reported - Fenwick & West LLP

fenwick.com

reported - Fenwick & West LLP

2012

Trends in Terms of

U.S. Life Science

Venture Financings

Full Year 2012

Fenwick

fenwick & west llp


2012

Trends in Terms of

U.S. Life Science

Venture Financings

Full Year 2012

Survey Intro and Background

This survey reflects our analysis of the terms of venture financings for 363 life science companies headquartered in

the United States that reported raising money during 2012. The results are summarized below.

Survey Contents

Overview of Fenwick & West Results...................................................................................................................3

Analysis of Industry Data...................................................................................................................................4

Detailed Fenwick & West Results: Valuation...................................................................................................... 12

Detailed Fenwick & West Results: Financing Terms.............................................................................................15

Detailed Fenwick & West Results: Regional and Industry Variations.................................................................... 21

Fenwick

fenwick & west llp


fenwick & west llp

Overview of Fenwick & West Results

Valuations for life science companies receiving venture capital financing during 2012 continued to trend modestly

upward from 2011 levels. However, total investment into venture-backed life science companies declined during 2012,

and our analysis of fundraising trends indicates that fundraising by life science venture capitalists has continued to

decline as well.

Key observations and highlights from our survey include the following:

• Up rounds outpaced down rounds 52% to 17% during 2012. This represents an improvement over results from

2011, which averaged 47% up rounds and 25% down rounds.

• The average round-to-round price increase for 2012, as measured by the Fenwick & West Life Science Venture

Capital Barometer, increased to 23%. For comparison, Barometer results for 2011 were 14%.

• Within life science industry sub-sectors, Barometer results for biopharmaceutical companies remained in line

with 2011, averaging 16% for both 2011 and 2012. In contrast, Barometer results for medical device companies

moved up from an average of 12% during pricing 2011 changes, to average life sciences of 30% breakdown during 2012.

• Fundraising by life science venture capitalists, which fell off markedly following the 2008 recession, has

60%

continued to decline during 2012. We estimate that the percentage of VC fundraising allocable to life sciences

has declined from 19% of funds raised in 2009 to 12.5% of funds raised in 2012. In absolute dollar terms, we

40%

estimate that fundraising has fallen from an average of $7.8 billion/year in 2007 and 2008 to $2.5 billion in

all life sciences

rections 2012.

20%

l deals per year

• Senior and participating liquidation preferences remained a common feature of 2012 life science venture

biopharma

financings, appearing in 51% (for 0% senior preferences) and 66% (for participating preferences) of the financings

we reviewed, which is in line with results observed during 2011.

medical devices

24%

21%

19%

-20%

Q1'10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12

Direction of Price Change, 2010-2012 Trend (Four Quarter Moving Average) of Barometer Results, 2010-2012

4 quarter running average

52% 60%

45%

47%

Up Rounds

Down Rounds

'10

26%

'11

25%

'12

17%

40%

20%

0%

all life sciences

medical devices

biopharma

30%

23%

16%

-20%

Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12

Flat Rounds

29%

28%

31%

3

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Analysis of Industry Data

The financing environment for venture backed life science companies remained challenging during 2012. Capital to fund

life science startups is in increasingly short supply, despite indications that long-run demand for life science innovation

will remain strong.

As industry participants are keenly aware, funding for life science startups is becoming scarce. Fundraising by life

science-focused venture capitalists has been declining since 2009, and appears to be well below the level needed to

sustain the current levels of investment. For example, in 2012 investments into venture-backed life science companies

were over $6.2 billion, but we estimate that life science-focused venture capitalists raised only $2.5 billion in new funds.

While funding provided by corporate investors, wealthy individuals and disease foundations will continue to help to fill

some of the gap, there is clearly a shortfall between funds raised and funds deployed.

On the other hand, the potential demand for the innovation produced by life science startups remains strong. In the

near term, larger life science companies continue to look to startups for promising new technologies that can bolster

product pipelines and offer the potential for higher revenue growth. Consistent with this, 2012 M&A activity, while down

from the highs of 2011, remained on par with the robust levels seen during 2010, and Nasdaq healthcare and biotech

stocks significantly outperformed the broader market indexes during 2012. Furthermore, long run macroeconomic

factors such as an aging world population and rising standards of living in emerging markets will drive increased

demand for healthcare products, particularly innovative products that have the potential to improve outcomes and

reduce overall system costs.

The current shortage of venture capital financing for life science companies is driving several trends that we see in the

market:

• Life science venture capitalists are making fewer new investments, with PwC and NVCA reporting that 2012 saw

the fewest “first time” investments in life companies of any year since 1995.

• Life science companies continue to go public, but the majority of life science companies going public in 2012

priced below their target range, suggesting that many IPOs are being driven as much by necessity as by choice.

See Fenwick & West’s IPO Survey for further information on recent trends in IPO activity.

• Large life science companies are playing an increasingly important role in providing funding to the sector, both

through creative partnerships with life science startups and venture capital firms (as described in our 1H 2012

Survey) and through corporate venture investments.

In turn, companies and investors in the life science industry are adapting their strategies to account for current financing

conditions. For example:

• Investors are favoring investments that are seen as having less technology and development risk, such as inlicensing

later stage compounds and pursuing treatments for orphan diseases, which can be done with smaller

clinical trials and an accelerated regulatory pathway.

• In a similar vein, investors are also favoring sectors and business models that require less capital to reach

commercial potential. The growing interest in digital health and healthcare IT companies, including among

investors in traditional FDA-regulated life science companies, represents one aspect of this trend. Likewise,

investors continue to be interested in medical device companies, which typically require less capital than

biotech companies to advance their products to commercialization, with our survey showing an uptick in

medical device company valuations during 2012.

4

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Analysis of Industry Data (continued)

• Furthermore, companies and investors are both accommodating, and in some cases actively planning for,

earlier exits of investments. For example, life science acquisitions now frequently involve significant earn-out

payments tied to achievement of post-closing milestones (e.g., analysis by Jon Norris of Silicon Valley Bank),

which represents a way for investors and companies to exit at an earlier stage, prior to hitting key valuation

inflection points, while still preserving the potential to realize upside returns. It is also becoming increasingly

common for companies to take active steps – from the earliest stages of business – to enable an earlier exit.

Examples of this trend include strategic partnerships involving a built-in option to purchase (e.g., Resolve

Therapeutics recent partnership with Takeda Pharmaceuticals) or put-call structure (e.g., Warp Drive Bio’s

partnership with Sanofi-Aventis), and the use of tax-efficient structures involving limited liability companies to

facilitate partial liquidation events and an earlier return of investor capital.

A more detailed summary and analysis of industry reports and data begins on the following page.

5

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


$4.9m

fenwick & west llp

10%

5%

Average deal size

$4m

$2m

Analysis of Industry Data (continued)

0%

2005 2006 2007 2008 2009 2010 2011 2012

$0

Venture Capital and Corporate Investment

• Investments in venture-backed life science companies declined significantly during 2012, and remain at levels

that are markedly below five-year historical averages.

• The number of “first round” (initial) life science venture

financings reported by the MoneyTree Report fell to the

lowest level seen since 1995.

first

First Round

round

Life

life

Science

science

Deals

deals

Decline

decline

35%

33%

als

313

466

• Corporate investors participated in 16.7% of life science

deals and provided 9.6% of the funding received by

life science companies during 2012, according to the

MoneyTree Report. This represents an increase from

participation in 15.3% of deals and providing 7.2% of

funding during 2010 and 2011.

According to Dow Jones VentureSource (“VentureSource”), equity

investments in U.S. venture-backed life science companies totaled

$6.2 billion across 551 deals during 2012, a 19% decrease in dollars

and 12% decrease in deals in comparison to 2011. Within the life

science sector, biopharmaceutical investments were off 17% in

dow jones venture source

VentureSource Results

302

deals

316

deals

$3.2 $7.1

$4.5

5 year

average

medical

devices

biopharma

$3.4

$4.2

2011

316

308

dollars and 14% in

number of deals during 2012 in comparison to 2011, and medical device

investments were off 21% in dollars and 10% in number of deals.

The PwC/NVCA MoneyTree Report based on data from Thomson Reuters

(“the MoneyTree Report”) showed generally similar results, reporting

that investments in venture-backed life science companies totaled $6.6

billion across 779 deals in 2012, a 15% decrease in dollars and a 7%

decrease in deals in comparison other to industry 2011. The data MoneyTree life sciences Report showed

deals in billions of dollars, # of deals

somewhat more positive results for biotechnology investments, which

were reported to be

off 15% in dollars

but approximately

even in number of

deals during 2012,

as compared to medical device investments which were off 13% in

dollars and 15% in number of deals.

$2.7

$3.5

2012

For comparison, VentureSource reported that during 2012 overall

equity investments into venture-backed companies (measured

across all industry sectors) decreased 15% in dollars in 4% in

number of deals in comparison to 2011. Similarly, the MoneyTree

Report showed a 10% decrease in dollars and a 6% decrease in

number of deals.

285

266

30%

25%

20%

15%

10%

5%

0%

The pwc/nvca MoneyTree money Report tree Results

361

deals

492

deals

$2.9

$4.6

5 year

average

$6.9m

Average deal size

medical

devices

biotech

First round deals

(as % of all life science deals)

2005 2006 2007 2008 2009 2010 2011 2012

Source: The Money Tree Report

$2.8

$4.9

2011

368

$2.4

313

468 466

$4.1

2012

$4.9m

$8m

17%

$6m

$4m

$2m

$0

dow jo

302

deals

316

deals

5

av

6

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Analysis of Industry Data (continued)

Healthcare IT and Digital Health Trends

Investments in digital health and other healthcare-related information technologies are continuing to trend upward,

with digital health incubator Rock Health reporting that venture capitalists invested $1.4 billion in the digital health

sector during 2012, representing a 46% increase in dollars (and a 56% increase in number of deals) in comparison to

2011.

While the Rock Health report indicates that the largest digital health sector by funding was health consumer

engagement (representing $237 million of total 2012 funding), the digital health sector also includes big data analytics

tools and digital health technologies to support better clinical trials that offer the potential to help shorten the cycle and

reduce the cost of biopharmaceutical and medical device R&D.

7

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Analysis of Industry Data (continued)

Venture Capital Fundraising

• The total amount raised by venture capitalists in all industries increased during 2011 and 2012, but fundraising

by life science venture capitalists has continued to decline.

• We estimate that only $2.5 billion (i.e., 12.5%) of venture capital funds raised during 2012 are likely to be

deployed toward life science investments, a decrease from $3.0 billion (i.e., 15%) of funds raised in 2011. For

comparison, we estimate that during 2008 — the last year prior to the significant decline in venture capital

fundraising that accompanied the recession — $7.8 billion (i.e., 27%) of funds raised by venture capitalists were

likely to go toward life science investments.

In overall fundraising, Dow Jones reported that U.S. venture capital funds raised $20.3 billion during 2012, in line

with the $20.0 billion raised in 2011, and an increase from the $16.9 billion raised in 2010. Similarly, Thomson/NVCA

money raised by fund type

reported that U.S. venture capital funds raised $20.6 billion during 2012, up from $18.8 billion raised in 2011 and $13.7

money raised by fund type

billion raised in 2010.

However, our analysis of the underlying data

from Dow Jones — which is detailed in chart on

this page — indicates that while venture capital

fundraising has recovered somewhat in recent years,

the portion of funds likely to be allocated to life

science investment has declined from 19% of funds

raised in 2009 to 12.5% of funds raised in 2012.

In order to estimate life science-related fundraising,

we categorized funds based on their stated

investment objectives, as either dedicated life

science funds (i.e., focusing exclusively on traditional

FDA-regulated life sciences), healthcare funds (i.e.,

making both traditional life sciences and healthcare

IT/services investments), multi-industry funds (i.e.,

making both healthcare and IT/growth investments)

or pure IT/growth funds. We then assumed that

one half of the amount raised by healthcare funds

and one quarter of the amount raised by multiindustry

funds would be allocated to life science

investment. We would note that neither our analysis

nor the underlying fundraising statistics reported

by Dow Jones and NVCA capture funding provided

by non-venture capital sources (such as corporate

investments from “captive” or evergreen funds,

and investments by angel investors and disease

foundations), which may account for some of the

disparity we observe between funds raised and funds

invested.

$40,000

$40,000

$35,000

$35,000

$30,000

$30,000

$25,000

$20,000 $25,000

$20,000

$15,000

$15,000

$10,000

$10,000

$5,000

$5,000

$0

2007

$0

2007

30%

30%

25%

20% 25%

20%

15%

15%

10%

10%

5%

5%

0%

0%

Venture Capital Fundraising By Fund Type

20%

20%

2008

2009

2010

2011

2012

Source: Dow Jones; Fenwick & West Analysis

2007

2008

27%

$7.8 $7.8

2007

27%

$7.8 $7.8

2008

2008

2009

Life Science Funds Raised

(as % of all deals)

Life Science Funds Raised

(as % of all deals)

17%

19%

15%

17%

12%

19%

15%

12%

Life Science Dollars Raised

(estimated)

$2.8 Life Science $2.9 Dollars $3.0 Raised $2.5

(estimated)

$2.8 $2.9 $3.0 $2.5

2009

2009

2010

2010

2010

2011

2011

2011

2012

2012

2012

it/growth

(no life sciences)

it/growth

(no life sciences)

multi-industry

healthcare

multi-industry

life sciences

healthcare

life sciences

percent of

fundraising

allocable to

life sciences

(estimate)

$10,000

$10,000

$5,000

$5,000

$0

$0

8

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Analysis of Industry Data (continued)

Merger and Acquisition Activity

• Industry reports indicate that life science M&A activity tapered off from the very strong levels seen during 2011,

but remained in line with results from 2010.

• In the biopharmaceutical sector, various sources (e.g., HBM Partners and Ernst & Young) indicate that 2012 M&A

activity was attributable to a broader range of buyers, with large biotech, small/mid-size pharma and specialty

buyers participating alongside traditional big pharma players.

As a measure of industry-wide activity, Burrill & Co., which reports on public and private company M&A activity for U.S.-

based companies across a diversified set of life science sectors, reported total deal volume of $73.7 billion for 2012, a

22% decrease from the $94.3 billion reported for 2011, but in line with 2010 volume of $71.8 billion.

In the biopharmaceutical sector, the HBM Partners Pharma/Biotech M&A Report (“HBM Report”), reported 22 sales of

U.S. venture-backed companies during 2012 (for $2.1 billion upfront, $6.5 billion total possible value), in comparison

to 18 sales during 2011 (for $3.7 billion upfront, $6.2 billion total). In the medical device sector, Dow Jones reported

21 medical device acquisitions of U.S. venture-backed companies during 2012, a decrease from the 29 acquisitions

reported in 2011.

For comparison, Dow Jones reported that overall M&A activity for venture-backed companies (measured across all

industries) decreased 23% in dollar terms and 21% in number of deals during 2012, as compared to 2011.

9

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


Median Prices for Life Science & Technology IPO Deals

2011-2012

fenwick & west llp

Analysis of Industry Data (continued)

$20

Initial Public Offerings

$18

• Life science IPO activity during 2012 remained on par with levels seen during 2011.

$16.26

• However, life science companies seeking to go public continue to face a difficult pricing environment, with a

$16

majority of 2012 life science IPOs pricing below their target range according to a report by Burrill & Co. and

Relation of Final IPO Price

Fenwick & West’s Technology IPO survey. $14.00

$14

2011 to original -2012 IPOs: Red Red Herring Herring Range

(% of deals)

$13.00

to Final IPO Price Changes

Dow Jones reported that 12 U.S. venture-backed life science companies (10 in the

$12

Technology

biopharmaceutical sector and 2 in the medical device sector) went public during

47.6%

2012, on par with the 10

Life

life

Science

science IPOs $10.00 (8 biopharmaceutical and 2 medical $10.11 device)

reported for $10 2011. Similarly, Burrill & Co. reported 16 life science company IPOs

Deals

Life Science

Above

during 2012, even with 16 life science IPOs in 2011.

Range

$8

For comparison, 2012 IPO activity for venture-backed companies, measured across

Red Herring Final Price 1st Day Close

all industry sectors, began strongly in Q1 2012 but then tapered off, ending the year

approximately even with 2011 levels. Dow Jones reported= a total of 50 venturebacked

IPOs during 2012 (20 of which occurred during Q1), in line with the 46

venture-backed IPOs during 2011.

Average Prices for Life Science & Technology IPO Deals

2011-2012

Public Markets

In the Nasdaq public markets, life science stocks significantly out-performed the broader market index during 2012. The

Nasdaq Composite (IXIC) increased 16% during 2012. In comparison, the Nasdaq Biotech Index (NBI) increased 32%

during 2012, and the broader Nasdaq Healthcare Index (IXHC) increased 27%.

$20

Nasdaq Market Indexes, Percentage Change 2012

nasdaq index comparison: daily

$18

$19.52

Within

Range

Below

Range

7.4%

29.6%

63.0%

28.6%

23.8%

40%

30%

$16

$14.39

$14

$12.96

Technology

$15.33

$12.28

nasdaq

biotech

nasdaq

healthcare

20%

$12

$10

Life Science

$9.93

nasdaq

10%

0%

$8

Red Herring Final Price 1st Day Close

-10%

1/3/12

1/12/12

1/24/12

2/2/12

2/13/12

2/23/12

3/5/12

3/14/12

3/23/12

4/3/12

4/13/12

4/24/12

5/3/12

5/14/12

5/23/12

6/4/12

6/13/12

6/22/12

7/3/12

7/13/12

7/24/12

8/2/12

8/13/12

8/22/12

8/31/12

9/12/12

9/21/12

10/2/12

10/11/12

10/22/12

11/2/12

11/13/12

11/23/12

12/4/12

12/13/12

12/24/12

10

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Valuation – Direction of Price Change

Up rounds outpaced down rounds during 2012, with a substantial number of flat rounds in each quarter. This is similar

to the pattern from our 2011 results, although the ratio of up rounds to down rounds has increased slightly over 2011

averages. The results from 2012 are a clear improvement over 2010 life science results from our Silicon Valley Survey,

which show several quarters in which down rounds exceeded up rounds.

Results from this survey and our earlier Silicon Valley surveys indicate that flat rounds occur more often in life science

deals, as compared to other industry sectors. This is likely due to the higher percentage of life science financings that

are “inside

price

led”

change

(i.e. where

directions

funding is provided entirely by existing investors, without a new outside party setting the

valuation). % of total deals per quarter

Direction of Price Change

Percentage of deals in which the direction of price change was up, down or flat

64%

48%

53%

49%

50%

55%

51%

48%

53%

30%

36%

37%

Up Rounds

2010*

Q2*

Q3*

Q4*

2011

Q2

Q3

Q4

2012

Q2

Q3

Q4

Down Rounds

20%

22%

27%

36%

29%

22%

20%

27%

22%

15% 16%

14%

Flat Rounds

50% 30% 9% 29% 34% 25% 30% 23% 23% 34% 36% 32%

Note: in some cases results may sum to less than 100% due to rounding.

* Includes data from Silicon Valley companies only, so reflects fewer data points than 2011 nationwide results.

11

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Valuation – Magnitude of Price Change (Barometer)

The Fenwick & West Life Science Venture Capital Barometer showed average round-to-round price increases of

between 19% and 26% for quarters during 2012. The four-quarter moving average increased over 2012, ending the year

at 23%, in comparison to a four-quarter moving average of 14% as of Q4 2011. (For an explanation of how the Barometer

is calculated, see “Notes on Methodology” at the end of this survey.)

Within life science industry sub-sectors, Barometer results for biopharmaceutical companies remained in line with 2011,

averaging 16% for both 2011 and 2012. In contrast, Barometer results for medical device companies moved up from an

average of 12% during 2011 to an average of 30% during 2012.

The graph immediately below shows the average percentage change between the price per share at which companies

raised funds in a given period, compared to the price per share at which such companies raised funds in their prior

round of financing, which is a calculation we refer to as the Fenwick & West Life Science Venture Capital Barometer.

Subsequent graphs show a four-quarter moving average of Barometer results and results by series of financing.

Fenwick & West Life Science Venture Capital Barometer

Average percentage pricing changes, in per life share sciences price breakdown

for companies raising financing during the quarter

60%

60% 40%

40% 20%

20%

biopharma

-20%

Q1'10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12

Note: Separate

-20%

biopharma and medical devices results not reported prior to 2011 due to smaller data set.

* Includes data from Silicon Valley companies only, so reflects fewer data points than 2011 nationwide results.

** Please note that Q3 2010 results include one company that had a 500% up round among a small data set; if this

result were excluded the Barometer result would have been 5%.

4 quarter running average

60%

Trend (Four Quarter Moving Average) of Barometer Results, 2010-2012

4 quarter running average

60%

40%

20%

40%

pricing changes, life sciences breakdown

all life sciences

medical devices

all life medical sciences devices

biopharma all life sciences

Q1'10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12

medical devices

medical biopharma devices

0%

20%

biopharma

all life sciences

-20%

0% Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12

24%

21%

19%

24%

21%

19%

30%

23%

16%

30%

23%

16%

-20%

Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12

12

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Valuation – Magnitude of Price Change (Barometer)

Barometer Results by Series of Financing

Average percentage change in per share price for companies raising financing of a given series during the quarter

price changes by series

70%

60%

50%

series b

40%

30%

20%

series c

series e+

28%

26%

17%

10%

0%

series d

7%

-10%

-20%

-30%

Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 ’12 Q4 ’12

13

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Financing Rounds Included in Survey

The financing deals covered by this survey broke down by series as shown in the graphs below.

Financing Rounds Surveyed

Detail on proportion of deals included in survey from each financing round

q1 2011

19%

27%

21%

9%

23%

q2 2011

26% 26%

21%

13% 14%

a

b

c

d

e+

a

b

c

d

e+

35%

q3 2011

29%

22%

18% 18%

12%

q4 2011

14%

27%

11%

14%

a

b

c

d

e+

a

b

c

d

e+

q1 2012

22% 22% 21%

23% 24%

20%

17% 17%

17% 16%

q2 2012

a

b

c

d

e+

a

b

c

d

e+

q3 2012

31%

25%

23%

21%

23%

17%

17%

14%

14% 14%

q4 2012

a

b

c

d

e+

a

b

c

d

e+

14

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Terms – Liquidation Preference

Senior liquidation preferences appear in a substantial portion of life science deals, and are more frequent in later

rounds of financing. Participation rights are also common, appearing in an average of 66% of life science deals during

2012, and uncapped in an average of 70% of the deals in which they are used.

The following graphs show the percentage of deals in which senior liquidation preferences were used, both overall

and by series of financing.

Senior Liquidation Preferences

Percentage of non-Series A deals involving senior liquidation preferences

percent

percent

of

of

deals

deals

with

with

senior

senior

liquidation

liquidation

preference

preference

90%

90%

75%

75%

65%

65%

60%

60%

45%

45%

34%

34%

42%

42%

53% 53%

53% 53%

41%

41%

63%

63%

47%

47%

30%

30%

15%

15%

0%

0% Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 ’12 Q2 ’12 Q3 ’12 Q4 ’12

Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 ’12 Q2 ’12 Q3 ’12 Q4 ’12

Senior Liquidation Preferences by Series

Percentage of deals of a given series involving senior liquidation preferences

percent

percent

of

of

deals

deals

with

with

senior

senior

liquidation

liquidation

preference

preference

90%

90%

75%

75%

60%

60%

45%

45%

30%

30%

15%

15%

series c

series e+

series series e+

series d

series 67%

67%

54%

54%

47%

47%

series b

series 29%

29%

0%

0% Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 ’12 Q2 ’12 Q3 ’12 Q4 ’12

Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 ’12 Q2 ’12 Q3 ’12 Q4 ’12

15

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Terms – Liquidation Preference

The following graph shows the percentage of deals involving senior liquidation preferences in which the preference

was greater than the investors’ purchase price (i.e., involving multiple preferences). The color bands indicate the

proportion of multiple liquidation preference deals in which the total preference was 1-2x, 2-3x or greater than 3x

the investors’ purchase price.

percent of senior preferences

Multiple Preferences

having multiple liquidation preferences

Percentage of senior liquidation preference deals involving multiple preferences

40%

35%

30%

20%

18%

10%

26%

22%

21%

17%

28%

multiple preferences

>1x-2x

10%

0%

Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 ’12 Q4 ’12

>2x-3x

>3x

The following graph shows the percentage of deals involving participation rights. The color bands indicate the

proportion of participation right deals in which the participation rights were capped (i.e., limited to a specific

multiple of liquidation preferences or other amount) and uncapped.

Participation Rights in Liquidation

percent of deals with participation

Percentage capped of deals and uncapped involving participation right

80%

60%

71%

56% 55%

61%

68%

62% 63%

71%

participation

capped

40%

20%

uncapped

0%

Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12

16

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Terms – Pay-to-Play Provisions

Pay-to-play provisions appeared in an average of 21% of life science deals during 2012. All pay-to-play provisions

included in the 2012 results provided for conversion to common stock, as opposed to a shadow series of preferred

stock.

The following graph shows the percentage of deals involving pay-to-play provisions. The color bands indicate the

proportion of pay-to-play provisions that involve conversion to common stock and shadow preferred stock.

Pay-to-Play Provisions

Percentage percent of of deals deals involving with pay pay-to-play play provisions

to common and to shadow preferred

30%

28%

27%

25%

20%

15%

21%

13%

18%

20%

18%

pay to play

10%

9%

to common

5%

0%

Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 ’12 Q4 ’12

to shadow preferred

17

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Terms – Other Provisions

Cumulative dividends and redemption rights appeared in an average of 37% and 44%, respectively, of life science deals

during 2012. Anti-dilution provisions were predominantly weighted average.

Cumulative Dividends

Percentage percentage

of deals of of deals

involving involving

cumulative cumulative

dividends

dividends

60% 60%

50% 50%

47%

40% 40%

31%

30% 30%

28%

30%

32%

33% 33%

37%

20% 20%

Q1 Q1 '11 '11 Q2 Q2 '11 '11 Q3 Q3 '11 '11 Q4 Q4 '11 '11 Q1 Q1 '12 '12 Q2 Q2 '12 '12 Q3 Q3 ’12 ’12 Q4 Q4 ’12 ’12

Redemption Rights

percentage of of deals involving mandatory redemption

Percentage of deals involving mandatory redemption or redemption at the option of the investor

or or redemption at at the option of of the investor

60% 60%

56%

50% 50%

49%

42%

46%

48%

40% 40%

37%

36%

38%

30% 30%

20% 20%

Q1 Q1 '11 '11 Q2 Q2 '11 '11 Q3 Q3 '11 '11 Q4 Q4 '11 '11 Q1 Q1 '12 '12 Q2 Q2 '12 '12 Q3 Q3 ’12 ’12 Q4 Q4 ’12 ’12

18

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Terms – Other Provisions

Antidilution Provisions

Percentage percentage of deals of involving deals weighted involving average, full ratchet, full ratchet or no antidilution

weighted average or no antidilution

100%

no antidilution

2%

80%

60%

40%

weighted average

91%

20%

ratchet

0%

7%

Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 ’12 Q4 ’12

Corporate Reorganizations

Percentage of post-Series A financings involving a corporate reorganization

percentage of deals involving a corporate reorganization

15%

10%

9%

5%

5%

4%

3%

7%

5%

7%

5%

0%

Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 ’12 Q4 ’12

19

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Detailed Fenwick & West Results

Terms – Regional and Industry Variations

In comparing results from our 2012 nationwide life sciences survey to the corresponding results from our quarterly

Silicon Valley surveys, we observed several notable variations in the frequency of certain financing terms.

In particular,

• Senior liquidation preferences and pay-to-play provisions are significantly more common in life sciences deals as

Deal Deal Terms Terms compared to non-life sciences deals. This is consistent with the fact that, in comparison to other industries, life

Average Average prevalence science prevalence companies in 1H 2012 in 1H typically deals 2012 deals need to raise more capital over longer periods of time.

Senior Liquidation Preference

Deal Terms Deal Terms

54% 54%

Average Average prevalence prevalence in 1H 2012 in 1H deals 2012 deals

41% 41%

Pay-to-Play Provisions

31%

31%

54%

54%

21%

21% 20%

20%

41%

41%

4%

4%

Nat’l LSNat’l SV LS LS SV 31% LS Other SV 31% Other

senior senior liquidation liquidation preference preference

Nat’l LSNat’l SV LS LS SV LS Other SV Other

pay to pay play to play

21%

21% 20%

20%

• Participating preferred stock is used frequently in life science deals, 4% 4% and more frequently still outside of Silicon

Valley.

Nat’l

The frequency of uncapped participating preferred, on the other hand, varies between Silicon Valley and

69% LSNat’l 69% SV LS SV LS OtherSV Other

Nat’l LSNat’l SV LS SV LS OtherSV Other

non-Silicon senior senior liquidation Valley liquidation deals. preference preference pay to pay play to play

54%

54%

Participating Preferred Stock

51%

51%

Uncapped Participation

69%

69%

33%

33%

28%

28%

54%

54%

51%

51%

19%

19%

Nat’l LSNat’l SV LS LS SV 33% LS Other SV 33% Other

participating preferred preferred

Nat’l LSNat’l SV LS LS SV LS Other SV Other

28% 28%

uncapped uncapped participation

19%

19%

Nat’l LSNat’l SV LS SV LS OtherSV Other

participating participating preferred preferred

44%

44%

Nat’l LSNat’l SV LS SV LS OtherSV Other

50% 50%

uncapped uncapped participation participation

44%

13%

44%

13%

5%

5%

50%

22%

50%

22%

16%

16%

20

Nat’l LSNat’l SV LS LS SV LS Other SV Other

Nat’l LSNat’l SV LS LS SV LS Other SV Other

cumulative cumulative dividends dividends

13% 13%

5%

5%

redemption redemption

22%

22%

16%

Trends in Terms of U.S. Life Science Venture Financings

Nat’l LS full Nat’l SV LS year SV LS Other 2012 SV Other

cumulative cumulative dividends dividends redemption redemption

16%

Nat’l LSNat’l SV LS SV LS OtherSV Other


54%

54%

51%

51%

fenwick & west llp

33% 33%

Detailed Fenwick & West Results

Terms – Regional and Industry Variations

28%

28%

19%

19%

• Nat’l Cumulative LSNat’l SV LS dividends SV LS Other SV Other and redemption rights Nat’l are LSNat’l significantly SV LS SV LS Other more SV Other common outside of Silicon Valley, but within

participating Silicon participating Valley are preferred no preferred

more common in life uncapped sciences uncapped deals participation

than participation

in other industries.

Cumulative Dividends

Redemption Rights

44%

44%

50%

50%

13%

13%

5%

5%

22%

22%

16%

16%

Nat’l LSNat’l SV LS SV LS Other SV Other

Nat’l LSNat’l SV LS SV LS Other SV Other

cumulative cumulative dividends dividends redemption redemption

The graphs above compare the frequency of various deal terms between (1) nationwide life science deals, not

including deals from Silicon Valley, (2) Silicon Valley life science deals, and (3) Silicon Valley deals for industries

other than life sciences. The percentages in the graphs above represent the average frequency of a particular term

across all 2012 results.

21

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

Notes on Methodology

For purposes of this survey, we use the term “life sciences” to refer to companies operating in the traditionally FDAregulated

biopharmaceutical and medical device sectors. We recognize that companies operating in adjacent sectors

such as healthcare IT or biofuel production also comprise part of the life sciences industry, broadly defined. But

because companies in these sectors are subject to different regulatory requirements and business conditions, and

often are funded by venture capital firms that do not participate in the biopharmaceutical and medical device sectors,

we have elected to exclude these companies from the survey to provide more comparable and relevant results.

The Fenwick & West Life Science Venture Capital Barometer measures the average percentage change between the

price per share at which companies raised funds in a given period, compared to the price per share at which such

companies raised funds in their prior round of financing. In calculating the average, all rounds (up, down and flat) are

included, and results are not weighted for the amount raised in a financing. When interpreting the Barometer results

please bear in mind that the results reflect the average price increase of companies raising money in a given quarter

compared to their prior round of financing, which was in general 12‐18 months prior. Given that venture capitalists (and

their investors) generally look for at least a 20% IRR to justify the risk that they are taking, and that by definition we are

not taking into account those companies that were unable to raise a new financing (and that likely resulted in a loss to

investors), a Barometer increase in the 30-40% range should be considered normal.

22

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


fenwick & west llp

About the Firm

Fenwick & West provides comprehensive legal services to technology and life sciences clients of national and

international prominence. Fenwick is committed to providing innovative, cost-effective and practical legal services that

focus on global technology industries and issues. We have built internationally recognized practices in a wide spectrum

of corporate, intellectual property, tax and litigation areas, all focused on the unique business needs of emerging and

established companies, investors and research institutions. Over 40% of the attorneys in our life sciences group have

advanced degrees in disciplines such as molecular biology, organic chemistry, electrical engineering and immunology,

as well as business or research experience prior to their legal careers. Fenwick attorneys differentiate themselves by

having a deep understanding of our clients’ technologies, industry environments and business needs.

About the Authors

Mr. Matthew Rossiter, Partner in the Corporate and Intellectual Property Groups, represents start-up companies,

established public companies and venture capital investors, with particular focus on the life science industry. He seeks

to provide thoughtful, practical advice to clients on a variety of corporate finance and corporate governance matters, as

well as on complex commercial and intellectual property transactions.

Mr. Barry J. Kramer, Partner in the Corporate Group, represents a wide range of technology and life science companies,

from privately held start-ups to publicly traded companies, as well as prominent venture capital funds. Mr. Kramer is the

co-author of Fenwick & West’s quarterly venture financing terms survey.

Mr. Michael J. Patrick, Partner in the Corporate Group, provides general corporate representation, including merger and

acquisition counsel, for a broad array of life science and medical device companies, start-ups and venture capital firms.

Mr. Patrick is the co-author of Fenwick & West’s quarterly venture financing terms survey.

Contact/Sign Up Information

For additional information about this report please contact Matt Rossiter at 415-875-2372 or mrossiter@fenwick.com;

Barry Kramer at 650-335-7278 or bkramer@fenwick.com or Michael Patrick at 650-335-7273 or mpatrick@fenwick.com.

To be placed on an email list for future editions of this survey please visit:

www.fenwick.com/subscribe-lifesciencesurvey.

© 2013 Fenwick & West LLP. All Rights Reserved.

disclaimer

the preparation of the information contained herein involves assumptions, compilations and analysis, and there can be no assurance

that the information provided herein is error-free. neither fenwick & west llp nor any of its partners, associates, staff or agents shall

have any liability for any information contained herein, including any errors or incompleteness. the contents of this report are not

intended, and should not be considered, as legal advice or opinion.

23

Trends in Terms of U.S. Life Science Venture Financings

full year 2012


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