pharmaceutical industry update: challenges, opportunities, & outlook

Pharmaceutical Industry Update: Challenges, Opportunities, & Outlook

Bin Li, Ph.D., MBAEquity Research Analyst Global PharmaceuticalsMerrill Lynch

Refer to important disclosures at the end of this report

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IntroductionIntroduction

Current Industry Overview

Issues & Challenges

Positives & Catalysts

Therapeutic Analysis

Outlook & Opportunity

Case Study


Current Status: 2002… Slowdown From 2001Current Status: 2002… Slowdown From 2001

2002 % Constant $ Growth

Const.$ Bil %Share 2002 CAGR 97- 01

SOURCE: IMS HEALTH,MIDAS, retail and hospital where available

LATIN AMERICA 16.5 4.1 - 10.4 + 0.6

A/A/A 31.8 7.9 + 10.6 + 9.9

JAPAN 46.9 11.7 + 1.0 + 3.5

EUROPE 102.4 25.5 + 8.1 + 7.6

NORTH AMERICA 203.6 50.7 + 11.7 + 14.2

WORLDWIDE 401.2 100.0 + 8.2 + 9.5

10 Strategic Markets 336.5 83.8 + 9.0 + 10.5

World Audited MarketWorld Audited Market


10 Strategic Markets: U.S. Is the Key Growth Driver10 Strategic Markets: U.S. Is the Key Growth Driver

+9.0%10 Key Markets

$336.5 Bil

Constant Dollars* Pharmacy Market Only

+11.5%USA

$195.6 Bil

+14.5%CANADA$8.0 Bil

+1.0%JAPAN

$46.9 Bil

+4.0%FRANCE$19.2 Bil

+5.2%ITALY

$13.2Bil

+8.0%GERMANY$20.3 Bil

+11%SPAIN$8.7 Bil

+7.4%EUROPE$75.0 Bil

+7.4%EUROPE$75.0 Bil

% Constant $ Growth

+9.5%MEXICO*$6.1 Bil

SOURCE: IMS HEALTH

+11.4%UK

$13.7 Bil

+8.4%BRAZIL*$4.1 Bil


U.S. & Europe Dominate Growth

-20

-10

0

10

20

30

40

50

60

70

80

90

100

1997 1998 1999 2000 2001*

NorthAmerica

Europe (All)

JapanA/A/A

LatinAmerica

Constant Dollars. Includes panels w/o six years of dataSource: IMS HEALTH

Ten Key Markets

% Contribution to Absolute Growth


Key Industry Challenges & IssuesKey Industry Challenges & Issues

Pipeline

Patent

Price

Promotion

Politics


Key Industry Issues: Pipeline, Patent, Price, Promotion, & PoliticsKey Industry Issues: Pipeline, Patent, Price, Promotion, & Politics

Pipeline Drought: Approvals Declined Despite Increased R&DPipeline Drought: Approvals Declined Despite Increased R&D

NME Approvals Have Declined Since 1996

50

100

150

200

250

300

350

400

450

500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E

Inde

xed

R&

D, S

ales

, & N

ME

(199

0=10

0)

R&D Spending ($Bn)

Total US Sales ($Bn)

NME Approvals



Patent Exposure: Enormous Pressure from Patent Expirations Patent Exposure: Enormous Pressure from Patent Expirations

Top 5 brands 2001 2002 2003 2004 2005 2006

1 Prozac (Eli Lilly)Prilosec (AstraZeneca) Cipro (Bayer) Allegra (Aventis) Zithromax (Pfizer) Zocor (Merck)

2 Pepcid (Merck) Augmentin (Glaxo) Wellbutrin (Glaxo) Celexa (Forest) Amaryl (Aventis) Zoloft (Pfizer)

3 Mevacor (Merck) Claritin (Schering) Flonase (Glaxo) Diflucan (Pfizer) Biaxin (Abbott) Pravachol (BMY)

4 Alphagan (Allergan) Prinivil (Merck) Accupril (Pfizer) Paraplatin (BMS) Basen (Takeda) Ambien (Sanofi)

5 Elocon (Schering) Zestril (AstraZeneca) Monopril (BMS) Epogin (Chugai) Harnal (Yamamouchi) Zofran (Glaxo)

Worldwide Revenue for Products Off-Patent Yr. 2001-06

-

4,000

8,000

12,000

16,000

20,000

24,000

2001A 2002E 2003E 2004E 2005E 2006E**

WW

Rev. (U

S $

mm

)

0.0%

2.0%

4.0%

6.0%

% o

f To

tal R

ev.

Revenue Off Patent Patent Rev. as % of Total Rev



Price & Politics: Pressure From All Levels, Every Direction Price & Politics: Pressure From All Levels, Every Direction Private Sector:

– Rising HMO Rx co-pays (increased co-pay reduces drug utilization)– Heavier discounts and higher rebates– Retail chains suing for differential discount rates

Federal: – Medicare Part B, Medicaid price control (FTC & DOJ are investigating

pharmaceutical industry pricing and marketing practices. The government is focused on drug

company “inducements” that may have improperly influenced sales of products)

– Drug Reimportation - back to agenda

0%

5%

10%

15%

20%

25%

Had Not Filled One Rx Taken Smaller Dose Taken Rx LessFrequently

$0.00$5.00

$10.00$15.00$20.00$25.00$30.00$35.00

1996 2001

Generic (Preferred) Branded (Preferred)

Branded (Non-Formulary)

Source: Harris Survey and IMS



Price & Politics: Pressure From All Levels, Every Direction Price & Politics: Pressure From All Levels, Every Direction

State: – Maine Rx - entitlement to Medicaid type discounts – States suing for overcharging Medicare for cancer drugs – States forming purchasing groups to demand discounts

Suffolk County - inflated AWP prices to overcharge

Foreign Government:– Japan: price downward revision coming soon– Italy: 5% price cut; regional formularies; reference pricing– Germany: increased parallel importing; generic substitution, reference

pricing; 6% cut– France: increased generic substitution; reduced reimbursement (but

better for NCEs)



Promotion: Increased Spending Due To Intense Competition Promotion: Increased Spending Due To Intense Competition

Sales force has doubled in 6 years

Marketing cost also doubled (DTC is the fastest growth component)

30,000

40,000

50,000

60,000

70,000

80,000

1996 1997 1998 1999 2000 2001 2002

# o

f S

ale

s R

ep

s

02

46

810

1214

1618

20

1995 1996 1997 1998 1999 2000 2001

Retail Value of Samples Office-Based PromotionHospital-Based Promotion Journal Advertising

DTC Advertising



Generic Competition: Faster Substitution & High Litigation Risk Generic Competition: Faster Substitution & High Litigation Risk

Selected List of Recent Patent Litigation:

Against Favor Mix Pending

Norvasc Fosamax Prilosec Wellbutrin

Augmentin Neurontin

Claritin Zyprexa

Prozac Premarin

Taxol Plavix

Buspar Allerga

Paxil Lipitor

Rebetol Vioxx

All are blockbuster drugs. Some have expiration beyond 2010.


Despite the Issues, Industry Still Has Growth PotentialDespite the Issues, Industry Still Has Growth Potential

Industry Positives Support A Healthy Growth Industry Positives Support A Healthy Growth

Political Environment – Republic President and Congress Favor Market Approach for Drug Price

Medicare Rx Reform – The President and Congress Still Pushing for the Bill– $400-500 Bn for Rx over 10 years

Changes in FDA– New FDA commissioner and PDUFA III– Other Initiatives: improved transparency, better communication,

shortened approved times, and new cGMP rules

Demographic Trends Underpin Long-Term Revenue Growth Patent Pressure Will Ease in the Next Few Years Pipeline Candidates Have Increased Overall, Pipeline to Patent Profile (P2P) Should Improve


Demographic Trends Underpin Long-Term GrowthDemographic Trends Underpin Long-Term Growth

By the Year 2006, 30% of the US Population Will Be 50+ Years OldBy the Year 2006, 30% of the US Population Will Be 50+ Years Old

Source: Census Bureau Estimates and Forecasts, 2001

26.0%

27.0%

28.0%

29.0%

30.0%

2000 2001 2002 2003 2004 2005 2006

% of US Population Age >50


Demographic Trends Underpin Long-Term GrowthDemographic Trends Underpin Long-Term Growth

Major Diseases Are Under-diagnosed and Under-treatedMajor Diseases Are Under-diagnosed and Under-treated

Diagnosis 12 Month Visits (Mil)

Hypertension 53.6Diabetes 25.1Hyperlipidemia 14.7Osteoarthritis 11.4Hypercholesterol 8.9Dermatophytosis Nail 7.8Cataracts 7.3Menopause 7.2Esophagitis 7.1Depression 7.0


Number of Product in Development Has Been Steadily ClimbingNumber of Product in Development Has Been Steadily Climbing

2870 30673474 3328 3454 3396 3500

418461

528 561 630 651 714733

742

816 871911 992

1135427

442

499 477469 449

486

0

1000

2000

3000

4000

5000

6000

1995 1996 1997 1998 1999 2000 2001

Nu

mb

er

of

Dru

gs

Preclinical Phase I Phase II Phase III

Drug Candidates by Clinical Trial Phase Drug Candidates by Clinical Trial Phase

Source: Pharmaprojects


Pipeline to Patent Ratio Is ImprovingPipeline to Patent Ratio Is ImprovingNew Product Rev. Will Offset Off-patent Rev. Loss in 2004New Product Rev. Will Offset Off-patent Rev. Loss in 2004

Source: Merrill Lynch Research

US Major Pharmaceuticals: Net Incremental Revenue (= Current - Previous Yr.)

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

2003 2004 2005 2006 2007 2008

Incremental Rev. Gain from New Products (current vs. previous yr)

Incremental Rev. Loss Due to Patent Expiration (current vs. previous yr)

Net Incremental Revenue


Industry Earnings Growth OutlookIndustry Earnings Growth OutlookLong-Term Earnings Growth Is Expected To Be Around 10%Long-Term Earnings Growth Is Expected To Be Around 10%


BMY LLY MRK PFE SGP WYE Average

2001 12% 4% 8% 24% -4% 15% 12%

2002 -36% -8% -2% 21% -10% 2% -3%

2003E 8% 2% 9% 13% -69% 13% -4%

2004E 1% 13% 8% 19% 23% 11% 13%

2005E 4% 18% 10% 12% 29% 10% 14%

2006E -2% 15% 0% 4% 26% 10% 9%

2007E 6% 14% 2% 1% 18% 7% 8%

2008E 4% 14% 1% 1% 17% -4% 6%

CAGR (03-08) 3% 15% 4% 7% 23% 6% 10%

IBES LTG 10% 13% 8% 14% 8% 11% 11%


Therapeutic Analysis - 2002 OverviewTherapeutic Analysis - 2002 OverviewCardiovascular and Central Nervous System Drugs Still DominateCardiovascular and Central Nervous System Drugs Still Dominate


WW Revenue (US $M) 2001A 2002E Growth

1 Cardiov ascular 51,155 55,112 8%

2 CNS 38,146 42,447 11%

3 Infectious Diseases 31,855 32,935 3%

4 Respiratory 18,513 19,717 7%

5 Gastrointestinal 17,355 18,984 9%

6 Oncology 15,671 17,102 9%

7 Endocrine & Metabolic 15,401 14,197 -8%

8 Hematology 11,742 13,949 19%

9 Rheumatology 10,167 10,688 5%

10 Musculoskeletal 5,185 6,084 17%

11 Urology 4,288 4,913 15%

12 Women's Health 4,008 4,110 3%

13 Transplantation 3,222 3,351 4%

14 Ophthalmology 2,714 2,942 8%

15 Dermatology 2,265 2,134 -6%


Therapeutic Analysis - Disease CategoryTherapeutic Analysis - Disease CategoryHealthy Growth for Most Treatment Classes. Decline Due to Generics Healthy Growth for Most Treatment Classes. Decline Due to Generics


High Growth Category - New Products: Lipid Lowering, Asthma etc. Slow Growth Category - No New Products: Hypertension, Ulcers, etc. Declining Category - Generic Substitution: Diabetes, Antibiotic, etc.

Disease Category 2001A 2002E Growth

1 Hypertension, CHF 22,858 23,868 4%

2 Lipid Lowering 18,345 20,552 12%

3 Antibiotic 17,957 16,307 -9%

4 GERD, Ulcers 16,001 16,922 6%

5 Cancer 15,492 16,932 9%

6 Diabetes 11,453 10,102 -12%

7 Depression 11,145 11,716 5%

8 Arthritis 10,156 10,665 5%

9 Asthma/COPD 9,041 9,980 10%

10 Allergy, Rhinitis 8,458 8,688 3%


Therapeutic Analysis - Drug ClassTherapeutic Analysis - Drug ClassStatin, Anti-ulcerant & Blood Growth Factor Top the Chart Statin, Anti-ulcerant & Blood Growth Factor Top the Chart


High Growth Category - New Products: blood growth factor, antipsychotic Slow Growth Category - No New Products: COX-2 inhibitor, antihistamine Declining Category - Generic Substitution: ACE inhibitor, Ca blocker

Drug Class 2001A 2002E Growth

1 Statin 17,792 19,856 12%

2 Anti-ulcerant (PPI) 13,259 14,800 12%

3 Blood growth factor* 8,689 10,387 20%

4 Anti-depressant/SSRI 8,112 8,040 -1%

5 ACE inhibitor 7,534 7,159 -5%

6 COX-2 inhibitor 6,915 7,370 7%

7 Ca blocker 6,801 6,685 -2%

8 Antipsychotic** 6,612 7,944 20%

9 Antihistamine 6,584 6,586 0%

10 Angiotensin II antagonist 5,092 6,402 26%


Therapeutic Analysis - Top 10 Drugs Therapeutic Analysis - Top 10 Drugs Statin Drugs Are the Winners, PPIs Are Still Around Statin Drugs Are the Winners, PPIs Are Still Around


Blockbuster drugs are highly concentrated in global giants - Pfizer has 3, Merck has 2 of the top 10, AstraZeneca, Abbott, Lilly, Glaxo, J & J, Amgen have the rest

Major pharmaceutical firms blockbuster strategy

Brand Name 2001A 2002E Growth

1 Lipitor 6,832 8,444 24%

2 Zocor 6,670 7,210 8%

3 Prilosec/Losec 5,684 4,638 -18%

4 Celebrex 4,360 4,230 -3%

5 Prevacid 3,771 4,004 6%

6 Norvasc 3,582 3,805 6%

7 Procrit/Eprex 3,429 4,098 20%

8 Zyprexa 3,087 3,692 20%

9 Paxil 2,990 3,268 9%

10 Vioxx 2,555 2,671 5%


Therapeutic Analysis - Growth OutlookTherapeutic Analysis - Growth Outlook

CNS, Oncology, Urology, Musculoskeletal Will Lead the GrowthCNS, Oncology, Urology, Musculoskeletal Will Lead the Growth


11%

14%

6%

15%

4%3%

8%

-1%

12%

6%6%

22%

6%

20%

11%

7%

0%

5%

10%

15%

20%

25%

Car

diov

ascu

lar

CN

S

Infe

ctio

usD

isea

ses

Res

pira

tory

Gas

troi

ntes

tinal

Onc

olog

y

End

ocrin

e &

Met

abol

ic

Hem

atol

ogy

Rhe

umat

olog

y

Mus

culo

skel

etal

Uro

logy

Wom

en's

Hea

lth

Tra

nspl

anta

tion

Oph

thal

mol

ogy

Der

mat

olog

y

Mis

cella

neou

s

2001-05 CAGR for All Therapeutic Categories = 9%


Therapeutic Analysis - Drug Class Growth ForecastTherapeutic Analysis - Drug Class Growth Forecast

Lead Table Will Be Significantly Different in 3 Years Lead Table Will Be Significantly Different in 3 Years


High growth class: crowded, competitive, but new launches expand the market Slow or negative class: mature class and generic competition

Drug Class 2002E 2005E Growth

1 Statin 19,856 26,085 10%

2 Anti-ulcerant (PPI) 14,800 15,585 4%

3 Blood growth factor* 10,387 14,938 15%

4 Anti-depressant/SSRI 8,040 10,333 6%

5 ACE inhibitor 7,159 5,614 -7%

6 COX-2 inhibitor 7,370 9,991 10%

7 Ca blocker 6,685 6,077 -3%

8 Antipsychotic** 7,944 11,320 14%

9 Antihistamine 6,586 4,127 -11%

10 Angiotensin II antagonist 6,402 9,546 17%


Therapeutic Analysis - Next Wave of New MedicinesTherapeutic Analysis - Next Wave of New Medicines

100 for AIDS (40 antivirals, 15 Vaccines, etc.)

400 for Cancer (70 for Lung Cancer, 60 for Breast Cancer, 55 for Colon Cancer, 50 for Skin

Cancer, and 50 for Prostate Cancer)

200 for Heart Disease and Stroke (20 for Stroke, 20 for Congestive Heart Failure, 10 for

Hypertension, 10 for Hyperlipidemia, etc.)

200 for Neurologic Disease (40 for Pain, 30 for Brain Tumors, 25 for Alzheimer’s Disease,

17 for Parkinson’s Disease, 16 for Multiple Sclerosis)

800 for Elderly (40 for Respiratory, 20 for Diabetes, 20 for Rheumatoid Arthritis, 20 for

Depression, etc.)

>1,000 New Medicines in R&D Stage for Major Diseases:>1,000 New Medicines in R&D Stage for Major Diseases:


Therapeutic Analysis - CardiovascularTherapeutic Analysis - Cardiovascular

Hypertension – New guideline will expand patient base (140/90 to 120/80 mm Hg)– Old treatment dominated by generics (diuretics, beta-blockers) – Branded ACE inhibitors & Ca blockers converted to generics – New class dominated by branded drugs (ARB)– Lack of innovative treatment (only Inspra)

Lipid-lowering – Statin: still the biggest class ($20B/yr) and growing at a healthy pace– Statin: new competitor (Crestor) expected to challenge Lipitor, Zocor etc– Statin: generics eroding market share and will grow significantly beyond 2006– New Class: Zetia


Therapeutic Analysis - CNSTherapeutic Analysis - CNS

Antidepressant – SSRI: Prozac expired, Paxil, Celexa, Zoloft will follow– SNRI: new entrant (Cymbalta)– Still Needs New Class: Sub-P antagonist

Antipsychotics – Atypicals: crowded and relative new class (Zyprexa, Risperdol, Seroquel,

Geodon, Abilify)

Alzheimer’s and Parkinson’s Disease– No effective treatment but market potentials are enormous– Alzheimer’s: cholinesterase inhibitor (Aricept, Reminyl) & memantine


Therapeutic Analysis - DiabetesTherapeutic Analysis - Diabetes Epidemic Type 2 Diabetes

– Increased 60% in 1990’s (16 million and climbing)– 20% of the elderly (>60 yrs) have diabetes– Underlying the epidemic: Obesity– Diabetic complications

• microvascular: retinopathy (visual loss), nephropathy (renal failure)• macrovascular: MI, PVD, stroke• combined/metabolic: neuropathy, cardiomyopathy, foot ulcers

Anti-diabetic Agents– Sulfonylurea (glyburide, glipizide), Metformin (Glucophage) have been genericized and widely

prescribed – Glitazone (Actos, Avandia), Alpha-glucosidase inh. (acarbose), insulin secretion enhancer

(mitiglinide) are becoming popular– Insulin

• old generation could face first batch of bio-generics• new generations of insulin: inhaled (Exubera), glucagon-like (exenatide)

– Many new emerging classes: PPAR agonist, beta-3 agonist, aldose reductase inhibitor, dipeptidylpeptidase IV inihibitor


Therapeutic Analysis - OncologyTherapeutic Analysis - Oncology

New Development Stemmed from Scientific Breakthroughs Accommodative Regulatory Agency

– FDA new policy for accelerated review/approval– CDER & CBER combined– New standard for approval (survival is not the only primary endpoint)

Market Demand – No cure cancer therapy available – Unsatisfied physicians and patients will try everything available (off-label)

Excellent Field for New Biologics– Add-on is the new way of treatment– Pricing is more attractive than other drugs

Generics Have Few Opportunity– Regulatory route for biogenerics not clear


Outlook & Opportunity:2003 ApprovalsOutlook & Opportunity:2003 Approvals


Company Product Sales 2006E Indication Status

Abbott Labs Uprima 90 Erectile dy sfunction Filed

Alcon Vigamox 75 Anti-infectiv e (ey es) Approv ed

Bristol-My ers Squibb Rey ataz 478 HIV/AIDS Approv ed

Eli Lilly Sy mby ax (OFC) 338 Biopolar Depression Filed 4Q:02

Eli Lilly Cialis 605 Sex ual Dy sfunction Approv able

Eli Lilly Cy mbalta 971 Depression Approv able

Eli Lilly Dulox etine 291 Stres Urinary Incontinence (SUI) Filed 4Q:02

Merck Emend 295 Emesis Approv ed

Pfizer Somav ert 240 Grow th Hormone Deficiency Approv ed

Pfizer Dy nastat 99 Surgical Pain Filed

Schering-Plough Asmanex 490 Asthma Approv able

Watson Pharmaceuticals Ox y trol 125 Urinary Incontinence Approv ed

Wy eth InductOs 39 Bone Repair & Regeneration Filed

Wy eth Flumist 728 Intranasal Flu Vaccine Approv ed

Gilead Cov iracil 331 HIV/AIDS Filed

AstraZeneca Crestor 2066 Hy perlipidemia Approv ed

AstraZeneca Iressa 700 Cancer (NSCLC) Approv ed

Glax oSmithKline Lev itra 524 Sex ual Dy sfunction Approv ed

Glax oSmithKline Ariflo 190 COPD Filed

Glax oSmithKline Bex x ar 95 Cancer Filed

Nov artis Enablex 600 Urinary Incontinence Filed

Nov artis My ofortic 330 Organ Transplant Filed

Nov artis/Genentech Xolair 326 Asthma Approv ed

Nov artis Certican 230 Organ Transplant Filed

Roche Fuzeon 464 HIV/AIDS Approv ed

Sanofi-Sy nthelabo Xatral OD 545 BPH (Benign Prostatic Hy pertrophy ) Approv able

Shire Fozrenol 170 Hy perphosphatemia Approv able

Fujisaw a Funguard 320 Antifungal Filed

Ky orin/Allergan Zy mar 67 Sy nthetic Antibacterial Approv ed


Outlook & Opportunity:Further Look at 2003 ApprovalsOutlook & Opportunity:Further Look at 2003 Approvals

First-In-Class: 5 out of 25 (20%)– Long development time and costly, may not return the investment

Me-Too Drugs: 13 out of 25 (72%)– Shorter R&D time: no target identification & validation– Lower regulatory hurdle: clear clinical protocol (well-defined clinical endpoints), FDA

familiarity– Market familiarity: compete on moderate improved efficacy, incremental safety benefit– Higher marketing cost: market share battle between incumbent and new players– In general, 2nd or 3rd entrant may still gain significant share

• 3 out of 13 me-too drugs are either 2nd or 3rd (e.g. Cialis, Levitra)– Later entrants may not become blockbuster

• 10 out of 13 belong to this category• but there are some exceptions (Crestor…the market is big enough)

New Formulation/Delivery Technology: 2 out of 25 (8%)– Viable business model that many mid size pharmaceutical companies rely on

Break Down of the 25 Expected New Products...Break Down of the 25 Expected New Products...


Development for First-in-Class Drug is Long and CostlyDevelopment for First-in-Class Drug is Long and Costly

4 8 12

Discovery(2-10 years)

Preclinical TestLaboratory and animal testing

Phase I20-80 healthy volunteers used todetermine safety and dosage

Phase II100-300 patient volunteers used to look for efficacy and side effects

Phase III1,000-25,000 patient volunteers used to monitor

diverse reactions to long-term use

FDA Review/Approval

Additional Postmarketing TestingYears

0 16

Compound Success Rates by Stage

5,000-10,000 screened

250enters preclinical testing

250enters preclinical testing

5enters clinical testing

5enters clinical testing

1approved by the FDA

1approved by the FDA

Compound Success Rates by StagesCompound Success Rates by Stages


Me-Too Drug May Save 25% Cost & 2-5 Years of Development Time Me-Too Drug May Save 25% Cost & 2-5 Years of Development Time

Expenditures Est.

Target Identification

TargetValidation

Screen

Development

Primary

Screening

Secondary

Screening

Preclinical

Studies

Phase I Phase II Phase IIILead

Optimization

Regulatory

Submission

and Review

Early

Discovery

Compound Discovery

and Development Clinical Trials

$14 B $19 B $19.4 B

Average Time = 14.2 yrs; Average Cost = $820 MAverage Time = 14.2 yrs; Average Cost = $820 M

GenomicsFunctional GenomicsProteomicsBioinformaticsGene sequencingGene chip

Novel assay technologiesCombinatorial chemistryHigh-throughput screeningToxicology screeningMedicinal chemistry

Information Systems


Outlook & Opportunity:The Era of Generics Has ComeOutlook & Opportunity:The Era of Generics Has Come

Favorable Political Environment and Legislation– Government budget pressure (federal and state budget deficit)– Increasing drug cost for private payors (HMO, employers)– High profile patent abuses by branded pharmaceutical companies– Hatch-Waxman and the new Medicare Rx bill

• No clinical trial, only bio-equivalent study and CMC• 6 months exclusivity and 30 months stay

Enhanced FDA Division for Generics Legal System: Data Show Court Side More Often With Generics

– Creative legal strategies from generic companies– On average, generic challengers won 70% of the litigation

Potential Windfall for Patent Challengers– Risk/Benefit analysis encourages litigation– Enormous financial rewards for 6 month exclusivity

• Generic Prozac• Generic Prilosec

The Balance Has Shifted to GenericsThe Balance Has Shifted to Generics


Outlook & Opportunity:The Era of Generics Has ComeOutlook & Opportunity:The Era of Generics Has Come

Patent Exposure: Enormous Opportunity for Generic Substitution Patent Exposure: Enormous Opportunity for Generic Substitution

Worldwide Revenue for Products Off-Patent Yr. 2001-06

-

4,000

8,000

12,000

16,000

20,000

24,000

2001A 2002E 2003E 2004E 2005E 2006E**

WW

Rev. (U

S $

mm

)

0.0%

2.0%

4.0%

6.0%

% o

f To

tal R

ev.

Revenue Off Patent Patent Rev. as % of Total Rev

Top 5 brands 2001 2002 2003 2004 2005 2006

1 Prozac (Eli Lilly)Prilosec (AstraZeneca) Cipro (Bayer) Allegra (Aventis) Zithromax (Pfizer) Zocor (Merck)

2 Pepcid (Merck) Augmentin (Glaxo) Wellbutrin (Glaxo) Celexa (Forest) Amaryl (Aventis) Zoloft (Pfizer)

3 Mevacor (Merck) Claritin (Schering) Flonase (Glaxo) Diflucan (Pfizer) Biaxin (Abbott) Pravachol (BMY)

4 Alphagan (Allergan) Prinivil (Merck) Accupril (Pfizer) Paraplatin (BMS) Basen (Takeda) Ambien (Sanofi)

5 Elocon (Schering) Zestril (AstraZeneca) Monopril (BMS) Epogin (Chugai) Harnal (Yamamouchi) Zofran (Glaxo)Source: Merrill Lynch Research


Outlook & Opportunity: The Era of Generics Has ComeOutlook & Opportunity: The Era of Generics Has Come

Many Blockbusters May Lose Patent Earlier Than ExpectedMany Blockbusters May Lose Patent Earlier Than Expected

Selected List of Recent Patent Litigation:

Against Favor Mix Pending

Norvasc Fosamax Prilosec Wellbutrin

Augmentin Neurontin

Claritin Zyprexa

Prozac Premarin

Taxol Plavix

Buspar Allerga

Paxil Lipitor

Rebetol Vioxx

All are blockbuster drugs. Some have expiration beyond 2010.



Patent Exposure for Major U.S. Pharmaceutical CompaniesPatent Exposure for Major U.S. Pharmaceutical Companies

Manufacturers ProductExposure(% of Pharma Revs) Litigation Status

BMY Paraplatin 4% Generic Appeal Decision 4Q

BMY Plavix 15% Trial in 2Q04

LLY Zyprexa 25% Trial begins January ‘04

MRK Fosamax 8% Generic Appeal Decision

PFE Norvasc 6% PFE Appeal & Citizen’s Petition

PFE Neurontin 7% Trial in Fall ‘03

SGP Rebetol 12% Settlement Discussions Ongoing

WYE Premarin 10% Trade Secret RulingForthcoming




Patent Exposure for Major EU Pharmaceutical CompaniesPatent Exposure for Major EU Pharmaceutical Companies

ManufacturersExposure

(% of Pharma Revs) CAGR%Possible CAGR%

Assuming Exposures

Novartis 25% 13% 5%

Sanofi-Synthelabo 29% 15% 5%

Roche 9% 19% 17%

Aventis 16% 13% 5%

AstraZeneca 11% 19% 16%

GlaxoSmithKline 18% 10% 10%



Case Study: Dr. Reddy’sCase Study: Dr. Reddy’sA Company Has Emerged As A Major Player in Generic IndustryA Company Has Emerged As A Major Player in Generic Industry


Before 1995, Domestic Focus and API Suppliers Acquired Cheminor, American Remedies, and Set Up its U.S. Subsidiary in

Late-90s to Gain Access to the U.S. Market U.S. IPO in 2001 Increased Internal R&D in Proprietary Drugs Major Paragraph IV Challenges for 6 Month Exclusivity (10 total)

– Prozac, Zyprexa, Plavix

A Respected Generic Player in the Global Market 2003 Sales: $380M (+25%, ex-fluo.), Net Income: $74M, GM: 57% CAGR (3 yr.) +31%, US +55% Market Cap: $1.9B


Case Study: Dr. Reddy’sCase Study: Dr. Reddy’sA Company Has Emerged As A Major Player in Generic IndustryA Company Has Emerged As A Major Player in Generic Industry


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DisclosuresDisclosuresIn Germany, this report should be read as though Merrill Lynch has acted as a member of a consortium which has underwritten the

most recent offering of securities during the last five years for companies covered in this report and holds 1% or more of the sharecapital of such companies.

The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, theoverall profitability of Merrill Lynch, including profits derived from investment banking revenues.

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pharmaceutical industry update: challenges, opportunities, & outlook

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