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Pharmaceutical Industry Update: Challenges, Opportunities, & Outlook

Pharmaceutical Industry Update: Challenges, Opportunities, & Outlook. Bin Li, Ph.D., MBA Equity Research Analyst Global Pharmaceuticals Merrill Lynch. Disclaimer. Introduction. Current Industry Overview Issues & Challenges Positives & Catalysts Therapeutic Analysis

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Pharmaceutical Industry Update: Challenges, Opportunities, & Outlook

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  1. Pharmaceutical Industry Update: Challenges, Opportunities, & Outlook Bin Li, Ph.D., MBA Equity Research Analyst Global Pharmaceuticals Merrill Lynch

  2. Disclaimer

  3. Introduction • Current Industry Overview • Issues & Challenges • Positives & Catalysts • Therapeutic Analysis • Outlook & Opportunity • Case Study

  4. Current Status: 2002… Slowdown From 2001 2002 % Constant $ Growth Const.$ Bil %Share 2002 CAGR 97- 01 World Audited Market LATIN AMERICA 16.5 4.1 - 10.4 + 0.6 A/A/A 31.8 7.9 + 10.6 + 9.9 JAPAN 46.9 11.7 + 1.0 + 3.5 EUROPE 102.4 25.5 + 8.1 + 7.6 NORTH AMERICA 203.6 50.7 + 11.7 + 14.2 WORLDWIDE 401.2 100.0 + 8.2 + 9.5 10 Strategic Markets 336.5 83.8 + 9.0 + 10.5 SOURCE: IMS HEALTH,MIDAS, retail and hospital where available

  5. +11.5% USA $195.6 Bil +1.0% JAPAN $46.9 Bil +5.2% ITALY $13.2Bil +4.0% FRANCE $19.2 Bil +11.4% UK $13.7 Bil +9.5% MEXICO* $6.1 Bil +11% SPAIN $8.7 Bil +8.4% BRAZIL* $4.1 Bil 10 Strategic Markets: U.S. Is the Key Growth Driver +9.0% 10 Key Markets $336.5 Bil +8.0% GERMANY $20.3 Bil % Constant $ Growth +14.5% CANADA $8.0 Bil +7.4% EUROPE $75.0 Bil Constant Dollars * Pharmacy Market Only SOURCE: IMS HEALTH

  6. U.S. & Europe Dominate Growth % Contribution to Absolute Growth Ten Key Markets North America Europe (All) A/A/A Japan Latin America Constant Dollars. Includes panels w/o six years of data Source: IMS HEALTH

  7. Key Industry Challenges & Issues • Pipeline • Patent • Price • Promotion • Politics

  8. Key Industry Issues: Pipeline, Patent, Price, Promotion, & Politics Pipeline Drought: Approvals Declined Despite Increased R&D

  9. Top 5 brands 2001 2002 2003 2004 2005 2006 1 Prozac (Eli Lilly) Prilosec (AstraZeneca) Cipro (Bayer) Allegra (Aventis) Zithromax (Pfizer) Zocor (Merck) 2 Pepcid (Merck) Augmentin (Glaxo) Wellbutrin (Glaxo) Celexa (Forest) Amaryl (Aventis) Zoloft (Pfizer) 3 Mevacor (Merck) Claritin (Schering) Flonase (Glaxo) Diflucan (Pfizer) Biaxin (Abbott) Pravachol (BMY) 4 Alphagan (Allergan) Prinivil (Merck) Accupril (Pfizer) Paraplatin (BMS) Basen (Takeda) Ambien (Sanofi) 5 Elocon (Schering) Zestril (AstraZeneca) Monopril (BMS) Epogin (Chugai) Harnal (Yamamouchi) Zofran (Glaxo) Key Industry Issues: Pipeline, Patent, Price, Promotion, & Politics Patent Exposure: Enormous Pressure from Patent Expirations

  10. Key Industry Issues: Pipeline, Patent, Price, Promotion, & Politics Price & Politics: Pressure From All Levels, Every Direction • Private Sector: • Rising HMO Rx co-pays (increased co-pay reduces drug utilization) • Heavier discounts and higher rebates • Retail chains suing for differential discount rates • Federal: • Medicare Part B, Medicaid price control (FTC & DOJ are investigating pharmaceutical industry pricing and marketing practices. The government is focused on drug company “inducements” that may have improperly influenced sales of products) • Drug Reimportation - back to agenda Source: Harris Survey and IMS

  11. Key Industry Issues: Pipeline, Patent, Price, Promotion, & Politics Price & Politics: Pressure From All Levels, Every Direction • State: • Maine Rx - entitlement to Medicaid type discounts • States suing for overcharging Medicare for cancer drugs • States forming purchasing groups to demand discounts • Suffolk County - inflated AWP prices to overcharge • Foreign Government: • Japan: price downward revision coming soon • Italy: 5% price cut; regional formularies; reference pricing • Germany: increased parallel importing; generic substitution, reference pricing; 6% cut • France: increased generic substitution; reduced reimbursement (but better for NCEs)

  12. Key Industry Issues: Pipeline, Patent, Price, Promotion, & Politics Promotion: Increased Spending Due To Intense Competition • Sales force has doubled in 6 years • Marketing cost also doubled (DTC is the fastest growth component) # of Sales Reps

  13. Key Industry Issues: Pipeline, Patent, Price, Promotion, & Politics Generic Competition: Faster Substitution & High Litigation Risk • Selected List of Recent Patent Litigation: • AgainstFavor Mix Pending • Norvasc Fosamax Prilosec Wellbutrin • Augmentin Neurontin • Claritin Zyprexa • Prozac Premarin • Taxol Plavix • Buspar Allerga • Paxil Lipitor • Rebetol Vioxx • All are blockbuster drugs. Some have expiration beyond 2010.

  14. Despite the Issues, Industry Still Has Growth Potential Industry Positives Support A Healthy Growth • Political Environment • Republic President and Congress Favor Market Approach for Drug Price • Medicare Rx Reform • The President and Congress Still Pushing for the Bill • $400-500 Bn for Rx over 10 years • Changes in FDA • New FDA commissioner and PDUFA III • Other Initiatives: improved transparency, better communication, shortened approved times, and new cGMP rules • Demographic Trends Underpin Long-Term Revenue Growth • Patent Pressure Will Ease in the Next Few Years • Pipeline Candidates Have Increased • Overall, Pipeline to Patent Profile (P2P) Should Improve

  15. Demographic Trends Underpin Long-Term Growth By the Year 2006, 30% of the US Population Will Be 50+ Years Old Source: Census Bureau Estimates and Forecasts, 2001 Source: Census Bureau Estimates and Forecasts, 2001

  16. Demographic Trends Underpin Long-Term Growth Major Diseases Are Under-diagnosed and Under-treated Diagnosis12 Month Visits (Mil) Hypertension 53.6 Diabetes 25.1 Hyperlipidemia 14.7 Osteoarthritis 11.4 Hypercholesterol 8.9 Dermatophytosis Nail 7.8 Cataracts 7.3 Menopause 7.2 Esophagitis 7.1 Depression 7.0

  17. Number of Product in Development Has Been Steadily Climbing Drug Candidates by Clinical Trial Phase Source: Pharmaprojects

  18. Pipeline to Patent Ratio Is Improving New Product Rev. Will Offset Off-patent Rev. Loss in 2004 Source: Merrill Lynch Research

  19. Industry Earnings Growth Outlook Long-Term Earnings Growth Is Expected To Be Around 10% Source: Merrill Lynch Research

  20. Therapeutic Analysis - 2002 Overview Cardiovascular and Central Nervous System Drugs Still Dominate Source: Merrill Lynch Research

  21. Therapeutic Analysis - Disease Category Healthy Growth for Most Treatment Classes. Decline Due to Generics • High Growth Category - New Products: Lipid Lowering, Asthma etc. • Slow Growth Category - No New Products: Hypertension, Ulcers, etc. • Declining Category - Generic Substitution: Diabetes, Antibiotic, etc. Source: Merrill Lynch Research

  22. Therapeutic Analysis - Drug Class Statin, Anti-ulcerant & Blood Growth Factor Top the Chart • High Growth Category - New Products: blood growth factor, antipsychotic • Slow Growth Category - No New Products: COX-2 inhibitor, antihistamine • Declining Category - Generic Substitution: ACE inhibitor, Ca blocker Source: Merrill Lynch Research

  23. Therapeutic Analysis - Top 10 Drugs Statin Drugs Are the Winners, PPIs Are Still Around • Blockbuster drugs are highly concentrated in global giants - Pfizer has 3, Merck has 2 of the top 10, AstraZeneca, Abbott, Lilly, Glaxo, J & J, Amgen have the rest • Major pharmaceutical firms blockbuster strategy Source: Merrill Lynch Research

  24. Therapeutic Analysis - Growth Outlook CNS, Oncology, Urology, Musculoskeletal Will Lead the Growth Source: Merrill Lynch Research

  25. Therapeutic Analysis - Drug Class Growth Forecast Lead Table Will Be Significantly Different in 3 Years • High growth class: crowded, competitive, but new launches expand the market • Slow or negative class: mature class and generic competition Source: Merrill Lynch Research

  26. Therapeutic Analysis - Next Wave of New Medicines • 100 for AIDS (40 antivirals, 15 Vaccines, etc.) • 400 for Cancer (70 for Lung Cancer, 60 for Breast Cancer, 55 for Colon Cancer, 50 for Skin Cancer, and 50 for Prostate Cancer) • 200 for Heart Disease and Stroke (20 for Stroke, 20 for Congestive Heart Failure, 10 for Hypertension, 10 for Hyperlipidemia, etc.) • 200 for Neurologic Disease (40 for Pain, 30 for Brain Tumors, 25 for Alzheimer’s Disease, 17 for Parkinson’s Disease, 16 for Multiple Sclerosis) • 800 for Elderly (40 for Respiratory, 20 for Diabetes, 20 for Rheumatoid Arthritis, 20 for Depression, etc.) >1,000 New Medicines in R&D Stage for Major Diseases:

  27. Therapeutic Analysis - Cardiovascular • Hypertension • New guideline will expand patient base (140/90 to 120/80 mm Hg) • Old treatment dominated by generics (diuretics, beta-blockers) • Branded ACE inhibitors & Ca blockers converted to generics • New class dominated by branded drugs (ARB) • Lack of innovative treatment (only Inspra) • Lipid-lowering • Statin: still the biggest class ($20B/yr) and growing at a healthy pace • Statin: new competitor (Crestor) expected to challenge Lipitor, Zocor etc • Statin: generics eroding market share and will grow significantly beyond 2006 • New Class: Zetia

  28. Therapeutic Analysis - CNS • Antidepressant • SSRI: Prozac expired, Paxil, Celexa, Zoloft will follow • SNRI: new entrant (Cymbalta) • Still Needs New Class: Sub-P antagonist • Antipsychotics • Atypicals: crowded and relative new class (Zyprexa, Risperdol, Seroquel, Geodon, Abilify) • Alzheimer’s and Parkinson’s Disease • No effective treatment but market potentials are enormous • Alzheimer’s: cholinesterase inhibitor (Aricept, Reminyl) & memantine

  29. Therapeutic Analysis - Diabetes • Epidemic Type 2 Diabetes • Increased 60% in 1990’s (16 million and climbing) • 20% of the elderly (>60 yrs) have diabetes • Underlying the epidemic: Obesity • Diabetic complications • microvascular: retinopathy (visual loss), nephropathy (renal failure) • macrovascular: MI, PVD, stroke • combined/metabolic: neuropathy, cardiomyopathy, foot ulcers • Anti-diabetic Agents • Sulfonylurea (glyburide, glipizide), Metformin (Glucophage) have been genericized and widely prescribed • Glitazone (Actos, Avandia), Alpha-glucosidase inh. (acarbose), insulin secretion enhancer (mitiglinide) are becoming popular • Insulin • old generation could face first batch of bio-generics • new generations of insulin: inhaled (Exubera), glucagon-like (exenatide) • Many new emerging classes: PPAR agonist, beta-3 agonist, aldose reductase inhibitor, dipeptidylpeptidase IV inihibitor

  30. Therapeutic Analysis - Oncology • New Development Stemmed from Scientific Breakthroughs • Accommodative Regulatory Agency • FDA new policy for accelerated review/approval • CDER & CBER combined • New standard for approval (survival is not the only primary endpoint) • Market Demand • No cure cancer therapy available • Unsatisfied physicians and patients will try everything available (off-label) • Excellent Field for New Biologics • Add-on is the new way of treatment • Pricing is more attractive than other drugs • Generics Have Few Opportunity • Regulatory route for biogenerics not clear

  31. Outlook & Opportunity:2003 Approvals Source: Merrill Lynch Research

  32. Outlook & Opportunity:Further Look at 2003 Approvals Break Down of the 25 Expected New Products... • First-In-Class: 5 out of 25 (20%) • Long development time and costly, may not return the investment • Me-Too Drugs: 13 out of 25 (72%) • Shorter R&D time: no target identification & validation • Lower regulatory hurdle: clear clinical protocol (well-defined clinical endpoints), FDA familiarity • Market familiarity: compete on moderate improved efficacy, incremental safety benefit • Higher marketing cost: market share battle between incumbent and new players • In general, 2nd or 3rd entrant may still gain significant share • 3 out of 13 me-too drugs are either 2nd or 3rd (e.g. Cialis, Levitra) • Later entrants may not become blockbuster • 10 out of 13 belong to this category • but there are some exceptions (Crestor…the market is big enough) • New Formulation/Delivery Technology: 2 out of 25 (8%) • Viable business model that many mid size pharmaceutical companies rely on

  33. Development for First-in-Class Drug is Long and Costly Compound Success Rates by Stages Discovery (2-10 years) Compound Success Rates by Stage 5,000-10,000 screened Preclinical Test Laboratory and animal testing Phase I 20-80 healthy volunteers used to determine safety and dosage 250 enters preclinical testing Phase II 100-300 patient volunteers used to look for efficacy and side effects 5 enters clinical testing Phase III 1,000-25,000 patient volunteers used to monitor diverse reactions to long-term use FDA Review/Approval Additional Postmarketing Testing Years 1 approved by the FDA 0 4 8 12 16

  34. Regulatory Lead Target Target Screen Primary Secondary Preclinical Submission Identification Validation Development Screening Screening Optimization Studies and Review Me-Too Drug May Save 25% Cost & 2-5 Years of Development Time Average Time = 14.2 yrs; Average Cost = $820 M Compound Discovery Early and Development Discovery Clinical Trials Expenditures Est. $14 B $19 B $19.4 B Phase III Phase I Phase II Genomics Functional Genomics Proteomics Bioinformatics Gene sequencing Gene chip Novel assay technologies Combinatorial chemistry High-throughput screening Toxicology screening Medicinal chemistry Information Systems

  35. Outlook & Opportunity:The Era of Generics Has Come The Balance Has Shifted to Generics • Favorable Political Environment and Legislation • Government budget pressure (federal and state budget deficit) • Increasing drug cost for private payors (HMO, employers) • High profile patent abuses by branded pharmaceutical companies • Hatch-Waxman and the new Medicare Rx bill • No clinical trial, only bio-equivalent study and CMC • 6 months exclusivity and 30 months stay • Enhanced FDA Division for Generics • Legal System: Data Show Court Side More Often With Generics • Creative legal strategies from generic companies • On average, generic challengers won 70% of the litigation • Potential Windfall for Patent Challengers • Risk/Benefit analysis encourages litigation • Enormous financial rewards for 6 month exclusivity • Generic Prozac • Generic Prilosec

  36. Outlook & Opportunity:The Era of Generics Has Come Patent Exposure: Enormous Opportunity for Generic Substitution Top 5 brands 2001 2002 2003 2004 2005 2006 1 Prozac (Eli Lilly) Prilosec (AstraZeneca) Cipro (Bayer) Allegra (Aventis) Zithromax (Pfizer) Zocor (Merck) 2 Pepcid (Merck) Augmentin (Glaxo) Wellbutrin (Glaxo) Celexa (Forest) Amaryl (Aventis) Zoloft (Pfizer) 3 Mevacor (Merck) Claritin (Schering) Flonase (Glaxo) Diflucan (Pfizer) Biaxin (Abbott) Pravachol (BMY) 4 Alphagan (Allergan) Prinivil (Merck) Accupril (Pfizer) Paraplatin (BMS) Basen (Takeda) Ambien (Sanofi) 5 Elocon (Schering) Zestril (AstraZeneca) Monopril (BMS) Epogin (Chugai) Harnal (Yamamouchi) Zofran (Glaxo) Source: Merrill Lynch Research

  37. Outlook & Opportunity: The Era of Generics Has Come Many Blockbusters May Lose Patent Earlier Than Expected • Selected List of Recent Patent Litigation: • AgainstFavor Mix Pending • Norvasc Fosamax Prilosec Wellbutrin • Augmentin Neurontin • Claritin Zyprexa • Prozac Premarin • Taxol Plavix • Buspar Allerga • Paxil Lipitor • Rebetol Vioxx • All are blockbuster drugs. Some have expiration beyond 2010.

  38. Outlook & Opportunity: The Era of Generics Has Come Patent Exposure for Major U.S. Pharmaceutical Companies Source: Merrill Lynch Research

  39. Outlook & Opportunity: The Era of Generics Has Come Patent Exposure for Major EU Pharmaceutical Companies Source: Merrill Lynch Research

  40. Case Study: Dr. Reddy’s A Company Has Emerged As A Major Player in Generic Industry • Before 1995, Domestic Focus and API Suppliers • Acquired Cheminor, American Remedies, and Set Up its U.S. Subsidiary in Late-90s to Gain Access to the U.S. Market • U.S. IPO in 2001 • Increased Internal R&D in Proprietary Drugs • Major Paragraph IV Challenges for 6 Month Exclusivity (10 total) • Prozac, Zyprexa, Plavix • A Respected Generic Player in the Global Market • 2003 Sales: $380M (+25%, ex-fluo.), Net Income: $74M, GM: 57% • CAGR (3 yr.) +31%, US +55% • Market Cap: $1.9B Source: Merrill Lynch Research

  41. Case Study: Dr. Reddy’s A Company Has Emerged As A Major Player in Generic Industry Source: Merrill Lynch Research

  42. Disclosures

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