S&P Pharma Industry Overview - 11252010

Current Environment ............................................................................................ 1

Industry Profile ...................................................................................................... 8

Industry Trends ................................................................................................... 14

How the Industry Operates ............................................................................... 18

Key Industry Ratios and Statistics................................................................... 28

How to Analyze a Pharmaceutical Company ................................................ 30

Glossary................................................................................................................ 36

Industry References........................................................................................... 40

Comparative Company Analysis ......................................................... Appendix

This issue updates the one dated June 3, 2010. The next update of this Survey is scheduled for May 2011.

Industry Surveys Healthcare: Pharmaceuticals Herman Saftlas, Pharmaceuticals Analyst

November 25, 2010

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INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 1

CURRENT ENVIRONMENT

Generics look to impending branded patent cliff

Often viewed as the flip side of the branded pharmaceuticals business, the generic drug sector is expected to enjoy above-average growth over the coming years. Gains should be achieved largely for the same reasons that the branded sector is likely to remain in the doldrums. Key growth drivers for generics include a record number of patent expirations on widely prescribed branded drugs, and mounting pressure from government and private industry third-party customers for greater use of less expensive generic drugs.

In addition, the recently enacted federal healthcare reform legislation—aimed at reducing healthcare costs while extending coverage to some 31 million Americans presently without medical coverage—represents a positive driver for generics. This huge expansion of the industry’s end-user base is expected to start phasing in during 2014, and will be especially welcomed by the generics industry, which will need new business by that time as patent-cliff–related sales diminish.

We also expect this sector to benefit materially from the planned implementation of a new US Food and Drug Administration (FDA) regulatory process to approve generic versions of biologics. Although no such system presently exists in the US, a biosimilars regulatory approval system has been established in Europe.

We project the global generic drug market to expand at double-digit rates over the next few years, from a base of $83 billion in 2009, based on data from IMS Health Inc. (IMS), a market research firm specializing in pharmaceuticals. According to Teva Pharmaceutical Industries Ltd., the total global generics drug market is projected to expand to between $135 billion and $150 billion by 2015. This represents a compound annual growth rate (CAGR) of 10% over the 2009–15 period, assuming the upper end of the projected 2015 total.

Based on data provided by DataMonitor, a market research firm, worldwide generic sales by geographic region in 2009 broke down as follows: North and South America, about 33%; Europe, 31%; and Asia-Pacific, 36%. However, the generic penetration rates typically vary widely by country to country, reflecting divergence in regulatory protocols, demographics, and the individual preferences of major companies serving each market.

According to statistics provided by BCC Research, a market research firm, generics accounted for close to 18% of the German pharmaceutical market in 2008 (latest available), but only 11% in France, 10% in the US, and 6% in Japan.

The largest company in the global generics space in 2008 (latest available) was Teva, with an estimated 18% of the market, based on data from BCC Research. Other key players, according to BCC, were the Sandoz division of Novartis AG (10%), Mylan Inc. (6%), Watson Pharmaceuticals Inc. (6%), ratiopharm (3%), STADA Arzneimittel AG (3%), Actavis (2%), Ranbaxy Laboratories Ltd. (2%), and all others (50%). In June 2010, Teva acquired ratiopharm.

To appreciate the inherent substantial savings afforded to consumers via generic drugs, the Generic Pharmaceutical Association (GPhA), an industry trade organization, has noted that the use of generic drugs saved the US healthcare system over $834 billion in the 10 years through 2009, based on an IMS study. For 2009 alone, generics saved the nation close to $140 billion.

Patent cliff represents a key driver Never before in its history has the generic industry faced such as huge new product opportunity as now, with an unprecedented number of major branded blockbuster drugs losing patent protection in the US and Europe. Based on estimates from IMS Health, the global branded drug industry stands to lose patent protection on drugs with aggregate sales of over $142 billion over 2010–15. That projected hit is equal to some 17% of worldwide sales in 2009, based on IMS data.

2 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

While we expect nearly all generic drug companies to benefit from these expirations, we think major players such as Teva, Sandoz, and Mylan are likely to reap the largest rewards, especially in the US market, which

affords first-to-file applications with six months of marketing exclusivity.

Pending drug patent expirations Below we highlight some of the larger branded drugs (with 2009 global sales figures) losing patent protection over the next few years.

2010— Sanofi-Aventis’ Lovenox cardiovascular drug ($4.3 billion), Merck & Co. Inc.’s Cozaar antihypertensive ($3.6 billion), and Pfizer Inc.’s Effexor XR anti-depressant ($3.2 billion).

2011—Pfizer’s Lipitor cholesterol regulator ($11.4 billion), Bristol-Myers Squibb Co.’s Plavix blood-thinning agent ($6.1 billion), and Eli Lilly & Co.’s Zyprexa anti-psychotic ($4.9 billion).

2012—Novartis AG’s Diovan heart drug ($6.0 billion), AstraZeneca Plc’s Seroquel schizophrenia drug ($4.9 billion), and Merck’s Singulair asthma/allergy treatment ($4.7 billion).

2013—Eli Lilly’s Cymbalta anti-depressant ($3.1 billion) and Humalog human insulin ($2.0 billion).

2014—Sanofi-Aventis’ Lantus diabetes treatment ($4.4 billion), and Roche Holding Ltd.’s Rituxan therapy for rheumatoid arthritis ($5.6 billion) and Herceptin treatment for breast cancer ($4.8 billion).

Healthcare reform to benefit generics With its emphasis on cost savings and expanded coverage, healthcare reform is a win-win situation for the generic pharmaceutical sector, in our view, since nearly all health insurance plans should favor its low-cost products. We also expect this sector to benefit materially from the planned implementation of a new FDA regulatory process to approve generic versions of biologics (no such system presently exists).

ManB02: MAJOR POTENTIAL PATENT EXPIRATIONS

MAJOR POTENTIAL PATENT EXPIRATIONS(Ranked by US sales)

2009 SALES

BRAND NAME COMPANY INDICATION (MIL. $)2010

Lovenox Sanofi-Aventis Treatment/prevention of venous thromboembolism

2,700

Effexor XR Wyeth Depression, anxiety, panic disorder

2,554

Flomax Boehringer Ingelheim

Benign prostatic hypertrophy

1,718

Aricept Pfizer Alzheimer’s disease 1,464 Cozaar Merck High blood pressure 771 Arimidex AstraZeneca Breast cancer 697 Hyzaar Merck High blood pressure 584 Mirapex Boehringer

IngelheimParkinson’s disease, restless leg syndrome

417

Aldara Graceway Actinic keratosis, genital warts, skin cancer

412

Differin Galderma Acne 282 Astelin Meda Allergic rhinitis 209 Fosamax Plus D Merck Osteoporosis 123

2011Lipitor Pfizer High cholesterol 6,053 Plavix Bristol-Myers

Squibb/SanofiAnti-clotting factor 5,556

Zyprexa Lilly Schizophrenia, bipolar disorder

1,968

Xalatan Pfizer Glaucoma, ocular hypertension

519

Protonix Wyeth Stomach ulcers, GERD 497 Femara Novartis Breast cancer 461 Caduet Pfizer High blood pressure and

high cholesterol 362

Patanol Alcon Allergic conjunctivitis 256 2012

Seroquel AstraZeneca Schizophrenia, bipolar disorder

3,482

Singulair Merck Asthma, allergic rhinitis 3,465 Actos Takeda Type 2 diabetes 2,782 Lexapro Forest Depression 2,554 Levaquin Ortho-Mcneil Bacterial infections 1,632 Diovan Novartis Hypertension, CHf 1,469 Diovan HCT Novartis Hypertension 1,376 TriCor Abbott High triglycerides 1,350 Lidoderm Teikoku Postherpetic neuralgia 1,064 Viagra Pfizer Erectile dysfunction 1,000 Geodon Pfizer Schizophrenia 975 Provigil Cephalon Narcolepsy, idiopathic

hypersomnolence 966

Lunesta Sepracor Insomnia 804 Avandia GlaxoSmithKline Type 2 diabetes 436 Avapro Sanofi-Aventis Hypertension 413 Avalide Sanofi-Aventis Hypertension 359 Avandamet GlaxoSmithKline Type 2 diabetes 207 Clarinex Schering Allergic rhinitis 207 Atacand AstraZeneca Hypertension, CHf 162

Sources: Medco's 2010 Drug Trend Report; Standard & Poor's.


We also see heightened merger and acquisition (M&A) activity in this area, as large-capitalization branded drug companies are likely to increase their exposure in the generic space over the coming years. We note that Novartis already has a major position in global generics through its Sandoz division, and Pfizer markets generics through its Greenstone division.

GENERICS DOMINATE US RX MARKET

Widely used by virtually all managed care and governmental health insurance organizations, inexpensive generic drugs accounted for more than 70% of prescriptions written in the US in 2009, up from 57% in 2004, according to IMS Health. However, given their low cost—often 10% or less compared with branded prices—generics represented only about 17% of total US pharmaceutical sales, according to IMS.

Generic prescriptions written increased 5.9% in 2009, continuing the fairly steady growth trend seen over the past decade. Generic drugs have provided Americans with safe and effective lower-cost alternatives to brand name prescription drugs. Besides the price advantage, generics’ success in the marketplace has also reflected consumer confidence in their quality, which reflects strict FDA standards for strength, purity, and potency.

This market continues to grow, helped by patent expirations and greater inducements by managed care and other third-party payers on patients to select generic options. However, the sector has also had its share of problems, including some quality control manufacturing issues that have resulted in plant shutdowns and product recalls.

On balance, we think that healthcare reform will be a net positive, but we see some initial drawbacks such as increased Medicaid rebates, and product liability and pricing lawsuits. Finally, we believe FDA review time for generics remains a serious problem, with a backlog of more than 2,000 abbreviated new drug applications (ANDAs) presently before the FDA’s generic division. Moreover, review times have lengthened significantly over the past three years, from an average of 16 months in 2006 to over 26 months in 2009.

PLANS FOR GENERIC USER FEES

Addressing the ANDA backlog issue, generic companies are attempting to have the FDA implement a user fee system for the generic industry that would help the FDA fund additional staffing to speed up the approval process. The proposed program, which would be similar to the branded drug sector’s Prescription Drug User Fee Act (PDUFA), appears to have wide support among generic drug companies, consumer groups, and the FDA itself. We note that President Obama, in his fiscal 2011 budget for the FDA, has included funds generated from a proposed user fee program for generic drugs.

First enacted in 1992, the PDUFA provided a process for the FDA to collect fees from brand-name drug manufacturers, with the funds used to expand FDA staffing, upgrade information technology, and speed up the overall new drug approval process. The PDUFA has been reauthorized several times since its initial creation, and the evidence has shown it to be highly successful in achieving its goals.

However, we do not think that the branded PDUFA system can be easily applied to the generic sector, as the latter involves several unique complexities. One key difference between new branded drugs and generics is that new generics typically face many patent-related obstacles before they are cleared for commercialization. This applies even after the FDA determines that the generics themselves are safe and effective therapies.

Generic companies usually vie with one another to be the first to file a Paragraph IV ANDA, which is a special kind of filing that seeks to invalidate targeted branded patents or otherwise show that their generic does not infringe, thereby gaining marketing approval well before the patent on the branded drug expires. Under Hatch-Waxman legislation, the first company to file a successful Paragraph IV ANDA is rewarded with a lucrative six-month period of marketing exclusivity. However, when a Paragraph IV is filed, the innovator company will invariably sue the generic company, thereby triggering a 30-month stay during which the FDA is prevented from approving the generic.


Innovator companies also initiate counter-claims of patent infringement against generics, sometimes delaying generic entries for years until the litigation is resolved. In addition, new generic drugs are often blocked by other obstacles, such as Citizen Petitions filed by branded drug companies. These filings request the FDA to use more stringent standards with respect to possible safety risks on generic copies of certain hard-to-copy innovator drugs, since generic approvals do not require clinical trials (in essence, they just need to show bio-equivalence).

Given such delaying tactics as the 30-month stay, Citizen Petitions, and protracted litigation—all of which can delay generic launches for years—the usefulness of having the FDA speed up its own review of generic drugs could become a moot point. Generic companies have expressed concerns that a user fee program requiring upfront payments to the FDA would not necessarily speed up commercialization.

FDA and generics industry have divergent motives In September 2010, the FDA convened a special meeting with generic industry representatives and consumer groups to discuss ideas concerning the creation of a generic user fee program. Topics covered included the program’s fee structure, FDA performance goals, existing ANDA applications, post-marketing surveillance, and related issues. Although the benefits for generics are not as clear-cut as they are for branded products, we believe that generic manufacturers are largely in favor of a reasonably priced user fee program, which would help make the overall approval process faster and more efficient.

We think the FDA is also in favor of generic user fees, but for different reasons. Beset by much negative publicity in recent years over unsafe generic products produced overseas, such as tainted heparin and similar issues, the FDA is now eager to impose stricter quality controls and to conduct increased inspections at foreign facilities, which user fees could help fund.

Although questions remain about how a new generic user fee program will be structured, especially with regard to fees and the defined performance metrics, we believe that a consensus will be reached between generic manufacturers and the FDA, with a workable program likely to be proposed during 2011.

BIOGENERICS: US HEALTHCARE REFORM CALLS FOR A PATHWAY

In March 2010, President Obama signed into law new healthcare reform legislation, officially known as the Patient Protection and Affordable Care Act (PPACA), which formally authorized the FDA to establish a regulatory pathway for the approval and marketing of biogenerics (also known as biosimilars, or follow-on biologics). These products are generic versions of biotechnology products, meaning that they are similar in structure and efficacy to currently marketed biotechnology drugs.

While biogenerics are now being marketed in Europe, they are not yet available in the US, as no regulatory pathway for their development and marketing has yet been approved in this country. According to estimates from the Generic Pharmaceutical Association (GPhA), an industry trade group, competition from biogenerics could save patients, insurers, and the government anywhere from $42 billion to as much as $108 billion during the first 10 years after biogenerics are cleared for marketing in the US.

A regulatory pathway would create new protocols and standards that the FDA would use to evaluate and approve generic biologic filings. Such a regulatory pathway would provide an immediate new generics market, which would consist of many branded biologics that are now off-patent. These include Epogen (erythropoietin), Neupogen (filgrastim), human growth hormones, and insulin products that presently have little or no generic competition in the US.

In addition, a relatively large amount of biotech product sales is subject to patent expiration over the next five years. According to a recent study by Medco Health Solutions Inc., a pharmacy benefits manager, biologics with approximately $32 billion in sales may go off-patent by the end of 2015. Some of these products include Eli Lilly’s Humalog human insulin (estimated sales of $2.3 billion in 2010), Pfizer’s Enbrel anti-inflammatory TNF inhibitor ($3.1 billion), and Roche’s Herceptin ($6.7 billion) and Rituxan ($6.6 billion) anticancer compounds.


A key point of contention between the branded biopharmaceutical industry and the generic companies had related to the length of patent exclusivity that should be granted on new biopharmaceuticals. In 2009, Congressional leaders sought a period of just five years, which generic producers supported. Citing the cost of developing complex medicines, which academicians recently estimated at more than $1 billion per approved drug, and the need to recoup these investments before generics enter the market, the pharmaceutical and biotech industries claimed they needed an exclusivity period of 12 to 14 years.

The new healthcare reform legislation resolved this controversy by granting new biotech drugs 12 years of patent-protected marketing exclusivity. While the generic industry was not happy with the longer exclusivity period, we think key players with broad-based global manufacturing capacity stand to be net beneficiaries of this legislation.

Major companies that we expect to reap handsome returns from biosimilars include leading generic producers such as Sandoz (part of Novartis), Teva, Mylan, and Watson Pharmaceuticals. In recent years, companies such as Merck, Pfizer, and Teva have launched or expanded units to develop biosimilars in anticipation of the establishment of a formal approved pathway.

However, we believe the creation of a regulatory pathway for biologics is likely to be a more knotty issue for the FDA, given the greater complexity and inherent instability of biotech compounds. A major difference between biologics and conventional drugs is that large molecule biologics are made from living organisms, while small molecule drugs are produced from chemicals.

Being more difficult to discover and manufacture, and presently not subject to generic competition in the US, biologics typically dominate hard-to-treat diseases of the immune system such as rheumatoid arthritis, multiple sclerosis, and cancer.

MERGER ACTIVITY PICKS UP FOR GENERICS COMPANIES

Following a record-breaking year in 2009, we expect the total value of pharmaceutical mergers and acquisitions in 2010 to fall sharply below the record $141 billion worth of deals in 2009, based on data from Dealogic Inc., a market research firm. However, the decline is due primarily to a drop in mega-deals in the branded Big Pharma sector. In contrast, M&A activity in the generics space has accelerated over the past 18 months, and is likely to remain at a relatively high level over the coming years, in our opinion.

Although business models in the generic sector are quite different from Big Pharma’s, this sector has experienced heightened M&A activity as major generic players seek to achieve greater globalization of their businesses to diversify the potential risks of slowing trends in individual markets. Similar to their branded cousins, generic mergers also reflect the need to expand sales bases and improve margins through cost economies and operating synergies.

The biggest deal in the generic sector so far in 2010 has been Teva’s acquisition of ratiopharm, which was completed in June 2010 for about $5 billion in cash and debt. Ratiopharm is the second largest generic manufacturer in Germany, with 2009 sales of about $2.3 billion. In order to acquire ratiopharm, Teva had to outbid Pfizer and Atavis (an Iceland-based generics firm) in an auction contest.

We believe Teva was strongly motivated to do this deal to secure a greater footprint in the European generics market, which we expect will grow faster than the US market over the next five years. Germany’s generic pharmaceutical market alone, with an estimated $8.6 billion in annual sales, is the world’s second largest, according to IMS.

We expect the deal, funded by cash on hand and new debt, to add immediately to Teva’s adjusted ADR profits, and to be accretive to GAAP ADR earnings by the second quarter of 2011. We also expect merger synergies to exceed $400 million over the first three years after the merger takes place. Teva expects to spend some $15 billion to $20 billion on acquisitions through 2015, comparable to the $19 billion that it has spent on acquisitions over the five years through 2009.


Table B04: TOP US PHARMACEUTICAL COMPANIES NEW PRODUCT PIPELINES

TOP US PHARMACEUTICAL COMPANIES NEW PRODUCT PIPELINES(As of November 2010) EST. 2015

SALES

COMPANY NAME OF COMPOUND PHARMACOLOGIC CLASS TREATMENT STATUS (MIL. $)Abbott Laboratories Bardoxolone Antioxidant inflammation modulator Chronic kidney disease Phase II 150

Briakinumab Human monoclonal antibody Crohn's disease Phase III 500Certriad Fibrate and statin combination Cholesterol and triglycerides

regulationFiled 400

Flutiform Beta2 agonist Asthma Filed 200

Bristol-Myers Squibb Apixaban (partnered with Pfizer)

Factor Xa inhibitor Thrombosis Phase III 1,750

Belatacept Anti-b7 integrin Mab Immuno-suppression transplants

Phase III 425

Dapaglifloxin Selective SGLT2 Inhibitor Diabetes Phase III 370Ipilimumab Human monoclonal antibody Melanoma Phase III 700Necitumumab (partnered with Eli Lilly)

Monoclonal antibody Cancer Phase III 500

Onglyza Dipeptidyl peptidase IV (DPP-IV) inhibitor

Diabetes Launched 650

Eli Lilly & Co. Bydureon Glucagon-like peptide 1 (GLP-1) agonist

Diabetes Filed 950

Effient Platelet ADP antagonist Acute coronary syndrome Approved 450Enzastaurin Protein kinase C (PKC) inhibitor Cancer Phase III 250Necitumumab (partnered with Bristol-Myers)

Monoclonal antibody Cancer Phase III 500

Ramucirumab Anti-VEGFrMAb Breast cancer Phase III 100Semagacestat y-secretase inhibitor Alzheimer's disease Phase III 240Solaneuzumab Monoclonal antibody Alzheimer's disease Phase III 150Teplizumab Monoclonal antibody Diabetes Phase III 225

Johnson & Johnson Abiraterone Abiraterone acetate Prostate cancer Phase III 350Bapineuzamab (partnered with Pfizer)

Anti-beta amyloid Mab Alzheimer's disease Phase III 1,100

Ceftobiprole Cephalosporin Bacterial infections Filed 850Dacogen Pyrimidine analogue Cancer Phase III 150Dapoxetine SSRI Premature ejeculation Filed 300Rilpivirine Reverse transcriptase inhibitor HIV Phase III 300Simponi (partnered with Merck)

Anti-TNFa Mab Rheumatoid arthritis Launched 2,600

Stelara Anti-IL-12 & IL-23 MAb Psoriasis Filed 780Telaprevir Protease inhibitor Hepatitis C Phase III 1,800Xarelto Factor Xa inhibitor Thrombosis Phase III 1,500

Merck & Co. Bocepravir HCV protease inhibitor Hepatitis C Phase III 820Bridion Selective relaxant binding agent Novel anesthetic Phase III 650Deforolimus (MK-8669) Rapamycin analogue (mTOR

inhibitor)Cancer Phase III 200

MK-0524B Tredaptive with simvastatin Cholesterol regulation Phase III 1,400Odanacatib Cathepsin K inhibitor Osteoporosis Phase III 600Org 36286 Corifollitropin alfa Infertility Phase III 200Preladenant Adenosine A2 antagonist Parkinson's disease Phase II 300Saphris 5HT-2/D2 antagonist Schizophrenia Approved 250Simponi (partnered with Johnson & Johnson)

Anti-TNFa MAb Rheumatoid arthritis Approved 2,600

Telcagepant CGRP antagonist Migraine Phase III 700TRA Thrombin receptor antagonist Acute coronary syndrome Phase III 1,500Tredaptive Nicotinic Acid/Laropiprant Cholesterol regulation Filed 500

Pfizer Inc. Apixaban (partnered with Bristol-Myers Squibb)

Factor Xa inhibitor Thrombosis Phase III 1,750

Aprela Oestrogen agonist & SERM Osteoporosis & menopause Phase III 200Axinitib VEGF inhibitor Cancer Phase III 550Bapineuzamab (partnered with J&J)

Humanized monoclonal antibody Alzheimer's Phase III 1,100

Bosutinib Kinase inhibitor Leukemia Phase III 460CP-675 Monoclonal antibody Skin cancer Phase III 550CP-690550 JAK-3 inhibitor Immunosuppressive Phase III 1,200CP-751 IGF-IR monoclonal antibody Cancer Phase III 200Fesoterodine Antimuscarinic agent Incontinence Approved in

Europe 500

PF-02341066 MET tyrosine kinase inhibitor Cancer Phase III 800Prevnar 13 Pneumococcal 13-valent Vaccine Approved 4,500Pristiq Desvenlafaxine Depression Approved 200Pristiq Desvenlafaxine Vasomotor symptoms Approvable 150Relistor Mu opioid antagonist Constipation Filed 400Viviant SERM Osteoporosis Approvable 150Xiaflex Collagenase clostridium Peyronie's disease Phase III 320

Sources: Company reports; Standard & Poor's estimates.


European firms are also increasingly diversifying and acquiring generic drug companies, partly to provide a balance to their branded products, many of which face generic competition. Novartis has successfully employed this strategy with its Sandoz division, which experienced significant growth in recent years.

We see these acquisitions mirroring a rising trend toward globalization of the generics industry. In our opinion, this diversification trend underscores difficulties at home, including an increasingly price-competitive US market, a bottleneck of generic filings at the FDA, and other regulatory issues, contrasted with higher margins on generics in many foreign countries and greater opportunities abroad for lucrative generic biotech products.

Big Pharma eyes biotech to drive growth A key defining trend, well documented in recent years, has been Big Pharma’s push into biotechnology, as that space is believed to offer the potential to provide a wave of new products that will help offset impending patent expirations, and drive future growth. Viewing biotechnology as the new frontier in breakthrough therapeutics, drug companies have specifically targeted biotech firms for acquisitions and new alliances in the face of disappointing returns from conventional small molecule pharmaceutical R&D, in our view.

Biologics are also less vulnerable to generic competition, even after their patents expire, as large molecule biologics are by nature more difficult to replicate. In addition, costly clinical trials may deter potential generic drugmakers from entering certain markets.

We believe this objective played a key role in the 2009 mega-mergers: Roche Holding’s $47 billion acquisition of the remaining stock in US biotech Genentech Inc. that it did not already own, and Pfizer’s $68 billion merger with Wyeth Pharmaceuticals, which had one of the strongest biotechnology pipelines among large pharma players. Based on data provided by EvaluatePharma, a research firm specializing in pharmaceutical and biotechnology equities, biotechnology products are expected to account for 48% of the top 100 drugs of 2016, up from 31% in 2009 and 15% in 2000.

The most recent Big Pharma/biotech merger deal in 2010 has been French drugmaker Sanofi-Aventis’ $18.5 billion hostile bid for Genzyme Corp. Sanofi launched a tender offer in October and, although Genzyme rejected the price, we believe a mutually acceptable deal could be done at a higher price. We see Genzyme’s roster of treatments for rare genetic disorders helping to buoy Sanofi’s top line amid sales erosion due to generic competition for Plavix and Lovenox, as well as providing long-term synergies. Even with a likely sweetening of the offer by 7%–8%, we think the deal would provide Sanofi with earnings accretion of around 5% in 2011 and 7% in 2012. We believe biologics represent one of the bright spots in the pharmaceutical industry, and should continue to spawn lucrative new therapies that bolster the sector’s sales and earnings. Fifteen of the 34 innovative treatments approved by the FDA in 2009 were biologics, as were 10 of the 18 innovative compounds approved by the FDA during the first half of 2010. We project 2010 growth in global biotechnology sales at roughly double the mid-single-digit pace that we see for the pharmaceutical sector.

Looking at the mega-deals discussed above, we believe key Genentech assets that attracted Roche’s interest were monoclonal antibodies; Avastin, a drug for colorectal, breast, and lung cancers; Rituxan, a treatment for non-Hodgkin’s lymphoma; and Herceptin for breast cancer. In addition, Roche’s license option on Genentech’s drug pipeline was set to expire in 2015.

Smaller deals done in recent years included Bristol-Myers Squibb Co.’s purchase of Medarex Inc. in 2009 for $2.3 billion, and Eli Lilly’s acquisition of Imclone Systems Inc. in 2008 (also $2.3 billion). We think the motive for the acquisition of Medarex was its promising oncology and immunology pipeline, led by ipilimumab for advanced melanoma. In Lilly’s case, we think the key attraction was ImClone’s Erbitux anticancer therapy, plus other experimental drugs, including an advanced oncology agent similar to Erbitux.


INDUSTRY PROFILE

Emerging markets drive global growth

Global pharmaceutical sales are expected to expand 5%–7% in 2011, to over $880 billion, primarily driven by projected growth of 15%–17% in emerging markets, based on estimates from IMS Health Inc. (IMS), a market research firm specializing in pharmaceuticals. Sales in China alone are forecast to advance 25%–27% in 2011, reflecting an expanding middle class, rising standards of living, and expanded government healthcare funding.

The projected 5%–7% global gain represents a somewhat faster pace of growth than the 4%–6% gain that IMS has forecast for the overall market in 2010. The indicated gain in 2010 was based on projected growth

of 13%–15% in emerging markets in Asia and Africa, as well as 10%–12% gains seen for Latin America. Sales in developed markets in North America and Europe were estimated to show increases only in the 3%–5% range in 2010.

According to IMS, sales in the US are expected to account for roughly 36% of the global pharmaceutical market in 2011, Europe 16%, Japan 11%, emerging markets 20%, and all other areas 17%.

The robust growth projected for emerging markets is in sharp contrast to projected compound annual growth rates of only 3%–6% for major drug markets in North America and Europe over the 2009–14 period, according to IMS. Emerging markets are expected to account for 48% of total pharmaceutical market growth in 2013, up from an indicated 37% in 2009. Emerging markets are expected to account for close to 20% of total worldwide pharmaceutical sales in 2011, up from 16% in 2009 and 13% in 2001.

Most developed drug markets are showing declining growth rates in pharmaceutical spending, reflecting slowing demographic trends, weakening economies and sovereign debt issues, rising pressures on drug

pricing amid constrained government budgets, and sales erosion resulting from a record number of patent expirations on branded blockbuster drugs over 2011–14 (known as the patent cliff).

By geographical region, total global pharmaceutical sales in 2009 were divided as follows, based on IMS data: North America, 38.7%; Europe, 31.5%; Asia, Africa, and Australia, 12.7%; Japan, 11.3%; and Latin America, 5.7%. The strongest growing regional segments in 2009 were emerging markets such as China and Latin America.

Despite an impending massive loss of revenues resulting from patent expirations, worldwide

pharmaceutical sales are expected to increase at a compound annual growth rate (CAGR) in the 5%–8% range over 2009–14, and reach $1.1 trillion by 2014, based on an IMS forecast.

B06: LEADING PHARMACEUTICAL COMPANIES

LEADING PHARMACEUTICAL COMPANIES

COMPANY 2005 2006 2007 2008 2009

1. Pfizer 34.3 34.2 31.4 27.7 27.82. Merck 18.7 20.6 21.9 20.1 19.83. AstraZeneca 12.4 14.5 15.2 16.1 18.34. GlaxoSmithKline 17.0 18.7 18.3 16.5 15.05. Hoffman-La Roche 8.0 10.2 11.9 12.6 14.36. Novartis 12.6 13.6 13.5 12.2 13.47. Eli Lilly 8.9 9.7 10.7 12.0 13.28. Johnson & Johnson 15.6 15.7 15.9 15.6 12.89. Amgen 11.6 14.2 13.6 12.8 12.5

10. Teva Pharmaceuticals 7.3 9.0 9.8 11.2 12.1Total, Top 10 146.4 160.4 162.2 156.8 159.2

Total, US Market 247.3 270.3 280.5 285.7 300.3Source: IMS Health Inc.

-------- US PHARMA SALES (BIL. $) ---------

Table B13: GLOBAL PHARMACEUTICAL SALES, BY REGION

GLOBAL PHARMACEUTICAL SALES, BY REGION

SALES MARKET FORECAST

(BIL. $) SHARE (%) % CHG. CAGR % % GROWTH

2009 2009 2008-09 2004-09 2009-10

North America 323.8 38.7 5.5 5.2 3-5Europe 263.9 31.5 4.8 6.6 3-5Asia, Africa, Australia 106.6 12.7 15.9 13.9 13-15Japan 95 11.3 7.6 3.9 0-2Latin America 47.9 5.7 10.6 10.9 10-12

TOTAL 837.3 100.0 7.0 6.7 4.6

CAGR-Compound annual growth rate.Source: IMS Health Inc.


Key drivers fueling the projected gain include robust 14%–17% annual growth in emerging markets. Research and development (R&D) discoveries and development of novel new therapies for cancer, diabetes, HIV, multiple sclerosis, and other immune disorders are also expected to foster growth. IMS also pointed

out that patent expirations are expected to peak in 2011–12, when six of the world’s 10 largest selling drugs lose patent protection. Thus, revenue comparisons should be favorable after 2012.

Total revenue loss from patent expirations over the 2010–14 period is

expected to exceed $142 billion. Major generic inroads are expected in the areas of cholesterol regulation (now dominated by Pfizer’s Lipitor), antipsychotics (such as Lilly’s Zyprexa and AstraZeneca’s Seroquel), antiulcerants, and heart drugs (including Merck’s Cozaar/Hyzaar and Bristol-Myers Squibb’s Plavix).

US AND EUROPEAN PHARMA SALES SLOWING

Domestic pharmaceutical sales are projected to advance 3%–5% in 2011, comparable with gains indicated for 2010, but below past growth rates of 5.1% in 2009 and 9.3% in 2006, according to IMS. We attribute the sluggish growth to weakness in the overall economy, with high unemployment (resulting in more people without insurance), patent losses, and tougher pricing. The pricing situation has been exacerbated by the advent of US healthcare reform, which will entail new rounds of price discounting and rebates in the Medicaid and Medicare programs.

Affected by recession-related constrained government budgets, along with sovereign debt issues, European countries have implemented unilateral reductions in pharmaceutical pricing and utilization. Largely in view of that trend, as well as lingering softness in national economies, pharmaceutical growth in the top five European countries in the aggregate is expected to be only 1%–3% in 2011, totaling $135 billion to $145 billion, based on IMS estimates.

Pharmaceutical pricing reductions in Europe have been fairly widespread to date in 2010, with cuts implemented in nearly all major countries across branded and generic sectors. France recently announced plans to reduce its 2011 pharmaceutical budget by close to $700 million (equal to about 2% of its total spending), while at the same time terminating tax incentives for orphan drugs. Other high-profile reductions announced earlier this year included a program in Greece designed to save more than $2.5 billion by reducing drug prices by over 20%; and a plan in Italy to achieve $2 billion in pharma savings through price reductions and tightened utilization.

In contrast, pharmaceutical sales in Japan are projected to increase between 5%–7% in 2011, to the $96 billion to $100 billion range, according to IMS. Japan is a highly regulated market, where annual drug sales generally fluctuate erratically, impacted by biennial across-the-board pharmaceutical price cuts; however, no price cuts are expected in 2011.

Although the patent cliff starts in earnest in 2011, most of the major losses are expected to occur during the fourth quarter of that year, with their major impact expected to be felt in 2012. Three of the world’s top 10 drugs—Pfizer’s Lipitor, Eli Lilly’s Zyprexa, and Bristol-Myers Squibb’s Plavix—lose US patent protection in October and November 2011. Total global sales of those three products were close to $22 billion in 2009.

Table B02: TOP PRESCRIPTION DRUGS

TOP PRESCRIPTION DRUGS(Ranked by 2009 US sales)

-------------- SALES (BIL. $) --------------

DRUG COMPANY USE 2005 2006 2007 2008 2009

Lipitor Pfizer Cholesterol reducer 8.2 8.6 8.1 7.8 7.5Nexium AstraZeneca Antiulcer 4.3 5.1 5.4 5.9 6.3Plavix Bristol-Myers Squibb/Sanofi Antiplatelet 3.5 2.9 3.9 4.8 5.6Advair Diskus GlaxoSmithKline Asthma 3.5 3.9 4.2 4.4 4.7Seroquel AstraZeneca Antipsychotic 2.5 3.0 3.4 3.8 4.2Abilify Bristol-Myers Squibb/Otsuka Antidepressant 1.5 1.9 2.3 3.0 4.0Singulair Merck Respiratory 2.5 3.0 3.4 3.5 3.7Actos Takeda Antidiabetic 2.2 2.6 2.9 3.1 3.4Enbrel Amgen Antiarthritic 2.8 3.1 3.1 3.1 3.3Epogen Amgen Antianemia 2.9 3.2 3.0 3.0 3.2

Source: IMS Health Inc.


SPOTLIGHT ON EMERGING MARKETS

With markets in the world’s major developed nations either stagnant or showing only modest growth, pharmaceutical manufacturers are increasing their focus on global emerging markets to provide impetus for top line growth over the coming years.

Based on IMS forecasts, sales in 17 developing nations that IMS refers to as “pharmerging” countries—including China, Brazil, Mexico, South Korea, Turkey, India, and Russia—are expected to grow collectively at a compound annual rate of 14%–17% in the five years through 2014. Emerging markets are expected to contribute nearly half of the 5%–7% total global pharmaceutical growth projected for 2011, according to IMS. Drug sales in the 17 pharmerging countries are expected to expand by 15%–17%, to $170 billion–$180 billion in 2011.

These markets provide opportunities… Unlike the more developed areas of the world, developing nations are generally enjoying rapid rates of growth in demographics and gross domestic product (GDP), and rising levels of disposable income. Consequently, an increasing number of people in such countries are able to buy goods and services they previously could not afford, although the larger population segments in these regions are still mostly impoverished.

Typically, healthcare expenditures, including spending on pharmaceuticals, increase with a rising standard of living. According to the International Monetary Fund, emerging markets comprise some 85% of the world’s population, and they accounted for all real worldwide economic growth over the past five years.

Another factors spurring growth in these markets is that as they develop, their populations become subject to ailments and conditions that typically affect developed nations. These include poor health behaviors such as drinking alcoholic beverages, smoking, and rising levels of obesity, which, in turn, lead to cardiovascular disease, cancer, diabetes, respiratory ailments, and other maladies. We believe these situations provide multinational pharmaceutical manufacturers with opportunities to tap large new customer bases.

We also see emerging areas yielding additional benefits in terms of raw materials and production. Many developing nations provide opportunities for attractive low labor-cost manufacturing bases, allowing multinational drug makers to establish new manufacturing plants from which pharmaceuticals could be sold to other emerging markets, as well as to developed countries.

…as well as challenges and obstacles Despite the bright growth prospects for these markets, we still believe that multinational pharmaceutical manufacturers face many challenges in emerging markets. In many developing nations, patients largely pay for their drugs out-of-pocket, resulting in consumption curtailments during periods of economic weakness.

We also believe that drug sales in countries such as Russia and Mexico, where patients are primarily responsible for paying for their own drugs, have been more affected by the recent recession and high unemployment than nations such as Germany, Japan, Spain, and Turkey, where the government is the principal source of funding.

Intellectual property rights are also a problem that must be considered. Although significant progress has been made in recent years to protect intellectual property rights, enforcing patents will probably still remain challenging over the foreseeable future in many areas, in our view.

From the standpoint of the large multinational pharmaceutical companies, we must also be aware of the impact on margins and bottom line results generated from sales in emerging markets. We note that such margins and operating profits are typically significantly lower than those realized in developed nations, largely reflecting much lower pricing. With most pharmaceutical purchases made out-of-pocket by largely impoverished populaces, emerging drug prices are typically at least 50% below those in Western markets.


Branded pharmaceuticals represent the largest segment of the aggregate emerging pharmaceutical sector, accounting for 50% of an estimated $180 billion market in 2009. Other categories included original branded drugs (28%), patented originals (17%), and commodity generics (5%).

Branded generics are essentially off-patent generics manufactured and marketed under their original brand names. They are very popular in developing nations because the brand names are typically associated with quality in markets where domestically manufactured drugs often lack the same level of quality control. Unlike the prices on commodity generics in developed countries, which are typically deeply discounted by numerous players in the market, prices on branded generics remain relatively high because of their aura of quality and because government regulatory agencies limit the number of approved generics.

Principal emerging markets Pharmaceutical companies have acknowledged their under-penetration of these markets, and most have expressed their intention to accelerate sales efforts in these areas. Below we highlight prospects for key emerging markets and the involvement that major pharmaceutical companies have in them.

China. By far the largest emerging market is China, which has the largest population and third largest economy in the world, with an estimated GDP of $8.7 trillion in 2009. It also has the largest pharmaceutical market among the emerging countries. With projected drug sales growing over 25% in 2011, to close to $50 billion, China is expected to be the world’s third largest pharmaceutical market in 2011, after the US and Japan, according to IMS.

Along with a rising standard of living and an expanding middle class, we see drug sales in this huge market also spurred by the Chinese government’s $124 billion healthcare stimulus package for 2009 through 2011, which aims to cover 90% of the Chinese population with basic healthcare insurance. A key part of the new healthcare stimulus program is the creation of a selected list of covered pharmaceuticals. While we think the list will comprise mostly generics and other low-priced drugs, we believe the sheer size of the Chinese market, with varied opportunities unfolding, offers significant growth potential for both home-based companies and Big Pharma multinationals.

China also has a substantial market in traditional Chinese medicines (known as TCMs) and even exports such medicines. We see such factors as China’s population of 1.3 billion people, its rapid urbanization, a fast-rising senior population, and a growing middle class, leading the country to have many of the conditions and chronic diseases prevalent in the developed world.

European drug makers, including AstraZeneca, Sanofi-Aventis, Bayer AG, Roche, Novartis and Novo Nordisk, have long established themselves in China. US drug makers, such as Pfizer, Eli Lilly, Bristol-Myers Squibb, Merck, Johnson & Johnson, and Abbott Laboratories, are more recent entrants, but have garnered significant market share among the multinationals. However, pharmaceutical multinationals face increasing difficulties in their penetration of China, including more local competition and government interference.

According to IMS, multinationals, in aggregate, hold only 30% of China’s drug market, while Chinese firms, numbering over 5,000, comprise the remaining 70%. We expect these proportions over the coming years to be relatively unchanged, but we see all participants benefiting from the significant growth projected for the overall Chinese pharmaceutical market. While indigenous Chinese drugmakers have stronger sales and distribution channels throughout the provinces, we still see foreign players, including AstraZeneca, Eli Lilly, Novartis, and Pfizer, making efforts to greatly expand the number of sales reps and local sales offices.

Brazil. The Brazilian pharmaceutical market has continued to grow at a brisk rate in recent years, fueled by strength in its overall economy. With a population of over 200 million, Brazil is the fifth largest country in the world in terms of population. Industry research firm Business Monitor International (BMI) valued Brazil’s pharmaceutical market at $16.9 billion in 2008, and forecasted a CAGR of 11.9% to 2018. This market also showed resilience during the global recession. While many countries witnessed volume contractions for medicines over the past few quarters, Brazil’s retail pharmaceutical sales increased 19% in the 12 months through June 2010, based on IMS data. Brazil’s pharmaceutical market was ranked as ninth


in the world in 2009, and was expected to replace the United Kingdom in eighth place in 2011, based on IMS analysis, and then remain at that level in 2013.

Demand for drugs is supported by a rapidly growing population, which has increased at about 2% annually over the past decade. Public insurance covers 90% of the population, with an increasing penetration of supplementary private insurance, according to IMS. There are more than 300 pharmaceutical companies operating in Brazil. While 20% of the companies were multinationals in 2008, according to IMS, the multinationals are estimated to account for 75% of Brazil’s market. Most major multinationals, including Pfizer, Eli Lilly, Novo Nordisk, Novartis, Daiichi-Sankyo, Astellas, GlaxoSmithKline, Roche, and Sanofi-Aventis, have set up R&D and manufacturing facilities, and/or acquired or set up alliances with local Brazilian companies.

Russia. This large pharmaceutical market has also experienced high double-digit growth in recent years, helped by increased government healthcare funding and expansion in the private health insurance sector. This growth is occurring despite relatively stagnant demographics. With a population of some 141 million, Russia is the world’s ninth largest country. However, estimated average life expectancy is 66 years, below 1955 levels, according to the World Bank. Overall, the health of the Russian people has deteriorated, and the number of births has been lagged that of deaths. Smoking is prevalent, and chronic disease rates are high.

The World Bank noted that total healthcare spending in Russia includes a relatively large proportion of private expenditures, reflecting out-of-pocket payments for health facilities and the purchase of pharmaceuticals. Russia’s State Medical Guarantee Program does not cover outpatient drug benefits.

Nonetheless, the Russian pharmaceutical market has been growing at double-digit rates in the past few years. Industry research firm Frost & Sullivan estimates that it grew 28% to $14.3 billion in 2008, partly reflecting hospitals’ utilization of higher-priced specialty drugs, and another 13% in 2009 to $16.2 billion, with the deceleration likely reflecting the financial crisis. Other drivers include increasing government influence over drug prescribing, growing public and private insurance coverage, and a population that is becoming more health conscious.

Imports account for some 70%–80% of the drugs used in Russia (in terms of market value), mostly from Swiss, French, and German pharmaceutical companies. In an effort to boost domestic production, the Russian Health Ministry in December 2009 initiated a program designed to have 55 “strategically important” pharmaceuticals manufactured domestically. These drugs are currently produced by multinationals such as Novartis, Sanofi-Aventis, Roche, and others, according to Frost & Sullivan.

India. With an estimated population of 1.2 billion as of mid-2010, India is the world’s second largest country. But it ranks twelfth in terms of the size of its economy, as the country has a large impoverished rural and urban population with an underdeveloped economy. At an estimated $10 billion in annual sales, India’s pharmaceutical market is also relatively small compared to its population size, with per capita healthcare expenditures well below other emerging countries such as China, Russia, and Brazil.

The Indian healthcare system is dominated by private medical services, with about 70% of the hospitals privately owned, and some 80% of total healthcare expenditures in 2009 derived from private sources, according to Frost & Sullivan.

Healthcare spending has been growing rapidly in this country in recent years, spurred by a rising middle class, expansion in the private medical insurance sector, and favorable government policies. According to Frost & Sullivan, healthcare spending in India expanded from 4.9% of GDP in 2006, to 5.2% in 2009. While only 10% of the population has health insurance, the insurance business is growing fast. In addition, the Indian government has undertaken a number of healthcare initiatives, including a program to improve rural health services and a national disease surveillance system.

We also expect increased foreign involvement in the Indian pharmaceutical market, reflecting recent legislation upholding international intellectual property rights and granting a 150% tax reduction for certain pharmaceutical R&D expenditures.


India is home to a reasonably advanced native pharmaceutical sector, albeit one specializing in generic drugs. The Indian pharmaceutical industry ranks third worldwide by volume of production, accounting for about 10% of the world’s total pharmaceutical output, according to Srikant Kumar Jena, Minister of State for Chemicals and Fertilizers. According to Business Monitor International, sales of prescription drugs and OTC medicines in India are forecast to increase from $17.1 billion in 2009, to $66.3 billion in 2019, representing a CAGR of 15%.

Western pharmaceutical companies have been establishing their own manufacturing facilities in India, as the cost of setting up and running a facility in India is a fraction of the cost in the West. In addition, many multinationals have been looking to make Indian acquisitions since Japanese pharmaceutical giant Daiichi Sankyo acquired Rambaxy Laboratories in 2008. In 2009, Sanofi-Aventis (France), Abbott Laboratories, Pfizer, Merck AG, and Hospira all acquired Indian drugmakers. Alliances also have been struck between Western multinationals and Indian drug makers.

Major drugmakers engaged in emerging markets While nearly all major large-capitalization drugmakers have exposure in emerging markets, we believe that the European companies on average have a relatively greater presence in emerging markets that their US counterparts, probably reflecting their earlier entry and the traditional ties that exist between Europe and developing nations in Asia. Below we highlight selected global pharmaceutical companies and their operations in emerging markets.

Novartis. We believe Novartis ranks above its peers in emerging markets, with that segment accounting for 23% of the company’s pharmaceutical sales in the first quarter of 2010, 25% of its vaccines and diagnostics revenues, and 29% of its Sandoz (generics) sales. During 2009, Novartis generated aggregate sales growth of 17% (to $4 billion) in its top six emerging markets (Brazil, China, India, Russia, South Korea, and Turkey). These sales comprised close to 14% of the company’s total pharmaceutical sales. Spurred by collaborations in China and other ongoing aggressive investment activity in other emerging countries, Novartis expects the above-mentioned six developing countries to represent over 20% of its pharmaceutical business in 2012.

Sanofi-Aventis. Another major player in emerging markets is Sanofi-Aventis, which derived over 25% of its total sales from emerging markets in 2009. Emerging market revenues rose 19%, to about $10 billion, accounting for about 25% of total consolidated sales in 2009. Especially strong growth was seen in the company’s sales to China and Russia, which increased about 29% and 60%, respectively. Sanofi has a long history in emerging markets: it was the first foreign drugmaker in China (1982) and has had an established position in India for over 50 years. We expect continued robust growth for Sanofi in this sector, reflecting organic growth in the markets themselves, plus acquisitions. During 2009 and 2010, the company made several acquisitions in emerging markets in Eastern Europe and Latin America.

GlaxoSmithKline. Ranking as the world’s second largest pharmaceutical company, Glaxo is also moving aggressively in emerging markets, with pharmaceutical sales in those areas rising 20% in 2009, to $4.8 billion (accounting for about 10% of total sales). This growth has been augmented by some 10 bolt-on acquisitions. Glaxo’s strategy is to build positions in key markets, optimize pricing, and develop innovative partnerships in developing markets. In recent years, the company has formed 13 alliances with local drug companies. The company also expanded its vaccine business in emerging markets through the acquisition of Stiefel in 2009.

AstraZeneca. Sales in emerging markets in 2009 rose 12% to $4.3 billion (13% of total revenues). Highlighting the company’s focus on emerging markets is the fact that its sales CAGR in the BRIC countries, Mexico, and Turkey grew 23.2% from 2004 to 2009, making it No. 1 in growth among the top 10 multinational pharmaceutical manufacturers in these markets during that period. AstraZeneca’s goal is to continue double-digit growth, with emerging markets projected to account for 25% of sales by 2014. It grew its employment base in emerging markets from about 5,000 in 2002 to 14,000 in 2009. In China, it is expanding its coverage from 200 cities to 300 cities.

Pfizer. As the world’s largest pharmaceutical company with a strong portfolio of brands, Pfizer is uniquely situated, we believe, to capitalize on IMS Health’s projected $120 billion–$140 billion of total


growth for emerging markets in the five years through 2014. Boosted by the Wyeth acquisition, emerging markets accounted for about $6.5 billion in 2009, equal to roughly 14% of its total sales in that year. While the company plans expansion throughout the emerging markets spectrum, it is placing particular emphasis on China, where Pfizer sees the market growing at a 30% annual rate. To keep pace, it expects to build its field force from 3,300 people in 272 Chinese cities in 2010, to 5,400 in 360 cities in 2012.

Merck. Augmented by last year’s acquisition of Schering-Plough, Merck is accelerating its emerging markets exposure, with sales in those regions expected to account for over 25% of its pharmaceutical and vaccine revenue in 2013, up from 17% in the first quarter of 2010. Based on IMS and other data sources, it was ranked fifth among the large multinational pharmaceutical manufacturers in 2009 in sales to emerging markets; it was second in Latin America (after Sanofi-Aventis), with six of the top 20 products in the region. We expect growth to be driven by new, in-line, and mature products, as well as branded generics and other products that we believe the company will add through local and regional partnerships or acquisitions. In addition, since 2007, Merck has increased the number of sales reps in China by 90%, to about 3,000 today. We also see much potential for Merck’s expanding vaccine portfolio in emerging markets, which are estimated to account for 80% of the global vaccine preventable disease market.

INDUSTRY TRENDS

Like most industries, big brand-name pharmaceutical companies face ongoing challenges and uncertainties. In the past few years, the industry has been subjected to heightened competition from generic drugmakers, unprecedented pricing pressure from payers, and hard-to-control inflation in research and development (R&D) budgets. Perhaps most importantly, however, the pharmaceutical industry has been experiencing a decline in R&D productivity, with a relative dearth of innovative new products launched in recent years—an area that might have offset some of the other difficulties mentioned earlier.

In addition, the overall global pharmaceutical market is fairly fragmented, with the largest company (Pfizer) accounting for only 8% of the market. These challenges continued to plague the industry in 2009, although ongoing improvements in early-stage product pipelines, particularly in the fields of cancer and diabetes, offer long-term promise. In addition, new products and an aging population are likely to create a robust future for this industry.

Nevertheless, Big Pharma (the large-capitalization pharmaceutical sector) remains in transition. Rarely have the pressures on large pharmaceutical companies been so intense. As the industry sorts through its problems, it is responding with major cost-cutting initiatives, including sales and marketing overhauls and the reorganization of R&D operations. The industry is pursuing new product development in selected areas, and is forming alliances and making acquisitions with pipeline considerations in mind.

IMS Health finds that Big Pharma companies overall have been struggling to grow, while generics firms are doing better, although they face a period of intense competition. Biotechnology companies continue to exhibit robust revenue growth, albeit from a much smaller base.

DEMOGRAPHIC TRENDS REMAIN FAVORABLE

Three worldwide demographic trends bode well for long-term pharmaceutical consumption: the aging of the population in the largest markets; the lengthening of the average life expectancy; and a rising incidence of chronic diseases. In many Western countries, the elderly population—a group with a disproportionately greater use of prescription drugs—is growing faster than the general population.

Since seniors account for a disproportionate amount of prescription drug consumption, projected above-average growth for the aged has positive implications for pharmaceuticals. According to the United Nations Population Division, people aged 60 were projected to account for 22% of the total world population by 2050, up from 10.8% in 2009.


In the US, the Census Department projected that the 65 and older segment of the population will expand from an indicated 41.7 million in 2010 to 79.3 million by 2030, when all of the baby boomers (Americans born from 1946 through 1964) will be 65 and older. As a percentage of the total population, persons 65 and older are expected to account for close to 20% of all Americans in 2030, up from 13% in 2010. This represents a bullish trend for the pharmaceutical industry since the elderly as a group account for roughly one-third of prescription drug consumption.

NEW STRATEGIES FOR GROWTH

Confronting both the healthcare reform and patent cliff issues, major branded pharmaceutical companies have embarked on a number of new strategies aimed at strengthening their top lines, as well as providing platforms for continued long-term profit growth. One key strategy major pharmaceutical companies put into place in late 2009 and early 2010 were several rounds of price increases. Average prices on branded pharmaceuticals in the US increased 9.1% in 2009, versus 7.4% in 2008, according to data supplied by Express Scripts Inc., a leading pharmacy benefit management firm.

Most of the major pharmaceutical companies have also reconfigured their R&D programs to focus on their proven specific areas of therapeutic expertise. They are also placing renewed emphasis on the faster-growing fields of specialty pharmaceuticals, biologics, vaccines, and, in some cases, even generics. Prices of specialty drugs rose 9.4% in 2008 and 11.5% in 2009.

Specialty pharmaceuticals typically comprise high-priced biotech-based treatments for cancer, rheumatoid arthritis, immune disorders, and similar conditions. Additional evidence of the industry’s shift in R&D focus to the specialty sector is the increased number of specialty drug launches in recent years. Specialty drugs accounted for close to 65% of new chemical entity launches in the US from 2005 through 2009, based on data from IMS.

Nearly all large-capitalization pharmaceutical companies have also embarked on major expense streamlining programs aimed at downsizing their corporate cost structures to meet slowing or declining revenues. With each facing significant generic erosion and other top-line challenges, leading pharmaceutical companies, such as Pfizer, Merck, GlaxoSmithKline Plc, Bristol-Myers Squibb, and Eli Lilly, are all in the midst of multibillion-dollar cost-cutting programs.

Reflecting changes in marketing patterns, nearly all major drugmakers have cut back their pharmaceutical sales forces, ending more than a decade of aggressive sales force expansion, often referred to as Big Pharma’s “arms race.” According to Standard & Poor’s estimates, current sales force employment is probably down 20% from a peak of 105,000 in 2005. Based on projections made by ZS Associates, a sales strategy consulting firm, the industry’s sales force is expected to drop to 70,000 by 2015.

Along with personnel cutbacks, many drug companies are also consolidating manufacturing facilities in an effort to eliminate excess overhead and improve productivity. Bristol-Myers Squibb, Pfizer, Merck, and Eli Lilly have all reduced excess manufacturing capacity in recent years. While all major pharmaceutical companies are cutting costs, Pfizer’s and Merck’s plans are probably the most extensive. Pfizer’s goal is to generate cost reductions of $4 billion–$5 billion by the end of 2012, facilitated in large part by synergies accruing from its 2009 acquisition of Wyeth. Helped by synergies from its 2009 acquisition of Schering-Plough, Merck expects to achieve cost saving of about $3.5 billion by 2012.

FDA APPROVED 18 NOVEL DRUGS IN THE FIRST HALF OF 2010

While R&D productivity is still well below past levels, the total number of approvals of new molecular entities (NMEs) and of novel biologics in the first half of 2010 totaled 18, up from only eight in the first half of 2009. The gain came from the biologics space, with 10 novel products approved, versus five in the comparable 2009 period. Pharmaceutical NMEs increased to eight, from three.


Approvals during the first half of 2010 included new treatments for Type 2 diabetes, multiple sclerosis, cancer, osteoporosis, and various other conditions. Some of the more promising new products, in our opinion, include Victoza, Prolia, and Prevnar 13, described below.

Victoza. Generically known as liraglutide, this drug from Novo-Nordisk AS is a once-daily injection treatment for Type 2 diabetes. The drug, approved in January 2010, is intended to help lower blood sugar levels in persons with Type 2 diabetes, who have difficulty making insulin, a hormone that prevents sugar buildup in the blood. Victoza is in a class of medicines known as glucagon-like peptide-1 (GLP-1) receptor agonists that help the pancreas make more insulin after a meal is eaten. We estimate sales of this drug could exceed $1.5 billion in 2015.

Prolia. In June 2010, the FDA granted marketing approval of this monoclonal antibody treatment of menopausal women with osteoporosis who are at a high risk for

fractures. We believe Prolia compares favorably in efficacy and safety with existing therapies, while offering convenient twice-annual dosing, which could improve patient compliance. The drug is currently undergoing Phase III studies for other uses, including the treatment of bone loss caused by cancer therapy. Prolia has also been approved in Europe. We project Prolia sales of close to $2.5 billion by 2015.

Prevnar 13. In February 2010, the FDA approved Pfizer’s Prevnar 13, a pneumococcal 13-valent conjugate vaccine for pediatrics. This vaccine, which Pfizer obtained through its 2009 acquisition of Wyeth, will be the successor to Prevnar, a pneumococcal 7-valent conjugate vaccine. The new vaccine protects against six additional types of the disease-causing bacteria (it is called Prevnar 13 because it fights 13 different types of streptococcus pneumoniae). We forecast sales of this vaccine of over $5 billion by 2015.

Promise in the pipeline We think there is still significant potential in the industry’s R&D pipeline, which should drive good growth for the industry once it passes the high-patent-expiration years of 2011 and 2012. Based on data provided by the Pharmaceutical Research and Manufacturers of America (PhRMA), a trade group, the industry had some 2,900 compounds under development in 2009, up from 1,800 compounds in 1999.

B12: RECENT NEW MOLECULAR ENTITIES APPROVED

RECENT NEW MOLECULAR ENTITIES APPROVED*THERAPEUTIC APPROVAL

TRADE NAME GENERIC NAME APPLICANT POTENTIALS DATE

Gilenya fingolimod Novartis P 9/21/10Ella ulipristal acetate HRA Pharma S 8/13/10Lastacaft alcaftadine Vistakon

PharmaceuticalsS 7/28/10

Natazia dienogest; estradiol valerate

Bayer Healthcare S 5/6/10

Zortress everolimus Novartis S 4/20/10Asclera polidocanol Chemische Fabrik

Kreussler S 3/30/10

Carbaglu carglumic acid Orphan Europe P 3/18/10VPriv velaglucerase alfa Shire Human Genetic P 2/26/10Victoza liraglutide recombinant Novo Nordisk S 1/25/10Votrient pazopanib GlaxoSmithKline S 10/19/09Folotyn pralatrexate Allos Therapeutics PO 9/24/09Telavancin telavancin Theravance S 9/11/09Bepotastine Besilate

bepotastine besilate Ista Pharmaceuticals S 9/8/09

Sabril vigabatrin Lundbeck SO 8/21/09Saphris asenapine Organon S 8/13/09Livalo Tablets pitavastatin Kowa Research S 8/3/09Onglyza saxagliptin Bristol Myers Squibb S 7/31/09Effient prasugrel Eli Lilly P 7/10/09Multaq dronedarone hcl Sanofi Aventis P 7/1/09Besifloxacin HCL besifloxacin Bausch & Lomb S 5/28/09Samsca tolvaptan tablets Otsuka America S 5/19/09Fanapt iloperidone Vanda Pharmaceuticals S 5/6/09Ulesfia benzyl alcohol Sciele Pharma S 4/9/09Coartem artemether 20mg/

lumefantrine 120mgNovartis PO 4/7/09

Affinitor everolimus Novartis P 3/30/09Uloric febuxostat Takeda S 2/13/09Savella Tablets milnacipran hcl tablets Cypress Bioscience S 1/14/09*Excludes diagnostic NMEs and some biologics. P-Priority review: significant improvement compared

with marketed products, in the treatment or prevention of a disease. S-Standard review: drug appears

to have therapeutic qualities similar to those of one or more already marketed drugs. O-Orphan drug.

Source: US Food and Drug Administration.


The recent total includes 750 oncology compounds, including many for common lung and breast cancers; 277 for heart disease and stroke; 300 for rare diseases, including treatments of immune system disorders, epilepsy and cystic fibrosis; and 104 for HIV/AIDS. Selected R&D compounds with especially bright prospects, in our opinion, include the following:

Xarelto. Xarelto (rivaroxaban) is a novel oral anticoagulant discovered and developed by Bayer AG. US marketing rights to the drug were granted to the Ortho-McNeil division of Johnson & Johnson. A member of a new class of Factor Xa inhibitors, the drug was found to be effective in the prevention of blood clots after knee and hip replacements. Given expected wider applications of this blood-thinning agent in the years ahead, we expect Xarelto sales to exceed $1 billion annually by 2013.

Bapineuzumab. Bapineuzumab, a humanized monoclonal antibody acting on the nervous system, has the potential, in our opinion, to become a disease modifying agent in the treatment of Alzheimer’s disease. Developed by Elan Pharmaceuticals and Wyeth (now part of Pfizer), this compound is presently in Phase III trials. Johnson & Johnson recently acquired Elan’s 50% interest in bapineuzumab. If Phase III results come in as expected, we see multibillion-dollar sales potential for this compound.

Other new compounds under development that are promising, in our opinion, include the following:

Darapladib (from GlaxoSmithKline) and anacetrapib (Merck)—cholesterol-regulating agents SCH 530348 (Merck)—an oral thrombin-receptor antagonist blood-thinning agent for acute

coronary syndrome Asenapine (Merck)—a new HT2A/D2 receptor antagonist for schizophrenia Silenor and Somaxon (Sanofi-Aventis)—new anti-insomnia agents Indacaterol (Novartis)—a long-acting beta2 agonist inhaler for chronic obstructive pulmonary

disease (COPD) Dapagliflozin (Bristol-Myers Squibb)—a Type 2 diabetes treatment

DTC ADVERTISING SHRINKING

Total direct-to-consumer (DTC) pharmaceutical advertising spending increased 3.9% in 2009, to about $4.8 billion, following a decline in recession-impacted 2008, based on data from Kantar Media, a leading provider of advertising and marketing information. The gain in 2009 was achieved despite a 12% decline in total advertising expenditures, according to Kantar. We see the rise in pharmaceutical marketing outlays commensurate with the gains seen in prescription trends and pharmaceutical sales in 2009, which were generally better than expected.

New launches, which are usually a key driver of DTC advertising, also showed some improvement in 2009. We also attribute better DTC volume to increases in selling, general, and administrative (SG&A) spending. While print and broadcast media continue to dominate DTC advertising, we are also seeing an increasing volume of advertising dollars directed to the Internet, where interactive communication is available for patients via email.

Historically, DTC has been highly successful in promoting pharmaceutical brand recognition in competitive markets, especially for so-called lifestyle drugs such as antidepressants, painkillers, and erectile dysfunction agents. Studies also confirmed DTC effectiveness as persons suffering from various medical conditions generally recall seeing DTC ads for drugs treating those conditions.

Reflecting an attempt to reduce the level of persons abusing prescription drugs and to achieve significant cost savings, there has been a clamor by some in Washington for a moratorium on DTC advertising for new products. While noting that occasionally DTC is useful in informing consumers about new therapies, DTC critics argue that these promotions are used primarily by the drug companies to boost sales of their established products, instead of less expensive generic alternatives, and that the cost of these ads dramatically increases the nation’s drug spending. However, we do not expect restrictive DTC legislation to emerge, given the benefits that DTC provides for patients and consumers.


HOW THE INDUSTRY OPERATES

The modern pharmaceutical industry emerged during the 1920s and 1930s, with key discoveries and the synthesis of sulfa antibacterials, penicillin and other antibiotics, and various other compounds, as well as the emergence of large-scale production capabilities. Industry output expanded markedly during World War II, in response to the growing demand for penicillins and related anti-infectives.

In the postwar years, greater industry investment in research and development (R&D) led to important scientific breakthroughs in new therapeutics and vaccines. During this period, corporations capitalized on the discovery of tranquilizers, amphetamines, advanced antibiotics, and the Salk polio vaccine.

Today, the pharmaceutical industry derives most of its profits from a broad base of compounds used to treat infections, cardiovascular conditions, depression, inflammatory disease, and other chronic conditions. In recent years, most leading drugmakers have also collaborated with biotechnology firms to develop novel therapies based on recombinant deoxyribonucleic acid (DNA) technology, monoclonal antibodies, and

genomics research. Such joint efforts are expected to yield important new therapies for a variety of diseases and medical conditions over the coming years. Oncology, for example, has benefited from these scientific advances and is now the fastest-growth segment of the drug industry in terms of sales.

About 59% of all US workers had health insurance provided by their employers in 2009, based on the 2009 Employer Health Benefits survey published by the Henry J. Kaiser Family Foundation (KFF), a private nonprofit foundation focused on US healthcare issues. Of those with health insurance, some 98% were covered under managed care plans, with conventional fee-for-service coverage representing the balance. In the managed care

segment, 60% were in preferred provider organization programs (PPOs), 20% in more rigid but less costly health maintenance organizations (HMOs), 10% in point-of-services (POS) plans, and the remainder in other types. With PPOs, patients select providers from the insurer’s network or pay more to go outside of the network; with HMOs, they use the network’s providers, which are paid a set monthly fee per patient.

As the cost of medical care continues to rise, employer-sponsored health plans are forcing patients to shoulder a larger portion of their expenses. Drug spending is a key target of these programs’ efforts to rein in costs. Although prescription drug spending still accounts for a relatively small component of total national healthcare expenditures, accounting for about 10% of the total tab, the pace of growth has slowed in recent years. After peaking in 1999 at 18.1%, the growth rate fell to an indicated 5.2% in 2009. While utilization continues to climb, the slowdown in spending growth is due to a greater reliance on cheaper generic drugs, a decline in the number of innovative new drugs (which tend to be more expensive than older drugs) coming to market, and increased utilization management by payers.

MCOs are implementing tiered cost-sharing formulas and increasing drug copayments. In 2009, about 89% of all workers covered by employer-sponsored plans had plans with some kind of tiered cost sharing (most offering three or four options), up from 27% in 2000, according to the KFF. The added out-of-pocket expense has prompted consumers to choose less costly generic drugs, and, among the elderly and the poor, either to purchase cheaper versions of their drugs from outside the US or to forgo the use of high-priced medications. Increasingly, the plans also require pharmacists to dispense generics when available or—in therapeutic categories for which a choice of branded drugs exists—a preferred brand for which the plan has negotiated an attractive discount.

Table B03: LEADING THERAPY CLASSES IN US SALES

LEADING THERAPY CLASSES IN US SALES(Ranked by 2009 US sales, in billions of dollars)

----------------- SALES (BIL. $) -----------------

CLASS 2005 2006 2007 2008 2009

1. Antipsychotics 10.2 11.4 12.8 14.2 14.62. Lipid regulators 17.9 19.6 16.2 14.5 14.33. Proton pump inhibitors 12.7 13.5 14.0 13.8 13.64. Antidepressants 10.0 10.4 9.2 9.5 9.95. Angiotensin II antagonists 4.9 5.7 6.5 7.5 8.46. Monoclonal antibodies 3.9 5.7 6.6 7.3 8.07. Anti-arthritics 3.6 4.4 4.8 5.6 6.38. Erythropoietins 8.5 9.8 8.4 6.9 6.39. Analogs of human insulin 2.4 3.1 3.8 5.0 6.3

10. Anti-platelets 3.7 4.1 4.4 5.2 6.0Total, Top 10 77.8 87.7 86.7 89.5 93.7

Total US Market 247.3 270.3 280.5 285.7 300.3

Source: IMS Health Inc.


Although it faces challenges, the pharmaceutical industry is still among the world’s most profitable. The average return on sales for companies in the S&P Pharmaceuticals Index was 15.9% in 2008, versus a return of only 4.5% for the S&P Industrials Index. We note, however, that due to lack of new products, generic competition, and pricing constraints, the drug industry’s profitability has eroded in recent years (the net return on the S&P Pharmaceuticals Index was 18.7% in 2002). Historically, the industry has rejuvenated itself by developing premium-priced breakthrough therapies that have opened up entirely new markets.

HIGH RISK, HIGH REWARDS

Financially, drug manufacturing is a high-risk business: for every 5,000 compounds discovered, only one ever reaches the pharmacist’s shelf. The odds against making a profit are steep as well: fewer than a third of marketed drugs achieve enough commercial success to recoup their R&D investments. However, when a drugmaker launches a new compound that is widely accepted in the marketplace, the economic rewards can be immense. This is the primary reason for the industry’s hefty profit margins.

To optimize R&D efforts and achieve maximum returns, pharmaceutical companies spent much of the 1990s and early 2000s focusing on developing blockbuster products. The drug companies aggressively marketed these to primary care physicians, who prescribed them to broad patient populations. If, in contrast, the companies developed compounds with benefits similar to those of drugs already on the market (known as “me-too” drugs), they were not likely to be rewarded by the current cost-conscious managed care market. The model is slowly changing, as R&D efforts turn to drugs that are prescribed by specialist physicians and target narrower patient populations.

DRUGS’ PREDICTABLE LIFE CYCLES

Drugs have widely different development processes, but their product life cycle nearly always follows a stable, long-term pattern. In the US, after the average period of 10 years or more for discovery, development, testing, and approval by the US Food and Drug Administration (FDA), a branded ethical (prescription) drug will have a commercial life of about a decade. The life cycle is similar in Western Europe and Japan, the two other major areas of the world where the majority of new drug discovery and development take place.

Drugs usually require several years of sales build-up to reach their full commercial potential. Physicians have to become comfortable with the product and its approved application, while companies often continue conducting clinical trials that will enable them to receive FDA approval for additional indications.

In some cases, companies benefit as doctors start to use their drugs for off-label (or unapproved) indications; these sometimes represent a hefty proportion of a drug’s total revenues. Eventually, rival drugs similar in action may enter the market, or major customers may opt to replace the drug with less expensive compounds in the same therapeutic class. The latter tactic, referred to as “therapeutic substitution,” is especially popular with HMOs and other managed care companies.

REGULATION: FDA OVERSEES US MARKET

The Food and Drug Administration is responsible for regulatory oversight of the pharmaceuticals and medical technologies industries in the United States. The agency, which began operations in the mid-1800s, did not acquire even modest regulatory powers until 1906. Over time, in response to events, Congress has strengthened the FDA’s oversight.

A defining moment for pharmaceutical regulation and for the medical field in general came when Congress passed the Food, Drug, and Cosmetic Act of 1938. This landmark legislation outlined the framework for the pharmaceutical approval process in the United States. The law required, for the first time, that drugmakers submit evidence of a product’s safety based on clinical trials. It also required that a drug’s label state its contents, how it should be administered, and its possible side effects.


Following an outbreak in Europe of severe birth defects caused by thalidomide, Congress passed the Kefauver-Harris Drug Amendments of 1962 to require that manufacturers demonstrate both the safety and the efficacy of new drugs before receiving approval for commercial sale in the United States. In addition, this legislation required that drugs be produced according to specified guidelines for “good manufacturing practices” and that manufacturing plants be subject to FDA approval and periodic inspection.

The most significant drug legislation since then was the FDA Modernization Act of 1997, which sped the approval of new drugs for life-threatening illnesses and improved the overall efficiency of the FDA. The law also extended the popular Prescription Drug User Fee Act (PDUFA), a program initiated in 1992 that charges drugmakers a fee for filing new drug applications (NDAs). Because the funds were used to hire new FDA personnel, the program has been credited with significantly reducing new drug approval times.

The latest version of PDUFA, which Congress renewed in September 2007 as part of a broader law addressing FDA reforms, calls for user fees to generate nearly $400 million in revenues a year from fiscal 2008 through fiscal 2012, as well as an additional $225 million for drug safety monitoring programs. The 1997 law allowed seriously ill patients easier access to experimental compounds and provided new

incentives for the development of pediatric medicines. It also expanded the drug companies’ ability to disseminate information on off-label uses of new and existing drugs.

In 2005, following a series of high-profile studies showing that some popular drugs for arthritis (Vioxx) and depression (Effexor and the class of therapeutics known as selective serotonin reuptake inhibitors, or SSRIs) have potentially unacceptable side effects, the FDA began a series of initiatives to improve its drug safety evaluation processes. These initiatives included the establishment of an Office of Drug Safety (ODS), which is responsible for postmarketing surveillance and other drug safety issues. Nonetheless, critics, including some congressional leaders and FDA insiders, worried that the office would not be independent of the agency, and,

therefore, would not have the authority to bring problematic side effects to the agency’s attention once products are on the market.

How new drugs enter the US market As the principal federal agency responsible for enforcing US food and drug laws, the FDA regulates the introduction of new drugs. The agency also monitors the manufacture, transport, storage, and sale of all food, biologic, cosmetic, and medical device products in the United States.

The FDA requires that pharmaceutical manufacturers perform extensive testing to prove that their products are safe and effective before it will sanction commercial sale. All animal and human tests, which often last for years and cost many millions of dollars, are conducted by manufacturers, often in conjunction with colleges or universities, the National Institutes of Health (the medical research agency of the US Department of Health and Human Services), or similar research institutions. Legislation passed in September 2007 requires the FDA to keep track of severe adverse events and the safety and effectiveness of drugs that are already on the market.

Identifying and testing candidate drugs R&D is the lifeblood of the pharmaceutical industry. Drugmakers become industry leaders by spending large sums on R&D in order to produce a steady stream of successful products. Ethical pharmaceuticals are patent-protected for a finite number of years, however, so the pharmaceutical industry must continually find

Chart H02: FDA APPROVALS

FDA APPROVALS* (Number of drugs)

0

25

50

75

100

125

150

1994 95 96 97 98 99 00 01 02 03 04 05 06 07 08 2009

New Drug Applications (NDAs)

New Molecular Entities (NMEs)

*Includes tentative NDA approvals under the President's Emergency Plan for AIDS Relief, starting in 2007. Source: US Food & Drug Administration.


new drugs to ensure future growth. Companies with R&D programs that falter often end up struggling, particularly if they face generic competition for their key drugs. Some weakened companies have merged with larger, more successful companies in order to stay afloat. Those that come up with hit products prosper.

Searching for innovative products is difficult in almost any industry. It is especially challenging in the pharmaceuticals industry, because products come from highly complex fields, such as molecular biology and biochemistry, and involve the intricate workings of the human body. The quest for new pharmaceuticals must combine an understanding of complex human chemistry and physiology with knowledge of all life sciences. Intuitive acumen is also needed to form theories about new therapeutic modalities.

Working from a set of hypotheses on how certain compounds might interact in the body, researchers synthesize new compounds to combat particular diseases. Often, proteins, segments of proteins, or genes (isolated by molecular biologists) or new chemicals (discovered by analytical chemists) form the basis for new drugs.

Once candidate molecules are identified, they are studied in test tubes and in animals to determine their side effects, efficacy, and properties (such as how long the body takes to absorb them). Animal tests (usually on mice and rats) are conducted to determine any possible side effects and efficacy. Most of the candidates are eliminated at this stage, because they have unacceptable side effects or do not function as expected. Often, hundreds of compounds are tested before researchers find one promising enough to advance to human clinical trials. When such trials are indicated, a company must first submit an investigational new drug (IND) application to the FDA, informing the agency that human studies will start in 30 days unless it objects.

Since the mid-1980s, the industry’s R&D expenditures have risen sharply, both in dollar terms and as a percentage of total sales. The Pharmaceutical Research and Manufacturers of America (PhRMA), an industry trade group, estimated that industry investment in drug development by PhRMA members totaled an estimated $45.7 billion in 2009. Company-financed domestic R&D outlays by PhRMA member companies were estimated at 16.0% of US pharmaceutical sales in 2009, in line with the average over the past two decades. In contrast, the average US manufacturing firm spends less than 5% of sales on R&D.

The FDA requires drugs to undergo three phases of clinical testing on humans:

Phase I. In this phase, a small number of healthy people get moderate doses of the drug in order to test the drug’s safety, safe dosing range, and mechanism of action. If this initial test is successful, the subjects’ dosage is slowly increased to determine its safety at higher levels.

Phase II. During Phase II, a larger group of subjects, which have the disease or condition that the drug is intended to treat, is tested in placebo-controlled clinical trials. Phase II researchers look for efficacy and continue to study safety and optimal dosing.

Phase III. Drugs that pass the first two hurdles then undergo Phase III trials. At this level, the most complex and rigorous tests are performed on still larger groups of ill patients to ascertain the drug’s safety, effectiveness, and optimum dosage regimens. Usually, Phase III procedures employ randomized, double-blind studies with placebo control. This means that one group of patients is given the drug while another group receives an inert substance. Neither the patients nor their doctors are aware of which patients are actually receiving the drug being tested.

According to FDA estimates, of 20 drugs entering clinical testing, 13 to 14, on average, will successfully complete Phase I. Of those, about nine will finish Phase II, but only one or two are likely to survive the Phase III trials. Even after a drug successfully completes Phase III, there is the possibility that the FDA will deem the data insufficient for approval. Ultimately, only one of the original 20 may be approved for marketing.

When the clinical research on a drug is complete, the manufacturer submits an NDA to the FDA. The application compiles the research completed during the three trial phases and includes full details of the product’s formula, production, labeling, and intended use. NDAs are typically voluminous documents, sometimes exceeding 50,000 pages. Recently, many firms have taken advantage of the FDA’s new policy of accepting electronic filings via e-mail.


In recent years, the FDA has delayed approvals of an increasing number of NDAs by sending applicants “approvable” letters—requests for additional information. These requests, usually made for safety reasons, often delay the agency’s decisions for months to years, with the time period dependant on the complexity of the data sought. Following receipt of an approvable letter, manufacturers sometimes drop development of a product; others choose to invest additional resources in order to get the drug on the market.

In February 2008, Novartis AG’s Type 2 diabetes drug Galvus won marketing clearance from European health authorities, with liver monitoring requirements. In the US, however, Galvus has met obstacles. In February 2007, the FDA issued an approvable letter on the drug, but added that it would require additional trials of the drug in patients with kidney damage before it would consider approval. In January 2008, Novartis said the FDA was requesting a very large study, and that given the cost and uncertain outcome, the company decided to step back from the US for now and concentrate on developing a European market for Galvus. The absence of Galvus in the US has helped spur sales of Merck’s similar Januvia diabetes franchise, with sales that we expect to reach some $3.1 billion in 2010, up from $2.5 million in 2009.

In July 2007, the FDA sent Wyeth an approvable letter for Pristiq, a new drug indicated for menopause-associated hot flashes, because of concerns about serious cardiovascular and liver side effects. In this case, the agency also requested an additional clinical trial that will last a year or longer. In mid-March 2008, Wyeth withdrew its European Union (EU) application for Pristiq to treat menopausal symptoms, following risk-benefit questions raised by European regulators. However, Pristiq won FDA approval for depression in early March 2008.

After a drug is approved, manufacturers often submit supplemental NDAs containing additional clinical trial results, in order to obtain approval for additional indications. The FDA determines label content, which must include a detailed description of the drug and its chemical composition, indications, contraindications, and side effects.

Postmarket surveillance Traditionally, the FDA has required companies to conduct postmarket surveillance, though in reality few companies do so, despite recent interest in expanding such programs. Preclinical studies usually identify common toxicities, but postmarket surveillance can be important for picking up rare side effects or other unexpected developments, which are apparent only after the drug is widely used. Postmarket surveillance is sometimes referred to as Phase IV testing. In the past, companies often viewed postmarket studies as a marketing tool, using data generated from such studies to support new applications for expanded indications and improve their relationships with scientific leaders and patient groups.

In the past, the FDA rarely undertook measures against a drug for safety reasons once the drug was on the market. However, if the safety or efficacy of a drug already on the market was in question, the FDA could be more stringent: it could order a company to recall selected lots of a product, or, in a worst-case scenario, it could ask a manufacturer to withdraw a product from the market. These actions could result from adverse events, defective packaging, misleading labeling, failure to meet content uniformity tests, loss of sterility, subpotency, or lack of evidence of effectiveness.

The FDA’s attitude toward monitoring drugs already on the market has been evolving rapidly. Following the Vioxx scandal in 2004, the agency began placing a greater emphasis on postmarket drug safety. The Office of Drug Safety set up an independent Drug Safety Oversight Board (DSOB), consisting of scientific experts, although both the ODS and the DSOB have maintained low profiles to date.

The FDA also requires companies that undertake postmarket surveillance of certain drugs (either voluntarily or at the FDA’s request) to report on the progress of their commitments. The Food and Drug Administration Amendments Act of 2007 (FDAAA), signed into law in September 2007, requires manufacturers to work with the FDA to establish a risk management plan as part of the NDA process. Specifics of the plan are still being worked out, but it has the potential to significantly increase the value of Phase IV studies.


Exceptions for life-and-death situations Experimental drugs still in clinical trials are sometimes made available to seriously ill patients through the FDA’s Treatment IND program or its compassionate use protocol. The Treatment IND lets manufacturers provide unapproved drugs to patients who meet specific criteria if no other therapies are available. The compassionate use protocol enables patients with life-threatening diseases to have access to experimental drugs, provided Phase I trials have been completed, even if those patients are not part of the clinical trial. At least 40 drugs have been granted IND treatment status since this policy was enacted in 1987, many of which were for acquired immune deficiency syndrome (AIDS) or cancer.

In July 2007, the FDA and Novartis designed a Treatment IND program for Novartis’ drug Zelnorm, which treats irritable bowel syndrome in combination with constipation for women aged 55 or younger. The FDA agreed to give Zelnorm this status after it requested, for safety reasons, that Novartis suspend marketing of the drug to a broader population in March 2007.

New drugs targeting serious or life-threatening diseases that lack adequate treatments can also receive expedited review by the FDA under its Subpart E regulation. In this situation, the FDA can approve the drug based on results of a Phase II trial, although the manufacturer still must conduct a postapproval outcomes study. In recent years, several new breakthrough protease inhibitors for the treatment of human immunodeficiency virus (HIV) and AIDS were approved only a few months after their applications were filed. Novartis’s important drug Gleevec, for treating chronic myeloid leukemia, was also approved on an accelerated basis, based on results of three large Phase II studies.

Another piece of legislation designed to help both patients with rare diseases and the drug industry is the Orphan Drug Act. Enacted in 1983 to foster the development of drugs to treat diseases afflicting “small” populations (i.e., those with fewer than 200,000 patients), this law provides research grants, tax breaks, and exclusive marketing rights to manufacturers of drugs aimed at patient markets that would otherwise be too small to justify commercial development.

More than 300 drugs developed with help from the Orphan Drug Act are currently on the market, treating about 25 million Americans. Ironically, several orphan drugs—including Gleevec, GlaxoSmithKline’s Retrovir AZT AIDS drug, Amgen Inc.’s Epogen antianemia drug, and Genentech Inc.’s Protropin human growth hormone—subsequently became blockbuster products. The orphan drug Myozyme, which the FDA approved as the first-ever treatment for Pompe disease, a rare enzyme deficiency, was approved in 2006, and generated impressive sales of $325 million in 2009 and $296 million in 2008. In total, the FDA approved 17 orphan drugs in fiscal 2009, down from 13 in fiscal 2008.

REGULATION OUTSIDE THE UNITED STATES

The pharmaceutical industry is global; thus, a company seeking to maximize a drug’s potential files for its approval in many countries. Big pharmaceutical companies usually seek to get their products on the market in Europe, which is the world’s second largest pharmaceutical market.

Companies filing for regulatory approval in the EU can either apply through a centralized EU procedure that enables them to sell their approved products in all EU countries, or file on an individual country basis. The London-based European Medicines Agency (EMEA) reviews all applications submitted under the centralized process and recommends them to the European Commission, which grants final marketing authorization. Under EU rules, implemented in November 2005, the centralized process must be used for biologically derived therapies (those made from living cells) and for all medicines addressing certain therapeutic areas, such as cancer, AIDS, diabetes, and neurodegenerative diseases.

The alternative, known as the “mutual recognition” procedure, allows drugmakers with a medicinal product already approved in one EU country to petition other countries to accept the product. Should an EU country refuse to recognize the original country’s authorization, the matter is submitted to an EMEA scientific committee for arbitration.


In Japan, the Ministry of Health, Labor, and Welfare supervises new drug approvals. Although it is improving, the approval process moves much more slowly in Japan than in the United States and Europe. Many drugs do not reach the Japanese people until they have been on the market in Western countries for several years. Nevertheless, Japan, as the world’s third largest pharmaceutical market, remains important to US companies. The Japanese health ministry has publicly committed itself to reducing approval times, which is expected to strengthen Japan’s pharmaceutical companies.

PROHIBITIVE BARRIERS TO ENTRY

The branded prescription pharmaceutical industry has barriers to entry that are among the highest of any US industry. Economic, regulatory, and legal obstacles block potential new competitors. As noted earlier, the arduous processes of new drug discovery, development, and regulatory filing require heavy R&D expenditures. All told, development of a new drug can take 10 years or more, at a total cost of more than $800 million (a total that includes the costs of unsuccessful compounds).

To enable manufacturers to recoup these investments and earn a satisfactory rate of return, most developed nations entitle new drugs to patent protection. A patent can be issued either on a drug’s chemical structure (a composition patent, which is generally stronger) or on its method of manufacture or synthesis (process patent). Sometimes the patent offices grant a “use patent,” which lets the holder manufacture and market the compound for a specific therapeutic purpose and prevents competitors from using the drug in the same way; this kind of patent tends to be more vulnerable to competitors’ challenges in court.

Some countries are better than others at issuing and enforcing patents. The World Trade Organization (WTO), an international group set up in 1995 to establish rules for conducting international trade, requires members to recognize patents. Under WTO rules, new pharmaceutical patents extend for 20 years from the application date. The previous system granted protection for 17 years from the date of patent issuance. However, given the length of time it takes to bring a product from the application stage to market, patent protection for most products is effectively reduced to only eight to 10 years.

China, India, and other developing countries in Asia have been particularly notorious for ignoring foreign companies’ patents. Their attitude has harmed business relationships and angered countries (and companies) that do adhere to international patent laws. However, because they wanted to belong to the WTO, China and India have begun to officially recognize international patents: China has done so since 2001, and India has done so since the beginning of 2005. Their commitment to reform is important because US companies, under ever-greater pressure in the West, see these countries as potentially huge markets, with attractive demographics and rapidly expanding economies.

PRICING REFLECTS PRODUCT STRENGTHS, MARKET CHARACTERISTICS

Many factors affect the pricing of new pharmaceuticals. These include the relative efficacy and safety profile of a drug versus its rivals, the size of its market, the competition it faces, and its development costs. In the United States, breakthrough therapies treating life-threatening conditions can command premium prices, well above those for existing products. New drugs that are not significant improvements to existing alternatives are usually priced within parameters set by similar drugs already on the market. This paradigm differs from other parts of the world, where government price controls limit how much drugmakers can charge for their products.

Drug pricing varies widely among different classes of trade—that is, different kinds of payers. Large-scale buyers, such as hospital chains and other institutional customers, usually pay well below list price, because their huge volume purchases enable them to negotiate heavy discounts. Government organizations, such as the Department of Defense and the Department of Veterans Affairs, and programs such as Medicaid, for example, typically negotiate some of the steepest discounts for drugs. Wholesale distributors and pharmacy chains for the retail (or individual physician/patient) market, however, pay prices for drugs that are at the higher end of the scale.


Historically, drugmakers have raised prices to private customers to compensate for the discounts they give to managed care customers—a practice known as cost shifting. In recent years, several pharmacy chains and pharmacy trade associations have sued leading drug manufacturers, charging illegal price fixing and restraint of trade.

Medicaid, a US federal/state program that pays for medical services (including prescription drugs) for 55 million low-income patients, accounted for an indicated 9.1% of US drug sales in 2009, based on estimates made by the government’s Centers for Medicare & Medicaid Services (CMS). Under the current Medicaid rebate program, drugmakers are required to reimburse state Medicaid programs for either 22.1% of sales or the difference between prices charged to Medicaid and the best price the drugmaker offers a nongovernmental customer, whichever is higher. With the enactment of the Medicare Part D prescription drug coverage in 2005, most of the elderly indigent population whose drug costs were previously covered by Medicaid were shifted into Medicare Part D.

AFTER PATENTS EXPIRE COMES THE GENERIC STAGE

In the US, a prescription drug’s patent protects it for 20 years, but during more than half of that time, the drug is likely to be in development. Typically, patents expire eight to 10 years after a drug comes on the market. At that time, generic drugs—the chemical equivalents of a branded drug—usually appear immediately, and prices fall rapidly. Once this happens, the profitability of the branded drug generally erodes, particularly in the United States. (In contrast, in Japan and some European countries, generic drugs are only slightly less expensive than branded ones.)

Generic drug companies do not have the same high costs of R&D, tough regulatory approval, and sales and marketing as the proprietary companies, so they can afford to discount their products. Generics manufacturers set prices depending on the kind of molecule they are making, how easy it is to manufacture, and, most importantly, how many generic competitors they expect to face. When some easy-to-manufacture blockbuster drugs go off patent, half a dozen or more generic competitors may enter the market simultaneously at prices that are as much as 80% or more below brand pricing. In less competitive situations, involving drugs that maintain some barrier to entry (such as special manufacturing skills) or those that have exclusivity for a limited time post-launch (see the “Hatch-Waxman Act” in the following text), fewer competitors come into the market at the same time, and pricing, at least initially, is more stable. As more competitors enter the field, prices drop even further.

The Hatch-Waxman Act The modern generics drug industry originated largely as a result of the enactment of the Drug Price Competition and Patent Term Restoration Act of 1984 (commonly known as the Hatch-Waxman Act). This watershed legislation simplified the generic drug approval process by allowing new generics to be filed under an expedited format called the abbreviated new drug application (ANDA). This filing format requires only that new generics demonstrate their bioequivalence to the branded drugs they replace, rather than undergo the rigorous clinical trials required for original products.

An amendment to the Hatch-Waxman Act provided for 180 days of marketing exclusivity for the first generic to file for FDA approval and challenge in court the patent of a branded drug. This provision is the source of much tension between brand name and generics manufacturers. A generics company can launch its product without interference from other generics companies as soon as it receives FDA approval. However, if a company launches a drug before the innovator’s patent expires or is invalidated, it runs the risk of paying treble damages (three times sales) in the event that a court upholds the patent. Until 2005, the threat of paying large amounts of damages deterred nearly all generics companies from launching copies of an innovative drug until either a high court declared a patent invalid or the patent expired on schedule.

In recent years, however, many generic firms have become more aggressive, and commenced “at risk” launches—i.e., before receiving a final court ruling invalidating a patent. An example of this was Teva Pharmaceutical Industries Ltd.’s launch of a generic version of Wyeth’s popular Protonix heartburn medication in December 2007. We think companies now are more willing to undertake at-risk launches because they believe they are more likely to prevail in patent litigation, based on a number of favorable


decisions in recent years. To date, no generics company that has launched a product at-risk has had to pay treble damages. Often, companies take an at-risk launch after lower courts ruled against the brand-name company. However, this is not always the case, as happened with Teva’s Protonix launch.

In August 2006, the subtleties of the “launch-at-risk” strategy were highlighted in an unusual situation in which Apotex Inc., a Canadian generics company, commercialized a generic copy of Plavix, a best-selling anticoagulant developed by French drugmaker Sanofi-Aventis, before the drug’s patent expired. Apotex was not worried about the consequences of such a maneuver because Bristol-Myers Squibb Co., which markets the drug in the US, and Sanofi-Aventis had previously agreed that they would not seek a hefty penalty if Apotex were to undertake such a maneuver. (The complicated motivation for this strange agreement is described in detail in the November 2006 issue of Healthcare: Pharmaceuticals Industry Survey.) Nonetheless, Bristol-Myers Squibb and Sanofi-Aventis were able to stop Apotex after several weeks, but not before Apotex flooded retailers’ shelves with its generic, which caused Sanofi-Aventis and Bristol-Myers Squibb to lose hundreds of millions of dollars in sales.

In June 2007, a US district court upheld the validity of the main Plavix patent—a decision immediately appealed by Apotex. Industry experts believe the lower-court ruling all but ensures that Plavix is protected until its patent expiration in November 2011. In December 2008, an appeals court upheld Bristol’s Plavix patent. We believe Apotex will have to pay damages, but they will probably not be substantial due to the agreement signed in 2006 by Apotex, Sanofi-Aventis, and Bristol-Myers Squibb.

In September 2007, an appeals court decision involving Neurontin, Pfizer’s best-selling antiepilepsy drug, left several generics manufacturers vulnerable to hefty fines. The court overturned a lower court decision, from 2005, in favor of the generics companies, and it ordered a trial to determine if the companies are infringing Pfizer’s formulation patent covering gabapentin, the active ingredient in Neurontin. This case, which is still pending, stands out because the generics companies took a greater-than-average risk by launching their products in 2004—before the lower court had made a ruling. While some on Wall Street are predicting that a Pfizer victory is a long shot, the penalties (in case Pfizer wins) could be large because the drug is popular—it generated about $2 billion in sales in 2004—and because generics have been on the market since then.

For a generics manufacturer, the advantages of having six months of exclusivity are enormous. Because competition is limited, the generics supplier has to offer only a slight discount to the branded drug; in many cases, this enables the generics company to rack up hefty profits. Without the 180-day exclusivity, the company would likely face a price-sensitive, highly competitive market for that product.

To compensate the branded drug industry for greater competition from generics, the Hatch-Waxman Act granted patent extensions for branded products. An additional five years of protection was granted to new chemical entities, and three more years were given to new approved formulations or new uses for existing drugs. New formulations often encompass controlled-release or pediatric versions of the branded drugs. Sustained- or controlled-release dosing typically provides greater efficacy, fewer side effects, and patient compliance benefits.

The Medicare Prescription Drug Improvement and Modernization Act of 2003, best known for expanding Medicare coverage to prescription drugs for the first time, significantly modified the Hatch-Waxman Act. The new rules affected the expenditure of money—from tens of millions to hundreds of millions of dollars—as they clarified confusion over which generics companies are entitled to exclusivity if several companies appear to be eligible at the same time, and if the start dates of the exclusivity period appear to be uncertain.

The FDA approved 682 generics in fiscal 2007, a 30% year-on-year increase. The rapid rise in applications led to a huge backlog of new approval applications; the FDA estimated that more than 850 generic applications were filed in fiscal 2008. Some 91 first-time generics were approved in 2008. In response to the backlog, the agency plans to speed up the review process.

A new Generic Initiative for Value and Efficiency (GIVE) program was launched in October 2007. This program uses additional funding from the FDAAA to add more trained reviewers and revamp the way that the agency prioritizes applications. Instead of basing reviews on order of submission, it looks at reviews


based on patent expiration date: those targeting brand-name drugs with patents close to expiration will get priority over those that are directed at drugs with patents expiring later.

Going over-the-counter In the US, innovator companies sometimes apply to the FDA for permission to switch a prescription product to over-the-counter (OTC), or nonprescription, status, if they expect that product will shortly face generic competition. Marketing an OTC version of a drug broadens the drug’s commercial appeal and extends its economic life. The strategy works best for popular products used for common, minor maladies. Only the original manufacturer—or a licensee—can market the product under that franchise. Other companies may sell the product on a private-label basis once the product’s patents expire. About 60% of all drugs sold in the US are OTC, according to IHS Global Insight, an economic, financial, and political forecaster.

OTC products face more straightforward, free-market forces of supply and demand than do prescription pharmaceuticals, whose pricing that is affected by heavy discounting to third-party providers and government agencies. Consumers’ sensitivity to prices is also greater with OTC products, because they usually pay for OTC drugs out-of-pocket, and most insurance plans do not reimburse for OTC drugs. These drugs are free from the time-consuming, safety-related recordkeeping that the FDA requires for prescription products.

Compared with the prescription products that they replace, products switched to OTC status have lower margins. However, because OTC drugs are mass-marketed products, manufacturers often make up the difference in volume. In addition, popular consumer medications can have long shelf lives; this bolsters margins by minimizing waste.

Some of the more successful prescription-to-OTC switches in recent years include Schering-Plough Corp.’s Claritin (a nonsedating antihistamine); Merck’s Pepcid and GlaxoSmithKline’s Zantac 75 (heartburn remedies); Schering-Plough’s Gyne-Lotrimin and Johnson & Johnson’s Monistat 7 (vaginal yeast infection treatments); Johnson & Johnson’s Imodium A-D (antidiarrhea medicine); and The Procter & Gamble Co.’s Aleve, Wyeth’s Advil, and Bristol-Myers Squibb’s Nuprin (analgesics). AstraZeneca Plc’s best-selling heartburn drug Prilosec also went OTC in 2001.

In June 2007, the first OTC diet pill, Alli, went on the market in the US. GlaxoSmithKline’s Consumer Health business is selling the drug, which is a low-dose version of Xenical, a prescription diet drug made and sold globally by Roche Holding Ltd. GlaxoSmithKline received FDA approval for the drug in February 2007, after considerable debate. Xenical, which reduces the amount of fat the body absorbs from food, is effective in weight loss only if used with diet and exercise.

LIABILITY ISSUES

Inevitably, pharmaceutical companies are subject to lawsuits alleging adverse side effects from their medications. Some product liability cases are consolidated into class-action suits. A.H. Robins, a once-large pharmaceutical and medical products company, was driven into bankruptcy in 1985 by huge liabilities stemming from its sale of intrauterine contraceptive devices that were later deemed unsafe.

Wyeth was the target of thousands of lawsuits following the recalls in 1997 of its diet drugs Redux and Pondimin. Pondimin (generically known as fenfluramine) is the “fen” part of the now-banned “fen-phen” weight-loss cocktail. As the end of 2007, more than 99% of plaintiffs had agreed to enter into settlement discussions with the company, which had taken charges of $21.1 billion (as of year-end 2007) in order to pay for a trust fund, litigation, and other costs associated with the diet drug litigation.

In November 2007, Merck agreed to pay $4.85 billion to plaintiffs who contend that they suffered heart attacks and strokes after taking the company’s painkiller Vioxx. The settlement would cover federal and state lawsuits filed against the company since 2004 alleging adverse cardiac events that resulted from taking Vioxx. (Merck pulled Vioxx from the market in September 2004.) In July 2008, Merck noted that this settlement, which also applies to tolled claims, was signed by the parties after several meetings with three of the four judges overseeing the coordination of more than 95% of the US lawsuits. In terms of claimants, some 48,500


of approximately 50,000 individuals who registered eligible injuries had submitted some or all of the materials required for enrollment in the settlement program as of mid-July 2008.

Product liability and insurance coverage for potential damages are increasingly important issues in the industry. Liability risk is often mentioned as a growing cost within the healthcare system. There have been many calls for legislative reform to address this, including proposals to limit a manufacturer’s liability if the FDA has approved a drug or device.

KEY INDUSTRY RATIOS AND STATISTICS

National healthcare expenditures. Annual estimates of all healthcare spending in the United States are released by the Centers for Medicare & Medicaid Services (CMS) each January. The data are structured according to the type of expenditure, including such categories as hospital care, physician care, and drugs and other medical nondurables. The annual report, entitled Health, United States, includes detailed information on the sources of funds for each segment. A summary of this report also appears in each January/February issue of the policy journal Health Affairs.

Total domestic expenditures for prescription drugs were roughly $234.1 billion in 2008. According to the latest available data from the CMS, expenditures for 2009 were estimated at $246.3 billion.

Changes in funding from government and private sources are important to observe. For example, federal, state, and local government funding represented some 37% of US spending on pharmaceuticals in 2008 (mostly from Medicare), compared with about 17% in 1990. The implementation in January 2006 of Medicare Part D, which extended Medicare coverage to outpatient retail pharmacy prescription drugs, was the key factor behind the increased proportion of government funding. In May 2009, Medicare’s board of trustees estimated the cost of Part D to exceed $900 billion over the 2009–18 period. Medicare paid for 22% of all US prescription drug costs in 2008, up from 18% in 2006. All government sources accounted for 37% of all the money spent on all prescription drugs in 2008, including programs under Medicare, Medicaid, and the Department of Veterans Affairs.

Health, United States publishes statistics showing rates of change in total healthcare spending and by segment. Proportional changes in pharmaceutical spending can be measured against other healthcare sectors to determine the industry’s relative growth.

Between 1990 and 2003, spending on prescription drugs grew at an average annual rate of 12.4%, outpacing the 7.0% rate of growth for overall healthcare spending. CMS data show that prescription drug spending in 2006 rose 8.5%, largely reflecting the phase-in of Medicare Part D. However, drug spending growth slowed to 3.2% in 2008. We attribute the attrition partly to the effects of the recession in the US and patent expirations.

A dearth of new drugs—combined with generic competition for several popular brands, a slowdown in price increases, and more stringent measures by managed care organizations to migrate members to cheaper generic drugs—has helped to keep a brake on rising drug costs, according to the Center for Studying Health System Change, a research group.

Medicare and Medicaid spending. Changes in government spending and reimbursement rates can have significant ramifications for drugmakers that derive sizable sales from Medicare or Medicaid patients. The CMS provides information on spending and reimbursement rates for Medicaid and Medicare.

According to CMS data, aggregate spending for Medicare was $469 billion in 2008, up from $432 billion in 2007, equal to over 42% of all public funding. Medicaid expenditures in 2008 were $344 billion, up from $329 billion in 2007. The implementation of the Medicare drug benefit that began in January 2006 caused a decline in Medicaid spending on drugs in 2006, and a parallel rise in total Medicare spending in that year. Indigent elderly who were previously eligible for Medicaid reimbursement for prescription drugs—about 6.5


million people—are now part of the Medicare Part D program. In general, this is an advantage for the pharmaceutical industry, because Medicare pays higher prices for drugs than Medicaid.

Consumer price index (CPI). The CPI, compiled by the US Department of Labor, tracks price inflation in key segments of the economy, including medical care. The medical care component is further subdivided into products and services, with prescription and nonprescription drug statistics broken down separately.

During the 1980s, prescription drug prices surged at an average annual rate of 9.6%, compared with a 4.1% rate for the CPI. By the early 1990s, excessive drug cost inflation began to receive heightened political attention, and leading drugmakers feared price controls. Although prices continued to outpace the CPI, the pace of inflation slowed in the 1990s.

Between 1990 and 2003, prescription drug prices increased at an average annual rate of 3.9%, compared with a 2.4% rise in the CPI. In 2009, they increased at an annual rate of 3.4%, matching a rise in the overall medical inflation rate for the same period, according to the Bureau of Labor Statistics. These rates included

generics, which are a growing part of consumption but weigh down the average because they cost a fraction of the price of innovative drugs.

Research and development (R&D) as a percentage of sales. As new drugs represent the lifeblood of the pharmaceutical industry, the percentage of a company’s sales that it devotes to R&D can have an important impact on future trends in sales and earnings. For the drug industry overall, this percentage in the aggregate is higher than for any other industry. The Pharmaceutical Research and Manufacturers of America, an industry trade group, reported that R&D spending by members, both in the US and abroad, totaled an estimated $45.8 billion in 2009, down from $47.4 billion (revised) in 2008.

Foreign currency exchange. US drugmakers derive close to two-fifths of their total sales from non-US customers. They carefully monitor fluctuations in the value of the dollar relative to foreign currencies, as such changes can have a substantial impact on their sales and earnings. Assuming all other variables remain constant, a rise in the dollar’s value (compared with other major world currencies) lowers sales and earnings, because foreign sales translate into fewer dollars. A stronger dollar also makes US goods more expensive abroad, while products manufactured elsewhere become more competitive in the United States. When the dollar is weak, the opposite occurs: exchange rates enhance drugmakers’ sales and earnings, and price competitiveness improves.

The dollar experienced a general advance against the euro through the first half of 2010, but tended to show more uneven patterns during the third quarter. The dollar-to-yen relationship also showed a similar pattern to euro/dollar movements during the first nine months of 2010.

H01: CPI for Drugs

Table B01: PRODUCER PRICE INDEXES FOR SELECTED PRESCRIPTION DRUG PRODUCTS

CONSUMER PRICE INDEXES—DRUGS (1982-84=100)

100

150

200

250

300

350

400

450

1995 96 97 98 99 00 01 02 03 04 05 06 07 08 09 2010

All items Prescription drugs OTC preparations

OTC-Over the counter.Source: Bureau of Labor Statistics.

PRODUCER PRICE INDEXES FORSELECTED PRESCRIPTION DRUG PRODUCTS(2001=100)

PRODUCT 2005 2006 2007 2008 2009 2010*

Cancer therapy 115.5 119.5 118.3 118.2 120.1 118.0Analgesics† 108.1 110.3 113.0 118.7 126.9 136.4Cardiovasculars 119.5 123.0 125.4 133.2 142.4 157.9Bronchial therapy 118.9 121.1 123.7 129.1 135.8 146.7Digestive antispasmodic/

antisecretories 118.7 127.2 134.8 142.6 151.5 160.9Broad & medium spectrum

antibiotics 119.5 126.4 134.6 142.2 144.9 145.4

*Through September. †Contains prescription and non-prescription analgesics.Sources: US Department of Labor; Standard & Poor's.


HOW TO ANALYZE A PHARMACEUTICAL COMPANY

In evaluating a pharmaceutical company, there are important factors to consider. The most meaningful factors are its products, markets, and financial health.

RESEARCHING THE BUSINESS

A thorough examination of the company’s products and markets is the first step in the analysis. A pharmaceutical firm’s drug portfolio is the main ingredient of its success.

Does the company sell primarily prescription or nonprescription products? Prices and profit margins of prescription drugs are significantly higher than those of nonprescription drugs, which are essentially mass-marketed consumer products. Patent protection is an important consideration for prescription drugs, whereas the success of nonprescription or over-the-counter (OTC) drugs is more closely linked to brand-name recognition and promotional spending levels.

For both prescription and nonprescription drugmakers, company size and market share are important considerations. Pharmaceutical firms must have the critical mass to support heavy spending on research and development (R&D), as new product development is crucial to future success. In addition, these companies have to maintain a large sales force to market drugs in key domestic and foreign markets. Smaller drug companies, and even larger ones that depend heavily on one or two products, are more vulnerable to eventual patent expirations and competition from rival drugs.

With respect to market share, does the company dominate any key markets? Key markets are those with a large population whose chronic condition requires a daily regimen of maintenance therapy, thus offering the greatest sales opportunities. Medications for high blood pressure, elevated cholesterol levels, depression, ulcers, diabetes, and arthritis are examples. Oncology, once a niche therapeutic segment, is now exceedingly attractive because of its technological advances, growth rate, and profitability.

Prescription and nonprescription drug companies vary widely by the type of pharmaceuticals they offer and the markets that they serve. Does the company have a narrow or a broad product line? A broad product line is more desirable because greater diversification makes the company less dependent on a single product. It also makes the company more resilient to economic cycles and competition.

Prescription drugmakers, however, focus their product development and marketing efforts on select therapeutic areas. For many decades, Wyeth (formerly American Home Products) has dominated the female hormone replacement market with its Premarin family of products, while Pfizer Inc. has captured the lead in the growing cholesterol-reduction market with its popular drug Lipitor. Sometimes drugmakers create new markets with their discoveries, such as Pfizer’s Viagra treatment for erectile dysfunction and Merck & Co. Inc.’s Proscar treatment for enlarged prostate glands. Launched in 2006, Merck’s Gardasil vaccine for preventing infection with human papillomavirus (HPV)—believed to be the main cause of cervical cancer—has the potential to build a new market, in our opinion.

Nonprescription drugmakers do not have to fund major R&D projects, but they must maintain large advertising budgets to promote their products, which tend to face more competition than branded prescription drugs. As a result, most of the major firms have just a handful of truly successful product lines. Sales growth is slow for these businesses, with success highly dependent on the manufacturer’s clout in the marketplace and overall market share.

If a prescription drugmaker has a diversification or acquisition program, has this been a plus or a minus? The program should be carefully analyzed to determine whether its initial objectives are being met or whether the program is hurting the company’s performance. In general, large pharmaceutical companies regularly turn to smaller, more entrepreneurial companies as sources of innovation. Business development—the process of scouting for attractive deals and negotiating terms—is an integral part of a company’s operating expertise and core strategy.


Prescription drugmakers As noted earlier, most major prescription drugmakers tend to focus on a few specific therapeutic markets. Pfizer and Merck, for example, have carved out major stakes in the huge global antihypertensive and cholesterol-lowering drug markets by releasing a steady stream of new products in recent years. Eli Lilly & Co. achieved phenomenal success in antidepressants with Prozac, which dominated the market for more than a decade until 2000, when it was overtaken by Pfizer’s Zoloft. Eli Lilly’s sales of Prozac eroded sharply following the loss of patent protection in August 2001. GlaxoSmithKline Plc has maintained dominance in respiratory drugs with its Advair and Flovent drugs.

In a healthcare market dominated by managed care, a company’s relative size and the breadth of its product offerings have become increasingly important. Health maintenance organizations, preferred provider organizations, hospital chains, and other large-scale pharmaceutical purchasers prefer to deal with a limited number of large drug manufacturers that can offer them “one-stop shopping.”

There are other factors when analyzing a prescription drugmaker. Questions to ask include the following:

When do the patents on the company’s most important drugs expire? If the expiration dates are within the next few years, is the company adequately preparing to make up for the revenues lost to generics competition? If a company loses its marketing exclusivity on key drugs without earning adequate profits from new products, it can find itself in difficult economic straits. Many of the leading US drugmakers, including Bristol-Myers Squibb Co., Merck, and Pfizer, are presently contending with fierce generics competition, with a wave of major drugs going off patent through 2011.

Have R&D efforts been productive? In terms of R&D, the larger, well-funded firms typically have the advantage of being able to hire top scientists and to conduct more clinical trials, which are necessary to develop new drugs. Most leading drugmakers spend between 14% and 18% of their revenues on R&D. However, their success rates—in terms of lucrative new drugs—differ markedly. In addition, R&D productivity can be cyclical, with firms that generated a series of significant new products experiencing troughs before rebounding. In the 1990s, Merck and Pfizer had highly productive R&D programs, each spawning a number of blockbuster drugs.

More recently, we think Merck has rejuvenated its pipeline with the launch of blockbusters such as Gardasil, and Januvia, a promising new treatment for Type 2 diabetes. Pfizer also launched several promising drugs such as Lyrica for neuropathic pain and Chantix for smoking cessation. However, we think both Pfizer and Merck face steep patent challenges at the beginning of the next decade. Specifically, Merck’s Cozaar/Hyzaar cardiovascular (sales of $3.6 billion in 2009), lost patent protection in 2010, and Pfizer’s Lipitor cholesterol-lowering agent (sales of $11.4 billion in 2009) will lose patent protection in 2011.

In the present managed care environment, companies with new drugs that are both therapeutic breakthroughs and cost effective hold the keys to success. New products that provide essentially identical results to existing therapies are less likely to reap big commercial rewards.

Has the company formed any promising alliances? Large firms often benefit from alliances with smaller biotechnology and biopharmaceutical firms working on potentially lucrative new drugs. Conversely, a smaller company may find it necessary to team up with a larger partner to fund the clinical trials and commercialization of its discoveries.

Business ventures with foreign companies can be a source of new products. For example, many drugs popular in the United States today were discovered by European and Japanese firms, but they are marketed by US drugmakers under royalty arrangements. Pfizer’s Lipitor drug is sold under license from Sankyo Co. Ltd. of Japan.

Many companies also maintain relationships with scientists at leading medical colleges or other organizations, such as the federal government’s National Institutes of Health (NIH), which can funnel experimental products to drugmakers. Bristol-Myers Squibb and GlaxoSmithKline, for example, have obtained major new drugs from these sources.


What is the company’s international business profile? The United States remains the most important market for US drugmakers, as well as for many foreign drug companies, because of its size and lack of government-imposed price constraints. Nonetheless, pharmaceutical markets elsewhere represent an attractive source of growth. Indeed, pharmaceutical sales in developing nations are expanding much faster than are those in the domestic market.

Although the level of foreign business varies from company to company, the US pharmaceuticals industry currently derives about two-fifths of its revenues from sales outside the United States. Because many countries exercise strict price controls, foreign markets contribute a lower portion of profits than of sales.

Which foreign markets has the company entered or does it plan to enter? Drugmakers should evaluate foreign markets carefully with respect to their individual risks and profit potential. In addition, it is important to assess the possible impact of changes in currency exchange rates.

How diversified is the firm’s foreign business? Foreign markets differ widely by level of pharmaceutical utilization, degree of government control over pricing, and the acceptance of clinical research from outside sources. Japan, for example, with the highest per capita consumption of prescription drugs in the world, is the largest single market outside the United States. However, the Japanese government generally requires across-the-board drug price cuts every few years.

How effective is the company in working with the FDA? Because all drugs sold in the United States must first be cleared by the US Food and Drug Administration (FDA), a firm must be able to work with the agency and understand its criteria. Here again, size and experience can help. Most large, well-established drug companies are adept at working with the agency, while many smaller or newer firms are less proficient and often encounter major snags in obtaining approval for their products.

Besides new drug applications, the FDA also inspects and monitors pharmaceutical plants for product integrity and quality control. (Several generic drugmakers ran into problems in this area a number of years ago.) In addition, the agency is expanding its role in postmarket surveillance of drug safety.

How effective is the company at working with third-party government and private payers? Reimbursement is crucial for the commercial success of a product. Private and public payers alike are taking an increasingly hard line in evaluating the cost effectiveness of recently approved drugs. In Europe, several governments have established semi-independent organizations to make recommendations on whether a new drug should be reimbursed—and in some controversial cases, they have argued against coverage. The United States has not taken this approach, although it is considering the establishment of a reimbursement evaluation organization. US payers are increasingly differentiating drugs within the same class and placing them in separate tiers, with varying contributions from patients, aimed at giving patients incentives to use certain drugs. The ability to negotiate fair deals with Medicare over reimbursement for prescription drugs is also likely to be increasingly important to drug companies in the future.

Nonprescription drugmakers While the prescription drug market depends on research-intensive innovation to differentiate among products and bolster sales, the nonprescription segment depends much more on consumer-directed marketing. The main factors that must be considered in evaluating a nonprescription drug company include the relative strength of its product offerings, its ability to develop new products, competitive pressures in each market segment, and the manufacturer’s ability to support product sales through effective advertising and promotional campaigns.

Companies with a strong presence in both prescription and nonprescription sectors typically generate the most successful OTC products, because most of the leading OTC medications on the market today started their lives as ethical, or prescription, drugs. Nonprescription drugmakers strive to cultivate broad consumer loyalty. For example, Johnson & Johnson’s Tylenol, launched as an OTC product in 1955, remains the best-selling nonprescription product in the US. This highly regarded analgesic has successfully fought off rival painkillers and cheaper private-label acetaminophen products, thanks to effective advertising that has built unmatched


brand loyalty. The product has even survived recalls due to tampered packaging and reports of possible liver damage from overdosing or adverse reactions when combined with alcohol.

Strong recognition for an original brand also gives the manufacturer an ability to expand sales through line extensions. Leading OTC products, such as Tylenol, Advil, Bayer, and Motrin, have successfully broadened their consumer appeal through the addition of specialized formulations for children, combinations with other products, and extra-strength versions.

ANALYZING FINANCIAL STATEMENTS

Once the analyst has reviewed a company’s products and markets, a look at its financial statements is in order. The income statement contains some key figures and ratios (described below). Balance sheet and cash flow data provide further insight into a company’s financial position and performance. Individual company statistics should be compared with those of rival companies and industry averages.

The income statement When looking at a pharmaceutical company’s income statement, it is important to examine trends in sales growth; profit margins; R&D and selling, general, and administrative (SG&A) expenses; and return on equity.

What are the company’s sales trends? Examine the company’s recent and historical sales performance. Has sales growth been consistent or volatile? How has growth been achieved: through volume, pricing, acquisitions, or through a combination of these?

How wide are operating margins? Drug companies characteristically have high operating profit margins (operating earnings before depreciation and nonoperating items as a percentage of sales). Margins have contracted from their highs of about 40% in the early 1990s, due to reduced pricing flexibility. However, drug margins still exceed overall averages in other industries by a wide margin, averaging 32% in 2008, versus 17% for corporations in the S&P 500 Composite Stock index.

The high margins reflect drugmakers’ very low raw material costs and SG&A expenses per dollar of sales that are less than average. Although substantial costs are incurred during a drug’s R&D phase, once those costs have been covered, most revenues flow to the bottom line. Companies that can consistently develop value-added, widely used drugs with long lives can command margins well above the industry average.

It is important to note that companies can temporarily pump up margins by crimping R&D spending. While this tactic can provide short-term earnings improvement, it also undermines a drugmaker’s ability to develop the new products needed to support future growth.

Changes in a company’s margins over a period of years can reveal management’s effectiveness in improving the company’s profitability. Restructuring and cost-streamlining efforts often can play a major role in boosting a company’s profit margins.

What are the company’s pretax and net returns? Drug industry pretax and net income returns have historically been above the averages in other industries. While the gap narrowed in recent years, as pharma margins contracted under more constrained managed care pricing and as patents expired, pharmaceutical margins still exceed the overall healthcare industry by a wide margin. Drugmakers’ net earnings as a percentage of sales averaged about 16% between 2004 and 2008, versus an average of 6.4% for the S&P 500 over the same period.

The drug business is less capital intensive than most other industries, and it tends to have lower interest expense and depreciation as a percentage of sales. Drugmakers’ profit margins also have been augmented by lower tax rates, R&D credits, and tax credits from manufacturing operations in Ireland and other areas. Lower-than-average drug industry tax rates also reflect the large portion of sales derived from countries with tax rates below those of the United States. Past tax credits from manufacturing operations in Puerto Rico now have been largely eliminated.


A company’s geographic business mix should be examined to determine how its blended tax rate compares with others in the industry. But before comparing different companies’ net returns, make sure that the reported results are truly comparable. Although current accounting standards require that discontinued operations be segmented out, nonrecurring items (such as restructuring charges, asset sales gains, foreign exchange gains and losses, and similar nonoperating items) are often buried in the category of “other income/expenses” and must be factored out when making comparisons. Accounting practices also vary for inventory and depreciation.

What is the return on stockholders’ equity? Return on equity (ROE), or net earnings as a percentage of average stockholders’ equity, is viewed as a key measure of management’s effectiveness in the pharmaceutical industry. The drug industry’s average ROE of 19% between 2004 and 2008 ranked among the highest of all industries. The lofty ratio is essentially a function of the industry’s relatively high profit margins. The comparable level for the S&P 500 was 12%.

Cash flow Another way of looking at profits is cash flow—essentially, net earnings plus depreciation and other noncash charges. It provides a useful gauge of a company’s capacity to finance capital projects. Cash flow as a percentage of sales for drugmakers is close to 23%, almost double the average percentage for US industrial companies.

The source and application of funds statement shows how a company allocates its cash flow, which is often a leading indicator of future growth. Firms investing heavily in acquisitions and capital projects are preparing to expand the business. Those paying out more in dividends are rewarding investors but retaining less cash for future growth.

Balance sheet The balance sheet is a snapshot of a company’s financial condition at a specific moment in time, so it should be examined to determine a company’s financial health. For pharmaceutical companies, most balance sheet analysis focuses on liquidity. To assess a company’s short-term liquidity, analysts look at its level of cash and marketable securities. Companies with large liquid assets also are better situated to make timely acquisitions.

A reliable check for liquidity is the current ratio, which measures the ratio of current assets to current liabilities. A healthy working capital ratio is essential to ensure that the company can adequately meet its current liabilities. This ratio always should be greater than 1.0. Any meaningful degradation in these items from previous reporting periods may signal a liquidity problem.

Debt leverage varies significantly among drugmakers. An appropriate debt load largely depends on a drug company’s product line and the strength of its projected new product stream. The ratio of long-term debt to total capital from 2004 to 2008 was 21%, less than half the average for US industrial companies.

VALUATION MEASURES

Investors typically use various valuation metrics to help them determine a stock’s worth. Common measurements usually include multiples of key income statement entries such as sales, earnings and EBITDA, often in ratios combined with past or future growth rates. Valuations can also encompass a number of balance sheet metrics, such as return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC). While these metrics can be very useful, one must also take into account that stock valuations are also influenced by various external factors, such as investor sentiment on stocks in general, competition from bonds and other investments, industry conditions, and other considerations.

Along with other industrial sectors, the price/earnings (P/E) ratio—the stock price divided by either the latest four quarters of earnings per share (EPS), or by the projected forward four quarters of EPS—is typically the most commonly used valuation method. This ratio is useful in evaluating a company’s performance relative to other firms in the same industry, as well as to companies in other sectors.


Over much of the past decade, drug stocks commanded above-average P/E ratios, largely reflecting above-average growth rates and high profit margins driven by blockbuster drugs. In more recent years, however, P/E multiples in the branded pharmaceutical space have contracted significantly, as generics began to grab the market share of products whose patents have expired. In addition, the sector has also been hurt by a tougher global pricing environment, reflecting efforts by governments and other third-party payers to save money by curtailing utilization and reducing prices of high-priced branded drugs.

A variant of the P/E ratio is the P/E to growth or PEG ratio, which aims to improve on the simple P/E by adjusting it to a company’s past or future growth rate. A company’s PEG is then examined with peer PEGs to determine if a stock is undervalued or overvalued. A lower than average PEG may identify undervalued stocks, while higher than average PEGs often indicates the reverse.

Another key valuation metric applied widely with pharmaceutical stocks is discounted cash flow (DCF) analysis. This tool models projections of a company’s future cash flows, discounted by a weighted average cost of capital to derive at a per share present value for any given firm. If the calculated per share DCF value is higher than the current stock price, the stock may be an undervalued investment opportunity.

Similar to DCF analysis, another tool commonly used in analyzing pharmaceutical and biotechnology companies is net present value (NPV) analysis. This metric is often specifically used to determine the value of a company’s new drug R&D pipeline. NPV and DCF analyses may also play a key role in selecting potential acquisition opportunities.


GLOSSARY

180-day exclusivity—A generics company that is the first to file a completed abbreviated new drug application (ANDA) that contains a challenge to the patent of the brand-name drug gets 180 days of exclusivity; that is, only that generics company is allowed to market the generic product for six months following the expiration of the branded drug’s patent. In some cases, two generics companies share exclusivity if they filed patent challenges for different doses. The maker of the brand-name drug also has the right to market an "authorized generic" following patent expiration. (See Authorized generic.)

Abbreviated new drug application (ANDA)—The application filed for approval of generic drugs by the US Food and Drug Administration (FDA). ANDAs require substantially less information than do new drug applications (NDAs) for prescription drugs, because applicants have to prove only that their products are identical (bioequivalent) to the brand products. (See Bioequivalence.)

Active pharmaceutical ingredient (API)—A component of a drug that provides pharmacological activity and is important to the product’s efficacy. The ability to get access to cheap, reliable APIs is an important competitive advantage for generics companies that do not make their own APIs.

Agonist—A drug that promotes certain kinds of cellular activity by binding to a cell’s receptor.

Amino acids—The building blocks of proteins. Amino acids include alanine, aspartic acid, glutamic acid, and additional compounds.

Anesthetic—A drug used to induce unconsciousness or to numb a local area of the body.

Antagonist—A drug that prevents certain types of cellular reactions by blocking substances from binding to a cell’s receptor.

Antibody—A protein produced by certain types of white blood cells to deactivate foreign proteins.

Antigen—Any substance that induces a body’s immune response.

Authorized generic—A generic version of a branded drug, made by the manufacturer or by a company that has been approved by the manufacturer. It is identical to the branded drug but has a different label. Innovator manufacturers use authorized generics to take some of the profits that are gained by generics companies from 180-day exclusivities.

Autoimmune disease—A condition, such as multiple sclerosis, in which the body produces antibodies against its own tissues.

Bioavailability—The percentage of a drug’s active ingredient that reaches a patient’s bloodstream and body tissues.

Bioequivalence—Drugs that have the same rate and extent of absorption into the body when administered at the same dose and under similar conditions are described as bioequivalent. Such products can be substituted for each other without a dosage adjustment to obtain the same therapeutic effect.

Biogeneric—Also known as follow-on proteins or biosimilars, these are copies of therapeutic proteins launched after patent expiration of the main active ingredient. Like traditional generics, they have the same qualitative and quantitative composition, active substances, and pharmaceutical forms as the innovative product. Unlike traditional generics, however, they are not identical and are likely to require independent proof of efficacy and safety.

Bioinformatics—A system whereby biological information, especially genetic data, is collected, stored, and accessed via computers and electronic media.

Biological—A medicine (e.g., vaccine, antigen, serum, or plasma) made of large protein molecules that are derived from living organisms or their byproducts, not from chemicals; also called a biologic.


Biotechnology—Generally, biotechnology refers to any technological application that uses biological systems, living organisms, or derivatives to make or modify products and processes. The approach differs from traditional drug development, which relies on synthetic chemistry and results in small-molecule, easy-to-administer treatments that come in pills and tablets. Biotech products consist of larger molecules that are harder for the body to absorb and thus often have special administration requirements, such as injections.

Breakthrough drug—A compound that represents a major therapeutic advance because its chemical composition or mode of action is significantly different than that of existing drugs.

Bronchodilator—A drug used to widen the bronchioles (tubular extensions within the lungs) to aid in respiration.

Chemotherapy drugs—Drugs that work systemically to treat cancers by killing cells. Usually, these drugs are indiscriminate and kill both healthy and cancerous cells throughout the body.

Chromosomes—Microscopic threadlike components in the nucleus of a cell that carry hereditary information in the form of genes.

Clinical trials—A series of carefully defined tests through which experimental drugs are administered to humans to determine their safety and efficacy.

Clotting factors—Proteins involved in the normal clotting of blood.

Combination therapy—The use of two or more drugs that together have greater therapeutic power in treating illness and diseases than either drug used alone.

Corticosteroids—Natural steroid hormones secreted by the adrenal glands, or synthetic copies of those hormones, used to treat inflammation and other conditions.

Data exclusivity—In the United States, a five-year period during which generic companies and the FDA cannot use data submitted by a brand name company to evaluate a generic version of a patented drug. Other countries use different time frames.

Deoxyribonucleic acid (DNA)—The basic molecule that contains genetic information for most living systems. The DNA molecule consists of four nucleotide bases (adenine, cytosine, guanine, and thymine) and a sugar-phosphate frame arranged in two connected strands, forming a double helix.

Enzyme—A protein that controls chemical reactions in the human body.

Ethical drugs—Medicines requiring a doctor’s prescription.

Fast track—An expedited review status granted by the FDA for experimental drugs that target serious or life-threatening diseases and have the potential to address "unmet medical needs."

Formulary—A select list of drugs that a healthcare insurer has approved for reimbursement. Formularies often categorize drugs into levels, or tiers, depending on the extent to which the insurer wants to encourage members to use that drug (in other words, the extent to which the insurer will reimburse for the drug).

Gene—The basic determinant of heredity, genes are chromosomal segments that direct the syntheses of proteins and conduct other molecular regulatory functions.

Generic drug—A compound that contains the same active ingredients as a branded drug. A company cannot market a generic version of a rival’s branded product until its patent expires.

Genomics—The study of genes and their functions, including mapping genes within the genome, identifying their nucleic acid structures, and investigating their functions.

Growth factors—Proteins responsible for regulating cell proliferation, function, and differentiation.


Hatch-Waxman Act—A series of amendments to the Federal Food, Drug, and Cosmetic Act (passed in 1984) that shortened the new generic drug approval process and provided for patent extensions on branded drugs; formally known as the Drug Price Competition and Patent Term Restoration Act.

Hormone—A chemical produced by a gland and released in the bloodstream.

Immunomodulator—A drug that attempts to modify the immune system.

Influenza—Contagious disease caused by any of several viruses (Types A, B, and C) and characterized by inflammation of the respiratory tract, fever, and muscle pain. Humans and animals can catch different versions of the virus and sometimes spread them between species. Type A, in particular, mutates rapidly and causes severe disease.

Investigational new drug (IND)—An experimental new compound that has successfully completed animal studies and has been approved by the FDA to proceed to human trials.

Managed care—A supervised system of financing and providing healthcare services for a defined population group. Health maintenance organizations (HMOs) are currently the most popular form of managed care.

Monoclonal antibodies—Large protein molecules produced by white blood cells, which seek out and destroy harmful foreign substances.

Neurotransmitter—A compound designed to act upon the transfer of electrical impulses in the nervous system.

New active substance (NAS)—A chemical, biological, or radiopharmaceutical substance that is intended for use in a prescription medicine but which has not yet received government approval for use in humans.

New chemical entity (NCE)—A new molecular compound that has not yet received government approval for use by humans; excludes biologic compounds and vaccines.

New drug application (NDA)—The formal filing that drug makers submit to the FDA for approval to market new drugs. The document must contain clinical evidence of the compound’s safety and efficacy.

New molecular entity (NME)—An NCE or biological product, intended for use in a prescription medicine, that has not received government approval for use in humans.

Orphan drug—A drug designed to treat rare diseases afflicting a relatively small patient population. The US government gives drugmakers special incentives to encourage the development of such drugs.

Outcomes management—The practice of evaluating the relative success and cost-efficiency of various medical products and services. It is typically employed by HMOs and other managed care providers to justify the choice or coverage of a particular type of therapy. Pharmaceutical companies utilize data obtained from outcomes management for marketing purposes and to determine future directions for research and development.

Over-the-counter (OTC) drugs—Compounds sold in pharmacies and other outlets without need of a prescription; also known as proprietary medications.

Pandemic—A disease appearing worldwide. An epidemic disease spreads rapidly through a community; an endemic disease is native to a particular country or region and is generally under control in that region.

Pharmacogenomics—The study of how an individual’s genetic composition affects the response to drugs. It combines traditional pharmaceutical sciences, such as biochemistry, with the knowledge of genes, proteins, and single nucleotide polymorphisms.

Pharmacokinetics—Analysis of a drug’s absorption and distribution in the body, its chemical changes in the body, and how it is stored and eliminated.


Recombinant DNA technology—The process of creating new DNA by combining components of DNA from different organisms. Usually, the new DNA is incorporated into therapeutic substances.

Serious adverse event (SAE)—Any negative side effect of medication that leads to hospitalization or disability, or that is life-threatening or irreversible.

Therapeutic substitution—A policy that some managed care organizations employ to substitute less expensive drugs for more expensive ones in the same therapeutic class, even though the drugs use different modes of action.

Treatment IND—An FDA program that allows experimental drugs (INDs) that treat life-threatening diseases to be made commercially available to very sick patients before the drugs obtain formal FDA approval.

Virus—Simple pathogens made only of a protein coating and genetic material (DNA and ribonucleic acid). Much smaller than bacteria, viruses straddle the line between living and nonliving. They are inert and dormant until they are absorbed into a living host, where they reproduce inside cells by combining their genetic material with that of the host cells. The flu virus, which has eight genes that rapidly mutate, comes in many strains, which vary in their infectiousness and potency.


INDUSTRY REFERENCES

PERIODICALS

BioCentury http://www.biocentury.com Weekly; covers the pharmaceutical and biotechnology industries, with an emphasis on timely analysis of industry-related news events.

Drug Topics http://www.drugtopics.modernmedicine.com Monthly; covers drugs and retail pharmacies.

FDA Consumer http://www.fda.gov/fdac/default.htm Monthly; aimed at consumers, with articles on the FDA and medical topics.

F-D-C Reports: The Pink Sheet http://www.fdcreports.com Weekly newsletter; covers trade in, and regulation of, pharmaceuticals and biotechnology.

IN VIVO: The Business and Medicine Report The RPM Report Start-Up magazine http://www.windhover.com Monthly newsletters devoted to strategic and financial analysis of the pharmaceutical, biotech, and devices industries, with an emphasis on deal-making trends and corporate strategy.

MedAdNews R&D Directions http://www.pharmalive.com The first is a monthly publication covering pharmaceutical advertising; the second publishes 10 times a year and reports on new drugs under development, as well as overall trends in pharmaceutical R&D activity.

Medical Marketing & Media http://www.mmm-online.com Monthly; covers trends in drug marketing and advertising, regulation, and related topics.

New England Journal of Medicine http://www.nejm.org Weekly; publishes detailed scientific articles on medical treatments and health issues.

Pharmaceutical Executive http://www.pharmexec.com/pharmexec Monthly; covers trends and developments in the pharmaceutical industry.

Scrip World Pharmaceutical News http://www.pjbpubs.com/scrip/index.htm Twice-weekly newsletter; covers prescription and over-the-counter (OTC) medicines, and biotechnology news.

BOOKS

Health, United States http://www.cdc.gov/nchs Annual survey of national trends in public health statistics.

The Merck Manual of Diagnosis and Therapy, 18th Ed. http://www.merck.com/pubs Detailed information for physicians on various diseases and medical conditions, and on therapeutics for treating them.

Parexel’s Pharmaceutical R&D Statistical Sourcebook http://www.parexel.com Annual recap of drug industry research and development (R&D) spending, drugs in development, and regulatory statistics.

Physicians’ Desk Reference http://www.medec.com Annual compendium listing commercial prescription drugs and their FDA-approved prescribing information.

TRADE ASSOCIATIONS

BIO http://www.bio.org Trade association representing the country’s leading biotechnology companies in business, legislative, and regulatory affairs.

Consumer Healthcare Products Association (CHPA) http://www.chpa-info.org Represents manufacturers and distributors of OTC medicines and dietary supplements; promotes industry interests in legislative and regulatory arenas; and publishes information on the OTC drug industry.


Generic Pharmaceutical Association http://www.gphaonline.org Trade association representing manufacturers and distributors of generic drugs in legislative, regulatory, and related matters.

Pharmaceutical Research and Manufacturers of America (PhRMA) http://www.phrma.org Trade association representing the country’s leading research-based pharmaceutical and biotechnology companies in legislative and regulatory affairs; publishes pertinent industry statistics.

RESEARCH FIRMS

Decision Resources Inc. http://www.decisionresources.com A market research and publishing firm focusing on the pharmaceutical and biotechnology industries.

Henry J. Kaiser Family Foundation http://www.kff.org A private nonprofit foundation focused on US healthcare issues; publishes studies on a variety of healthcare topics.

IMS Health Inc. http://www.imshealth.com Market research firm specializing in pharmaceuticals.

The National Institute for Health Care Management Foundation http://www.nihcm.org Nonprofit, nonpartisan group that conducts research on healthcare issues.

GOVERNMENT AGENCIES

Centers for Medicare & Medicaid Services (CMS) http://cms.hhs.gov A division of the US Department of Health and Human Services, the CMS administers the Medicare and Medicaid programs and sets rates at which program providers are compensated.

National Center for Health Statistics (NCHS) http://www.cdc.gov/nchs A division of the Centers for Disease Control and Prevention, the NCHS provides US data on diseases, pregnancies, births, mortality, and other categories.

National Institutes of Health (NIH) http://www.nih.gov Government agency consisting of 27 institutes and centers; provides major R&D funding in the life sciences in the US, and maintains databases of clinical trial results and research publications.

US Food and Drug Administration (FDA) http://www.fda.gov US government agency charged with overseeing the food and pharmaceutical industries; controls and supervises the approval of new drugs and the manufacture and sale of marketed drugs.

COMPARATIVE COMPANY ANALYSIS — HEALTHCARE: PHARMACEUTICALS

Operating Revenues

Million $ CAGR (%) Index Basis (1999 = 100)

Ticker Company Yr. End 2009 2008 2007 2006 2005 2004 1999 10-Yr. 5-Yr. 1-Yr. 2009 2008 2007 2006 2005

PHARMACEUTICALS‡ABT [] ABBOTT LABORATORIES DEC 30,764.7 29,527.6 D 25,914.2 22,476.3 22,287.8 C 19,680.0 D 13,177.6 8.8 9.3 4.2 233 224 197 171 169AGN [] ALLERGAN INC DEC 4,503.6 4,403.4 3,938.9 A,C 3,063.3 A 2,319.2 2,045.6 1,452.4 12.0 17.1 2.3 310 303 271 211 160BMY [] BRISTOL-MYERS SQUIBB CO DEC 18,808.0 D 20,597.0 D 19,348.0 D 17,914.0 19,207.0 D 19,380.0 A,C 20,222.0 (0.7) (0.6) (8.7) 93 102 96 89 95ENDP † ENDO PHARMACEUTICALS HLDGS DEC 1,460.8 A 1,260.5 1,085.6 909.7 A 820.2 615.1 138.5 26.6 18.9 15.9 1,054 910 784 657 592FRX [] FOREST LABORATORIES -CL A # MAR 4,112.0 3,845.1 3,718.3 3,360.3 A 2,912.1 3,113.8 881.8 16.6 5.7 6.9 466 436 422 381 330

HITK § HI TECH PHARMACAL CO INC # APR 168.2 109.3 62.0 59.0 78.0 67.7 26.7 20.2 19.9 53.8 630 410 232 221 292JNJ [] JOHNSON & JOHNSON DEC 61,897.0 63,747.0 61,035.0 53,194.0 50,434.0 47,348.0 A 27,471.0 A 8.5 5.5 (2.9) 225 232 222 194 184KG [] KING PHARMACEUTICALS INC DEC 1,776.5 1,565.1 A 2,136.9 1,988.5 1,772.9 1,304.4 D 348.3 A 17.7 6.4 13.5 510 449 614 571 509LLY [] LILLY (ELI) & CO DEC 21,836.0 20,378.0 A 18,633.5 A 15,691.0 14,645.3 13,857.9 A 9,912.9 D 8.2 9.5 7.2 220 206 188 158 148MRX † MEDICIS PHARMACEUT CP -CL A DEC 571.9 517.8 A 457.4 349.2 376.9 303.7 116.9 A 17.2 13.5 10.5 489 443 391 299 322

MRK [] MERCK & CO DEC 27,428.3 A 23,850.3 24,197.7 22,636.0 22,011.9 23,430.2 32,714.0 (1.7) 3.2 15.0 84 73 74 69 67MYL [] MYLAN INC DEC 5,090.5 5,137.6 2,178.8 H 1,611.8 A 1,257.2 1,253.4 790.1 20.5 32.4 (0.9) 644 650 276 204 159PRX § PAR PHARMACEUTICAL COS INC DEC 1,193.2 A 578.1 769.7 D 725.2 432.3 D 690.0 A 80.3 31.0 11.6 106.4 1,486 720 958 903 538PRGO † PERRIGO CO JUN 2,006.9 D 1,817.2 1,447.4 A 1,366.8 1,024.1 A 898.2 877.6 F 8.6 17.4 10.4 229 207 165 156 117PFE [] PFIZER INC DEC 49,934.0 A 48,341.0 A 48,209.0 A 48,201.0 A,C 51,298.0 A 52,516.0 A,C 16,204.0 11.9 (1.0) 3.3 308 298 298 297 317

SLXP § SALIX PHARMACEUTICALS LTD DEC 232.9 178.8 268.2 208.5 154.9 A 105.5 3.1 NM 17.2 30.3 7,530 5,780 8,672 6,742 5,008VPHM § VIROPHARMA INC DEC 310.4 232.3 A 203.8 167.2 132.4 22.4 0.0 NM 69.2 33.6 ** ** ** ** NAWPI [] WATSON PHARMACEUTICALS INC DEC 2,793.0 A 2,535.5 2,496.7 1,979.2 A 1,646.2 1,640.6 689.2 A 15.0 11.2 10.2 405 368 362 287 239

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 71,760.0 70,189.7 D 66,074.3 61,203.1 54,577.3 D 53,179.0 9,807.4 A 22.0 6.2 2.2 732 716 674 624 556CAH [] CARDINAL HEALTH INC JUN 99,512.4 D 91,091.4 86,852.0 D 81,363.6 D 74,910.7 65,053.5 25,033.6 A,F 14.8 8.9 9.2 398 364 347 325 299MCK [] MCKESSON CORP # MAR 108,702.0 106,632.0 101,703.0 92,977.0 D 88,050.0 D 80,514.6 36,712.5 A,C 11.5 6.2 1.9 296 290 277 253 240MWIV § MWI VETERINARY SUPPLY SEP 941.3 831.4 710.1 A 606.2 A 496.7 394.3 NA NA 19.0 13.2 ** ** ** ** NAOMI † OWENS & MINOR INC DEC 8,037.6 7,243.2 D 6,800.5 5,533.7 A 4,822.4 4,525.1 3,186.4 A 9.7 12.2 11.0 252 227 213 174 151

PDCO [] PATTERSON COMPANIES INC # APR 3,237.4 3,094.2 2,998.7 2,798.4 2,615.1 2,421.5 1,040.3 12.0 6.0 4.6 311 297 288 269 251PMC § PHARMERICA CORP DEC 1,841.2 A 1,947.3 A 1,217.8 A NA NA NA NA NA NA (5.4) ** ** ** ** NAPSSI § PSS WORLD MEDICAL INC # MAR 2,055.2 1,952.7 1,855.8 1,741.6 1,619.4 1,473.8 1,793.5 A 1.4 6.9 5.2 115 109 103 97 90HSIC † SCHEIN (HENRY) INC DEC 6,538.3 D 6,394.9 D 5,920.2 D 5,153.1 4,635.9 A,C 4,060.3 A 2,285.7 A 11.1 10.0 2.2 286 280 259 225 203

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 33,187.0 F 32,215.0 F 30,270.0 A,F 26,999.0 A,F 24,143.0 F 21,741.0 F 17,950.0 A,C 6.3 8.8 3.0 185 179 169 150 135ELN ELAN CORP PLC -ADR DEC 820.9 761.8 516.4 497.3 426.7 D 464.0 1,007.8 (2.0) 12.1 7.8 81 76 51 49 42GSK GLAXOSMITHKLINE PLC -ADR DEC 47,092.9 A 36,391.1 A 46,017.9 A 46,089.8 A 37,854.9 A 39,191.8 A 13,711.3 13.1 3.7 29.4 343 265 336 336 276NVS NOVARTIS AG -ADR DEC 44,267.0 A 41,459.0 A 38,072.0 D 36,031.0 A,C 32,212.0 A 28,247.0 A 21,643.3 A 7.4 9.4 6.8 205 192 176 166 149TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 13,899.0 11,085.0 A 9,408.0 8,408.0 A 5,250.4 4,798.9 A 1,282.4 A 26.9 23.7 25.4 1,084 864 734 656 409

VRX VALEANT PHARMACEUTICALS INTL DEC 821.5 A 758.3 A 843.9 1,068.8 935.5 D 886.5 151.8 A,F 18.4 (1.5) 8.3 541 500 556 704 616

Note: Data as originally reported. CAGR-Compound annual growth rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.

HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies

Net IncomeMillion $ CAGR (%) Index Basis (1999 = 100)

Ticker Company Yr. End 2009 2008 2007 2006 2005 2004 1999 10-Yr. 5-Yr. 1-Yr. 2009 2008 2007 2006 2005PHARMACEUTICALS‡ABT [] ABBOTT LABORATORIES DEC 5,745.8 4,734.2 3,606.3 1,716.8 3,372.1 3,175.8 2,445.8 8.9 12.6 21.4 235 194 147 70 138AGN [] ALLERGAN INC DEC 621.3 578.6 501.0 (127.4) 403.9 377.1 188.2 12.7 10.5 7.4 330 307 266 (68) 215BMY [] BRISTOL-MYERS SQUIBB CO DEC 3,239.0 3,155.0 1,968.0 1,585.0 2,992.0 2,378.0 4,167.0 (2.5) 6.4 2.7 78 76 47 38 72ENDP † ENDO PHARMACEUTICALS HLDGS DEC 266.3 261.7 227.4 137.8 202.3 143.3 3.3 NM 13.2 1.8 NM NM NM 4,228 NMFRX [] FOREST LABORATORIES -CL A # MAR 682.4 767.7 967.9 454.1 708.5 838.8 112.7 19.7 (4.0) (11.1) 606 681 859 403 629

HITK § HI TECH PHARMACAL CO INC # APR 31.1 9.8 (5.1) (2.0) 11.5 8.3 1.7 33.8 30.3 217.0 1,839 580 (301) (120) 677JNJ [] JOHNSON & JOHNSON DEC 12,266.0 12,949.0 10,576.0 11,053.0 10,411.0 8,509.0 4,167.0 11.4 7.6 (5.3) 294 311 254 265 250KG [] KING PHARMACEUTICALS INC DEC 92.0 (333.1) 183.2 288.6 116.6 (50.6) 45.7 7.3 NM NM 201 (730) 401 632 255LLY [] LILLY (ELI) & CO DEC 4,328.8 (2,071.9) 2,953.0 2,662.7 2,001.6 1,810.1 2,546.7 5.4 19.1 NM 170 (81) 116 105 79MRX † MEDICIS PHARMACEUT CP -CL A DEC 76.0 10.3 70.4 (75.8) 65.0 30.8 41.4 6.2 19.8 639.1 183 25 170 (183) 157

MRK [] MERCK & CO DEC 12,901.3 7,808.4 3,275.4 4,433.8 4,631.3 5,813.4 5,890.5 8.2 17.3 65.2 219 133 56 75 79MYL [] MYLAN INC DEC 232.6 (181.2) (1,138.0) 217.3 184.5 203.6 154.2 4.2 2.7 NM 151 (117) (738) 141 120PRX § PAR PHARMACEUTICAL COS INC DEC 77.6 (45.9) 51.1 6.7 11.8 29.2 (1.8) NM 21.6 NM NM NM NM NM NMPRGO † PERRIGO CO JUN 141.1 135.8 73.8 71.4 (353.0) 80.6 1.5 NM 11.9 3.9 NM NM 4,773 4,618 NMPFE [] PFIZER INC DEC 8,621.0 8,026.0 8,213.0 11,024.0 8,094.0 11,332.0 3,199.0 10.4 (5.3) 7.4 269 251 257 345 253

SLXP § SALIX PHARMACEUTICALS LTD DEC (43.6) (47.0) 8.2 31.5 (60.6) 6.8 (4.6) NM NM NM NM NM NM NM NMVPHM § VIROPHARMA INC DEC (11.1) 67.6 95.4 66.7 113.7 (19.5) (29.5) NM NM NM NM NM NM NM NMWPI [] WATSON PHARMACEUTICALS INC DEC 222.0 238.4 141.0 (445.0) 138.2 151.3 178.9 2.2 8.0 (6.9) 124 133 79 (249) 77

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 511.9 469.1 493.8 468.0 291.9 468.4 70.9 21.9 1.8 9.1 722 661 696 660 412CAH [] CARDINAL HEALTH INC JUN 1,142.8 1,315.9 839.7 1,244.7 1,046.7 1,524.7 456.3 9.6 (5.6) (13.2) 250 288 184 273 229MCK [] MCKESSON CORP # MAR 1,263.0 823.0 989.0 968.0 737.0 (156.7) 184.6 21.2 NM 53.5 684 446 536 524 399MWIV § MWI VETERINARY SUPPLY SEP 24.9 19.9 16.9 13.8 4.6 2.5 NA NA 58.1 25.0 ** ** ** ** NAOMI † OWENS & MINOR INC DEC 116.9 101.3 72.7 48.8 64.4 60.5 28.0 15.4 14.1 15.4 418 362 260 174 230

PDCO [] PATTERSON COMPANIES INC # APR 212.3 199.6 224.9 208.3 198.4 183.7 64.5 12.7 2.9 6.3 329 310 349 323 308PMC § PHARMERICA CORP DEC 42.2 5.0 (24.1) NA NA NA NA NA NA 744.0 ** ** ** ** NAPSSI § PSS WORLD MEDICAL INC # MAR 69.4 58.0 56.8 50.5 44.3 39.4 22.2 12.1 12.0 19.6 313 262 256 228 199HSIC † SCHEIN (HENRY) INC DEC 308.4 251.0 235.0 183.1 162.4 128.2 50.3 19.9 19.2 22.9 613 499 467 364 323

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 7,521.0 6,101.0 5,595.0 6,043.0 4,706.0 3,813.0 956.0 22.9 14.6 23.3 787 638 585 632 492ELN ELAN CORP PLC -ADR DEC (162.3) (35.2) (665.9) (408.7) 508.2 (368.3) 335.8 NM NM NM (48) (10) (198) (122) 151GSK GLAXOSMITHKLINE PLC -ADR DEC 8,942.0 6,727.7 10,346.1 10,554.9 8,059.5 8,246.5 2,924.8 11.8 1.6 32.9 306 230 354 361 276NVS NOVARTIS AG -ADR DEC 8,400.0 8,125.0 6,518.0 6,992.0 6,130.0 5,767.0 4,439.3 6.6 7.8 3.4 189 183 147 158 138TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 2,000.0 635.0 1,952.0 546.0 1,072.3 331.8 117.8 32.7 43.2 215.0 1,697 539 1,657 463 910

VRX VALEANT PHARMACEUTICALS INTL DEC 176.5 199.9 195.5 215.5 246.8 161.0 62.5 10.9 1.9 (11.7) 282 320 313 345 395

Note: Data as originally reported. CAGR-Compound annual growth rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available.


Return on Revenues (%) Return on Assets (%) Return on Equity (%)Ticker Company Yr. End 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005

PHARMACEUTICALS‡ABT [] ABBOTT LABORATORIES DEC 18.7 16.0 13.9 7.6 15.1 12.1 11.5 9.5 5.3 11.6 28.5 26.9 22.7 12.1 23.5AGN [] ALLERGAN INC DEC 13.8 13.1 12.7 NM 17.4 8.7 8.7 8.1 NM 15.8 14.1 14.9 14.6 NM 30.1BMY [] BRISTOL-MYERS SQUIBB CO DEC 17.2 15.3 10.2 8.8 15.6 10.7 11.3 7.6 5.9 10.2 23.9 27.7 19.2 15.0 27.9ENDP † ENDO PHARMACEUTICALS HLDGS DEC 18.2 20.8 21.0 15.2 24.7 12.0 14.3 14.7 10.0 17.4 20.3 21.6 19.5 14.6 27.0FRX [] FOREST LABORATORIES -CL A # MAR 16.6 20.0 26.0 13.5 24.3 12.0 15.8 23.7 13.4 20.8 15.2 19.6 28.7 15.9 24.3

HITK § HI TECH PHARMACAL CO INC # APR 18.5 9.0 NM NM 14.7 24.2 10.2 NM NM 12.6 28.1 12.2 NM NM 14.5JNJ [] JOHNSON & JOHNSON DEC 19.8 20.3 17.3 20.8 20.6 13.7 15.6 14.0 17.2 18.7 26.4 30.2 25.6 28.6 29.9KG [] KING PHARMACEUTICALS INC DEC 5.2 NM 8.6 14.5 6.6 2.4 NM 5.4 9.2 4.0 4.0 NM 7.6 13.5 6.1LLY [] LILLY (ELI) & CO DEC 19.8 NM 15.8 17.0 13.7 15.3 NM 12.1 11.4 8.1 53.2 NM 24.1 24.5 18.4MRX † MEDICIS PHARMACEUT CP -CL A DEC 13.3 2.0 15.4 NM 17.2 7.1 0.9 6.2 NM 6.1 11.7 1.7 12.9 NM 12.5

MRK [] MERCK & CO DEC 47.0 32.7 13.5 19.6 21.0 16.2 16.3 7.0 9.9 10.6 33.2 42.3 18.3 25.0 26.3MYL [] MYLAN INC DEC 4.6 NM NM 13.5 14.7 0.9 NM NM 7.1 9.2 3.2 NM NM 17.8 14.0PRX § PAR PHARMACEUTICAL COS INC DEC 6.5 NM 6.6 0.9 2.7 10.5 NM 6.4 0.9 1.6 17.2 NM 11.9 1.7 3.0PRGO † PERRIGO CO JUN 7.0 7.5 5.1 5.2 NM 5.5 6.0 4.0 4.1 NM 15.2 16.1 10.6 11.6 NMPFE [] PFIZER INC DEC 17.3 16.6 17.0 22.9 15.8 5.3 7.1 7.1 9.5 6.7 11.7 13.1 12.1 16.1 12.1

SLXP § SALIX PHARMACEUTICALS LTD DEC NM NM 3.1 15.1 NM NM NM 2.3 10.4 NM NM NM 2.9 12.2 NMVPHM § VIROPHARMA INC DEC NM 29.1 46.8 39.9 85.9 NM 7.4 15.8 15.4 37.1 NM 11.7 21.0 18.0 75.6WPI [] WATSON PHARMACEUTICALS INC DEC 7.9 9.4 5.6 NM 8.4 4.6 6.7 3.9 NM 4.4 8.7 12.0 8.0 NM 6.4

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 0.7 0.7 0.7 0.8 0.5 4.0 3.8 3.9 3.9 2.5 18.9 16.1 13.6 11.1 6.8CAH [] CARDINAL HEALTH INC JUN 1.1 1.4 1.0 1.5 1.4 4.7 5.6 3.6 5.5 4.8 13.9 17.4 10.6 14.6 12.6MCK [] MCKESSON CORP # MAR 1.2 0.8 1.0 1.0 0.8 4.7 3.3 4.1 4.3 3.7 18.4 13.4 16.0 15.9 13.2MWIV § MWI VETERINARY SUPPLY SEP 2.6 2.4 2.4 2.3 0.9 7.6 6.8 6.8 6.6 2.7 12.8 11.7 11.7 12.8 10.0OMI † OWENS & MINOR INC DEC 1.5 1.4 1.1 0.9 1.3 6.6 6.2 4.5 3.3 5.4 16.0 15.5 12.5 9.2 13.3

PDCO [] PATTERSON COMPANIES INC # APR 6.6 6.5 7.5 7.4 7.6 9.3 9.5 11.2 10.8 11.0 16.2 18.2 18.9 15.9 17.6PMC § PHARMERICA CORP DEC 2.3 0.3 NM NA NA 6.0 0.7 NA NA NA 12.2 1.6 NA NA NAPSSI § PSS WORLD MEDICAL INC # MAR 3.4 3.0 3.1 2.9 2.7 8.0 6.9 7.1 6.7 6.4 18.4 17.0 15.9 13.8 14.1HSIC † SCHEIN (HENRY) INC DEC 4.7 3.9 4.0 3.6 3.5 8.3 7.3 7.6 6.7 6.5 15.1 13.5 14.5 13.6 13.9

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 22.7 18.9 18.5 22.4 19.5 14.8 12.9 14.4 22.1 18.7 41.1 39.8 37.2 41.8 33.6ELN ELAN CORP PLC -ADR DEC NM NM NM NM 119.1 NM NM NM NM 18.0 NM NA NA NM 122.1GSK GLAXOSMITHKLINE PLC -ADR DEC 19.0 18.5 22.5 22.9 21.3 14.1 11.3 18.5 21.8 17.9 64.4 43.9 54.5 66.2 66.2NVS NOVARTIS AG -ADR DEC 19.0 19.6 17.1 19.4 19.0 9.7 10.6 9.1 11.1 10.9 15.6 16.3 14.4 18.8 18.4TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 14.4 5.7 20.7 6.5 20.4 6.0 2.3 8.9 3.5 10.7 11.3 4.2 15.7 6.4 18.8

VRX VALEANT PHARMACEUTICALS INTL DEC 21.5 26.4 23.2 20.2 26.4 9.6 11.7 9.8 10.2 13.2 13.8 16.0 15.0 17.1 21.7

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.


Debt as a % ofCurrent Ratio Debt / Capital Ratio (%) Net Working Capital

Ticker Company Yr. End 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005

PHARMACEUTICALS‡ABT [] ABBOTT LABORATORIES DEC 1.8 1.5 1.5 0.9 1.5 33.0 33.3 34.8 33.3 23.4 109.8 159.9 192.1 NM 115.1AGN [] ALLERGAN INC DEC 3.8 3.3 3.0 3.2 1.7 23.5 28.7 28.6 33.2 3.5 65.0 103.9 112.9 109.1 7.4BMY [] BRISTOL-MYERS SQUIBB CO DEC 2.2 2.2 1.2 1.6 1.8 29.3 34.9 29.2 41.9 42.3 80.2 81.8 257.1 190.4 155.1ENDP † ENDO PHARMACEUTICALS HLDGS DEC 2.7 3.1 2.7 3.1 1.9 17.3 24.8 0.0 0.0 0.2 39.9 46.6 0.0 0.1 0.4FRX [] FOREST LABORATORIES -CL A # MAR 4.7 4.6 4.8 3.9 5.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

HITK § HI TECH PHARMACAL CO INC # APR 6.7 3.8 6.0 5.8 7.5 0.0 0.3 0.0 0.0 0.0 0.0 0.4 0.0 0.0 0.0JNJ [] JOHNSON & JOHNSON DEC 1.8 1.6 1.5 1.2 2.5 13.7 15.6 13.6 4.7 5.0 46.2 60.0 70.0 52.8 10.8KG [] KING PHARMACEUTICALS INC DEC 2.3 1.7 4.0 2.7 1.3 12.5 30.7 13.7 14.9 0.0 53.6 145.5 29.3 37.9 0.0LLY [] LILLY (ELI) & CO DEC 1.9 0.9 2.3 1.9 1.9 40.8 40.4 25.0 24.0 33.4 112.1 NM 66.8 75.8 113.5MRX † MEDICIS PHARMACEUT CP -CL A DEC 2.5 2.7 1.9 6.2 7.1 19.6 21.9 22.5 47.1 48.0 39.0 55.0 40.0 82.4 75.5

MRK [] MERCK & CO DEC 1.8 1.3 1.2 1.2 1.6 18.6 15.5 15.7 21.1 19.2 126.8 79.1 140.5 221.4 66.2MYL [] MYLAN INC DEC 1.9 2.1 1.5 3.4 4.5 58.0 61.2 52.2 48.2 45.9 318.1 316.9 445.3 96.7 73.9PRX § PAR PHARMACEUTICAL COS INC DEC 2.4 1.6 1.7 1.3 3.0 0.0 0.0 0.0 0.0 34.9 0.0 0.0 0.0 0.0 65.7PRGO † PERRIGO CO JUN 2.3 2.4 1.9 1.8 1.8 45.2 45.5 43.1 46.2 49.7 134.1 133.4 191.8 217.6 244.6PFE [] PFIZER INC DEC 1.7 1.6 2.1 2.2 1.5 28.5 11.6 9.1 6.5 7.7 176.7 49.6 29.2 21.7 47.2

SLXP § SALIX PHARMACEUTICALS LTD DEC 3.0 2.6 2.3 3.8 3.2 14.5 23.2 5.1 0.0 0.0 28.9 66.6 14.3 0.0 0.0VPHM § VIROPHARMA INC DEC 11.2 8.3 22.0 16.0 2.5 13.3 24.8 33.5 0.0 0.0 34.1 78.8 42.1 0.0 0.0WPI [] WATSON PHARMACEUTICALS INC DEC 1.7 3.0 2.6 1.8 5.5 24.3 26.5 30.7 37.4 20.9 160.1 84.5 123.4 196.6 52.7

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 1.1 1.1 1.1 1.2 1.3 30.2 30.5 28.4 20.9 18.2 248.2 236.5 143.2 62.5 49.2CAH [] CARDINAL HEALTH INC JUN 1.4 1.4 1.3 1.3 1.3 26.1 30.7 30.1 22.1 19.9 74.6 96.8 112.1 76.4 69.5MCK [] MCKESSON CORP # MAR 1.3 1.2 1.2 1.2 1.3 23.3 27.0 22.7 22.3 14.0 51.0 74.7 73.6 66.0 28.3MWIV § MWI VETERINARY SUPPLY SEP 2.2 1.9 2.0 1.9 1.5 0.0 0.1 0.1 0.2 0.4 0.0 0.1 0.2 0.3 0.8OMI † OWENS & MINOR INC DEC 1.9 2.0 1.9 1.9 1.8 21.1 34.2 31.6 44.1 28.5 32.5 55.8 54.4 72.6 50.4

PDCO [] PATTERSON COMPANIES INC # APR 3.3 2.8 2.1 2.3 2.1 25.8 29.6 33.1 8.3 14.0 66.8 87.0 101.2 25.5 48.0PMC § PHARMERICA CORP DEC 4.2 3.6 3.7 NA NA 39.3 42.9 44.4 NA NA 76.7 88.1 93.1 NA NAPSSI § PSS WORLD MEDICAL INC # MAR 2.9 2.4 1.9 2.7 2.4 31.5 40.1 31.0 28.3 30.0 52.9 71.6 61.9 49.5 56.9HSIC † SCHEIN (HENRY) INC DEC 2.0 1.7 2.0 2.0 2.2 9.1 11.3 18.2 22.7 27.1 21.6 30.2 46.6 54.6 56.9

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 1.3 1.2 1.1 1.8 2.0 27.5 36.1 36.4 6.0 7.0 149.3 383.3 573.9 14.5 16.0ELN ELAN CORP PLC -ADR DEC 4.5 2.3 4.4 2.0 6.7 74.6 114.7 128.8 89.4 86.3 169.9 460.7 246.5 194.6 177.0GSK GLAXOSMITHKLINE PLC -ADR DEC 1.4 1.7 1.3 1.5 1.4 56.5 62.8 39.6 31.8 39.3 271.2 210.0 215.4 128.0 143.8NVS NOVARTIS AG -ADR DEC 1.7 1.3 1.6 1.3 1.4 12.3 3.8 1.2 1.4 3.5 61.0 49.8 6.3 12.7 21.6TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 1.6 1.3 1.8 1.9 2.4 17.0 23.4 19.1 28.2 22.0 95.0 188.0 74.6 128.5 54.6

VRX VALEANT PHARMACEUTICALS INTL DEC 1.4 1.8 1.9 2.6 2.5 18.8 0.0 0.0 23.5 25.3 335.0 0.0 0.0 61.9 100.3



Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)Ticker Company Yr. End 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005

PHARMACEUTICALS‡ABT [] ABBOTT LABORATORIES DEC 15 - 11 20 - 15 25 - 21 45 - 35 23 - 17 42 46 54 104 50 3.8 - 2.7 3.1 - 2.3 2.6 - 2.1 3.0 - 2.3 2.9 - 2.2AGN [] ALLERGAN INC DEC 31 - 17 37 - 15 42 - 32 NM - NM 36 - 22 10 11 12 NM 13 0.6 - 0.3 0.7 - 0.3 0.4 - 0.3 0.4 - 0.3 0.6 - 0.4BMY [] BRISTOL-MYERS SQUIBB CO DEC 16 - 11 17 - 10 32 - 26 33 - 25 17 - 14 77 97 112 138 73 7.3 - 4.7 9.7 - 5.7 4.4 - 3.5 5.6 - 4.2 5.4 - 4.2ENDP † ENDO PHARMACEUTICALS HLDGS DEC 12 - 7 13 - 7 21 - 15 34 - 20 21 - 12 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0FRX [] FOREST LABORATORIES -CL A # MAR 15 - 8 17 - 8 19 - 11 38 - 25 21 - 15 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

HITK § HI TECH PHARMACAL CO INC # APR 11 - 2 14 - 4 NM - NM NM - NM 33 - 11 0 0 NM NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0JNJ [] JOHNSON & JOHNSON DEC 15 - 10 16 - 11 19 - 16 18 - 15 20 - 17 43 39 44 39 36 4.2 - 3.0 3.4 - 2.5 2.7 - 2.4 2.6 - 2.1 2.1 - 1.8KG [] KING PHARMACEUTICALS INC DEC 33 - 15 NM - NM 30 - 13 17 - 13 37 - 16 0 NM 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0LLY [] LILLY (ELI) & CO DEC 10 - 7 NM - NM 23 - 18 24 - 20 33 - 27 50 NM 63 65 83 7.2 - 4.8 6.6 - 3.3 3.5 - 2.8 3.2 - 2.7 3.1 - 2.5MRX † MEDICIS PHARMACEUT CP -CL A DEC 22 - 6 NM - 54 32 - 20 NM - NM 32 - 22 12 89 10 NM 10 2.0 - 0.6 1.7 - 0.6 0.5 - 0.3 0.5 - 0.3 0.5 - 0.3

MRK [] MERCK & CO DEC 7 - 4 17 - 6 41 - 28 23 - 16 17 - 12 27 42 101 75 72 7.6 - 4.0 6.7 - 2.5 3.6 - 2.5 4.8 - 3.3 6.0 - 4.3MYL [] MYLAN INC DEC 62 - 31 NM - NM NM - NM 25 - 18 27 - 19 0 NM NM 24 30 0.0 - 0.0 0.0 - 0.0 0.9 - 0.5 1.3 - 1.0 1.6 - 1.1PRX § PAR PHARMACEUTICAL COS INC DEC 12 - 4 NM - NM 21 - 11 NM - 64 NM - 62 0 NM 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0PRGO † PERRIGO CO JUN 27 - 12 30 - 19 46 - 20 24 - 19 NM - NM 14 13 22 22 NM 1.2 - 0.5 0.7 - 0.5 1.1 - 0.5 1.2 - 0.9 1.2 - 0.8PFE [] PFIZER INC DEC 15 - 9 20 - 12 23 - 19 19 - 15 27 - 18 65 108 97 63 69 6.9 - 4.2 9.0 - 5.3 5.2 - 4.2 4.3 - 3.4 3.7 - 2.6

SLXP § SALIX PHARMACEUTICALS LTD DEC NM - NM NM - NM 96 - 44 28 - 14 NM - NM NM NM 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0VPHM § VIROPHARMA INC DEC NM - NM 16 - 8 13 - 5 24 - 7 10 - 1 NM 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0WPI [] WATSON PHARMACEUTICALS INC DEC 19 - 11 14 - 9 25 - 18 NM - NM 28 - 21 0 0 0 NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 16 - 8 17 - 9 21 - 16 21 - 18 31 - 19 12 10 7 4 4 1.5 - 0.8 1.1 - 0.6 0.5 - 0.4 0.2 - 0.2 0.2 - 0.1CAH [] CARDINAL HEALTH INC JUN 12 - 8 17 - 8 36 - 26 26 - 21 29 - 22 19 14 18 9 6 2.4 - 1.5 1.8 - 0.8 0.7 - 0.5 0.4 - 0.4 0.3 - 0.2MCK [] MCKESSON CORP # MAR 14 - 7 23 - 9 20 - 15 17 - 14 22 - 12 10 16 7 7 10 1.4 - 0.7 1.7 - 0.7 0.5 - 0.4 0.5 - 0.4 0.8 - 0.5MWIV § MWI VETERINARY SUPPLY SEP 20 - 10 27 - 12 31 - 21 30 - 19 58 - 43 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0OMI † OWENS & MINOR INC DEC 17 - 11 22 - 14 25 - 16 29 - 23 21 - 16 33 32 38 49 32 3.0 - 1.9 2.3 - 1.5 2.3 - 1.5 2.2 - 1.7 2.0 - 1.5

PDCO [] PATTERSON COMPANIES INC # APR 16 - 9 22 - 9 24 - 17 25 - 19 37 - 23 6 0 0 0 0 0.6 - 0.4 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0PMC § PHARMERICA CORP DEC 16 - 10 NM - 76 NM - NM NA - NA NA - NA 0 0 NM NA NA 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 NA - NA NA - NAPSSI § PSS WORLD MEDICAL INC # MAR 19 - 11 22 - 15 25 - 18 29 - 20 25 - 16 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0HSIC † SCHEIN (HENRY) INC DEC 16 - 10 23 - 11 24 - 17 26 - 21 25 - 17 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 9 - 6 12 - 8 16 - 11 17 - 12 17 - 12 40 45 47 37 35 7.0 - 4.4 5.8 - 3.8 4.1 - 2.9 3.1 - 2.1 3.0 - 2.0ELN ELAN CORP PLC -ADR DEC NM - NM NM - NM NM - NM NM - NM 24 - 2 NM NM NM NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0GSK GLAXOSMITHKLINE PLC -ADR DEC 12 - 8 21 - 12 16 - 13 16 - 13 19 - 16 53 83 55 46 54 6.8 - 4.3 6.9 - 3.9 4.3 - 3.4 3.5 - 3.0 3.5 - 2.8NVS NOVARTIS AG -ADR DEC 15 - 9 17 - 12 21 - 18 21 - 17 21 - 17 46 43 39 30 34 5.1 - 3.0 3.7 - 2.5 2.1 - 1.8 1.7 - 1.4 1.9 - 1.6TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 25 - 18 62 - 44 19 - 12 62 - 41 27 - 15 26 61 15 42 15 1.5 - 1.1 1.4 - 1.0 1.3 - 0.8 1.0 - 0.7 1.0 - 0.6

VRX VALEANT PHARMACEUTICALS INTL DEC 14 - 8 12 - 5 22 - 11 21 - 11 18 - 9 58 120 164 37 32 7.0 - 4.2 22.6 - 10.1 15.2 - 7.6 3.4 - 1.8 3.6 - 1.8


20052009 2008 2007 2006


Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)Ticker Company Yr. End 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005

PHARMACEUTICALS‡ABT [] ABBOTT LABORATORIES DEC 3.71 3.06 2.34 1.12 2.17 2.17 1.51 1.24 (1.17) 2.89 57.39 - 41.27 61.09 - 45.75 59.50 - 48.75 49.87 - 39.18 50.00 - 37.50AGN [] ALLERGAN INC DEC 2.05 1.90 1.64 (0.44) 1.54 4.82 1.76 0.72 0.87 5.34 64.08 - 35.41 70.40 - 28.95 69.15 - 52.50 61.51 - 46.28 55.25 - 34.51BMY [] BRISTOL-MYERS SQUIBB CO DEC 1.63 1.60 1.00 0.81 1.53 4.10 3.31 2.26 1.83 2.28 26.62 - 17.23 27.37 - 16.00 32.35 - 25.73 26.41 - 20.08 26.60 - 20.70ENDP † ENDO PHARMACEUTICALS HLDGS DEC 2.27 2.12 1.70 1.03 1.53 4.99 6.36 7.75 5.85 4.24 26.14 - 15.75 28.48 - 13.87 35.85 - 26.04 34.75 - 21.06 31.93 - 19.02FRX [] FOREST LABORATORIES -CL A # MAR 2.25 2.53 3.08 1.43 2.11 14.58 11.94 10.19 8.93 7.69 32.76 - 18.37 42.76 - 19.23 57.97 - 34.89 54.70 - 36.18 45.21 - 32.46

HITK § HI TECH PHARMACAL CO INC # APR 2.61 0.87 (0.45) (0.17) 0.96 8.79 6.52 5.75 6.73 6.61 29.64 - 4.32 12.57 - 3.46 13.59 - 8.50 32.13 - 11.64 31.50 - 10.21JNJ [] JOHNSON & JOHNSON DEC 4.45 4.62 3.67 3.76 3.50 7.04 5.35 5.12 3.67 8.64 65.41 - 46.25 72.76 - 52.06 68.75 - 59.72 69.41 - 56.65 69.99 - 59.76KG [] KING PHARMACEUTICALS INC DEC 0.38 (1.37) 0.75 1.19 0.48 4.46 3.22 6.51 5.41 3.66 12.45 - 5.86 12.60 - 6.98 22.25 - 9.75 20.00 - 15.15 17.99 - 7.50LLY [] LILLY (ELI) & CO DEC 3.94 (1.89) 2.71 2.45 1.84 5.30 2.45 10.10 9.94 9.77 40.78 - 27.21 57.52 - 28.62 61.00 - 49.09 59.24 - 50.19 60.98 - 49.47MRX † MEDICIS PHARMACEUT CP -CL A DEC 1.29 0.18 1.26 (1.39) 1.18 6.45 5.03 6.16 5.00 2.98 27.82 - 7.85 27.02 - 9.66 39.94 - 25.37 40.31 - 22.57 37.67 - 26.30

MRK [] MERCK & CO DEC 5.67 3.66 1.51 2.04 2.11 (0.17) 7.97 7.37 7.00 7.48 38.42 - 20.05 61.18 - 22.82 61.62 - 42.35 46.37 - 31.81 35.36 - 25.50MYL [] MYLAN INC DEC 0.31 (1.05) (4.49) 1.01 0.80 (8.44) (9.56) (11.28) 2.75 2.76 19.21 - 9.65 15.49 - 5.75 22.90 - 12.93 25.00 - 18.65 21.69 - 15.21PRX § PAR PHARMACEUTICAL COS INC DEC 2.30 (1.38) 1.48 0.20 0.35 10.49 8.82 9.98 8.84 8.24 27.93 - 8.57 24.33 - 7.80 30.68 - 16.61 38.70 - 12.80 43.81 - 21.64PRGO † PERRIGO CO JUN 1.53 1.46 0.80 0.77 (4.57) 4.76 4.52 4.30 3.83 3.12 40.94 - 18.54 43.08 - 27.72 36.86 - 16.09 18.69 - 14.42 19.89 - 12.76PFE [] PFIZER INC DEC 1.23 1.19 1.19 1.52 1.10 (2.53) 2.71 3.41 3.65 1.89 18.99 - 11.62 24.24 - 14.26 27.73 - 22.24 28.60 - 22.16 29.21 - 20.27

SLXP § SALIX PHARMACEUTICALS LTD DEC (0.88) (0.98) 0.17 0.68 (1.55) 3.11 1.22 2.11 2.73 3.24 25.86 - 6.14 10.47 - 5.07 16.38 - 7.50 18.72 - 9.77 22.79 - 13.85VPHM § VIROPHARMA INC DEC (0.14) 0.95 1.37 0.97 2.56 1.70 (0.11) 5.35 4.15 2.99 14.55 - 3.79 15.16 - 8.00 18.39 - 7.11 23.44 - 7.07 24.36 - 1.67WPI [] WATSON PHARMACEUTICALS INC DEC 2.11 2.32 1.38 (4.37) 1.32 (2.81) 6.51 3.56 0.10 8.81 40.25 - 23.05 32.70 - 20.17 33.91 - 25.02 35.27 - 21.35 36.93 - 27.99

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 1.70 1.46 1.34 1.14 0.69 (0.50) (0.53) 0.43 3.10 3.69 26.58 - 13.75 24.30 - 13.33 28.28 - 21.10 24.48 - 20.08 21.09 - 13.24CAH [] CARDINAL HEALTH INC JUN 3.20 3.67 2.13 2.96 2.43 7.30 4.26 4.12 8.52 8.20 39.87 - 24.87 62.25 - 27.79 76.15 - 56.41 75.74 - 61.15 69.64 - 52.85MCK [] MCKESSON CORP # MAR 4.70 2.99 3.40 3.25 2.42 12.59 7.39 7.64 9.10 13.36 64.98 - 33.13 68.40 - 28.27 68.43 - 50.80 55.10 - 44.60 52.89 - 30.13MWIV § MWI VETERINARY SUPPLY SEP 2.06 1.65 1.43 1.28 0.46 13.13 10.94 10.15 8.28 5.23 42.21 - 20.37 45.11 - 20.16 44.60 - 30.00 38.61 - 23.79 26.49 - 19.78OMI † OWENS & MINOR INC DEC 1.87 1.65 1.21 0.81 1.09 7.86 6.58 5.06 3.89 4.19 32.25 - 20.13 36.67 - 23.27 29.68 - 19.90 23.49 - 18.31 22.39 - 17.47

PDCO [] PATTERSON COMPANIES INC # APR 1.79 1.70 1.70 1.52 1.44 5.34 3.60 2.64 4.42 3.45 28.34 - 16.08 37.78 - 15.75 40.08 - 28.32 38.28 - 29.61 53.85 - 33.21PMC § PHARMERICA CORP DEC 1.39 0.17 (1.13) NA NA 4.57 4.35 3.97 NA NA 21.69 - 13.97 25.83 - 12.99 23.20 - 13.22 NA - NA NA - NAPSSI § PSS WORLD MEDICAL INC # MAR 1.20 0.97 0.88 0.75 0.67 4.58 3.55 3.20 3.63 3.10 22.89 - 13.19 21.72 - 14.97 21.83 - 16.11 21.60 - 14.74 16.65 - 10.76HSIC † SCHEIN (HENRY) INC DEC 3.47 2.82 2.65 2.08 1.87 10.65 8.83 7.40 6.05 5.51 56.92 - 33.55 63.62 - 32.08 63.45 - 45.82 54.08 - 42.82 45.93 - 32.70

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 5.19 4.20 3.74 3.86 2.91 (0.70) (4.08) (4.21) 7.46 7.04 47.61 - 29.96 49.85 - 32.58 59.47 - 42.21 66.49 - 44.90 50.13 - 34.72ELN ELAN CORP PLC -ADR DEC (0.32) (0.07) (1.42) (0.94) 1.23 0.43 (1.28) (1.45) (1.02) (1.18) 9.13 - 4.61 37.45 - 4.99 24.90 - 11.70 19.42 - 11.88 29.93 - 3.00GSK GLAXOSMITHKLINE PLC -ADR DEC 3.52 2.59 3.75 3.74 2.84 (0.83) 0.14 2.97 4.09 2.28 43.47 - 27.15 54.64 - 31.02 59.98 - 47.49 58.40 - 50.03 53.80 - 44.17NVS NOVARTIS AG -ADR DEC 3.70 3.59 2.81 2.98 2.63 19.94 17.22 16.83 8.54 8.43 56.42 - 33.34 61.30 - 41.80 60.36 - 51.19 61.60 - 51.72 54.71 - 45.63TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 2.29 0.81 2.54 0.72 1.73 2.82 (0.68) 4.42 1.47 4.76 56.88 - 41.05 50.00 - 35.89 47.14 - 30.81 44.71 - 29.22 45.91 - 26.78

VRX VALEANT PHARMACEUTICALS INTL DEC 1.11 1.25 1.22 1.35 1.55 (0.51) 2.41 3.52 3.14 1.31 15.50 - 9.26 14.90 - 6.65 26.48 - 13.20 28.28 - 14.51 27.28 - 13.74

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. J-This amount includes intangibles that cannot be identified.

The analysis and opinion set forth in this publication are provided by Standard & Poor’s Equity Research Services and are prepared separately from any other analytic activity of Standard & Poor’s.In this regard, Standard & Poor’s Equity Research Services has no access to nonpublic information received by other units of Standard & Poor’s.

The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.


S&P Pharma Industry Overview - 11252010

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