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Industry Surveys Healthcare: Pharmaceuticals Herman Saftlas, Pharmaceuticals Analyst June 3, 2010

Current Environment ............................................................................................ 1 Industry Profile ...................................................................................................... 9 Industry Trends ................................................................................................... 11 How the Industry Operates ............................................................................... 18 Key Industry Ratios and Statistics................................................................... 28 How to Analyze a Pharmaceutical Company ................................................ 30 Industry References........................................................................................... 35 Comparative Company Analysis ......................................................... Appendix

CONTACTS: INQUIRIES & CLIENT RELATIONS 800.852.1641 clientrelations@ standardandpoors.com MEDIA Michael Privitera 212.438.6679 michael_privitera@ standardandpoors.com REPLACEMENT COPIES 800.852.1641 Standard & Poor’s Equity Research Services 55 Water Street New York, NY 10041

This issue updates the one dated December 3, 2009. The next update of this Survey is scheduled for December 2010.


Topics Covered by Industry Surveys Aerospace & Defense

Environmental & Waste Management

Natural Gas Distribution

Airlines

Financial Services: Diversified

Oil & Gas: Equipment & Services

Alcoholic Beverages & Tobacco

Foods & Nonalcoholic Beverages Healthcare: Facilities

Oil & Gas: Production & Marketing

Healthcare: Managed Care

Pharmaceuticals

Healthcare: Products & Supplies Heavy Equipment & Trucks

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Broadcasting, Cable & Satellite

Homebuilding Household Durables

Restaurants Retailing: General

Chemicals

Household Nondurables

Retailing: Specialty

Communications Equipment Computers: Commercial Services

Industrial Machinery Insurance: Life & Health

Savings & Loans Semiconductor Equipment

Computers: Consumer Services & the Internet Computers: Hardware

Insurance: Property-Casualty

Semiconductors

Investment Services Lodging & Gaming

Supermarkets & Drugstores

Metals: Industrial Movies & Entertainment

Telecommunications: Wireline

Airlines

Food Retail

Pharmaceuticals

Autos & Auto Parts

Foods & Beverages

Telecommunications

Banking

Media

Tobacco

Apparel & Footwear: Retailers & Brands Autos & Auto Parts Banking Biotechnology

Computers: Software Computers: Storage & Peripherals Electric Utilities

Paper & Forest Products

Telecommunications: Wireless Transportation: Commercial

Global Industry Surveys

Oil & Gas

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CURRENT ENVIRONMENT Pharma gears up for Obamacare Representing the most sweeping and comprehensive federal healthcare legislation since the enactment of Medicare in 1965, the recently passed national healthcare legislation is expected to have a significant impact on nearly all segments of the US healthcare industry for many years to come. Officially known as the Patient Protection and Affordable Care Act (PPACA), the new healthcare reform legislation was signed into law by President Obama on March 23, 2010. The law will require US citizens and legal residents to have minimum essential health insurance coverage, requires employers to provide coverage for their employees, and encourages the expansion of Medicaid eligibility in order to cover more persons under that program. Special exchanges are also expected to be set up whereby employers and individuals would be able to purchase health coverage at competitive rates. Funding for PPACA is expected to be derived through new taxes on individuals and healthcare companies, and reductions in spending for Medicare Advantage plans (the private managed care plans serving Medicare beneficiaries). Overall, PPACA is expected to cost about $938 billion over the 10 years from 2010 through 2019, with an indicated deficit reduction of $143 billion over that period, based on estimates made by the nonpartisan Congressional Budget Office (CBO), a research arm of Congress. The most costly proposals were avoided Early on, the US-based pharmaceutical industry recognized the potentially unfavorable ramifications of many of the healthcare reforms being proposed by President Obama and Congressional Democrats. Acting through its Washington-based lobbying arm, the Pharmaceutical Research and Manufacturers of America (PhRMA), and under the leadership of its president, Billy Tauzin, PhRMA took a proactive role in reaching a deal with the Obama Administration on a version of healthcare reform that included some compromises— agreeing to some significant concessions, while successfully blocking some of the more threatening issues. Proposals that were blocked included several that could have caused damaging major structural changes to the industry. These included measures such as the public option, which would have established a government-run insurance program to compete with private sector plans; the reimportation of inexpensive drugs from Canada and other foreign countries; and mandating rebates on drugs used by indigent seniors covered by either Medicare or Medicaid (known as “dual eligible” rebates). However, probably the most damaging from the industry’s perspective would have been a directive for the federal government to negotiate Medicare Part D drug pricing directly with pharmaceutical manufacturers. Under the present law, negotiations must be handled through managed care organizations and other private sector buyers. Another potential negative for the pharmaceutical industry that did not appear in final healthcare reform legislation was a proposal to eliminate the present deferral of US taxes on foreign earnings of multinational corporations. President Obama’s initial 2010 budget proposal included a provision to save $210 billion from 2010 through 2019 by “implementing international enforcement, reform deferral, and other tax reform policies,” which many believed was a reference to removing the tax deferral in foreign earnings. Under current law, those earnings are not taxed until they are repatriated back to the US. For the largecapitalization US-based pharmaceutical companies, which generate close to two-fifths of revenues from international sales, new US taxes on foreign profits would materially affect earnings. We estimate that such a change would have raised Big Pharma’s estimated average tax rate to 35%, from 23%, and reduced industry profits by more than 15%. While indicating that this proposal would not be implemented at the present time, President Obama did not rule our revisiting it at some future date. The new healthcare reform law also left out a proposal that would have prohibited branded/generic patent settlements—agreements whereby branded drugmakers to pay or otherwise compensate generic producers INDUSTRY SURVEYS

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for keeping generics off the market. The Federal Trade Commission (FTC) under Jon Liebowitz has been staunchly opposed to these deals, which are considered anticompetitive and detrimental to consumer interests, because they delay the entry of cheaper generics into the market for several years. We believe the issue may also be revisited in the future, given its prior support by President Obama and its consumerfriendly theme.

THE COST OF HEALTHCARE REFORM We estimate the industry’s contribution to healthcare reform over the next 10 years will exceed $100 billion, equal to roughly 3% of US pharmaceutical expenditures on an annual basis. The major components of healthcare reform, from the pharmaceutical industry’s perspective, are increased Medicaid rebates, Medicare Part D discounts, new fees in the form of excise taxes on pharmaceutical manufacturers, and expansion of the 340B price-discounting program. We note that the $100 billion price tag for this program is well over the $80 billion that the industry agreed to in mid-2009. However, we believe the increased cost will still be manageable for most firms without causing material damage to their profits. Changes in Medicaid have already begun to affect pharmaceutical sales and profits. Specifically, healthcare reform calls for an increase in the mandated Medicaid price rebate rate for branded drugs to 23.1%, from 15.1%, of average manufacturer prices, retroactive to January 1, 2010. Under present laws, drug producers are required to make rebates to state Medicaid agencies based on their costs to provide prescription drugs to Medicaid beneficiaries. The Medicaid rebates were enacted in 1991 as required volume discounts in light of the relatively large quantities of drugs purchased by Medicaid. Based on projections made by the Centers for Medicare & Medicaid Services (CMS), an agency within the US Department of Health & Human Services, Medicaid will account for over 9% of US pharmaceutical expenditures in 2010. Other reform initiatives expected to affect sales in 2010 include expansion of the 340B drug discount program, and the application of Medicaid fee-for-service rebates to Medicaid managed care plans. Established in 1992, the 340B program requires ceiling prices on drugs sold to federally qualified health centers, certain state operated hospitals, and other facilities. The expanded program now includes children’s hospitals, freestanding cancer hospitals, and various other medical facilities meeting federal guidelines. We estimate total Medicaid and 340B-related changes will result in incremental costs of over $40 billion over 10 years. Medicare discounts and new taxes start in 2011 Beginning in 2011, the industry has agreed to implement discounts of 50% on all drugs purchased by senior patients in the Medicare Part D coverage gap, often referred to as the “doughnut hole.” Currently, Part D beneficiaries reaching this gap (from about $2,700 to about $6,100) must pay the full cost of their prescriptions out-of-pocket. This gap is expected to be closed eventually, with seniors ultimately being responsible for about 25% of the cost of their drugs. We estimate the impact on the industry of the 50% discounts to be in the area of $25 billion over 10 years. On the plus side, measures taken to close the doughnut hole could provide an indirect benefit to the industry: if Medicare drugs become more affordable to seniors, the result could be greater utilization of branded drugs. Today, many seniors using branded drugs switch to less expensive similar generic drugs once they reach the doughnut hole. Based on CMS estimates, Medicare is expected to account for 24% of US prescription drug outlays in 2010. Also kicking in at the beginning of 2011 will be a series of new fees in the form of excise taxes payable to the federal government. The amounts paid by the pharmaceutical companies will be based on their sales to Medicaid, Medicare, and other government programs, and are expected to total about $25 billion over 10 years. The aggregate fee was indicated at $2.5 billion for 2011, $2.8 billion each in 2012 and 2013, $3 billion annually from 2014 through 2016, $4 billion for 2017, and topping out at $4.1 billion in 2018. For 2019 and ensuing years, the fee will be fixed at $2.8 billion and will not be indexed to inflation. 2

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INDUSTRY SURVEYS


The pain from new rebates, discounts, and taxes will be felt for about four years, before positive offsets emerge in the form of an expanded patient population resulting from new medical insurance and prescription drug coverage being provided for the 32 million Americans who presently have no insurance. We estimate that the federal government will use some 10% of the projected $900 billion-plus it will spend over the 10 years for new healthcare subsidies for pharmaceuticals.

THE IMPACT ON INDIVIDUAL COMPANIES We believe the sales impact on key players will be in the 1%–2% range in 2010, and increase to the 2%–3% area in 2011, as new Medicare discounts and fees begin to take effect. Similarly, we see the bottom line impact as roughly in line with the top-line hits. With respect to individual companies, we see hits to firms differentiated based on their relative exposure to Medicare and Medicaid, as well as the relative importance of US branded pharmaceutical sales to total revenues. We believe major healthcare firms such as Johnson & Johnson and Abbott Laboratories, which have well-diversified product bases in vaccines, medical devices, and consumer products, along with branded drugs, should be relatively less affected than pure-play pharmaceutical companies such as Bristol-Myers Squibb Co. and Eli Lilly & Co.  Johnson & Johnson. Being somewhat more reliant on Medicaid than other major drugmakers, J&J projected a healthcare reform–related sales reduction equal to about 3% of its branded US pharmaceutical sales in 2010. However, when looking at the total enterprise, the sales hit in 2010 is expected to be less than 1%. The company forecasts the impact on earnings per share (EPS) at about $0.10, equal to 2% of our $4.85 estimate for J&J in 2010.  Abbott Laboratories. Abbott projected healthcare reform hits of $230 million in 2010 and about $430 million for 2011, which we calculate to equal below-peer sales effects of 0.6% in 2010 and 1.1% in 2011. We attribute this to Abbott’s well-diversified business model across a wide variety of drugs, devices, and consumer products, as well as broad representation in world geographic markets.  Merck. We view Merck & Co. Inc. as relatively better situated than its peers vis-à-vis healthcare reform. For full-year 2010, Merck projects that increased Medicaid rebates and other related discounts will reduce revenues by about $170 million (about 0.3% of 2010 sales, based on our estimates). For 2011, Merck sees an impact of $300 million–$350 million, as the new “doughnut hole” discounts and pharmaceutical industry fees kick in. However, this projected hit is still below 1% of our estimate for Merck’s sales in 2011. The company reiterated its forecast for a high-single-digit compound annual growth in EPS over the 2009–13 period. Merck’s favorable position, in our view, reflects benefits from its merger last year with Schering-Plough Corp.  Eli Lilly. Based on our estimates, we expect healthcare reform initiatives to reduce Lilly’s sales in 2010 by about $350 million (about 1.6% of total sales) and to penalize EPS by about $0.35 (about 8% of estimated profits). For 2011, we expect a top-line hit for the company of close to $700 million. We think Lilly is especially vulnerable to the new Medicaid rebates and Medicare discounts, since we believe both programs account for a large part of sales of its most important drug, Zyprexa anti-psychotic.  Bristol-Myers Squibb. We also believe Bristol-Myers will be relatively more negatively affected by healthcare reform than its peers, given its pure-play pharmaceutical sales base, heavy reliance on the US market (74% of sales in 2009), and exposure to Medicaid and Medicare. We estimate a healthcare reform sales hit of over $350 million in 2010, with that number doubling in 2011. As a percentage of total sales, we peg the impact as equal to about 2% of Bristol’s total revenues in 2010, and over 3% in 2011.  Pfizer. Since Medicaid and Medicare are important markets, we see the sales hits for Pfizer Inc. totaling about $400 million in 2010, and rising to over $800 million in 2011. However, as a percentage of sales, the impacts will probably only represent about 0.5% in 2011, and 1% in 2011, reflecting the company’s huge sales base (which we estimate to reach $68 billion in 2010), enlarged through the 2009 merger with Wyeth.  Gilead Sciences. Reflecting the impact of healthcare reform, Gilead Sciences Inc. lowered 2010 sales guidance by $200 million, which represents nearly 3% of its anticipated product sales in 2010 ($7.4 billion INDUSTRY SURVEYS

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to $7.6 billion). Gilead’s HIV business has significant exposure to Medicaid and state programs, for which the company is subject to higher rebates. Gilead has stated that nearly half of its payers are affected by the legislation, including the Aids Drug Assistance Program (ADAP) and the US Public Health Service (PHS). In 2011, Gilead expects the industry fee, which has not yet been fully calculated, and charges related to closing the Medicare Part D doughnut hole, to have some impact. While we see negative near-term impacts, we expect Gilead to benefit from increased patients under coverage in the 2013–14 time frame.  Amgen Inc. This leading biopharmaceuticals firm guided to the lower end of its previously issued guidance for 2010 to reflect an estimated $200 million to $250 million negative impact from healthcare reform, which represents between 1% and 2% of its expected product sales of more than $15 billion. Again, higher Medicaid rebates are the key component in 2010. Additional factors, including “doughnut hole” discounts and new taxes, will affect results starting in 2011. These negatives are expected to hurt the business over the next few years before benefits from the legislation kick in. Generics to benefit from healthcare reform With its emphasis on cost savings and expanded coverage, healthcare reform is a win-win situation for the generic pharmaceutical sector, in our view, as its low-cost products should be favored in any healthcare reform plan. We expect this sector to also benefit materially from the planned implementation of a new FDA regulatory process to approve generic versions of biologics (no such system presently exists). We also anticipate generic drugmakers to reap handsome dividends from a huge bulge in patent expirations over the 2010–13 period, especially for generic players able to obtain six-month marketing exclusivities through first-to-file, paragraph IV generic applications. We also see heightened merger and acquisition (M&A) activity in this area, with large-capitalization branded drug companies likely to increase their exposure in the generic space over the coming years. We note that Novartis AG already has a major position in global generics through its Sandoz division.

NEW BIOGENERICS LAW REPRESENTS A KEY POSITIVE We think the industry scored a key win in the long-standing battle over biogenerics. Also referred to as biosimilars or follow-on biologics, these products are generic versions of biotechnology products in that they are comparable in structure and efficacy to currently marketed biotechnology drugs. While these products are presently being marketed in Europe, they are not yet available in the US, as no regulatory pathway for their development and marketing has yet been approved in this country. A key point of contention between the branded biopharmaceutical industry and the generic companies related to the length of patent exclusivity that should be granted on new biopharmaceuticals. In 2009, Congressional leaders sought a period of just five years, which generic producers supported. Citing the cost of developing complex medicines, which academicians recently estimated at more than $1 billion per approved drug, and the need to recoup these investments before generics enter the market, the pharma/biotech industries claimed they needed an exclusivity period of 12 to 14 years. The new healthcare reform legislation resolved this controversy by granting new biotech drugs 12 years of patent-protected marketing exclusivity. Besides being a boon for the pure-play biotechnology companies, we see the new patent period as a clear win for the pharmaceutical industry, which presently derives close to 20% of its revenues from biologics, based on data from EvaluatePharma, a firm that specializes in providing data and projections related to the global pharmaceutical industry. EvaluatePharma also estimates that close to 50% of the top 100 drugs in 2014 will be biotech products, with biologics accounting for six of the top 10 in that year. We think biologics represent close to a third of the pharmaceutical industry’s total pipeline of research and development (R&D) compounds in 2010. Biologicals, which comprise popular treatments for cancer, rheumatoid arthritis, multiple sclerosis, and other hard-to-treat diseases, are among the most expensive pharmaceuticals on the market, typically costing between $20,000 and $40,000 on an annual basis, with drugs for some rare diseases costing several hundred thousand dollars a year. Based on government estimates, generic biosimilars could yield savings to Medicare and other government agencies of close to $10 billion over 10 years, with even greater savings 4

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accruing to private sector buyers. Global sales of branded biological products are projected to reach close to $115 billion in 2010, according to estimates by Standard & Poor’s. Biogenerics represent a key opportunity for Novartis, which was an early Big Pharma participant with representation in the generics space through its Sandoz subsidiary. We also note that other major largecapitalization firms such as Merck and Pfizer have said they are committed to the potentially lucrative biogenerics market. A key obstacle to bringing copies of biologics to market in the US is the lack of a regulatory pathway for approval. Consensus is that regulators cannot treat biologics like ordinary pharmaceutical generics because biologics are made from living source materials (cell lines) that are variable and hard to replicate. Typically, generics manufacturers would not have access to the exact same cell lines as the innovator company; thus, the generics they produce would not be bioequivalent to the original drug. Creating a new regulatory pathway for biosimilars requires action by Congress, in the same way that Congress was responsible for creating a regulatory pathway for generic copies of traditional medicines in 1984. However, past legislative proposals have been stymied by questions on how to ascertain that the generic copies are true bioequivalents of their branded targets without relying on extensive testing (which raises production costs and reduces the spread between brand and generic prices). Another highly debated issue concerns the length of marketing exclusivity that should be granted to originator branded biologics. A major difference between biologics and conventional drugs is that large molecule biologics are made from living organisms, while small molecule drugs are produced from chemicals. Being more difficult to discover and manufacture, and presently not subject to generic competition in the US, biologics typically dominate hard-to-treat diseases of the immune system such as rheumatoid arthritis, multiple sclerosis, and cancer.

PHARMA STILL FACES HEFTY PATENT CLIFF While the adjustment to all facets of the new US healthcare reform program will take some time to manage, we believe the more pressing issue for the branded pharmaceutical industry remains how to deal with an impending record number of blockbuster drugs set to lose patent protection over the 2011–14 period. Standard & Poor’s believes the looming drug patent expiration loss the industry is presently facing is unprecedented, in terms of both the number of drugs and the magnitude of the total hit. According to IMS Health Inc. (IMS), a market research and consulting firm specializing in the pharmaceutical industry, the global pharmaceutical industry faces a cumulative loss of $142 billion sales in the years 2010 through 2014, as generics encroach on a slew of patent-expired branded blockbuster drugs. That projected hit is equal to some 17% of worldwide sales in 2009, based on IMS data. Some of the larger drugs that are scheduled to lose patent protection over the 2010–13 period include the following (with 2009 global sales figures): in 2010, Sanofi-Aventis’ Lovenox cardiovascular drug ($4.3 billion), Merck & Co. Inc.’s Cozaar antihypertensive ($3.6 billion), and Pfizer Inc.’s Effexor XR antidepressant ($3.2 billion); in 2011, Pfizer’s Lipitor cholesterol regulator ($11.4 billion), Bristol-Myers Squibb Co.’s Plavix blood-thinning agent ($6.1 billion), Eli Lilly & Co.’s Zyprexa anti-psychotic ($4.9 billion), and AstraZeneca Plc’s Seroquel schizophrenia drug ($4.9 billion); in 2012, Novartis AG’s Diovan heart drug ($6.0 billion), and Merck’s Singulair asthma/allergy treatment ($4.7 billion); and in 2013, Eli Lilly’s Cymbalta anti-depressant ($3.1 billion) and Humalog human insulin ($2.0 billion). Confronting both the healthcare reform and patent cliff issues, major branded pharmaceutical companies have embarked on a number of new strategies aimed at strengthening their top lines, as well as providing platforms for continued long-term profit growth. One key strategy major pharmaceutical companies put into place in late 2009 and early 2010 were several rounds of price increases. Average prices on branded pharmaceuticals in the US increased 9.1% in 2009, versus 7.4% in 2008, according to data supplied by Express Scripts Inc., a leading pharmacy benefit management firm. Most of the major pharmaceutical companies have also reconfigured their R&D programs to focus on their proven specific areas of therapeutic expertise. They are also placing renewed emphasis on the faster-growing INDUSTRY SURVEYS

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fields of specialty pharmaceuticals, biologics, vaccines, and, in some cases, even generics. Prices of specialty drugs rose 9.4% in 2008 and 11.5% in 2009. Specialty pharmaceuticals typically comprise high-priced biotech-based treatments for cancer, rheumatoid arthritis, immune disorders, and similar conditions. Additional evidence of the industry’s shift in R&D focus to the specialty sector is the MAJOR POTENTIAL PATENT EXPIRATIONS increased number of specialty drug (Ranked by US sales) launches in recent years. Specialty 2008 SALES drugs accounted for close to 65% of BRAND NAME COMPANY INDICATION (MIL. $) new chemical entity launches in the US 2010 Effexor XR Wyeth Depression, anxiety, panic 2,791 from 2005 through 2009, based on data from IMS. disorder Flomax Cozaar Arimidex Hyzaar Aldara Mirapex Differin Astelin Rapamune 2011 Lipitor Actos Zyprexa

Boehringer Ingelheim Benign prostatic hypertrophy Merck High blood pressure AstraZeneca Breast cancer Merck High blood pressure Graceway Actinic keratosis, genital warts, skin cancer ManagB02: MAJOR Boehringer Ingelheim Restless legs syndrome Galderma POTENTIAL Acne Meda Allergic rhinitis PATENT Wyeth Transplant rejection

1,318

Pfizer Takeda Lilly

6,392 2,569 1,853

EXPIRATIONS

Levaquin Aricept Xalatan

Ortho-McNeil Eisai Pfizer

Caduet

Pfizer

High cholesterol Type 2 diabetes Schizophrenia, bipolar disorder Bacterial infections Alzheimer’s disease Glaucoma, ocular hypertension High blood pressure and high cholesterol Allergic conjunctivitis Brain cancer Acne Asthma

731 617 548 375 344 282 273 136

1,719 1,224 494

Nearly all large-capitalization pharmaceutical companies have also embarked on major expense streamlining programs aimed at downsizing their corporate cost structures to meet slowing or declining revenues. With each facing significant generic erosion and other top-line challenges, leading pharmaceutical companies, such as Pfizer, Merck, GlaxoSmithKline Plc, Bristol-Myers Squibb, and Eli Lilly, are all in the midst of multibillion-dollar costcutting programs.

Reflecting changes in marketing patterns, nearly all major drugmakers have cut back their pharmaceutical 256 sales forces, ending more than a decade Patanol Alcon 224 of aggressive sales force expansion, Temodar Schering 109 often referred to as Big Pharma’s Tazorac Allergan Accolate AstraZeneca 44 “arms race.” Standard & Poor’s Source: Medco's 2009 Drug Trend Report. estimates that current sales force employment is probably down 20% from a peak of 105,000 in 2005. Based on projections made by ZS Associates, a sales strategy consulting firm, the industry’s sales force is expected to drop to 70,000 by 2015. 418

Along with personnel cutbacks, many drug companies are also consolidating manufacturing facilities in an effort to eliminate excess overhead and improve productivity. Bristol-Myers Squibb, Pfizer, Merck, and Lilly have all reduced excess manufacturing capacity in recent years. While all major pharmaceutical companies are cutting costs, Pfizer’s and Merck’s plans are probably the most extensive. Helped by synergies from its 2009 acquisition of Schering-Plough, Merck expects to achieve cost saving of about $3.5 billion by 2012. Pfizer’s goal is to generate cost reductions of $4 billion–$5 billion by the end of 2012, facilitated in large part by synergies accruing from its 2009 acquisition of Wyeth.

BRANDED M&A LIKELY TO EBB, BUT GENERICS ACTIVITY TO RISE Following a record-breaking year in 2009, we expect the total value of pharmaceutical mergers and acquisitions to decline sharply in 2010. Pharmaceutical M&A deals totaled about $141 billion in 2009, according to Dealogic Inc., a market research firm. Key mega-deals in 2009 included Pfizer’s acquisition of rival drugmaker Wyeth (for some $68 billion in cash and stock); Merck’s acquisition of Schering-Plough (some $41 billion in cash and stock); and Roche Holding Ltd.’s acquisition of Genentech Inc., a leading biotechnology company, through a successful $46 billion hostile tender offer for the 44% equity interest in Genentech that Roche did not already own. 6

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TOP US PHARMACEUTICAL COMPANIES NEW PRODUCT PIPELINES (As of May 2010) COMPANY

NAME OF COMPOUND

PHARMACOLOGIC CLASS

TREATMENT

Abbott Laboratories

ABT-874 Certriad

Human monoclonal antibody Fibrate and statin combination

Flutiform Vicodin CR

Beta2 agonist Hydrocodone/acetaminophen

Crohn's disease Cholesterol/tryglycerides regulation Asthma Pain

Apixaban (partnered with Pfizer) Belatacept

Factor Xa inhibitor

Thrombosis

Phase III

1,100

Anti-b7 integrin Mab

Immuno-suppression transplants Diabetes Melanoma Diabetes

Phase III

800

Phase III Phase III Approved

750 500 1,600

Anti-VEGFrMAb Glucagon-like peptide 1 (GLP-1) agonist Platelet ADP antagonist Protein kinase C (PKC) inhibitor Monoclonal antibody Monoclonal antibody y-secretase inhibitor

Breast cancer Diabetes

Phase III Filed

400 1,100

Acute coronary syndrome Cancer Alzheimer's disease Diabetes Alzheimer's disease

Approved Phase III Phase III Phase III Phase III

950 250 200 225 240

Cephalosporin Anti-beta amyloid Mab

Bacterial infections Alzheimer's disease

Filed Phase III

850 1,100

SSRI Pyrimidine analogue Reverse transcriptase inhibitor Anti-TNFa Mab

Premature ejeculation Cancer HIV Rheumatoid arthritis

Filed Phase III Phase III Approved

300 150 350 2,600

Anti-IL-12 & IL-23 MAb Protease inhibitor Factor Xa inhibitor Abiraterone acetate

Psoriasis Hepatitis C Thrombosis Prostate cancer

Filed Phase III Phase III Phase III

780 1,250 1,500 350

Bristol-Myers Squibb

Dapaglifloxin Ipilimumab Onglyza Eli Lilly & Co.

Ramucirumab Bydureon

B04: TOP SGLT2 US Inhibitor Selective PHARMACEUTICAL Human monoclonal antibody Dipeptidyl peptidase IV (DPP-IV) COMPANIES’ NEW inhibitor PRODUCT PIPELINES

Effient Enzastaurin Solaneuzumab Teplizumab Semagacestat Johnson & Johnson

Ceftobiprole Bapineuzamab (partnered with Pfizer) Dapoxetine Dacogen Rilpivirine Simponi (partnered with Merck) Stelara Telaprevir Xarelto Abiraterone

STATUS

EST. 2015 SALES (MIL. $)

Filed

500 400

Filed Filed

200 350

Merck & Co.

Bocepravir HCV protease inhibitor Deforolimus (MK-8669) Rapamycin analogue (mTOR MK-0524B Tredaptive with simvastatin MK-0822 Cathepsin K inhibitor Corifollitropin alfa Org 36286 Preladenant Adenosine A2 antagonist 5HT-2/D2 antagonist Saphris Simponi (partnered with J&J) Anti-TNFa MAb Bridion Selective relaxant binding agent Telcagepant CGRP antagonist TRA Thrombin receptor antagonist Nicotinic acid/Laropiprant Tredaptive V710 Staphylococcus

Hepatitis C Cancer Cholesterol regulation Osteoporosis Infertility Parkinson's disease Schizophrenia Rheumatoid arthritis Novel anesthetic Migraine Acute coronary syndrome Cholesterol regulation Vaccine

Phase III Phase III Phase III Phase III Phase III Phase II Approved Approved Phase III Phase III Phase III Filed Phase II

790 200 800 600 200 300 600 2,600 650 700 2,100 750 1,150

Pfizer Inc.

Apixaban (partnered with Bristol-Myers Squibb) Aprela Axinitib CP-690550 Bapineuzamab (partnered with J&J) CP-675 CP-751 Fesoterodine

Factor Xa inhibitor

Thrombosis

Phase III

1,100

Oestrogen agonist & SERM VEGF inhibitor JAK-3 inhibitor Humanized monoclonal antibody

Osteoporosis & menopause Cancer Immunosuppressive Alzheimer's

Phase III Phase III Phase III Phase III

200 550 1,200 1,100

Monoclonal antibody IGF-IR monoclonal antibody Antimuscarinic agent

Skin cancer Cancer Incontinence

Phase III Phase III Approved in Europe Phase III Approved Approvable Filed Approvable Phase III

Prevnar 13 Pneumococcal 13-valent Desvenlafaxine Pristiq Pristiq Desvenlafaxine Mu opioid antagonist Relistor Viviant SERM Collagenase clostridium Xiaflex Source: Company reports; Standard & Poor's estimates.

INDUSTRY SURVEYS

Vaccine Depression Vasomotor symptoms Constipation Osteoporosis Peyronie's disease

HEALTHCARE: PHARMACEUTICALS / JUNE 3, 2010

550 200 500 4,500 200 150 400 150 320

7


After a lull of almost a decade, merger activity in the global large-capitalization pharmaceutical sector (often referred to as Big Pharma) ramped up sharply in 2009 as key players chose to go the merger route to survive impending patent expirations and other industry challenges. We view the ramp-up of merger activity in 2009 primarily reflecting their need to strengthen sales and profits through merger-related synergies in the face of patent expirations on key drugs, weak R&D productivity, and depressed stock valuations that made deals more attractive. The decline in R&D productivity in the drug sector is particularly problematic: the number of major new pharmaceutical launches, especially among US drugmakers, has trended down in recent years, after peaking with the launch of about half a dozen blockbuster products at the end of the 1990s. While we see a decline in mega-mergers among the major branded pharmaceutical companies, we think consolidation is likely to pick up in the global generics arena. Although business models in the generic sector are quite different from Big Pharma’s, this sector has experienced heightened M&A activity in recent years, as major generic players seek to achieve greater globalization of their businesses to diversify the risks of possible slowing trends in individual markets. Similar to their branded cousins, generic mergers also reflect the need to expand sales bases and improve margins through cost economies and operating synergies. Teva to acquire Ratiopharm The biggest deal in the generic sector so far in 2010 has been Teva Pharmaceutical Industries Ltd.’s acquisition of Ratiopharm in late March 2010 in an auction contest against Pfizer and Actavis, an Icelandbased generics firm. Ratiopharm is the second largest generic manufacturer in Germany, with 2009 sales of about $2.3 billion. Teva’s winning bid was about $5 billion; the deal is expected to be completed by the end of 2010. We believe Teva was strongly motivated to do this deal to secure a greater footprint in the European generics market, which we expect will grow faster than the US market over the next five years. Germany’s generic pharmaceutical market alone, with an estimated $8.6 billion in annual sales, is the world’s second largest, according to IMS. Ratiopharm has a strong portfolio that includes some 500 molecules, with products across the major therapeutic spectrum and marketed in 26 countries. Ratiopharm also has considerable expertise in the biogenerics space, which we believe represents a major growth opportunity over the coming years. While we believe the purchase price, at 2.3 times 2009 sales and some 12X EBITDA, is somewhat more expensive than recent similar deals in the biopharmaceutical sector, we think the deal still represents a strong positive for Israel-based Teva, which ranks as the world’s largest generics firm. We expect the deal, to be funded by cash on hand and new debt, to add immediately to Teva’s adjusted ADR profits, and to be accretive to GAAP ADR earnings three quarters after the deal is consummated. We also expect merger synergies to exceed $400 million over the first three years after the merger takes place. Teva expects to spend some $15 billion to $20 billion on acquisitions through 2015, comparable to the $19 billion that it has spent on acquisitions over the five years through 2009. European firms are also increasingly diversifying and acquiring generic drug companies, partly to provide a balance to their branded products, many of which face generic competition. Novartis has successfully employed this strategy with its Sandoz division, which experienced significant growth in recent years. Standard & Poor’s sees these acquisitions mirroring a rising trend toward globalization of the generics industry. In our opinion, this diversification trend underscores difficulties at home, including an increasingly price-competitive US market, a bottleneck of generic filings at the FDA, and other regulatory issues, contrasted with higher margins on generics in many foreign countries and greater opportunities abroad for lucrative generic biotech products. 

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INDUSTRY PROFILE Global drug sales projected to reach $1.1 trillion in 2014 Despite an impending massive loss of revenues resulting from patent expirations, worldwide pharmaceutical sales are expected to increase at a compound annual growth rate (CAGR) in the 5%–8% range, and reach $1.1 trillion by 2014, based on a forecast released in mid-April 2010 by IMS Health Inc. (IMS), a market research and consulting firm specializing in the LEADING PHARMACEUTICAL COMPANIES pharmaceutical industry. Key drivers fueling the -------- US PHARMA SALES (BIL. $) --------B06: LEADING projected gain include robust 14%–17% annual COMPANY PHARMACEUTICAL 2005 2006 2007 2008 2009 growth in Brazil, Russia, India, and China (the 1. Pfizer 34.3 34.2 31.4 27.7 27.8 COMPANIES BRIC economies), and other developing nations, 2. Merck 18.7 20.6 21.9 20.1 19.8 which IMS calls “pharmerging” markets. 3. AstraZeneca 12.4 14.5 15.2 16.1 18.3 Research and development (R&D) discoveries 4. GlaxoSmithKline 17.0 18.7 18.3 16.5 15.0 and development of novel new therapies for 5. Hoffman-La Roche 8.0 10.2 11.9 12.6 14.3 cancer, diabetes, HIV, multiple sclerosis, and 6. Novartis 12.6 13.6 13.5 12.2 13.4 other immune disorders are also expected to 7. Lilly 8.9 9.7 10.7 12.0 13.2 foster growth. IMS also pointed out that patent 8. Johnson & Johnson 15.6 15.7 15.9 15.6 12.8 expirations are expected to peak in 2011–12, 9. Amgen 11.6 14.2 13.6 12.8 12.5 10. Teva Pharmaceuticals 7.3 9.0 9.8 11.2 12.1 when six of the world’s 10 largest selling drugs Total, Top 10 146.4 160.4 162.2 156.8 159.2 lose patent protection. Thus, revenue comparisons should be favorable after 2012. Total, US Market 247.3 270.3 280.5 285.7 300.3 Total revenue loss from patent expirations over Source: IMS Health Inc. the 2010–14 period is expected to exceed $142 billion. Major generic inroads are expected in the areas of cholesterol regulation (now dominated by Pfizer’s Lipitor), antipsychotics (such as Lilly’s Zyprexa and AstraZeneca’s Seroquel), antiulcerants, and heart drugs (including Merck’s Cozaar/Hyzaar and Bristol-Myers Squibb’s Plavix). Global sales in 2009 rose 7.0%, to $837 billion (in constant currencies), representing improvement from a 5.3% gain in 2008, based in IMS data. The gain in 2009 was better than previously expected, reflecting stronger-than-anticipated patient demand, especially in the US and other developed markets; favorable comparisons in Japan; and continued robust demand from emerging markets. However, recent growth is still well below past norms, with global pharmaceutical industry sales expanding at a compound annual growth rate of 10% over the 1999– 2008 period, based in IMS statistics. GLOBAL PHARMACEUTICAL SALES, BY REGION SALES* MARKET FORECAST (BIL. $) SHARE (%) % CHG. CAGR % % GROWTH B13: GLOBAL 2009 2009 2008-09 2004-09 2009-10

By geographical region, total global pharmaceutical sales in 2009 were PHARMACEUTICAL divided as follows, based on IMS data: North America 323.8 38.7 5.5 5.2 3-5 SALES, BY REGION North America, 38.7%; Europe, Europe 263.9 31.5 4.8 6.6 3-5 31.5%; Asia, Africa, and Australia, Asia, Africa, Australia 106.6 12.7 15.9 13.9 13-15 12.7%; Japan, 11.3%; and Latin Japan 95.0 11.3 7.6 3.9 0-2 America, 5.7%. The strongest growing Latin America 47.9 5.7 10.6 10.9 10-12 regional segments in 2009 were TOTAL 837.3 100.0 7.0 6.7 4.6 emerging markets such as China and *In constant dollars, using Q4 2009 average exchange rates. CAGR-Compound annual growth rate. Latin America. For 2010, IMS projects Source: IMS Health Inc. total global sales growth in the 4%–6% area, driven largely by projected growth of 13%–15% in emerging markets in Asia and Africa, as well as 10%–12% gains seen for Latin America. Sales in developed markets in North America and Europe are expected to show increases only in the 3%– 5% range.

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US MARKET SHOWS SURPRISING STRENGTH Sales of ethical pharmaceuticals and insulin in US retail and non-retail channels totaled about $300 billion in 2009, a 5.1% year-over-year increase, versus a meager 1.8% gain in 2008. These results represented a marked improvement from an earlier IMS projection made in April 2009 for a 1%–2% decline for 2009. The final data reflected the effect of 32 innovative products launched in 2009; a less-than-anticipated impact from generic erosion in the areas of epilepsy, migraine, and immune system disorders; and greaterthan-expected resiliency of the US pharmaceutical market to the general recession, as well as firmer pricing trends and changing wholesaler inventory stocking patterns. Fearing a falloff in demand because of the weaker economy, drug distributors were carrying relatively low inventories going into 2009. However, when demand proved stronger than expected, they were forced to rebuild stocking quickly, resulting in an unforeseen temporary ramp-up in sales. IMS also noted strength in prescription trends in 2009, with dispensed prescription volume in retail outlets increasing 2.1%, to 3.9 billion prescriptions, versus a gain of only 1.8% in 2008. Increased usage of specialty drugs, which grew 7.5%, was another driver in 2009. Specialty pharmaceuticals, which include treatments for cancer, rheumatoid arthritis, multiple sclerosis, and other hard-to-treat chronic conditions, represented 21% of total US drug sales in LEADING THERAPY CLASSES IN US SALES 2009. According to restated IMS data, total US (Ranked by 2009 US sales, in billions of dollars) pharmaceutical sales rose only 1.8% to about ----------------- SALES (BIL. $) ----------------- $286 billion in 2008, and total prescriptions B03: CLASS 2005 2006 2007 2008 2009 written edged up only 0.9%, both record lows. LEADING 1. Antipsychotics 10.2 11.4 12.8 14.2 14.6 By comparison, drug sales grew 3.7% in 2007, THERAPY 2. Lipid regulators 17.9 19.6 16.2 14.5 14.3 and 9.4% in 2006. Prescriptions written IN 14.0 13.8 13.6 increased at rates of 2.6% in 2007 and 4.5% in 3. Proton pump inhibitors CLASSES 12.7 13.5 4. Antidepressants 10.4 9.2 9.5 9.9 US10.0 SALES 2006, according to restated IMS data. 5. 6. 7. 8. 9. 10.

Angiotensin II antagonists Monoclonal antibodies Anti-arthritics Erythropoietins Analogs of human insulin Anti-platelets Total, Top 10

4.9 3.9 3.6 8.5 2.4 3.7 77.8

5.7 5.7 4.4 9.8 3.1 4.1 87.7

6.5 6.6 4.8 8.4 3.8 4.4 86.7

7.5 7.3 5.6 6.9 5.0 5.2 89.5

8.4 8.0 6.3 6.3 6.3 6.0 93.7

Rising unemployment has left millions of Americans without health insurance and prescription drug coverage, and affected both sales and volume levels, with greater usage of inexpensive generics. Based on anecdotal evidence, there has also been considerable pillTotal US Market 247.3 270.3 280.5 285.7 300.3 cutting among cash-paying patients seeking to Source: IMS Health Inc. save on drug costs. We also attribute weak drug sales in recent years to the effects of ongoing generic erosion in many key lines, as well as a relatively low level of new blockbuster products. We believe the US Food & Drug Administration (FDA) has also taken a more cautious stance in terms of new drug approvals in the post-Vioxx environment. (The Vioxx issue is discussed in more detail in the “How the Industry Operates” section of this Survey.) TOP PRESCRIPTION DRUGS (Ranked by 2009 US sales) DRUG

COMPANY

USE

Lipitor Pfizer B02: TOP Nexium AstraZeneca PRESCRIPTION Plavix Bristol-Myers Squibb/Sanofi DRUGS Advair Diskus GlaxoSmithKline Seroquel AstraZeneca Abilify Bristol-Myers Squibb/Otsuka Singulair Merck Actos Takeda Enbrel Amgen Epogen Amgen Source: IMS Health Inc.

10

Cholesterol reducer Antiulcer Antiplatelet Asthma Antipsychotic Antidepressant Respiratory Antidiabetic Antiarthritic Antianemia

-------------- SALES (BIL. $) -------------2005 2006 2007 2008 2009

8.2 4.3 3.5 3.5 2.5 1.5 2.5 2.2 2.8 2.9

8.6 5.1 2.9 3.9 3.0 1.9 3.0 2.6 3.1 3.2

8.1 5.4 3.9 4.2 3.4 2.3 3.4 2.9 3.1 3.0

7.8 5.9 4.8 4.4 3.8 3.0 3.5 3.1 3.1 3.0

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7.5 6.3 5.6 4.7 4.2 4.0 3.7 3.4 3.3 3.2

The most widely dispensed therapeutic category in 2009 in terms of written prescriptions was lipid regulators, up 3.6%; followed by codeine and combination pain treatments, up 4.2%; and antidepressants, up 3.2%, according to IMS. Prescriptions for seizure disorder INDUSTRY SURVEYS


drugs increased 6.0%, and proton pump inhibitors rose 4.8%. We attribute much of the gains in these categories to the greater availability of inexpensive generics. In terms of dollar sales, the largest-selling US class in 2009 was anti-psychotics, slightly outpacing lipid regulators, which had held first place for many years, based on IMS data. Sales of lipid regulators dropped in 2009 to 27% below their 2006 level, reflecting significant attrition in Merck’s Vytorin and Zetia drugs. Those lines remain under pressure from disappointing clinical trials that indicated the drugs were no more effective than generic lipid regulators in terms of reducing cardiac mortality. Sales of proton pump inhibitors have also been in a modestly declining trend in recent years, largely reflecting generic erosion in Pfizer’s Protonix heartburn drug. However, other segments, such as angiotensin II heart drugs, antiplatelet therapies, and analeptics, showed sales growth in 2009. One of the strongest categories in 2009 was antineoplastic monoclonal antibodies, which grew 9% to $8 billion, according to IMS. The latter group consists largely of well-known oncology agents such as Roche’s Avastin, Rituxan, and Herceptin. Over the next five years, IMS has projected North American pharmaceutical sales growth in the 3%–6% range, helped by expanded coverage resulting from the passage of healthcare reform legislation, firmer pricing trends, and contributions from new products. For 2010, IMS projected a sales rise in the 3%–5% range. The US market should benefit from healthcare reform legislation that is expected to provide new medical insurance for some 32 million Americans presently without coverage.

THE OUTLOOK FOR EUROPE AND JAPAN Representing the second largest regional pharmaceutical market (after the US), Europe continues to experience growth that is below the worldwide average. Retail pharmacy sales in five Western European markets rose 2%, to $110 billion, in the 12 months through January 2010, according to IMS. By individual country, sales showed the following changes: Spain (+3%), Germany (+3%), the UK (+2%), Italy (+1%), and France (unchanged). The European growth rate seen in the 12 months through January 2010 was markedly lower than the high-single-digit growth rate experienced by the European market over the past four years. IMS projects total sales for the top five European markets to grow at a CAGR of 3%–5% over 2009–14. Japan, historically a highly regulated market, has seen pharmaceutical sales fluctuate erratically in recent years, with the government biennially implementing across-the-board pharmaceutical price cuts. In 2009 (a hiatus year), pharmaceutical sales rose 7.6% from 2008, when sales were reduced by price cuts. With 2010 expected to be another price-cut year, IMS projects a gain of 0%–2%. We believe that governmentmandated biennial price cuts have wreaked havoc on Japan’s pharmaceutical industry, which is struggling with a lack of new products, a new and vigorous government emphasis on generics penetration, and efforts to end the tradition of having doctors prescribe and dispense medications. IMS has projected 2%–5% compound annual growth in drug sales in Japan over the five years through 2014.

INDUSTRY TRENDS Like most industries, big brand-name pharmaceutical companies face ongoing challenges and uncertainties. In the past few years, the industry has been subjected to heightened competition from generic drugmakers, unprecedented pricing pressure from payers, and hard-to-control inflation in research and development (R&D) budgets. Perhaps most importantly, however, the pharmaceutical industry has been experiencing a decline in R&D productivity, with a relative dearth of innovative new products launched in recent years— an area that might have offset some of the other difficulties mentioned earlier. In addition, the overall global pharmaceutical market is fairly fragmented, with the largest company (Pfizer) accounting for only 8% of the market. These challenges continued to plague the industry in 2009, although ongoing improvements in early-stage product pipelines, particularly in the fields of cancer and diabetes, offer long-term promise. In addition, new products and an aging population are likely to create a robust future for this industry. Nevertheless, Big Pharma (the large-capitalization pharmaceutical sector) remains in transition. Rarely have the pressures on large pharmaceutical companies been so intense. As the industry sorts through its problems, it is responding with major cost-cutting initiatives, including sales and marketing overhauls and the INDUSTRY SURVEYS

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reorganization of R&D operations. The industry is pursuing new product development in selected areas, and is forming alliances and making acquisitions with pipeline considerations in mind. IMS Health Inc. (IMS), a market research and consulting firm specializing in the pharmaceutical industry, finds that Big Pharma companies overall have been struggling to grow, while generics firms are doing better, although they face a period of intense competition. Biotechnology companies continue to exhibit robust revenue growth, albeit from a much smaller base.

DEMOGRAPHIC TRENDS REMAIN FAVORABLE Three worldwide demographic trends bode well for long-term pharmaceutical consumption: the aging of the population in the largest markets; the lengthening of the average life expectancy; and a rising incidence of chronic diseases. In many Western countries, the elderly population—a group with a disproportionately greater use of prescription drugs—is growing faster than the general population. Since seniors account for a disproportionate amount of prescription drug consumption, projected aboveaverage growth for the aged has positive implications for pharmaceuticals. According to the United Nations Population Division, people aged 60 were projected to account for 22% of the total world population by 2050, up from 10.8% in 2009. In the US, the Census Department projected that the 65 and older segment of the population will expand from an indicated 41.7 million in 2010 to 79.3 million by 2030, when all of the baby boomers (Americans born from 1946 through 1964) will be 65 and older. As a percentage of the total population, persons 65 and older are expected to account for close to 20% of all Americans in 2030, up from 13% in 2010. This represents a bullish trend for the pharmaceutical industry since the elderly as a group account for roughly one-third of prescription drug consumption.

EMERGING MARKETS LEAD INDUSTRY GROWTH Emerging markets, a key component for nearly all global economic projections, are expected to be the principal growth driver for the pharmaceutical sector over the coming years. Based on forecasts made by IMS, pharmaceutical sales in 17 developing nations that IMS calls “pharmerging”—including China, Brazil, Mexico, South Korea, Turkey, India, and Russia—are expected to grow collectively at a compound annual rate of 14%–17% in the five years through 2014. IMS projected that sales in pharmerging countries would represent some 48% of total pharmaceutical market growth in 2013, up from an indicated 37% in 2009. With several blockbuster drugs slated to lose their patent protection in the US and the European Union (EU), increasing generic competition, and a dearth of innovation, many branded pharmaceutical manufacturing giants need to find other ways to expand. One of the most promising, in our view, is to penetrate fast-growing emerging markets. Although there are exceptions, the emerging countries may be defined as those undergoing strong economic growth, resulting in a rapid rise in gross domestic product (GDP) and disposable income. Consequently, an increasing number of people in such countries are able to buy goods and services they previously could not afford, though many citizens are still relatively poor. In addition, many are also increasingly facing health-related issues commonly seen in the developed markets of the US and EU, such as the following: aging populations; an increasing prevalence of non-communicable, chronic diseases such as cardiovascular disease, cancer, diabetes, and respiratory ailments; and such poor health behaviors as smoking and rising levels of obesity. We believe these situations provide multinational pharmaceutical manufacturers with opportunities to tap large, new customer bases. Many emerging countries provide good growth prospects for the pharmaceutical giants. By far, the largest is China, which has the largest population and the third largest economy in the world, with a GDP of $8 trillion in 2008. It also has the largest pharmaceutical market among the emerging countries. The next three largest countries (comprising the second tier of emerging pharmaceutical markets, as defined by IMS) are Brazil, Russia, and India, which had GDPs in 2008 in the $2 trillion–$4 trillion range. Countries in the third tier are

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those with GDPs of less than $2 trillion and consist of Venezuela, Poland, Argentina, Turkey, Mexico, Vietnam, South Africa, Thailand, Indonesia, Romania, Egypt, Pakistan, and Ukraine. The global recession that started in late 2008 has had differing effects on the economies of the countries occupying the three tiers. Russia, dependent on oil exports, experienced a decline in GDP, while China and South Korea fared much better than expected. Despite the differences, we still see promising long-term growth prospects of the pharmaceutical markets they collectively provide. Drug sales in countries such as Russia and Mexico, where patients are primarily responsible for paying for their own drugs, will probably be more affected by high unemployment and economic weakness than nations such as Germany, Japan, Spain, and Turkey, where the government is the principal source of funding. IMS noted that pharmerging countries accounted for 16% of the worldwide market in 2009, up from 13% in 2001, and should capture close to 20% of the worldwide pharmaceuticals market by 2013. Despite the bright growth prospects for these markets, we still believe that multinational pharmaceutical manufacturers face many challenges in emerging markets. IMS noted that in many emerging countries, patients’ out-of-pocket payments are high relative to public funding, making issues of willingness and ability to pay key. In addition, we are likely to see many countries, seeking cost containment, continuing to pressure drug prices and reimbursement, which can limit a drugmaker’s growth prospects. Other hurdles IMS sees include well-entrenched products made by local companies and generic drugs dominating the market in a growing number of countries. We do not view these as unassailable obstacles, however, for many of the large multinational players can, if allowed by the government of the country, acquire or establish alliances with local manufacturers. We think governments would also favor major global players making major capital investments in their countries, thus spurring local employment and contributing to the tax base. The countries that occupy the top two tiers of the emerging pharmaceutical markets—Brazil, Russia, India, and China—are collectively known as BRIC, a term coined by investment bank Goldman Sachs Group Inc. They are important for several reasons: not only do their internal pharmaceutical markets have substantial growth prospects, but they also have the largest industrial bases among the emerging markets. In our view, these countries represent the most promising, low-labor-cost manufacturing bases for giant drugmakers to set up plants from which to sell pharmaceuticals both to other emerging markets and to developed countries.

NEW FDA LEADERSHIP STAYS THE COURSE Under pressure to prevent or minimize the incidence of adverse drug events occurring after drugs are approved for marketing, the FDA has taken steps to demand greater tests for safety and efficacy before new compounds are approved, and to implement new surveillance procedures to closely monitor drugs after they reach the market. These steps began with the passage of the Food and Drug Administration Amendments Act of 2007 (FDAAA), though we think a more efficient and widespread application of this regulation is being put into place under the new FDA commissioner, Dr. Margaret Hamburg, and deputy commissioner, Dr. Joshua Sharfstein. The law affects two areas of critical importance to the FDA: funding and safety surveillance. It reauthorized a 15-year-old user-fee program that requires manufacturers to pay fees in exchange for faster reviews of their new drug applications (NDAs). User fees play a critical role in agency funding: they accounted for an estimated one-quarter of the FDA’s annual budget in fiscal 2007. With respect to surveillance regulations, the new legislation gave the FDA expanded powers to require drug companies to further study the safety of medicines if needed, and to mandate new label warnings when safety issues arise. A key component of the FDAAA is that it requires the FDA to impose stricter safety surveillance after a drug is commercialized. Every drug application will now include a postmarket risk management program for three years after launch.

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The FDA has been criticized in recent years for its lack of effectively monitoring pharmaceutical safety issues, especially following the heightened publicity that emerged after serious adverse effects were found with Merck’s Vioxx pain medication (subsequently pulled from the market), and GlaxoSmithKline’s diabetes drug Avandia. Complying with new FDAAA disclosure requirements, the FDA in September 2008 posted on its website its first quarterly report listing drugs now on the market that were being considered for potential safety issues. The data is culled from the agency’s Adverse Event Reporting System (AERS). Under FDAAA, the agency is required to inform the public each quarter of new safety information or potential signals of serious risk. Some of the drugs on the list include Eli Lilly’s Cymbalta antidepressant, which may be linked with urinary retention; Biogen Idec’s Tysabri treatment for multiple sclerosis, which is being studied for an association with skin cancer; and Baxter Healthcare’s Suprane anesthesia agent for possible links to cardiac arrest. Sentinel is another new FDA program developed in accordance with FDAAA directives. Envisioned as an effective postmarketing surveillance system, the Sentinel System will be a national, integrated, electronic database for monitoring medical product safety. Data will be fed into Sentinel in a FDA APPROVALS* (Number of drugs) secure fashion from existing databases run by private health plans, insurance plans, 150 government agencies, and private industry. 125 Sentinel will strengthen the agency’s ability to track how drugs and medical products 100 H02: FDA perform once they reach the market. 75 APPROVALS Besides postmarket surveillance issues, the 50 FDA has also been criticized in recent years 25 for delays in reaching decisions on new drug 0 submissions under the PDUFA program. 1994 95 96 97 98 99 00 01 02 03 04 05 06 07 08 2009 During 2008, the FDA missed for than 15 deadlines. Part of the problem may reflect New Drug Applications (NDAs) underfunding of the agency by the federal New Molecular Entities (NMEs) government. The agency’s budget in fiscal *Includes tentative NDA approvals under the President's Emergency Plan year 2008 was $2.1 billion, only 5% above for AIDS Relief, starting in 2007. the year-earlier level despite a much heavier Source: US Food & Drug Administration. workload. Seeking to remedy this situation, President Obama has proposed a significant increase in the agency budget for fiscal 2010, to $3.2 billion. Much of the additional funds would be earmarked for beefing up agency staffing levels.

DTC ADVERTISING SHRINKING Total direct-to-consumer (DTC) pharmaceutical advertising spending increased 3.9% in 2009, to about $4.8 billion, following a decline in recession-impacted 2008, based on data from Kantar Media, a leading provider of advertising and marketing information. The gain in 2009 was achieved despite a 12% decline in total advertising expenditures, according to Kantar. We see the rise in pharmaceutical marketing outlays commensurate with the gains seen in prescription trends and pharmaceutical sales in 2009, which were generally better than expected. New launches, which are usually a key driver of DTC advertising, also showed some improvement in 2009. We also attribute better DTC volume to increases in selling, general, and administrative (SG&A) spending. While print and broadcast media continue to dominate DTC advertising, we are also seeing an increasing volume of advertising dollars directed to the Internet, where interactive communication is available for patients via email. Historically, DTC has been highly successful in promoting pharmaceutical brand recognition in competitive markets, especially for so-called lifestyle drugs such as antidepressants, painkillers, and erectile dysfunction 14

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agents. Studies also confirmed DTC effectiveness as persons suffering from various medical conditions generally recall seeing DTC ads for drugs treating those conditions. Reflecting an attempt to reduce the level of persons abusing prescription drugs and to achieve significant cost savings, there has been a clamor by some in Washington for a moratorium on DTC advertising for new products. While noting that occasionally DTC is useful in informing consumers about new therapies, DTC critics argue that these promotions are used primarily by the drug companies to boost sales of their established products, instead of less expensive generic alternatives, and that the cost of these ads dramatically increases the nation’s drug spending. However, we do not expect restrictive DTC legislation to emerge, given the benefits that DTC provides for patients and consumers.

FDA APPROVED 25 NOVEL DRUGS IN 2009 While R&D productivity is still well below past levels, the total number of approvals of new chemical entities (NMEs) and of biologic license applications (BLAs) in 2009 totaled 25, one more than in 2008. The gain came from the biologics space, with six BLAs approved, versus three in 2008. Pharmaceutical NMEs dropped to 19, from 21. While the 2008 and 2009 totals exceeded the average low twenties level seen in 2005 through 2007, they were still well below the annual average of 33 approvals from 1998 through 2004. RECENT NEW MOLECULAR ENTITIES APPROVED* TRADE NAME

GENERIC NAME

APPLICANT

THERAPEUTIC APPROVAL POTENTIALS DATE

Votrient pazopanib GlaxoSmithKline S 10/19/09 pralatrexate Allos Therapeutics PO 9/24/09 Folotyn Telavancin telavancin Theravance S 9/11/09 B12: RECENT NEW Bepotastine bepotastine besilate S 9/8/09 MOLECULAR ENTITIESIsta Pharmaceuticals Besilate APPROVED Sabril vigabatrin Lundbeck SO 8/21/09 Saphris asenapine Organon S 8/13/09 pitavastatin Kowa Research S 8/3/09 Livalo Tablets Onglyza saxagliptin Bristol Myers Squibb S 7/31/09 Effient prasugrel Eli Lilly P 7/10/09 dronedarone hcl Sanofi Aventis P 7/1/09 Multaq Besifloxacin Hcl besifloxacin Bausch & Lomb S 5/28/09 Samsca tolvaptan tablets Otsuka America S 5/19/09 iloperidone Vanda Pharmaceuticals S 5/6/09 Fanapt Ulesfia benzyl alcohol Sciele Pharma S 4/9/09 Coartem artemether 20mg/ Novartis PO 4/7/09 lumefantrine 120mg Affinitor everolimus Novartis P 3/30/09 Uloric febuxostat Takeda S 2/13/09 Cypress Bioscience S 1/14/09 Savella Tablets milnacipran hcl tablets *Excludes diagnostic NMEs. P-Priority review: significant improvement compared with marketed products, in the treatment or prevention of a disease. S-Standard review: drug appears to have therapeutic qualities similar to those of one or more already marketed drugs. O-Orphan drug. Source: US Food and Drug Administration.

Approvals in 2009 included new treatments for cardiovascular disease, fibromyalgia, rheumatoid arthritis, depression, leukemia, Crohn’s disease, and various other conditions. Selected approvals in 2009 for which we project blockbuster potential include the following:

 Savella. Generically known as milnacipran hydrochloride, Savella was developed by Forest Laboratories Inc. in conjunction with Cypress Bioscience Inc. It was approved in January 2009 for the treatment of fibromyalgia, a chronic pain condition that is characterized by widespread musculoskeletal aches, pain, and stiffness; soft tissue tenderness; general fatigue; and sleep disturbances. Savella belongs to a class of drugs called serotonin-norepinephrine reuptake inhibitors (SNRIs), which also includes certain antidepressants. We see Savella competing with rival fibromyalgia drugs such as Pfizer’s Lyrica and Eli Lilly’s Cymbalta in a potential multibillion-dollar fibromyalgia therapeutics market. We see Savella generating sales of several hundred million dollars annually within the next five years.  Simponi. The FDA granted marketing approval of Simponi (golimumab) in April 2009 for the treatment of moderate-to-severe rheumatoid arthritis, psoriatic arthritis, and ankylosing spondylitis. These are chronic conditions caused by immune system dysfunction, whereby it attacks the body’s joints, causing pain and discomfort. INDUSTRY SURVEYS

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A next-generation version of Remicade (global sales of $5.2 billion), Simponi is a member of a class of compounds known as tumor necrosis factor (TNF) inhibitors. Rival TNF inhibitors include Pfizer’s Enbrel and Abbott Laboratories’ Humira. Simponi offers patient-administered delivery and is available on a oncemonthly treatment basis. We believe Simponi has multibillion-dollar annual sales potential.  Multaq. Developed by French drugmaker Sanofi-Aventis, Multaq (dronedarone) was approved by the FDA in June 2009. The drug is indicated for the treatment of atrial fibrillation, a cardiac condition that accounts for about one-third of all arrhythmia hospitalizations in Europe. A serious disease, atrial fibrillation increases the risk of stroke up to fivefold, and doubles the risk of fatality. It has been estimated that there are about 2.5 million persons in the US and 4.5 million in Europe with atrial fibrillation, many of whom are probably not aware of their condition. Standard & Poor’s believes this compound should generate global sales of over $1 billion annually by 2013.  Effient. After an 18-month delay, the FDA finally approved Effient (prasugrel) in July 2009. Effient, marketed by Eli Lilly, is a blood-thinning drug used to reduce the risk of blood clots in patients undergoing angioplasty, a common procedure to unblock clogged coronary arteries. Platelets in the blood can clump around the procedure site, causing clots that can lead to heart attack, stroke, and death. In clinical trials, Effient was found to have better efficacy than rival blood thinner Plavix (marketed by Bristol-Myers Squibb and Sanofi-Aventis), but was also associated with the risk of dangerous internal bleeding, which resulted in the FDA requiring a “black box” warning on Effient’s label (Plavix does not carry a black box warning). While we see its use restricted in patients prone to bleeding, we still see significant potential for Effient in patients under 75 without specific bleeding risks. We estimate annual sales of $1.3 billion for Effient by 2014. Promise in the pipeline We think there is still significant potential in the industry’s R&D pipeline, which should drive good growth for the industry once it passes the high-patent-expiration years of 2011 and 2012. Based on data provided by the Pharmaceutical Research and Manufacturers of America (PhRMA), a trade group, the industry had some 2,900 compounds under development in 2009, up from 1,800 compounds in 1999. The recent total includes 750 oncology compounds, including many for common lung and breast cancers; 277 for heart disease and stroke; 300 for rare diseases, including treatments of immune system disorders, epilepsy and cystic fibrosis; and 104 for HIV/AIDS. Selected R&D compounds with especially bright prospects, in our opinion, include the following:  Xarelto. Xarelto (rivaroxaban) is a novel oral anticoagulant discovered and developed by Bayer AG. US marketing rights to the drug were granted to the Ortho-McNeil division of Johnson & Johnson. A member of a new class of Factor Xa inhibitors, the drug was found to be effective in the prevention of blood clots after knee and hip replacements. Given expected wider applications of this blood-thinning agent in the years ahead, we expect Xarelto sales to exceed $1 billion annually by 2013.  Bapineuzumab. Bapineuzumab, a humanized monoclonal antibody acting on the nervous system, has the potential, in our opinion, to become a disease modifying agent in the treatment of Alzheimer’s disease. Developed by Elan Pharmaceuticals and Wyeth (now part of Pfizer), this compound is presently in Phase III trials. Johnson & Johnson recently acquired Elan’s 50% interest in bapineuzumab. If Phase III results come in as expected, we see multibillion-dollar sales potential for this compound. Other new compounds under development that are promising, in our opinion, include the following:  Darapladib (from GlaxoSmithKline) and anacetrapib (Merck)—cholesterol-regulating agents  SCH 530348 (Merck)—an oral thrombin-receptor antagonist blood-thinning agent for acute coronary syndrome  Asenapine (Merck)—a new HT2A/D2 receptor antagonist for schizophrenia  Silenor and Somaxon (Sanofi-Aventis)—new anti-insomnia agents  Indacaterol (Novartis)—a long-acting beta2 agonist inhaler for chronic obstructive pulmonary disease (COPD)  Liraglutide (Novo Nordisk A/S)—a GLP-1 analogue for Type 2 diabetes  Dapagliflozin (Bristol-Myers Squibb)—another Type 2 diabetes treatment 16

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PRINCIPAL THERAPEUTIC MARKETS In this section, Standard & Poor’s reviews key products, recent sales performances trends, and forecasts for selected therapeutic markets extending to 2014.  Central nervous system drugs. Representing the single largest ethical drug segment, central nervous system (CNS) drugs are also one of the industry’s growing sectors. Accounting for about 10% of the global market, sales of CNS fell about 4% in 2009, based on data provided by IMS Health. The decline largely reflected increased generic erosion in antiepileptics and antidepressants. CNS drugs include various narcotic and non-narcotic analgesics, sedatives, antianxiety agents, antidepressants, antiepileptics, and nonsteroidal anti-inflammatory drugs (NSAIDs, which are prescribed mainly for arthritis). This sector also includes drugs for Alzheimer’s disease, Parkinson’s disease, and related neurological disorders.  Antidepressants. One of the largest CNS segments, antidepressants comprise mostly serotonin reuptake inhibitors (SSRIs). A newer class of antidepressants, called serotonin-norepinephrine reuptake inhibitors (SNRIs), are used to treat major depression, as well as anxiety disorders, obsessive-compulsive conditions, attention deficit/hyperactivity disorder (ADHD), and neuropathic pain. SNRIs act upon and increase the levels of both serotonin and norepinephrine, two neurotransmitters that are involved mood disorders. Total worldwide antidepressant sales fell about 3.9% in 2009, to $19.4 billion, according to IMS. Greater use of generics and negative publicity concerning the use of these drugs by adolescents hurt use and sales of antidepressants. While most of the SSRIs are now available as generics, three of the leading SNRIs—Eli Lilly’s Cymbalta, and Pfizer’s Effexor XR and Pristiq—are still patent protected.  Antipsychotics. This has been one of the stronger CNS segments, rising 4.6% to $23.2 billion in 2009, according to IMS. Although growth has slowed somewhat from past years, demand for these drugs continues to reflect expansion of the overall schizophrenia patient market and new indications for existing therapies in such areas as bipolar disorder and mental illness associated with Alzheimer’s and Parkinson’s diseases. Key branded, patent protected drugs in this category include AstraZeneca’s Seroquel, Eli Lilly’s Zyprexa and Bristol-Myers Squibb’s Abilify. Johnson & Johnson’s Risperdal lost US patent protection in 2008. With patents on other major products in this category expected to expire over the next six years, we see the dollar value of this market declining through 2014.  Cardiovasculars. This broad-based category includes treatments for heart attacks, hypertension, angina, coagulation, arrhythmia, and elevated cholesterol levels. Heart drugs are a high priority for many leading drug companies, given the large number of patients who take them and the therapies’ life-saving potential. In addition, patients must remain on these medications for life, which creates a stable level of demand. Cardiovascular disease causes about 30% of all deaths in most developed nations of the world. One in five Americans suffers from some type of cardiovascular problem. However, the cardiovascular drug market in dollars has been shrinking in recent years, reflecting an influx of inexpensive generics resulting from patent expirations on widely used anti-hypertensive agents, and cholesterol-reducing agents such as Merck’s Zocor and Bristol-Myers Squibb’s Pravachol. Pfizer’s Lipitor, the leading cholesterol treatment, as well as the largest selling drug in the world (worldwide sales of over $11.4 billion in 2009), is scheduled to lose US patent protection in late 2011. Another leading drug, which still has many years of patent life, is AstraZeneca’s Crestor. We estimate the total cardiovascular market at over $70 billion in 2009. However, we expect this market to decline by over 25% over the next five years, reflecting patent expirations. Treatments for hypertension, or high blood pressure, represent another important area, with more than 60 million Americans and 100 million people worldwide living with elevated blood pressure. It is generally an asymptomatic condition, but if left untreated, it can lead to stroke, aneurysm, heart attack, and kidney failure. However, here also, most of the key therapies are now largely generic. Still largely patent protected, angiotensin II receptor blockers (ARBS) antihypertensives remain strong, with aggregate global sales of $25.2 billion in 2009, up over 11% from 2008, based on IMS data. However, we INDUSTRY SURVEYS

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see this market also suffering from generic attrition over the coming years. Patents are expiring for two key products—Cozaar/Hyzaar (from Merck) and Diovan (Novartis)—in 2010 and 2012, respectively.  Oncology drugs. Once the province of specialty pharmaceutical companies and biotech startups because of its size and the limited efficacy of available products, oncology is now one of the fastest growing therapeutic categories. Based on IMS data, this worldwide market grew 8.8%, to over $52 billion, in 2009. A significant number of innovative new compounds has driven much of the growth. The total market is expected to expand to over $70 billion by 2014, according to projections made by EvaluatePharma, a provider of market and company data, trends, and forecasts related to the worldwide pharmaceutical industry. Mainstream pharmaceutical manufacturers see oncology as one of the most attractive growth areas. They are investing heavily in it for several reasons: scientific breakthroughs that are helping to identify truly effective novel therapies, the recent introduction of a few key drugs that broke the $1 billion sales barrier, and the limitations of their once stalwart traditional primary care markets. Roche Holding Ltd., with its 2009 acquisition of Genentech, currently ranks as the leading oncology firm in the world. Its key products include Rituxan, a treatment for non-Hodgkin’s lymphoma; Avastin, a humanized monoclonal antibody used to treat a broad range of different cancers and other conditions; and Herceptin, a treatment for breast cancer. Roche’s oncology sales totaled more than $24 billion in 2009. Other key oncology drugs include Novartis’ targeted therapy Gleevec, an SRC-ABL kinase inhibitor, which had global sales of $3.9 billion in 2009; and Erbitux, a treatment for colorectal cancer, and head and neck cancers, which is marketed by Eli Lilly, Bristol-Myers Squibb and Merck KGaA. A relative newcomer is Pfizer’s Sutent, which has been approved for kidney cancer and one form of gastrointestinal cancer.  Diabetes drugs. IMS Health pegged the diabetes medications group as the fourth bestselling therapeutic category in the world in 2009, and one the fastest growing, with worldwide sales climbing to $30.4 billion in 2009, up from $27.5 billion in 2008, and $24.3 billion in 2007. However, growth over the coming years is likely to slow. EvaluatePharma estimated global growth of diabetes drugs at a compound annual growth rate (CAGR) of 7% over the 2008–14 period. While Eli Lilly and Danish manufacturer Novo Nordisk A/S dominate this market, we see other players moving more aggressively in Type 2 diabetes therapies, especially Merck with its Januvia/Janumet drugs and Bristol-Myers Squibb’s Onglyza.

HOW THE INDUSTRY OPERATES The modern pharmaceutical industry emerged during the 1920s and 1930s, with key discoveries and the synthesis of sulfa antibacterials, penicillin and other antibiotics, and various other compounds, as well as the emergence of large-scale production capabilities. Industry output expanded markedly during World War II, in response to the growing demand for penicillins and related anti-infectives. In the postwar years, greater industry investment in research and development (R&D) led to important scientific breakthroughs in new therapeutics and vaccines. During this period, corporations capitalized on the discovery of tranquilizers, amphetamines, advanced antibiotics, and the Salk polio vaccine. Today, the pharmaceutical industry derives most of its profits from a broad base of compounds used to treat infections, cardiovascular conditions, depression, inflammatory disease, and other chronic conditions. In recent years, most leading drugmakers have also collaborated with biotechnology firms to develop novel therapies based on recombinant deoxyribonucleic acid (DNA) technology, monoclonal antibodies, and genomics research. Such joint efforts are expected to yield important new therapies for a variety of diseases and medical conditions over the coming years. Oncology, for example, has benefited from these scientific advances and is now the fastest-growth segment of the drug industry in terms of sales. About 59% of all US workers had health insurance provided by their employers in 2009, based on the 2009 Employer Health Benefits survey published by the Henry J. Kaiser Family Foundation (KFF), a private, nonprofit foundation focused on US healthcare issues. Of those with health insurance, some 98% were 18

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covered under managed care plans, with conventional fee-for-service coverage representing the balance. Breaking down the managed care segment, 60% were in preferred provider organization programs (PPOs), 20% in more rigid but less costly health maintenance organizations (HMOs), 10% in point-of-services (POS) plans, and the remainder in other types. With PPOs, patients select providers from the insurer’s network or pay more to go outside of the network; with HMOs, they must use the network’s providers, which are paid a set monthly fee per patient. As the cost of medical care continues to rise, employer-sponsored health plans are forcing patients to shoulder a larger portion of their expenses. Drug spending is a key target of these programs’ efforts to rein in costs. Although prescription drug spending still accounts for a relatively small component of total national healthcare expenditures, accounting for about 10% of the total tab, the pace of growth has slowed in recent years. After peaking in 1999 at 18.1%, the growth rate fell to an indicated 5.2% in 2009. While utilization continues to climb, the slowdown in spending growth is due to a greater reliance on cheaper generic drugs, a decline in the number of innovative new drugs (which tend to be more expensive than older drugs) coming to market, and increased utilization management by payers. MCOs are implementing tiered cost-sharing formulas and increasing drug copayments. In 2009, about 89% of all workers covered by employer-sponsored plans had plans with some kind of tiered cost sharing (most offering three or four options), up from 27% in 2000, according to the KFF. The added out-of-pocket expense has prompted consumers to choose less costly generic drugs, and, among the elderly and the poor, either to purchase cheaper versions of their drugs from outside the US or to forgo the use of high-priced medications. Increasingly, the plans also require pharmacists to dispense generics when available or—in therapeutic categories for which a choice of branded drugs exists—a preferred brand for which the plan has negotiated an attractive discount. Although it faces challenges, the pharmaceutical industry is still among the world’s most profitable. The average return on sales for companies in the S&P Pharmaceuticals Index was 15.9% in 2008, versus a return of only 4.5% for the S&P Industrials Index. We note, however, that due to lack of new products, generic competition, and pricing constraints, the drug industry’s profitability has eroded in recent years (the net return on the S&P Pharmaceuticals Index was 18.7% in 2002). Historically, the industry has rejuvenated itself by developing premium-priced breakthrough therapies that have opened up entirely new markets.

HIGH RISK, HIGH REWARDS Financially, drug manufacturing is a high-risk business: for every 5,000 compounds discovered, only one ever reaches the pharmacist’s shelf. The odds against making a profit are steep as well: fewer than a third of marketed drugs achieve enough commercial success to recoup their R&D investments. However, when a drugmaker launches a new compound that is widely accepted in the marketplace, the economic rewards can be immense. This is the primary reason for the industry’s hefty profit margins. To optimize R&D efforts and achieve maximum returns, pharmaceutical companies spent much of the 1990s and early 2000s focusing on developing blockbuster products. The drug companies aggressively marketed these to primary care physicians, who prescribed them to broad patient populations. If, in contrast, the companies developed compounds with benefits similar to those of drugs already on the market (known as “me-too” drugs), they were not likely to be rewarded by the current cost-conscious managed care market. The model is slowly changing, as R&D efforts turn to drugs that are prescribed by specialist physicians and target narrower patient populations.

DRUGS’ PREDICTABLE LIFE CYCLES Drugs have widely different development processes, but their product life cycle nearly always follows a stable, long-term pattern. In the United States, after the average period of 10 years or more for discovery, development, testing, and approval by the US Food and Drug Administration (FDA), a branded ethical (prescription) drug will have a commercial life of about a decade. The life cycle is similar in Western Europe and Japan, the two other major areas of the world where the majority of new drug discovery and development take place. INDUSTRY SURVEYS

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Drugs usually require several years of sales build-up to reach their full commercial potential. Physicians have to become comfortable with the product and its approved application, while companies often continue conducting clinical trials that will enable them to receive FDA approval for additional indications. In some cases, companies benefit as doctors start to use their drugs for off-label (or unapproved) indications; these sometimes represent a hefty proportion of a drug’s total revenues. Eventually, rival drugs similar in action may enter the market, or major customers may opt to replace the drug with less expensive compounds in the same therapeutic class. The latter tactic, referred to as “therapeutic substitution,” is especially popular with HMOs and other managed care companies.

REGULATION: FDA OVERSEES US MARKET The Food and Drug Administration is responsible for regulatory oversight of the pharmaceuticals and medical technologies industries in the United States. The agency, which began operations in the mid-1800s, did not acquire even modest regulatory powers until 1906. Over time, in response to events, Congress has strengthened the FDA’s oversight. A defining moment for pharmaceutical regulation and for the medical field in general came when Congress passed the Food, Drug, and Cosmetic Act of 1938. This landmark legislation outlined the framework for the pharmaceutical approval process in the United States. The law required, for the first time, that drugmakers submit evidence of a product’s safety based on clinical trials. It also required that a drug’s label state its contents, how it should be administered, and its possible side effects. Following an outbreak in Europe of severe birth defects caused by thalidomide, Congress passed the KefauverHarris Drug Amendments of 1962 to require that manufacturers demonstrate both the safety and the efficacy of new drugs before receiving approval for commercial sale in the United States. In addition, this legislation required that drugs be produced according to specified guidelines for “good manufacturing practices” and that manufacturing plants be subject to FDA approval and periodic inspection. The most significant drug legislation since then was the FDA Modernization Act of 1997, which sped the approval of new drugs for life-threatening illnesses and improved the overall efficiency of the FDA. The law also extended the popular Prescription Drug User Fee Act (PDUFA), a program initiated in 1992 that charges drugmakers a fee for filing new drug applications (NDAs). Because the funds were used to hire new FDA personnel, the program has been credited with significantly reducing new drug approval times. The latest version of PDUFA, which Congress renewed in September 2007 as part of a broader law addressing FDA reforms, calls for user fees to generate nearly $400 million in revenues a year from fiscal 2008 through fiscal 2012, as well as an additional $225 million for drug safety monitoring programs. The 1997 law allowed seriously ill patients easier access to experimental compounds and provided new incentives for the development of pediatric medicines. It also expanded the drug companies’ ability to disseminate information on off-label uses of new and existing drugs. In 2005, following a series of high-profile studies showing that some popular drugs for arthritis (Vioxx) and depression (Effexor and the class of therapeutics known as selective serotonin reuptake inhibitors, or SSRIs) have potentially unacceptable side effects, the FDA began a series of initiatives to improve its drug safety evaluation processes. These initiatives included the establishment of an Office of Drug Safety (ODS), which is responsible for postmarketing surveillance and other drug safety issues. Nonetheless, critics, including some congressional leaders and FDA insiders, worried that the office would not be independent of the agency, and, therefore, would not have the authority to bring problematic side effects to the agency’s attention once products are on the market. How new drugs enter the US market As the principal federal agency responsible for enforcing US food and drug laws, the FDA regulates the introduction of new drugs. The agency also monitors the manufacture, transport, storage, and sale of all food, biologic, cosmetic, and medical device products in the United States.

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The FDA requires that pharmaceutical manufacturers perform extensive testing to prove that their products are safe and effective before it will sanction commercial sale. All animal and human tests, which often last for years and cost many millions of dollars, are conducted by manufacturers, often in conjunction with colleges or universities, the National Institutes of Health (the medical research agency of the US Department of Health and Human Services), or similar research institutions. Legislation passed in September 2007 requires the FDA to keep track of severe adverse events and the safety and effectiveness of drugs that are already on the market. Identifying and testing candidate drugs R&D is the lifeblood of the pharmaceutical industry. Drugmakers become industry leaders by spending large sums on R&D in order to produce a steady stream of successful products. Ethical pharmaceuticals are patent-protected for a finite number of years, however, so the pharmaceutical industry must continually find new drugs to ensure future growth. Companies with R&D programs that falter often end up struggling, particularly if they face generic competition for their key drugs. Some weakened companies have merged with larger, more successful companies in order to stay afloat. Those that come up with hit products prosper. Searching for innovative products is difficult in almost any industry. It is especially challenging in the pharmaceuticals industry, because products come from highly complex fields, such as molecular biology and biochemistry, and involve the intricate workings of the human body. The quest for new pharmaceuticals must combine an understanding of complex human chemistry and physiology with knowledge of all life sciences. Intuitive acumen is also needed to form theories about new therapeutic modalities. Working from a set of hypotheses on how certain compounds might interact in the body, researchers synthesize new compounds to combat particular diseases. Often, proteins, segments of proteins, or genes (isolated by molecular biologists) or new chemicals (discovered by analytical chemists) form the basis for new drugs. Once candidate molecules are identified, they are studied in test tubes and in animals to determine their side effects, efficacy, and properties (such as how long the body takes to absorb them). Animal tests (usually on mice and rats) are conducted to determine any possible side effects and efficacy. Most of the candidates are eliminated at this stage, because they have unacceptable side effects or do not function as expected. Often, hundreds of compounds are tested before researchers find one promising enough to advance to human clinical trials. When such trials are indicated, a company must first submit an investigational new drug (IND) application to the FDA, informing the agency that human studies will start in 30 days unless it objects. Since the mid-1980s, the industry’s R&D expenditures have risen sharply, both in dollar terms and as a percentage of total sales. The Pharmaceutical Research and Manufacturers of America (PhRMA), an industry trade group, estimated that industry investment in drug development by PhRMA members totaled an estimated $45.7 billion in 2009. Company-financed domestic R&D outlays by PhRMA member companies were estimated at 16.0% of US pharmaceutical sales in 2009, in line with the average over the past two decades. In contrast, the average US manufacturing firm spends less than 5% of sales on R&D. The FDA requires drugs to undergo three phases of clinical testing on humans:  Phase I. In this phase, a small number of healthy people get moderate doses of the drug in order to test the drug’s safety, safe dosing range, and mechanism of action. If this initial test is successful, the subjects’ dosage is slowly increased to determine its safety at higher levels.  Phase II. During Phase II, a larger group of subjects, which have the disease or condition that the drug is intended to treat, is tested in placebo-controlled clinical trials. Phase II researchers look for efficacy and continue to study safety and optimal dosing.  Phase III. Drugs that pass the first two hurdles then undergo Phase III trials. At this level, the most complex and rigorous tests are performed on still larger groups of ill patients to ascertain the drug’s safety, effectiveness, and optimum dosage regimens. Usually, Phase III procedures employ randomized, double-blind studies with placebo control. This means that one group of patients is given the drug while another group receives an inert substance. Neither the patients nor their doctors are aware of which patients are actually receiving the drug being tested. INDUSTRY SURVEYS

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According to FDA estimates, of 20 drugs entering clinical testing, 13 to 14, on average, will successfully complete Phase I. Of those, about nine will finish Phase II, but only one or two are likely to survive the Phase III trials. Even after a drug successfully completes Phase III, there is the possibility that the FDA will deem the data insufficient for approval. Ultimately, only one of the original 20 may be approved for marketing. When the clinical research on a drug is complete, the manufacturer submits an NDA to the FDA. The application compiles the research completed during the three trial phases and includes full details of the product’s formula, production, labeling, and intended use. NDAs are typically voluminous documents, sometimes exceeding 50,000 pages. Recently, many firms have taken advantage of the FDA’s new policy of accepting electronic filings via e-mail. In recent years, the FDA has delayed approvals of an increasing number of NDAs by sending applicants “approvable” letters—requests for additional information. These requests, usually made for safety reasons, often delay the agency’s decisions for months to years, with the time period dependant on the complexity of the data sought. Following receipt of an approvable letter, manufacturers sometimes drop development of a product; others choose to invest additional resources in order to get the drug on the market. In February 2008, Novartis AG’s Type 2 diabetes drug Galvus won marketing clearance from European health authorities, with liver monitoring requirements. In the US, however, Galvus has met obstacles. In February 2007, the FDA issued an approvable letter on the drug, but added that it would require additional trials of the drug in patients with kidney damage before it would consider approval. In January 2008, Novartis said the FDA was requesting a very large study, and that given the cost and uncertain outcome, the company decided to step back from the US for now and concentrate on developing a European market for Galvus. The absence of Galvus in the US has helped spur sales of Merck’s similar Januvia diabetes franchise, with sales that we expect to reach some $3.1 billion in 2010, up from $2.5 million in 2009. In July 2007, the FDA sent Wyeth an approvable letter for Pristiq, a new drug indicated for menopauseassociated hot flashes, because of concerns about serious cardiovascular and liver side effects. In this case, the agency also requested an additional clinical trial that will last a year or longer. In mid-March 2008, Wyeth withdrew its European Union (EU) application for Pristiq to treat menopausal symptoms, following risk-benefit questions raised by European regulators. However, Pristiq won FDA approval for depression in early March 2008. After a drug is approved, manufacturers often submit supplemental NDAs containing additional clinical trial results, in order to obtain approval for additional indications. The FDA determines label content, which must include a detailed description of the drug and its chemical composition, indications, contraindications, and side effects. Postmarket surveillance Traditionally, the FDA has required companies to conduct postmarket surveillance, though in reality few companies do so, despite recent interest in expanding such programs. Preclinical studies usually identify common toxicities, but postmarket surveillance can be important for picking up rare side effects or other unexpected developments, which are apparent only after the drug is widely used. Postmarket surveillance is sometimes referred to as Phase IV testing. In the past, companies often viewed postmarket studies as a marketing tool, using data generated from such studies to support new applications for expanded indications and improve their relationships with scientific leaders and patient groups. In the past, the FDA rarely undertook measures against a drug for safety reasons once the drug was on the market. However, if the safety or efficacy of a drug already on the market was in question, the FDA could be more stringent: it could order a company to recall selected lots of a product, or, in a worst-case scenario, it could ask a manufacturer to withdraw a product from the market. These actions could result from adverse events, defective packaging, misleading labeling, failure to meet content uniformity tests, loss of sterility, subpotency, or lack of evidence of effectiveness. The FDA’s attitude toward monitoring drugs already on the market has been evolving rapidly. Following the Vioxx scandal in 2004, the agency began placing a greater emphasis on postmarket drug safety. The 22

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Office of Drug Safety set up an independent Drug Safety Oversight Board (DSOB), consisting of scientific experts, although both the ODS and the DSOB have maintained low profiles to date. The FDA also requires companies that undertake postmarket surveillance of certain drugs (either voluntarily or at the FDA’s request) to report on the progress of their commitments. The Food and Drug Administration Amendments Act of 2007 (FDAAA), signed into law in September 2007, requires manufacturers to work with the FDA to establish a risk management plan as part of the NDA process. Specifics of the plan are still being worked out, but it has the potential to significantly increase the value of Phase IV studies. Exceptions for life-and-death situations Experimental drugs still in clinical trials are sometimes made available to seriously ill patients through the FDA’s Treatment IND program or its compassionate use protocol. The Treatment IND lets manufacturers provide unapproved drugs to patients who meet specific criteria if no other therapies are available. The compassionate use protocol enables patients with life-threatening diseases to have access to experimental drugs, provided Phase I trials have been completed, even if those patients are not part of the clinical trial. At least 40 drugs have been granted IND treatment status since this policy was enacted in 1987, many of which were for acquired immune deficiency syndrome (AIDS) or cancer. In July 2007, the FDA and Novartis designed a Treatment IND program for Novartis’ drug Zelnorm, which treats irritable bowel syndrome in combination with constipation for women aged 55 or younger. The FDA agreed to give Zelnorm this status after it requested, for safety reasons, that Novartis suspend marketing of the drug to a broader population in March 2007. New drugs targeting serious or life-threatening diseases that lack adequate treatments can also receive expedited review by the FDA under its Subpart E regulation. In this situation, the FDA can approve the drug based on results of a Phase II trial, although the manufacturer still must conduct a postapproval outcomes study. In recent years, several new breakthrough protease inhibitors for the treatment of human immunodeficiency virus (HIV) and AIDS were approved only a few months after their applications were filed. Novartis’s important drug Gleevec, for treating chronic myeloid leukemia, was also approved on an accelerated basis, based on results of three large Phase II studies. Another piece of legislation designed to help both patients with rare diseases and the drug industry is the Orphan Drug Act. Enacted in 1983 to foster the development of drugs to treat diseases afflicting “small” populations (i.e., those with fewer than 200,000 patients), this law provides research grants, tax breaks, and exclusive marketing rights to manufacturers of drugs aimed at patient markets that would otherwise be too small to justify commercial development. More than 300 drugs developed with help from the Orphan Drug Act are currently on the market, treating about 25 million Americans. Ironically, several orphan drugs—including Gleevec, GlaxoSmithKline’s Retrovir AZT AIDS drug, Amgen Inc.’s Epogen antianemia drug, and Genentech Inc.’s Protropin human growth hormone—subsequently became blockbuster products. The orphan drug Myozyme, which the FDA approved as the first-ever treatment for Pompe disease, a rare enzyme deficiency, was approved in 2006, and generated impressive sales of $325 million in 2009 and $296 million in 2008. In total, the FDA approved 17 orphan drugs in fiscal 2009, down from 13 in fiscal 2008.

REGULATION OUTSIDE THE UNITED STATES The pharmaceutical industry is global; thus, a company seeking to maximize a drug’s potential files for its approval in many countries. Big pharmaceutical companies usually seek to get their products on the market in Europe, which is the world’s second largest pharmaceutical market. Companies filing for regulatory approval in the EU can either apply through a centralized EU procedure that enables them to sell their approved products in all EU countries, or file on an individual country basis. The London-based European Medicines Agency (EMEA) reviews all applications submitted under the centralized process and recommends them to the European Commission, which grants final marketing authorization. Under EU rules, implemented in November 2005, the centralized process must be used for INDUSTRY SURVEYS

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biologically derived therapies (those made from living cells) and for all medicines addressing certain therapeutic areas, such as cancer, AIDS, diabetes, and neurodegenerative diseases. The alternative, known as the “mutual recognition” procedure, allows drugmakers with a medicinal product already approved in one EU country to petition other countries to accept the product. Should an EU country refuse to recognize the original country’s authorization, the matter is submitted to an EMEA scientific committee for arbitration. In Japan, the Ministry of Health, Labor, and Welfare supervises new drug approvals. Although it is improving, the approval process moves much more slowly in Japan than in the United States and Europe. Many drugs do not reach the Japanese people until they have been on the market in Western countries for several years. Nevertheless, Japan, as the world’s third largest pharmaceutical market, remains important to US companies. The Japanese health ministry has publicly committed itself to reducing approval times, which is expected to strengthen Japan’s pharmaceutical companies.

PROHIBITIVE BARRIERS TO ENTRY The branded prescription pharmaceutical industry has barriers to entry that are among the highest of any US industry. Economic, regulatory, and legal obstacles block potential new competitors. As noted earlier, the arduous processes of new drug discovery, development, and regulatory filing require heavy R&D expenditures. All told, development of a new drug can take 10 years or more, at a total cost of more than $800 million (including costs of unsuccessful compounds). To enable manufacturers to recoup these investments and earn a satisfactory rate of return, most developed nations entitle new drugs to patent protection. A patent can be issued either on a drug’s chemical structure (a composition patent, which is generally stronger) or on its method of manufacture or synthesis (process patent). Sometimes the patent offices grant a “use patent,” which lets the holder manufacture and market the compound for a specific therapeutic purpose and prevents competitors from using the drug in the same way; this kind of patent tends to be more vulnerable to competitors’ challenges in court. Some countries are better than others at issuing and enforcing patents. The World Trade Organization (WTO), an international group set up in 1995 to establish rules for conducting international trade, requires members to recognize patents. Under WTO rules, new pharmaceutical patents extend for 20 years from the application date. The previous system granted protection for 17 years from the date of patent issuance. However, given the length of time it takes to bring a product from the application stage to market, patent protection for most products is effectively reduced to only eight to 10 years. China, India, and other developing countries in Asia have been particularly notorious for ignoring foreign companies’ patents. Their attitude has harmed business relationships and angered countries (and companies) that do adhere to international patent laws. However, because they wanted to belong to the WTO, China and India have begun to officially recognize international patents: China has done so since 2001, and India has done so since the beginning of 2005. Their commitment to reform is important because US companies, under ever-greater pressure in the West, see these countries as potentially huge markets, with attractive demographics and rapidly expanding economies.

PRICING REFLECTS PRODUCT STRENGTHS, MARKET CHARACTERISTICS Many factors affect the pricing of new pharmaceuticals. These include the relative efficacy and safety profile of a drug versus its rivals, the size of its market, the competition it faces, and its development costs. In the United States, breakthrough therapies treating life-threatening conditions can command premium prices, well above those for existing products. New drugs that are not significant improvements to existing alternatives are usually priced within parameters set by similar drugs already on the market. This paradigm differs from other parts of the world, where government price controls limit how much drugmakers can charge for their products. 24

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Drug pricing varies widely among different classes of trade—that is, different kinds of payers. Large-scale buyers, such as hospital chains and other institutional customers, usually pay well below list price, because their huge volume purchases enable them to negotiate heavy discounts. Government organizations, such as the Department of Defense and the Department of Veterans Affairs, and programs such as Medicaid, for example, typically negotiate some of the steepest discounts for drugs. Wholesale distributors and pharmacy chains for the retail (or individual physician/patient) market, however, pay prices for drugs that are at the higher end of the scale. Historically, drugmakers have raised prices to private customers to compensate for the discounts they give to managed care customers—a practice known as cost shifting. In recent years, several pharmacy chains and pharmacy trade associations have sued leading drug manufacturers, charging illegal price fixing and restraint of trade. Medicaid, a US federal/state program that pays for medical services (including prescription drugs) for 55 million low-income patients, accounted for an indicated 9.1% of US drug sales in 2009, based on estimates made by the government’s Centers for Medicare & Medicaid Services (CMS). Under the current Medicaid rebate program, drugmakers are required to reimburse state Medicaid programs for either 22.1% of sales or the difference between prices charged to Medicaid and the best price the drugmaker offers a nongovernmental customer, whichever is higher. With the enactment of the Medicare Part D prescription drug coverage in 2005, most of the elderly indigent population whose drug costs were previously covered by Medicaid were shifted into Medicare Part D.

THE GENERIC STAGE In the United States, a prescription drug’s patent protects it for 20 years, but during more than half of that time, the drug is likely to be in development. Typically, patents expire eight to 10 years after a drug comes on the market. At that time, generic drugs—the chemical equivalents of a branded drug—usually appear immediately, and prices fall rapidly. Once this happens, the profitability of the branded drug generally erodes, particularly in the United States. (In contrast, in Japan and some European countries, generic drugs are only slightly less expensive than branded ones.) Generic drug companies do not have the same high costs of R&D, tough regulatory approval, and sales and marketing as the proprietary companies, so they can afford to discount their products. Generics manufacturers set prices depending on the kind of molecule they are making, how easy it is to manufacture, and, most importantly, how many generic competitors they expect to face. When some easy-to-manufacture blockbuster drugs go off patent, half a dozen or more generic competitors may enter the market simultaneously at prices that are as much as 80% or more below brand pricing. In less competitive situations, involving drugs that maintain some barrier to entry (such as special manufacturing skills) or those that have exclusivity for a limited time post-launch (see the “Hatch-Waxman Act” in the following text), fewer competitors come into the market at the same time, and pricing, at least initially, is more stable. As more competitors enter the field, prices drop even further. The Hatch-Waxman Act The modern generics drug industry originated largely as a result of the enactment of the Drug Price Competition and Patent Term Restoration Act of 1984 (commonly known as the Hatch-Waxman Act). This watershed legislation simplified the generic drug approval process by allowing new generics to be filed under an expedited format called the abbreviated new drug application (ANDA). This filing format requires only that new generics demonstrate their bioequivalence to the branded drugs they replace, rather than undergo the rigorous clinical trials required for original products. An amendment to the Hatch-Waxman Act provided for 180 days of marketing exclusivity for the first generic to file for FDA approval and challenge in court the patent of a branded drug. This provision is the source of much tension between brand name and generics manufacturers. A generics company can launch its product without interference from other generics companies as soon as it receives FDA approval. However, if a company launches a drug before the innovator’s patent expires or is invalidated, it runs the risk of paying treble damages (three times sales) in the event that a court upholds the patent. Until 2005, the threat of paying INDUSTRY SURVEYS

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large amounts of damages deterred nearly all generics companies from launching copies of an innovative drug until either a high court declared a patent invalid or the patent expired on schedule. In recent years, however, many generic firms have become more aggressive, and commenced “at risk” launches—i.e., before receiving a final court ruling invalidating a patent. An example of this was Teva Pharmaceutical Industries Ltd.’s launch of a generic version of Wyeth’s popular Protonix heartburn medication in December 2007. We think companies now are more willing to undertake at-risk launches because they believe they are more likely to prevail in patent litigation, based on a number of favorable decisions in recent years. To date, no generics company that has launched a product at-risk has had to pay treble damages. Often, companies take an at-risk launch after lower courts ruled against the brand-name company. However, this is not always the case, as happened with Teva’s Protonix launch. In August 2006, the subtleties of the “launch-at-risk” strategy were highlighted in an unusual situation in which Apotex Inc., a Canadian generics company, commercialized a generic copy of Plavix, a best-selling anticoagulant developed by French drugmaker Sanofi-Aventis, before the drug’s patent expired. Apotex was not worried about the consequences of such a maneuver because Bristol-Myers Squibb Co., which markets the drug in the US, and Sanofi-Aventis had previously agreed that they would not seek a hefty penalty if Apotex were to undertake such a maneuver. (The complicated motivation for this strange agreement is described in detail in the November 2006 issue of Healthcare: Pharmaceuticals Industry Survey.) Nonetheless, Bristol-Myers Squibb and Sanofi-Aventis were able to stop Apotex after several weeks, but not before Apotex flooded retailers’ shelves with its generic, which caused Sanofi-Aventis and Bristol-Myers Squibb to lose hundreds of millions of dollars in sales. In June 2007, a US district court upheld the validity of the main Plavix patent—a decision immediately appealed by Apotex. Industry experts believe the lower-court ruling all but ensures that Plavix is protected until its patent expiration in November 2011. In December 2008, an appeals court upheld Bristol’s Plavix patent. We believe Apotex will have to pay damages, but they will probably not be substantial due to the agreement signed in 2006 by Apotex, Sanofi-Aventis, and Bristol-Myers Squibb. In September 2007, an appeals court decision involving Neurontin, Pfizer’s best-selling antiepilepsy drug, left several generics manufacturers vulnerable to hefty fines. The court overturned a lower court decision, from 2005, in favor of the generics companies, and it ordered a trial to determine if the companies are infringing Pfizer’s formulation patent covering gabapentin, the active ingredient in Neurontin. This case, which is still pending, stands out because the generics companies took a greater-than-average risk by launching their products in 2004—before the lower court had made a ruling. While some on Wall Street are predicting that a Pfizer victory is a long shot, the penalties (in case Pfizer wins) could be large because the drug is popular—it generated about $2 billion in sales in 2004—and because generics have been on the market since then. For a generics manufacturer, the advantages of having six months of exclusivity are enormous. Because competition is limited, the generics supplier has to offer only a slight discount to the branded drug; in many cases, this enables the generics company to rack up hefty profits. Without the 180-day exclusivity, the company would likely face a price-sensitive, highly competitive market for that product. To compensate the branded drug industry for greater competition from generics, the Hatch-Waxman Act granted patent extensions for branded products. An additional five years of protection was granted to new chemical entities, and three more years were given to new approved formulations or new uses for existing drugs. New formulations often encompass controlled-release or pediatric versions of the branded drugs. Sustained- or controlled-release dosing typically provides greater efficacy, fewer side effects, and patient compliance benefits. The Medicare Prescription Drug Improvement and Modernization Act of 2003, best known for expanding Medicare coverage to prescription drugs for the first time, significantly modified the Hatch-Waxman Act. The new rules affected the expenditure of money—from tens of millions to hundreds of millions of dollars— as they clarified confusion over which generics companies are entitled to exclusivity if several companies appear to be eligible at the same time, and if the start dates of the exclusivity period appear to be uncertain. 26

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The FDA approved 682 generics in fiscal 2007, a 30% year-on-year increase. The rapid rise in applications led to a huge backlog of new approval applications; the FDA estimated that more than 850 generic applications were filed in fiscal 2008. Some 91 first-time generics were approved in 2008. In response to the backlog, the agency plans to speed up the review process. A new Generic Initiative for Value and Efficiency (GIVE) program was launched in October 2007. This program uses additional funding from the FDAAA to add more trained reviewers and revamp the way that the agency prioritizes applications. Instead of basing reviews on order of submission, it looks at reviews based on patent expiration date: those targeting brand-name drugs with patents close to expiration will get priority over those that are directed at drugs with patents expiring later. Going over-the-counter In the US, innovator companies sometimes apply to the FDA for permission to switch a prescription product to over-the-counter (OTC), or nonprescription, status, if they expect that product will shortly face generic competition. Marketing an OTC version of a drug broadens the drug’s commercial appeal and extends its economic life. The strategy works best for popular products used for common, minor maladies. Only the original manufacturer—or a licensee—can market the product under that franchise. Other companies may sell the product on a private-label basis once the product’s patents expire. About 60% of all drugs sold in the US are OTC, according to IHS Global Insight, an economic, financial, and political forecaster. OTC products face more straightforward, free-market forces of supply and demand than do prescription pharmaceuticals, whose pricing that is affected by heavy discounting to third-party providers and government agencies. Consumers’ sensitivity to prices is also greater with OTC products, because they usually pay for OTC drugs out-of-pocket, and most insurance plans do not reimburse for OTC drugs. These drugs are free from the time-consuming, safety-related recordkeeping that the FDA requires for prescription products. Compared with the prescription products that they replace, products switched to OTC status have lower margins. However, because OTC drugs are mass-marketed products, manufacturers often make up the difference in volume. In addition, popular consumer medications can have long shelf lives; this bolsters margins by minimizing waste. Some of the more successful prescription-to-OTC switches in recent years include Schering-Plough Corp.’s Claritin (a nonsedating antihistamine); Merck’s Pepcid and GlaxoSmithKline’s Zantac 75 (heartburn remedies); Schering-Plough’s Gyne-Lotrimin and Johnson & Johnson’s Monistat 7 (vaginal yeast infection treatments); Johnson & Johnson’s Imodium A-D (antidiarrhea medicine); and The Procter & Gamble Co.’s Aleve, Wyeth’s Advil, and Bristol-Myers Squibb’s Nuprin (analgesics). AstraZeneca Plc’s best-selling heartburn drug Prilosec also went OTC in 2001. In June 2007, the first OTC diet pill, Alli, went on the market in the United States. GlaxoSmithKline’s Consumer Health business is selling the drug, which is a low-dose version of Xenical, a prescription diet drug made and sold globally by Roche Holding Ltd. GlaxoSmithKline received FDA approval for the drug in February 2007, after considerable debate. Xenical, which reduces the amount of fat the body absorbs from food, is effective in weight loss only if used with diet and exercise.

LIABILITY ISSUES Inevitably, pharmaceutical companies are subject to lawsuits alleging adverse side effects from their medications. Some product liability cases are consolidated into class-action suits. A.H. Robins, a once-large pharmaceutical and medical products company, was driven into bankruptcy in 1985 by huge liabilities stemming from its sale of intrauterine contraceptive devices that were later deemed unsafe. Wyeth was the target of thousands of lawsuits following the recalls in 1997 of its diet drugs Redux and Pondimin. Pondimin (generically known as fenfluramine) is the “fen” part of the now-banned “fen-phen” weight-loss cocktail. As the end of 2007, more than 99% of plaintiffs had agreed to enter into settlement discussions with the company, which had taken charges of $21.1 billion (as of year-end 2007) in order to pay for a trust fund, litigation, and other costs associated with the diet drug litigation. INDUSTRY SURVEYS

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In November 2007, Merck agreed to pay $4.85 billion to plaintiffs who contend that they suffered heart attacks and strokes after taking the company’s painkiller Vioxx. The settlement would cover federal and state lawsuits filed against the company since 2004 alleging adverse cardiac events that resulted from taking Vioxx. (Merck pulled Vioxx from the market in September 2004.) In July 2008, Merck noted that this settlement, which also applies to tolled claims, was signed by the parties after several meetings with three of the four judges overseeing the coordination of more than 95% of the US lawsuits. In terms of claimants, some 48,500 of approximately 50,000 individuals who registered eligible injuries had submitted some or all of the materials required for enrollment in the settlement program as of mid-July 2008. Product liability and insurance coverage for potential damages are increasingly important issues in the industry. Liability risk is often mentioned as a growing cost within the healthcare system. There have been many calls for legislative reform to address this, including proposals to limit a manufacturer’s liability if the FDA has approved a drug or device.

KEY INDUSTRY RATIOS AND STATISTICS  National healthcare expenditures. Annual estimates of all healthcare spending in the United States are released by the Centers for Medicare & Medicaid Services (CMS) each January. The data are structured according to the type of expenditure, including such categories as hospital care, physician care, and drugs and other medical nondurables. The annual report, entitled Health, United States, includes detailed information on the sources of funds for each segment. A summary of this report also appears in each January/February issue of the policy journal Health Affairs. Total domestic expenditures for prescription drugs were roughly $234.1 billion in 2008. According to the latest available data from the CMS, expenditures for 2009 were estimated at $246.3 billion. Changes in funding from government and private sources are important to observe. For example, federal, state, and local government funding represented some 37% of US spending on pharmaceuticals in 2008 (mostly from Medicare), compared with about 17% in 1990. The implementation in January 2006 of Medicare Part D, which extended Medicare coverage to outpatient retail pharmacy prescription drugs, was the key factor behind the increased proportion of government funding. In May 2009, Medicare’s board of trustees estimated the cost of Part D to exceed $900 billion over the 2009–18 period. Medicare paid for 22% of all US prescription drug costs in 2008, up from 18% in 2006. All government sources accounted for 37% of all the money spent on all prescription drugs in 2008, including programs under Medicare, Medicaid, and the Department of Veterans Affairs. Health, United States publishes statistics showing rates of change in total healthcare spending and by segment. Proportional changes in pharmaceutical spending can be measured against other healthcare sectors to determine the industry’s relative growth. Between 1990 and 2003, spending on prescription drugs grew at an average annual rate of 12.4%, outpacing the 7.0% rate of growth for overall healthcare spending. CMS data show that prescription drug spending in 2006 rose 8.5%, largely reflecting the phase-in of Medicare Part D. However, drug spending growth slowed to 3.2% in 2008. We attribute the attrition partly to the effects of the recession in the US and patent expirations. A dearth of new drugs—combined with generic competition for several popular brands, a slowdown in price increases, and more stringent measures by managed care organizations to migrate members to cheaper generic drugs—has helped to keep a brake on rising drug costs, according to the Center for Studying Health System Change, a research group.  Medicare and Medicaid spending. Changes in government spending and reimbursement rates can have significant ramifications for drugmakers that derive sizable sales from Medicare or Medicaid patients. The CMS provides information on spending and reimbursement rates for Medicaid and Medicare.

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According to CMS data, aggregate spending for Medicare was $469 billion in 2008, up from $432 billion in 2007, equal to over 42% of all public funding. Medicaid expenditures in 2008 were $344 billion, up from $329 billion in 2007. The implementation of the Medicare drug benefit that began in January 2006 caused a decline in Medicaid spending on drugs in 2006, and a parallel rise in total Medicare spending in that year. Indigent elderly who were previously eligible for Medicaid reimbursement for prescription drugs—about 6.5 million people—are now part of the Medicare Part D program. In general, this is an advantage for the pharmaceutical industry, because Medicare pays higher prices for drugs than Medicaid.  Consumer price index (CPI). The CPI, compiled by the US Department of Labor, tracks price inflation in key segments of the economy, including medical care. The medical care component is further subdivided into products and services, with prescription and nonprescription drug statistics broken down separately.

CONSUMER PRICE INDEXES — DRUGS (1982-84=100)

H01: CPI for Drugs

450 400 350 300 250 200 150 100 1995 96

97

98

All items

99

00

01

02

03

04

05

Prescription drugs

06

07

08

09 2010

OTC preparations

OTC-Over the counter. Source: Bureau of Labor Statistics.

PRODUCER PRICE INDEXES FOR SELECTED PRESCRIPTION DRUG PRODUCTS (1982=100) PRODUCT

2004

2005

2006

2007

Table B01: 780.7 PRODUCER Cancer therapy 754.4 808.1 799.6 PRICE INDEXES Analgesics 601.3 612.6 FOR 626.3 638.0 SELECTED PRESCRIPTION Cardiovasculars 424.5 447.9 461.4 470.3 DRUG PRODUCTS Bronchial therapy 640.5 657.1 669.4 683.5 Digestive antispasmodic/ antisecretories 109.9 119.3 127.8 135.5 Broad & medium spectrum antibiotics 276.9 290.8 307.6 327.7 Source: US Department of Labor.

2008

2009

798.8 672.2 500.1 713.7

812.3 721.8 533.7 750.7

During the 1980s, prescription drug prices surged at an average annual rate of 9.6%, compared with a 4.1% rate for the CPI. By the early 1990s, excessive drug cost inflation began to receive heightened political attention, and leading drugmakers feared price controls. Although prices continued to outpace the CPI, the pace of inflation slowed in the 1990s.

Between 1990 and 2003, prescription drug prices increased at an average annual rate of 3.9%, compared with a 2.4% rise in the CPI. In 2009, they 143.3 152.3 increased at an annual rate of 3.4%, matching a rise in the overall medical 346.3 352.6 inflation rate for the same period, according to the Bureau of Labor Statistics. These rates included generics, which are a growing part of consumption but weigh down the average because they cost a fraction of the price of innovative drugs.  Research and development (R&D) as a percentage of sales. As new drugs represent the lifeblood of the pharmaceutical industry, the percentage of a company’s sales that it devotes to R&D can have an important impact on future trends in sales and earnings. For the drug industry overall, this percentage in the aggregate is higher than for any other industry. The Pharmaceutical Research and Manufacturers of America, an industry trade group, reported that R&D spending by members, both in the US and abroad, totaled an estimated $45.8 billion in 2009, down from $47.4 billion (revised) in 2008.  Foreign currency exchange. US drugmakers derive close to two-fifths of their total sales from non-US customers. They carefully monitor fluctuations in the value of the dollar relative to foreign currencies, as such changes can have a substantial impact on their sales and earnings. Assuming all other variables remain constant, a rise in the dollar’s value (compared with other major world currencies) lowers sales and earnings, because foreign sales translate into fewer dollars. A stronger dollar also makes US goods more expensive abroad, while products manufactured elsewhere become more competitive in the United States. When the dollar is weak, the opposite occurs: exchange rates enhance drugmakers’ sales and earnings, and price competitiveness improves. INDUSTRY SURVEYS

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The dollar experienced a general advance against the euro through the first nine months of 2009, but weakened considerably from November 2009 through mid-May 2010. The dollar-to-yen relationship has been much more volatile in 2009, generally exhibiting wide swings up and down. But the dollar trended generally lower against the yen during the first four months of 2010.

HOW TO ANALYZE A PHARMACEUTICAL COMPANY In evaluating a pharmaceutical company, there are important factors to consider. The most meaningful factors are its products, markets, and financial health.

RESEARCHING THE BUSINESS A thorough examination of the company’s products and markets is the first step in the analysis. A pharmaceutical firm’s drug portfolio is the main ingredient of its success. Does the company sell primarily prescription or nonprescription products? Prices and profit margins of prescription drugs are significantly higher than those of nonprescription drugs, which are essentially massmarketed consumer products. Patent protection is an important consideration for prescription drugs, whereas the success of nonprescription or over-the-counter (OTC) drugs is more closely linked to brandname recognition and promotional spending levels. For both prescription and nonprescription drugmakers, company size and market share are important considerations. Pharmaceutical firms must have the critical mass to support heavy spending on research and development (R&D), as new product development is crucial to future success. In addition, these companies have to maintain a large sales force to market drugs in key domestic and foreign markets. Smaller drug companies, and even larger ones that depend heavily on one or two products, are more vulnerable to eventual patent expirations and competition from rival drugs. With respect to market share, does the company dominate any key markets? Key markets are those with a large population whose chronic condition requires a daily regimen of maintenance therapy, thus offering the greatest sales opportunities. Medications for high blood pressure, elevated cholesterol levels, depression, ulcers, diabetes, and arthritis are examples. Oncology, once a niche therapeutic segment, is now exceedingly attractive because of its technological advances, growth rate, and profitability. Prescription and nonprescription drug companies vary widely by the type of pharmaceuticals they offer and the markets that they serve. Does the company have a narrow or a broad product line? A broad product line is more desirable because greater diversification makes the company less dependent on a single product. It also makes the company more resilient to economic cycles and competition. Prescription drugmakers, however, focus their product development and marketing efforts on select therapeutic areas. For many decades, Wyeth (formerly American Home Products) has dominated the female hormone replacement market with its Premarin family of products, while Pfizer Inc. has captured the lead in the growing cholesterol-reduction market with its popular drug Lipitor. Sometimes drugmakers create new markets with their discoveries, such as Pfizer’s Viagra treatment for erectile dysfunction and Merck & Co. Inc.’s Proscar treatment for enlarged prostate glands. Launched in 2006, Merck’s Gardasil vaccine for preventing infection with human papillomavirus (HPV)—believed to be the main cause of cervical cancer— has the potential to build a new market, in our opinion. Nonprescription drugmakers do not have to fund major R&D projects, but they must maintain large advertising budgets to promote their products, which tend to face more competition than branded prescription drugs. As a result, most of the major firms have just a handful of truly successful product lines. Sales growth is slow for these businesses, with success highly dependent on the manufacturer’s clout in the marketplace and overall market share.

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If a prescription drugmaker has a diversification or acquisition program, has this been a plus or a minus? The program should be carefully analyzed to determine whether its initial objectives are being met or whether the program is hurting the company’s performance. In general, large pharmaceutical companies regularly turn to smaller, more entrepreneurial companies as sources of innovation. Business development— the process of scouting for attractive deals and negotiating terms—is an integral part of a company’s operating expertise and core strategy. Prescription drugmakers As noted earlier, most major prescription drugmakers tend to focus on a few specific therapeutic markets. Pfizer and Merck, for example, have carved out major stakes in the huge global antihypertensive and cholesterol-lowering drug markets by releasing a steady stream of new products in recent years. Eli Lilly & Co. achieved phenomenal success in antidepressants with Prozac, which dominated the market for more than a decade until 2000, when it was overtaken by Pfizer’s Zoloft. Eli Lilly’s sales of Prozac eroded sharply following the loss of patent protection in August 2001. GlaxoSmithKline Plc has maintained dominance in respiratory drugs with its Advair and Flovent drugs. In a healthcare market dominated by managed care, a company’s relative size and the breadth of its product offerings have become increasingly important. Health maintenance organizations, preferred provider organizations, hospital chains, and other large-scale pharmaceutical purchasers prefer to deal with a limited number of large drug manufacturers that can offer them “one-stop shopping.” There are other factors when analyzing a prescription drugmaker. Questions to ask include the following:  When do the patents on the company’s most important drugs expire? If the expiration dates are within the next few years, is the company adequately preparing to make up for the revenues lost to generics competition? If a company loses its marketing exclusivity on key drugs without earning adequate profits from new products, it can find itself in difficult economic straits. Many of the leading US drugmakers, including Bristol-Myers Squibb Co., Merck, and Pfizer, are presently contending with fierce generics competition, with a wave of major drugs going off patent through 2011.  Have R&D efforts been productive? In terms of R&D, the larger, well-funded firms typically have the advantage of being able to hire top scientists and to conduct more clinical trials, which are necessary to develop new drugs. Most leading drugmakers spend between 14% and 18% of their revenues on R&D. However, their success rates—in terms of lucrative new drugs—differ markedly. In addition, R&D productivity can be cyclical, with firms that generated a series of significant new products experiencing troughs before rebounding. In the 1990s, Merck and Pfizer had highly productive R&D programs, each spawning a number of blockbuster drugs. More recently, we think Merck has rejuvenated its pipeline with the launch of blockbusters such as Gardasil, and Januvia, a promising new treatment for Type 2 diabetes. Pfizer also launched several promising drugs such as Lyrica for neuropathic pain and Chantix for smoking cessation. However, we think both Pfizer and Merck face steep patent challenges at the beginning of the next decade. Specifically, Merck’s Cozaar/Hyzaar cardiovascular (sales of $3.6 billion in 2009), lost patent protection in 2010, and Pfizer’s Lipitor cholesterol-lowering agent (sales of $11.4 billion in 2009) will lose patent protection in 2011. In the present managed care environment, companies with new drugs that are both therapeutic breakthroughs and cost effective hold the keys to success. New products that provide essentially identical results to existing therapies are less likely to reap big commercial rewards.  Has the company formed any promising alliances? Large firms often benefit from alliances with smaller biotechnology and biopharmaceutical firms working on potentially lucrative new drugs. Conversely, a smaller company may find it necessary to team up with a larger partner to fund the clinical trials and commercialization of its discoveries. Business ventures with foreign companies can be a source of new products. For example, many drugs popular in the United States today were discovered by European and Japanese firms, but they are marketed INDUSTRY SURVEYS

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by US drugmakers under royalty arrangements. Pfizer’s Lipitor drug is sold under license from Sankyo Co. Ltd., of Japan. Many companies also maintain relationships with scientists at leading medical colleges or other organizations, such as the federal government’s National Institutes of Health (NIH), which can funnel experimental products to drugmakers. Bristol-Myers Squibb and GlaxoSmithKline, for example, have obtained major new drugs from these sources.  What is the company’s international business profile? The United States remains the most important market for US drugmakers, as well as for many foreign drug companies, because of its size and lack of government-imposed price constraints. Nonetheless, pharmaceutical markets elsewhere represent an attractive source of growth. Indeed, pharmaceutical sales in developing nations are expanding much faster than are those in the domestic market. Although the level of foreign business varies from company to company, the US pharmaceuticals industry currently derives about two-fifths of its revenues from sales outside the United States. Because many countries exercise strict price controls, foreign markets contribute a lower portion of profits than of sales. Which foreign markets has the company entered or does it plan to enter? Drugmakers should evaluate foreign markets carefully with respect to their individual risks and profit potential. In addition, it is important to assess the possible impact of changes in currency exchange rates. How diversified is the firm’s foreign business? Foreign markets differ widely by level of pharmaceutical utilization, degree of government control over pricing, and the acceptance of clinical research from outside sources. Japan, for example, with the highest per capita consumption of prescription drugs in the world, is the largest single market outside the United States. However, the Japanese government generally requires across-the-board drug price cuts every few years.  How effective is the company in working with the FDA? Because all drugs sold in the United States must first be cleared by the US Food and Drug Administration (FDA), a firm must be able to work with the agency and understand its criteria. Here again, size and experience can help. Most large, well-established drug companies are adept at working with the agency, while many smaller or newer firms are less proficient and often encounter major snags in obtaining approval for their products. Besides new drug applications, the FDA also inspects and monitors pharmaceutical plants for product integrity and quality control. (Several generic drugmakers ran into problems in this area a number of years ago.) In addition, the agency is expanding its role in postmarket surveillance of drug safety.  How effective is the company at working with third-party government and private payers? Reimbursement is crucial for the commercial success of a product. Private and public payers alike are taking an increasingly hard line in evaluating the cost effectiveness of recently approved drugs. In Europe, several governments have established semi-independent organizations to make recommendations on whether a new drug should be reimbursed—and in some controversial cases, they have argued against coverage. The United States has not taken this approach, although it is considering the establishment of a reimbursement evaluation organization. US payers are increasingly differentiating drugs within the same class and placing them in separate tiers, with varying contributions from patients, aimed at giving patients incentives to use certain drugs. The ability to negotiate fair deals with Medicare over reimbursement for prescription drugs is also likely to be increasingly important to drug companies in the future. Nonprescription drugmakers While the prescription drug market depends on research-intensive innovation to differentiate among products and bolster sales, the nonprescription segment depends much more on consumer-directed marketing. The main factors that must be considered in evaluating a nonprescription drug company include the relative strength of its product offerings, its ability to develop new products, competitive pressures in each market segment, and the manufacturer’s ability to support product sales through effective advertising and promotional campaigns. 32

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INDUSTRY SURVEYS


Companies with a strong presence in both prescription and nonprescription sectors typically generate the most successful OTC products, because most of the leading OTC medications on the market today started their lives as ethical, or prescription, drugs. Nonprescription drugmakers strive to cultivate broad consumer loyalty. For example, Johnson & Johnson’s Tylenol, launched as an OTC product in 1955, remains the best-selling nonprescription product in the US. This highly regarded analgesic has successfully fought off rival painkillers and cheaper private-label acetaminophen products, thanks to effective advertising that has built unmatched brand loyalty. The product has even survived recalls due to tampered packaging and reports of possible liver damage from overdosing or adverse reactions when combined with alcohol. Strong recognition for an original brand also gives the manufacturer an ability to expand sales through line extensions. Leading OTC products, such as Tylenol, Advil, Bayer, and Motrin, have successfully broadened their consumer appeal through the addition of specialized formulations for children, combinations with other products, and extra-strength versions.

ANALYZING FINANCIAL STATEMENTS Once the analyst has reviewed a company’s products and markets, a look at its financial statements is in order. The income statement contains some key figures and ratios (described below). Balance sheet and cash flow data provide further insight into a company’s financial position and performance. Individual company statistics should be compared with those of rival companies and industry averages. The income statement When looking at a pharmaceutical company’s income statement, it is important to examine trends in sales growth; profit margins; R&D and selling, general, and administrative (SG&A) expenses; and return on equity.  What are the company’s sales trends? Examine the company’s recent and historical sales performance. Has sales growth been consistent or volatile? How has growth been achieved: through volume, pricing, acquisitions, or through a combination of these?  How wide are operating margins? Drug companies characteristically have high operating profit margins (operating earnings before depreciation and nonoperating items as a percentage of sales). Margins have contracted from their highs of about 40% in the early 1990s, due to reduced pricing flexibility. However, drug margins still exceed overall averages in other industries by a wide margin, averaging 32% in 2008, versus 17% for corporations in the S&P 500 Composite Stock index. The high margins reflect drugmakers’ very low raw material costs and SG&A expenses per dollar of sales that are less than average. Although substantial costs are incurred during a drug’s R&D phase, once those costs have been covered, most revenues flow to the bottom line. Companies that can consistently develop valueadded, widely used drugs with long lives can command margins well above the industry average. It is important to note that companies can temporarily pump up margins by crimping R&D spending. While this tactic can provide short-term earnings improvement, it also undermines a drugmaker’s ability to develop the new products needed to support future growth. Changes in a company’s margins over a period of years can reveal management’s effectiveness in improving the company’s profitability. Restructuring and cost-streamlining efforts often can play a major role in boosting a company’s profit margins.  What are the company’s pretax and net returns? Drug industry pretax and net income returns have historically been above the averages in other industries. While the gap narrowed in recent years, as pharma margins contracted under more constrained managed care pricing and as patents expired, pharmaceutical margins still exceed the overall healthcare industry by a wide margin. Drugmakers’ net earnings as a percentage of sales averaged about 16% between 2004 and 2008, versus an average of 6.4% for the S&P 500 over the same period.

INDUSTRY SURVEYS

HEALTHCARE: PHARMACEUTICALS / JUNE 3, 2010

33


The drug business is less capital intensive than most other industries, and it tends to have lower interest expense and depreciation as a percentage of sales. Drugmakers’ profit margins also have been augmented by lower tax rates, R&D credits, and tax credits from manufacturing operations in Ireland and other areas. Lower-than-average drug industry tax rates also reflect the large portion of sales derived from countries with tax rates below those of the United States. Past tax credits from manufacturing operations in Puerto Rico now have been largely eliminated. A company’s geographic business mix should be examined to determine how its blended tax rate compares with others in the industry. But before comparing different companies’ net returns, make sure that the reported results are truly comparable. Although current accounting standards require that discontinued operations be segmented out, nonrecurring items (such as restructuring charges, asset sales gains, foreign exchange gains and losses, and similar nonoperating items) are often buried in the category of “other income/expenses” and must be factored out when making comparisons. Accounting practices also vary for inventory and depreciation.  What is the return on stockholders’ equity? Return on equity (ROE), or net earnings as a percentage of average stockholders’ equity, is viewed as a key measure of management’s effectiveness in the pharmaceutical industry. The drug industry’s average ROE of 19% between 2004 and 2008 ranked among the highest of all industries. The lofty ratio is essentially a function of the industry’s relatively high profit margins. The comparable level for the S&P 500 was 12%. Cash flow Another way of looking at profits is cash flow—essentially, net earnings plus depreciation and other noncash charges. It provides a useful gauge of a company’s capacity to finance capital projects. Cash flow as a percentage of sales for drugmakers is close to 23%, almost double the average percentage for US industrial companies. The source and application of funds statement shows how a company allocates its cash flow, which is often a leading indicator of future growth. Firms investing heavily in acquisitions and capital projects are preparing to expand the business. Those paying out more in dividends are rewarding investors but retaining less cash for future growth. Balance sheet The balance sheet is a snapshot of a company’s financial condition at a specific moment in time, so it should be examined to determine a company’s financial health. For pharmaceutical companies, most balance sheet analysis focuses on liquidity. To assess a company’s short-term liquidity, analysts look at its level of cash and marketable securities. Companies with large liquid assets also are better situated to make timely acquisitions. A reliable check for liquidity is the current ratio, which measures the ratio of current assets to current liabilities. A healthy working capital ratio is essential to ensure that the company can adequately meet its current liabilities. This ratio always should be greater than 1.0. Any meaningful degradation in these items from previous reporting periods may signal a liquidity problem. Debt leverage varies significantly among drugmakers. An appropriate debt load largely depends on a drug company’s product line and the strength of its projected new product stream. The ratio of long-term debt to total capital from 2004 to 2008 was 21%, less than half the average for US industrial companies. 

34

HEALTHCARE: PHARMACEUTICALS / JUNE 3, 2010

INDUSTRY SURVEYS


INDUSTRY REFERENCES PERIODICALS BioCentury http://www.biocentury.com Weekly; covers the pharmaceutical and biotechnology industries, with an emphasis on timely analysis of industryrelated news events. Drug Topics http://www.drugtopics.com Semimonthly; covers drugs and retail pharmacies. FDA Consumer http://www.fda.gov/fdac/default.htm Monthly; aimed at consumers, with articles on the FDA and medical topics. F-D-C Reports: The Pink Sheet http://www.fdcreports.com Weekly newsletter; covers trade in, and regulation of, pharmaceuticals and biotechnology. IN VIVO: The Business and Medicine Report The RPM Report Start-Up magazine http://www.windhover.com Monthly newsletters devoted to strategic and financial analysis of the pharmaceutical, biotech, and devices industries, with an emphasis on deal-making trends and corporate strategy. MedAdNews R&D Directions http://www.pharmalive.com The first is a monthly publication covering pharmaceutical advertising; the second publishes 10 times a year and reports on new drugs under development, as well as overall trends in pharmaceutical R&D activity. Medical Marketing & Media http://www.mmm-online.com Monthly; covers trends in drug marketing and advertising, regulation, and related topics. New England Journal of Medicine http://www.nejm.org Weekly; publishes detailed scientific articles on medical treatments and health issues.

INDUSTRY SURVEYS

Pharmaceutical Executive http://www.pharmexec.com/pharmexec Monthly; covers trends and developments in the pharmaceutical industry. Scrip World Pharmaceutical News http://www.pjbpubs.com/scrip/index.htm Twice-weekly newsletter; covers prescription and over-thecounter (OTC) medicines, and biotechnology news. BOOKS Health, United States http://www.cdc.gov/nchs Annual survey of national trends in public health statistics. The Merck Manual of Diagnosis and Therapy, 18th Ed. http://www.merck.com/pubs Detailed information for physicians on various diseases and medical conditions, and on therapeutics for treating them. Parexel’s Pharmaceutical R&D Statistical Sourcebook http://www.parexel.com Annual recap of drug industry research and development (R&D) spending, drugs in development, and regulatory statistics. Physicians’ Desk Reference http://www.medec.com Annual compendium listing commercial prescription drugs and their FDA-approved prescribing information. TRADE ASSOCIATIONS BIO http://www.bio.org Trade association representing the country’s leading biotechnology companies in business, legislative, and regulatory affairs. Consumer Healthcare Products Association (CHPA) http://www.chpa-info.org Represents manufacturers and distributors of OTC medicines and dietary supplements; promotes industry interests in legislative and regulatory arenas; and publishes information on the OTC drug industry.

HEALTHCARE: PHARMACEUTICALS / JUNE 3, 2010

35


Generic Pharmaceutical Association http://www.gphaonline.org Trade association representing manufacturers and distributors of generic drugs in legislative, regulatory, and related matters. Pharmaceutical Research and Manufacturers of America (PhRMA) http://www.phrma.org Trade association representing the country’s leading research-based pharmaceutical and biotechnology companies in legislative and regulatory affairs; publishes pertinent industry statistics.

National Institutes of Health (NIH) http://www.nih.gov Government agency consisting of 27 institutes and centers; provides major R&D funding in the life sciences in the US, and maintains databases of clinical trial results and research publications. US Food and Drug Administration (FDA) http://www.fda.gov US government agency charged with overseeing the food and pharmaceutical industries; controls and supervises the approval of new drugs and the manufacture and sale of marketed drugs.

RESEARCH FIRMS Decision Resources Inc. http://www.decisionresources.com A market research and publishing firm focusing on the pharmaceutical and biotechnology industries. Henry J. Kaiser Family Foundation http://www.kff.org A private nonprofit foundation focused on US healthcare issues; publishes studies on a variety of healthcare topics. IMS Health Inc. http://www.imshealth.com Market research firm specializing in pharmaceuticals. The National Institute for Health Care Management Research and Educational Foundation http://www.nihcm.org Nonprofit, nonpartisan group that conducts research on healthcare issues. NDCHealth http://www.ndchealth.com Provides market research on pharmaceuticals and other healthcare sectors. GOVERNMENT AGENCIES Centers for Medicare & Medicaid Services (CMS) http://cms.hhs.gov A division of the US Department of Health and Human Services, the CMS administers the Medicare and Medicaid programs and sets rates at which program providers are compensated. National Center for Health Statistics (NCHS) http://www.cdc.gov/nchs A division of the Centers for Disease Control and Prevention, the NCHS provides US data on diseases, pregnancies, births, mortality, and other categories. 36

HEALTHCARE: PHARMACEUTICALS / JUNE 3, 2010

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COMPARATIVE COMPANY ANALYSIS — HEALTHCARE: PHARMACEUTICALS Operating Revenues Million $ Ticker

Company

PHARMACEUTICALS‡ ABT [] ABBOTT LABORATORIES AGN [] ALLERGAN INC BMY [] BRISTOL-MYERS SQUIBB CO ENDP † ENDO PHARMACEUTICALS HLDGS FRX [] FOREST LABORATORIES -CL A

Yr. End

2009

2008

2007

2006

CAGR (%) 2005

5-Yr.

1-Yr.

2009

2008

2007

2006

2005

8.8 12.0 (0.7) 26.6 NA

9.3 17.1 (0.6) 18.9 NA

4.2 2.3 (8.7) 15.9 NA

233 310 93 1,054 NA

224 303 102 910 436

197 271 96 784 422

171 211 89 657 381

169 160 95 592 330

29,527.6 D 4,403.4 20,597.0 D 1,260.5 3,845.1

25,914.2 3,938.9 A,C 19,348.0 D 1,085.6 3,718.3

22,476.3 3,063.3 A 17,914.0 909.7 A 3,360.3 A

22,287.8 C 2,319.2 19,207.0 D 820.2 2,912.1

19,680.0 D 2,045.6 19,380.0 A,C 615.1 3,113.8

13,177.6 1,452.4 20,222.0 138.5 881.8

47,348.0 A 1,304.4 D 13,857.9 A 303.7 23,430.2

27,471.0 348.3 9,912.9 116.9 32,714.0

A A D A

8.5 17.7 8.2 17.2 (1.7)

5.5 6.4 9.5 13.5 3.2

(2.9) 13.5 7.2 10.5 15.0

225 510 220 489 84

232 449 206 443 73

222 614 188 391 74

194 571 158 299 69

184 509 148 322 67

1,253.4 690.0 A 898.2 52,516.0 A,C 105.5

790.1 80.3 877.6 F 16,204.0 3.1

20.5 31.0 8.6 11.9 NM

32.4 (0.9) 11.6 106.4 17.4 10.4 (1.0) 3.3 17.2 30.3

644 1,486 229 308 7,530

650 720 207 298 5,780

276 958 165 298 8,672

204 903 156 297 6,742

159 538 117 317 5,008

747.4 0.0 689.2 A

1.1 NM 15.0

4.0 69.2 11.2

26.4 33.6 10.2

111 ** 405

88 ** 368

117 ** 362

121 ** 287

110 NA 239

6.2 8.9 6.2 19.0 12.2

2.2 9.2 1.9 13.2 11.0

732 398 296 ** 252

716 364 290 ** 227

674 347 277 ** 213

624 325 253 ** 174

556 299 240 NA 151

JOHNSON & JOHNSON KING PHARMACEUTICALS INC LILLY (ELI) & CO MEDICIS PHARMACEUT CP -CL A MERCK & CO

DEC DEC DEC DEC DEC

61,897.0 1,776.5 21,836.0 571.9 27,428.3 A

63,747.0 1,565.1 A 20,378.0 A 517.8 A 23,850.3

61,035.0 2,136.9 18,633.5 A 457.4 24,197.7

53,194.0 1,988.5 15,691.0 349.2 22,636.0

50,434.0 1,772.9 14,645.3 376.9 22,011.9

MYL PRX PRGO PFE SLXP

[] § † [] §

MYLAN INC PAR PHARMACEUTICAL COS INC PERRIGO CO PFIZER INC SALIX PHARMACEUTICALS LTD

DEC DEC JUN DEC DEC

5,090.5 1,193.2 A 2,006.9 D 49,934.0 A 232.9

5,137.6 578.1 1,817.2 48,341.0 A 178.8

2,178.8 769.7 1,447.4 48,209.0 268.2

1,611.8 A 725.2 1,366.8 48,201.0 A,C 208.5

1,257.2 432.3 1,024.1 51,298.0 154.9

VRX VPHM WPI

† VALEANT PHARMACEUTICALS INTL § VIROPHARMA INC [] WATSON PHARMACEUTICALS INC

DEC DEC DEC

830.5 310.4 2,793.0 A

HEALTH CARE DISTRIBUTORS‡ ABC [] AMERISOURCEBERGEN CORP CAH [] CARDINAL HEALTH INC MCK [] MCKESSON CORP MWIV § MWI VETERINARY SUPPLY OMI † OWENS & MINOR INC

SEP JUN # MAR SEP DEC

71,760.0 99,512.4 D 108,702.0 941.3 8,037.6

70,189.7 D 91,091.4 106,632.0 831.4 7,243.2 D

66,074.3 86,852.0 D 101,703.0 710.1 A 6,800.5

PDCO PMC PSSI HSIC

# APR DEC # MAR DEC

NA 1,841.2 A NA 6,538.3 D

3,094.2 1,947.3 A 1,952.7 6,394.9 D

2,998.7 1,217.8 A 1,855.8 5,920.2 D

657.0 A,C 232.3 A 2,535.5

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS AZN ASTRAZENECA PLC -ADR DEC 33,187.0 F BVF BIOVAIL CORP DEC 821.5 A ELN ELAN CORP PLC -ADR DEC 820.9 GSK GLAXOSMITHKLINE PLC -ADR DEC 47,092.9 A NVS NOVARTIS AG -ADR DEC 44,267.0 A

32,215.0 758.3 761.8 36,391.1 41,459.0

TEVA

11,085.0 A

TEVA PHARMACEUTICAL INDS-ADR

Index Basis (1999 = 100)

10-Yr.

30,764.7 4,503.6 18,808.0 D 1,460.8 A NA

[] [] [] † []

PATTERSON COMPANIES INC PHARMERICA CORP PSS WORLD MEDICAL INC SCHEIN (HENRY) INC

1999

DEC DEC DEC DEC # MAR

JNJ KG LLY MRX MRK

[] § § †

2004

DEC

13,899.0

F A A A

H D A A

872.2 D 203.8 2,496.7

30,270.0 A,F 843.9 516.4 46,017.9 A 38,072.0 D 9,408.0

907.2 C 167.2 1,979.2 A

61,203.1 81,363.6 92,977.0 606.2 5,533.7

D D A A

2,798.4 NA 1,741.6 5,153.1

D A A A

823.9 A,C 132.4 1,646.2

54,577.3 D 74,910.7 88,050.0 D 496.7 4,822.4 2,615.1 NA 1,619.4 4,635.9 A,C

26,999.0 A,F 1,068.8 497.3 46,089.8 A 36,031.0 A,C

24,143.0 935.5 426.7 37,854.9 32,212.0

8,408.0 A

5,250.4

F D D A A

682.5 D 22.4 1,640.6

53,179.0 65,053.5 80,514.6 394.3 4,525.1

9,807.4 25,033.6 36,712.5 NA 3,186.4

A A,F A,C A

22.0 14.8 11.5 NA 9.7

2,421.5 NA 1,473.8 4,060.3 A

1,040.3 NA 1,793.5 A 2,285.7 A

NA NA NA 11.1

NA NA NA 10.0

NA (5.4) NA 2.2

NA ** NA 286

297 ** 109 280

288 ** 103 259

269 ** 97 225

251 NA 90 203

21,741.0 F 886.5 464.0 39,191.8 A 28,247.0 A

17,950.0 A,C 151.8 A,F 1,007.8 13,711.3 21,643.3 A

6.3 18.4 (2.0) 13.1 7.4

8.8 (1.5) 12.1 3.7 9.4

3.0 8.3 7.8 29.4 6.8

185 541 81 343 205

179 500 76 265 192

169 556 51 336 176

150 704 49 336 166

135 616 42 276 149

4,798.9 A

1,282.4 A

26.9

23.7

25.4

1,084

864

734

656

409

Note: Data as originally reported. CAGR-Compound annual growth rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.

HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies


Net Income Million $ Ticker

Company

PHARMACEUTICALS‡ ABT [] ABBOTT LABORATORIES AGN [] ALLERGAN INC BMY [] BRISTOL-MYERS SQUIBB CO ENDP † ENDO PHARMACEUTICALS HLDGS FRX [] FOREST LABORATORIES -CL A

Yr. End

2009

DEC DEC DEC DEC # MAR

5,745.8 621.3 3,239.0 266.3 NA

2005

70 (68) 38 4,228 403

138 215 72 NM 629

12,949.0 (333.1) (2,071.9) 10.3 7,808.4

10,576.0 183.2 2,953.0 70.4 3,275.4

11,053.0 288.6 2,662.7 (75.8) 4,433.8

10,411.0 116.6 2,001.6 65.0 4,631.3

8,509.0 (50.6) 1,810.1 30.8 5,813.4

4,167.0 45.7 2,546.7 41.4 5,890.5

11.4 7.3 5.4 6.2 8.2

7.6 NM 19.1 19.8 17.3

(5.3) NM NM 639.1 65.2

294 201 170 183 219

311 (730) (81) 25 133

254 401 116 170 56

265 632 105 (183) 75

250 255 79 157 79

(1,138.0) 51.1 73.8 8,213.0 8.2

217.3 6.7 71.4 11,024.0 31.5

154.2 (1.8) 1.5 3,199.0 (4.6)

4.2 NM NM 10.4 NM

2.7 21.6 11.9 (5.3) NM

NM NM 3.9 7.4 NM

151 NM NM 269 NM

(117) NM NM 251 NM

(738) NM 4,773 257 NM

141 NM 4,618 345 NM

120 NM NM 253 NM

(136.3) (19.5) 151.3

118.6 (29.5) 178.9

8.1 NM 2.2

NM NM 8.0

NM NM (6.9)

217 NM 124

(160) NM 133

22 NM 79

(54) NM (249)

(157) NM 77

468.4 1,524.7 (156.7) 2.5 60.5

70.9 456.3 184.6 NA 28.0

21.9 9.6 21.2 NA 15.4

1.8 (5.6) NM 58.1 14.1

9.1 (13.2) 53.5 25.0 15.4

722 250 684 ** 418

661 288 446 ** 362

696 184 536 ** 260

660 273 524 ** 174

412 229 399 NA 230

183.7 NA 39.4 128.2

64.5 NA 22.2 50.3

NA NA NA 19.9

NA NA NA 19.2

NA 744.0 NA 22.9

** ** ** 613

310 ** 262 499

349 ** 256 467

323 ** 228 364

308 NA 199 323

22.9 10.9 NM 11.8 6.6

14.6 1.9 NM 1.6 7.8

23.3 (11.7) NM 32.9 3.4

787 282 (48) 306 189

638 320 (10) 230 183

585 313 (198) 354 147

632 345 (122) 361 158

492 395 151 276 138

32.7

43.2

215.0

463

910

DEC DEC DEC

257.6 (11.1) 222.0

(190.3) 67.6 238.4

2,000.0

2006

147 266 47 NM 859

† VALEANT PHARMACEUTICALS INTL § VIROPHARMA INC [] WATSON PHARMACEUTICALS INC

DEC

2007

194 307 76 NM 681

VRX VPHM WPI

TEVA PHARMACEUTICAL INDS-ADR

2008

235 330 78 NM **

(181.2) (45.9) 135.8 8,026.0 (47.0)

TEVA

2009

21.4 7.4 2.7 1.8 NA

232.6 77.6 141.1 8,621.0 (43.6)

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS AZN ASTRAZENECA PLC -ADR DEC 7,521.0 BVF BIOVAIL CORP DEC 176.5 ELN ELAN CORP PLC -ADR DEC (162.3) GSK GLAXOSMITHKLINE PLC -ADR DEC 8,942.0 NVS NOVARTIS AG -ADR DEC 8,400.0

1-Yr.

12.6 10.5 6.4 13.2 NA

DEC DEC JUN DEC DEC

NA 42.2 NA 308.4

5-Yr.

8.9 12.7 (2.5) NM NA

MYLAN INC PAR PHARMACEUTICAL COS INC PERRIGO CO PFIZER INC SALIX PHARMACEUTICALS LTD

# APR DEC # MAR DEC

Index Basis (1999 = 100)

10-Yr.

2,445.8 188.2 4,167.0 3.3 112.7

[] § † [] §

PATTERSON COMPANIES INC PHARMERICA CORP PSS WORLD MEDICAL INC SCHEIN (HENRY) INC

1999

3,175.8 377.1 2,378.0 143.3 838.8

MYL PRX PRGO PFE SLXP

[] § § †

2004

3,372.1 403.9 2,992.0 202.3 708.5

DEC DEC DEC DEC DEC

PDCO PMC PSSI HSIC

CAGR (%) 2005

1,716.8 (127.4) 1,585.0 137.8 454.1

JOHNSON & JOHNSON KING PHARMACEUTICALS INC LILLY (ELI) & CO MEDICIS PHARMACEUT CP -CL A MERCK & CO

511.9 1,142.8 1,263.0 24.9 116.9

2006

3,606.3 501.0 1,968.0 227.4 967.9

[] [] [] † []

SEP JUN # MAR SEP DEC

2007

4,734.2 578.6 3,155.0 261.7 767.7

JNJ KG LLY MRX MRK

HEALTH CARE DISTRIBUTORS‡ ABC [] AMERISOURCEBERGEN CORP CAH [] CARDINAL HEALTH INC MCK [] MCKESSON CORP MWIV § MWI VETERINARY SUPPLY OMI † OWENS & MINOR INC

12,266.0 92.0 4,328.8 76.0 12,901.3

2008

469.1 1,315.9 823.0 19.9 101.3 199.6 5.0 58.0 251.0

26.1 95.4 141.0

493.8 839.7 989.0 16.9 72.7

(64.1) 66.7 (445.0)

468.0 1,244.7 968.0 13.8 48.8

224.9 (24.1) 56.8 235.0

208.3 NA 50.5 183.1

6,101.0 199.9 (35.2) 6,727.7 8,125.0

5,595.0 195.5 (665.9) 10,346.1 6,518.0

6,043.0 215.5 (408.7) 10,554.9 6,992.0

635.0

1,952.0

546.0

184.5 11.8 (353.0) 8,094.0 (60.6) (185.8) 113.7 138.2

291.9 1,046.7 737.0 4.6 64.4 198.4 NA 44.3 162.4

203.6 29.2 80.6 11,332.0 6.8

4,706.0 246.8 508.2 8,059.5 6,130.0

3,813.0 161.0 (368.3) 8,246.5 5,767.0

1,072.3

331.8

956.0 62.5 335.8 2,924.8 4,439.3 117.8

1,697

539

1,657

Note: Data as originally reported. CAGR-Compound annual growth rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available.

HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies


Return on Revenues (%) Ticker

Company

PHARMACEUTICALS‡ ABT [] ABBOTT LABORATORIES AGN [] ALLERGAN INC BMY [] BRISTOL-MYERS SQUIBB CO ENDP † ENDO PHARMACEUTICALS HLDGS FRX [] FOREST LABORATORIES -CL A

Return on Assets (%)

Return on Equity (%)

Yr. End

2009

2008

2007

2006

2005

2009

2008

2007

2006

2005

2009

2008

2007

2006

2005

DEC DEC DEC DEC # MAR

18.7 13.8 17.2 18.2 NA

16.0 13.1 15.3 20.8 20.0

13.9 12.7 10.2 21.0 26.0

7.6 NM 8.8 15.2 13.5

15.1 17.4 15.6 24.7 24.3

12.1 8.7 10.7 12.0 NA

11.5 8.7 11.3 14.3 15.8

9.5 8.1 7.6 14.7 23.7

5.3 NM 5.9 10.0 13.4

11.6 15.8 10.2 17.4 20.8

28.5 14.1 23.9 20.3 NA

26.9 14.9 27.7 21.6 19.6

22.7 14.6 19.2 19.5 28.7

12.1 NM 15.0 14.6 15.9

23.5 30.1 27.9 27.0 24.3

JNJ KG LLY MRX MRK

[] [] [] † []

JOHNSON & JOHNSON KING PHARMACEUTICALS INC LILLY (ELI) & CO MEDICIS PHARMACEUT CP -CL A MERCK & CO

DEC DEC DEC DEC DEC

19.8 5.2 19.8 13.3 47.0

20.3 NM NM 2.0 32.7

17.3 8.6 15.8 15.4 13.5

20.8 14.5 17.0 NM 19.6

20.6 6.6 13.7 17.2 21.0

13.7 2.4 15.3 7.1 16.2

15.6 NM NM 0.9 16.3

14.0 5.4 12.1 6.2 7.0

17.2 9.2 11.4 NM 9.9

18.7 4.0 8.1 6.1 10.6

26.4 4.0 53.2 11.7 33.2

30.2 NM NM 1.7 42.3

25.6 7.6 24.1 12.9 18.3

28.6 13.5 24.5 NM 25.0

29.9 6.1 18.4 12.5 26.3

MYL PRX PRGO PFE SLXP

[] § † [] §

MYLAN INC PAR PHARMACEUTICAL COS INC PERRIGO CO PFIZER INC SALIX PHARMACEUTICALS LTD

DEC DEC JUN DEC DEC

4.6 6.5 7.0 17.3 NM

NM NM 7.5 16.6 NM

NM 6.6 5.1 17.0 3.1

13.5 0.9 5.2 22.9 15.1

14.7 2.7 NM 15.8 NM

0.9 10.5 5.5 5.3 NM

NM NM 6.0 7.1 NM

NM 6.4 4.0 7.1 2.3

7.1 0.9 4.1 9.5 10.4

9.2 1.6 NM 6.7 NM

3.2 17.2 15.2 11.7 NM

NM NM 16.1 13.1 NM

NM 11.9 10.6 12.1 2.9

17.8 1.7 11.6 16.1 12.2

14.0 3.0 NM 12.1 NM

VRX VPHM WPI

† VALEANT PHARMACEUTICALS INTL § VIROPHARMA INC [] WATSON PHARMACEUTICALS INC

DEC DEC DEC

31.0 NM 7.9

NM 29.1 9.4

3.0 46.8 5.6

NM 39.9 NM

NM 85.9 8.4

20.7 NM 4.6

NM 7.4 6.7

1.7 15.8 3.9

NM 15.4 NM

NM 37.1 4.4

89.7 NM 8.7

NM 11.7 12.0

6.1 21.0 8.0

NM 18.0 NM

NM 75.6 6.4

HEALTH CARE DISTRIBUTORS‡ ABC [] AMERISOURCEBERGEN CORP CAH [] CARDINAL HEALTH INC MCK [] MCKESSON CORP MWIV § MWI VETERINARY SUPPLY OMI † OWENS & MINOR INC

SEP JUN # MAR SEP DEC

0.7 1.1 1.2 2.6 1.5

0.7 1.4 0.8 2.4 1.4

0.7 1.0 1.0 2.4 1.1

0.8 1.5 1.0 2.3 0.9

0.5 1.4 0.8 0.9 1.3

4.0 4.7 NA 7.6 6.6

3.8 5.6 3.3 6.8 6.2

3.9 3.6 4.1 6.8 4.5

3.9 5.5 4.3 6.6 3.3

2.5 4.8 3.7 2.7 5.4

18.9 13.9 NA 12.8 16.0

16.1 17.4 13.4 11.7 15.5

13.6 10.6 16.0 11.7 12.5

11.1 14.6 15.9 12.8 9.2

6.8 12.6 13.2 10.0 13.3

PDCO PMC PSSI HSIC

# APR DEC # MAR DEC

NA 2.3 NA 4.7

6.5 0.3 3.0 3.9

7.5 NM 3.1 4.0

7.4 NA 2.9 3.6

7.6 NA 2.7 3.5

NA 6.0 NA 8.3

9.5 0.7 6.9 7.3

11.2 NA 7.1 7.6

10.8 NA 6.7 6.7

11.0 NA 6.4 6.5

NA 12.2 NA 15.1

18.2 1.6 17.0 13.5

18.9 NA 15.9 14.5

15.9 NA 13.8 13.6

17.6 NA 14.1 13.9

18.9 26.4 NM 18.5 19.6

18.5 23.2 NM 22.5 17.1

22.4 20.2 NM 22.9 19.4

19.5 26.4 119.1 21.3 19.0

14.8 9.6 NM 14.1 9.7

12.9 11.7 NM 11.3 10.6

14.4 9.8 NM 18.5 9.1

22.1 10.2 NM 21.8 11.1

18.7 13.2 18.0 17.9 10.9

41.1 13.8 NM 64.4 15.6

39.8 16.0 NA 43.9 16.3

37.2 15.0 NA 54.5 14.4

41.8 17.1 NM 66.2 18.8

33.6 21.7 122.1 66.2 18.4

5.7

20.7

6.5

20.4

6.0

2.3

8.9

3.5

10.7

11.3

4.2

15.7

6.4

18.8

[] § § †

PATTERSON COMPANIES INC PHARMERICA CORP PSS WORLD MEDICAL INC SCHEIN (HENRY) INC

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS AZN ASTRAZENECA PLC -ADR DEC 22.7 BVF BIOVAIL CORP DEC 21.5 ELN ELAN CORP PLC -ADR DEC NM GSK GLAXOSMITHKLINE PLC -ADR DEC 19.0 NVS NOVARTIS AG -ADR DEC 19.0 TEVA

TEVA PHARMACEUTICAL INDS-ADR

DEC

14.4

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.

HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies


Current Ratio Ticker

Company

PHARMACEUTICALS‡ ABT [] ABBOTT LABORATORIES AGN [] ALLERGAN INC BMY [] BRISTOL-MYERS SQUIBB CO ENDP † ENDO PHARMACEUTICALS HLDGS FRX [] FOREST LABORATORIES -CL A

Debt as a % of Net Working Capital

Debt / Capital Ratio (%)

Yr. End

2009

2008

2007

2006

2005

2009

2008

2007

2006

2005

2009

2008

2007

2006

2005

DEC DEC DEC DEC # MAR

1.8 3.8 2.2 2.7 NA

1.5 3.3 2.2 3.1 4.6

1.5 3.0 1.2 2.7 4.8

0.9 3.2 1.6 3.1 3.9

1.5 1.7 1.8 1.9 5.2

33.0 23.5 29.3 17.3 NA

33.3 28.7 34.9 24.8 0.0

34.8 28.6 29.2 0.0 0.0

33.3 33.2 41.9 0.0 0.0

23.4 3.5 42.3 0.2 0.0

109.8 65.0 80.2 39.9 NA

159.9 103.9 81.8 46.6 0.0

192.1 112.9 257.1 0.0 0.0

NM 109.1 190.4 0.1 0.0

115.1 7.4 155.1 0.4 0.0

JNJ KG LLY MRX MRK

[] [] [] † []

JOHNSON & JOHNSON KING PHARMACEUTICALS INC LILLY (ELI) & CO MEDICIS PHARMACEUT CP -CL A MERCK & CO

DEC DEC DEC DEC DEC

1.8 2.3 1.9 2.5 1.8

1.6 1.7 0.9 2.7 1.3

1.5 4.0 2.3 1.9 1.2

1.2 2.7 1.9 6.2 1.2

2.5 1.3 1.9 7.1 1.6

13.7 12.5 40.8 19.6 18.6

15.6 30.7 40.4 21.9 15.5

13.6 13.7 25.0 22.5 15.7

4.7 14.9 24.0 47.1 21.1

5.0 0.0 33.4 48.0 19.2

46.2 53.6 112.1 39.0 126.8

60.0 145.5 NM 55.0 79.1

70.0 29.3 66.8 40.0 140.5

52.8 37.9 75.8 82.4 221.4

10.8 0.0 113.5 75.5 66.2

MYL PRX PRGO PFE SLXP

[] § † [] §

MYLAN INC PAR PHARMACEUTICAL COS INC PERRIGO CO PFIZER INC SALIX PHARMACEUTICALS LTD

DEC DEC JUN DEC DEC

1.9 2.4 2.3 1.7 3.0

2.1 1.6 2.4 1.6 2.6

1.5 1.7 1.9 2.1 2.3

3.4 1.3 1.8 2.2 3.8

4.5 3.0 1.8 1.5 3.2

58.0 0.0 45.2 28.5 14.5

61.2 0.0 45.5 11.6 23.2

52.2 0.0 43.1 9.1 5.1

48.2 0.0 46.2 6.5 0.0

45.9 34.9 49.7 7.7 0.0

318.1 0.0 134.1 176.7 28.9

316.9 0.0 133.4 49.6 66.6

445.3 0.0 191.8 29.2 14.3

96.7 0.0 217.6 21.7 0.0

73.9 65.7 244.6 47.2 0.0

VRX VPHM WPI

† VALEANT PHARMACEUTICALS INTL § VIROPHARMA INC [] WATSON PHARMACEUTICALS INC

DEC DEC DEC

1.4 11.2 1.7

1.6 8.3 3.0

3.9 22.0 2.6

3.1 16.0 1.8

2.5 2.5 5.5

59.3 13.3 24.3

68.4 24.8 26.5

65.1 33.5 30.7

64.0 0.0 37.4

64.1 0.0 20.9

441.4 34.1 160.1

251.8 78.8 84.5

132.9 42.1 123.4

146.9 0.0 196.6

221.8 0.0 52.7

HEALTH CARE DISTRIBUTORS‡ ABC [] AMERISOURCEBERGEN CORP CAH [] CARDINAL HEALTH INC MCK [] MCKESSON CORP MWIV § MWI VETERINARY SUPPLY OMI † OWENS & MINOR INC

SEP JUN # MAR SEP DEC

1.1 1.4 1.3 2.2 1.9

1.1 1.4 1.2 1.9 2.0

1.1 1.3 1.2 2.0 1.9

1.2 1.3 1.2 1.9 1.9

1.3 1.3 1.3 1.5 1.8

30.2 26.1 23.3 0.0 21.1

30.5 30.7 27.0 0.1 34.2

28.4 30.1 22.7 0.1 31.6

20.9 22.1 22.3 0.2 44.1

18.2 19.9 14.0 0.4 28.5

248.2 74.6 51.0 0.0 32.5

236.5 96.8 74.7 0.1 55.8

143.2 112.1 73.6 0.2 54.4

62.5 76.4 66.0 0.3 72.6

49.2 69.5 28.3 0.8 50.4

PDCO PMC PSSI HSIC

# APR DEC # MAR DEC

NA 4.2 NA 2.0

2.8 3.6 2.4 1.7

2.1 3.7 1.9 2.0

2.3 NA 2.7 2.0

2.1 NA 2.4 2.2

NA 39.3 NA 9.1

29.6 42.9 40.1 11.3

33.1 44.4 31.0 18.2

8.3 NA 28.3 22.7

14.0 NA 30.0 27.1

NA 76.7 NA 21.6

87.0 88.1 71.6 30.2

101.2 93.1 61.9 46.6

25.5 NA 49.5 54.6

48.0 NA 56.9 56.9

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS AZN ASTRAZENECA PLC -ADR DEC 1.3 BVF BIOVAIL CORP DEC 1.4 ELN ELAN CORP PLC -ADR DEC 4.5 GSK GLAXOSMITHKLINE PLC -ADR DEC 1.4 NVS NOVARTIS AG -ADR DEC 1.7

1.2 1.8 2.3 1.7 1.3

1.1 1.9 4.4 1.3 1.6

1.8 2.6 2.0 1.5 1.3

2.0 2.5 6.7 1.4 1.4

27.5 18.8 74.6 56.5 12.3

36.1 0.0 114.7 62.8 3.8

36.4 0.0 128.8 39.6 1.2

6.0 23.5 89.4 31.8 1.4

7.0 25.3 86.3 39.3 3.5

149.3 335.0 169.9 271.2 61.0

383.3 0.0 460.7 210.0 49.8

573.9 0.0 246.5 215.4 6.3

14.5 61.9 194.6 128.0 12.7

16.0 100.3 177.0 143.8 21.6

TEVA

1.3

1.8

1.9

2.4

17.0

23.4

19.1

28.2

22.0

95.0

188.0

74.6

128.5

54.6

[] § § †

PATTERSON COMPANIES INC PHARMERICA CORP PSS WORLD MEDICAL INC SCHEIN (HENRY) INC

TEVA PHARMACEUTICAL INDS-ADR

DEC

1.6

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.

HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies


Price / Earnings Ratio (High-Low) Ticker

Company

PHARMACEUTICALS‡ ABT [] ABBOTT LABORATORIES AGN [] ALLERGAN INC BMY [] BRISTOL-MYERS SQUIBB CO ENDP † ENDO PHARMACEUTICALS HLDGS FRX [] FOREST LABORATORIES -CL A

Yr. End

2009

DEC DEC DEC DEC # MAR

15 - 11 31 - 17 16 - 11 12 7 NA - NA 15 33 10 22 7-

2008 20 37 17 13 17 -

2007

2006

Dividend Payout Ratio (%) 2005

Dividend Yield (High-Low, %)

2009

2008

2007

2006

2005

2009

2008

21 32 26 15 11

45 - 35 NM - NM 33 - 25 34 - 20 38 - 25

23 36 17 21 21 -

17 22 14 12 15

42 10 77 0 NA

46 11 97 0 0

54 12 112 0 0

104 NM 138 0 0

50 13 73 0 0

3.8 0.6 7.3 0.0 0.0 -

2.7 0.3 4.7 0.0 0.0

3.1 0.7 9.7 0.0 0.0 -

2.3 0.3 5.7 0.0 0.0

2.6 0.4 4.4 0.0 0.0 -

2.1 0.3 3.5 0.0 0.0

3.0 0.4 5.6 0.0 0.0 -

2.3 0.3 4.2 0.0 0.0

2.9 0.6 5.4 0.0 0.0 -

2.2 0.4 4.2 0.0 0.0

10 15 7 6 4

16 - 11 NM - NM NM - NM NM - 54 17 6

19 30 23 32 41 -

16 13 18 20 28

18 - 15 17 - 13 24 - 20 NM - NM 23 - 16

20 37 33 32 17 -

17 16 27 22 12

43 0 50 12 27

39 NM NM 89 42

44 0 63 10 101

39 0 65 NM 75

36 0 83 10 72

4.2 0.0 7.2 2.0 7.6 -

3.0 0.0 4.8 0.6 4.0

3.4 0.0 6.6 1.7 6.7 -

2.5 0.0 3.3 0.6 2.5

2.7 0.0 3.5 0.5 3.6 -

2.4 0.0 2.8 0.3 2.5

2.6 0.0 3.2 0.5 4.8 -

2.1 0.0 2.7 0.3 3.3

2.1 0.0 3.1 0.5 6.0 -

1.8 0.0 2.5 0.3 4.3

18 64 19 15 14

27 - 19 NM - 62 NM - NM 27 - 18 NM - NM

0 0 14 65 NM

NM NM 13 108 NM

NM 0 22 97 0

24 0 22 63 0

30 0 NM 69 NM

0.0 0.0 1.2 6.9 0.0 -

0.0 0.0 0.5 4.2 0.0

0.0 0.0 0.7 9.0 0.0 -

0.0 0.0 0.5 5.3 0.0

0.9 0.0 1.1 5.2 0.0 -

0.5 0.0 0.5 4.2 0.0

1.3 0.0 1.2 4.3 0.0 -

1.0 0.0 0.9 3.4 0.0

1.6 0.0 1.2 3.7 0.0 -

1.1 0.0 0.8 2.6 0.0

NM - NM 24 7 NM - NM

NM - NM 10 1 28 - 21

0 NM 0

NM 0 0

0 0 0

NM 0 NM

NM 0 0

0.0 0.0 0.0 -

0.0 0.0 0.0

0.0 0.0 0.0 -

0.0 0.0 0.0

0.0 0.0 0.0 -

0.0 0.0 0.0

1.6 0.0 0.0 -

1.1 0.0 0.0

1.9 0.0 0.0 -

1.2 0.0 0.0

19 22 12 43 16

12 19 10 0 33

10 14 16 0 32

7 18 7 0 38

4 9 7 0 49

4 6 10 0 32

1.5 2.4 1.4 0.0 3.0 -

0.8 1.5 0.7 0.0 1.9

1.1 1.8 1.7 0.0 2.3 -

0.6 0.8 0.7 0.0 1.5

0.5 0.7 0.5 0.0 2.3 -

0.4 0.5 0.4 0.0 1.5

0.2 0.4 0.5 0.0 2.2 -

0.2 0.4 0.4 0.0 1.7

0.2 0.3 0.8 0.0 2.0 -

0.1 0.2 0.5 0.0 1.5

0.0 0.0 0.0 0.0 -

0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 -

0.0 0.0 0.0 0.0

0.0 NA 0.0 0.0 -

0.0 NA 0.0 0.0

0.0 NA 0.0 0.0 -

0.0 NA 0.0 0.0

5.8 - 3.8 22.6 - 10.1 0.0 - 0.0 6.9 - 3.9 3.7 - 2.5

4.1 15.2 0.0 4.3 2.1 -

2.9 7.6 0.0 3.4 1.8

3.1 3.4 0.0 3.5 1.7 -

2.1 1.8 0.0 3.0 1.4

3.0 3.6 0.0 3.5 1.9 -

2.0 1.8 0.0 2.8 1.6

1.3 -

0.8

1.0 -

0.7

1.0 -

0.6

JOHNSON & JOHNSON KING PHARMACEUTICALS INC LILLY (ELI) & CO MEDICIS PHARMACEUT CP -CL A MERCK & CO

DEC DEC DEC DEC DEC

MYL PRX PRGO PFE SLXP

[] § † [] §

MYLAN INC PAR PHARMACEUTICAL COS INC PERRIGO CO PFIZER INC SALIX PHARMACEUTICALS LTD

DEC DEC JUN DEC DEC

62 - 31 12 4 27 - 12 15 9 NM - NM

NM - NM NM - NM 30 - 19 20 - 12 NM - NM

VRX VPHM WPI

† VALEANT PHARMACEUTICALS INTL § VIROPHARMA INC [] WATSON PHARMACEUTICALS INC

DEC DEC DEC

11 5 NM - NM 19 - 11

NM - NM 16 8 14 9

NM - NM 21 - 11 46 - 20 23 - 19 96 - 44 67 13 25 -

37 5 18

21 36 20 31 25 -

16 26 15 21 16

25 NM 24 19 28 -

HEALTH CARE DISTRIBUTORS‡ ABC [] AMERISOURCEBERGEN CORP CAH [] CARDINAL HEALTH INC MCK [] MCKESSON CORP MWIV § MWI VETERINARY SUPPLY OMI † OWENS & MINOR INC

SEP JUN # MAR SEP DEC

16 12 14 20 17 -

8 8 7 10 11

17 17 23 27 22 -

9 8 9 12 14

PDCO PMC PSSI HSIC

# APR DEC # MAR DEC

NA - NA 16 - 10 NA - NA 16 - 10

22 NM 22 23 -

9 76 15 11

24 - 17 NM - NM 25 - 18 24 - 17

25 - 19 NA - NA 29 - 20 26 - 21

37 - 23 NA - NA 25 - 16 25 - 17

NA 0 NA 0

0 0 0 0

0 NM 0 0

0 NA 0 0

0 NA 0 0

NA 0.0 0.0 0.0 -

NA 0.0 0.0 0.0

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS AZN ASTRAZENECA PLC -ADR DEC 96 12 8 BVF BIOVAIL CORP DEC 14 8 12 5 ELN ELAN CORP PLC -ADR DEC NM - NM NM - NM GSK GLAXOSMITHKLINE PLC -ADR DEC 12 8 21 - 12 NVS NOVARTIS AG -ADR DEC 15 9 17 - 12

16 - 11 22 - 11 NM - NM 16 - 13 21 - 18

17 - 12 21 - 11 NM - NM 16 - 13 21 - 17

17 18 24 19 21 -

12 9 2 16 17

40 58 NM 53 46

45 120 NM 83 43

47 164 NM 55 39

37 37 NM 46 30

35 32 0 54 34

7.0 7.0 0.0 6.8 5.1 -

4.4 4.2 0.0 4.3 3.0

27 -

15

26

61

15

42

15

1.5 -

1.1

TEVA

TEVA PHARMACEUTICAL INDS-ADR

DEC

25 -

2005

25 42 32 21 19 -

[] [] [] † []

PATTERSON COMPANIES INC PHARMERICA CORP PSS WORLD MEDICAL INC SCHEIN (HENRY) INC

2006

15 15 10 7 8

JNJ KG LLY MRX MRK

[] § § †

2007

18

62 -

44

19 -

12

21 26 17 30 29 -

62 -

18 21 14 19 23

41

31 29 22 58 21 -

1.4 -

1.0

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.

HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies


Earnings per Share ($) Ticker

Company

PHARMACEUTICALS‡ ABT [] ABBOTT LABORATORIES AGN [] ALLERGAN INC BMY [] BRISTOL-MYERS SQUIBB CO ENDP † ENDO PHARMACEUTICALS HLDGS FRX [] FOREST LABORATORIES -CL A

Tangible Book Value per Share ($)

Yr. End

2009

2008

2007

2006

2005

2009

2008

DEC DEC DEC DEC # MAR

3.71 2.05 1.63 2.27 NA

3.06 1.90 1.60 2.12 2.53

2.34 1.64 1.00 1.70 3.08

1.12 (0.44) 0.81 1.03 1.43

2.17 1.54 1.53 1.53 2.11

2.17 4.82 4.10 4.99 NA

1.51 1.76 3.31 6.36 11.94

2007

Share Price (High-Low, $)

2006

2005

2009

2008

2007

2006

2005

1.24 0.72 2.26 7.75 10.19

(1.17) 0.87 1.83 5.85 8.93

2.89 5.34 2.28 4.24 7.69

57.39 64.08 26.62 26.14 32.76 -

41.27 35.41 17.23 15.75 18.37

61.09 70.40 27.37 28.48 42.76 -

45.75 28.95 16.00 13.87 19.23

59.50 69.15 32.35 35.85 57.97 -

48.75 52.50 25.73 26.04 34.89

49.87 61.51 26.41 34.75 54.70 -

39.18 46.28 20.08 21.06 36.18

50.00 55.25 26.60 31.93 45.21 -

37.50 34.51 20.70 19.02 32.46

JNJ KG LLY MRX MRK

[] [] [] † []

JOHNSON & JOHNSON KING PHARMACEUTICALS INC LILLY (ELI) & CO MEDICIS PHARMACEUT CP -CL A MERCK & CO

DEC DEC DEC DEC DEC

4.45 0.38 3.94 1.29 5.67

4.62 (1.37) (1.89) 0.18 3.66

3.67 0.75 2.71 1.26 1.51

3.76 1.19 2.45 (1.39) 2.04

3.50 0.48 1.84 1.18 2.11

7.04 4.46 5.30 6.45 (0.17)

5.35 3.22 2.45 5.03 7.97

5.12 6.51 10.10 6.16 7.37

3.67 5.41 9.94 5.00 7.00

8.64 3.66 9.77 2.98 7.48

65.41 12.45 40.78 27.82 38.42 -

46.25 5.86 27.21 7.85 20.05

72.76 12.60 57.52 27.02 61.18 -

52.06 6.98 28.62 9.66 22.82

68.75 22.25 61.00 39.94 61.62 -

59.72 9.75 49.09 25.37 42.35

69.41 20.00 59.24 40.31 46.37 -

56.65 15.15 50.19 22.57 31.81

69.99 17.99 60.98 37.67 35.36 -

59.76 7.50 49.47 26.30 25.50

MYL PRX PRGO PFE SLXP

[] § † [] §

MYLAN INC PAR PHARMACEUTICAL COS INC PERRIGO CO PFIZER INC SALIX PHARMACEUTICALS LTD

DEC DEC JUN DEC DEC

0.31 2.30 1.53 1.23 (0.88)

(1.05) (1.38) 1.46 1.19 (0.98)

(4.49) 1.48 0.80 1.19 0.17

1.01 0.20 0.77 1.52 0.68

0.80 0.35 (4.57) 1.10 (1.55)

(8.44) 10.49 4.76 (2.53) 3.11

(9.56) 8.82 4.52 2.71 1.22

(11.28) 9.98 4.30 3.41 2.11

2.75 8.84 3.83 3.65 2.73

2.76 8.24 3.12 1.89 3.24

19.21 27.93 40.94 18.99 25.86 -

9.65 8.57 18.54 11.62 6.14

15.49 24.33 43.08 24.24 10.47 -

5.75 7.80 27.72 14.26 5.07

22.90 30.68 36.86 27.73 16.38 -

12.93 16.61 16.09 22.24 7.50

25.00 38.70 18.69 28.60 18.72 -

18.65 12.80 14.42 22.16 9.77

21.69 43.81 19.89 29.21 22.79 -

15.21 21.64 12.76 20.27 13.85

VRX VPHM WPI

† VALEANT PHARMACEUTICALS INTL § VIROPHARMA INC [] WATSON PHARMACEUTICALS INC

DEC DEC DEC

3.15 (0.14) 2.11

(2.17) 0.95 2.32

0.28 1.37 1.38

(0.69) 0.97 (4.37)

(2.03) 2.56 1.32

(3.81) 1.70 (2.81)

(4.64) (0.11) 6.51

(0.76) 5.35 3.56

(1.26) 4.15 0.10

(1.96) 2.99 8.81

34.44 14.55 40.25 -

15.64 3.79 23.05

23.28 15.16 32.70 -

11.00 8.00 20.17

18.82 18.39 33.91 -

10.35 7.11 25.02

20.68 23.44 35.27 -

14.75 7.07 21.35

26.70 24.36 36.93 -

16.25 1.67 27.99

3.69 8.20 13.36 5.23 4.19

26.58 39.87 64.98 42.21 32.25 -

13.75 24.87 33.13 20.37 20.13

24.30 62.25 68.40 45.11 36.67 -

13.33 27.79 28.27 20.16 23.27

28.28 76.15 68.43 44.60 29.68 -

21.10 56.41 50.80 30.00 19.90

24.48 75.74 55.10 38.61 23.49 -

20.08 61.15 44.60 23.79 18.31

21.09 69.64 52.89 26.49 22.39 -

13.24 52.85 30.13 19.78 17.47

HEALTH CARE DISTRIBUTORS‡ ABC [] AMERISOURCEBERGEN CORP CAH [] CARDINAL HEALTH INC MCK [] MCKESSON CORP MWIV § MWI VETERINARY SUPPLY OMI † OWENS & MINOR INC

SEP JUN # MAR SEP DEC

1.70 3.20 4.70 2.06 1.87

1.46 3.67 2.99 1.65 1.65

1.34 2.13 3.40 1.43 1.21

1.14 2.96 3.25 1.28 0.81

0.69 2.43 2.42 0.46 1.09

(0.50) 7.30 12.59 13.13 7.86

(0.53) 4.26 7.39 10.94 6.58

0.43 4.12 7.64 10.15 5.06

3.10 8.52 9.10 8.28 3.89

PDCO PMC PSSI HSIC

# APR DEC # MAR DEC

NA 1.39 NA 3.47

1.70 0.17 0.97 2.82

1.70 (1.13) 0.88 2.65

1.52 NA 0.75 2.08

1.44 NA 0.67 1.87

NA 4.57 NA 10.65

3.60 4.35 3.55 8.83

2.64 3.97 3.20 7.40

4.42 NA 3.63 6.05

3.45 NA 3.10 5.51

28.34 21.69 22.89 56.92 -

16.08 13.97 13.19 33.55

37.78 25.83 21.72 63.62 -

15.75 12.99 14.97 32.08

40.08 23.20 21.83 63.45 -

28.32 13.22 16.11 45.82

38.28 NA 21.60 54.08 -

29.61 NA 14.74 42.82

53.85 NA 16.65 45.93 -

33.21 NA 10.76 32.70

3.74 1.22 (1.42) 3.75 2.81

3.86 1.35 (0.94) 3.74 2.98

2.91 1.55 1.23 2.84 2.63

(0.70) (0.51) 0.43 (0.83) 19.94

(4.08) 2.41 (1.28) 0.14 17.22

(4.21) 3.52 (1.45) 2.97 16.83

7.46 3.14 (1.02) 4.09 8.54

7.04 1.31 (1.18) 2.28 8.43

47.61 15.50 9.13 43.47 56.42 -

29.96 9.26 4.61 27.15 33.34

49.85 14.90 37.45 54.64 61.30 -

32.58 6.65 4.99 31.02 41.80

59.47 26.48 24.90 59.98 60.36 -

42.21 13.20 11.70 47.49 51.19

66.49 28.28 19.42 58.40 61.60 -

44.90 14.51 11.88 50.03 51.72

50.13 27.28 29.93 53.80 54.71 -

34.72 13.74 3.00 44.17 45.63

2.54

0.72

1.73

2.82

(0.68)

4.42

1.47

4.76

56.88 -

41.05

50.00 -

35.89

47.14 -

30.81

44.71 -

29.22

45.91 -

26.78

[] § § †

PATTERSON COMPANIES INC PHARMERICA CORP PSS WORLD MEDICAL INC SCHEIN (HENRY) INC

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS AZN ASTRAZENECA PLC -ADR DEC 5.19 4.20 BVF BIOVAIL CORP DEC 1.11 1.25 ELN ELAN CORP PLC -ADR DEC (0.32) (0.07) GSK GLAXOSMITHKLINE PLC -ADR DEC 3.52 2.59 NVS NOVARTIS AG -ADR DEC 3.70 3.59 TEVA

TEVA PHARMACEUTICAL INDS-ADR

DEC

2.29

0.81

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. J-This amount includes intangibles that cannot be identified.

The analysis and opinion set forth in this publication are provided by Standard & Poor’s Equity Research Services and are prepared separately from any other analytic activity of Standard & Poor’s. In this regard, Standard & Poor’s Equity Research Services has no access to nonpublic information received by other units of Standard & Poor’s. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.

HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies


S&P Pharm