Spring 2013 issue of Horizons

Pepperdine Private Cost of Capital Survey

Rates of Return by Investment Category

Private Equity - Investment Category Debt Bank - Senior Lending ($1M CF loan) Bank - Senior Lending ($50M CF loan) Bank - Senior Lending ($100M CF loan)

1st Quartile

Median

3rd Quartile

5.4% 3.8% 3.6%

6.5% 5.0% 4.8%

7.1% 6.3% 6.1%

Mezzanine Debt ($1M EBITDA) Mezzanine Debt ($25M EBITDA)

18.0% 17.9%

20.0% 18.5%

22.0% 19.0%

Equity Angel Investment (Seed) Angel Investment (Startup) Angel Investment (Later Stage) Venture Capital Investment (Startup) Venture Capital Investment (Later Stage) Private Equity Investment ($1M EBITDA) Private Equity Investment ($50M EBITDA)

30.0% 30.0% 20.0% 35.0% 20.0% 25.0% 22.0%

50.0% 40.0% 30.0% 40.0% 30.0% 30.0% 25.0%

100.0%

75.0% 40.0% 50.0% 35.0% 30.8% 30.0%

Source: Pepperdine Private Cost of Capital Survey - Winter 2011 Public Equity - Investment Category

Geometric Mean

Arithmetic Mean Standard Deviation

Public Equity - Micro-Cap Stocks Public Equity - Low-Cap Stocks Public Equity - Mid-Cap Stocks Public Equity - Large Company Stocks

12.0% 11.3% 10.9%

18.0% 15.2% 13.7% 11.8%

38.9% 29.2% 24.8% 20.3%

9.8%

Source: Ibbotson SBBI 2012 Valuation Yearbook (Morningstar)

The table reveals five characteristics of risk that impact cost of capital:

Factors that determine the valuation methods used and impact the valuation inputs include a company’s life cycle stage, size, and financial structure. Many life sciences companies are in the early stage of the business life cycle. As previously mentioned, the earlier the stage of a company, the less useful traditional valuation methods will be. Tax Changes The American Taxpayer Relief Act of 2012 provided several change to tax law that may affect investors, owners and others related to the life sciences industry. These include: Individuals: Capital Gain & Dividend Tax Rates ∙ For tax years beginning after December 31, 2012, the top rate for long-term capital gains and qualified dividends will rise to 20% (up from 15%) before the surtax described below for taxpayers with taxable income above certain thresholds ∙ The thresholds are $450,000 for married filing jointly and surviving spouse filers, $425,000 for head of household filers, $400,000 for single filers and $225,000 for married filing separately filers

∙ Debt has a lower required rate of return than equity, as debt holders receive priority in payment over equity holders. Equity investors bear more risk and therefore require a higher rate of return to be compensated for that additional risk. ∙ The size of a company affects the required rate of return. Generally, the smaller the company, the higher the required rate of return. ∙ The life cycle stage of a company also affects the required rate of return. Early stage companies have higher required rates of return than later stage companies, as the early stage companies do not have a proven track record and are therefore riskier investments. ∙ Stocks with high volatility (as measured by standard deviation) have higher rates of return. Volatility is an indication of risk, and high risk investments have higher required rates of return. ∙ Public equity markets have exhibited a lower rate of return than private equity investments.

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