in table 1) reveals that companies forecasting an increase in sales are mainly small or large companies. Most of the medium-sized companies forecast, on the other hand, stable sales even if none of the companies of this size expect their sales to decline. The disproportionate presence of large companies among those companies expressing optimistic evaluations is a strong signal because it underscores the sectorâ&#x20AC;&#x2122;s growth expectations. On account of their size, these companies are in fact those that tend to characterise the developmental trend of the sector. The high variance in the results recorded by small companies is in line with the great volatility in performance that generally characterises enterprises of this size.

Table 1 - The sentiments of biotech companies in Italy by size (percentage data from the sample) Small Medium Large Total

DIMINUTION 10% 0% 6% 8%

STABLE 32% 70% 31% 37%

GROWTH 52% 30% 63% 51%

N.A. 6% 0% 0% 4%

TOTAL 100% 100% 100% 100%

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT 2008

Table 2. The sentiments of red companies in Italy (percentage data from the sample) DIMINUTION Biotech Pure 6% Pharma Biotech (Biotech Oriented) 6% Big Pharma 11%

STABLE 43%

GROWTH 49%

N.A. 3%

TOTAL 100%

35% 11%

53% 78%

6% 0%

100% 100%

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT 2008

By focusing on red companies (see table 2), we can see that the companies with the highest growth expectations belong to Big Pharma. This data can be explained by the fact that this category includes pharmaceutical companies with structured activities and a highly diversified product mix.

Blossom Associati

2008

The size profile of biotech companies The Italian biotech industry is characterised by a significant numerical presence of small companies. They account for 75% of the certified companies (170 out of 228 and are defined by having sales of less than E 1 million and fewer than 50 employees. Medium-sized companies account for about 12% of the sample (28 out of 228). These companies employ fewer than 250 and have a turnover of less than E 50 million. The large companies (over 250 employees and with a turnover in excess of E 2 million) number 30 and constitute 13% of the sector. On the other hand, the subsidiaries of foreign companies in Italy number 34, of which 47% are large companies, 27% medium-sized companies and the remaining 26% small concerns. In terms of the analysis of the distribution of turnover by company size, it can be noted that over 85% of overall biotech sales in 2006 were accounted for by 30 large companies. This group also employs 80% of the workers recorded for the industry. Medium-sized companies account for 11% of biotech turnover and 11% of all employees, while small companies generate no more than 3% of sales and employ only 6% of all workers. Nevertheless, we should remember that these categories include the subsidiaries of multinationals operating in Italy, which alone account for 80% of total biotech sales and 50% of all employees in the industry. The clear numerical predominance of small companies calls for further analysis. The category includes start-ups as well as academic and corporate spin-offs. The latter two categories represent almost 55% of the small companies. On average, recently set up companies have sales of around E 500,000 compared to the E 1 million invoiced on average by small companies. As regards employee data, start-ups seem to employ almost twice as many workers as the small companies. However, in this respect it is necessary to make a methodological observation. These figures are artificially high due to there being pharmaceutical spin-offs within the start-up category that employ a much higher number of workers than the average (around 5/6 employees for company). Table 3 - Biotech companies in Italy: average values by company type (2007). Biotech sales (mln euros) Employees Years

START UP

SMALL

MEDIUM

SUBSIDIARIES

LARGE

0.51 17 <5

0.97 10 5<y<20

18.1 106 10<y<50

112.5 388 2<y<100

137.8 718 5<y<100

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT 2008

Figure 3 - Biotech companies in Italy: company size (2008).

Moreover, the analysis reveals that medium-sized companies post sales that are 18 times greater than those of small companies, and that each, on average, employs 20 workers. Regarding the operational maturity of the medium-sized companies, the age range of such companies, on average, is 10 to 50 years (80% of the small companies have an average age of 12 years). On average, large companies post sales of 140 million euros, have 40 years of business life (although there are companies in our list of over 100 years) and employ over 700 employees. It should also be mentioned that the large companies employing the largest share of the workforce are Big Pharma companies. Over 50% of all employees employed by large companies work for pharmaceutical corporations.

30;13%

28;12%

170;75%

Large Medium Small

Source: Blossom Associati - CrESIT 2008

The size profile of red biotech companies Table 4 outlines the average profiles of the 168 red companies comprising this sub-sector. As discussed in the introduction, we categorised companies according to the business model adopted. We identified 126 pure biotech companies and 42 Pharma biotech companies (of which 28 biotech oriented and 14 Big Pharma). The average data set forth in the table 4 indicate that average turnover and the average number of employees differ considerably according to the business model characterising the companies belonging to the red sub sector. In terms of average turnover, the data are much more variable than those examined on overall turnover. Pure biotech companies are, in general, recently constituted small to medium-sized companies4 (with a high start-up quota). On average, they employ fewer than 50 workers and generate sales of between 10 and 20 million. They are almost exclusively focused on biotech (which accounts on average for 80% of their turnover). Instead, the profile changes considerably when we consider Pharma Biotech companies, depending on whether they are biotech-oriented or belong to the Big Pharma segment. As regards the former type, they have been on the market from 5/15 years and are generally medium to large-sized companies. They employ 250/300 workers and generate over 100 million in sales with a very clear focus on biotech (which on average accounts for 70% of sales revenue).

Figure 4 - The subsidiaries of biotech multinationals in Italy: company size (2008).

9;26% 16;47%

9;27% Large Medium Small

Source: Blossom Associati - CrESIT 2008

Figure 5 - Biotech companies in Italy: breakdown of biotech turnover by company type (2006) (financial data in E m) 164;3 %

508;11 %

4.134;86 %

Large Medium Small

Source: Blossom Associati - CrESIT 2008 This finding is in line with the fact that of the 126 pure biotech companies no fewer than 102 are small companies. 4

Blossom Associati

2008

Figure 6 - Biotech companies in Italy: breakdown of all employees by company type (2007)

Table 4 - Biotech companies in Italy: average values by company type (2007). Biotech sales (mln euros) Biotech sales (mln euros) Employees Years

6% 11 %

83 %

Large Medium Small

BIOTECH PURE

BIOTECH ORIENTED

PHARMA ORIENTED

17.4

131.5

303.8

12.6 46 2<y<20

77.3 282 5<y<20

61.5 830 8<y<100

Source: Blossom Associati – CrESIT University Study of Insubria of Varese 2008

The Subsidiaries

Source: Blossom Associati - CrESIT 2008

Figura 9 - Types of spin off 26

Spin off corporate

Spin off accademici

Pharma Biotech, on the other hand, refers to large pharmaceutical conglomerates, often part of multinational groups, with decades of history behind them, very large turnovers and very large workforces (on average over 800 employees). For such companies biotech is one of their business operations but not their core activity; On average biotech accounts for 20% of total sales.

It should be pointed out that notwithstanding the numerical predominance of large companies, the subsidiaries of multinational companies (a group comprising 34 companies) form a heterogeneous group made up of 16 large, 9 small and 9 medium-sized companies. This explains (see table 3) the high average turnover (112 million euros) of the category, as also the relatively high number of employees (380 employees per company). In addition, it is necessary to specify that nearly all subsidiaries (no fewer than 32 of the 34 subsidiaries operating in the Biotech sector) are red companies, in line with the profile mentioned in the preceding paragraph. Academic and corporate spin-offs In this section, we set out to provide data on spin-offs in order to distinguish those with an academic pedigree from those with a corporate background. Spin-offs with a university origin amount to 26, a higher number than that reported last year (14). This number includes5: > academic spin-offs, which we could define as “institutional”, i.e. companies with a formal university involvement in the form of a shareholding; > “informal” spin-offs, i.e. biotech companies set up following the departure of university researchers and without a university shareholding.

Source: Blossom Associati – CrESIT Università degli Studi dell’Insubria di Varese 2008

The classification criterion used for university spin-off and adopted in earlier reports limited itself to “institutional” type spin-offs, as the formal presence of a university in the company's share capital was a necessary condition for such spin-offs. This was, therefore, an extremely restrictive criterion and consequently the actual importance of this type of company in the biotech sector was underestimated. 5

Of the 26 university spin-offs, 13 are “institutional” insofar as the university in which they originate detains a shareholding in their share capital, while the remaining 13 can be classified as “informal” as they originated with the departure of university researchers and no university has a shareholding in their share capital. Alongside the 26 academic spin-offs, there are 8 corporate spin-offs. 5 of the latter originated from foreign owned pharmaceutical firms and 3 from Italian biotech companies. If we focus our attention on the red sub sector, we shall find that the greater part of the spin-offs are active in this red sector. Actually, no fewer than 7 seven corporate spin-offs out of 8 and 17 academic spin-offs out of 26 are red biotech companies. Table 5 shows that the 34 identified spin-offs are small companies with a significant number of employees and an average turnover of slightly more than E 1 million. However, the data also reflect the influence of corporate spin-offs with pharmaceutical parentage. On average, these spin-offs employ a larger number of workers and post higher sales than academic spin-offs. If we ignore the pharmaceutically derived spin-offs, the morphological profile that we can outline for spin-offs generally corresponds with companies that are going through the first phase of their life cycle. Table 5. Spin-off characteristics: comparison between start-ups and small companies (average values in E mln.) (2006). Biotech sales (mln euros) Employees

SPIN-OFF 1.1 30

START-UP 0.51 18

SMALL 0.96 9

Source: Blossom Associati – CrESIT 2008

Biotech companies: capital structure This paragraph deals with the findings emerging from the study on the capital structure of Italian biotech companies. The objective is to evaluate their survival capacity in financial terms and their investment behaviour. For this purpose, we have attempted to provide evaluations on the degree of capitalisation of the companies and their level of indebtedness so as to provide indications regarding the types of investment carried out. In processing the findings, we have grouped the companies by size.

Blossom Associati

2008

Figure 10 - Small Biotech Companies: Average capital structure (2006). 30% MLT Liabilities ST Liabilities Working capital Shareholdersâ&#x20AC;&#x2122; equity Fixed asset

57%

70% 29%

14%

Source: Blossom Associati - CrESIT 2008

Figure 11 - Median Biotech Companies: average capital structure (2006).

34% MLT Liabilities ST Liabilities Working capital Shareholdersâ&#x20AC;&#x2122; equity Fixed asset

33%

47% 66%

20%

Source: Blossom Associati - CrESIT 2008

Figure 12 - Large Biotech Companies: average capital structure (2006). 28% MLT Liabilities ST Liabilities Working capital Shareholdersâ&#x20AC;&#x2122; equity Fixed asset

33%

37% 72%

30%

Source: Blossom Associati - CrESIT 2008

The results of this analysis have been expressed graphically (see figures from 10 to 12), in order to facilitate ready comparisons between the different structures. With reference to the sector as a whole, the basic elements to emerge are: > a sound level of capitalisation, which on average reaches 35% (share capital/total assets); > high asset cover (average sector ratio is 1.2); > a wholly sustainable level of debt given that the average debt/equity gearing is 0.5; > an asset structure featuring a clear predominance of working capital (amounting to 70% of all assets). Small companies are characterised by a high level of capitalisation (amounting to 57% of assets) along with a very limited debt exposure. Gearing is slightly above 0.2. As regards the composition of the liabilities, there is a slight prevalence of current liabilities. In terms of capital investment, working capital constitutes the main capital deployment with fixed assets constituting less than 30% of all assets. However, this data must take account of the problems regarding the correct recognition of intangible assets in balance sheets (such as investments in R&D), which are typical of companies operating in science-based sectors. As concerns the structure of larger companies no significant differences are noted as between medium-sized and large companies. The average level of capitalisation reaches values of over 30% (which is significant even if lower than the percentage found for small companies) while the level of financial exposure is also limited (gearing is 0.62 for medium-sized and 0.5 for large companies). Asset cover is positive (even if the values are lower than those of small companies). Their asset structure confirms the net prevalence of working capital as already noted for small companies. In brief, the analysis performed shows that the sector exhibits high levels of capitalisation and sound gearings. This constitutes an indispensable condition for Italy's biotech growth potential. As part of a sector with a very high content of technological innovation biotech companies require high levels of investment on which return times can be very long. Consequently, sufficiently capitalised corporate structures, with modest levels of outstanding debt are ideal vehicles to handle any adverse market situations and access venture capital.

Figure 13 - Pure Biotech Companies.

The capital structure of red biotech companies in Italy In this paragraph, the capital structures of red companies are analysed separately. As noted earlier, different business models are pursued and this results in different types of capital structure. In the following figures, the average capital structures are set out graphically for the various categories of company making up the red sub-sector. Red companies also exhibit a high level of capitalisation, varying between the 37% of biotech-oriented companies to the 29% of Big Pharma. The latter has a capital structure in line with its higher degree of operational maturity and higher average size. The gearing of Big Pharma companies, although very low, is the highest of all biotech companies (actually, it is close to 1, against 0.52 for pure biotech and 0.80 for Pharma biotech oriented). This reflects their appetite for working capital, necessary to sustain very large turnovers. The investment profile is also more pronounced as fixed assets exceed 30% of all capital deployment. Sources of finance of biotech companies in Italy In this year’s report, we decided to investigate the sources of finance used by the biotech companies. The information was gathered from questionnaires and supplemented by an analysis of company structure documented in chamber of commerce records. The study demonstrates that the primary source of finance remains capital contributions from shareholders (82%), followed by co-financed public sector programmes (61%) (we shall analyse in detail what categories of company benefit most from these contributions in the following section), bank loans (28%) and venture capital (20%) (see table 6). The figure of 20% referring to the number of companies that obtain venture and seed capital investments is a matter of great interest. It illustrates that this institution, albeit slowly, and taking due account of the specific nature of the biotech sector, is also taking root in our country.

30%

70%

Source: Blossom Associati – CrESIT 2008

47%

Source: Blossom Associati - CrESIT 2008

Figure 14 - Biotech oriented Companies. 22% 38%

78%

MLT Liabilities ST Liabilities Working capital Shareholders’ equity Fixed asset

35%

27%

Source: Blossom Associati - CrESIT 2008

Figure 15 - Pharma Oriented Companies.

32%

82% 61% 28% 20% 1%

MLT Liabilities ST Liabilities Working capital Shareholders’ equity Fixed asset

20%

Table 6 - Sources of finance of biotech companies in Italy (percentages of all companies). Capital contributions from shareholders Programmes co-financed by the public sector Banks Venture Capital/Private Equity Business Angels

33%

29%

MLT Liabilities ST Liabilities Working capital Shareholders’ equity Fixed asset

35%

68% 36%

Source: Blossom Associati - CrESIT 2008

Blossom Associati

2008

Here we analysis the recourse to venture capital/private equity by company size (see table 7). In response to our questionnaire, 30% of small companies declared that they use this channel to obtain financing. Most of these companies were start-ups or companies set up less than 10 years ago. Furthermore, 30% of the companies belonging to the small company segment that had declared a recourse to venture capital/private equity, were also found to be spin-offs (mainly academic spin-offs). On the contrary, however, no medium-sized or large company declared that it had made use of this channel of financing. The data confirm that the interest of institutional investors is, in general, concentrated upon recently constituted companies insofar as they exhibit a high growth and development potential. These investors include both foreign venture capital and Italian seed capital providers. Table 7 - Venture capital/private equity financing by company size (% of all companies). Small Medium Large

PERCENTAGE 30% 0% 0%

NR. OF COMPANIES 50 10 16

Source: Blossom Associati – CrESIT 2008

As regards programmes co-financed by the public sector, we can see that this percentage varies from 25% for large companies to 76% for small companies (see Table 8). On the one hand, the data demonstrate the greater importance that public financing has for small companies with respect to large companies, and on the other, the interest exhibited by public institutions for recently constituted companies operating in the territory. Table 8 - Public sector co-financing by company size (% of all companies).

Small Medium Large

PERCENTAGE 76% 40% 25%

NR. OF COMPANIES 50 10 16

Source: Blossom Associati – CrESIT Università degli Studi dell’Insubria di Varese 2008

As concerns recourse to bank financing, it is again interesting to break the data down by company size (see Table 9). The analysis shows that the companies making most use of bank loans are large companies. This finding fits with the fact that bank loans are a suitable vehicle to assist a company’s development (by financing investments and working capital) but are not suitable for a company’s initial developmental phases. Table 9 - Bank financing by company size (% of all companies). Small Medium Large

PERCENTAGE 26% 20% 38%

NR. OF COMPANIES 50 10 16

Source: Blossom Associati – CrESIT 2008

The data, moreover, confirmed the findings of our earlier gearing analysis, which showed that large companies had a higher gearing than that of smaller companies.

From the analysis of red company financing (see table 10), it appears that capital contributions are the principal means to raise capital (varying between 76% for biotech oriented and 83% for pure biotech). Big Pharma companies coherent with the foregoing observations and their corporate profile, make the greatest use, in percentage terms, of the banking system and no recourse to venture capital companies has ever been recorded. Table 10 - Sources of finance by red companies in Italy (% referring to all companies). BIOTECH PURE

BIOTECH ORIENTED

PHARMA ORIENTED

83%

76%

78%

63% 29% 29% 0%

47% 18% 18% 6%

33% 44% 0% 0%

Capital contributions from shareholders Programmes co-financed by the public sector Banks Venture Capital/Private Equity Business Angels Source: Blossom Associati â&#x20AC;&#x201C; CrESIT 2008

Incubated Biotech Companies Scientific parks or incubators are usually initiatives promoted or sponsored by territorial administrative bodies. Many of the companies we recognised for inclusion in our list are situated inside such parks: 79 of the 228 accredited companies. Such companies are exclusively medium-sized and small companies, but the latter (almost 90%) predominate. In addition, 40% of all companies situated in scientific parks and incubators are startups. For this company category, localisation in parks or incubators constitutes a distinct advantage as these structures put laboratories and equipment at the disposal of newly-constituted companies, which can, therefore, exploit the scope economies deriving from the co-localisation of biotech operations. The following table summarises the principal scientific and technological parks that focus on biotech. Against each, we have indicated the number of companies localised therein. Area Science Park, Park del Canavese and Parco Scientifico e Tecnologico della Sardegna are those that account for the largest number of companies in the sector, respectively 16 and 14). Among the most recent initiatives, we should mention the Insubrias BioPark, which grew from the â&#x20AC;&#x153;oldâ&#x20AC;? Centro Ricerche of Gerenzano. In the past, this centre had been owned by many well-known pharmaceutical multinationals such as Dow Chemical, Vicuron Pharmaceutical and Pfizer. Today the park belongs to the IFOM-IEO Campus, a new biomedical research Centre, the result of a joint commitment by the Foundation Istituto FIRC of Oncologia Molecolare (IFOM) and the Dipartimento di Oncologia Sperimentale of the Istituto Europeo di Oncologia (IEO), which had extended and supplemented their research activity in a jointly run campus situated near Milan.

Blossom Associati

2008

Biotechnological drugs: AIFA’s role

by Nello Martini AIFA

AIFA’s interest in biotechnological drugs covers a number of different aspects: from the evaluation of the innovative nature of drugs soon after introduction onto the market to post-marketing assessments, and from incentives for corporate research to the financing of non-profit research. In order to properly prepare itself for the arrival of new drugs on the market, AIFA has prepared a guideline document for the evaluation of the innovativeness of drugs that are ready to be marketed. The primary purpose is to determine a drug’s “place in therapy”, i.e. the role that can be attributed to the new drug within the set of therapies available for the treatment of a given condition. Defining a place in therapy also implies drawing up a characterisation of patients able to benefit from the administration of the drug. It should be borne in mind that even in the case of drugs whose efficacy has been clearly demonstrated, only a subgroup of patients will react in satisfactory manner. This, therefore, poses the question of how best to identify such responder patients. This procedure will not only prevent (or reduce) the inevitable toxicity determined by treating patients who obtain no benefit from the drug but it may also avoid wasteful spending. With this dual objective in mind, the idea of applying the principle of risk sharing was introduced into Italy, and subsequently adopted internationally. The principle refers to the sharing of risk between pharmaceutical companies and the bodies – public agencies or insurance companies – responsible for guaranteeing the reimbursement of drug costs. In short, the idea is that the price of drugs should only be reimbursed with respect to patients that respond to treatment while the costs of treating non-responder patients should be met by the companies. Along with the potentialities of biotechnological drugs, we must also bear in mind the problems arising from their use. In addition to the need to make appropriate definitions of the populations of patients who could benefit from the new therapies, there are also new implications in terms of safety and important repercussions in terms of expenditure.

The need to monitor new drugs in the phase immediately after their introduction onto the market is well known, as this operation is designed to promote the appropriate use of a drug and complete our knowledge of any attendant risks. The monitoring forms used for oncological drugs are an example of this requirement. At present 14 different forms are used and as of 2007, information had been gathered on about 25,000 patients receiving treatment. The analysis of the information acquired, conducted in cooperation with the Association of oncological physicians, provides a more complete picture of the risks/benefits of the new oncological drugs. Post-marketing monitoring constitutes a supplementary source of knowledge with respect to the data emerging from the analysis of clinical research conducted in Italy. In recent years, clinical trials in Italy have undergone a considerable overhaul from both a procedural and contextual point of view. Some preliminary considerations can be made based upon the data contained in the latest annual report on clinical drug trials, which summarise the contents of the National Observatory on the Clinical Trials of Drugs (OsSC). The existence of such an important nationwide databank – whose information goes back to the year 2000 – allows us not only to constantly monitor the trend in clinical trials in Italy, but also, and more importantly, to highlight their peculiar and inevitably critical aspects so that we can make the corrections necessary (at the level of controls and the system) in an attempt to sustain and further develop the entire sector. After five years, during which the absolute number of clinical trials, although exhibiting a slow but constant growth, had inched up to about 600/year, suddenly in 2006 the number of studies recorded by the OsCS shot up to 730 – a 11.8% year-on-year increase that signaled a resurgence in Italian research. Moreover, the distribution of the phases of the national research has also undergone a substantial change. In 2001, Phase II studies only represented 27.8% of all studies compared to 61.4% for Phase III studies. The data indicated that while Italy was “involved” in the development process of new molecules such involvement only referred to the final phases (immediately prior to registration). The expertise and the earlier phases were left to other countries, which were probably better endowed than Italy with clinical research facilities.

However, after only a few years the data now photograph a new situation. In 2006, Phase II studies accounted for 39.5% of all studies, with the percentage of Phase III studies falling to 46.2%. The data certainly reflect the “knock-on” effects of oncology, an area in which no less than 57% of the 1442 studies conducted were classified as Phase II. The regulatory authority's hope is that other therapeutic areas may soon proceed along the same road taken by oncology in order to acquire other areas of skill and leadership in the international panorama. Only in this way will Italy be able to play an important role in centralised and/or mutual recognition drug-registration processes, in which the level of expertise is fundamental. Biotechnologically derived drugs play a crucial role in the resurgence of national growth. The details of the clinical trials conducted in this specific sector are set out in tables table 1-7. It is also important to emphasise that clinical trials have, by now, acquired a predominantly international (67.8% of the total) and multicentric (84.9%) character. This means that Italian clinical research centres are fully integrated into the multinational framework. In addition, it can also be noted that clinical trials involving drugs of biotechnological origin have now come to represent about one quarter of all clinical trials taking place in Italy. As expected, the lion's share of these studies refers to drugs in the field of oncology. It is, moreover, also worth pointing out that over one third of the studies were promoted by non-profit institutions, which also bears witness to the interest in the spread of skills to be found in Italian research structures and in the health service. That drugs of biotechnological origin represent one of the cutting-edges of research is also demonstrated by the independent research projects on drugs financed by AIFA. As is known, AIFA projects are funded by pharmaceutical companies to the tune of 5% of their promotional budgets.

Blossom Associati

2008

The fund principally sets out to stimulate research in areas in which companies have little or no interest in making investments: from rare diseases to comparative studies on drugs and therapeutics strategies, and safety evaluations concerning the general population of patient users and not just the selected populations of clinical trial participants. Independent research projects put out to tender in the first two years of AIFAâ&#x20AC;&#x2122;s life (2005 and 2006) have already been financed. 2007 tendering procedure is about to be concluded while that for 2008 is already in preparation. It is interesting to note that out of the 105 projects financed in the first two tender processes, 26 (25%) prefer to studies on drugs of biotechnological origin. It could be asked why there should be no commercial interest in conducting studies on newly marketed innovative biotechnological and other drugs? We can illustrate the point with two examples. The first concerns the long-term (nine-year) cost/benefit profile of three aromatase inhibitors in the adjuvant treatment of breast cancer. The comparison also includes a procedure to determine if immediate treatment based on aromatase inhibitors is better than a sequential treatment, which includes an initial two-year period with tamoxifen. It is obvious that there will be little or no commercial interest in a comparison involving one drug and others of the same category, or either in determining the best therapeutic strategies aimed at identifying the specific contribution of a drug in a therapeutic setting in which treatment is already in progress. Another example is represented by the inclusion in the 2006 AIFA call to tender for independent research on drugs, of a question referring to the optimisation of therapeutic strategies in order to improve the risk/ benefit ratio of pharmacological treatment in oncology.

Thus, two studies have been financed on breast cancer treatment, both designed to compare different therapies involving the drug trastuzumab. This drugâ&#x20AC;&#x2122;s efficacy is well documented. However, it is still necessary to determine if the adverse events inevitably associated with this treatment can be reduced, especially as concerns cardiotoxicity, but without reducing the drugs clinical efficacy. One study in particular is aimed at evaluating if a short-term (three-month) treatment is safer, efficacy being the same, than the standard duration (twelve-month). A second survey sets out to determine if by halving the doses, treatment may be safer, conditions of efficacy being equal, than the actual doses advised for the present regime. In these cases, it is clear that there would be no commercial interest in conducting in-depth studies, which, in order to decrease toxicity, would entail a reduction in the quantity of the drug needed in the treatment for breast cancer. These cases are emblematic of the role that can be played by independent research in meeting the need for knowledge as well as having a potential impact on the health of women and clinical practice. Furthermore, if it were demonstrated that shorter and/or less aggressive treatments had a better cost benefit ratio for patients, another result would be a reduction in NHS spending.

Data referring to clinical trials involving active principles of biotechnological origin stated in the National Observatory on Clinical Trials

One final aspect that must be considered in discussing the role of AIFA refers to the contents of the so-called “programmatic agreements”. These concern industrial research incentives laid down in the 2006 Finance Act that will be disbursed on the basis of a call to tender published last autumn. In the spring of this year, the projects submitted by pharmaceutical companies will be evaluated. There are numerous areas earmarked for incentives – from an increase in research activities as well as researchers to Phase I and II clinical trials, as well as an increase in production nationwide and an increase in exports. Altogether, the value of the incentives amounts to E 100 million, which will be devolved to pharmaceutical companies to cover 10% of the investments carried out. In this manner, the overall volume of investments or supplementary spending by pharmaceutical firms to be generated by this initiative would amount to E 1 billion. Moreover, among the activities to qualify for incentives, biotechnological-drug development is obviously one with significant research implications as well as being one of the themes most meritorious of attention, even if we must await the conclusion of the evaluation process in order to quantify the results.

Table 1 - Trials by year Total CT involving drugs of biotechnological origin Year 2001 2002 2003 2004 2005 2006 2007 Total

N. CT 2 10 20 87 130 195 155 599

% 0.3 1.8 3.4 14.5 21.7 32.5 25.8 100.0

Table 2 - trials by year and by phase Total CTs involving drugs of biotechnological origin: 599 Year

N. CT

2001 2002 2003 2004 2005 2006 2007 Total

2 10 20 87 130 195 155 599

% Phase II 50.0 60.0 15.0 37.9 39.2 43.6 47.7 42.2

% Phase III 50.0 30.0 70.0 57.5 50.0 49.7 44.5 49.8

% Phase IV 0.0 0.0 15.0 4.6 10.8 6.2 7.7 7.6

% Bioeq/ Biod 0.0 10.0 0.0 0.0 0.0 0.5 0.0 0.3

% Tot. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Table 3 - Trials by promoter type: profit / non-profit Total CTs involving drugs of biotechnological origin: 604 Promoter type Profit No profit Total

N. CT 395 209 604

% 65.4 34.6 100.0

% in Italy 70.6 29.4 100.0

Table 4 - Trials by therapeutic area Total CTs involving drugs of biotechnological origin: 599 Therapeutic area N. CT Oncology 208 Immunology and infectious diseases 65 Haematology 57 Gastroenterology 51 Endocrinology 30 Rheumatology 28 Cardiology/Vascular Diseases 23 Neurology 23 Nephrology/Urology 22 Ophthalmology 22 Dermatology/Plastic surgery 18 Others 52 Total 599

% 34.4 10.8 9.4 8.4 5.0 4.6 3.8 3.8 3.6 3.6 3.0 9.0 100.0 Blossom Associati

2008

Table 5 - Trials by active principle The first 10 active principles (out of 106) are reported 1 2 3 4 5 6 7 8 9 10

ATC L01XC07 L01XC02 L01XC03 L01XC04 M03AX01 L01XC06 B03XA01 L04AA12 J07BB02 L03AB11

Active principle BEVACIZUMAB RITUXIMAB TRASTUZUMAB ALEMTUZUMAB TOSSINA BOTULINICA CETUXIMAB ERITROPOIETINA INFLIXIMAB ANTIGENE INFLUENZALE, PURIFICATO PEGINTERFERONE ALFA-2A

N. CT 35 33 17 13 13 12 11 11 10 10

Table 6 - Trials by Pharmaceutical Company Promoter Total CTs involving drugs of biotechnological origin with profit motivated promoter: 395 The first 14 (out of 120) promoters accounting for 50.1% of clinical trials are listed 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Pharmaceutical company promother Roche Amgen GlaxoSmithKline Novo Nordisk Schering Plough Wyeth Lederle Bristol Myers Squibb Serono International Chiron MolMed Merck Lilly Novartis Sanofi-Aventis

N. CT 54 26 15 12 12 12 11 11 8 8 8 7 7 7

% 13.7 6.6 3.8 3.0 3.0 3.0 2.8 2.8 2.0 2.0 2.0 1.8 1.8 1.8

N. CT 22 12 12 7 7 7 6 5

% 10.5 5.7 5.7 3.3 3.3 3.3 2.9 2.4

5 4 4 4

2.4 1.9 1.9 1.9

4 4 4 4

1.9 1.9 1.9 1.9

Table 7 - Trials by non-profit promoter Total CTs involving drugs of biotechnological origin with non-profit promoter: 209 The first 16 (out of 83) promoters accounting for 53.1% of clinical trials are listed 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 46

Non-profit promoter Hospital Trust Policlinico S. Orsola-Malpighi (Bologna) Hospital Trust S. Giovanni Battista (Turin) Policlinico Universitario Agostino Gemelli (Rome) Hospital Trust Padua Istituto Gaslini (Genoa) GIMEMA - Gruppo Italiano Malattie EMatologiche dell’Adulto (Rome) Hospital Trust Universitaria S. Martino (Genoa) Istituto Europeo di Oncologia (Milan) Istituto Nazionale per lo Studio e la Cura dei Tumori Fondazione Pascale (Naples) Hospital Trust Ospedali Riuniti di Bergamo Fondazione Ospedale S. Raffaele del Monte Tabor (Milan) GISL - Gruppo Italiano Studio Linfomi (Modena) GIMURELL - Gruppo Italiano MUltiREgionale per lo studio dei Linfomi e delle Leucemie Università di Udine Ospedale Oncologico (Bari) Istituto Nazionale Studio e Cura Tumori (Milan)

Networking to enhance business competitiveness - the role of the Italian Institute for Foreign Trade-ICE

by Ambassador Umberto Vattani, President Italian Institute for Foreign Trade

I am particularly pleased that ICE has contributed for the second time 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 cooperation, and inward and outward direct investment through its network of 115 offices in 86 countries and 17 Regional branches throughout the country. Italian biotech companies can rely on ICEâ&#x20AC;&#x2122;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 Italyâ&#x20AC;&#x2122;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 Italyâ&#x20AC;&#x2122;s National Association of biotechnology companies, Assobiotec, and with the Members of the Biotechnology, Biosafety and Life Sciences Committee, in order to establish common strategies.

Blossom Associati

2008

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 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 14 desks in our offices operating in countries such 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.

Cooperating and competing by Federica Bottazzi and Federica Rovida Blossom Associati Corporate Finance On 25 April 1953, Nature, one of the most important scientific journals published the results of research by James Watson and Francis Crick. In a short article the molecular form of DNA, now known as the “double helix”, was described. The discovery earned the two scientists the Nobel Prize in 1962 and gave the world the basis for the development of modern biotechnology. But what is biotechnology? A good starting point is most certainly the definition given by the OECD in 1982. According to this organisation, biotechnology is “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”. The European Federation of Biotechnology6 defines biotechnology as the “integration of natural sciences as well as organisms, cells, their parts or molecular analogues in industrial processes for the production of goods and services”. However, the most complete definition is certainly that given by the Convention on Biological Diversity7: “Biotechnology means any technological application that uses biological systems, living organisms, or derivatives thereof, to make or modify products or processes for specific use”. Biotechnologies are all those technologies that make use of living organisms (bacteria, animal cells of simple or complex organisms) or their derivatives (such as enzymes) to produce products useful to man in commercial quantities designed to improve the characteristics of plants and animals or to develop micro-organisms useful for specific uses.

The European Federation of Biotechnology (E.F.B.) is a European non-profit federation that brings together national associations, universities, scientific institutes, biotech companies and individual researchers in the field of biotechnology for the purpose of promoting biotechnologies in Europe and the world at large. 6

The Convention on biological diversity is an international treaty that was adopted in 1992 to safeguard biodiversity, the long-term use of its elements and the fair sharing of advantages deriving from the exploitation of genetic resources. 7

Blossom Associati

2008

It is immediately clear that this is a far ranging definition that attempts to bring together two worlds that are normally in conflict with one another; research aimed at scientific breakthroughs and industry with its sights on profitability and competition. Multidisciplinary is one of the salient features of biotechnologies: the most important applications are to be found in the medical-pharmaceutical and agri-foodstuff fields. However, other fields such as industry or the safeguarding of the environment, are developing strongly.

Nevertheless, the principal field of application is unquestionably health care, the so-called red biotechnology that employs the new technologies in medical-pharmaceutical fields, in order to produce: 1) diagnostic tools, which by acting at a genetic and proteic level can with, extreme precision and celerity, verify the origin of a possible pathology. Not only are the techniques of diagnosis modified but also the process itself, which by being simplified enables the tests to be carried out by anybody at any time.

White biotechnologies refers to the application of industrial processes and the safeguarding of the environment, which today are fast growing areas of activity. Biotechnologies are used to reduce the impact of certain industrial processes, monitor environmental pollution and identify polluting elements.

2) therapeutic products, which not only improve today’s treatment but also develop forms of treatment which otherwise would not be available.

Another field of application is agriculture and food processes, generally referred to as Green biotechnology. In the agricultural field, biotechnologies are used to modify the genetic characteristics of vegetables in order to obtain products with specific characteristics such as tolerance to herbicides, protection from insects or bacteria and/or protection from adverse environmental conditions. In the field of food production, they can increase the quality and nutritional value of agricultural and animal products and also improve the processing of foodstuffs. Another area of application at present undergoing development refers to the improvement in the safety level of foodstuffs in order to solve the highly important problem of microbial contamination. Biotechnologies are used to fight infections throughout the productive process in order to reduce the possibility of allergic reactions and to identify possible dangerous microorganisms, toxins or pathogens.

4) vaccines, in other words, organic substances that allow the organism to identify and subsequently fight infective diseases.

In addition, reference is often made to other areas in which of biotechnologies are applied. On the one hand, there are the so-called blue biotechnologies, referring to the manipulation of aquatic or marine products and, on the other, bio-informatics, or computerised technology, which adapts an informatics approach to resolve biological type problems. They play a fundamental role in the development of new drugs.

3) regenerative medicines, which use the natural capacity of the human body to maintain and repair itself. Stem cells are an outstanding example8.

However, whatever field is considered, there will always be the sure knowledge that biotechnological companies have innovation in their DNA, and not only as regards research and development activities but also, and above all, the concept of business itself. In this case, the principal players find themselves in a condition of having simultaneously to co-operate and compete in order to reach their objective: knowledge sharing, technological transfer and the creation of value. At this point it is natural to recur to the notion of system, which functions as the glue binding the whole operation together. Right from their very beginnings, developments in biotechnologies always took place within centres of excellence. We can think of San Diego, Cambridge, the Medican Valley, the Biovalley or the San Francisco Bay Area where in 1976, Genentech, the first biotechnological company in the pharmaceutical field was set up, which still today ranks among the first 10 biotechnological companies in terms of sales. The reason for the central role played by the concept of the system of excellence lies in the typical advantages deriving from “geographic proximity”, which entails the simplification of technological transfer and the spread of tacit knowledge.

Unlike most of the cells of the body, stem cells are undifferentiated, i.e. they do not have well determined tasks and functions. Consequently, they can be used to create new cells able to replace cells damaged by pathologies of various types and cure diseases caused by the malfunctioning of cells, such as Alzheimer or Parkinson’s disease. 8

The advantages of setting up a biotech system of excellence are of four types: > Advantages related to productivity: as regards the biotechnological sector, we speak primarily of reductions in transaction costs because – within a cluster – reciprocal relationships of trust are established, resources are required in common and infrastructure shared, whose costs would otherwise have to be borne by each actor individually, making it more difficult to enter into new business fields. > Advantages related to innovation: in this case, proximity to research centres of excellence is of fundamental importance because proximity makes it possible to develop a potential in terms of innovative capacity. > Advantages related to new businesses: these refer, first and foremost, to the creation of a fertile environment for the development of new biotechnological companies; > Advantages in terms of the creation of value: above all these refer to the value-control phase correlated to the fundamental role played by technological transfer. A cluster can be considered an integrated network system in which co-operation takes place together with transactions of various types between a series of players, as schematically depicted in the chart. Biotechnological companies are at the centre of the model. They have developed a series of relations with the other nodes of the cluster but especially with traditional pharmaceutical companies and in so doing both are able to overcome certain structural shortcomings: on the one hand, biotech companies need to raise R&D investment capital and lack comprehensive distribution networks and productive facilities; on the other, traditional pharmaceutical companies need to feed their own pipelines with innovative projects.

The first 10 biotech companies in the world Rank Company

Country

1 2 3 4 5 6 7 8 9 10

USA USA USA Belgium USA Switzerland USA Australia USA USA

Amgen Genentech Genzyme UCB Gilead Sciences Serono Biogen Idec CSL Cephalon MedImmune

Turnover (milions $)

R&D expediture (milions $)

14,268.0 9,284.0 3,187.0 3,169.6 3,026.1 2,804.9 2,683.0 2,148.3 1,764.1 1,276.8

3,366.0 1,773.0 650.0 772.6 383.9 560.5 718.4 119.1 403.4 448.9

Net profit / (losses) (milions $) 2,950.0 2,113.0 – 16.8 461.1 – 1,190.0 735.4 217.5 86.8 144.8 48.7

Employed 20,100 10,533 + 9,000 8,477 7,575 4,775 3,750 2,895 2,515 2,359

Source: Top 100 biotechnology companies, MedAdNews, June 2007

The biotechnological cluster model SERVICES PROVIDERS

INVESTORS Venture Capitalists Banks

Advisory Financial

Capital

Stock Market Business Angels Istitutional Investors

Professional Services

Interest, dividends

Legal Human Resources

Fees

CLUSTER Biotechnology companies Human Resources

Legislative Support

ISTITUTIONS European Union Istitutions

Fees

Economic Development Employment

Universities Consortia

Local Istitutions Industrial Associations

FUNDAMENTAL RESEARCH

Know how

Investments

COMPANIES Related Companies

Hospital Science Park Bio-incubator

Applied Companies Source: Blossom Associati - CrESIT 2008

Blossom Associati

2008

The top 10 traditional pharmaceutical companies in the world Rank Company

Country

1 2 3 4 5 6 7 8 9 10

USA USA GB Switzerland France Switzerland GB USA USA USA

Johnson & Johnson Pfizer GlaxoSmithKline Novartis Sanofi-Aventis Hoffmann-La Roche AstraZeneca Merck & Co. Abbott Laboratories Wyeth

Turnover (milions of $)

R&D (milions of $)

53,324 48,371 42,813 37,020 35,645 33,547 26,475 22,636 22,476 20,351

7,125 7,599 6,373 5,349 5,565 5,258 3,902 4,783 2,255 3,109

Net profit / (loss) (milions of $) 11,053 19,337 10,135 7,202 5,033 7,318 6,063 4,434 1,717 4,197

Employees 138,000 122,200 106,000 102,695 100,735 100,289 98,000 74,372 66,800 66,663

Source: Top 100 pharmaceutical companies, MedAdNews, June 2007

Financing by type Early stage financing

Expansion financing or development capital Bridge financing

Replacement Capital Cluster - Venture Turnaround MBO, LBO, MBI

Investment in the early phases of a companyâ&#x20AC;&#x2122;s life can be divided into: > seed financing, which refers to the experimental phase of an innovative idea when it is necessary to demonstrate the technical validity of a product/service; > start up financing, which is undertaken in the start-up phase of activities, when the commercial potential of a product/service is unknown. Investment designed to sustain corporate development and growth; the development of business activities can proceed by diversification (internal growth), the acquisition of companies or business units (external growth) or by cooperation with other companies (networking and clustering). Bridge financing refers to an advanced phase in corporate development, characterised by the consolidation of the shareholder with a controlling interest and its acquisition of the minority stakes of shareholders intending to disinvest, although it may also take the form of a public listing Investment aimed at reorganising the shareholding structure, whereby an institutional investor replaces one or more shareholders wishing to disinvest. Investment operations designed to harness together a number of independent companies. Investment for the restructuring of lame-duck companies. Operations designed to replace all the shareholders of the company with internal (Management buy-out), or external management (Management buy-in), by a debt funded acquisition (leveraged buy-out)

Profile: Blossom Associati Corporate Finance

Links are also very important with the financial system to which the sector companies must turn to raise the capital necessary for development. However, the market operators include not only banks and stock exchanges but also institutional investors such as private equity and venture capital and the informal channels of business angels and, last but not least, foundations and the large corporations. Within the cluster, there must be close links with the research system as this provides the input that forms the basis for the corporate development processes: new technologies, new products and high-level training. Public and hospital research centres perform a fundamental role, especially as concerns basic research. In addition, we should remember the scientific and technological parks and incubators, which are necessary to sustain companies especially in start-up phases. The network is completed by regulatory and norm-setting institutions operating at an international, national and local level, institutions that provide financing in pre-seed phases, and, last but not least, support sectors that provide financial, managerial, legal and operative consultancy on matters ranging from the drawing up of business plans, and the analysis of investment risks to accessing subsidised financing for R&D activities and the development of new entrepreneurial initiatives. They also put companies into contact with investors, and provide legal help concerning the safeguarding of intellectual property and patent law, as well as training services in cooperation with universities and other national and international activities and training for the development of innovation technological transfer and research.

The art of corporate innovation is different for every company

blossomassociati.com Helping companies improve their financial results

Blossom - Venture Capital Screening 2008 by Federica Bottazzi Blossom Associati Corporate Finance

The latest analyses of corporate finance conducted by Blossom Associati reveal that as of today the companies that could be listed on the stock exchange in the coming years number no more than 3 or 4. A screening of Italian companies conducted to determine the most interesting targets in the sector indicate once again that Italy is more suited to venture capital than public listing. Companies must first grow, set up an appropriate structure, create a network, develop research and only when the pipeline has reached a level such as to forecast a two-three year cash flow can they begin to consider public listing. In this context, venture capital as an intermediate stage prior to listing is certainly able to provide the acceleration needed. In our sector more than in others, venture capital and specialised advisors are essential, as they are only elements with the expertise to manage associated risks who posses the strategic managerial capacity necessary. For example, a biotech company with a mainly Phase 1 or 2 pipeline, without access to capital, know-how and the network, or retail sales would be too great a risk for any operator. Venture capital investments enable companies to survive for a period of between 18 to 24 months in order to attain a well-defined milestone that will successively set the premises for another round of investments, thereby guaranteeing capital gains for the investor. The investments in question albeit relatively modest are repeated over time. However, the high risk characterising the sector and the high failure rate of projects make it difficult to plan returns on investments. This, consequently, gives rise to the need to fraction the investments.

Geographical distribution of Specialised European VC Firms (2008)

The ideal situation for many emergent Italian companies with an excellent pipeline, although still in a preliminary phase, would be to find specialised foreign venture capital with the skills, networks and capital flows necessary for accelerating the pipeline development phase. It is necessary to bear in mind that while emergent companies compete for financing by submitting business plans to at least a dozen venture capital firms or financiers, so venture capitalist firms also compete internationally in their efforts to discover the best opportunities and create value at the point of intersection of three markets: new ideas, capital and talent. For example, it is quite usual for a medium-sized American venture capital firm to examine an average of about 6,000 business plans per year in order to identify the most promising start-ups and companies. Empirical international evidence as well as our own experience as strategic advisor reveal some features shared by all the most promising companies: a business concept that does not fix limits to growth potential or value, innovation, understood as a task falling to all in the organisation and, finally, the capacity to create a diversified portfolio of strategic exit strategy options evidencing the capital gains realised. Our screening of international venture capital firms shows an increasing interest in the biotech sector as illustrated by the presence of 354 American and European VCs investing or ready to invest in the sector. In the United States there are 194 VC firms operating in the sector. The areas with the greatest presence of investors are the San Francisco Bay Area, San Diego, New York and Boston. In Europe there are 160 VC firms investing in biotechnologies. The nations with the highest VC investments are the UK and Germany followed by Switzerland and France. The classical investment is equity capital financing (78%) with a strong preference towards a minority shareholding (50%), possibly as part of a syndicate with other local institutional investors. However, VC firms are also ready to provide other forms of financing including long-term loans (6%), and mezzanine loans (4%). The latter is usually seen as a form of pre-IPO financing.

Switzerland 11% Austria 5%

Sweden 4%

Belgium 2%

Netherlands 6% France 8% Ireland 4%

Denmark 4%

Germany 17%

Source: Blossom Associati Corporate Finance

Financing Stages - Specialised European Venture Capital Firms (2008) Small buyout (<15m equity) 2% Start-up 9% Bridge 12% Seed 10%

Other early stage 20%

Mid market buyout (15m - 150m equity) 7%

Expansion development 39%

Large buyout (150m - 300m equity) 1%

Source: Blossom Associati Corporate Finance

Type of Financing - Specialised European Venture Capital Firms (2008)

Source of financing of Italian biotech (% data of all sector companies). Capital contributions from shareholders Programmes co-financed by public sector Banks Venture Capital/Private Equity Business Angels

Altro 24%

United Kingdom 15%

82% 61% 28% 20% 1%

Shareholders Loans 10% Debt 6%

Investment in third party fund 2%

Minority Equity 50% Majority Equity 28%

Source: Blossom Associati â&#x20AC;&#x201C; CrESIT 2008

Mezzanine 4%

Source: Blossom Associati Corporate Finance

Blossom Associati

2008

Methodological Notes The 2008 analysis of the structure of the biotechnology sector for health care (Red Biotech), like previous reports, classified Red Biotech companies according to the analysis of the corporate models adopted: > “Born Biotech” or “Pure Biotech”: companies whose core business is mainly oriented to research and development activities. The marketing of biological products and the technologies used to develop them is only a marginal activity. “Born Biotech” companies can be differentiated in terms of product, drug agent and biotech platform but they all have one trait in common: the percentage of investments on projects, products, and biotechnological platforms or technologies (InvB) with respect to total investments (Inv) exceeds 70% (InvB/Inv>70%); > “Pharma Biotech” or “biotech product” companies are those companies operating along the entire value chain of the pharmaceutical sector - R&D and the production and marketing of biotechnological and traditional products. Their reference is the end user, and hence they cover both the primary care segment 9 and the secondary care segment 10. These companies have demonstrated their ability to utilise the returns on the sale of exploitation rights of their findings order to integrate themselves vertically. This gives them the ability to reach the end-user market directly, an indispensable strategy if the stable cash flow necessary to sustain R&D processes is to be guaranteed. A further segmentation was applied to Pharma Biotech companies, based on 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 2% to 40% the company is Pharma oriented. Therefore, not only companies that conduct R&D based on traditional technologies but also companies whose core business is oriented towards the production or marketing of biotechnological products have been excluded from the list of companies prepared according to Blossom Associati - CrESIT methodology. As already mentioned, this research does not intend to survey companies engaged on services, regulatory, legal and financial consultancy and generic biomedical production.

This segment of the pharmaceutical market concerns products that patients can purchase and use directly. It covers the most common drugs such as pills, oral solutions, etc. 9

This is the pharmaceutical market segment that comprises products whose administration requires hospitals and specialised medical personnel. 10

Some additional considerations may assist the understanding of the methodology applied. Scientific 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 technical, scientific and regulatory know-how of international importance; > a strong propensity to sustain, manage and promote technological transfer internationally; > 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 experimentation at a national and international level; > the utilisation of structures, technologies and highly qualified researchers and personnel. Universities. We have identified and analysed the main universities with a strong interest in capitalizing upon 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 in which they have shareholdings. Clinical research. For purposes of identifying research centres and structures, account was taken of the data and information drawn up by AIFA. Service companies: The 2008 report does not cover complementary product/service suppliers that offer products and services with marginal added value and which can be broken down into companies offering biotech services and biotech commodities. Biotech service companies make ICT skills available and provide assistance for the activities of biotech companies involved in R&D processes. Their principal services refer to the gathering of information from public or private databases, the implementation of IT systems for data management and support for laboratory and marketing activities. Biotech commodity companies are involved in the production and sale of the products used in R&D processes. As concerns their positioning in the value chain, both cover the entire range of activities, and adopt business models with a low yield/risk profile and a limited contribution in terms of innovation and value creation. This model is profoundly different from the business model typical of the biotech companies analysed within the framework of the Blossom Associati-CrESIT report. The use of this methodology does not allow us to estimate the aggregate value of all activities correlated to the industry, which is â&#x20AC;&#x201C; as may be imagined â&#x20AC;&#x201C; far wider than the specifically biotech system.

Blossom Associati

2008

Data and criteria for size segmentation The selection of the companies was based on 2007 data. The data and analyses contained in the Report refer to the year or years indicated in the associated tables. For the classification by size of the companies, reference was made to the Community definition of the company, which came into force on January 1st, 2005. It was introduced by recommendation 361 of 2003, and replaced 96/280/EC with an updated text. In this regard, the following definitions are used: > small company, refers to a company with fewer than 50 employees and an annual turnover or a budget of no more than 10 million euros (the higher of the two figures is used); > medium-sized company refers to a company with fewer than 250 employees and an annual turnover of no more than 50 million euros or annual budget of no more than 43 million euros; > large company refers to company with more than 250 employees and an annual turnover of over 50 million euros or annual budget of more than 43 million euros (the lower of the two figures is used). The research areas: segmentation criteria The companies analysed in this report were classified in terms of their operating area: The Red Biotech, in which the new technologies are adapted to medical-pharmaceutical contexts such as: > Diagnostic instruments that by acting out a genetic and proteic level can, with extreme precision and celerity, verify the origin of a possible pathology. Not only are the techniques of diagnosis modified but also the process itself, which by being simplified enables the tests to be carried out by anybody at any time. > Therapeutic products that not only improve today's treatment but also develop treatment that otherwise would not be available. > Regenerative medicines that use the natural capacity of the human body to maintain and repair itself. Stem cells are an outstanding example11. > Vaccines, in other words, organic substances that allow the organism to identify and subsequently fight infective diseases. The White biotechnology12 (or grey biotechnologies refer to the application of industrial processes and the safeguarding of the environment, which today are fast growing areas of activity. The biotechnologies are used to reduce the environmental impact of certain products and processes13, monitor environmental pollution and identify polluting elements.

Unlike most cells of the body, stem cells are undifferentiated, i.e. they do not have well determined tasks and functions. Consequently, they can be used to create new cells able to replace cells damaged by pathologies of various types and cure diseases caused by the malfunctioning of cells, such as Alzheimer or Parkinsonâ&#x20AC;&#x2122;s disease. 11

White biotechnologies.

The chemical textile or paper-making industries are examples of such applications.

Green biotechnology, in the agricultural field, is used to modify the genetic characteristics of vegetables in order to obtain products with specific characteristics such as tolerance to herbicides, protection from insects or bacteria and protection from adverse environmental conditions. In the field of food production, they can increase the quality and nutritional value of agricultural and animal products and improve the processing of foodstuffs. A further area of application at present undergoing development refers to the improvement in the safety level of foodstuffs in order to overcome the highly important problem of microbial contamination. Biotechnologies fight infections throughout the productive process in order to reduce the possibility of allergic reactions and identify possible dangerous microorganisms, toxins or pathogens. Biotech platforms refer to companies concerned with the development and marketing of hardware and software technologies to support R&D. Such technologies may be broken down into product and process technologies. Bioinformatic companies implement hardware and software systems for the generation, integration and management of data produced in the course of drug discovery processes. In general, the time to market that characterises the different platforms is considerably different from that typical of companies oriented to the development of new drugs, i.e. Born Biotech or Pharma Biotech. Thus, in the case of these biotech companies not only is time to market lower but also their failure rate. In actual fact, the risk/yield profile is much more similar to those of ICT14.

Information and communication technology companies, where information technology and telematics converge upon new methods for the transmission of information. Such methods include networks and multimedia. 14

Blossom Associati

2008

Accrediting biotechnological companies Blossom Associati - CrESIT accreditation

Essentially, our method consists in consistently applying a single definition of the â&#x20AC;&#x153;Biotechnological Sectorâ&#x20AC;? throughout the entire study. Hence, Blossom Associati, in agreement with the Research Centre for Economy, Health, Innovation and the Territory (CrESIT) of Insubria University decided to adopt a single methodology in order to guarantee valid comparisons between national and international findings. An analysis of the main national and international studies showed that the different methods used often produce mutually incompatible and sometimes misleading analyses on account of the different objectives being pursued. Therefore, for the purpose of minimising the differences encountered, we dedicated our attention to the main methodologies used by the various international studies in order to extrapolate the best from each.

Thanks to this work of analysis and cooperation Blossom Associati and CrESIT are, today, a national and international reference point. And as such we can provide all the key data on the Italian sector according to specific requirements. Whenever it is necessary to modify some criteria of analysis, enlarge or modify the objectives of an analysis, we can reclassify and re-analyse the data by providing the key data on the national sector while remaining faithful to the underlying principle based on the adoption of a single, reliable and accredited database. Consequently, in order to determine the sample of accredited Italian biotechnological companies we adopted an analytic selection criterion that lays down the following prerequisites for each company: > the legal body in question must be a company set up to create value and generate profit; > it must undertake research and development within the territory of Italy (albeit not on an exclusive or prevalent basis). > Its R&D activities must concern innovative technologies and products based on biotechnological type platforms, bearing in mind that we have adopted the definition of biotechnology proposed by the Convention on Biological Diversity.

In order to guarantee a fully comprehensive analysis able to include the maximum possible number 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) company identification. An initial identification of the set of companies complying with the minimum requisites was conducted, based upon a thoroughgoing, company-by-company analysis. Information was directly acquired on the companies within the ambit of official national/regional databank, ministerial web sites, agencies, universities, incubators, science parks, companies, etc. The research was subsequently supplemented by the analysis of chamber of commerce records and financial statements. In conclusion, a final verification was conducted based on direct contacts with companies. b) company selection. The selection of the companies was the most complex phase as it called for special attention in assessing whether companies met the methodological requisites we had 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 each single firm through qualitative questionnaires and the entering of essential information on a database designed by Blossom Associati and CrESIT. Each company was later analysed for initial inclusion or exclusion according to its compliance with the requisites defined by a scientific committee made up of Blossom Associati, and CrESIT. In order to guarantee the total independence and professionalism of our work, the final selection for definitive approval remained the prerogative of Blossom Associati, which, on the basis of all the information acquired, certified the companies that were to be included in the sector. c) data collection. The collection of the data on the financial statements was prepared by CrESIT on the basis of indications agreed upon with Blossom Associati. The data was collected by acquiring annual accounts 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: > financial statements and notes to the financial statements filed with the chamber of commerce, for the years 2006, 2005, 2004, 2003 and 2002; > chamber of commerce records (both ordinary records and records on shareholding structure) produced in the period November-January 2008. Blossom Associati, Assobiotec and Farmindustria collected qualitative information from companies using a specially prepared questionnaire. The companies responded to the questionnaires in an exhaustive manner. In actual fact, the reply rate was well above the 10% figure obtained by the best international surveys (Harzing, 1997). On average, the reply rate of companies was about 73%. The data collection process was concluded on February 20th, 2008. The rigorous application of the methodology developed, and 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, in many cases, are included in several other studies and databases. However, in view of the importance of the work we cannot, a priori, exclude the possibility that companies or parks may have been overlooked that should have been included in the list of recognised companies. Any companies and parks not included in our list that believe they meet the requisites indicated, should request Blossom Associati for a qualitative analysis form so that they can furnish information necessary for the 2009 edition of the Report. On the other hand, those companies included among the recognised companies that consider they do not meet the requisites defined in the methodology may request removal from the list if they provide Blossom Associati with pertinent reasons and data.

Blossom Associati

2008

ITALIAN BIOTECH COMPANY

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62

AB ANALITICA ABBOTT ABIOGEN PHARMA ADALTIS ITALIA ADAMANTIO ADIENNE PHARMA&BIOTECH ADRIACELL ADVANCED ANALYTICAL TECHNOLOGIES AETHIA AGRIFUTUR AGRITEST AGROLABO ALFA WASSERMANN ALLTOX ALPHAGENICS ALSO BIOTECH AMGEN ANALISI & CONTROLLI ANALLERGO ANIDRAL APAVADIS APULIABIOTECH ARETA INTERNATIONAL AVANTGARDE AXXAM BCS BIOTECH BGT ITALIA BIO & GEO BIO DEC BIO FLAG BIO HI-TECH BIO RAD BIO3 RESEARCH BIOALLERGY INTERNATIONAL BIOANALISI CENTRO SUD BIOANALISI TRENTINA BIOANSWERS BIOCI DI CAIOLO CARLO BIODIVERSITY BIOFARMA BIOFIN LABORATORIES BIOFUTURA BIOGEN-DOMPE' BIOGENETICS BIO-KER BIOMAN BIOMAT BIONUCLEON BIOPAINT BIOREP BIOSEARCH AMBIENTE BIOSENSOR TECHNOLOGIES BIOSILAB BIOSISTEMA BIOSPA BIOSPHERE BIOSTRANDS BIOSYNTH BIOTECGEN BIOTECK BIOTECNE CONSORZIO PER LE RICERCHE BIOTEST ITALIA

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124

BIOTRACK BIOXELL BMR GENOMICS BOEHRINGER INGELHEIM ITALIA BOUTY BRANE DISCOVERY BSA AMBIENTE CAGE CHEMICALS CBM CCS AOSTA CEINGE BIOTECHNOLOGIES AVANZATE CELGENE CELL THERAPEUTICS EUROPE CENTRO BIOTECNOLOGIE AVANZATE CHARLES RIVER LABORATORIES CHIESI FARMACEUTICI CLONIT COGEP CONGENIA COSMO COSTANTINO CREABILIS BIOTECH CUTECH CYANINE TECHONOLOGIES DAC DALTON BIOTECNOLOGIE DEGENE DEGUSSA TEXTURANT SYSTEMS ITALIA DIALECTICA DIASORIN DIATECH DIATHEVA DIESSE DIAGNOSTICA SENESE DOMPE’ BIOTECH DOTT. DINO PALADIN ELI LILLY ITALIA EOS EPPENDORF ERATECH ESAOTE ESPIKEM ETNA BIOTECH EURAND EUROCLONE EUROSPITAL EXENIA GROUP EXPERTEAM DI DE BORTOLI EXPLORA FATRO FERTIREV FIDIA ADVANCED BIOPOLYMERS FLAMMA FOTOSINTETICA & MICROBIOLOGICA GENALTA GENEDIA GENEXTRA GENTIUM GENZYME GILEAD SCIENCES GIO.ECO GNOSIS GREENLAB

125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186

GRIFOLS ITALIA GUYA BIOSCIENCE HMGB BIOTECH IDRABEL IMED INBIOS INCURA INDENA INNOVATE BIOTECHNOLOGY INVENTO INVITROGEN IPSEN IST. RICERCHE DI BIOLOGIA MOLECOLARE ANGELETTI ISTA ISTITUTO DI RICERCHE BIOMEDICHE ANTOINE MARXER ITALFARMACO JANSSEN CILAG KEDRION KENTON KERYOS LAY LINE GENOMICS LEA BIOTECH LEAF BIOSCIENCE LIFELINELAB LORENZ BIOTECH MEDESTEA RESEARCH & PRODUCTION MEDITECKNOLOGY MENARINI BIOTECH MERCK SERONO MERISTEMA METAPONTUM AGROBIOS MILLIPORE MOLECULAR BIOTECHNOLOGY MOLMED MOLTENI FARMACEUTICI MONTEGEN NANOVECTOR NARVALUS NAXOSPHARMA NEMO LAB NERVIANO MEDICAL SCIENCES NEUROGENICS NEUROSCIENZE PHARMANESS NEWRON PHARMACEUTICALS NGB GENETICS NICOX RESEARCH NIKEM NOBIL BIO RICERCHE NOTOPHARM NOVARTIS FARMA NOVO NORDISK FARMACEUTICI N.T.I. NURAGING BIOTECH NUTRISEARCH NYCOMED ITALIA PHARMESTE PHILOGEN PIONEER HI-BRED ITALIA PLANTECHNO POLIMED POLIMEKON PORTO CONTE RICERCHE

187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228

PRIGEN PRIMM PRION DIAGNOSTICA PROBIOTICAL PROGETTO NATURA PROTEGEON BIO PROTEIOS PROTEOTECH PROTERA ROCHE ROTTAPHARM S.A.F.AN. BIOINFORMATICS SACACE BIOTECHNOLOGIES SANOFI PASTEUR MSD SB TECHNOLOGY SCHERING-PLOUGH SEKMED SERVIER ITALIA SHAR.DNA SIENABIOTECH SIGEA SIGMA TAU SILICON BIOSYSTEMS SPIDER BIOTECH TALENT TARGET HEART BIOTEC TECAN ITALIA TECNA TECNOBIOCHIP TECNOBIOMEDICA TECNOGEN TECTRONIK TIB MOLBIOL TISSUELAB TOP TOSCANA BIOMARKERS TRANSACTIVA UFPEPTIDES WETWARE CONCEPTS WEZEN BIOPHARMACEUTICALS WYETH LEDERLE XEPTAGEN

Although extreme care was taken in the compilation of the following list, it should be noted that it is not comprehensive and may contain omissions and errors, for which no liability can be accepted. Please notify Blossom Associati of any requests for amendments, supplementary information or cancellation, so that the most appropriate initiatives may be taken.

Blossom Associati

2008

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