Facet Biotech

BUSINESS OVERVIEW Facet Biotech develops oncology therapeutics, focusing on tumor biology and antibody engineering. The company has four antibodies in the clinical stage of development. It also has several investigational compounds for the treatment of cancer and immunologic disease in various stages of development with partners Biogen and BMS.

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INVESTMENT RISKS & CONCERNS •

SELECTED OPERATING DATA FYE December 31 2006 Revenue growth 72% Selected items as a % of revenue: R&D 390% SG&A 71% EBIT -363% D&A 58% Capex 62% % of revenue by geography: U.S. 40% Europe 60% % of revenue by major customer: Biogen Idec 35% BMS <10% Roche 60% EKR Therapeutics <10% 0% ∆ diluted shares out (avg)

2007 -48%

2008 -32%

1Q09 105%

731% 169% -845% 113% 346%

828% 254% -876% 111% 21%

251% 107% -301% 41% 1%

72% 28%

100% 0%

n/a n/a

65% <10% 27% <10% 0%

47% 35% <10% <10% 0%

21% 54% <10% 18% 0%

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Source: Gridstone Research, Company filings, Manual of Ideas analysis.

INVESTMENT HIGHLIGHTS •

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Spun-off from PDL BioPharma in December. PDL contributed $405 million or $17 per Facet share in cash to the company. Facet believes it has sufficient resources to fund expenses through 2012. Products in development include two Phase 2 drugs, Daclizumab for multiple sclerosis and Volociximab for solid tumors (partner: Biogen) and two Phase 1 drugs, Elotuzumab for multiple myeloma (partner: BMS) and PDL192 for solid tumors. The collaboration agreement with Biogen includes co-promotion rights, while under the BMS deal, Facet is entitled to royalties based on net sales. Revenue rose 105% to $9.6 million in Q1, driven primarily by revenue from the BMS collaboration. New business strategy: focus research efforts in oncology, advance existing pipeline, expand the pipeline, and refine protein engineering platform. Restructuring underway. Facet intends to cut employees from 372 at yearend 2008 to 200 by 3Q09, a 46% reduction. Facet is also consolidating operations into one of two leased facilities. CEO Faheem Hasnain (50) previously served as President and CEO of PDL. Before PDL, he was an EVP at Biogen, president of oncology therapeutics at BMS and VP of ebusiness at GlaxoSmithKline.

Net cash of $352 million and “net net” current assets of $257 million at the end of the first quarter. Net cash equals 139% of market value. Cash-burning operations. The company used $20 million of cash in operating activities in 1Q09, down from cash usage of $57 million in 1Q08, as revenue rose from $4.7 million in 1Q08 to $9.6 million in 1Q09. Headcount declined y-y. Customer concentration. The company sourced 82% of revenue from Biogen and BMS in 2008. Results volatile due to dependence on deals with other drug companies. Revenue fell 48% in 2007 and 32% in 2008, as termination of a collaboration agreement with Roche in 2005 resulted in the elimination of royalties on sales of Zenapax. Drug development pipeline may not produce marketable products, potentially leaving shareholders with little value. Facet is expected to consume much of its cash in R&D efforts. Shareholder Roderick Wong’s demand for a $15 per-share cash dividend and sale of assets was rebuffed by the company. While we generally favor companies paying out excess cash, a liquidation of Facet may have shortchanged shareholders, as the company owns material drug development assets.

COMPARABLE PUBLIC COMPANY ANALYSIS

RHHBY ABT BMY LLY FACT

MV ($mn)

EV ($mn)

EV / Rev.

114,720 67,910 39,660 39,460 230

99,620 77,920 37,390 44,430 -90

2.4x 2.6x 1.8x 2.2x n/m

P/ Tang. Book 4.4x 296x 5.4x 10.2x .6x

This FY P/E n/a 12x 10x 8x n/m

Next FY P/E n/a 11x 9x 8x n/m

MAJOR HOLDERS CEO Hasnain <1% │ Other insiders 1% │ Baupost 18%* │ Iridian 13% │ Barclays 4% │ BVF 4% │ Visium 4%

RATINGS ¶¶¶ VALUE Intrinsic value materially higher than market value? MANAGEMENT Capable and properly incentivized? ¶¶¶ FINANCIAL STRENGTH Solid balance sheet? ¶¶¶¶¶ MOAT Able to sustain high returns on invested capital? ¶¶¶ EARNINGS MOMENTUM Fundamentals improving? ¶¶ MACRO Poised to benefit from economic and secular trends? ¶¶ EXPLOSIVENESS 5%+ probability of 5x upside in one year? ¶¶¶ * To view Seth Klarman’s thesis on Facet, visit the following webpage and fast-forward to 26 minutes and 30 seconds into the presentation: www.bengrahaminvesting.ca/Resources/Video_Presentations/Klarman.htm

THE BOTTOM LINE In March, large shareholder Seth Klarman articulated the downside protection afforded investors by stating that Facet “has about $16-$17 per share in cash… So you could clearly liquidate that, stop all discovery activities and probably mail out $10 or $12 or $14 per share back to the holders.” As there are no plans to liquidate Facet and cash is being consumed in drug development, investors must assess the company’s pipeline in order to judge the intrinsic value of the shares.