Rebuilding Trust: A Revolution in Compliance November 17, 2004

1. Rebuilding Trust: A Revolution in ComplianceNovember 17, 2004 Anthony Farino Leader, US Pharmaceutical Advisory Services Group

2. Fundamental Challenges in the Pharmaceutical Industry • Market dynamics and competitive pressures are making it necessary for pharmaceutical and health care products companies to examine their corporate strategies, to re-engineer processes, all with a goal of improving productivity and reducing costs. • R&D continues to face the challenge of increasing the flow of new products to a level sufficient to sustain targeted sales growth. • Regulators across the globe are flexing their muscles through increased rule-making activity; enforcement actions and punitive fines. • Continued investigations into commercial practices, and enhanced scrutiny of clinical and manufacturing functions will continue to fuel significant change in business practices and required controls. • Regulatory sanctions are now of a level that can threaten the very existence of companies, and risk and compliance departments can now make a significant difference to the success of a company, and its share price. • Governments, large payers, and patients continue to raise questions about product pricing and the cost effectiveness of certain therapies.

3. Fundamental Challenges Exist Across the Major Markets • Tougher regulatory environment is impacting across the value chain creating increased cost of compliance and reputational risk • Increasing concern over drug safety issues • Pressure from seniors has resulted in the passing of the Medicare drug benefit • Increasing use of generics and therapeutic substitution • Price control concerns rising from re-importation from Canada USA • Rising patient-co-payments • The likely introduction of a new pricing system • An increasing tendency to refuse reimbursement for costly new products • Greater separation of prescribing and dispensing • Continuing pressure on pharmaceutical budgets • Direct and indirect measures to control drug prices • Tighter controls on reimbursement • More sophisticated methods of monitoring prescribing Major Challenges Japan Europe Source: IMS Health 2002, PwC WINS Analysis

4. What Others Are Saying About the Industry “Stakeholders from almost every conceivable corner are leveling criticism at the industry for the prices of its products, for its reliance on the US to finance most of its research, and for its resistance to change ways that have long made it the most profitable sector in the US economy.” - John K. Iglehart, Founding Editor, Health Affairs The prices of the top 30 brand-name drugs prescribed for seniors rose by 4.3 times the rate of inflation last year. Families USA "I do think there is a serious problem in the pharma industry with the business model and with the lack of trust and respect in the general public.” - Hank McKinnel, Pfizer CEO, FT – May 3, 2000

5. Questions Senior Executives are Asking How do we know we have achieved a compliance mindset throughout the organization? How do our governance, risk and compliance practices measure up against leading practices? How do we ensure identification and resolution of issues in a timely manner? How do we build value and efficiency from our investment in governance, risk and compliance?

6. Looking for Answers….Research Recently Conducted by PwC PwC and Economic Intelligence Unit on Compliance (June 2003) Survey of 160 executives at international financial institutions, regulators and technology houses in US, UK, Europe and Asia and 20 interviews META Group survey on behalf of PwC (October 2003) 135 interviews with executives and line of business managers at North American multi-nationals with revenue greater than $1 billion Global CEO Survey on Risk (December 2003) 1391 phone interviews with CEOs around the world; 35% from companies with more than a billion in revenue PwC and Economic Intelligence Unit on Governance (April 2004) Survey of 200 executives at international financial institutions, regulators and technology houses in US, UK, Europe and Asia

7. Key Research Findings: Governance 97% of respondents saw integrity as a source of competitive advantage and over half reported it as a source of “great competitive advantage” Clear, public codes of governance, better communication with more constituencies and a clean track record were identified as the most important ways companies could demonstrate a culture of integrity. The compliance function and the risk management function stood out as top governance-related areas for expanded resource allocation.

8. Key Research Results: Risk 60% of CEOs responding report ERM is a priority of theirs and the board’s 43% believe they don’t have the information they need to manage risk on an enterprise level. 58% say risk is not fully integrated into strategic planning 51% say everyone in the organization does not understand their accountability with regard to risk management 73% say risk is not fully integrated across all business units and functions

9. Key Research Results: Compliance Only 15% feel their compliance procedures are effective in minimizing reputational risk Reputational risk identified as #1 priority Only 25% believe they are in full compliance with regulations and laws Customers are viewed as second only to regulators as key drivers to adopt and implement best practices Compliance with internal risk control policies viewed as more effective at protecting against reputational damage than compliance with government and/or exchange rules

10. What Others are Saying about Compliance Programs MetaGroup/PwC SurveyOctober 2003

11. Integrated View of Governance, Risk Management & Compliance

12. A New Vision of Compliance: An Integrated View of Governance, Risk, and Compliance

13. Where are GRC Programs Most Vulnerable? • Tone-at-Top/Oversight/Culture • Corporate strategy and missions do not consider GRC concerns • Culture not aligned with organization’s GRC strategy, mission and values • Management behavior is inconsistent with stated procedures • Inability or lack of process to elevate issues to senior management • Senior management is not effectively communicating the organizational strategy • Understanding Cost • Total Cost of Compliance is not known • Compliance Functions have become costly, an in some instances ineffective and inefficient • Unexpected costs are incurred as a result of required compliance steps • Resources are unavailable to support compliance requirements • Monitoring and Reporting • Lack of identification of the appropriate data to be monitored and reported results in ineffective programs and cost increases • Costs of monitoring increases without focus on use of technology and synergies among people and processes • Quality of underlying data that is used to monitor is unreliable • Inability to monitor information on a timely basis is key to effective program maintenance • Accountability for monitoring is not clearly defined • The audit plan do not consider compliance risks and / or the outcomes of audits are not elevated to senior management to assess and take corrective action

14. Leading Practices Associated with Key Enablers

15. Concluding Thoughts: Enabling the Strategic Advantages of GRC Aim higher Drive an awareness deep into the organisation’s DNA Anticipate the next challenges Help the board to operate effectively Communicate with all stakeholders who affect the way your company performs