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LIFESCIENCELEADER.COM APRIL 2014 36 leaders ROUNDTABLE WAYNE KOBERSTEIN: Great to see you all here this morning. My top priority today is to elicit your thoughts on three central questions: What are the most important factors in how the market cap for small biotech companies is calculated? How are the companies affected by the value of their market cap at key stages in their development? What actions can companies take to achieve/optimize their market cap at those key stages of development? Chief Editor Rob Wright welcomes the panelists, and they begin to define the objective and subjective factors that determine a small biotech's valuation from its earliest stages. ROB WRIGHT: Good morning. Thank you for coming. One of the most valuable things we have in our lives is time, so I'd like to make sure I thank you for taking the time to be with us today. We wanted to do something more interactive than bringing a bunch of people together and having a separate group talking up on the stage. We also want to develop this discussion into future editorial that our readers find valuable. Now I'm going to turn it over to Wayne. But first let's go around the table and have everyone introduce yourself. The panel answers the roll call: A Dennis Purcell Senior Partner of Aisling Capital B Rich Vincent CFO of Sorrento Therapeutics C Jacob Guzman Corporate Client Group Director at Morgan Stanley D Allan Shaw Managing Director at Life Science Advisory Practice, Alvarez & Marsal LLC E Ford Worthy Partner & CFO of Pappas Ventures F Kenneth Moch President and CEO of Chimerix G Jaisim Shah CEO of Semnur Pharmaceuticals H William Marth CEO of AMRI I George Golumbeski Senior Vice President, Business Development at Celgene J Henry Ji CEO of Sorrento Therapeutics question — what factors determine a small-cap company's valuation, from start-up on? DENNIS PURCELL: It starts with supply and demand. If you're starting a company, the more options you have, the better the valuation will be. It's really important to get the right people around the table at the beginning because the valuation going forward is largely set based on insider participation — whether the insiders have enough money and whether they will support you and your strategy. You can't start by doing present value calculations or following set formulas. It's really more of an art than a science right at the beginning. KOBERSTEIN: More art than a science — I suspected that. Can you follow from that, Rich? RICHARD VINCENT: From the very early stages, before you can even attract VC money, you've got to step back and figure out how you get a company off the ground. In San Diego, we see a lot of start-up companies, and it's very difficult for many good companies to secure seed money. We often have to go to friends and family and some of the angels in town or in other major cities in the bay area or on the East Coast. We actually try to avoid the question of valuation with some of the seed money we raise, by offering convertible notes. The notes will typically carry a standard 6 to 8 percent interest rate and some sort of discount factor toward the next financing (typically a VC-led round whereby the VCs lead the due diligence effort). So we take the valuation question off the table at that stage and defer until the VCs or other larger investors invest. A lot of the seed people like that, because then they don't have to do all the hard work the venture folks do to determine the quality of an asset. KOBERSTEIN: What about thereafter, once you get past that very early stage? VINCENT: Then you follow the lines that Dennis mentioned: it's all about supply and demand. We do that by being tactical across the spectrum of the business, whether it's bringing in the right management team, board, and opinion leaders, or IR (investor relations) firms to LEADING OFF I had the idea for this meeting mainly because I don't know what the answers are to those questions. I don't know what goes into deter- mining the market cap and valuation of a biotech company, either private or public, at the small-cap level. I can guess and observe like any other layperson, and I imagine that a lot of the answers have to do with subjective factors. But, that's fine, we can discuss what those are. Why is valuation important? What should it be in an optimum world? And then, how can companies actively work to reach that optimum valuation market cap? So, let's start, clockwise to my left. Dennis, can you begin with a general answer to the first THE ART OF OPTIMIZING SMALL BIOTECH MARKET CAPS— FROM SCIENTIFIC DREAMS TO STRATEGIC REALITY By W. Koberstein A F B G C H D I E J B i o _ I n v e s t o r _ F o r u m . i n d d 3 Bio_Investor_Forum.indd 3 3 / 2 1 / 2 0 1 4 1 1 : 1 1 : 4 3 A M 3/21/2014 11:11:43 AM