Page 1

Equity Research

North America

Industry Report

Major Pharmaceuticals

Morgan Stanley Healthcare Team

Global Pharmaceuticals: Is This the Year for Restructuring? Jami Rubin Managing Director, Morgan Stanley

Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Morgan Stanley in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 800-624-2063 to request a copy of this research.

Please see analyst certification and other important disclosures starting on page 21.


Equity Research North America

Major Pharmaceuticals

Industry Report

Large Pharma Performance Relative to S&P

Morgan Stanley Healthcare Team

800 700 600 500 400 300 200 100

8/3 1 4/1 /93 12 9/94 /06 7/2 /94 6/9 3/1 5 10 3/96 /29 6/1 /96 8/9 2/0 7 5 9/2 /98 4 5/1 /98 12 4/99 /31 8/1 /99 8/0 4/0 0 11 9/01 /30 7/2 /01 3/0 3/1 2 10 2/03 /28 6/2 /03 1/0 4

0

Large-Cap Pharma

S & P 500

Source: FactSet

Please see analyst certification and other important disclosures starting on page 21.

2


Equity Research North America

Major Pharmaceuticals

Industry Report

Global Sector Underperformance

Morgan Stanley Pharma Team

1.6 1.4 1.2 1 0.8 0.6 0.4

MSCI Global

24-Dec-04

24-Nov-04

24-Oct-04

24-Sep-04

24-Aug-04

24-Jul-04

24-Jun-04

24-May-04

24-Apr-04

24-Mar-04

24-Feb-04

24-Jan-04

24-Dec-03

24-Nov-03

24-Oct-03

24-Sep-03

24-Aug-03

24-Jul-03

24-Jun-03

24-May-03

24-Apr-03

24-Mar-03

24-Feb-03

0

24-Jan-03

0.2

MSCI Global Pharma

e = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research Please refer to important disclosures at the end of this report.

3


Equity Research North America

Major Pharmaceuticals

Industry Report

US Pharma Returns on Capital (1996-2008E)

Morgan Stanley Healthcare Team

25%

22%

23% 24% 23%

20% 16% 15%

14% 12% 12% 11% 12% 12% 12%

10% 5%

20 05 E 20 06 E 20 07 E 20 08 E

20 04

20 03

20 02

20 01

20 00

19 99

19 98

19 97

19 96

0%

Source: Company data, Morgan Stanley Research

Please see analyst certification and other important disclosures starting on page 21.

4


Equity Research North America

Major Pharmaceuticals

Industry Report

Stocks are well off their highs

Morgan Stanley Healthcare Team

Merck & Co. Inc. (MRK)

Eli Lilly & Co. (LLY)

Bristol-Myers Squibb Co. (BMY) 28-Apr-1995 to 20-Apr-2005 (Monthly) U.S. Dollar

28-Apr-1995 to 20-Apr-2005 (Monthly) U.S. Dollar

High: 75.533 Low: 14.743 Last: 25.550

High: 109.000 Low: 17.313 Last: 58.020

28-Apr-1995 to 20-Apr-2005 (Monthly) U.S. Dollar

80

120

70

100

60

80

High: 91.625 Low: 19.545 Last: 34.070 90 80 70

50

60

60

50

40

40

40

30

30

20 20

Volume in Millions (max/avg)

Volume in Millions (max/avg)

337

95

96

97

98

99

00

01

02

03

95

04

96

97

98

99

00

01

02

03

04

96

97

98

99

00

01

02

03

04

Data Source: Prices / Exshare

Wyeth Pharmaceuticals (WYE)

Schering-Plough Corp. (SGP)

High: 50.042 Low: 6.708 Last: 26.760

578 137

95

Data Source: Prices / Exshare

Pfizer Inc. (PFE) 28-Apr-1995 to 20-Apr-2005 (Monthly) U.S. Dollar

137 67

109

Data Source: Prices / Exshare

20 Volume in Millions (max/avg)

28-Apr-1995 to 20-Apr-2005 (Monthly) U.S. Dollar

28-Apr-1995 to 20-Apr-2005 (Monthly) U.S. Dollar

High: 60.813 Low: 9.125 Last: 19.950

55 50 45 40 35 30 25

High: 70.250 Low : 17.875 Last: 42.950

60

70

50

60

40

50

30

40

20

30

20 15

10 20

10 Volume in Millions (max/avg)

Volume in Millions (max/avg)

1242

102

293 95

96

97

Data Source: Prices / Exshare

98

99

00

01

02

03

04

Volume in Millions (max/avg)

248

95

96

Data Source: Prices / Exshare

97

98

99

00

01

02

03

04

303 81

95

96

97

98

99

00

Data Source: Prices / Exshare

Source: FactSet

Please see analyst certification and other important disclosures starting on page 21.

5

01

02

03

04


Equity Research North America

Major Pharmaceuticals

Industry Report

Drivers of Rising Returns (1996-2000)

Morgan Stanley Healthcare Team

• Major New Product launches – Lipitor, Zyrexa, Viagra, Fosamax

• Inception of DTC Advertising • Favorable Pricing Environment • Favorable Patent Cycle • Washington not focused on prescription drugs

Please see analyst certification and other important disclosures starting on page 21.

6


Equity Research North America

Major Pharmaceuticals

Industry Report

Drivers of Declining Returns (2001-2004)

Morgan Stanley Healthcare Team

Diminished R&D Productivity –Higher Cost of Commercializing a Drug –Increased Number of failures

Major Patent Expirations – Prozac – Claritin – Prilosec

Pricing pressures (cost shifting in private pay sector) • Increased aggression of generic competitors •

– Higher number of players pursuing each opportunity – Increased number of legal challenges

Increased Therapeutic Density Please see analyst certification and other important disclosures starting on page 21.

7


Equity Research North America

Major Pharmaceuticals

Industry Report

New Product Approvals Versus R&D Spending

Morgan Stanley Healthcare Team

45

2.5 $39

40 35 $30

30

$26

25 20

$32

2.0

$34

$19

$21

1.5

$23

1.0

15 10

0.5

5 0

0.0 1997

1998

1999

# of NME Approvals

2000

2001

R&D Spend ($bn)

2002

2003

2004

# Approvals/$1 bn

Source: PHRMA, FDA

Please see analyst certification and other important disclosures starting on page 21.

8


Equity Research North America

Major Pharmaceuticals

Industry Report

Patent Expirations Hampering Sales Growth

Morgan Stanley Healthcare Team

Launches w/in 4 Years

10,000

Patent Expirations

8,000

Launches - Expirations

6,000 4,000 2,000 0 -2,000 -4,000 -6,000 2001

2002

2003

2004 2005E 2006E 2007E 2008E

Source: Company data, Morgan Stanley Research

Please see analyst certification and other important disclosures starting on page 21.

9


Equity Research North America

Major Pharmaceuticals

Industry Report

The Pharmaceutical Industry is Cyclical

Morgan Stanley Healthcare Team

•Returns are determined by three cyclical factors 1) The economy –The economy does not determine demand but does determine the ability to pay 2) Research and development productivity –R&D is not a linear process. Paradigm shifts in science shape R&D productivity 3) Intellectual property cycle –This is not the same as the R&D cycle plus patent protection period. Generic technology can undermine some patents –Life cycle extension strategies create opportunities for generic companies and introduce more volatility into big cap pharma returns Please see analyst certification and other important disclosures starting on page 21.

10


Equity Research North America

Major Pharmaceuticals

Industry Report

Cycles are Evident in the Healthcare Sector

Morgan Stanley Healthcare Team

17 16

HatchWaxman

5 Year Growth Rate

DRG's 15

Resumption of new product cycle

Hillary Clinton PBM's HMO's

Resumption of new product cycle DTC

14 13 12 11

Patent Expiration Maturation of new product cycle

10 9 Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 Source: Company data, Morgan Stanley Research

Please see analyst certification and other important disclosures starting on page 21.

11


Equity Research North America

Major Pharmaceuticals

Industry Report

Product Cycle in the Pharmaceutical Industry

Morgan Stanley Healthcare Team

Technology & Products Cycles

Antibiotics Other anti-infectives

Chemistry Empiricism

Single lesion Diseases Addressed with Single action drugs Eg PPIs, H2 blockers Beta blockers statins

Chemistry Empiricism Biology

Multi-factorial diseases and genotyped medicine ?

Chemistry Empiricism Biology Genetics

Source: Company data, Morgan Stanley Research

Please see analyst certification and other important disclosures starting on page 21.

12


Equity Research North America

Major Pharmaceuticals

Industry Report

Regulatory Pressures Remain a Threat

Morgan Stanley Healthcare Team

• Government striving to control rising healthcare costs • Medicare Modernization Act will enable seniors to purchase drugs at a significant discount • FDA appears to be exercising caution – recent withdrawals of Bextra and Tysabri – Additional warning labels on anti-depressants, NSAIDs, and antipsycotics

Please see analyst certification and other important disclosures starting on page 21.

13


Equity Research North America

Major Pharmaceuticals

Industry Report

How Can Industry Respond to These Threats?

Morgan Stanley Healthcare Team

Increased Efficiency of Operations – Focus on operating margins and balance sheet to improve overall ROIC – Blockbuster business models a thing of the past; model doesn’t work when revenues turn down.

•PFE’s $4.0 bn internal restructuring may lead to increased belttightening across the industry – Ways to cut costs • reductions in SG&A • efficiencies in R&D • manufacturing plant closures

– BMY, MRK, Roche, LLY have already begun to streamline; others to follow Please see analyst certification and other important disclosures starting on page 21.

14


Equity Research North America

Major Pharmaceuticals

Industry Report

SGA spending cuts may be biggest opportunity

Morgan Stanley Healthcare Team

SGA as a % of Sales - US Major Pharma 40% 35%

32%

31%

31%

31% 29%

30%

32%

33%

29% 26%

25% 20% 1996

1997

1998

1999

2000

2001

2002

2003

Source: Company data, Morgan Stanley Research

Please see analyst certification and other important disclosures starting on page 21.

15

2004


Equity Research North America

Major Pharmaceuticals

Industry Report

Sales force cuts could be logical start

Morgan Stanley Healthcare Team

• Rep growth has far outpaced doctor growth, suggesting each rep has fewer doctors to visit 100,000

450,000

90,000

400,000

80,000

350,000

70,000

300,000

60,000

250,000

50,000

200,000

40,000

150,000

30,000

100,000

20,000

50,000

10,000

0

0 1996

1997

1998

1999

# reps

2000

2001

1996

1997

1998

1999

#doctors

Source: McGraw Hill Healthcare Information Group

Please see analyst certification and other important disclosures starting on page 21.

16

2000

2001


Equity Research North America

Major Pharmaceuticals

Industry Report

Sales force cuts could be logical start

Morgan Stanley Healthcare Team

• The quality of each rep’s interaction is worsening Sit down with Doctor, 20%

Leaves samples at front desk, 28%

Leaves w/o leaving samples or seeing Doctor, 15%

Meets Doctor at sample closet, 37%

Source: McGraw Hill Healthcare Information Group

Please see analyst certification and other important disclosures starting on page 21.

17


Equity Research North America

Major Pharmaceuticals

Industry Report

Sales Force Cuts seem like Logical Start

Morgan Stanley Healthcare Team

• Only MRK, which actually derives most of its sales from primary care, has right sized its sales force • If PFE could achieve the same level of productivity, it could eliminate 10,000 sales reps Sales per rep ($ millions) $1.8 $1.6 $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 PFE

GSK

NVS

BMY

MRK

SGP

SNY

WYE

LLY

Source: 2003 Company data

Please see analyst certification and other important disclosures starting on page 21.

18


Equity Research North America

Major Pharmaceuticals

Industry Report

Cox-2s were major source of spending

Morgan Stanley Healthcare Team

PFE's Estimated Promtional Spending by Product (2004)

$900 $800 $700 $600 $500 $400 $300 $200 $100

Please see analyst certification and other important disclosures starting on page 21.

19

Inspra

Zyvox

Spiriva

Neurontin

Xalatan

Relpax

Detrol

Geodon

Aricept

Norvasc

Zyrtec

Caduet

Zithromax

Viagra

Zoloft

Bextra

Celebrex

Lipitor

$0


Equity Research North America

Major Pharmaceuticals

Industry Report

Other sources of cost savings

Morgan Stanley Healthcare Team

• Risk-sharing among companies including marketing collaborations and development agreements -( BMY/MRK:muraglitazar) • Outsourcing of clinical trials to lower cost regions such as India, China, Poland -(GSK and NVS) • Improved asset utilization • lower Capital Expenditures (BMY and MRK) • more efficient manufacturing (MRK) • improved inventory management (LLY and MRK)

Please see analyst certification and other important disclosures starting on page 21.

20


Equity Research North America

Major Pharmaceuticals

Industry Report

Disclaimers

Morgan Stanley Pharma Team Analyst Certification

The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Jami Rubin. Important US Regulatory Disclosures on Subject Companies The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (collectively, "Morgan Stanley"). The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

21


Equity Research North America

Major Pharmaceuticals

Industry Report

Analyst Stock Ratings

Morgan Stanley Pharma Team STOCK RATINGS

Different securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. For example, Morgan Stanley uses a relative rating system including terms such as Overweight, Equal-weight or Underweight (see definitions below). A rating system using terms such as buy, hold and sell is not equivalent to our rating system. Investors should carefully read the definitions of all ratings used in each research report. In addition, since the research report contains more complete information concerning the analyst's views, investors should carefully read the entire research report and not infer its contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. GlobalStock Stock Ratings Distribution Global Ratings Distribution (asof of Mar January 2005) (as 31,31, 2005) Coverage Universe Investment Banking(IBC) Clients (IBC) Coverage Universe Investment Banking Clients %% of of % of % of Rating Stock Rating % of Stock Rating Category Count Total Count Total IBC Category Category Count Total Count Total IBC % of Rating Category Overweight/Buy 647 35% 260 39% 40% Overweight/Buy 267 40% 40% Equal-weight/Hold 669 84535% 45% 297 45% 35% Equal-weight/Hold 868 45% 299 45% 34% Underweight/Sell 378 20% 106 16% 28% Underweight/Sell 371 1,87019% 105 16% 28% Total 663 Total 1,908 671

Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equalweight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O or Over) - The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. More volatile (V) - We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts. Analyst Industry Views Attractive (A) - The analyst expects the performance of his or her industry coverage universe to be attractive versus the relevant broad market benchmark over the next 12-18 months. In-Line (I) - The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad market benchmark over the next 12-18 months. Cautious (C) - The analyst views the performance of his or her industry coverage universe with caution versus the relevant broad market benchmark over the next 12-18 months. Stock price charts and rating histories for companies discussed in this report are available at http://www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.

22


Equity Research North America

Major Pharmaceuticals

Industry Report

Other Important Disclosures

Morgan Stanley Pharma Team

Other Important Disclosures This research report has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings disclosed in the section entitled "Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons. Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the equity securities of companies covered in its research reports on a principal basis. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company. With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. This publication is disseminated in Japan by Morgan Stanley Japan Limited; in Hong Kong by Morgan Stanley Dean Witter Asia Limited; in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia by Morgan Stanley Dean Witter Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services licence No. 233742, which accepts responsibility for its contents; in Taiwan by Morgan Stanley & Co. International Limited, Taipei Branch; in Korea by Morgan Stanley & Co. International Limited, Seoul Branch; in India by JM Morgan Stanley Securities Private Limited; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., which accept responsibility for its contents. Morgan Stanley & Co. International Limited, authorized and regulated by Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities is available on request. Copyright 2005 Morgan Stanley 23

Jami Rubin April 2705  

Industry Report Equity Research Please see analyst certification and other important disclosures starting on page 21. Morgan Stanley Healthc...

Read more
Read more
Similar to
Popular now
Just for you