natixis - biosimilars - attacking the last bastion

SECTOR REPORT

EQUITY RESEARCH

EQUITY MARKETS

CORPORATE & INVESTMENT BANKING / INVESTMENT SOLUTIONS / SPECIALIZED FINANCIAL SERVICES

6 December 2010 EuropePharmaceuticals Outperformance

Biosimilars: Attacking the last bastion

The copying of biologics has moved up a gear. Cracks are appearing in the walls of the last bastion of resistance to generics with the new law which authorises the marketing of biosimilars in the United States. The arrival in the arena of marketing heavyweights such as Pfizer, which has just signed an agreement with Indian generic maker Biocon, marks a new stage in the process.

We are now expecting a widespread arrival of biosimilars when patents expire for most biologics. This is leading to a commoditisation of the status of certain groups, and means, for example, that the recent derating of Roche has a structural component.

But it would be a mistake to write off the biologics industry. The economic basis for biosimilar copies is radically different from that of generics. Substitutable biosimilars will be allowed in the United States, but they should remain the exception rather than the rule. Biosimilars will therefore have a different business model from low value added conventional generics: a relatively strong marketing content, low cyclicality and a relatively high profitability. This is a real opportunity for generic makers, but also for pharmaceutical groups, which explains why Pfizer and Merck have suddenly arrived on the scene, and are likely to be followed by others soon.

Biosimilar penetration will be highly differentiated by market segment, depending on barriers to entry. Biosimilars will ultimately come to dominate in simple proteins (EPO hormones, etc.) but will remain weak even in the long-term for insulins, because of capital intensity which will not allow significant price cuts. Monoclonal antibodies, protected by being far more complex than conventional proteins, will also feel less pressure and at a later stage.

We are therefore still cautious on Roche (Neutral), which is suffering from persistent doubts about its growth capacity, but we maintain our confident stance on insulin producers Novo Nordisk (Buy) and sanofi-aventis (Buy). Stada (Buy) remains one of the few stock market vehicles to play the generic sector in Europe.

Equity Markets equity.natixis.com Bloomberg access NXSE Distribution of this report in the United States. See important disclosures at the end of this report.

Analyst(s) Philippe Lanone (33 1) 58 55 05 03 [email protected] Béatrice Muzard (33 1) 58 55 05 13 [email protected]

66.30

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déc-07 av r-09 sept-10

DJ St oxx Healt hcare

Rel. DJ St oxx

Source: Natixis

Company Rating Price Target P/E (x) EV/EBIT (x) EV/Turnover (x)

2010 2011 2010 2011 2010 2011 Novo Nordisk Buy DKK574.00 DKK600.00 24.5 20.2 17.9 15.4 5.7 5.0 Roche Neutral CHF138.40 CHF150.00 10.5 9.4 8.7 7.7 2.9 2.6 Sanofi-aventis Buy €47.92 €63.00 7.0 7.0 5.6 5.3 2.1 2.0 Stada Buy €24.15 €29.00 11.3 10.4 10.4 9.6 1.4 1.3 Median 10.9 9.9 9.5 8.7 2.5 2.3

http://www.sec.natixis.com/�

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Contents

Investment summary 4

1. Valuation: What impact from biosimilars? 6 Valuing pharmaceuticals: Raptures of the deep 6 European groups: Solid growth capacity 8

2. Biologics: what makes them different? 15 Highly specific products 15 Players in a highly profitable market 16

3. Biosimilars: a “new breed” of drugs! 21 Quite a difference between "similar" and "same"! 21 Regulations: the US is lagging behind, but is more ambitious than Europe 23 Commercial impact: what can be learned from Europe? 28

4. The biosimilars players 31 A branded product business model 31 Generic drug producers: few biosimilar candidates 33 An eldorado that is also attracting the pharmaceutical groups 40

5. Big pharma: growth strategies in the face of biosimilars 42 Roche: growth in spite of everything 42 Insulins: biologics apart 46 What impact for sanofi-aventis and Novo Nordisk? 49

6. Appendix 53

7. Company profile 58

Novartis 59 Our top pick 59

Novo Nordisk 63 Above the fray 63

Roche 67 Return to grace unlikely before 2011 67

Stada 71 The recovery is on track 71

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Investment summary

Pfizer took on the persona of Dr Faustus in October 2010, when it found its Mephistopheles in the form of Indian generic manufacturer Biocon, with which it signed an agreement for the development of biosimilars. What seems at first an unholy alliance bears witness to the great attractiveness of the biosimilars market, into which – in addition to large generic makers such as Teva, Sandoz and Stada – major pharmaceutical groups (e.g. Merck, Pfizer and Amgen) are rushing enthusiastically.

The potential market opening up is enormous. Biologics currently represent a market of $94bn, and a majority of them will have lost their patent protection by 2015. The market for biosimilar products – though currently still taking its first hesitant steps - could reach $10bn by 2017.

Up to now, it has not been possible for biologics to face generic competition, because of their complexity. But the legislation has changed. In Europe, the marketing of biosimilars (copies of biologics) has been possible since 2006. In the United States, the Obama law will go even further. Not only will the launch of biosimilars be possible, but in some cases (unlike the situation in Europe) they may be substitutable for the original drug, producing a situation similar to that in conventional generics. There will even be the possibility of attacking patents. This should however be much less widespread than for conventional generics. Generally speaking, as in Europe, this will be a separate category of products, with a business model halfway between a generic and a branded product.

In Europe, biologics are recognised for their specificity, and biosimilars are not generics. Clinical trials are required before biosimilars can be approved, and they are marketed under a specific name. This means development and marketing costs, and a much less substantial price discount than for a generic. Whereas a conventional generic is launched at a discount of 80% to the price of a branded product, for a biosimilar the discount is around 20% to 30%. There are two consequences. For the generic maker this means the certainty of better profitability and lower profit volatility for biosimilars than for conventional generics. But special production expertise is essential, and a certain level of financial clout. This is why only the heavyweights in the generics sector are present, such as Sandoz and Teva. And for the pharma groups, this means that presence in biologics remains an advantage, as biologics will only experience gradual erosion once their patent has expired, and not the sudden sharp fall of chemical products.

Experience of the situation in Europe, where some fifteen biosimilars have been launched since 2006, confirms that biosimilars only very gradually capture market share, limited to a few percentage points, which results in a moderate fall in the original products (-10% to -15%/year). In our view however, this situation will change. Once biosimilars have been widely introduced in all categories, and once prescribers have grown used to them, market share growth rates will be more rapid, and we have based our models on the most pessimistic hypotheses.

In our universe of stocks, biosimilars are primarily a major opportunity for Novartis, whose generics subsidiary, Sandoz, is already the leader in this segment with 47% of the market in 2009. It was moreover a pioneer with the marketing of the first Western biosimilar in 2006, Omnitrope, a human growth hormone. It recorded $118m of sales in this field in 2009, and we expect it to reach $600m in 2015. Furthermore, Sandoz has signed agreements with Momenta, which may be in the process of making history in the United States. Thanks to original technology, this company has succeeded in obtaining approval for a substitutable generic for Lovenox, by sanofi-aventis, a drug which is however recognised as a biologic in Europe. If successes of this

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type continue (it is now attacking Copaxone by Teva), this could change our analysis, with the widespread introduction of substitutable generics for biologics. But as things stand today, we consider that this is no more than a long-term risk.

In any case, the generics division should be an important growth lever for Novartis, with annual profit growth of 20%/year. We are maintaining our Buy rating for Novartis, with a target price of CHF70.

Amongst the big pharmas, the two groups most affected are Roche and Novo, followed to a lesser extent by sanofi-aventis.

In our view the disappearance of Roche’s premium to the sector shows that the market has taken on board a fear about falling sales of major products in the second part of the decade. Roche however has lengthy patent protection, with the bulk of its patents not expiring until 2018 and 2019. This is therefore primarily a problem for the next decade. An actuarial calculation, comparing valuations for products with and without biosimilars, thus shows an impact in the order of 8% of valuation. This means that Roche’s derating has a structural component. But the group does have growth strategies, despite biosimilars. The first one concerns new subcutaneous forms, which should take the place of some current sales, while in the process extending patent protection until 2024. Roche also has successors, with in particular T-DM1 for Herceptin, which despite delays remains highly promising, and GA 101 for Mabthera. Generally speaking, the group’s advanced pipeline remains one of the best in the industry, with a potential of CHF12.7bn, i.e. 33% of pharma sales only counting products in phase III. We are therefore confident, even assuming the arrival of biosimilars, that pharma sales should grow by 5%/year until 2015, and by around 4% a year after that date. However, the market will wait – before taking these prospects on board – for positive news flow, which means forgetting about recent disappointments (taspoglutide, Avastin). Until then, we are maintaining our Neutral rating.

The insulins market will also feel the competition from biosimilars. But two specific features will limit their impact: 1/ high capital intensiveness, and 2/ the crucial importance ofhe injection device. The necessary investments must provide a return, and the price flexibility of biosimilars will be limited. Furthermore, the insulins market is growing rapidly. Even if we assume that biosimilar penetration will ultimately be strong, we consider that Novo’s insulin franchise could t grow up to 2022, and by 2030 still maintain its 2012 level. The impact will therefore remain circumscribed, and the market’s attention will continue to be focused on the very strong short-term momentum, thanks in particular to Victoza. We think that the premium relative to the sector will be maintained, and we are sticking with our Buy rating.

Similarly, the sales of Lantus from sanofi-aventis should have no difficulty growing up to 2015, before stabilising with the arrival of biosimilars and the ramp-up of Degludec. The development of the Lantus/GL1 fixed combination may extend the growth of the franchise up to the end of the decade. We are therefore maintaining our Buy rating and our target price of €63.

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1. Valuation: What impact from biosimilars?

The performance of European pharmaceuticals was sluggish in 2010, only just following the market trend. This was despite the fact that EPS levels were extremely resilient during the crisis. The market is quite simply terrified by the “patent cliff”, and despite another demonstration of resilience in 2010, it seems to take apocalyptical prospects on board when it comes to valuation. Against this background, in which aversion to risk tends to become a pathological search for “scare stories”, the growing confirmation of the imminence of biosimilars is a new spectre on which its fears can be focused. As we demonstrate in this report, the market’s fears will once again turn out to be overdone, but they need to be taken into account from a stock market viewpoint, so as to evaluate the prospects of groups such as Roche and Novo Nordisk.

Valuing pharmaceuticals: Raptures of the deep

Chart 1: Historic relative performance of pharma sector

Source: Datastream

Following a very good performance since mid-2008, the sector’s performance has proved disappointing in Europe in 2010. Since the start of the year, it has been a market performer, as the sentiment of uncertainty about its short and medium term growth capacity has continued to put pressure on its valuation.

The significant upward revision of profit estimates has gone unnoticed. And yet, if the financial performances of pharma in Europe are compared to those of the CAC 40, it clearly emerges that pharma has turned out to be the only sector to be completely immune to the 2009 recession, with no decline in profits. In fact, over the period 2007/2009, the EPS of CAC 40 companies fell by 40%. It will not return to its initial level until 2012. Five years for nothing! Over the same period, pharma has achieved a 40% increase over 5 years, a growth differential which seems set to continue up to 2014.

Significant growth differential in relation to the market

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Chart 2: Comparative trends of market and pharma sector EPS (base: 100 in 2007)

Source: Natixis

This has made the valuation ratios of the sector fall to all-time low levels. P/E has thus been plumbing new depths. It seems that the market is expecting a meltdown in profits on a scale which is impossible in our view.

Chart 3: Historic relative PE of pharmaceutical sector in Europe and US (in x)

Source: Datastream

The causes of the worries are well known. Temporarily reassured by a revival in R&D productivity, the market has found two other causes of concern:

− The difficult environment for the sector (health care spending restrictions in Europe, fears about price trends in the United States, etc).

− And above all renewed fears about resilience in the face of attacks from the generic makers. As the patent expirations of 2011/12 come closer, doubts about short-term growth are more keenly felt. But in a longer-term view, anxiety about the arrival of the first biosimilars (generics of biologics) is beginning to be heard. Accordingly, the groups which have previously enjoyed the strongest immunisation against the genetic threat - because of the biologic component of their sales (Roche, Novo Nordisk, etc.) - are coming under the spotlight, and questions are being asked.

The aim of this report is to evaluate the threat posed by biosimilars in a long-term perspective to the valuation of the sector, and the valuations of Novo-Nordisk and Roche in particular.

Valuation ratios falling to all-time lows

Admittedly patent expiry dates are getting closer …

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European groups: Solid growth capacity In the absence of substitutable generics for biologics (in the current state of technology – see Momenta below), the sudden arrival of biosimilars represents a new form of competition, and a sharp brake on price flexibility for biologics, but not a complete calling into question of the sector. As shown clearly in chart 2 which compares EPS momentum, the sector still has a solid growth capacity over the next 4 to 5 years. The composition of the portfolio of the major European stocks helps us to understand that there is a bedrock of profit which is unaffected by “generic” themes of any kind. Thus, exposure to emerging countries is a growth asset for some players. In addition, the industry to innovation power is appearing more clearly in the decisions taken by the FDA. This will provide real support for the top line, and will be a genuine catalyst for valuations in the sector to move upwards. Finally, our estimates are made on a constant structural basis, but this does not allow for the mechanical accretive effect on EPS in the event of major acquisitions financed by debt.

67% of European laboratories’ portfolios are not “genericable”

Biosimilars will lead to a redrawing of the analysis criteria for pharmaceutical companies. This is why we have defined three categories of activity.

− The genericable part. We think it is prudent to think ahead, and we consider that all chemical products, whatever the length of their patent protection, will be affected by faster erosion in a long-term perspective. We are including those biologics which are set to rapidly come up against widespread competition from biosimilars.

− Sales of “strong barrier to entry” products, for which any rapid erosion is ruled out, whatever happens (insulins, etc.).

− Non-genericable activities, including vaccines, OTC and emerging countries.

We have calculated that actual expiration represents on average 6% of OP per year for the sector in the current “patent cliff” period. This will easily be absorbed by the growth in activities which are not sensitive to patent issues. The proportion of growing non-cyclical activities is rapidly increasing for all groups, which are broadly following the same strategy, except for those whose portfolio already meets these criteria, i.e. Novo and Roche.

Table 1: Structure of sales: Two-thirds are not genericable As % Genericable part (including

“simple” biologics: EPO, interferons)

Entry barrier (including respiratory, monoclonal

antibodies, insulins)

Definitely not genericable (emerging, vaccines, OTC)

AstraZeneca 70 14% (respiratory excl. emerging) 16% (o/w emerging 13%) Bayer

GSK 36 Advair+ Tykerb, Arzerra 5465 19%

Vaccines + emerging excl. vaccines+OTC £13,106m

45%

Novartis 42 9% (biologics+Alcon) 49% (consumer+ generics+ vaccines+emerging)

Novo Nordisk 7 70% Emerging 23%

Roche 36 42% (strictly monoclonal antibodies Europe/US)

22%

Sanofi-aventis 39 13% (insulins)

48% (vaccines+ emerging excl. vaccines +OTC + generics excl. emerging)

Sector average 33 28 39

Source: Natixis

But the sector has growth relays which can offset the loss of profits…

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The proportion of activities in which rapid growth is set to continue – either because generic competition is impossible, or because it is improbable and has minor impact – represents on average 67% of the sales of the groups. This proportion will continue to increase following recent acquisitions: Alcon for Novartis, and soon Genzyme for sanofi-aventis. Accordingly, it is hard to imagine how any of the groups could see their profits decline. Two companies stand out in this classification: Novo Nordisk, which has a very low genericable proportion, and at the other end of the spectrum AstraZeneca, which has to cope with the fact that most of its products are genericable. Note the case of GlaxoSmithKline, for which the Advair question could change the situation totally, if Sandoz managed to obtain authorisation for a substitutable generic.

Even after allowing for this pessimistic vision of the fate of biologics, and assuming a rapid fall in the genericable proportion as a whole (-20%/year), leading to its virtual disappearance in the space of 7 years, and without taking into account the impact of external growth, this sales structure does not suggest that there would be a fall in profits for the sector. On the other hand, it is set to go through a period of two years of near-stability, which corresponds in fact to the “patent cliff” which has triggered so many fears.

Chart 4: Growth despite biosimilars (simulation of sales trend based on previous table)

Source: Natixis

Biosimilars: Legitimate concerns The market’s concern about biosimilars is legitimate, for many questions have still not really been answered.

− To what extent will the FDA authorise biosimilars and on the basis of which clinical trials?

− Will biosimilars be interchangeable?

− Which types of products?

− Will sudden attacks on patented products become widespread, as in the case of conventional chemical drugs (ABLAs)?

In this report we attempt to provide some answers to these questions.

The passing of the Obama law (March 2010), and above all the authorisation of a substitutable generic for Lovenox (July 2010), mark a historical turning point for the industry. The substitutable generic authorisation amounts in fact to recognition of the technological ability, in this case of Momenta, to analyse the structure of a complex product so as to reproduce it in a way which is

And 67% of 2010 sales are not genericable, or only with difficulty

Law on biosimilars is increasing investor concerns

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Generic possible Grow th Barrier

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considered to be perfect in the eyes of the FDA. This seems to us to open the door to the possibility of substitutable copies for certain products, and this is probably what is terrifying the market.

We do indeed think that the special nature of many biologics will be attenuated, and that the corresponding stock market premium will therefore quite legitimately decline. This only applies however to the products which are easiest to reproduce.

Two categories of products seem in our view destined to escape any rapid erosion by generics, not only short-term but also long-term:

− Monoclonal antibodies, whose fabrication is too complex for a substitutable generic to be feasible in the near future, and for which any future biosimilar must present more significant clinical trials, as confirmed by the recent European guidelines.

− Insulin analogues. The Pfizer-Biocon agreement means there is no doubt that biosimilars for insulins will ultimately become widespread. But impact will remain limited: in addition to the inevitable clinical trials, capital intensity will limit price discounts. Note that an insulin unit on the scale required for global markets requires an investment of $50m to $100m, and that the administration system – which is essential – is highly complex (it took sanofi-aventis 10 years to develop a competitive pen device).

Impact on valuation: The example of Roche

The Roche share price trend, in particular, shows in our view that the market is now bundling together high barrier products and conventional chemical products. Roche – which makes two-thirds of its sales with biologics – has thus seen its valuation premium relative to the sector fall away, which is probably excessive. This is due in large part to the confusion sown by the imprecision of the new US law, and the announcements of groups which are now preparing biosimilars for monoclonal antibodies.

We have attempted to evaluate the real impact of the arrival of biosimilars on the main company concerned, i.e. Roche. It is 5 times less serious in profit terms than in the case of a conventional generic. With a conventional generic, we estimate that the profit for the originator group is reduced by 90%. In the case of a biosimilar, on our estimates, profit is simply divided by 2.

We have carried out simulations of the impact on valuation of the arrival of a biosimilar (see the case of Herceptin in the annex), which is based on the following hypotheses:

− An impact on Europe and the United States (excluding the emerging countries).

− A 25%/year reduction in sales of the product after the arrival of the biosimilars.

− A margin which is gradually reduced by 10 percentage points after the arrival of the biosimilar (based on a margin which in any case has been reduced by the decline in sales excluding biosimilars).

− The calculation does not take into account defence strategies, and particularly the launch of subcutaneous forms, which will enable the recovery of a large proportion of the value.

The law will apply – particularly initially - to those biologics which are easy to reproduce

It has led to a reduction in Roche’s stock market premium


SECTOR REPORT

Chart 5: Impact of biosimilars on valuation of Herceptin (CHFm)

Source: Natixis

If major product values are added together, this indicates an overall impact on valuation.

Table 2: Impact of arrival of biosimilars on valuation of major Roche products (CHFm)

Product Value without biosimilars Value with biosimilars Difference Avastin 25 851 22 462 3 389 Mabthera 13 513 11 767 1 746 Herceptin 14 556 11 611 2 945 Lucentis 5 546 4 783 813 Others 6 250 4 300 1 950 Total 10 843

Source: Natixis

We arrive at a valuation difference of CHF12.6 /share, which represents 8.4% of the target price. As this calculation makes no allowance for new formulations, the real impact is lower. It does however justify a decline in the premium relative to the sector. However the share price is at a 2012 P/E discount of 5% to the sector, which corresponds to a fall of 25% relative to the historic premium. Clearly the share is undervalued, even after allowance is made for biosimilars. But the short term momentum has been affected by R&D setbacks.

Innovation: THE differentiating factor

The recent decisions taken by the FDA and EMEA and their experts highlight the increase in the productivity of the pipelines of the major groups, which slumped from 2003 to 2009. But genuine efforts have been made to adapt to meet the regulators’ requirements, and have been based on new development methods combining 1/ the selection of patients chosen for clinical trials on the basis of the expression of genetic anomalies, 2/ research into outcome data (improvement in patient survival for an anti-cancer drug, reduction in the risk of vascular incidents for a molecule in cardiology) and no longer just into an effect on a bio-marker, and 3/ the setting up of secondary effect surveillance plans. Lastly, the prioritisation of certain programmes has been carried out alongside the discontinuation of earlier developments, thus incidentally enabling the R&D/sales ratio to be maintained at a stable level over the last three years.

The product news flow is now clearly more encouraging. And 2010 marks a turning point. Approvals and favourable recommendations by experts have come in quick succession. Mention should be

The impact of the arrival of biosimilars for Roche’s major biologics…

…could lead to a theoretical 8% reduction in the value of the group’s capitalisation

Biosimilars impact

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Without biosimilars With biosimilars


SECTOR REPORT

made of Brilinta (arterial thrombosis - AZn), Gilenya (MS, Novartis), Pradaxa (thrombosis, Boehringer Ingelheim) and more recently Benlysta (lupus, GSK). Better defined, the trials have also turned out to be positive: Xarelto (thrombosis, Bayer), teriflunomide (MS, sanofi-aventis). This trend should continue in 2011 with the eagerly awaited phase III trials of iniparib (breast cancer, sanofi-aventis), Degludec (long-acting insulin, Novo Nordisk) and dalcetrapib (dyslipidemia, Roche).

Certainly not everything in the garden is rosy, as shown by the negative decisions by FDA experts about Avastin (Roche) in breast cancer (even though it had already been marketed in the United States) and the suspension of major developments (taspoglutide from Roche/Ipsen), but these are signals of pipeline regeneration which the market is beginning to value, with the first prescriptions / sales, and which explain the difference in valuation between Novartis and its European counterparts.

Table 3: Valuation of Pharma sector 3/12/2010) x PE EV/EBITDA EV/Sales EV/EBIT

2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e AstraZeneca 7.6 8.5 8.3 4.3 4.5 4.2 1.9 1.9 1.8 4.7 5.0 4.7 Bayer 12.1 11.0 10.3 6.5 5.8 5.1 1.5 1.4 1.3 10.5 9.0 8.0 GlaxoSmithKline 9.8 9.5 8.9 6.8 6.4 6.0 2.4 2.2 2.1 7.2 6.8 6.4 Ipsen 13.4 11.7 9.0 7.4 6.1 5.2 1.4 1.2 1.1 9.8 8.0 6.6 Merck KGaA 8.7 8.2 7.4 6.5 5.9 5.2 1.6 1.5 1.4 10.5 9.4 8.4 Novartis 9.7 9.2 8.4 7.7 7.1 6.7 2.4 2.2 2.1 8.0 7.6 7.2 Novo Nordisk 20.2 17.7 15.2 10.9 9.5 8.0 4.0 3.5 3.1 12.3 10.8 9.1 Roche 9.4 8.7 7.5 6.7 6.0 5.4 2.6 2.4 2.1 7.7 6.8 6.1 Sanofi-aventis 7.0 7.2 7.2 4.8 4.6 nm 2.0 1.8 nm 5.3 5.0 nm UCB 14.2 12.7 11.2 9.5 8.8 7.7 2.0 1.9 1.7 13.4 12.4 10.8 European average 10.2 9.7 8.9 6.7 6.2 5.1 2.3 2.1 1.8 7.8 7.2 6.0 Abbott 10.2 9.5 8.5 7.0 5.9 5.2 2.1 1.8 1.7 8.9 7.5 6.4 Bristol-Myers Squibb 11.5 13.0 13.8 5.9 7.1 7.7 2.1 2.4 2.7 6.4 8.4 10.9 Eli Lilly and Company 7.7 9.0 9.0 5.0 5.4 5.8 1.6 1.7 1.9 5.8 6.7 7.5 Johnson & Johnson 12.5 11.7 10.7 7.3 6.5 5.6 2.4 2.1 1.9 8.6 7.5 6.4 Merck & Co 9.3 8.8 8.7 6.3 5.4 4.9 2.6 2.3 2.3 7.8 6.7 6.2 Pfizer 7.3 7.5 7.2 4.2 4.0 4.0 2.0 2.0 2.2 5.0 4.8 5.1 US average 10.0 9.8 9.3 6.1 5.6 5.8 2.2 2.1 2.1 7.3 6.7 6.5 World average 10.1 9.7 9.1 6.4 5.9 5.4 2.3 2.1 1.9 7.6 7.0 6.2

Source: Natixis estimates

Our favourite stocks

The strong share price momentum of Novo-Nordisk (Rating: Buy) is set to continue. The recent Q3 10 publication reflects the already large contribution of Victoza (Q3 sales of DK10,700bn). This rapid growth is set to continue in the short term, not least with the launch in 2012 of its long-acting insulin Degludec, currently in phase III, which we see offering peak sales of over DKK15bn in the long term. We value Novo-Nordisk at DKK600 per share based on a DCF analysis.

Thanks to its diversification business model, and its better-than-average R&D productivity and top-line dynamism, Novartis (Buy, target price CHF70) still has a very attractive profile. Faced with a more difficult context, with upcoming patent expirations in 2011/12 (29% of pharma sales), Novartis has three responses: 1/ diversification, particularly into generics and OTC, enabling it to tap into new markets (biosimilars) and increase its bargaining power with payers, 2/ its ability to innovate, highlighted on many occasions in 2010, and 3/ from now on, an optimisation of its asset base, by better use of production capacities, via a reduction in the number of sites (86 sites in all), and a

The real response to this new threat is the group’s ability to innovate

It is this ability to innovate which means we are maintaining our Buy rating for Novo and Novartis


SECTOR REPORT

lowering of the WCR. In results terms, this should lead to the cost of sales holding steady, or even falling, and an increase in ROCE (22% in 2010 excluding Alcon) significantly higher than the cost of capital (9%). More specifically, the generics division remains one of the cornerstones of the group’s strategy, aimed at decreasing the risk inherent in traditional pharmaceuticals. The generics business involves little development risk, and by definition no patent risk. Furthermore, the increase in the size of Sandoz has reduced the volatility of its results. The valuation of the generics leaders has thus increased significantly, and is becoming higher than that of conventional pharma players. Based on a 2012e EV/EBIT ratio of 8.5x, comparable with that of Teva, Sandoz could represent an EV of $17.5bn (out of a total of $178bn for Novartis, i.e. 11%). Novartis remains our favourite European stock.

Table 4: Breakdown of restated value of Novartis

$m 12 Sales 12 EBIT Multiples Multiples Enterprise value

12 EV/sales 12 EV/EBIT EV/sales EV/EBIT Novartis 59,528 16,405 3.0 10.8 178,293 177,414 Pharma 32,650 9,870 2.7 9.5 88,808 94,160 Sandoz 10,100 2,050 2.0 8.5 20,503 17,507 Consumer Health 6,604 1,375 2.5 10.0 16,510 13,750 Alcon (100%) 7,674 3,200 6.5 15.6 50,064 50,064 Vaccines (Chiron) 2,500 635 4.0 15.0 10,000 9,525 Corporate Charges -725 10.5 -7,592 -7,592 Total Enterprise Value 59,528 16,405 3.0 10.8 178,293 177,414 + Financial assets 11,381 11,381 - Roche 7,381 7,381 - Others 4,000 4,000 - Minorities (Alcon) 11,055 11,055 - Net debt 7,649 7,649 Restated value ($m) 170,971 170,092 Restated value per share (CHF) 76.2 75.8

Source: Natixis

Since July 2010, sanofi-aventis (Buy, target price €63) has been suffering from the uncertainty surrounding the Genzyme acquisition. The market’s usual touchy reaction about the buyer’s share price has been made worse by the stubbornness of the Genzyme management which refuses to open the door for negotiations, which suggests to us that taking a controlling interest will be a long process. In view of this, we are more cautious about the stock. The associated value creation cannot be fully reflected in the share price until completion of the deal is in sight. The value creation should easily reach €4 to €5 per share, depending on the level to which the bid is raised. Looking beyond the value creation linked to this operation, the group remains substantially undervalued in its current structure. The doomsday scenario the market is expecting will not happen (at most, a 2% decline in EPS is expected in 2012). In fact, the bedrock of growing non-genericable businesses, and the contribution of new products (Multaq, Jevtana), offset the loss of the profits of Plavix, Eloxatin, Taxotere and Lovenox-US (we estimate the impact at 11% a year from 2010 to 2012).

However, we are continuing to adopt a more cautious stance on Roche (Neutral, target price CHF150). The group has admittedly undergone a major derating, which has wiped off all of its historic premium. There are several explanations for this: 1/ worries about short-term growth (disappointing quarterly figures) and particularly medium-term growth (are biosimilars a danger for the future of Herceptin, Mabthera and Avastin?), 2/ questions about the fate of Avastin in breast cancer (FDA decision on 17 December), and the fate of taspoglutide. The announcement of the first restructuring plan of the decade (savings estimated at CHF1.8bn after tax, i.e. about 11% of the

Sanofi-aventis remains substantially undervalued, as the market is anticipating a doomsday scenario which will not happen

The market is likely to hold back on Roche until the Avastin decision is taken. Neutral rating maintained


SECTOR REPORT

group’s adjusted net profit in 2013) has not overcome this scepticism. Pharma stocks do not react to this theme. The main requirement for a return to grace would be clear positive news flow, together with good organic growth figures. It seems that this is not likely to happen for several months. We are maintaining our Neutral recommendation.

As for Stada, we consider that – after experiencing serious problems (particularly the insolvency of its distributors in Serbia and the negative impact of health reforms in Germany) – the group is in an upward phase. We are therefore maintaining our Buy rating, with a target price of €29. Stada published encouraging Q3 10 results, bolstered by the Branded Products division (+12%) and growth in Russia (+13%), and has confirmed its 2014 guidance figures. We therefore think the worst is behind us (provisions of €29m in 2010): the share should outperform the sector, and its discount of 30% (2012e P/E of 9.5x vs. 13.3x for all generic manufacturers combined) should decline.

We are confident about Stada’s ability to recover, and are maintaining our Buy rating


SECTOR REPORT

2. Biologics: what makes them different?

In this report, we analyse the impact of the emergence of “generic” copies, or biosimilars, of drugs known as biologics. This section looks at the key role played by this category of products for the sector.

A biological drug is one whose active matter is a complex molecule on a large scale, produced not through chemical synthesis, but by biotechnological means (genetic engineering). This makes them much more difficult to reproduce than conventional chemical molecules, and has seen the emergence of a specific regulatory framework in the US (Biological Licence Application, since 1996).

The launch of revolutionary biological therapies in a range of therapeutic fields (cancer, arthritis, MS, anaemia, etc.) saw the spectacular rise of this market from the 1990s onwards, giving a major boost to groups such as Amgen, Novo Nordisk and later Roche. Biologics generated 2010 sales of around $110bn, i.e. some 15% of the worldwide pharmaceuticals market, and boast above-average margins for the industry.

Highly specific products The definition of biological medicines is not that clearly defined, but it mainly includes therapeutic proteins and, in the broad sense, all products produced using biotechnological means, i.e. with living organisms (bacteria, or genetically modified cells). They are proteins that have been modified to a greater or lesser extent and which differ from small chemical molecules obtained through synthesis, above all in terms of their complexity.

This complexity relates to the size of the compounds, which can be several hundred times that of small conventional molecules, and to how they are organised spatially. Biological drugs are huge structures compared to the handful of building blocks that make up conventional small molecules

The following illustration gives a comparison of the actual size of molecules.

Chart 6: Biologics: a different order of complexity

*Da: this measure indicates the weight of the molecule

Source: Hospira


SECTOR REPORT

This complexity is the reason behind the production method. In many cases direct synthesis is not possible. These molecules are therefore obtained through genetic engineering. This involves taking bacteria whose DNA has been specially modified, cultivating them and having them express the product in fermenters. The first medicine to be produced using this process was human insulin, made by Eli Lilly, in 1984.

The products can be hard to characterise with any precision. The spatial distribution of the atoms is as significant as the composition itself and the slightest modification to the molecules’ structure can impact on their efficacy. In particular, proteins tend to develop chains of sugar on their surface (glycosylation), which can vary depending on operating conditions during production.

A major consequence of these characteristics is that a minor change in production procedures can lead to significant differences in efficacy or side effects.

This sensitivity to manufacturing procedures and the types of cells used is at the root of the regulatory difference between biologics and small molecules. Indeed, it is not possible to ensure an exact copy of these molecules, short of applying the same procedures as the original maker, which only it knows, down to the last detail. Hence the idea that process and product are intrinsically linked with biologics.

Because of the specific nature of these products, regulatory authorities have created specific approval frameworks for biologics. In 1996, the FDA introduced the biological licence application (BLA), which differs from that for conventional chemical entities (New Drug Application). Under its terms, no generic can be authorised for biologics registered in compliance with this procedure.

This regulatory specificity, coupled with the fact that generic copies are impossible to make, produced an Eldorado for the industry, all but free of any generics threat. This is one of the reasons for the significant historical premium awarded to companies like Roche and Novo, which are big players in the biologics field. But this situation is changing.

Players in a highly profitable market

A market worth over $94bn in 2009….

Biological products fall into very disparate categories. The main ones are recombinant proteins and monoclonal antibodies.

Biological products: highly complex

A defining feature of biological products is their highly specific production processes

Biologics are governed by a distinct regulatory framework


SECTOR REPORT

Table 5: Key categories of biological products

Category 2009 world sales ($m) Examples Insulins

14 512 Lantus (sanofi-aventis) Humalog (Lilly) Novolog (Novo Nordisk) Levemir (Novo Nordisk)

Alpha interferons 1 902 Pegasys PEG-Intron

EPO 9 532 Aranesp (Amgen) Epogen (Amgen)

Growth hormones 3 137 Genotropin (Pfizer) Humatrope (Lilly)

Monoclonal antibodies 35 613 Mabthera (Roche) Herceptin (Roche)

Beta interferons 6 251 Avonex (Biogen IDEC) Rebif (Merck KgaA)

Heparins 5 738 Lovenox Fraxiparine

G-CSF 5 163 Neulasta (Amgen) Neupogen (Amgen)

Coagulation factors 6 272 Kogenate (Bayer Schering) NovoSeven (Novo Nordisk)

Sources: Evaluate, Natixis

The main categories are as follows:

− Recombinant proteins (world market of over $47bn in 2009): this segment includes various product categories, from EPO (anaemia), to G-CSF (neutropenia), to insulins, growth hormones, coagulation factors, alpha interferons (anti-viral therapies) and beta interferons (MS therapies). These products are now well characterised and offer a relatively simple molecular structure.

− Monoclonal antibodies ($35bn market in 2009): These products, mainly indicated to treat cancer and autoimmune diseases (RA, MS), are much more complex in their molecular structure, are much bigger than an EPO and are more difficult to reproduce. Because they are more recent, they still boast extensive patent protection. They also remain the preserve of just a few groups, Roche being the unrivalled leader. The emergence of biosimilars is unlikely to affect this category in the short term.

− Vaccines ($21bn market): These are biological products par excellence, manufactured from genetic material (eggs, cell lines) with limited stability and subject to contamination risk. They tend to be complex and expensive to produce, giving generics manufacturers extra technological and industrial hurdles to overcome.

− Enzymes ($2bn market in 2009). This is a very specific category but also includes proteins, which are authorised under the BLA procedure. It therefore comes under the definition of biologics.

− Drugs of animal extraction: Strictly speaking, these are not biological products, i.e. manufactured using genetic engineering or in-vitro culture, but there are similarities in terms of the complexity of their molecular composition which is not always well characterised. Among the products in this category are treatments such as Wyeth’s Premarin (oestrogen) and low molecular weight heparins (worldwide market of $5.7bn) such as sanofi-aventis’ Lovenox. The problem here is the precise characterisation of the product, which can be a barrier to generics.

Sales of $94bn in 2009…

… derived mainly from recominant proteins…

…and monoclonal antibodies


SECTOR REPORT

For instance, Premarin was the subject of a decision by the FDA which blocked generics, based on the fact that its structure was not fully understood. But the treatment of these drugs clearly illustrates that they are at the border line of the biologics market: for Lovenox, for example, the European authorities considered it as a biologic and requested clinical studies. By contrast, the US authorities authorised a substitutable generic without clinical trials. These products will very likely cease to be regarded as biologics in the future.

Peptides, like Teva’s Copaxone (MS), or GLP1 (diabetes, AstraZeneca, Novo), are not traditional biologics either, as they are not manufactured using genetic engineering, but by means of chemical synthesis. These are chains of aminoacids, which are less complex than proteins and can be synthesised directly. As such, they do not come under the scope of the definition described above. That said, they are complex to manufacture and synthesising them requires specific expertise. In the same way as biologics, they represent significant technological barriers to entry.

… very profitable …

Biological products are more profitable than the sector average (25-30%). The difference is even more pronounced for monoclonal antibodies.

Their operating margin can often exceed 40%, by our estimates, thanks to three factors:

− In most cases, the drugs are part of a recent generation of treatments and therefore benefit from innovation effects. The therapeutic benefit they confer is often more clearly established than with conventional products, which means they can command very high prices. Treatment costs for latest-generation cancer therapies can exceed $40,000/year.

− The fact they have been on the market for a mere ten years or so means there is an oligopoly in effect in the majority of cases.

− A key reason is that the products are by definition injectable, due to the difficulty of developing an oral formulation for these large molecules. Selling expenses are often low because most of the products are for hospital use. Hospital sales forces tend in most cases to be limited to a few hundred reps, as opposed to several thousand for primary care.

But it is clear that these factors will not remain static. The oligopoly situation will ease as new products/categories come to market. Similarly, cuts in health-care spending are likely to hit these drugs particularly hard. As for price sensitivity, this is unlikely to be called seriously into question until biosimilars are a common feature in these categories. The slump in sales will therefore go hand in hand with a deterioration in profitability.

Table 6: Operating margins of biotechnology groups

En % 09 sales Top-selling products (09) 2007 2008 2009 2010e Roche pharma 38 996 MCHF Mabthera/Rituxan (CHF6.087bn)

Herceptin (CHF5.266bn) 35 36 36 39

Amgen 14 642 M$ Neulasta ($3.355bn) Enbrel ($3.493bn)

36 37 38 41

Novo Nordisk 51 078 MDKK NovoRapid (DKK9.749bn) NovoSeven (DKK7.072bn)

21 27 29 32

Biogen Idec 4 377 M$ Avonex ($2.323bn) 27 30 30 38 Average of 4 biotech. 30 33 33 38 Average of top 5 pharma groups 28 29 31 31

Sources: Evaluate, Natixis Securities, Datastream

Some products (peptides, heparins) have similar characteristics to biologics

Much higher margins than with chemical products

Groups with a big biologics presence boast a margin of 38%, i.e. significantly higher than their traditional pharma counterparts


SECTOR REPORT

A presence in the biologics field therefore remains a key advantage. The main players are shown in the following chart.

Chart 7: Pharma groups have varying degree of involvement in biologics (biologics contribution as % of 2009 revenues)

Source: Natixis

… but most biological products are set to come off patent by the decade’s end

By our estimates, around $24bn worth of sales will lose patent protection by the end of 2015.

Table 7: Key patent expriries (2010e sales)

Year Product (indication) Company World sales ($m)

US sales ($m)

Europe sales

US patent Europe patent

Expired Betaseron (Arthritis) Bayer 1 590 587 587 2012 Enbrel (Arthritis) Amgen 3 500 3 273 3 273 2012 2013 Humalog (Insulin) Lilly 2 075 1 287 1 287 2013 2010 Copaxone (MS) Teva 3 127 2 176 2 176 2014 2015

Cerezyme Genzyme 725 364 364 2014 2014 Novolog Novo Nordisk 2 057 823 823 2014 (2017 formulation)

Neulasta 3 466 2 586 2 586 2015 2015 Lantus Sanofi-aventis 3 500 2 874 2 874 2015 2014 2015 Epogen Amgen 2 608 2 608 2 608 2015 Expired

2018 Erbitux Merck Kg/BMS 1 783 666 666 2018 Avastin (CHFm) Roche 6 550 3 244 3 244 2019

Herceptin (CHFm) Roche 5 620 1 674 1 674 2019 2014 2019 Mabthera (CHFm) Roche 6 430 3 044 3 044 2019 2014

2024 Aranesp Amgen 2 441 1 060 1 060 2024 2026 Avonex Amgen 2 481 1 473 1 473 2026 2012

Sources: Natixis, company presentations, Evaluate. Expiry dates can vary depending on the source.

For patent expiry dates, more caution needs to be exercised for biologics than for traditional products. The drugs authorised under the BLA procedure do not appear in the Orange Book, and not all patents are necessarily public. This is important to bear in mind given the key nature of production or formulation method patents. Expiry dates also vary depending on the source. According to Roche, Mabthera is protected until 2019 in the US, whereas Hospira hopes to be able to launch a generic form from 2015.

European companies most active are Roche and Novo

Biologics: patent expiries getting closer

0%

20%

40%

60%

80%

100%

Amgen Nov o Nordisk Genzy me Roche sanofi-av entis GSK Nov artis


SECTOR REPORT

In all events, it is estimated that these expiries will affect around $40bn in sales between now and the end of the decade, with an initial wave in 2014/15. The issue of the emergence of biosimilar rivals and their impact on sales are crucial factors for companies like Roche or Novo Nordisk in Europe and for Amgen in the US. Depending on the assumptions used for the arrival of biosimilars, their long-term prospects are radically different. But this is not a problem in the short term. Looking out to 2015, the market for biological products is still set to average annual growth of +5.8%.

Around $40bn in sales affected by expiries out to 2019


SECTOR REPORT

3. Biosimilars: a “new breed” of drugs!

The information on the previous page about the inevitable loss of patent protection for most of the biological products is an indication of the biosimilar market's potential. However, there is more to consider than this quantitative aspect. The world of biosimilars will involve a very different business model from that of conventional generic drugs. It will consist of value-added products that will be much more lucrative and less cyclical.

Biosimilars also offer a major opportunity for existing generics groups, and even for the pharma groups, some of which are already preparing their offensive in this promising sector. It is therefore as much of a new growth component for some groups as a threat for others.

Clearly, companies such as Roche and Amgen have to adapt their strategy to take account of this new situation. We will now take a look at the specific characteristics of biosimilars and their financial implications, then examine the groups’ strategies.

Quite a difference between "similar" and "same"! The characteristics of biological products described earlier in this report mean that even a very minor change in the production process can lead to significant differences in the product’s biological activity, that is to say its efficacy and, most importantly, side effects. One example of this is the EPO product, Eprex. This J&J product had been available on the European market for years without any problems, when very serious cases of side effects emerged. The group had to temporarily withdraw the product from the market, then began an investigation into the source of the problem. After months of research, it emerged that a minute change in the production process involving the coating on a stopper, had done very serious damage. This idea prompted the first public hearings on biosimilars on both sides of the Atlantic, and led to the current regulations.

The idea of sufficient similarity lies at the core of the thinking that has been done about biosimilars, and has been the subject of many debates, which are still continuing even though they have led to legislation on both sides of the Atlantic. There are two factions: the generic manufacturers, which believe that the differences between the original product and its copy are small enough to consider them interchangeable, without any further precautions being taken. The pharma industry protested against this approach as soon as the FDA public hearings began in 2006, and in the end broadly won its case in Europe and the US. In the vast majority of cases, approval of biosimilars will not be possible until clinical trials are undertaken, which firmly establishes them as inexact replicas.

Biosimilar does not mean identical


SECTOR REPORT

Similar, but different!

Biosimilars are different from the original drugs. Analysis of the first biosimilars that hit the market, particularly in India, has supplied ammunition for those arguing for non-substitutability. Roche has made known its views on the Mabthera biosimilar launched by Dr Reddy’s in India using the brand name Reditux (in reference to the US name for the drug, Rituxan). Roche highlighted the many differences (much higher level of remaining host cell proteins, differences in glycosylation etc.). Chromatographic analysis shows the visible differences in composition.

Chart 8: Chromatographic differences between a monoclonal antibody and its biosimilar

Source: Roche

The stumbling block: immunogenicity

The main issue that this raises relates to immunogenicity. This is the product’s ability to provoke an immune response. For many peptides and proteins, the human body makes antibodies, i.e. it recognises them as foreign antigens. As biosimilar copies are not exact replicas, they will be recognised differently by the body, and it will produce specific antibodies. If the difference in composition is significant, this immune response can become a cause for concern. The main concern is the relative lack of knowledge about biosimilars’ ability to provoke an immune response which is a clinical problem.

The different production of antibodies by the body can result in differences on the pharmacokinetic, pharmacological and safety front. Elimination of the product can also be affected. The consequences are unpredictable – they could be benign or they could be fatal. The Eprex case (see above) is one example, but there are also concerns about possible anaphylactic shock when on an I.V., or cases of delayed hypersensitivity.

Inexact replicas: the example of Rituxan in India

Clinical trials will be required…


SECTOR REPORT

An immune response can vary for many reasons:

− Firstly, the structure of the protein, whether this is due to a variable sequence of amino acids or a simple difference in structure, caused by a change in the physical, chemical or enzymatic treatment during the production or storage process. Differences in glycosylation in particular lead to differences in structure. It is therefore clear that a different production process can lead to a difference in immunogenicity.

− The formulation can have an effect, or even the packaging materials, or the conditions of use during a perfusion.

− The impurities themselves can influence the immune response. In some cases, these impurities that result from the original manufacturer’s precise production process can act as an adjuvant and affect the drug’s efficacy. Their replacement by other impurities may not have the same effect. Particularly if the impurities contain remaining host cell proteins used in the manufacturing process.

Problem: an immune response in humans can be difficult to predict using animal models. This is the basis of the argument for the necessity of comparative clinical trials in the development of biosimilars, and not just bioequivalence data.

The regulatory authorities have made a lot of progress in a few years. The situation is now clarified in Europe, and the legislation is moving forward quickly in the US.

Regulations: the US is lagging behind, but is more ambitious than Europe Europe has been a pioneer in the biosimilar field, with very innovative regulations introduced from 2006 and the market approval of around fifteen biosimilars since then. Biosimilars’ progress in Europe provides a textbook case from which we can extrapolate their future. But US regulations, which are still being worked out, are expected to be even bolder, authorising substitutable generics in certain cases, which is not possible in Europe!

Europe: regulations are now firmly in place…

Biosimilars are already a reality in Europe, and between 2006 and mid-2010 14 biosimilar products were launched. The European Commission initiated discussions on the subject in 2005, and has drawn up legislation on the major issues. It has applied one key principle: to consider the biosimilars as new products. They are treated as new products and have to undergo comparative clinical trials to prove that there is no clinically significant difference between the copy and the original, in terms of efficacy and side effects. Established as non-substitutable, they are launched under different brand names from the original product. Guidelines have been laid down for all the major product categories, and biosimilar competition has begun to grow.

Overarching guidelines were established in 2005: biosimilars’ efficacy and tolerance must be guaranteed by pharmacokinetic and pharmacodynamic data, clinical data and pharmacovigilance data (including a year of immunogenicity data) and checks on the biosimilars’ manufacturing production process.

To obtain marketing approval, a biosimilar manufacturer has to provide studies demonstrating that its product is equivalent in terms of quality, safety and efficacy to the reference biological product

…and they will especially assess the immunogenicity of the copies of the biological products

The European example: precise guidelines for each class of drug…

…including clinical trials carried out on several hundred patients


SECTOR REPORT

that is already on the market. The active substance must be similar in molecular terms (same molecular family) and in biological terms (same effects on the body). The presentation, dosage and route of administration must also be identical, otherwise additional data must be supplied in agreement with the EMEA. Obviously, for the sake of consistency, the same reference compound is used in all the studies.

These overarching guidelines are broken down into product type, starting with the growth hormones. In the appendices, we have detailed the studies required for the major categories. The latest ones, published in November 2010, set the frame for monoclonal antibody biosimilars.

The EMEA guidelines make a distinction between biosimilars that are a protein, an immunological product (vaccines or allergens) or a blood-derived product (coagulation factors, antithrombin, immunoglobulin, etc.). For the blood-derived products, Abbreviated New Drug Applications which only include similarity trials, will not be accepted. The biosimilars will have to have a ‘new product’ application, with all the upstream studies that that encompasses, whether they are pre-clinical (pharmacokinetic, pharmacodynamic, efficacy, safety), clinical (pharmacology/toxicology) or involve the safety of the production process. This is especially important for Novo Nordisk’s NovoSeven, which loses patent protection in 2011, but this is much less of a concern than the biosimilar issues regarding insulins.

All in all, the guidelines in Europe have resulted in a significant number of patients in clinical trials, as shown by the table below.

Table 8: Number of patients in clinical trials for marketed biosimilars Biosimilar (category) Company Number of indications

studied Number of patients in the clinical trials

Retacrit (EPO) Hospira 3 1 978

Binocrit (EPO) Sandoz 2 826

Onmitrope (human growth hormone) Sandoz 1 242

Valtropin (human growth hormone) Biopartners 1 164 Nivestim (GCSF) Hospira 1 371 Zarzio Sandoz 1 316 Ratiograstim Ratiopharm 2 877

Source: Hospira

The picture varies greatly, from a quite similar number of patients to those for the original product in the case of Retacrit, to a few hundred. The cost of these trials, not counting the failures, will therefore range roughly from $80m to $150m.

The US: Pandora’s Box has been opened…

The situation in the US is currently very different from that in Europe. Remember that up until now, marketing copies of biological drugs was simply impossible. It has only since Obama’s healthcare reform legislation was passed in March 2010 that it has been made possible via the Affordable Care Act. In return for a 12 year marketing exclusivity period granted to all new biological drugs, the law authorises the approval of biosimilars, in a section covering only 46 out of the 2000 or so pages of the US health reform legislation. But it is one of the most important points!

Biosimilars are therefore considered to be new products

14 biosimilars are currently marketed in Europe


SECTOR REPORT

This new law is very vague about the practical aspects and leaves the field wide open to the FDA to define how the law will actually be applied, which has not yet been done. To this end, the FDA has recently begun a series of consultations with manufacturers to gather opinions before issuing regulations. The law stipulates the following:

− Approval of biosimilars will not be made by the same body that authorises conventional generics. The latter are covered by the Office of Generic Drugs. Approval of biosimilars will be given by the Office of New Drugs, as is the case for new molecules. The FDA has created a special unit, the Biosimilar Review Committee, to advise the other branches of the FDA on this subject, so that approvals are made on a consistent basis.

− Approval will only be given when it has been demonstrated by analytical methods that: 1/ the copy is ‘highly similar’ to the reference product, even if there are minor differences in terms of the non-clinically active components; 2/ the pre-clinical trials have been undertaken; and 3/ one or more clinical studies has demonstrated the product’s safety and efficacy for at least one indication. In addition, under the law, the biosimilar must have the same mechanism of action as the reference product if it is known, as well as the same method of administration, and the same dosage. The production unit also has to manufacture a sufficiently pure product.

However, the law states that the FDA can decide to waive these conditions at its discretion! The FDA therefore has supreme authority when making its decisions.

Its stance on many points has yet to be worked out. Some time ago, the FDA began to consider this issue, and initiated a series of consultations, including a public meeting in early November at which different opinions from the pharma and generics industries were expressed. The main stumbling blocks are as follows:

− The type of clinical studies required to demonstrate biosimilarity, i.e. what should we understand by ‘highly similar’?

− Also, the trials required to demonstrate interchangeability on top of biosimilarity.

The FDA should take it one step further than the EMEA

We see two differences in the rationale employed by the FDA and that of the EMEA.

For starters, under the law, certain biosimilars can be considered “interchangeable”. This interchangeability signifies that a biosimilar copy of a drug can be used without needing approval from the practitioner who prescribed the original. Under the law, a biosimilar may be determined to be “interchangeable” if it can be expected to produce the same clinical effect as the standard. Yet again, it is up to the FDA to define what this implies. It is also up to the FDA to define a Risk Evaluation and Mitigation Strategy (REMS).

However, the greatest difference with the situation in Europe has to do with the possibility of challenging patents. This mechanism is intended to replicate one that exists already through the Hatch-Waxman Act concerning chemical molecules. Under this Act, companies can file ANDAs (abbreviated new drug applications) to launch a copycat version of a drug that is still protected by a patent if they can have the patent invalidated by a court. This is only possible in the US and it has weighed heavily on the valuation of pharmaceuticals groups due to the high risk it poses to their products. The vast majority of major drugs available in the US have been targeted by ANDAs. The new law makes it possible to file ABLAs (abbreviated biological licence applications) under section 351 (k). There is one new feature: an arbitration procedure between the manufacturer of the

In the US, the law on biosimilars is part of the Obama healthcare reforms

It specifies clinical trials

Now that the legal framework has been set up, the FDA has to establish a regulatory framework


SECTOR REPORT

biosimilar drug and the originator of the molecule before an actual court battle. This is a very complex procedure that makes up 22 of the 46 pages in the Affordable Care Act (ACA).

This is partly due to the fact that, in contrast to the situation with conventional chemical molecules, the patents in this case are not officially identified. The FDA centralises patents covering conventional drugs in its Orange Book on its website. The patents involved are clearly stated and the generic drugs producers can tell which patent they will need to challenge in order to bring a copycat onto the market. They are required to tell the originator which patent they have decided to challenge.

This is not the case with biological products. Given that such drugs are not eligible for the NDA procedure, the patents that cover them are not included in the Orange Book. This means that potential challengers cannot know with any certainty which patent the producer of the original molecule may invoke.

The new law makes it compulsory for certain data to be exchanged between the generic producer and the originator of a molecule:

− the originator must provide a list of patents that may protect its molecule to any generic drugs producer who comes forward;

− the generic producer must provide the originator with data concerning its biosimilar drug, including a description of its production methods.

The conditions and deadlines for this exchange of information are governed by very specific rules. Following the data exchange, the two companies are required to enter into an arbitration procedure before taking the matter to the courts. In view of the deadlines involved, this process is expected to last at least six months. It is important to note that, in the event of a challenge to their patents, biological drugs are not protected by the 30-month stay period that chemical molecules currently benefit from. However, the first biosimilar drug to win its case benefits from a one-year exclusivity period, compared to just six months at the moment in the case of chemical molecules.

The purpose of this procedure is to put an end to the lengthy legal battles that are jamming up US courts. However, there is no guarantee that these measures will be used on a large scale. The procedure is complex and it is unlikely that the manufacturers of biosimilar drugs will be willing to hand over their data without batting an eyelid.

Insofar as biosimilar drug makers carry out clinical trials, it could be in their interest instead to attempt to prove that they have developed a genuinely new product, and thus opt for a BLA procedure. This option presents a number of advantages by comparison with the 351 (k) procedure:

− if approved, the drug would be granted a 12-year exclusivity period;

− the application filed for the biosimilar drug would remain confidential;

− patent-related matters could be addressed without suffering the FDA’s involvement.

Yet again, it is difficult to predict how things will pan out. However, given the complexity of the procedure, we find it hard to imagine that ABLAs will be used as extensively as ANDAs. The more complex and controversial the technology (e.g. monoclonal antibodies), the less inclined generic drugs producers will be to opt for this approach.

Question marks remain over their interchangeability and the possibility of challenging patents upstream

We believe that these possibilities will be used less than for traditional generics


SECTOR REPORT

Momenta: fact is stranger than fiction

The negotiations currently underway concerning legislation in the US will probably spawn a more stringent regulatory framework than in Europe. However, this may only be the beginning. Under a worst-case scenario for the biological drugs industry, the licence given to the FDA could ultimately lead to a situation very close to the one that many conventional generic drugs are in. Science is progressing and one company in particular believes that it can revolutionise the situation. This company is Momenta.

Momenta caused a big upset after being awarded in July FDA approval for a generic drug that can be substituted for Lovenox. This sanofi-aventis drug is recognised as a biological product in Europe.

With its generic drug M-enoxaparin, Momenta has taken a different approach to the one generally used for biosimilars. Momenta considers that it has completely characterised Lovenox and its production process, using new analytical techniques, including specific enzymes, improvements on conventional analysis methods (NMR) and patented mathematical techniques. The company claims to have developed an exact copy of Lovenox. In order to make this claim, it performed an analysis of several batches, after which it maintained that its generic drug was within the acceptable variability limits observed with the sanofi-aventis drug. In other words, Momenta claimed that it was capable of producing an exact copy of Lovenox, using the production method employed by sanofi-aventis!

It took a long time for Momenta’s product to be given a green light (five years!). It is important to stress that the application was not only reviewed by the Office of Generic Drugs but also by the Office of New Drugs, in anticipation of the new legislation. What’s more, the FDA decided to split hairs when it came to the product’s immunogenicity. It wanted, in particular, to obtain assurance regarding the risk of heparin-induced thrombocytopenia (HIT), a potentially-serious side effect linked to modifications in the immune system. This could have seen the FDA ordering Momenta to carry out clinical trials. Considering the very low frequency of HIT, the company would have needed to enrol a large patient population (10,000?) in the hope of obtaining a statistically significant demonstration of the innocuousness of the generic drug. From an economic perspective, this would not have been an option. Momenta was able to convince the FDA that its analytical technique was powerful enough to avoid having to carry out anything more than limited preclinical trials.

The FDA therefore approved the product as a substitutable generic drug. This is a groundbreaking decision as it signifies that the FDA accepts that Momenta’s characterisation technology can produce a copy that is close enough to the original to: 1/ warrant authorisation of automatic substitution; and 2/ avoid ordering clinical trials to prove this. In other words, a situation very similar to the one observed with conventional generic drugs, and hence potentially likely to wreak as much havoc in the pharmaceuticals industry.

However, with the help of Sandoz, Momenta plans to apply its technology to practically every biological product on the market.

− Copaxone, a peptide developed by Teva, is first on the list. Copaxone is used in the treatment of multiple sclerosis. Sandoz filed an ADNA in 2007. This is expected to provide further evidence of the validity of Momenta’s technology. Momenta is still battling with Teva over patent issues and we would expect the case to go the courts in 2011, which could see the arrival of a generic form in 2012.

− Assuming Momenta succeeds with copaxone, it plans to move on to glycoproteins. This would not involve any radical change from Lovenox and Copaxone. By 2016, we think that Momenta could be in a position to launch generics that would be substitutable for simple proteins (growth

Momenta could revolutionise the regulatory framework…

…thanks to an analysis method that makes it possible to obtain exact copies

Following on from Lovenox, Copaxone is next in line for Momenta…


SECTOR REPORT

hormones, EPO, etc.). This would mark a small revolution, which we have decided not to factor into our models for the time being.

− The final stage would be to attack monoclonal antibodies. However, the fabrication process is far more complex and we would expect the burden of proof to be higher. On this basis, we would not expect any potential substitutable generics to arrive before 2020, if at all.

If Momenta succeeds with the development of pure copies of biological drugs, this would move the goalposts for biological products. What had been a threat from “biosimilars” would become a threat from “generic” drugs, with even more disastrous consequences for the biological drugs industry.

That being said, based on Momenta’s success with Lovenox alone, which was a very specific situation, this does not imply that the company’s technology will make it possible to copy all biological drugs. For one, in some cases, production costs would be prohibitive, e.g. insulin, which necessitates heavy investment, even though there would be no particular problem copying what is a well-known molecule. As for monoclonal antibodies, we would expect the FDA to keep a hard line on this issue, considering the multiple-stage production method used for such products, which is more complex than for simple proteins. We would not expect a substitutable generic form of a monoclonal antibody to be developed for many years, and certainly not in the coming decade. Hence, at this stage, we are basing our evaluations on biosimilar copies of monoclonal antibodies and insulins for instance, and not on substitutable generics.

To sum up, we believe that the US situation as regards biosimilars should become closer to traditional generics than in Europe.

Commercial impact: what can be learned from Europe? Fourteen biosimilar drugs have been launched in Europe since the middle of 2006. The European market thus gives us precious examples of the trends in market share for biosimilar drugs as well as in their prices.

Table 9: Main biosimilar drugs launched in Europe Commercial name Generic name Company Standard CHMP opinion EMEA approval

Omnitrope somatropine Sandoz Genotropin (Pfizer) Jan.-06 Apr.-06 Valtropin somatropine Biopartners Humatrope (Lilly) Feb.-06 Apr.-06 Binocrit epoetine alfa Sandoz Eprex (J&J) Jun.-07 Aug.-07 Epoetin Alfa Hexal epoetine alfa Sandoz (Hexal) Eprex (J&J) Jun.-07 Aug.-07 Abseamed epoetine alfa Medice No Jun.-07 Aug.-07 Retacrit epoetine zeta Hospira Eprex (J&J) Oct.-07 Dec.-07 Silapo epoetine zeta Stada Eprex (J&J) Oct.-07 Dec.-07 Ratiograstim filgrastime Ratiopharm Neupogen (Amgen) Feb.-08 Sep.-08 Tevagrastim filgrastime Teva Neupogen (Amgen) Feb.-08 Sep.-08 Filgrastim Ratiopharm filgrastime Ratiopharm Neupogen (Amgen) Feb.-08 Sep.-08 Biograstim filgrastime CT Arzneimittel Neupogen (Amgen) Feb.-08 Zarzio filgrastime Sandoz Neupogen (Amgen) Nov.-08 Feb.-09 Filgrastim filgrastime Sandoz (Hexal) Neupogen (Amgen) Nov.-08 Feb.-09 Nivestim filgrastime Hospira Neupogen (Amgen) Mar.-10 Jun.-10

Source: Hospira

…possibly followed by even more complex molecules…


SECTOR REPORT

Amgen has communicated its market share in the EPO and G-CSF segments. In both cases, although its products carry discounts of 20% to the originals, growth in market share is weak and slow.

In terms of value, after close to three years on the market, Aranesp’s biosimilar drugs account for just 6% of the treatment of anaemia in patients on dialysis. This market share has remained stable even with the arrival of new biosimilar EPOs. The problem in this market is that pharmaceuticals groups have reacted by lowering the price of their products by around 9% since November 2008. This, in turn, has led generic drugs producers to cut their own prices. This downward spiral has led to a contraction of 15% in the EPO market since 2007. This is evidence of how difficult it is to alter prescription habits: doctors are reticent to prescribe a product over which they have doubts with respect to its quality, and patients tend to prefer to stick to their branded treatment.

Figure 9 European EPO market – market share trends in value

Source: Amgen

The situation is hardly better in the market for neutropenia treatments, where biosimilar G-CSF products have captured 5% of the market in the twenty months they have been available. However, they appear to be growing their market share a little more rapidly than biosimilar EPOs.

Figure 10: European G-CSF market – market share trends in value

Source: Amgen

Even with price discounts of 20%, the first biosimilars are finding it hard to make their mark

Market shares of 5%-6% in the two largest markets targeted


SECTOR REPORT

To sum up, biosimilar drugs in Europe, where substitutable generic forms (interchangeable) of biological products are not currently possible, have not triggered any major changes in their given markets. We believe that this situation is provisional. With the spread of biosimilar drugs across many drug classes, we would expect them to gain more credence with practitioners and take on more market share. On this basis, we are expecting erosion in the sales of the original products to speed up (-20% p.a. vs. -10%/-15% observed until now).

In addition, this model will remain valid only for as long as substitutable generics remain prohibited. Over the very long term, the situation should come more into line with that of conventional generics. This could happen in less than ten years time if Momenta has its way.

In the longer term, we expect much more pronounced penetration for biosimilars


SECTOR REPORT

4. The biosimilars players

There are few credible players on this very high potential market. The European experience and the future US guidelines teach us that the criteria of success lie not only in the capacity for development and production, but also in the ability to differentiate future products between themselves. This assumes analytical and development skills as well as marketing expertise.

Chart 11: Biosimilars market ($bn)

Source: Merck

A branded product business model The principal idea underlying regulations is that there is no certainty of obtaining a sufficiently exact replica of the original biological product that would avoid differences in effectiveness / side effects when different producers are involved. The only way of assuring sufficient similarity is to conduct clinical studies. There are two consequences if the product is not recognised as identical:

− The product will be sold under a different brand name, thereby implying marketing costs.

− The product will involve development costs that could prove substantial, as the healthcare authorities will often require phase III studies involving several hundred patients in order to assure the safety of the product.

Additionally, given industrial investments on a completely different scale than those required for a chemical synthesis, it is understandable that product costs are much higher than for traditional generics, thereby preventing “price busting”.

The business model will therefore be completely different. The biosimilars will have an intermediary economic logic between pharmaceutical products and traditional generics.

Biosimilars will have a strong marketing content

0

2

4

6

8

10

2 010 2011e 2012e 2013e 2014e 2015e 2016e 2017e

US EU G5


SECTOR REPORT

Table 10: Biosimilars – a different breed of animal

Generics Biosimilars Original drug Development cost $0.5-5m $50-150m $500-1,000m Development time 1-4 years 7-8 years 10-15 years Economic logic Pure commodity: no differentiation

between competitors for a given product, competition based exclusively on price

Intermediate situation: price competition, but no substitution. A certain degree of differentiation between products is possible based on marketing

Complete speciality: price determined as a function of the added therapeutic value. Very high price flexibility during the period of patent protection in innovative segments.

Structure of the competitive environment

Multiple competitors by segment Several competitors Few competitors for a given product

Pricing power None Weak Very high during patent protection Price level (% of original product) 15% 70% 100% Competitiveness factor Cost of production exclusively Sales force, formulation, product

quality, price Added therapeutic value, commercial presence

Normal operating margin (% of revenues)

15%-20% 20%-25% 30%-35%

Cyclicality High – substantial dependence on the US ANDA system, leading to highly volatile results as a function of processes / exclusivity periods

Moderate dependence in principle on the ABLA system – consequently, launches after expirations and relatively low cyclicality for results

Very long and very limited cycles (patent cliff in 2008/2012).

Barriers to entry for new competitors

Non-existent in a standard case - possibility of slightly different formulations

High Very high

Production technology Chemical synthesis Genetic engineering / cell culture Chemical synthesis / genetic engineering

Source: Natixis

Biosimilars producers must effectively master the same technologies as producers of biotechnology products, i.e.:

− The development of cell lines and their culture.

− Industrial fermentation.

− Virology.

− Biologics-specific separation techniques.

− Production in sterile facilities or controlled microbiology.

These are not chemical company expertises. As such, producers must evolve. This shift has been successfully made by the Swiss company Lonza, a former fine chemicals producer than is now entirely focused on subcontracted production of biological products (for example, for Roche–Genentech).

Candidates will not only have to make high investments for the development of each product (cf. table), but will also need skills that themselves require years to acquire. This contributes to the barriers to entry in the sector. There will consequently be fewer biosimilars companies than traditional generics producers.

In summary, biosimilars (in contrast to traditional generics) are not commodity products, but indeed relatively differentiable valued added products that are less cyclical and more profitable than traditional generics due to much higher technological, financial and marketing barriers to entry.

Technology also involves production methods


SECTOR REPORT

The players here will therefore be different from traditional generics producers, above all due to the major role of marketing. These players will include:

− Major generic drug producers.

− Pharmaceutical groups seeking to position themselves in growing areas.

Generic drug producers: few biosimilar candidates Numerous players from widely varying horizons are beginning to invest in this field, particularly in emerging markets, where Indian groups (Biocon, Dr Reddy’s, Wockhardt, etc.) are very active. But few groups look to have the expertise needed to satisfy the demands of the FDA. As we see it, the best placed groups are Sandoz, Teva and (ultimately) Pfizer.

Chart 12: Breakdown of the biosimilars market in 2009 (€250m total)

Source: Sandoz

Table 11: Criteria of success

Sandoz Teva Hospira Stada Pfizer Biocon – Indian generic producer

Products on the market in Europe

Europe: 3 products - Growth hormone - EPO - G-CSF* US: 1 product Growth hormone (Omnitrope)

Europe: 2 products - Growth hormone - G-CSF* US: 1 product Growth hormone

2 products - EPO (partnership with Bioceuticals) - G-CSF*(Pliva)

1 product - EPO Partnership with Bioceuticals

None

Development capacity

8-10 drugs In-house

Europe US: Neugranin (long duration G-CSF*) 2 monoclonal antibodies

Europe: partners US: 2 projects in phase I

Partnership with Cellpharm

In-house / Biocon Projects in the insulin area

Production 4 sites Agreement with Lonza

Current difficulties In-house / Biocon

Marketing Synergies with pharmaceuticals

Strong presence in hospitals and clinics and with payers

In-house

Presence Global 1st biosimilar in Japan

Global Global Europe Global Local

Solidity of financial structure

Excellent Good (however, numerous recent acquisitions)

Good Weak Good

Source: Natixis

Others3%

Stada7%

Hopsira16%

Sandoz47%

Tev a/Ratiopharm

27%


SECTOR REPORT

Teva: unsatisfactory no. 2 position for the world leader in generic drugs

The objective of Teva, the world leader in generic drugs, is to double its revenues to $31bn looking out to 2015 while maintaining a net margin of 22%. This medium-term objective has the advantage of enabling the market to accept the generic risk weighing on Copaxone (which is being targeted by Momenta) and to be enthusiastic about future sources of growth. This targeted growth will involve acquisitions and the emergence of new generic segments such as respiratory products and biosimilars.

Teva is developing in this segment through acquisitions and partnerships:

− First, the acquisition of Barr in 2009 enabled Teva to double its presence in biologics (by the number of its researchers, research and production sites and number of projects under development) and its production capacities.

− The acquisition in 2008 for $400m of CoGenesys (spin-off from Human Genome Sciences), a specialist in albumin fusion processes (albumin is one of the principal plasma proteins and is consequently a vector of choice for the diffusion of an active pharmaceutical principle).

− Finally, the signing in January 2009 of a historic agreement with the Swiss group Lonza, the leader in antibody production for major pharmaceutical groups. Through this agreement, the two groups set up a joint venture dedicated to the development of a portfolio of biosimilars.

Teva has expertise in both discovery methods and industrial processes. The group’s three biotech R&D sites (located in the United States, Lithuania and Israel) provide it with mastery of recombinant protein expression, microbiotical fermentation, mammalian cell culture, purification processes and formulation analysis and development methods. These expertises are supplemented by the group’s expertise in the production of sterile finished products, biological pharmaceutical ingredients (Lonza) and albumin fusion technology (CoGenesys) needed in the development of sustained release formulations.

Sales of biosimilars have grown very gradually, rising from $50m in 2007 to $74m in 2009 through a G-CSF in Europe and a growth hormone in the United States and Europe.

Among the most advanced R&D projects, we would note:

− Tevagrastim, a G-CSF for which a BLA application was filed in the United States in December 2009 (the product is already marketed in Europe). This product will be sold under the Neutroval brand name.

− Neugramin, a long duration G-CSF (biosimilar of Amgen’s Neulasta) that is in advanced phase development in Europe and the United States.

− Two monoclonal antibodies

Like Sandoz, Teva has decided to reinforce its positions in activities that feature the same requirements as biosimilars, with an initial focus on respiratory diseases (26% of brand name product sales, corresponding to $2.4bn by 2015 and with average annual growth of over 20%). In Europe, where the development of copies of respiratory products is better regulated, Teva is testing four molecules for which filings are expected in 2011 and 2012, particularly a copy of Symbicort (budesonide + formoterol) with the Spiromax inhaler (filing in 2011) and a copy of Advair (fluticasone + salmeterol) with Spiromax or a variable dose inhaler (2012).

Acquisitions and a partnership with Lonza

Three R&D sites

One of the sources of growth needed in order to double sales by 2015


SECTOR REPORT

Table 12: Forecast Teva sales

$m 2009 2010e 2011e 2012e 2013e 2014e 2015e CAGR 2010/2015 (%) Generic drugs 9,340 10,843 12,754 14,953 17,512 20,251 23,109 16.3 Innovative (copaxone & Azilect) 2,665 2,970 3,263 3,740 4,051 3,925 3,757 4.8 Respiratory products 898 1,071 1,257 1,520 1,845 2,156 2,425 17.8 API 565 591 612 615 654 710 764 5.3 Women’s health 357 377 413 420 458 511 562 8.3 Biosimilars 74 105 134 184 265 365 524 37.9 Group sales 13,899 15,957 18,433 21,432 24,785 27,918 31,141 14.3

Source: Evaluate

Sandoz: the pioneer

No. 2 in the generic drug industry, Sandoz (a subsidiary of Novartis) is the pioneer on the highly specific biosimilar market.

Sandoz has been present on this market since 2006, bolstered by its cutting-edge position in high valued added generics, its key presence in Europe (where the first biosimilars were authorised) and the financial support of its parent company. Novartis has effectively invested in new capacities (three sites are dedicated to recombinant protein production) and in R&D (four centres are dedicated to biosimilars) and has carried out a number of major deals, with the acquisition of Ebewe and Oriel.

Sandoz’s biosimilar sales should therefore rise from a still modest $118m in 2009 to $190m in 2010. This segment posted a 76% increase in sales over the first nine months of 2010 compared to 10% for the entire division.

Sandoz has consequently become a key asset for Novartis, both in terms of its growth dynamic and for the reinforced bargaining power with payers that it provides.

− A strategy that has long been focused on high value added generics

Table 13: Pillars of growth at Sandoz

Product line Competitive positioning in 2010

Size of target market 2009 sales ($m)

2015 sales ($m)

Biosimilars No. 1 Market share around 50%

Sales of products with patents expiring by 2015: $64bn

118 1,000e

Injectable generics No. 2 Acquisition of Ebewe in 2009 Launch of Enoxaparin

Sales of products with patents expiring by 2015: $8.3bn (anti-cancer treatments).

300e 600e

Respiratory products Top 5 Acquisition of Oriel

Sales of products with patents expiring by 2015: $13bn ($17bn in 2016) Treatments for asthma and chronic obstructive pulmonary disease (COPD)

0 1,000e

Total Sandoz sales No. 2 behind Teva World market: $80bn in 2009. 7,493 12,400

Source: Novartis, Business Review 2010

With estimated sales of $8.3bn in 2010, Sandoz is the no. 2 generics producer worldwide behind Teva. After a period of rapid growth (+33% from 2004 to 2007, largely underpinned by the acquisitions of Eon Labs and Hexal in 2005), Sandoz entered into a normalised growth phase in 2008/09 before returned to strong sales growth in 2010. This renewed dynamism reflects 1/ a more aggressive launch strategy in the United States (tacrolimus, losartan, lansoprazole) and Europe

Sales of $190m expected in 2010 in the biosimilars area...


SECTOR REPORT

(generic version of Plavix) as well as 2/ the takeoff of sales of biosimilars in Europe and the United States with the launch at the end of July of M-enoxaparin

Chart 13: Growth in US and biosimilar sales in local currencies

Source: Novartis

The development alliance with Momenta (cf. US section) constitutes one of the pillars of Sandoz’s strategy in the biosimilars area. We would highlight the fact that M-enoxaparin got off to a very strong start, with sales of $292m in Q3 10, its first quarter of commercialisation. This was higher than sanofi-aventis’ Lovenox sales in the United States on the primary care market targeted by Sandoz (40% of Lovenox prescriptions come from family physicians vs. 60% from hospitals). Note however that sales were inflated by an inventory effect that will tend to reduce sales over the coming quarter. The group will consolidate 100% of sales and 55% of profits until another generic producer enters the market. Momenta’s development projects include a generic version of Copaxone, the leading product of Teva, which in this situation plays the role of the besieged party and is using legal and regulatory tools (including citizen petitions among others) to attempt to block Momenta.

In-house development also represents sources of future growth. Sandoz has launched three products in Europe and one product in the United States since 2006. The first products commercialised in Europe were the growth hormone and white and red blood cell stimulating factors (G-CSF and EPO). Combined sales are becoming more and more significant each quarter ($4m in monthly sales for the biosimilar EPO in 2008, $15.8m in 2010). The future will now be determined outside of Europe, in priority in the United States or even Japan, where Sandoz was the first generic producer to launch a biosimilar (EPO, Omnitrope in 2009). The challenge in Europe is to boost its market shares. This should be possible thanks to the commercial support of both Sandoz and the Pharma division. Additionally, eight or nine drugs are under development targeting biological products. Management has not provided details concerning these projects, but has clearly ruled out the insulin segment, which is viewed as insufficiently profitable. We believe that Sandoz’s programmes involve the alpha and beta interferons, with the group additionally emerging as one of the key players in the treatment of multiple sclerosis.

Other high value added development programmes are in advanced phases, notably in the respiratory diseases area. The products being studied show similarities with biosimilars in terms of their difficulty of development rather than by their nature. Additionally, the asthma and COPD treatment markets will approach $17bn in 2015 (including Advair, Symbicort and Spiriva). From a regulatory point of view, Sandoz estimates that its products are completely capable of benefiting

…to which can be added $450m in sales for M-Enoxaparin

8 to 9 new drugs are under development

-1%

-11% -17% -14%-5%

2% 5%

24% 19%

43%

76%

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10


SECTOR REPORT

from automatic substitution by payers (in contrast to Teva, which is not counting on its products being considered as direct substitutes by the US regulator). Nevertheless, Sandoz is entering this market very cautiously. After a relatively unfruitful partnership Vectura (abandon of the agreement concerning the generic version of Advair in the United States, continuation in Europe), Sandoz now appears to be betting on the US company Oriel Therapeutics, which it acquired on 1 June 2010 for $332m ($74m upfront and $258m linked to certain development milestones). Oriel came with three projects under development and innovative inhalation systems. We would emphasise the fact that inhalators constitute the key differentiating criteria on this market. Novartis could claim a complete line ranging from a subscription product (QAB 149, whose launch is underway in Europe and planned in the United States in 2011) to generic products.

Finally, Sandoz is looking into injectable generics. Sandoz took over Ebewe in September 2009 for $1.2bn. The high valuation (2008 sales of €188m ($272m) reflected this company’s exceptional profitability (2008 operating profit: €53m), unique technology concerning administration and formulation methods, strong position in the oncology area (which will clearly see strong growth over 2010/2012 due to patent expirations for major drugs with combined sales of $10bn) and growth outlook (+20%e after +26% in 2007 and +17% in 2006).

− Financial impact

We estimate that Sandoz will show average annual sales growth of 8.2% over the next five years. We therefore consider that Sandoz should be Novartis’ most dynamic division over 2010/2015. After a very good year in 2010 (sales +15% in local currencies, +10% organic growth over the first nine months), Sandoz’s top line momentum should be underpinned by 1/ the growth of the world market (estimated at 7-9% per year and more likely +15% in volume terms due to patent expirations for major blockbusters and the boom on the emerging markets and even Japan, where the penetration rate of generics remains very low at 17% in volume terms versus 70% in the United States and Germany) and 2/ the strong development of the biosimilar and respiratory product lines.

This positioning on the biosimilars and more generally high value added generics (respiratory, injectables which will account for 23% in 2015 versus 5% in 2010) combined with constant industrial productivity efforts should enable an increase in the operating margin starting in 2015. In the meantime, we estimate that Sandoz’s has little leverage to boost its operating margin, which reached a record level of 21.2% over the first nine months of 2010. Productivity gains should serve to offset pressure on the German market (Sandoz’s no. 2 market) and the increase in R&D spending. As such, we are forecasting operating profit growth of 8.8% per year on average between 2010 and 2015 (+26% as of end September 2010).

Table 14: Forecast Sandoz sales and operating profit

$m 2009 2010e 2011e 2012e 2013e 2014e 2015e Sales 7,493 8,350 9,250 10,100 10,900 11,650 12,400 % change 11.4 10.8 9.2 7.9 6.9 6.4 - Biosimilars 118 190 240 500 650 800 1,000 - Injectables 300 350 400 450 500 550 600 - M-Enox 450 650 400 350 300 250 - Rest of portfolio 7,075 7,360 7,960 8,750 9400 10,000 10,550 % change 4.0 8.2 9.9 7.4 6.4 5.5 Adjusted operating profit 1,395 1,669 1,880 2,050 2,280 2,500 2,550 Adjusted operating margin (%) 18.6 20.0 20.3 20.3 20.9 21.5 20.6

Source: Natixis

Sandoz is more generally targeting differentiated generics that are difficult to develop

With forecast operating profit growth of 9% per year, Sandoz represent a long-term source of growth for Novartis


SECTOR REPORT

Hospira

Hospira is the world leader in injectable generics, commercialising lines of anti-cancer drugs and products used in intensive care wards. 2009 sales reached $3.9bn, boosted by the acquisition in 2007 of Mayne Pharma (an Australian company specialising in injectable products) for $2.1bn.

Following the launch of its biosimilar version of EPO (Retacrit) in 2007 and its G-CSF biosimilar (Nivestim) in March 2010, the group has solid ambitions in this area. In these two cases, Hospira has signed a commercial licence agreement with drug developers: Bioceuticals (in which Stada has a 15.9% stake) for the EPO biosimilar and Pliva for the G-CSF biosimilar.

Hospira is one of the very few players to disclose its biosimilars pipeline. Two projects are currently in phase I studies in the United States and Canada: the pegylated version of filgrastim (white blood cell growth factor or G-CSF) and Retacrit. While these two drugs were developed by partners in Europe, Hospira is responsible for the clinical trials in the United States and Canada. Finally, three monoclonal antibodies are also in the screening test phase and could enter into preclinical trials soon.

Hospira has become a significant player, with two biosimilars on the market …


SECTOR REPORT

Chart 14: Hospira pipeline

Source: Hospira

However, the group has not yet recorded positive results in this segment. Despite the launch of a first biosimilar in Europe in 2008, growth remains weak here, reaching only +6.5% in Q3 vs. +9% overall for the company (excluding the impact of Eloxatin, whose sales fell to zero in Q3 10). Management has therefore lowered its guidance for sales growth in 2010 from 3-5% to 2-3%.

Finally, concerning production, the group was inspected by the FDA and received a warning letter concerning the quality of certain processes. This led Hospira to record charges ($85m expected for the full year), partially extraordinary (penalties for failure to supply required information, consultant fees etc.) and partially recurring (operating expense for the recall of manufactured products).

Hospira has high ambitions based on its solid commercial positions (with hospitals, oncology clinics, dialysis centres and payer organisations). However, the group will have to prove its development abilities. Its credibility in this area will come from the entry into clinical testing of its first monoclonal antibodies and the approval of the EPO and G-CSF biosimilars in the United States (the group was not responsible for testing in Europe). Hospira will also have to demonstrate its abilities in terms of production quality control, a factor to which the regulatory authorities are even more sensitive in the case of protein production. As we do not consider commercial presence to be a differentiating factor, we do not believe that Hospira will be a leading player in this area over the medium term.

Stada: an outsider in the biosimilars area

Stada is developing its biosimilars through Bioceuticals, a specific non-consolidated project financing structure in which it holds a 15.86% stake. It has a call option here that will enable it to acquire a 100% stake starting in 2011 at a pre-determined price. Bioceuticals posted 2009 sales of €26.7m (vs. €16.1m in 2008) and a net profit of €0.9m (vs. -€14.3m in 2008).

Among the treatments developed by Bioceuticals, the Epo-Zeta (Retacrit/Silapo) is the only one already being commercialised (since the beginning of 2008). Hospira has obtained exclusive distribution rights in Europe (with the exception of German and certain eastern European countries, where Hospira has only semi-exclusive rights alongside Stada). Through this partnership, Bioceuticals will receive milestone payments from Hospira over coming years that could reach up to an additional €14m. This amount will depend notably on the possible commercialisation of Epo-Zeta in the United States and Canada. Epo-Zeta could also have potential applications in nephrology and oncology. The other development projects are more uncertain. Research efforts concerning Filgrastim (phase I, immunostimulant, worldwide commercialisation licence granted to Stada

…and three monoclonal antibodies in early development

Even if the company has a good commercial presence with payer organisations…

…its commercial performances are not yet convincing

Stada could become a future player through its non-consolidated subsidiary Bioceuticals.

Retracit IV oncology indication EU

Retracit Screnal indication EU

nevestim Filgrastim EU

Filgrastim AUS

Pegfilgastrim Global

EPO Renal/oncology US/CAN

mAb1 Oncology Global

mA2 Oncology Global

mAb3 Oncology Global

PIPE

LINE

Phase III Submission Launch

APPR

OVED

Cell line/ Preclinical Phase I Phase II


SECTOR REPORT

subsidiary Cell Pharm) were suspended in 2009 and efforts concerning the monoclonal antibodies will not proceed until Bioceuticals finds a partner (2009 R&D spending: €2.5m).

Over the short term, the potential improvement in profitability (14.3% in 2014e vs. 13.5% in 2009) will come more from productivity efforts than the boom in biosimilars. The group’s restructuring plan (“Build the future”) aims to optimise production costs looking out to 2013 through economies of scale and the transfer of production capacities to low cost countries in order to offset price reductions. This implies the sale or abandon of certain production facilities as well as the outsourcing of different functions, thereby leading to simplification in group structures and major workforce reductions in all divisions and regions with the exception of Germany (800 full time employees, 10% of the workforce). Productivity gains make credible the announced objectives for 2014, which target a doubling in net profit in five years based on average annual sales growth of 7% and margin improvements. Note that in Q3 10, the operational difficulties in Serbia were offset by the performances of the branded products division, with the group adjusted operating margin stable at 14%.

Table 15: breakdown of the Stada operating margin

€m 2009 2010e 2011e 2012e 2013e 2014e Sales 1,569 1,590 1,690 1,830 1,970 2,100 – generics 1,116 1,095 1,160 1,260 1,365 1,470 – branded products 393 420 450 485 515 535 Adjusted operating profit 211 220 235 252 275 300 – generics 159 159 170 190 210 227 – branded products 80 88 95 100 105 110 Adjusted operating margin (%) 13.5 13.8 13.9 13.8 14.0 14.3 – generics (%) 14.3 14.5 14.7 15.1 15.4 15.4 – branded products (%) 20.2 21.0 21.1 20.6 20.4 20.6

Source: Natixis

An eldorado that is also attracting the pharmaceutical groups The biosimilars segment’s business model, which is characterised by high marketing content and very strong market growth, has attracted the interest of unexpected players in the form of the pharmaceutical groups, which usually find themselves on the defensive here. Certain groups such as Novo considered the idea but then abandoned it. However, several groups are preparing to launch biosimilars, including Merck, AstraZeneca, Amgen etc. Nevertheless, Pfizer is by far the group with the most advanced and most ambitious programme here.

Pfizer: accelerated efforts

Following Novartis, Merck, AZN and Amgen, the world leader Pfizer is the fifth group to publicly announce its interest in biosimilar. However, in contrast to its peers, Pfizer has decided to initially proceed through a partnership with the Indian group Biocon, which reported 12-month sales as of end June 2010 of $512m, up 44% (+24% in H1 11), with 50% coming from biological copies. This agreement (announced in October 2010) signals a generalisation of biosimilars in all categories of biologicals, with an initial focus on insulins.

Management’s priority is to lift the profitability of the generics division

Pfizer is targeting the insulin market


SECTOR REPORT

The agreement calls for Pfizer to pay Biocon $200m upfront as well as up to $150m in milestone payments in return for an exclusive worldwide commercialisation licence. Biocon remains responsible for clinical development, production, supplies and product approvals.

This agreement initially concerns diabetes. Biocon has already commercialised Insugen in India, with this product representing 10% of the national market. This product is also in the launch phase in Latin America, Asia and North Africa. The filing for approval for this product (as well as for Basalog, a generic version of Lantus) is expected between 2012 and 2016 in Europe and the United States (where Biocon’s management is targeting IND status). Biocon has adopted a commercial strategy worthy of a sector major with a glucose test (Breeze 2) supplied at no charge to patients treated with Basalog. In contrast, the administration system (pre-filled syringe) is not competitive with the latest generation insulin pens.

Biocon is also a leading player in nephrology with Erypro (an erythropoietin), Renodapt (the generic version of Roche’s Cellcept (mycophenolate mofetil) indicated for the prevention of rejection following kidney transplants) and Tacrograf.

Above all, the group has moved into the monoclonal antibody segment, with:

− The launch of BioMAb EGFR (generic version of Roche’s Herceptin), approved in 22 emerging markets and launched at a 50% discount compared to the price of the branded product.

− The phase III development of T1h, an anti-CD6 monoclonal antibody used in the treatment of psoriasis (clinical results expected in July 2011).

− Upstream research on monoclonal antibodies conducted in connection with the agreement signed with Mylan.

Pfizer’s interest here is to enter the traditional insulin biosimilars market in Europe in 2012 and the United States in 2015, taking market shares away from Lilly and Novo Nordisk, the only groups currently present in first generation insulins (human insulins) in Europe and the United States (26% of Novo Nordisk’s diabetes sales in 2010). Over the medium term, the objective is clearly to produce modern (analogue) insulin biosimilars and to compete with sanofi-aventis’ Lantus and Novo’s Levemir and NovoRapid. This will only be possible following patent expirations (cf. table 22), with the first product concerned being NovoRapid.

Over the long term, this agreement will give Pfizer access to monoclonal antibody biosimilars, an area in which it has begun to make direct investments. Granted, the acquisition of Wyeth already enables the group to claim recognised development and production capabilities in the biologics area. The group has as such announced a $300m investment programme in the biosimilar production area.

The Indian group Biocon is a credible player in endocrinology

1st step: copies of traditional insulins in 2012 2nd step: analogues in 2015


SECTOR REPORT

5. Big pharma: growth strategies in the face of biosimilars

Roche and Novo Nordisk are already getting ready to respond to the biosimilar offensive. Roche is in the front line, since all of its blockbusters are concerned. It enjoys lengthy patent protection and the products concerned are generally monoclonal antibodies, but its range will therefore see erosion in Europe and the USA once patents start to expire. The group must therefore as a matter of necessity find fresh sources of growth. The strategies employed by pharmaceuticals groups to fight back against biosimilars may be summarised in three points:

− Develop new formulations.

− Develop new delivery systems.

− Develop new chemical entities as successors.

The first two aim to establish a technological barrier and, more importantly, to obtain patent extensions.

Roche: growth in spite of everything Roche generates two-thirds of its sales with biological products and could potentially face competition from biosimilars on most of its major products. The chart below summarises sales of the group’s biological products in Europe and the USA.

Chart 15: Sales in Europe / USA of Roche’s biological products (first 9 months of 2010; CHFm)

Source: Natixis

All told, 45.6% of pharmaceutical sales will suffer competition from biosimilars resulting in an erosion of sales (excluding emerging countries, where it generally already exists and does not have the same impact). However, these products were generally launched recently and enjoy lengthy patent protection, which postpones this outcome accordingly.

Roche: 67% of pharma sales is generated with biological products

45.6% of pharmaceutical sales will suffer biosimilar competition

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SECTOR REPORT

Chart 16: Patent expiries per year (Europe / USA sales of biologics, CHFm)

Sources: Roche, Natixis

In fact, apart from Mabthera and Herceptin, which will lose patent protection in Europe in 2014/2015, the other geographical zones and products are protected until the end of the decade. This particularly puts the impact of biosimilars into perspective since the progression of the three blockbusters, Avastin, Mabthera and Herceptin, is already weak in mature zones, and their growth already stems almost entirely from the Japan / emerging countries zones, which will not be called into question.

The problem therefore mainly concerns the decline in growth in sales in the period 2018/2030. Note that by this time, by construction we can but envisage a gradual fall, insofar as new generations of more competitive products are likely to have emerged. The impact of biosimilars, in the absence of automatic substitution, will therefore correspond to a more rapid fall in sales. In our models, we expect a decline of 5%, then 10% per year in the absence of biosimilars, and 20% and then 25% per year with biosimilars. This results in the valuation difference indicated in the “valuation” section (cf. page 10).

However, this does not include the strategies to secure the long-term survival of these franchises. Roche, in particular, is developing both successors and new methods of administration. The different initiatives are summarised in the table below.

Table 16: Roche’s strategy for ensuring the long-term survival of its biological products

Product Sales 2014e (CHFbn) Successor SC from Mabthera 8.6 GA 101- RG1678 (2013) Yes

Phase III Herceptin 7.0 Pertuzumab (2012)

T-DM1 (2013) Yes

Phase III Avastin 7.9 RG7334anti-PIGF

RG7347anti-NRP1 Probable

Actemra 1.3 Yes Recormon 0.8 Mircera (2007) Probable


But mostly in the next decade

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SECTOR REPORT

The most original: the new subcutaneous forms of monoclonal antibodies

Monoclonal antibodies are administered by intravenous infusion (IV). Beside the inconvenience for patients, this method of injection requires premises and staff, generating high costs for healthcare systems. Thus, at present, patients treated following a breast cancer operation to prevent possible metastasis and a relapse (adjuvant treatment), have, sometimes for a period of years, to come back to the hospital every three weeks to be put on a drip for several hours.

Table 17: Treatment protocols

Drug / indication Protocol Herceptin breast cancer / adjuvant treatment With Taxol: 90 minutes on a drip initially + 30 minutes per week for 12 to 18 weeks.

Then 30 to 90 minutes every 3 weeks, up to 52 weeks.

Herceptin breast cancer /metastatic Monotherapy or with Taxol: 90 minutes IV drip then 30 minutes once a week until

progression of the disease.

Sources: Prescribing information, Natixis

The aim of Roche’s developments is to reduce these costs and this inconvenience through use of subcutaneous injections (comparable to those used by diabetics for insulin). These injections can be carried out in a few seconds, with small needles that are not painful. They would be carried out by a nurse or by the patients themselves at home. The savings for healthcare systems are substantial, and will lead to these techniques being supported by the organisations that pay for healthcare, in particular public bodies in the US.

However, this supposes a technological leap forward, for which the group will rely, among other things, on the technology of a small US biotechnology company, Halozyme, which uses a recombinant enzyme.

The agreements between Halozyme and Roche were signed in December 2006. They concern:

− 5 developments for which Roche has already exercised its option and for which clinical trials have been decided.

− Up to 8 others for which trials have not yet been decided.

The first subcutaneous development of a monoclonal antibody, Herceptin, entered phase III in mid-2009. The study provides for an adjuvant treatment for one year after the operation, with two years of monitoring, for 550 patients. The results will therefore not be known until the start of 2014. A launch could therefore be envisaged at the end of 2014/start of 2015. In March 2010, Roche announced the entry into phase III of Mabthera in the SC form. The study starts in December 2010 and will enrol 530 patients. We expect a launch in 2013 or 2014.

We believe that Roche intends to develop subcutaneous forms of all of its big monoclonal antibodies, including Avastin (but for a limited share of the latter’s sales). Actemra is being developed in a subcutaneous form, but not with the same technology. Last, it is more than probable that Roche’s new generations of products will be rapidly developed in subcutaneous form (ocrelizumab, T-DM1, etc.). All told, we believe that the products concerned represent 2014 sales of CHF30bn, of which CHF15bn/20bn could switch to a subcutaneous form. The aim is to increase bioavailability and improve comfort of use for the patient, but also to prolong the patent life of blockbusters, Halozyme’s technology being protected by patent until 2024.

However, the subcutaneous forms will only save part of the sales, insofar as they will only be an asset if the product is not associated with a chemotherapy, which in any case will be administered

The counterattack has already been launched. First with new subcutaneous forms of monoclonal antibodies

Which will extend the patent protection of these products


SECTOR REPORT

via an IV infusion, i.e. especially in the adjuvant or management indication. We estimate that three-quarters of Herceptin sales and more than half of Mabthera sales could be concerned.

Innovation as a fresh source of growth

The alternative is to develop successors, which has the advantage of capitalising on the commercial franchise while benefiting from higher prices. A typical example is the strategy applied with the development of T-DM1. This product consists of a Herceptin molecule (trastuzumab) chemically linked to a cytotoxic product. Herceptin, a targeted therapy, will therefore preferentially fix to the cancer cells, which will be destroyed. This “bomber” effect results in improved efficacy.

The indications are, in principle, the same as those of Herceptin, and a large share of the sales will cannibalise those of Herceptin. However, the group is aiming for a hefty pricing premium, justified not just by superior efficacy, but also by a better side effect profile (cf. table).

Table 18: Phase II results for T-DM1

T-DM1 (n=67)

Herceptin + Taxotere

(n=70) Patients with an objective response 32 (47.8%) 29 (41.4%) Safety-evaluable patients (n=67) (n=68) Patients suffering from side effects, n (%) 63 (94.0) 68 (100.0) Side effects (grade III) 25 (37.3) 51 (75.0)

3 most frequent side effects with Herceptin + Taxotere - Alopecia (hair loss) 1 (1.5) 45 (66.2) - Neutropenia (reduction in the number of white blood cells) 5 (7.5) 39 (57.4) - Diarrhoea 7 (10.4) 31 (45.6)

Source: Roche

The development of T-DM1 has not been an easy ride, however. After announcing the filing in May 2010, Roche had to withdraw it in August, as the FDA had refused the filing based solely on the phase II results. It now has to conduct phase III trials. The first, the Emilia study (980 patients), was launched in 2009, and should be enough for a filing in 2012 as a second-line treatment. Another study, Marianne, will make it possible to envisage an indication as a first-line treatment in 2014. T-DM1 will therefore arrive on the market just in time to counter Herceptin biosimilars, but probably not soon enough to prevent some erosion of the European franchise. Conversely, between now and 2019, we believe that Roche will be able to replace most of its Herceptin sales by subcutaneous forms or successors.

In the case of Mabthera, the successor GA 101 looks interesting. It shares the same mechanism of action as Mabthera, it is an anti-CD20, but it is an antibody modified for better efficacy. This was already confirmed in phase I studies in terms of response rate, and it is being developed in Mabthera’s main indications: CLL and NHL. Two phase III studies are underway, which should enable a filing in 2013. The product could arrive on the market in 2014, enabling a rapid substitution, but once again, it will in principle arrive a little late to avoid some erosion of European sales.

These are just designated successors. But Roche has a well-filled pipeline, which despite some recent delays unquestionably ensures the company’s long-term future, with or without biosimilars.

Roche also has successors to most of its blockbusters, such as T-DM1 for Herceptin

Generally speaking, the advanced-stage pipeline is well filled, guaranteeing long-term growth


SECTOR REPORT

Table 19: State of Roche’s products in phase III or entering phase III

Product Indication Status Launch expected

Peak sales potential (CHFm)

T-DM1 Metastatic breast cancer Phase III underway 2013 1,000 RG1273 Pertuzumab Metastatic breast cancer over

expressing HER2 Phase III underway 2012 800

RG 7159 GA 101 CLL

NHL Phases III underway 2014 (CLL),

2015 (NHL) 3,000

RG 7204- Braf inhibitor Melanoma Entering phase III 2012 800 RG 3616 Hedgehog inhibitor Basocellular carcinoma Pivotal phase II 2012 300 RG 3638 MetMab Solid tumours Entering phase III 2015 600 Ocrelizumab Multiple sclerosis Entering phase III 2014 600 RG1658 dalcetrapib CETP inhibitor Dyslipidaemia Phase III 2014 5,000 RG 1439 Aleglitazar Diabetes - cardiovascular risk Phase III 2014 600 Total phase III and equivalent 2012/2015 12,700


Products in phase III represent CHF12.7bn, or 33% of pharmaceutical sales in 2010 with, it is true, a large share for dalcetrapib, or 44% including Actemra, which was launched recently and whose peak sales potential has yet to be unlocked. Given the absence of generification of major products, apart from Xeloda (end of 2013) and maybe Tarceva (2018 patent) and Boniva (on which ANDAs are ongoing), the growth profile therefore remains well assured, as Roche is the only one of the big pharma groups whose sales will not suffer the loss of a major product in the USA. We therefore expect a progression of around 5% per year in its pharma top line between now and 2015, then 4% to 5% per year. When the patent protection ends, US/Europe sales of Herceptin, for example, will account for just 6% of the group’s pharma sales. Even an erosion of this figure will be hardly noticeable.

Insulins: biologics apart The Pfizer / Biocon agreement shows the reality of the threat from insulin biosimilars. We believe that a widespread arrival of insulin biosimilars is inevitable, as for the other categories. But the impact will not be major.

Specific barriers

The question of the generification of insulins, in particular modern insulins, does not seem to particularly worry investors. Novo Nordisk’s PE, which is almost double the sector average, reflects the total absence of concern on this theme, which is not even the subject of investor questions. This is a paradoxical attitude since the main reason for the weakness of pharmaceutical sector valuations is fears regarding the patent cliff in 2009/2012.

Table 20: Patent expiries on the main insulins

Product Laboratory Launch date Patent expiry date in the USA Humalog Lilly 1999 June. 2014 Novolog Novo Nordisk 2000 Dec. 2014 (formulation 2017) Lantus Sanofi-aventis 2001 February 2015 Levemir Novo Nordisk 2006 2019 Apidra Sanofi-aventis 2005 2018/2022

Source: Orange book

Insulins are a special case. These products involve specific entry barriers


SECTOR REPORT

The patents on the main compounds are due to fall into the public domain soon (table above). Why are investors so relaxed about this? Because several traditional arguments mean that insulins are seen as not being vulnerable to generic competition.

Of course, insulins are assured of a gentle decline, like any biological product, unlike the sudden collapse that follows the arrival of a substitutable generic in the USA. But the market’s optimism is based on two other characteristics: the importance of the injector pen and capital intensity. In our view this will limit the cut in prices that may be granted to 15% vs. 30% for a traditional biosimilar.

Capital intensity is particularly high in this market segment. Generics manufacturers will have to make substantial capital investments. We estimate that a world-class insulin production unit requires investment of around $50/100m. Moreover, Pfizer plans to invest $300m. This is particularly the case as the current producers will capitalise on their market position to develop big units at a low unit price. Novo Nordisk thus spent between 2003 and 2009 $300m for a Brazilian unit and will spend $420m for its Chinese facility between 2008 and 2012. However, this does not prevent smaller producers from developing tools, probably at a much lower cost.

We therefore estimate that the additional depreciation that will impact P&L accounts is equivalent to around 5% of sales, limiting accordingly the price reduction than may be granted.

Pens: a cutting-edge technology

Delivery devices have long been a major criterion of differentiation and a historical strength for Novo Nordisk. Indeed, patients are very sensitive to this aspect, as it helps reduce anxiety over injections.

The latest generation of delivery systems to arrive on the market is insulin injector pens. They now represent most of the market in Europe. Novo Nordisk long ago launched a rechargeable model, Flexpen, which gave it a lead over rivals. Indeed, this pen was rolled out for Novo Nordisk’s analogues Levemir and Novolog. Conversely, the take-off of sanofi-aventis’ Lantus was slowed by a less competitive pen, Opticlick, developed by a Swiss company, Ypsomed. Since then, sanofi-aventis has itself developed a new generation pen, Solostar, which accelerated sales. Today, Solostar represents 32% of Lantus prescriptions in the US (we describe these developments in detail in our May 2010 report “Diabetes: the new winners”). In any case, the fact that sanofi-aventis experienced difficulty in developing a competitive pen shows that the task will not be that easy for generic manufacturers, though it is a key aspect.

Capital intensity is higher than for other product categories

Delivery systems are an additional entry barrier


SECTOR REPORT

Chart 17 : Insulin pens: a differentiating factor

Source: sanofi-aventis

But insulin biosimilars are already a reality

Indian and Chinese insulin producers are already active. Four or five Indian biosimilar human insulin producers shared the market in 2009 (Wockhardt, Biocon, USV, Lupin), with a market share of around 15%. Novo Nordisk remained the undisputed leader with 59% of the market, followed by Lilly (20%). It seems that this market share was maintained thanks to price cuts to remain competitive. Certain generics manufacturers, such as Wockhardt and Biocon, look to have a lead. Wockhardt has launched a recombinant human insulin, Wosulin, which was developed in pen form. More importantly, Wockhardt carried out acquisitions of companies in Europe, France (Negma), the UK and Germany. It therefore has sizeable marketing capacity in Europe. Similarly, the company is expanding in the USA, and in the long run, is set become a major player in biosimilar insulins. However, Biocon has moved back in front thanks to the agreement with Pfizer (cf. above).

Yet the real threat does not concern traditional insulins, whose cheap prices do not necessarily justify massive investments, accounting for the fact that biosimilars are as yet little developed. The situation is different for insulin analogues, which sell for high prices. We believe that biosimilars will increase in number, once the patents on the analogues have fallen.

In fact, the race is already on. Wockhardt is the first company to have launched a biosimilar of Lantus, Glaritus, since followed by Biocon with Basalog. So far, the product is only available in India. So, developments are underway on both sides of the Atlantic, once the patents expire.

In other words, we believe that a widespread launch of biosimilars should be factored into the models as of 2015 for analogues. Conversely, the financial and technological entry ticket will rule out a hefty price discount. In western countries, they could be launched with a discount of around 15% vs. 30% for other biosimilars.

But the arrival of insulin biosimilars looks inevitable

But with a probably smaller price discount than for traditional biosimilars

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SECTOR REPORT

What impact for sanofi-aventis and Novo Nordisk?

A fast-growing market

A first point setting insulins apart from other markets is their strong growth, which is practically in double digits. The impact of the arrival of biosimilars should accordingly be seen in perspective. Indeed, the European experience (cf. above) shows that penetration of the market in the case of a traditional insulin is very gradual, no more than a few per cent per year. Even assuming that in 2015 this is stepped up, we would have to assume penetration above 10% per year for it to lead to a fall in the sales of the princeps product. In the case of insulins, the specific barriers make it even more difficult. Admittedly, one of the growth levers for the insulin segment, namely the switch from old generations to new generations at higher prices, will in the end fade at the end of the decade, when full substitution has taken place. But the rise in the number of diabetics and growing insulinisation will keep growth of the market at around 7% per year on a sustainable basis. The capture of market share by the biosimilars, initially gradual, should accelerate as of 2020.

Chart 18: Insulin market with and without biosimilars ($m)

Source: Natixis

Even assuming a pessimistic scenario, where the share of biosimilars reaches 40% of the market at constant prices in 2030 (i.e. the current share of traditional insulins, etc.), our baseline hypothesis is therefore a stabilisation in sales of products that lose patent protection. In other words, in 2015 for sanofi-aventis’s Lantus and Novo Nordisk’s Novolog, and in 2019 for Levemir. This is based on the assumption that insulin biosimilars will have smaller price discounts than traditional biosimilars, because of the entry barriers described previously, which will limit the pricing flexibility of generic manufacturers. Novo Nordisk’s traditional insulins will face biosimilar competition in 2012 according to Pfizer, but sales of these insulins already began to erode gradually some years ago. Biosimilar competition will merely accentuate this trend. In addition, the lion’s share of sales is generated in emerging markets, where generic competition is already a fact of life in a number of countries. In short, we believe it is prudent to assume erosion of 5% per year as of 2013, with an acceleration in the decline to -10% per year as of 2015. With substitution by analogues adding to the pressure from biosimilars, traditional insulins are set to disappear in western countries by the end of the decade, and will then even see their sales decline in emerging markets. This scenario is backed up by a textbook case, namely sanofi-aventis’ Insuman. It is, to the best of our knowledge, one of the few traditional insulins whose sales by geographic zone are made public. Sales generated in western Europe are declining (-2.4% in the first nine months of 2010) and those in emerging countries are growing (+20% to €18m).

In a fast-growing market, the new biosimilar competitors will make a place for themselves without causing a fall in sales of existing analogues

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SECTOR REPORT

This overall analysis does not take into account the effect of new products. By 2015, a new generation of products will have been launched on the market, even if we just stick to the field of insulins. Thus, pharmaceuticals groups have under development:

− Fixed short-acting GLP1 / insulin combinations.

− New long-acting super-insulins.

− New forms of administration for insulins.

We described these different approaches in detail in our report “Diabetes: the new winners” published on 5 May 2010. In this note, we will just give the timetable for the launches of the different products and their sales potential. The advantage is that all these developments will enjoy lengthy patent protection, beyond 2025, and therefore secure the long-term survival of the groups’ insulin businesses.

In the short term, the launch of Novo Nordisk’s Degludec is the focus of attention. From the point of view of biosimilars, however, this is not the most urgent issue, since Levemir, the group’s long-acting insulin analogue, is protected until 2019. However, it will help fuel the group’s growth. The first phase III results show a competitive profile relative to Lantus. We expect a launch on the market in 2012. Peak sales potential amounts to DKK5.6bn ($1bn).

The following stage will comprise the promising GLP1-insulins fixed combinations. Sanofi-aventis remains the leader in this field, with a Lantus/ lixisenatide combination, which is expected to enter phase III at the start of 2012, and should therefore be on the market in 2014. The advantage of these combinations is that they offer both a basal effect (over the day) thanks to the insulin, and a prandial effect (short-term during at meal) with the GLP1. Lixisenatide looks to have a particularly well suited pharmacokinetic profile. Phase III studies on (short-acting) Lantus /Byetta associations and lixisenatide/ Lantus have shown that glycaemia is strongly improved, with no deterioration in the side effect profile. Novo Nordisk is also developing a fixed combination between Degludec and Victoza. We therefore believe that these fixed combinations will become established for several categories of patients.

Novo Nordisk: the long-term future looks assured

The Degludec / Victoza combination, which could arrive on the market in 2015, will create an additional market alongside Degludec and Victoza.

We built a long-term model (2010/2030) for Novo Nordisk’s diabetes franchise using conservative assumptions for the arrival of biosimilars, i.e.:

− An acceleration in the decline of sales of traditional insulins as of 2013 and especially as of 2015 (-10% per year). This leads to a virtual disappearance of this activity at the end of the period.

− Stability in the first few years following the loss of patent protection, then a decline of 5% per year as of 2022 for short-acting analogues.

− A gradual decline in activities excluding insulins.

What is more, we only included in the model the developments currently in phase III, i.e. Degludec (phase III results already published). We assume peak sales for Victoza of DKK16bn ($3bn) in 2021, followed by a gradual decline. This leads to the following sales structure:

Sanofi-aventis and especially Novo Nordisk have new generations of products that will ensure their growth in diabetes

Novo Nordisk’s diabetes franchise will continue to grow until 2022 despite biosimilars


SECTOR REPORT

Chart 19: Novo Nordisk’s diabetes franchise sales (DKKm)

Source: Natixis

Novo Nordisk’s diabetes franchise should continue to grow until 2022, reaching sales of DKK80bn, almost doubling the 2010 level and showing average annual growth of 6%. Assuming there are no new developments in the period, the franchise would then experience a gradual decline, but in 2030 would still generates sales at the level seen in 2012, a feat that no other group can hope to match (except Roche), excluding the upstream pipeline.

What is more, Novo Nordisk has long-term sources of growth that are not included in the model.

− A once-a-week formulation of Victoza, which could be launched in 2015/16.

− Oral GLP1s, which could be launched in 2017/18.

− A long-acting oral insulin, which could be launched in 2017/18.

− An ultra-short-acting insulin.

These developments are still in the upstream phase, but are a reminder that the sales of pharmaceutical groups are, in principle, completely renewed every 20 years and that fears regarding long-term growth are groundless.

Sanofi-aventis: a lasting franchise

We believe that, in the case of Lantus, the fixed combination could be substituted for €1.9bn in sales in 2022, and add incremental sales of €1bn. Sales generated in the fixed combination form would therefore amount to €2.9bn in 2022, or 59% of sales in the franchise, which would thus reach a higher peak (€6.5bn in 2019 vs. €5.7bn) and maintain sales of nearly €5bn in 2022.

Sanofi-aventis’s diabetes franchise will continue to grow

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SECTOR REPORT

Chart 20: Sales in the Lantus franchise (€m)

Source: Natixis

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Lantus - non-substituted part Lantus standalone Lantus + Combi


SECTOR REPORT

6. Appendix

Table 21: Main biological products by therapeutic class

$m Group 2009 2010e 2011e 2012e 2013e 2014e 2015e Anticoagulants Lovenox/Clexane (€m) Sanofi-Aventis 3,043 2,643 1,810 1,755 1,701 1,623 1,502 AVE-5026 (€m) Sanofi-Aventis - - - - 20 60 80 Fraxiparine GlaxoSmithKline 358 348 351 352 350 346 333 Fragmin Eisai 157 190 219 240 255 266 278 Fragmin Pfizer 222 211 205 199 193 187 181 Hibor Laboratorios Farmacéuticos 57 54 58 59 66 89 110 Clivarine Abbott Laboratories - - 28 80 84 88 92 Heparin Sodium Fresenius 188 122 96 74 76 78 80 Heparin Sodium Hospira 27 40 46 53 59 65 71 Lowhepa Ajinomoto 28 32 36 38 40 42 44 Hirudoid STADA Arzneimittel 23 22 23 25 26 27 28 Heparin Ajinomoto 26 27 27 27 26 26 25 Heparin Na Lock Mitsubishi Tanabe Pharma 22 23 24 24 24 24 24 Enoxaparin sodium Hospira - - - 11 24 24 24 Novo-Heparin Mochida Pharmaceutical 18 20 20 20 20 20 20 Fragmin Kissei Pharmaceutical 13 13 13 11 11 10 9 Heparin Sodium Laboratorios Farmacéuticos 5 5 5 5 5 5 5 Ivor Sigma-Tau 4 3 3 3 3 3 3 Total anticoagulants 5,738 4,630 3,565 3,558 3,554 3,540 3,434 Monoclonal antibodies Avastin (CHFm) Roche 6,222 6,550 6,600 7,020 7,470 7,920 8,200 Rituxan (CHFm) Roche 6,087 6,430 6,870 7,300 7,750 8,050 8,050 Herceptin (CHFm) Roche 5,266 5,620 6,000 6,400 6,800 6,950 7,000 Lucentis (CHFm) Roche 1,198 1,475 1,630 1,650 1,650 1,650 1,650 Xolair (CHFm) Roche 620 670 730 770 800 815 835 Humira Abbott Laboratories 5,488 6,568 7,398 8,057 8,575 8,973 9,314 Prolia Amgen - 70 587 1,294 1,926 2,527 3,017 Remicade Johnson & Johnson 3,088 3,214 3,076 2,990 2,927 2,868 2,755 Remicade Merck & Co 431 2,660 2,793 2,853 2,867 2,770 2,547 Lucentis Novartis 1,232 1,551 1,768 1,932 2,042 2,107 2,127 Actemra Roche 44 209 459 676 960 1,285 1,551 Soliris Alexion Pharmaceuticals 387 531 690 836 983 1,147 1,313 Erbitux Merck KGaA 971 1,101 1,206 1,308 1,362 1,406 1,408 Cimzia UCB 105 270 451 651 861 1,046 1,198 Simponi Merck & Co 3 83 250 453 677 836 1,006 Simponi Johnson & Johnson 32 234 464 686 865 947 1,052 Stelara Johnson & Johnson 33 279 471 580 677 821 983 Remicade Mitsubishi Tanabe Pharma 509 671 800 871 935 987 1,040 Erbitux Bristol-Myers Squibb 683 682 726 803 857 908 950 Tysabri Elan 509 607 700 745 747 750 760 Tysabri Biogen Idec 544 626 645 638 626 623 617 Vectibix Amgen 233 298 363 416 462 506 549 Xolair Novartis 338 376 436 489 514 539 560 Synagis AstraZeneca 782 600 513 531 551 562 561 Humira Eisai 71 160 238 300 357 402 448 Nimotuzumab YM BioSciences - - 14 21 44 134 300 Ilaris Novartis 3 22 54 84 139 230 346 Actemra Chugai 90 176 274 335 393 438 438 Arzerra GlaxoSmithKline 6 58 118 165 214 267 346 Synagis Abbott Laboratories 260 260 260 260 260 260 260 Vectibix Takeda - 35 83 114 141 166 191 Campath/MabCampath Genzyme 42 88 105 106 145 184 225 ReoPro Eli Lilly 232 218 207 196 187 179 159 Simulect Novartis 110 110 110 110 110 110 110 Removab Fresenius 2 45 58 65 73 81 89 Orthoclone OKT-3 Johnson & Johnson 46 46 46 46 46 46 46 Cimzia Laboratorios Farmacéuticos - 1 2 3 4 5 6


SECTOR REPORT

$m Group 2009 2010e 2011e 2012e 2013e 2014e 2015e Reditux Dr. Reddy's Laboratories 4 4 4 4 4 5 5 Total monoclonal antibodies 35,613 42,626 47,230 51,791 56,035 59,535 62,049 Enzymes Cerezyme Genzyme 793 725 1,029 1,028 1,051 1,078 1,099 Fabrazyme Genzyme 430 187 336 433 477 518 554 Replagal Shire 194 307 357 395 436 467 491 Vpriv Shire 3 104 172 237 272 296 316 Aldurazyme Genzyme 155 170 188 204 217 231 243 Replagal Dainippon Sumitomo Pharma 27 52 56 68 80 80 80 Uplyso Protalix BioTherapeutics - - 4 15 30 47 62 Total enzymes 1,601 1,545 2,143 2,379 2,563 2,717 2,845 EPO Aranesp Amgen 2,652 2,441 2,347 2,265 2,209 2,152 2,089 Epogen Amgen 2,569 2,608 2,414 2,307 2,131 2,031 1,928 Mircera Roche 165 250 392 576 698 819 936 Procrit/Eprex Johnson & Johnson 2,245 2,088 1,971 1,872 1,601 1,306 1,162 Nesp Kyowa Hakko Kirin 278 431 529 517 510 504 498 NeoRecormon Roche 965 937 898 791 697 623 545 Epogin Chugai 475 444 435 394 340 291 273 Mircera Chugai - - 36 81 154 190 224 Epoetin alfa BS Kissei Pharmaceutical - 23 40 62 72 80 88 Retacrit Hospira 21 33 43 52 60 68 76 Espo Kyowa Hakko Kirin 149 136 46 39 33 32 32 Espogen LG Life Sciences 14 17 18 20 22 24 25 Total EPO 9,532 9,406 9,169 8,976 8,528 8,119 7,876 Coagulation factors NovoSeven (DKKm) Novo Nordisk 7,072 7,950 8,500 8,850 9,200 9,550 9,800 Advate Baxter International 1,700 1,864 2,006 2,154 2,304 2,458 2,613 Kogenate Bayer 1,238 1,275 1,318 1,376 1,409 1,416 1,403 Helixate CSL 490 540 575 609 644 679 714 Humate P CSL 545 592 618 643 668 694 719 Hemofil M Baxter International 291 263 287 304 324 344 365 ReFacto Pfizer 47 279 276 285 285 287 290 Xyntha Pfizer - 108 131 142 162 179 194 Haemoctin SDH Biotest 124 127 137 147 158 170 183 Recombinate Baxter International 358 292 274 253 236 219 201 Koate-DVI Talecris Biotherapeutics 47 55 64 71 78 85 92 NN7008 Novo Nordisk - - - - 1 9 31 Total coagulation factors 6,272 6,852 7,241 7,606 7,955 8,288 8,598 G-CSF Neulasta Amgen 3,355 3,466 3,417 3,452 3,490 3,540 3,503 Neupogen Amgen 1,288 1,265 1,222 1,210 1,182 1,135 1,066 Leukine Genzyme 21 57 85 125 155 185 215 Neutrogin/Granocyte Chugai 349 326 296 258 236 207 182 Gran Kyowa Hakko Kirin 149 175 177 170 169 163 156 Leucomax Merck & Co 2 10 10 10 10 10 10 Nivestim Hospira - 2 3 4 6 7 9 Sargramostim Hospira - - - 1 1 1 2 Stemgen Swedish Orphan Biovitrum - 1 1 1 1 1 1 G-CSF Total 5,163 5,303 5,210 5,231 5,249 5,249 5,143 Growth hormones Norditropin SimpleXx (DKKm) Novo Nordisk 4,401 4,800 5,200 5,620 6,065 6,441 6,815 Nutropin (CHFm) Roche 400 430 450 470 480 490 500 Genotropin Pfizer 887 908 912 917 912 909 902 Humatrope Eli Lilly 449 435 426 422 414 406 380 Saizen Merck KGaA 267 268 274 275 275 278 279 Serostim Merck KGaA 87 94 101 99 99 99 99 NutropinAq Ipsen 56 63 72 79 85 89 90 Tev-Tropin/Tjet Teva Pharmaceutical 45 45 50 50 55 60 65 ARX201 Merck KGaA - - - - 8 23 45 Rastan Pharmstandard 6 23 31 41 49 55 60 Eutropin LG Life Sciences 29 31 31 31 31 30 30 NN8630 Novo Nordisk - - - - - 12 26 Growtropin Dong-A Pharmaceutical 12 15 17 18 20 22 23 SR-rhGH Bioton - - 4 8 12 16 20


SECTOR REPORT

$m Group 2009 2010e 2011e 2012e 2013e 2014e 2015e Declage LG Life Sciences 4 5 5 5 6 6 7 SciTropin Bioton 5 5 5 5 5 5 5 Total growth hormones 3,137 3,201 3,329 3,450 3,559 3,680 3,780 Sex hormones Gonal-F/Gonalef Merck KGaA 678 668 685 675 672 668 665 Puregon/Follistim Merck & Co 97 530 493 460 427 401 365 Elonva Merck & Co - 16 41 78 120 150 170 Follitrope LG Life Sciences 12 15 16 18 20 21 23 Total sex hormones 786 1,229 1,235 1,231 1,238 1,241 1,222 Immunomodulators Enbrel Amgen 3,493 3,500 3,454 3,424 3,387 3,333 3,256 Enbrel Pfizer 378 3,188 3,306 3,406 3,456 3,450 3,202 Enbrel Takeda 348 450 513 553 590 620 643 Esbriet InterMune - - 7 21 49 98 146 Pirespa Shionogi 16 36 47 57 67 72 76 Total immunomodulators 4,236 7,174 7,327 7,461 7,548 7,572 7,324 Insulins Lantus (€m) Sanofi-Aventis 3,080 3,500 3,830 4,300 4,850 5,430 5,700 Apidra (€m) Sanofi-Aventis 137 175 210 250 295 335 380 Levemir (DKKm) Novo Nordisk 5,223 6,765 7,983 9,180 10,374 11,618 12,896 NovoRapid/NovoLog (DKKm) Novo Nordisk 9,749 11,555 13,058 14,233 15,514 16,756 17,928 Human insulin & devices (DKKm) Novo Nordisk 11,315 11,710 11,827 11,827 11,709 11,123 10,456 NovoMix (DKKm) Novo Nordisk 6,499 7,640 8,404 9,076 9,802 10,489 11,118 Humalog Eli Lilly 1,959 2,075 2,204 2,323 2,421 2,317 2,185 Humulin ReliOn Eli Lilly 1,022 1,051 1,059 1,070 1,075 1,069 1,055 Degludec Novo Nordisk - - - - 70 212 409 Afrezza MannKind - - 34 97 175 244 308 DegludecPlus Novo Nordisk - - - - 34 98 179 Gensulin Bioton 25 74 91 87 96 103 114 Biosulin Pharmstandard 7 11 14 16 19 23 26 SciLin Bayer - 3 4 5 6 8 10 Total insulins 14,512 15,008 16,346 17,776 19,431 20,907 21,982 Alpha interferons Pegasys (CHFm) Roche 1,655 1,700 1,800 1,900 2,020 2,060 2,110 PEGIntron Merck & Co 149 729 734 748 771 791 796 Intron A Merck & Co 38 211 203 193 180 169 146 Sumiferon Dainippon Sumitomo Pharma 63 61 62 58 58 54 51 Multiferon Swedish Orphan Biovitrum - - 4 5 7 9 10 Aimafix Pharmstandard 1 1 1 1 1 1 1 Infergen/Advaferon Astellas Pharma 1 1 1 1 1 1 1 Total alpha interferons 1,902 2,706 2,800 2,909 3,032 3,088 3,109 Beta interferons Avonex Biogen Idec 2,323 2,481 2,483 2,432 2,332 2,206 2,106 Rebif Merck KGaA 2,142 2,183 2,186 2,134 2,087 2,038 1,952 Betaferon/Betaseron Bayer 1,692 1,590 1,517 1,451 1,338 1,238 1,132 Extavia Novartis 49 145 200 251 293 314 332 Feron Daiichi Sankyo 45 50 51 51 51 51 51 Total beta interferons 6,251 6,449 6,436 6,320 6,101 5,847 5,574 Total biologics market 94,742 106,129 112,032 118,688 124,793 129,785 132,935

Table 22: Clinical and pharmacovigilance trials recommended in European biosimilar guidelines

Product Pharmacokinetic Pharmacodynamic Efficacy Safety Pharmacovigilance Insulin

(adopted 22/02/2006)

Crossover study, single dose, subcutaneous injection, preferably type I diabetics.

Double blind euglycemic hyperinsulinemic clamp study.

Provide comparative data for speed of glucose IV and seric insulin concentration.

No need if clinical comparability was established by pharmacokinetic and pharmacodynamic trials.

Immunogenicity trial of at least 12 months, including 6 months of comparative phase to be submitted before marketing approval. The 12-month results can be submitted after launch.

Detailed post-marketing monitoring and risk management programme factoring in the risks identified during development and risks of immunogenicity.

G-CSF

(adopted 22/02/2006)

Crossover study, single dose, subcutaneous and intravenous injections.

Comparative trials on several doses in healthy volunteers: Absolute neutrophils count and CD34 cell count.

Trial comparing biosimilar and reference product in prophylaxis and severe neutropeny in patients treated with cytotoxic chemotherapy. The patient group selected must be homogenous (same type of tumour, disease stage, planned and previous treatments).

This trial has two arms where the duration and frequency of neutropeny caused by chemotherapy is known, otherwise a three-arms trial is required. Measurement of duration of severe neutropeny and secondly, the occurrence of febrile neutropeny, infections and total doses of G-CSF.

Follow-up data for 6 months of range of patients in comparative clinical trials. Include enough patients to assess side effect profile (particularly bone pains and anomalies diagnosed in the laboratory)

Risk management programme, pharmacovigilance plan. Immunogenicity and rare severe side effects must be monitored (particularly in chronic treatment).

The absence of efficacy must be observed (particularly in patients whose haematopoietic cell cultures are already mobilised).

EPO

(adopted 22/03/2006)

Crossover study, single dose, subcutaneous and intravenous injections in healthy volunteers.

Reticulocytes count At least two parallel randomised comparative trials between the biosimilar and reference product in anaemic patients due to renal insufficiency (patients most sensitive to EPO). First study: a 6-month correction phase. Measure of response rate (% of patients reaching target) and change in haemoglobin. Second study: a 6-month maintenance phase. Measure of maintenance rate (% of patients remaining in target without transfusion) or change in haemoglobin.

Comparative immunogenicity trials of at least 12 months to be presented before approval.

Comparative safety data from efficacy trials are enough before commercial launch.

Risk management programme, pharmacovigilance plan, monitoring of safety data (particularly rare side and serious effects such as pure red cell aplasia: PRCA).

Product Pharmacokinetic Pharmacodynamic Efficacy Safety Pharmacovigilance Growth hormone

(adopted 22/02/2006)

Crossover study, single dose, subcutaneous injections in healthy volunteers after suppression of endogenous production of growth hormone with a somatostatin analogue.

Measure of somatotropin activity markers: IGF-1 or others such as IGFBP-3.

At least one parallel randomised comparative double blind trial in children that have a growth hormone deficiency and have never been treated (most sensitive population). Measure of speed of growth and standard deviation score. Growth rate before treatment must be measured over a period of 6-18 months, the comparative trial must last at least 6 months.

Data obtained in efficacy trials are usually enough before launch.

Comparison of immunogenicity over 12 months and blood dosages of IGF-1, IGFBP-3, insulin and glucose.

Risk management programme, pharmacovigilance plan factoring in risks identified during development and immunogenicity risks.

Monoclonal antibodies

(issued 19/12/2010)

Comparative and multi-dose studies with a sufficient and homogenous sample of patients. Dose analyses –responses requested.

Criteria: concentration of the product (AUC, Cmax, etc.) elimination of the molecule from the organism and half life.

For cancer treatments: a monotherapy test is allowed, to minimise the sources of variability between the biosimilar and its reference product. A specific study targeting the adjuvant treatment is advised.

Possibility of combining the pharmacodynamic studies with pharmacokinetics

Dose-response study vital for all indications targeted.

With these pharmacokinetics/dynamics studies, proof of biosimilarity may be established.

Comparative randomised, double blind trials. Criterion of non-inferiority to princeps. To demonstrate biosimilarity, the criteria used (study targets, duration, etc..) may differ from traditional guidelines. The aim is to demonstrate similarity with the princeps product, and not the action on patients.

For cancer treatments, the response rate or time to progression will be accepted.

Possible to extrapolate the demonstration of biosimilarity to other indications of the princeps product

Verification of safety comparable to the original product. Immunogeneticity studies requested.

Pharmacovigilance study requested, comparable to that used by the inventor of the molecule.

Sources: Natixis, EMEA

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SECTOR REPORT

7. Company profile

Novartis 59 Our top pick 59

Novo Nordisk 63 Above the fray 63

Roche 67 Return to grace unlikely before 2011 67

Stada 71 The recovery is on track 71

Pharmacie I 59

SECTOR REPORT

6 December 2010

Pharmaceuticals Switzerland

Novartis BuyNOVZn.S / NOVN@VX

61.7

81.7

101.7

121.7

141.7

161.7

déc-07 j ui n-08 j anv-09 j ui l -09 f évr -10 sept -10

Novart is Rel. St oxx 50

Source: Natixis

Our top pick

Management opted for a business diversification model at the start of the decade. This consisted of building up a franchise of vaccines, generic drugs (the world’s no.2 with Sandoz) and ophthalmologic products (after taking over Alcon), and has led to a reduction in the risk usually associated with any pharmaceutical stock.

Sandoz is an undisputable growth lever (operating profit CAGR of +9% from 2010 to 2015e): its market stands to grow twice as fast as the pharma market, and Sandoz is investing in fields that will generate higher operating margins than conventional generic drugs. Value-added generics include biosimilars (a field in which the group is a pioneer and, for the time being, the market no.1), respiratory inhalers (developed with Oriel) and injectable drugs (Ebewe was taken over in 2009). Sandoz is thus a top-quality asset which, by our estimates, accounts for 11% of the group’s restated value.

The Pharma division, accounting for 70% of operating profit, is delivering excellent sales performances (7% organic growth for the first 9 months) and a continuously expanding operating margin (+90bp at end-September to 33.9%). This performance is being fuelled by an innovation effect (new products account for 21% of Pharma sales), which is not expected to run out of steam. For instance, Novartis is marketing a new oral MS drug, Gilenya, and we estimate its peak sales potential at $2.6bn. The ramp-up of new products will help the group weather the difficult 2011/12 period during which the group will lose patent protection on three of its major drugs (Diovan, Femara, Zometa), accounting for 29% of Pharma sales. The 2011/2015 period is set to show 1.7% average annual sales growth for this division.

Last of all, the takeover of Alcon is a strategic operation because it bolsters Novartis’ position in a highly-profitable and relatively generic-proof segment, ophthalmology. The takeover of Nestle’s 52% stake will, moreover, have an accretive impact of 7% in 2012, which will prevent Novartis’ EPS from shrinking, even a little, in 2012/13. The last stage of the process (acquisition of the 23% stake held by the public) could also have a significantly accretive impact if management uses a different financing method (a cash acquisition rather than a rights issue).

We reiterate our Buy rating on the stock. Novartis is our top pick in the European pharma sector based on its capacity to develop its activities, optimise its costs and manage its assets.

Price 12/03/2010 CHF53.45 Target CHF70.00 Upside 31.0% Performance 1m 12m 1 Jan Absolute -6.4% -4.9% -5.4% Sector 1.0% 8.1% 3.7% Stoxx 50 0.3% 2.3% -1.0% 12-month high/low CHF60.25 / CHF50.55 SMI 6440.9 Stoxx 50 2553.8 Market capitalisation CHF121.1bn Free float 100.0% - - Daily volume CHF352m Analyst(s) Béatrice Muzard (33 1) 58 55 05 13 [email protected] Philippe Lanone (33 1) 58 55 05 03 [email protected] Equity Markets equity.natixis.com Bloomberg access NXSE Distribution of this report in the United States. See important disclosures at the end of this report.

Close on 31/12

Turnover ($m)

Reported net profit

($m)

Adjusted EPS

(CHF)

Chg. EPS

(%)

PE

(x)

EV/EBIT

(x)

P/CF

(x)

Net yield

(%) 2009e 44,267 8,400 4.90 8.6 - - - - 2010e 50,705 10,003 5.48 12.0 9.7 10.4 8.3 4.2 2011e 57,214 9,848 5.78 5.4 9.2 8.5 6.6 4.6 2012e 59,528 10,628 6.04 4.6 8.8 8.0 6.5 4.7


Pharmacie I 60

SECTOR REPORT

Company profile Recent events Novartis was born of the merger between Swiss groups Ciba and Sandoz in 1996. In 2009, the pharma division (64% of consolidated sales) generated sales of $28.5bn. Novartis is also involved in the vaccines business following the Chiron acquisition (April 2006), and has become a significant player in flu vaccines. The group’s generics business (Sandoz), which has expanded significantly in recent years via the acquisition of local companies and organic growth, ranks no. 2 in the world behind Teva-Ivax. Novartis’ generics arm makes the group a unique case in our pharma universe. Consumer Health encompasses ophthalmology (CIBA Vision), strengthened by the acquisition of a 77% stake in Alcon, animal health and OTC activities (reinforced by the acquisition of BMS’ businesses).

Q3 10 results were excellent, with an EPS up 16%. Novartis continues to benefit from powerful innovation: new products represented 20% of Q3 10 sales. The group consolidated 100% of Alcon’s earnings starting in September 2010. Novartis received authorisation for Gilenya in the USA for relapsing remitting multiple sclerosis.

Turnover 10 Adjusted operating profit 10 ($m)

Alcon5%

Consumer Health12%

Generic16%Pharmaceutic

als62%

Vaccines & diagnostic

5%

1 311 1 669

10 076

1 180

-745

894

Alcon Consumerhealth

Corporate Generics Pharma-ceuticals

Vaccines

Opportunities / Strengths Weaknesses / Threats • New drugs are ramping up (Exforge and Lucentis

already have blockbuster status) and accounted for 21% of Pharma sales in Q3 10.

• Renowned development capacity in the fields of oncology (Tasigna, Afinitor), neurology (Gilenya in MS) and respiratory diseases (QAB 149, QVA 149).

• Major restructuring efforts ($1.830bn in total, paying off in 2010).

• Major exposure to emerging countries (24% of consolidated sales).

• The Pharma division's earnings are heavily dependent on Diovan whose patent expires in September 2012 in the USA (worldwide sales of $6.2bn in 2010; operating margin 50%; 25% of the group's adjusted operating income). Diovan's momentum could be curbed in the short term in the USA by the arrival in 2010 of generic versions of Cozaar, a rival anti-hypertension drug from Merck and whose patent expires in the USA in 2010.

• Positions need to be bolstered in vaccines (only two major product lines) and animal health (weak global position).

• Uncertainty about the acquisition of the remaining 23% stake in Alcon: the operation is being blocked by Alcon's management and the conditions for buying the 23% are far from optimal (rights issue, merger in compliance with Swiss law).

Share ownership Diary dates Shares Votes 01/27/2011 2010 earnings Free float 100.0% 100.0% 04/19/2011 Q1 11 earnings 07/19/2011 Q2 11 earnings 10/25/2011 Q3 11 earnings

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Financial Data 31/12 Novartis

Breakdown by activity ($m) 2008 2009e 2010e 2011e 2012e CAGR 09/12 Turnover 41,459 44,267 50,705 57,214 59,528 10.4% Pharmaceuticals 26,331 28,538 30,900 32,200 32,650 4.6% Generic 7,557 7,493 8,350 9,250 10,100 10.5% Consumer Health 5,812 5,812 6,275 6,350 6,604 4.4% Vaccines & diagnostics 1,759 2,424 2,780 2,200 2,500 1.0% Alcon 0 0 2,400 7,214 7,674 Adjusted operating profit 10,309 11,437 14,385 16,282 16,405 12.8% Pharmaceuticals 8,214 9,068 10,076 10,450 9,870 2.9% Generic 1,450 1,395 1,669 1,880 2,050 13.7% Consumer Health 1,121 1,118 1,311 1,292 1,375 7.1% Vaccines & diagnostics 309 719 1,180 560 635 -4.1% Alcon 0 0 894 2,800 3,200 Corporate -785 -863 -745 -700 -725 5.6% Adjusted operating margin 24.9% 25.8% 28.4% 28.5% 27.6% Pharmaceuticals 31.2% 31.8% 32.6% 32.5% 30.2% Generic 19.2% 18.6% 20.0% 20.3% 20.3% Consumer Health 19.3% 19.2% 20.9% 20.3% 20.8% Vaccines & diagnostics 17.6% 29.7% 42.4% 25.5% 25.4% Alcon - - 37.3% 38.8% 41.7% Profit & loss statement ($m) 2008 2009e 2010e 2011e 2012e CAGR 09/12 Turnover 41,459 44,267 50,705 57,214 59,528 10.4% Change 8.9% 6.8% 14.5% 12.8% 4.0% Organic growth - - - - -

EBITDA 11,704 12,283 14,845 16,951 17,480 12.5% Change 20.0% 4.9% 20.9% 14.2% 3.1%

EBIT 8,964 9,982 12,274 12,980 13,380 10.3% Change 21.6% 11.4% 23.0% 5.8% 3.1% Adjusted EBIT 10,309 11,437 13,895 16,282 16,405 12.8% Change 11.0% 10.9% 21.5% 17.2% 0.8% Operating margin 24.9% 25.8% 27.4% 28.5% 27.6%

Financial items 94 -353 -675 -975 -525 Pre-tax profit on ordinary activities 9,058 9,629 11,599 12,005 12,855 10.1% Exceptional items 0 0 0 0 0 Corporate tax -1,336 -1,468 -2,099 -2,026 -2,109 Goodwill amortisation/ impairment 0 0 0 1 2 Equity associates 441 293 749 503 538 Minority interests -38 -54 -246 -635 -658

Net profit on divested activities 70 0 0 0 0 Reported net profit 8,195 8,400 10,003 9,848 10,628 8.2% Change 21.3% 2.5% 19.1% -1.6% 7.9% Adjusted net profit 9,431 10,213 11,845 12,486 13,059 8.5% Change 13.4% 8.3% 16.0% 5.4% 4.6% Cash flow statement ($m) 2008 2009e 2010e 2011e 2012e CAGR 09/12 Cash flow from operations 11,129 12,238 13,951 17,448 17,700 13.1% Nets Investments -2,106 -1,887 -2,400 -2,870 -3,000 16.7% Decrease (Increase) in WCR -1,360 -47 -1,400 -1,600 -1,750 Free cash flow 7,663 10,304 10,151 12,978 12,950 7.9% Acquisitions -8,261 -2,009 -29,650 -800 -1,500 Dividend -3,345 -3,941 -4,486 -5,148 -5,606 12.5% Capital increase -473 224 0 0 0 Divestments 0 226 0 0 0 Miscellaneous -2,339 -1,995 0 0 0 Increase (Decrease) in cash -6,755 2,809 -23,985 7,030 5,844 Net debt -652 -3,461 20,524 13,493 7,649 Gearing -1.3% -6.0% 27.9% 17.2% 9.1%

Pharmacie I 62

SECTOR REPORT

Balance sheet ($m) 2008 2009e 2010e 2011e 2012e CAGR 09/12 Net fixed assets 33,919 36,445 81,200 72,000 75,000 27.2% o/w net goodwill 1,175 1,175 1,175 1,175 1,176 o/w gross goodwill 2,100 2,100 2,100 2,100 2,101 Financial fixed assets 23,499 25,369 15,744 15,744 15,744 WCR 1,547 2,085 9,237 16,024 12,512 Net assets on divested activities - - - - - - Total equity 50,437 57,462 73,658 78,274 83,607 13.3% o/w shareholders' equity 50,307 57,332 73,458 78,054 83,387 Provisions 9,180 9,898 12,000 12,000 12,000 Net debt -652 -3,461 20,524 13,493 7,649 Per share data (CHF) 2008 2009e 2010e 2011e 2012e CAGR 09/12 Shares outstanding (millions) 2,265.7 2,265.7 2,265.7 2,265.7 2,265.7 0.0% Diluted shares (millions) 2,265.5 2,267.9 2,288.0 2,288.0 2,288.0 0.3% Reported EPS 3.92 4.03 4.63 4.56 4.92 6.9% Adjusted EPS 4.51 4.90 5.48 5.78 6.04 7.3% Goodwill 0.00 0.00 0.00 0.00 0.00 Cash flow 5.32 5.87 6.46 8.08 8.19 11.8% Net dividend 2.00 2.10 2.25 2.45 2.50 6.0% Payout ratio 51.1% 52.2% 48.6% 53.8% 50.8% Book value 24.05 27.48 34.00 36.13 38.60 12.0% Financial ratios 2008 2009e 2010e 2011e 2012e CAGR 09/12 Personnel expenses (M€) 8,200 8,200 8,400 8,400 8,401 0.8% Personnel expenses (% of sales) 19.8% 18.5% 16.6% 14.7% 14.1% Operating margin 21.6% 22.5% 24.2% 22.7% 22.5% Adjusted operating margin 24.9% 25.8% 27.4% 28.5% 27.6% Effective rate of tax -14.7% -15.2% -18.1% -16.9% -16.4% Net margin 18.8% 18.4% 18.7% 17.4% 18.1% ROE 16.3% 14.7% 13.6% 12.6% 12.7% ROCE 22.1% 22.6% 11.9% 14.3% 14.5% Capital employed (M€) 36,391 39,455 91,362 88,949 88,437 30.9% Interest cover (x) na 32.4 20.6 16.7 31.2 Debt/EBITDA (x) -0.1 -0.3 1.4 0.8 0.4 Gearing -1.3% -6.0% 27.9% 17.2% 9.1% WCR (% of sales) 3.7% 4.7% 18.2% 28.0% 21.0% Goodwill (% of book value) 2.3% 2.0% 1.6% 1.5% 1.4% Net investments (% of sales) -5.1% -4.3% -4.7% -5.0% -5.0% Investment ratios 2010e 2011e 2012e EV/Turnover (x) 2.9 2.4 2.2 EV/EBITDA (x) 9.7 8.1 7.5 EV/Adjusted EBIT (x) 10.4 8.5 8.0 P/BV (x) 1.6 1.5 1.4 P/CF (x) 8.3 6.6 6.5 Adjusted P/E 9.7 9.2 8.8 Reported P/E 11.5 11.7 10.9 Net yield 4.2% 4.6% 4.7% Free cash flow yield (%) 8.2% 10.5% 10.4%

Pharmacie I 63

SECTOR REPORT

6 December 2010

Pharmaceuticals Denmark

Novo Nordisk BuyNOVOb.CO / NOVOB@DC

71.4

121.4

171.4

221.4

déc-07 j ui n-08 j anv-09 août -09 f évr -10 sept -10

Novo Nordisk

Rel. St oxx 50 Source: Natixis

Above the fray

The announcement of the Pfizer/Biocon agreement in insulin biosimilars came as a bombshell, causing Novo Nordisk to lose 10% in two trading sessions. Once it got over the shock, the market calmed down. It is true that, put brutally, this is a reminder that around 50% of the group’s diabetes franchise will face biosimilar competition between now and 2015. And that we therefore cannot expect growth for these products beyond that date. The question is therefore whether the stock’s 80% premium to the sector is justified.

In reality, even factoring in a virtual disappearance in the long term of traditional human insulins (26% of 2010e diabetes sales), and stability, even a fall, in short-acting analogues and premixes (42%), the progression of Victoza will enable the diabetes franchise to continue to show growth until 2022. Sales should double between 2010 and 2022, before falling back to the 2012 level in 2030.

Thereafter, a decline is inevitable for the current products, but Novo has a pipeline that holds out the hope of further growth thereafter. Thus the group’s growth profile remains much better and more assured than that of any other pharmaceuticals group, and its PE 12e of 18x does not factor in any more than the others the upstream pipeline, as it can be justified by the current generation of products.

In short, we are convinced that the current PE is not exaggerated, as it correctly reflects the bright long-term prospects. The anomaly lies instead in the valuations of the other pharmaceuticals groups. On top of this there is the strong short-term momentum, since conversely, the group will continue for two or three years to post strong growth, a unique quality in the sector. We therefore maintain our Buy rating to factor in this scarcity effect.

Price 12/03/2010 DKK574.00 Target DKK600.00 Upside 4.5% Performance 1m 12m 1 Jan Absolute 3.9% 70.7% 72.9% Sector 1.0% 8.1% 3.7% Stoxx 50 0.3% 2.3% -1.0% 12-month high/low DKK582.00 / DKK331.75 KFX 437.4 Stoxx 50 2553.8 Market capitalisation DKK352.6bn Free float 100.0% - - Daily volume DKK272m Analyst(s) Philippe Lanone (33 1) 58 55 05 03 [email protected] Béatrice Muzard (33 1) 58 55 05 13 [email protected] Equity Markets equity.natixis.com Bloomberg access NXSE Distribution of this report in the United States. See important disclosures at the end of this report.

Close on 31/12

Turnover (DKKm)

Reported net profit

(DKKm)

Adjusted EPS

(DKK)

Chg. EPS

(%)

PE

(x)

EV/EBIT

(x)

P/CF

(x)

Net yield

(%) 2009 51,078 10,768 17.97 14.7 - - - - 2010e 59,970 13,630 23.40 30.2 24.5 17.9 20.9 1.6 2011e 66,320 16,517 28.48 21.7 20.2 15.4 17.5 1.8 2012e 72,478 18,802 32.41 13.8 17.7 13.5 15.5 2.2


Pharmacie I 64

SECTOR REPORT

Company profile Recent events Novo Nordisk generates 73% of sales and 57% of its operating profit in diabetes treatments. The company is a world leader in insulins, its traditional area of expertise and a segment where it is world leader. The group achieved biopharma status via NovoSeven (coagulation factor), its second growth driver, which accounted for 13% of sales in 2009. The group also sells growth hormones (9% of sales) and hormone replacement treatments (3%).

Very impressive Q3 2010 results from Novo. Revenue was DKK15,584m, +14%, vs. DKK15,015m forecast. Victoza sales were almost double the consensus forecast, and the guidance for 2010 has been revised up. Once again, Novo has raised its full-year guidance, and is now looking for growth of 11-12% in the top line at constant exchange rates, vs. +9/10% previously, and growth of over 15% in operating profit vs. 12/15% in August 2010. July and October 2010: development failures for the two main rivals to Novo's Victoza, Roche's taspoglutide and Lilly's Bydureon.

Revenues 09 Operating profit 09

Biopharmaceuticals

27%

Diabetes73%

Biopharmaceuticals

43%Diabetes

57%

Opportunities / Strengths Weaknesses / Threats • Benefits from substitution of insulin analogues, a

fast-growing segment. • With sanofi-aventis, Novo is the only pharma

company to offer a full range of analogues (short-acting NovoRapid, long-acting Levemir).

• Strong exposure to emerging markets (China fifth-largest market for the group).

• The delay to the entry on the market of Bydureon (Lilly) will ease penetration for Victoza.

• Novo is the only company whose diabetes pipeline covers the entire spectrum of future therapies (ultra-basal insulins, long acting GLP-1, combo basal insulin/GLP-1, oral GLP-1).

• Potential biosimilar competition from 2012 for human insulins, and in 2015 for analogues, as well as the NovoSeven patent expiry means uncertainty regarding long-term prospects.

• The group is highly exposed to the dollar. • Price environment becoming tougher in the US with

the US healthcare reform.

Share ownership Diary dates Shares Votes 12/15/2010 Investors day Free float 100.0% 100.0% 02/02/2011 2010 earnings 04/28/2011 Q1 11 earnings 08/04/2011 Q2 11 earnings 10/27/2011 Q3 11 earnings

Pharmacie I 65

SECTOR REPORT

Financial Data 31/12 Novo Nordisk

Breakdown by activity (DKKm) 2008 2009 2010e 2011e 2012e CAGR 09/12 Turnover 45,553 51,078 59,970 66,320 72,477 12.4% Diabetes 33,356 37,502 45,000 50,380 55,737 14.1% Bio-pharmaceuticals 12,197 13,576 14,970 15,940 16,740 7.2% Reported operating profit 12,373 14,933 19,100 21,591 23,724 16.7% Diabetes 7,373 8,510 11,330 12,200 14,120 18.4% Bio-pharmaceuticals 5,000 6,423 7,770 9,391 9,604 14.4% Reported operating margin 27.2% 29.2% 31.8% 32.6% 32.7% Diabetes 22.1% 22.7% 25.2% 24.2% 25.3% Bio-pharmaceuticals 41.0% 47.3% 51.9% 58.9% 57.4% Profit & loss statement (DKKm) 2008 2009 2010e 2011e 2012e CAGR 09/12 Turnover 45,553 51,078 59,970 66,320 72,478 12.4% Change 8.9% 12.1% 17.4% 10.6% 9.3% Organic growth - - - - -

EBITDA 14,815 17,484 21,730 24,500 26,903 15.4% Change 24.0% 18.0% 24.3% 12.7% 9.8%

EBIT 12,373 14,933 19,100 21,591 23,724 16.7% Change 38.4% 20.7% 27.9% 13.0% 9.9% Adjusted EBIT 12,698 14,933 19,100 21,591 23,724 16.7% Change 27.7% 17.6% 27.9% 13.0% 9.9% Operating margin 27.9% 29.2% 31.8% 32.6% 32.7%

Financial items 322 -945 -1,400 0 850 Pre-tax profit on ordinary activities 12,695 13,988 17,700 21,591 24,574 20.7% Exceptional items 0 0 0 0 1 Corporate tax -3,050 -3,220 -4,070 -5,074 -5,775 Goodwill amortisation/ impairment 0 0 0 0 1 Equity associates -124 -55 40 50 70 Minority interests 0 0 0 0 1

Net profit on divested activities - - - - - Reported net profit 9,645 10,768 13,630 16,517 18,802 20.4% Change 13.2% 11.6% 26.6% 21.2% 13.8% Adjusted net profit 9,645 10,768 13,630 16,517 18,802 20.4% Change 37.4% 11.6% 26.6% 21.2% 13.8% Cash flow statement (DKKm) 2008 2009 2010e 2011e 2012e CAGR 09/12 Cash flow from operations 13,425 13,319 16,260 19,426 21,978 18.2% Nets Investments -1,772 -3,000 -3,500 -3,850 -4,100 11.0% Decrease (Increase) in WCR -562 -613 -600 -800 -900 Free cash flow 11,091 9,706 12,160 14,776 16,978 20.5% Acquisitions 0 0 0 0 0 Dividend -2,795 -3,724 -4,532 -5,337 -6,227 18.7% Capital increase -4,717 -6,500 -7,500 0 0 Divestments 0 0 0 0 0 Miscellaneous 0 4,112 0 0 0 Increase (Decrease) in cash 3,892 3,594 128 9,439 10,751 Net debt -7,844 -11,438 -11,566 -21,005 -31,756 Gearing -23.8% -32.0% -32.3% -58.7% -88.6%

Pharmacie I 66

SECTOR REPORT

Balance sheet (DKKm) 2008 2009 2010e 2011e 2012e CAGR 09/12 Net fixed assets 21,539 22,076 23,940 26,285 28,985 9.5% o/w net goodwill 788 1,037 1,037 1,037 1,037 o/w gross goodwill - - - - - Financial fixed assets 2,112 1,813 1,813 1,813 1,813 WCR 5,170 5,030 4,054 -6,492 -18,757 Net assets on divested activities - - - - - - Total equity 32,979 35,734 35,762 35,796 35,838 0.1% o/w shareholders' equity 32,979 35,734 35,762 35,796 35,838 Provisions 3,686 4,623 5,611 6,814 7,959 Net debt -7,844 -11,438 -11,566 -21,005 -31,756 Per share data (DKK) 2008 2009 2010e 2011e 2012e CAGR 09/12 Shares outstanding (millions) 614.2 614.2 614.2 614.2 614.2 0.0% Diluted shares (millions) 620.7 604.3 593.0 593.0 593.0 -0.6% Reported EPS 15.54 17.82 22.98 27.85 31.70 21.2% Adjusted EPS 15.66 17.97 23.40 28.48 32.41 21.7% Goodwill 0.00 0.00 0.00 0.00 0.00 Cash flow 19.47 22.04 27.42 32.76 37.06 18.9% Net dividend 6.00 7.50 9.00 10.50 12.50 18.6% Payout ratio 38.6% 42.1% 39.2% 37.7% 39.4% Book value 53.13 54.14 60.31 60.36 60.43 3.7% Financial ratios 2008 2009 2010e 2011e 2012e CAGR 09/12 Personnel expenses (M€) 14,615 16,113 17,587 19,020 20,570 8.5% Personnel expenses (% of sales) 32.1% 31.5% 29.3% 28.7% 28.4% Operating margin 27.2% 29.2% 31.8% 32.6% 32.7% Adjusted operating margin 27.9% 29.2% 31.8% 32.6% 32.7% Effective rate of tax -24.0% -23.0% -23.0% -23.5% -23.5% Net margin 21.4% 21.2% 22.7% 24.8% 25.8% ROE 29.2% 30.1% 38.1% 46.1% 52.5% ROCE 36.1% 41.9% 51.9% 82.9% 176.3% Capital employed (M€) 26,709 27,106 27,994 19,792 10,228 -27.7% Interest cover (x) na 15.8 13.6 na na Debt/EBITDA (x) -0.5 -0.7 -0.5 -0.9 -1.2 Gearing -23.8% -32.0% -32.3% -58.7% -88.6% WCR (% of sales) 11.3% 9.8% 6.8% -9.8% -25.9% Goodwill (% of book value) 2.4% 2.9% 2.9% 2.9% 2.9% Net investments (% of sales) -3.9% -5.9% -5.8% -5.8% -5.7% Investment ratios 2010e 2011e 2012e EV/Turnover (x) 5.7 5.0 4.4 EV/EBITDA (x) 15.7 13.5 11.9 EV/Adjusted EBIT (x) 17.9 15.4 13.5 P/BV (x) 9.5 9.5 9.5 P/CF (x) 20.9 17.5 15.5 Adjusted P/E 24.5 20.2 17.7 Reported P/E 25.0 20.6 18.1 Net yield 1.6% 1.8% 2.2% Free cash flow yield (%) 3.4% 4.2% 4.8%

Pharmacie I 67

SECTOR REPORT

6 December 2010

Pharmaceuticals Switzerland

Roche NeutralROCZg.S / ROG@VX

62.3

82.3

102.3

122.3

142.3

162.3

déc-07 j ui n-08 j anv-09 j ui l -09 f évr -10 sept -10

Roche Rel. St oxx 50

Source: Natixis

Return to grace unlikely before 2011

Roche had a rough ride this summer, what with taspoglutide’s virtual failure, Avastin’s negative recommendation in breast cancer, delays for T-DM1 and lacklustre sales. This in turn sharpened market concerns surrounding the emergence of biosimilars of the group’s blockbusters, a threat discernable in the new US law.

We have drawn up earnings scenarios with and without biosimilars for monoclonal antibodies, albeit without the worst case scenario of substitutable generics. While the impact is significant in terms of the valuation, with around 8.4%, mainly for Herceptin, Avastin, Mabthera and Lucentis, it is mitigated by the fact that there are no patent expiries in the short term. Markets-wise, the pressure has gone far beyond this over the last 12 months, with the share even trading below the sector average.

Roche’s medium/long-term growth prospects are among the best in the sector. Despite the recent setbacks, the group will benefit from recent launches (Actemra) and boasts a very healthy pipeline of phase III developments, in oncology (T-DM1, braf…), but also in metabolism disorders with dalcetrapib (dyslipidemia), for which the first phase III results will be announced in Q3 11. Roche is due to provide an overview of its late-stage developments at a meeting on 9 December. After the current rough patch, we see it continuing to deliver stronger growth than its peers.

2010 was a tough year for Roche, as it undertook restructuring efforts on a scale not seen at the group in a decade. It expects these initiatives to generate savings of CHF2.4bn in 2012, with a reduction in staff of 4,800. The earnings guidance for 2011 is likely to be cautious, a factor that has put the share under pressure in past years.

All told and despite the clear undervaluation, the market upswing is unlikely to show through until there is confirmation regarding Avastin and possibly not until the group reports its 2010 results. In the meantime, we are maintaining our Neutral rating.

Price 12/03/2010 CHF138.40 Target CHF150.00 Upside 8.4% Performance 1m 12m 1 Jan Absolute -4.6% -17.5% -21.3% Sector 1.0% 8.1% 3.7% Stoxx 50 0.3% 2.3% -1.0% 12-month high/low CHF186.00 / CHF130.20 SMI 6440.9 Stoxx 50 2553.8 Market capitalisation CHF119.4bn Free float 84.5% Hoffmann families 9.3% Daily volume CHF189m Analyst(s) Philippe Lanone (33 1) 58 55 05 03 [email protected] Béatrice Muzard (33 1) 58 55 05 13 [email protected]


Close on 31/12

Turnover (CHFm)

Reported net profit

(CHFm)

Adjusted EPS

(CHF)

Chg. EPS

(%)

PE

(x)

EV/EBIT

(x)

P/CF

(x)

Net yield

(%) 2009 49,051 7,784 12.18 8.7 - - - - 2010e 48,630 10,640 13.13 7.8 10.5 8.7 8.0 4.6 2011e 51,080 11,955 14.66 11.7 9.4 7.7 7.4 5.1 2012e 53,950 12,980 15.85 8.1 8.7 6.9 6.9 5.4


Pharmacie I 68

SECTOR REPORT

Company profile Recent events Roche is the world’s 5th-largest drug company. After the disposal in 2000 of its aromas and fragrances business, followed by its vitamins activity in 2003, Roche is now fully focused on human heath with 80% of its revenues in pharmaceuticals. Roche is the world leader in oncology, which accounted for 50% of its pharma sales in 2007. The group is also the world leader in diagnostics ahead of Abbott. Novartis holds 33% of Roche's shares with voting rights (6.1% of capital).

October 2010: The progression in pharma sales accelerated slightly in Q3 10 to +4% excluding Tamiflu and currencies. October 2010: good phase II data for T-DM1 and MetMab, both from the Genentech pipeline September 2010 : another potential setback for Roche. After the threat of Avastin being withdrawn in the USA in breast cancer, it is now Europe’s turn to become worried. June 2010: FDA reqests more data on taspoglutide (diabetes) March 2010: Success of Avastin in ovarian cancer, but failure in prostate cancer March 2010: decision to suspend the development of ocrelizumab in RA.

2009 sales by geographic area 2009 sales by division

North America

37%

Others26%

Europe37%

Pharmaceuticals

80%Diagnostics

20%

Opportunities / Strengths Weaknesses / Threats • A series of anti-cancer drugs (Avastin, Mabthera,

Herceptin, Tarceva) should ensure sales and earnings growth until 2014.

• Fresh growth will come from a second wave of launches, with especially Actemra in rheumatoid arthritis.

• Several long-term strengths in the field of metabolic diseases (cholesterol) will strengthen long-term growth.

• More than half of pharma sales are generated with biologics, which will not face direct generic competition in the short term.

• The shareholding structure (locked up by the families) prevents share buyback policies.

• Prospect of widespread biosimilar competition at the end of the decade means some element of uncertainty on long-term growth, even if the launch of subcutaneous formulations is an adequate answer.

• The share remains very sensitive to any doubts that might arise from the short-term performances of the major products (Avastin).

Share ownership Diary dates Shares Votes 12/09/2010 Investors day Hoffmann families 9.3% 50.0% 12/17/2010 PDUFA date Avastin Novartis 6.1% 33.3% 02/02/2011 2010 earnings Free float 84.6% 16.7%

Pharmacie I 69

SECTOR REPORT

Financial Data 31/12 Roche

Breakdown by activity (CHFm) 2008 2009 2010e 2011e 2012e CAGR 09/12 Turnover 45,617 49,051 48,630 51,080 53,950 3.2% Pharmaceuticals 35,961 38,996 38,150 39,980 42,050 2.5% Diagnostics 9,656 10,055 10,480 11,100 11,900 5.8% Reported operating profit 13,896 15,012 16,060 17,270 18,620 7.4% Pharmaceuticals 12,974 14,154 14,750 15,800 16,970 6.2% Diagnostics 1,187 1,198 1,665 1,820 2,000 18.6% Others -265 -340 -355 -350 -350 -1.0% Reported operating margin 30.5% 30.6% 33.0% 33.8% 34.5% Pharmaceuticals 36.1% 36.3% 38.7% 39.5% 40.4% Diagnostics 12.3% 11.9% 15.9% 16.4% 16.8% Profit & loss statement (CHFm) 2008 2009 2010e 2011e 2012e CAGR 09/12 Turnover 45,617 49,051 48,630 51,080 53,950 3.2% Change -1.1% 7.5% -0.9% 5.0% 5.6% Organic growth 6.0% 12.0% 7.0% 7.0% 107.0%

EBITDA 16,637 18,028 19,065 20,275 21,625 6.3% Change -2.5% 8.4% 5.8% 6.3% 6.7%

EBIT 13,896 15,012 16,060 17,270 18,620 7.4% Change -4.0% 8.0% 7.0% 7.5% 7.8% Adjusted EBIT 13,896 15,012 16,060 17,270 18,620 7.4% Change -4.0% 8.0% 7.0% 7.5% 7.8% Operating margin 30.5% 30.6% 33.0% 33.8% 34.5%

Financial items 236 -2,045 -1,990 -1,300 -900 Pre-tax profit on ordinary activities 14,132 12,967 14,070 15,970 17,720 11.0% Exceptional items 28 -2,735 0 0 0 Corporate tax -3,317 -1,722 -3,230 -3,795 -4,500 Goodwill amortisation/ impairment 0 0 0 0 0 Equity associates 1 0 0 0 0 Minority interests -1,875 -726 -200 -220 -240

Net profit on divested activities - - - - - Reported net profit 8,969 7,784 10,640 11,955 12,980 18.6% Change -8.1% -13.2% 36.7% 12.4% 8.6% Adjusted net profit 9,666 10,506 11,327 12,650 13,675 9.2% Change -6.7% 8.7% 7.8% 11.7% 8.1% Cash flow statement (CHFm) 2008 2009 2010e 2011e 2012e CAGR 09/12 Cash flow from operations 13,096 16,086 14,900 16,100 17,200 2.3% Nets Investments -3,557 -3,219 -3,250 -3,500 -3,800 5.7% Decrease (Increase) in WCR -524 324 -2,000 -850 -900 Free cash flow 9,015 13,191 9,650 11,750 12,500 -1.8% Acquisitions -5,223 -52,812 -500 -500 -500 Dividend -4,051 -4,395 -5,214 -5,434 -6,038 11.2% Capital increase 0 0 0 0 0 Divestments 541 300 0 0 0 Miscellaneous -936 3,167 -800 34 -2 Increase (Decrease) in cash -654 -40,549 3,136 5,850 5,961 Net debt -16,682 23,867 20,731 14,881 8,922 Gearing -31.0% 253.5% 147.3% 76.4% 35.0%

Pharmacie I 70

SECTOR REPORT

Balance sheet (CHFm) 2008 2009 2010e 2011e 2012e CAGR 09/12 Net fixed assets 33,664 31,963 32,500 32,300 32,700 0.8% o/w net goodwill 7,000 7,000 7,000 7,001 7,002 o/w gross goodwill 7,000 7,000 7,000 7,001 7,002 Financial fixed assets 3,821 4,123 4,000 4,000 4,000 WCR 6,387 3,720 6,103 5,570 5,721 Net assets on divested activities - - - - - - Total equity 53,822 9,414 14,072 19,488 25,499 39.4% o/w shareholders' equity 44,479 7,366 11,572 16,488 21,999 Provisions 6,732 6,525 7,800 7,500 8,000 Net debt -16,682 23,867 20,731 14,881 8,922 Per share data (CHF) 2008 2009 2010e 2011e 2012e CAGR 09/12 Shares outstanding (millions) 862.6 862.6 862.6 862.6 862.6 0.0% Diluted shares (millions) 862.6 862.6 862.6 862.6 862.6 0.0% Reported EPS 10.40 9.02 12.33 13.86 15.05 18.6% Adjusted EPS 11.21 12.18 13.13 14.66 15.85 9.2% Goodwill 0.00 0.00 0.00 0.00 0.00 Cash flow 15.18 18.65 17.27 18.66 19.94 2.3% Net dividend 5.00 5.40 6.30 7.00 7.50 11.6% Payout ratio 48.1% 59.8% 51.1% 50.5% 49.8% Book value 51.56 8.54 13.41 19.11 25.50 44.0% Financial ratios 2008 2009 2010e 2011e 2012e CAGR 09/12 Personnel expenses (M€) 9,401 9,402 9,402 9,402 9,403 0.0% Personnel expenses (% of sales) 20.6% 19.2% 19.3% 18.4% 17.4% Operating margin 30.5% 30.6% 33.0% 33.8% 34.5% Adjusted operating margin 30.5% 30.6% 33.0% 33.8% 34.5% Effective rate of tax -23.4% -16.8% -23.0% -23.8% -25.4% Net margin 23.8% 17.3% 22.3% 23.8% 24.5% ROE 20.2% na 91.9% 72.5% 59.0% ROCE 25.3% 30.7% 30.4% 33.3% 35.4% Capital employed (M€) 40,051 35,683 38,603 37,870 38,421 2.5% Interest cover (x) na 7.3 8.1 13.3 20.7 Debt/EBITDA (x) -1.0 1.3 1.1 0.7 0.4 Gearing -31.0% 253.5% 147.3% 76.4% 35.0% WCR (% of sales) 14.0% 7.6% 12.5% 10.9% 10.6% Goodwill (% of book value) 13.0% 74.4% 49.7% 35.9% 27.5% Net investments (% of sales) -7.8% -6.6% -6.7% -6.9% -7.0% Investment ratios 2010e 2011e 2012e EV/Turnover (x) 2.9 2.6 2.4 EV/EBITDA (x) 7.3 6.6 5.9 EV/Adjusted EBIT (x) 8.7 7.7 6.9 P/BV (x) 10.3 7.2 5.4 P/CF (x) 8.0 7.4 6.9 Adjusted P/E 10.5 9.4 8.7 Reported P/E 11.2 10.0 9.2 Net yield 4.6% 5.1% 5.4% Free cash flow yield (%) 8.1% 9.8% 10.5% Rating changes for Roche in the last 12 months Date Rating Previous Price 07/21/2010 Neutral Buy CHF143.00 04/16/2010 Buy (*) Add (*) CHF177.50 02/03/2010 Add (*) Buy (*) CHF180.60

Pharmacie I 71

SECTOR REPORT

6 December 2010

Pharmaceuticals Germany

Stada BuySTAGn.DE / SAZ@GR

23.1

43.1

63.1

83.1

103.1

123.1

143.1

déc-07 j ui n-08 j anv-09 août -09 f évr -10 sept -10

St ada

Rel. DJ STOXX Small 200 Source: Natixis

The recovery is on track

Stada is the world’s fifth-largest generics group. Its strategy consists of stepping up its presence in eastern Europe, notably in Russia. For the time being, it is investing discreetly in biosimilars via an unconsolidated specific project financing structure, in which it owns a 15.9% stake, Bioceuticals. In the event of success, Stada has a buy option enabling it to acquire all of the shares as of 2011, at a predetermined price. In 2009, Bioceuticals generated sales of €26.7m (€16.1m in 2008) and earnings of €0.9m (vs. -€14.3m in 2008).

Among the treatments developed by Bioceuticals, Epo-Zeta (Retacrit/Silapo, anti-anaemic) is the only one on the market (launched at the start of 2008). Hospira obtained exclusive distribution rights in the EU (with the exception of Germany and certain countries in eastern Europe, where the US group only holds semi-exclusive rights, with Stada). Thanks to this partnership, over the next few years Bioceuticals will receive from Hospira milestone payments of up to €14m. This amount will notably depend on the possible marketing of Epo-Zeta in the USA and Canada. The other developments are more laborious: research on the immunostimulant Filgrastim (Phase I) was suspended in 2009. As for the monoclonal antibodies, the clinical tests will not start until Bioceuticals has found partners.

Stada seems to have emerged from its recovery phase and is aiming for sustainable growth. The targets set for 2014, namely a doubling in the space of five years of net profit and annual growth in sales of 7%, look credible. Stada should be able to offset the price falls in Europe by cost savings (restructuring costs between now and 2013: €50m). We therefore assume an improvement in margins between now and 2014, even though we remain cautious (operating margin of 14.5%e in 2014 vs. 13.5% in 2009).

We are confident as regards the recovery in earnings, and we have a Buy rating on Stada. Our target price of €29 corresponds to a reduction in the discount relative to the sector in terms of PE 12 from 30% to 15%.

Price 12/03/2010 €24.15 Target €29.00 Upside 20.1% Performance 1m 12m 1 Jan Absolute 9.9% 0.6% -0.2% Sector 1.0% 8.1% 3.7% DJS Small200 4.1% 21.1% 18.2% 12-month high/low €32.10 / €20.70 DAX 30 6947.7 DJS Small200 177.0 Market capitalisation €1.4bn Free float 100.0% - - Daily volume €7m Analyst(s) Philippe Lanone (33 1) 58 55 05 03 [email protected] Béatrice Muzard (33 1) 58 55 05 13 [email protected]


Close on 31/12

Turnover (€m)

Reported net profit

(€m)

Adjusted EPS

(€)

Chg. EPS

(%)

PE

(x)

EV/EBIT

(x)

P/CF

(x)

Net yield

(%) 2009 1,568.8 100.7 1.97 0.3 12.2 11.0 7.4 2.3 2010e 1,590.0 65.0 2.14 8.5 11.3 10.4 7.1 2.5 2011e 1,690.0 132.0 2.33 8.7 10.4 9.6 6.6 2.7 2012e 1,830.0 151.0 2.57 10.2 9.4 8.8 6.2 2.9


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Company profile Recent events Stada is the world’s no.5 generics group with sales of €1.570bn in 2009. Sales and net income growth over the 2006/2009 period came to 8% and 3%. The company has been on an intensive acquisitions drive (taking over the UK’s British Forum Bioscience, Russia’s MAKIZ in 2007 and Serbia’s Hemofarm in 2006). It boasts key positions in Europe, especially on the most developed market, Germany, where it is ranked 3rd behind Sandoz and Ratiopharm in terms of market share. Moreover, Stada is ranked 2nd in Russia, a market posting very fast growth (Stada 2006/2009 sales growth: 30%/year).

Operating trends are on the right track: recovery in sight in Serbia and in Germany, good performances in Russia (sales +22%, 9M 10/9M 09). The management expects sales growth in 2010e (Natixis estimate: €1,590m, +1.4%). The group will probably not have to set aside any further provisions as it is booking only solvent sales. This good top-line performance is reflected in margin trends. The operating margin (adjusted) was 14.1% in 9M 10 (vs. 12.6% in 9M 09).

2009 sales by division 2009 reported operating profit (€m)

Others4%

Branded25%

Generics71%

156

75

-39-94

-44

6

56

106

156

Others Generics Branded

Opportunities / Strengths Weaknesses / Threats • A fast-growing market, not subject to any regulatory

or patent risk. • A significant market share in emerging countries in

Eastern Europe, especially Russia (the company’s second most important country in terms of sales).

• Speedy adjustment of the cost base in Germany (number of medical reps reduced by 150).

• Earnings growth estimated at 19% between 2007 and 2012, picking up after an expected blip in H2 08.

• Stada is a potential target in the current wave of consolidation.

• Overexposed to the German market (34% of sales in 2009), where generic selling prices are under a great deal of pressure.

• Solvency problems of payer organisations, especially in Serbia.

• Stada seems to have emerged from its recovery phase and is aiming to meet the targets set for 2014: doubling net profit in five years, with annual average sales growth of 7%.

• Relatively stretched gearing level (almost 1x equity).

• External growth operations, some of which could prove dilutive.

Share ownership Diary dates Shares Votes 03/30/2011 2010 earnings Free float 100.0% 100.0% 05/12/2011 Q1 11 earnings 06/16/2011 AGM 08/11/2011 Q2 11 earnings 11/10/2011 Q3 11 earnings

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Financial Data 31/12 Stada

Breakdown by activity (€m) 2008 2009 2010e 2011e 2012e CAGR 05/08 Turnover 1,646.6 1,568.8 1,590.0 1,690.0 1,830.0 5.3% Generics 1,155.0 1,115.6 1,095.0 1,160.0 1,260.0 4.1% Branded 368.9 392.6 420.0 450.0 485.0 7.3% Others 122.7 60.6 75.0 80.0 85.0 12.0% Reported operating profit 175.7 191.9 157.0 232.0 245.0 8.5% Generics 136.7 156.3 125.0 165.0 190.0 6.7% Branded 53.0 74.9 71.0 95.0 100.0 10.1% Others -14.1 -39.3 -39.0 -28.0 -45.0 -4.6% Reported operating margin 10.7% 12.2% 9.9% 13.7% 13.4% Generics 11.8% 14.0% 11.4% 14.2% 15.1% Branded 14.4% 19.1% 16.9% 21.1% 20.6% Others -11.5% -64.8% -52.0% -35.0% -52.9% Profit & loss statement (€m) 2008 2009 2010e 2011e 2012e CAGR 05/08 Turnover 1,646.2 1,568.8 1,590.0 1,690.0 1,830.0 5.3% Change 4.8% -4.7% 1.4% 6.3% 8.3% Organic growth - - - - -

EBITDA 255.4 280.1 300.0 326.0 346.0 7.3% Change -11.8% 9.7% 7.1% 8.7% 6.1%

EBIT 176.4 191.9 157.0 232.0 250.0 9.2% Change -18.1% 8.8% -18.2% 47.8% 7.8% Adjusted EBIT 219.0 211.1 220.0 235.0 252.0 6.1% Change -11.8% -3.6% 4.2% 6.8% 7.2% Operating margin 13.3% 13.5% 13.8% 13.9% 13.8%

Financial items -68.4 -50.1 -52.0 -47.0 -43.0 Pre-tax profit on ordinary activities 108.0 141.8 105.0 185.0 207.0 13.4% Exceptional items 0.0 0.0 0.0 0.0 0.0 Corporate tax -28.5 -40.8 -40.0 -53.0 -56.0 Goodwill amortisation/ impairment - - - - - Equity associates - - - - - Minority interests -0.8 -0.3 0.0 0.0 0.0

Net profit on divested activities - - - - - Reported net profit 78.7 100.7 65.0 132.0 151.0 14.4% Change -25.1% 28.0% -35.5% 103.1% 14.4% Adjusted net profit 115.7 115.8 126.0 137.0 151.0 9.2% Change -21.2% 0.1% 8.8% 8.7% 10.2% Cash flow statement (€m) 2008 2009 2010e 2011e 2012e CAGR 05/08 Cash flow from operations 150.4 191.2 200.0 215.0 230.0 6.4% Nets Investments -113.9 -97.2 -100.0 -110.0 -115.0 5.8% Decrease (Increase) in WCR 21.1 59.3 -45.0 -35.0 -40.0 Free cash flow 57.5 153.3 55.0 70.0 75.0 -21.2% Acquisitions -56.7 0.0 0.0 0.0 0.0 Dividend -41.6 -30.5 -32.3 -35.3 -38.2 7.8% Capital increase 0.6 0.0 0.0 0.0 0.0 Divestments 27.3 27.3 3.0 0.0 0.0 Miscellaneous -43.8 -3.0 0.0 0.0 0.0 Increase (Decrease) in cash -56.7 147.1 25.7 34.7 36.8 Net debt 1,015.8 899.0 873.3 838.6 801.8 Gearing 121.0% 103.4% 96.4% 83.9% 72.3%

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Balance sheet (€m) 2008 2009 2010e 2011e 2012e CAGR 05/08 Net fixed assets 1,307.5 1,309.9 1,360.0 1,380.0 1,380.0 1.8% o/w net goodwill 400.0 380.0 360.0 360.0 361.0 o/w gross goodwill 450.0 450.0 450.0 450.0 451.0 Financial fixed assets 105.4 96.7 130.0 140.0 145.0 WCR 569.1 480.7 469.2 518.2 601.3 Net assets on divested activities - - - - - - Total equity 839.7 869.7 905.8 999.6 1,109.5 8.5% o/w shareholders' equity 827.4 861.1 890.8 984.6 1,094.5 Provisions 126.4 118.6 180.0 200.0 215.0 Net debt 1,015.8 899.0 873.3 838.6 801.8 Per share data (€) 2008 2009 2010e 2011e 2012e CAGR 05/08 Shares outstanding (millions) 58.8 58.8 58.8 58.8 58.8 0.0% Diluted shares (millions) 58.8 58.7 58.8 58.8 58.8 0.1% Reported EPS 1.30 1.71 1.11 2.24 2.57 14.5% Adjusted EPS 1.97 1.97 2.14 2.33 2.57 9.2% Goodwill 0.00 0.00 0.00 0.00 0.00 Cash flow 2.56 3.26 3.40 3.66 3.91 6.3% Net dividend 0.52 0.55 0.60 0.65 0.70 8.4% Payout ratio 40.1% 32.1% 54.3% 29.0% 27.3% Book value 14.07 14.68 15.15 16.75 18.61 8.2% Financial ratios 2008 2009 2010e 2011e 2012e CAGR 05/08 Personnel expenses (M€) - - - - - - Personnel expenses (% of sales) - - - - - Operating margin 10.7% 12.2% 9.9% 13.7% 13.7% Adjusted operating margin 13.3% 13.5% 13.8% 13.9% 13.8% Effective rate of tax -26.4% -28.8% -38.1% -28.6% -27.1% Net margin - - - - - ROE 9.5% 11.7% 7.3% 13.4% 13.8% ROCE 8.3% 8.3% 8.4% 8.6% -3.3% Capital employed (M€) 1,927 1,861 1,919 1,988 2,071 3.6% Interest cover (x) 3.2 4.2 4.2 5.0 5.9 Debt/EBITDA (x) 4.0 3.2 2.9 2.6 2.3 Gearing 121.0% 103.4% 96.4% 83.9% 72.3% WCR (% of sales) 34.6% 30.6% 29.5% 30.7% 32.9% Goodwill (% of book value) 47.6% 43.7% 39.7% 36.0% 32.5% Net investments (% of sales) -6.9% -6.2% -6.3% -6.5% -6.3% Investment ratios 2010e 2011e 2012e EV/Turnover (x) 1.8 1.5 1.5 EV/EBITDA (x) 9.4 8.2 9.5 EV/Adjusted EBIT (x) 12.1 9.6 11.1 P/BV (x) 1.5 1.5 1.7 P/CF (x) 8.5 7.0 9.4 Adjusted P/E 12.8 9.6 12.3 Reported P/E 14.2 13.4 18.6 Net yield 2.6% 2.9% 2.2% Free cash flow yield (%) -6.6% 0.0% 4.1% Rating changes for Stada in the last 12 months Date Rating Previous Price 06/08/2010 Buy Neutral €29.79

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Sanofi-aventis : The investment research supervisor(s), or a Senior Manager(s) of Natixis and/or of its subsidiaries is/are on the managing board of the issuer.

Rating changes for Roche in the last 12 months Date Rating Previous Price 07/21/2010 Neutral Buy CHF143.00 04/16/2010 Buy (*) Add (*) CHF177.50 02/03/2010 Add (*) Buy (*) CHF180.60

Rating changes for Stada in the last 12 months Date Rating Previous Price 06/08/2010 Buy Neutral €29.79

* see the methodology applied to ratings before 05/01/2010 and indicated in the disclosure below Reference prices are based on closing prices. The information contained in these publications is exclusively intended for a client base consisting of professionals or qualified investors. It is sent to you by way of information and cannot be divulged to a third party without the prior consent of Natixis. It cannot be considered under any circumstances as an offer to sell, or a solicitation of any offer to buy financial instruments. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. Past and simulated performances offer no guarantee as to future performances. Any opinions offered herein reflect our current judgement and may change without notice. Natixis cannot be held responsible for the consequences of any decision made with regard to the information contained in those documents. Natixis has set up due procedures for the separation of activities, notably in order to prevent conflicts of interest between the research activities and its other activities. Details of these ‘information barriers’ are available on request from the head of compliance. On the date of those reports, Natixis and/or one of its subsidiaries may be in a conflict of interest with the issuer mentioned herein. In particular, it may be that Natixis or any person or company linked thereto, their respective directors and/or representatives and/or employees, have invested on their own account in, or act or intend to act, in the next twelve months, as an advisor, provider of liquidity, market maker, or corporate banker (and notably for underwriting transactions, placements or connected transactions), for a company discussed in this report. This research may be disseminated from the United Kingdom by Natixis, London Branch, which is authorised by the ACP and subject to limited regulation by the Financial Services Authority. Details about the extent of regulation by the Financial Services Authority are available from the London Branch on request. The transfer / distribution of this document in Germany is done by / under the responsibility of Natixis Zweigniederlassung Deutschland. NATIXIS is authorized by the ACP and regulated by BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) for the conduct of its business in Germany. Natixis is authorised by the ACP and regulated by Bank of Spain and the CNMV for the conduct of its business in Spain. Natixis is authorised by the ACP and regulated by Bank of Italy and the CONSOB (Commissione Nazionale per le Società e la Borsa) for the conduct of its business in Italy. Natixis, a foreign bank and broker-dealer, makes this research report available solely for distribution in the United States to major U.S. institutional investors as defined in Rule 15a-6 under the U.S. Securities Act of 1934. This document shall not be distributed to any other persons in the United States. All major U.S. institutional investors receiving this document shall not distribute the original nor a copy thereof to any other person in the United States. Natixis Bleichroeder LLC a U.S. registered broker-dealer and member of FINRA is a subsidiary of Natixis. Natixis has no officers or employees in common with Natixis Bleichroeder LLC. Natixis Bleichroeder LLC did not participate in the preparation of this research report and as such assumes no responsibility for its content. This research report has been prepared and reviewed by research analysts employed by Natixis, who are not associated persons of Natixis Bleichroeder LLC and are not registered or qualified as research analysts with FINRA , and are not subject to the rules of the FINRA. In order to receive any additional information about or to effect a transaction in any security or financial instrument mentioned herein, please contact a registered representative Natixis Bleichroeder LLC 1345 Avenue of the Americas, New York, NY 10105.

SECTOR REPORT

Natixis Natixis Bleichroeder Inc. Natixis Paris Office address Postal address New York Frankfurt 30 avenue Pierre Mendès France 47 quai d’Austerlitz BP 4 1345 Avenue of the Americas Im Trutz Frankfurt 55 75013 Paris 75013 Paris 75060 Paris Cedex 02 New York, NY 10105 D-60322 Frankfurt France France France USA Germany A public company with a board of directors Member of the NASD and SIPC and €4,653,020,308.80 capital Chris Thompson Sarah Schmitz 542 044 524 RCS Paris Tel. (1 212) 698-3400 Tel. (49 69) 971 53 312 [email protected] [email protected] Head of Research Sixte de Gastines Tel. (33 1) 58 55 06 87 London [email protected] Natixis London Branch LTD Cannon Bridge House Head of Equity Sales 25 Dowgate Hill Continental Europe London EC4R 2YA Philippe Denoyelle UK Tel. (33 1) 58 55 05 91 [email protected] Chris Thompson Tel. (1 212) 698-3400 Head of Equity Sales UK [email protected] Chris Thompson Tel. (1 212) 698-3400 [email protected] Head of Sales trading Christian Nucci Tel. (33 1) 58 55 05 76 [email protected] Head of Corporate broking Cédric Richard Tel. (33 1) 58 55 90 60 [email protected]

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natixis - biosimilars - attacking the last bastion

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