Pharmaceutical Industry
Update: Challenges,
Opportunities, & Outlook
Bin Li, Ph.D., MBA
Equity Research Analyst
Global Pharmaceuticals
Merrill Lynch
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Refer to important disclosures at the end of this report
Introduction

Current Industry Overview

Issues & Challenges

Positives & Catalysts

Therapeutic Analysis

Outlook & Opportunity

Case Study
Refer to important disclosures at the end of this report
Current Status:
2002… Slowdown From 2001
2002
World Audited Market
Const.$ Bil
% Constant $ Growth
%Share
2002
CAGR 97- 01
LATIN AMERICA
16.5
4.1
- 10.4
+ 0.6
A/A/A
31.8
7.9
+ 10.6
+ 9.9
JAPAN
46.9
11.7
+ 1.0
+ 3.5
EUROPE
102.4
25.5
+ 8.1
+ 7.6
NORTH AMERICA
203.6
50.7
+ 11.7
+ 14.2
WORLDWIDE
401.2
100.0
+ 8.2
+ 9.5
10 Strategic Markets
336.5
83.8
+ 9.0
+ 10.5
SOURCE: IMS HEALTH,MIDAS, retail and
hospital where available
Refer to important disclosures at the end of this report
10 Strategic Markets:
U.S. Is the Key Growth Driver
+11.5%
USA
$195.6 Bil
+14.5%
CANADA
$8.0 Bil
+9.0%
10 Key Markets
$336.5 Bil
% Constant $ Growth
+7.4%
EUROPE
$75.0 Bil
+1.0%
JAPAN
$46.9 Bil
SOURCE: IMS HEALTH
+4.0%
FRANCE
$19.2 Bil
+5.2%
ITALY
$13.2Bil
+11.4%
UK
$13.7 Bil
+9.5%
MEXICO*
$6.1 Bil
+8.4%
BRAZIL*
$4.1 Bil
+8.0%
GERMANY
$20.3 Bil
Constant Dollars
* Pharmacy Market Only
Refer to important disclosures at the end of this report
+11%
SPAIN
$8.7 Bil
U.S. & Europe Dominate Growth
100
90
80
70
60
50
40
30
20
10
0
-10
-20
1997
Source: IMS HEALTH
% Contribution to Absolute Growth
Ten Key
Markets
North
America
Europe (All)
A/A/A
Japan
Latin
America
1999
1998
2000
2001*
Constant Dollars. Includes panels w/o six years of data
Refer to important disclosures at the end of this report
Key Industry Challenges & Issues

Pipeline

Patent

Price

Promotion

Politics
Refer to important disclosures at the end of this report
Key Industry Issues: Pipeline, Patent,
Price, Promotion, & Politics
Pipeline Drought: Approvals Declined Despite Increased R&D
NME Approvals Have Declined Since 1996
Indexed R&D, Sales, & NME (1990=100)
500
450
R&D Spending ($Bn)
400
Total US Sales ($Bn)
350
NME Approvals
300
250
200
150
100
50
1990
1991
1992
1993
1994
1995
Refer to important disclosures at the end of this report
1996
1997
1998
1999
2000
2001
2002
2003E
Key Industry Issues: Pipeline, Patent,
Price, Promotion, & Politics
Patent Exposure: Enormous Pressure from Patent Expirations
24,000
6.0%
20,000
16,000
4.0%
12,000
8,000
2.0%
4,000
-
0.0%
2001A
2002E
2003E
Revenue Off P atent
Top 5 brands
% of Total Rev.
WW Rev. (US $ m m )
Worldw ide R evenue for Products Off-Patent Yr. 2001-06
2001
2002
1
Prozac (Eli Lilly)Prilosec (AstraZeneca)
2
Pepcid (Merck) Augmentin (Glaxo)
2004E
2005E
2006E**
P atent Rev. as % of Total Rev
2003
2004
2005
2006
Cipro (Bayer)
Allegra (Aventis)
Zithromax (Pfizer)
Zocor (Merck)
Wellbutrin (Glaxo)
Celexa (Forest)
Amaryl (Aventis)
Zoloft (Pfizer)
3
Mevacor (Merck)
Claritin (Schering)
Flonase (Glaxo)
Diflucan (Pfizer)
Biaxin (Abbott)
Pravachol (BMY)
4
Alphagan (Allergan)
Prinivil (Merck)
Accupril (Pfizer)
Paraplatin (BMS)
Basen (Takeda)
Ambien (Sanofi)
Monopril (BMS)
Epogin (Chugai) Harnal (Yamamouchi)
5
Elocon (Schering) Zestril (AstraZeneca)
Refer to important disclosures at the end of this report
Zofran (Glaxo)
Key Industry Issues: Pipeline, Patent,
Price, Promotion, & Politics

Price & Politics: Pressure From All Levels, Every Direction
Private Sector:
–
–
–

Rising HMO Rx co-pays (increased co-pay reduces drug utilization)
Heavier discounts and higher rebates
Retail chains suing for differential discount rates
Federal:
–
Medicare Part B, Medicaid price control
(FTC & DOJ are investigating
pharmaceutical industry pricing and marketing practices. The government is focused on drug
company “inducements” that may have improperly influenced sales of products)
–
Drug Reimportation - back to agenda
25%
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
20%
15%
10%
5%
1996
Generic (Preferred)
Branded (Non-Formulary)
2001
Branded (Preferred)
0%
Had Not Filled One Rx
Taken Smaller Dose
Source: Harris Survey and IMS
Refer to important disclosures at the end of this report
Taken Rx Less
Frequently
Key Industry Issues: Pipeline, Patent,
Price, Promotion, & Politics
Price & Politics: Pressure From All Levels, Every Direction

State:
–
–
–
Maine Rx - entitlement to Medicaid type discounts
States suing for overcharging Medicare for cancer drugs
States forming purchasing groups to demand discounts

Suffolk County - inflated AWP prices to overcharge

Foreign Government:
–
–
–
–
Japan: price downward revision coming soon
Italy: 5% price cut; regional formularies; reference pricing
Germany: increased parallel importing; generic substitution, reference
pricing; 6% cut
France: increased generic substitution; reduced reimbursement (but
better for NCEs)
Refer to important disclosures at the end of this report
Key Industry Issues: Pipeline, Patent,
Price, Promotion, & Politics
Promotion: Increased Spending Due To Intense Competition

Sales force has
doubled in 6 years
80,000
70,000
60,000
50,000
40,000
30,000
1996

Marketing cost also
doubled (DTC is the
fastest growth
component)
1997
1998
1999
2000
2001
2002
2000
2001
20
18
16
14
12
10
8
6
4
2
0
1995
1996
1997
Retail Value of Samples
Hospital-Based Promotion
DTC Advertising
Refer to important disclosures at the end of this report
1998
1999
Office-Based Promotion
Journal Advertising
Key Industry Issues: Pipeline, Patent,
Price, Promotion, & Politics
Generic Competition: Faster Substitution & High Litigation Risk
Selected List of Recent Patent Litigation:

Against
Favor
Mix
Pending
Norvasc
Fosamax
Prilosec
Wellbutrin
Augmentin
Neurontin
Claritin
Zyprexa
Prozac
Premarin
Taxol
Plavix
Buspar
Allerga
Paxil
Lipitor
Rebetol
Vioxx

All are blockbuster drugs. Some have expiration beyond 2010.
Refer to important disclosures at the end of this report
Despite the Issues, Industry Still Has
Growth Potential
Industry Positives Support A Healthy Growth

Political Environment
–

Medicare Rx Reform
–
–

Republic President and Congress Favor Market Approach for Drug Price
The President and Congress Still Pushing for the Bill
$400-500 Bn for Rx over 10 years
Changes in FDA
–
–
New FDA commissioner and PDUFA III
Other Initiatives: improved transparency, better communication,
shortened approved times, and new cGMP rules

Demographic Trends Underpin Long-Term Revenue Growth

Patent Pressure Will Ease in the Next Few Years

Pipeline Candidates Have Increased

Overall, Pipeline to Patent Profile (P2P) Should Improve
Refer to important disclosures at the end of this report
Demographic Trends Underpin LongTerm Growth
By the Year 2006, 30% of the US Population Will Be 50+ Years Old
30.0%
29.0%
28.0%
27.0%
26.0%
2000
2001
2002
2003
2004
% of US Population Age >50
Source: Census Bureau Estimates and Forecasts, 2001
Refer to important disclosures at the end of this report
2005
2006
Demographic Trends Underpin LongTerm Growth
Major Diseases Are Under-diagnosed and Under-treated
Diagnosis
Hypertension
Diabetes
Hyperlipidemia
Osteoarthritis
Hypercholesterol
Dermatophytosis Nail
Cataracts
Menopause
Esophagitis
Depression
Refer to important disclosures at the end of this report
12 Month Visits (Mil)
53.6
25.1
14.7
11.4
8.9
7.8
7.3
7.2
7.1
7.0
Number of Product in Development
Has Been Steadily Climbing
Drug Candidates by Clinical Trial Phase
6000
486
499
Number of Drugs
5000
427
4000
733
3000
418
477
469
449
911
992
1135
442
816
871
742
528
561
630
651
714
3474
3328
3454
3396
3500
1997
1998
1999
2000
2001
461
2000
2870
3067
1995
1996
1000
0
Preclinical
Refer to important disclosures at the end of this report
Phase I
Phase II
Phase III
Source: Pharmaprojects
Pipeline to Patent Ratio Is Improving
New Product Rev. Will Offset Off-patent Rev. Loss in 2004
U S M a jo r P h a rm a c e u tic a ls : N e t In c re m e n ta l R e v e n u e (= C u rre n t - P re v io u s Y r.)
$ 1 5 ,0 0 0
In cre m e n ta l R e v. G a in fro m N e w P ro d u cts (cu rre n t vs. p re vio u s yr)
In cre m e n ta l R e v. L o ss D u e to P a te n t E xp ira tio n (cu rre n t vs. p re vio u s yr)
N e t In cre m e n ta l R e ve n u e
$ 1 0 ,0 0 0
$ 5 ,0 0 0
$0
2003
2004
2005
2006
2007
2008
-$ 5 ,0 0 0
-$ 1 0 ,0 0 0
Refer to important disclosures at the end of this report
Source: Merrill Lynch Research
Industry Earnings Growth Outlook
Long-Term Earnings Growth Is Expected To Be Around 10%
BMY
LLY
MRK
PFE
SGP
WYE
Average
2001
12%
4%
8%
24%
-4%
15%
12%
2002
-36%
-8%
-2%
21%
-10%
2%
-3%
2003E
8%
2%
9%
13%
-69%
13%
-4%
2004E
1%
13%
8%
19%
23%
11%
13%
2005E
4%
18%
10%
12%
29%
10%
14%
2006E
-2%
15%
0%
4%
26%
10%
9%
2007E
6%
14%
2%
1%
18%
7%
8%
2008E
4%
14%
1%
1%
17%
-4%
6%
CAGR (03-08)
3%
15%
4%
7%
23%
6%
10%
IBES LTG
10%
13%
8%
14%
8%
11%
11%
Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Therapeutic Analysis - 2002 Overview
Cardiovascular and Central Nervous System Drugs Still Dominate
WW Revenue (US $M)
2001A
2002E
Growth
1
Cardiov ascular
51,155
55,112
8%
2
CNS
38,146
42,447
11%
3
Infectious Diseases
31,855
32,935
3%
4
Respiratory
18,513
19,717
7%
5
Gastrointestinal
17,355
18,984
9%
6
Oncology
15,671
17,102
9%
7
Endocrine & Metabolic
15,401
14,197
-8%
8
Hematology
11,742
13,949
19%
9
Rheumatology
10,167
10,688
5%
10
Musculoskeletal
5,185
6,084
17%
11
Urology
4,288
4,913
15%
12
Women's Health
4,008
4,110
3%
13
Transplantation
3,222
3,351
4%
14
Ophthalmology
2,714
2,942
8%
15
Dermatology
2,265
2,134
-6%
Refer to important disclosures at the end of this report
Source: Merrill Lynch Research
Therapeutic Analysis - Disease
Category
Healthy Growth for Most Treatment Classes. Decline Due to Generics
Disease Category
2001A
2002E
Growth
1
Hypertension, CHF
22,858
23,868
4%
2
Lipid Lowering
18,345
20,552
12%
3
Antibiotic
17,957
16,307
-9%
4
GERD, Ulcers
16,001
16,922
6%
5
Cancer
15,492
16,932
9%
6
Diabetes
11,453
10,102
-12%
7
Depression
11,145
11,716
5%
8
Arthritis
10,156
10,665
5%
9
Asthma/COPD
9,041
9,980
10%

3%
8,688
8,458
10 Allergy, Rhinitis
High Growth Category - New Products: Lipid Lowering, Asthma etc.
Slow Growth Category - No New Products: Hypertension, Ulcers, etc.

Declining Category - Generic Substitution: Diabetes, Antibiotic, etc.

Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Therapeutic Analysis - Drug Class
Statin, Anti-ulcerant & Blood Growth Factor Top the Chart
Drug Class
2001A
2002E
Growth
1
Statin
17,792
19,856
12%
2
Anti-ulcerant (PPI)
13,259
14,800
12%
3
Blood growth factor*
8,689
10,387
20%
4
Anti-depressant/SSRI
8,112
8,040
-1%
5
ACE inhibitor
7,534
7,159
-5%
6
COX-2 inhibitor
6,915
7,370
7%
7
Ca blocker
6,801
6,685
-2%
8
Antipsychotic**
6,612
7,944
20%
9
Antihistamine
6,584
6,586
0%
10
Angiotensin II antagonist
5,092
6,402
26%

High Growth Category - New Products: blood growth factor, antipsychotic

Slow Growth Category - No New Products: COX-2 inhibitor, antihistamine

Declining Category - Generic Substitution: ACE inhibitor, Ca blocker
Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Therapeutic Analysis - Top 10 Drugs
Statin Drugs Are the Winners, PPIs Are Still Around
Brand Name
2001A
2002E
Growth
1
Lipitor
6,832
8,444
24%
2
Zocor
6,670
7,210
8%
3
Prilosec/Losec
5,684
4,638
-18%
4
Celebrex
4,360
4,230
-3%
5
Prevacid
3,771
4,004
6%
6
Norvasc
3,582
3,805
6%
7
Procrit/Eprex
3,429
4,098
20%
8
Zyprexa
3,087
3,692
20%
9
Paxil
2,990
3,268
9%
10
Vioxx
2,555
2,671
5%

Blockbuster drugs are highly concentrated in global giants - Pfizer has 3, Merck has
2 of the top 10, AstraZeneca, Abbott, Lilly, Glaxo, J & J, Amgen have the rest

Major pharmaceutical firms blockbuster strategy
Refer to important disclosures at the end of this report
Source: Merrill Lynch Research
Therapeutic Analysis - Growth
Outlook
CNS, Oncology, Urology, Musculoskeletal Will Lead the Growth
25%
22%
2001-05 CAGR for All Therapeutic Categories = 9%
20%
20%
15%
14%
15%
12%
11%
11%
8%
6%
6%
6%
7%
6%
4%
5%
3%
-1%
Refer to important disclosures at the end of this report
Dermatology
Ophthalmology
Transplantation
Women's
Health
Urology
Musculoskeletal
Rheumatology
Hematology
Endocrine &
Metabolic
Oncology
Gastrointestinal
Respiratory
Infectious
Diseases
CNS
Cardiovascular
0%
Miscellaneous
10%
Source: Merrill Lynch Research
Therapeutic Analysis - Drug Class
Growth Forecast
Lead Table Will Be Significantly Different in 3 Years
Drug Class
2002E
2005E
Growth
1
Statin
19,856
26,085
10%
2
Anti-ulcerant (PPI)
14,800
15,585
4%
3
Blood growth factor*
10,387
14,938
15%
4
Anti-depressant/SSRI
8,040
10,333
6%
5
ACE inhibitor
7,159
5,614
-7%
6
COX-2 inhibitor
7,370
9,991
10%
7
Ca blocker
6,685
6,077
-3%
8
Antipsychotic**
7,944
11,320
14%
9
Antihistamine
6,586
4,127
-11%
10
Angiotensin II antagonist
6,402
9,546
17%

High growth class: crowded, competitive, but new launches expand the market

Slow or negative class: mature class and generic competition
Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Therapeutic Analysis - Next Wave
of New Medicines
>1,000 New Medicines in R&D Stage for Major Diseases:

100 for AIDS (40 antivirals, 15 Vaccines, etc.)

400 for Cancer (70 for Lung Cancer, 60 for Breast Cancer, 55 for Colon
Cancer, 50 for Skin Cancer, and 50 for Prostate Cancer)

200 for Heart Disease and Stroke (20 for Stroke, 20 for Congestive Heart
Failure, 10 for Hypertension, 10 for Hyperlipidemia, etc.)

200 for Neurologic Disease (40 for Pain, 30 for Brain Tumors, 25 for
Alzheimer’s Disease, 17 for Parkinson’s Disease, 16 for Multiple Sclerosis)

800 for Elderly (40 for Respiratory, 20 for Diabetes, 20 for Rheumatoid
Arthritis, 20 for Depression, etc.)
Refer to important disclosures at the end of this report
Therapeutic Analysis - Cardiovascular

Hypertension
–
–
–
–
–

New guideline will expand patient base (140/90 to 120/80 mm Hg)
Old treatment dominated by generics (diuretics, beta-blockers)
Branded ACE inhibitors & Ca blockers converted to generics
New class dominated by branded drugs (ARB)
Lack of innovative treatment (only Inspra)
Lipid-lowering
–
–
–
–
Statin: still the biggest class ($20B/yr) and growing at a healthy pace
Statin: new competitor (Crestor) expected to challenge Lipitor, Zocor etc
Statin: generics eroding market share and will grow significantly beyond 2006
New Class: Zetia
Refer to important disclosures at the end of this report
Therapeutic Analysis - CNS

Antidepressant
–
–
–

Antipsychotics
–

SSRI: Prozac expired, Paxil, Celexa, Zoloft will follow
SNRI: new entrant (Cymbalta)
Still Needs New Class: Sub-P antagonist
Atypicals: crowded and relative new class (Zyprexa, Risperdol, Seroquel,
Geodon, Abilify)
Alzheimer’s and Parkinson’s Disease
–
–
No effective treatment but market potentials are enormous
Alzheimer’s: cholinesterase inhibitor (Aricept, Reminyl) & memantine
Refer to important disclosures at the end of this report
Therapeutic Analysis - Diabetes

Epidemic Type 2 Diabetes
–
–
–
–

Increased 60% in 1990’s (16 million and climbing)
20% of the elderly (>60 yrs) have diabetes
Underlying the epidemic: Obesity
Diabetic complications
• microvascular: retinopathy (visual loss), nephropathy (renal failure)
• macrovascular: MI, PVD, stroke
• combined/metabolic: neuropathy, cardiomyopathy, foot ulcers
Anti-diabetic Agents
–
–
–
–
Sulfonylurea (glyburide, glipizide), Metformin (Glucophage) have been
genericized and widely prescribed
Glitazone (Actos, Avandia), Alpha-glucosidase inh. (acarbose), insulin secretion
enhancer (mitiglinide) are becoming popular
Insulin
• old generation could face first batch of bio-generics
• new generations of insulin: inhaled (Exubera), glucagon-like (exenatide)
Many new emerging classes: PPAR agonist, beta-3 agonist, aldose reductase
inhibitor, dipeptidylpeptidase IV inihibitor
Refer to important disclosures at the end of this report
Therapeutic Analysis - Oncology

New Development Stemmed from Scientific Breakthroughs

Accommodative Regulatory Agency
–
–
–

Market Demand
–
–

No cure cancer therapy available
Unsatisfied physicians and patients will try everything available (off-label)
Excellent Field for New Biologics
–
–

FDA new policy for accelerated review/approval
CDER & CBER combined
New standard for approval (survival is not the only primary endpoint)
Add-on is the new way of treatment
Pricing is more attractive than other drugs
Generics Have Few Opportunity
–
Regulatory route for biogenerics not clear
Refer to important disclosures at the end of this report
Outlook & Opportunity:
2003 Approvals
C o m p an y
Pro d u ct
A b b o tt L a b s
U p rim a
90
E re c tile d y s fu n c tio n
F ile d
A lc o n
V ig a m o x
75
A n ti-in fe c tiv e (e y e s )
A p p ro v e d
B ris to l-M y e rs S q u ib b
R e y a ta z
478
HIV / A IDS
A p p ro v e d
E li L illy
S y m b y a x (O F C )
338
B io p o la r De p re s s io n
F ile d 4 Q : 0 2
E li L illy
C ia lis
605
S e x u a l Dy s fu n c tio n
A p p ro v a b le
E li L illy
C y m b a lta
971
De p re s s io n
A p p ro v a b le
E li L illy
Du lo x e tin e
291
S tre s U rin a ry In c o n tin e n c e (S U I)
F ile d 4 Q : 0 2
M e rc k
Em end
295
E m e s is
A p p ro v e d
P fiz e r
S o m a v e rt
240
G ro w th Ho rm o n e De fic ie n c y
A p p ro v e d
P fiz e r
Dy n a s ta t
99
S u rg ic a l P a in
F ile d
S c h e rin g -P lo u g h
As m anex
490
A s th m a
A p p ro v a b le
W a ts o n P h a rm a c e u tic a ls
O x y tro l
125
U rin a ry In c o n tin e n c e
A p p ro v e d
W y e th
In d u c tO s
39
B o n e R e p a ir & R e g e n e ra tio n
F ile d
W y e th
F lu m is t
728
In tra n a s a l F lu V a c c in e
A p p ro v e d
G ile a d
C o v ira c il
331
HIV / A IDS
F ile d
A s tra Z e n e c a
C re s to r
2066
Hy p e rlip id e m ia
A p p ro v e d
A s tra Z e n e c a
Ire s s a
700
C a n c e r (N S C L C )
A p p ro v e d
G la x o S m ith K lin e
L e v itra
524
S e x u a l Dy s fu n c tio n
A p p ro v e d
G la x o S m ith K lin e
A riflo
190
C OPD
F ile d
G la x o S m ith K lin e
Bex x ar
95
C anc er
F ile d
N o v a rtis
E n a b le x
600
U rin a ry In c o n tin e n c e
F ile d
N o v a rtis
M y o fo rtic
330
O rg a n T ra n s p la n t
F ile d
N o v a rtis / G e n e n te c h
X o la ir
326
A s th m a
A p p ro v e d
N o v a rtis
C e rtic a n
230
O rg a n T ra n s p la n t
F ile d
R oc he
F uz eon
464
HIV / A IDS
A p p ro v e d
S a n o fi-S y n th e la b o
X a tra l O D
545
B P H (B e n ig n P ro s ta tic Hy p e rtro p h y )
A p p ro v a b le
S h ire
F o z re n o l
170
Hy p e rp h o s p h a te m ia
A p p ro v a b le
F u jis a w a
F u n g u a rd
320
A n tifu n g a l
F ile d
K y o rin / A lle rg a n
Z y m ar
Refer to important disclosures at the end of this report
S a l e s 2 0 0 6 E I n d i c a ti o n
67
S ta tu s
S y n th e tic A n tib a c te ria l
A p p ro v e d
Source: Merrill Lynch Research
Outlook & Opportunity:
Further Look at 2003 Approvals
Break Down of the 25 Expected New Products...

First-In-Class: 5 out of 25 (20%)
–

Me-Too Drugs: 13 out of 25 (72%)
–
–
–
–
–
–

Long development time and costly, may not return the investment
Shorter R&D time: no target identification & validation
Lower regulatory hurdle: clear clinical protocol (well-defined clinical endpoints),
FDA familiarity
Market familiarity: compete on moderate improved efficacy, incremental safety
benefit
Higher marketing cost: market share battle between incumbent and new players
In general, 2nd or 3rd entrant may still gain significant share
• 3 out of 13 me-too drugs are either 2nd or 3rd (e.g. Cialis, Levitra)
Later entrants may not become blockbuster
• 10 out of 13 belong to this category
• but there are some exceptions (Crestor…the market is big enough)
New Formulation/Delivery Technology: 2 out of 25 (8%)
–
Viable business model that many mid size pharmaceutical companies rely on
Refer to important disclosures at the end of this report
Development for First-in-Class Drug
is Long and Costly
Compound Success Rates by Stages
Discovery
Compound Success
Rates by Stage
(2-10 years)
Preclinical Test
5,000-10,000 screened
Laboratory and animal testing
Phase I
250
enters preclinical testing
20-80 healthy volunteers used to
determine safety and dosage
Phase II
100-300 patient volunteers used to
look for efficacy and side effects
Phase III
5
enters clinical testing
1,000-25,000 patient volunteers used to monitor
diverse reactions to long-term use
FDA Review/Approval
Additional Postmarketing Testing
1
approved by the FDA
Years
0
4
8
Refer to important disclosures at the end of this report
12
16
Me-Too Drug May Save 25% Cost &
2-5 Years of Development Time
Average Time = 14.2 yrs; Average Cost = $820 M
Compound Discovery
and Development
Early
Discovery
Clinical Trials
Expenditures Est.
$14 B
Target
Target
Identification Validation
$19 B
Screen
Primary
Secondary
$19.4 B
Lead
Development Screening Screening Optimization
Genomics
Functional Genomics
Proteomics
Bioinformatics
Gene sequencing
Gene chip
Novel assay technologies
Combinatorial chemistry
High-throughput screening
Toxicology screening
Medicinal chemistry
Information Systems
Refer to important disclosures at the end of this report
Preclinical
Studies
Phase I
Phase II
Phase III
Regulatory
Submission
and Review
Outlook & Opportunity:
The Era of Generics Has Come
The Balance Has Shifted to Generics

Favorable Political Environment and Legislation
–
–
–
–
Government budget pressure (federal and state budget deficit)
Increasing drug cost for private payors (HMO, employers)
High profile patent abuses by branded pharmaceutical companies
Hatch-Waxman and the new Medicare Rx bill
• No clinical trial, only bio-equivalent study and CMC
• 6 months exclusivity and 30 months stay

Enhanced FDA Division for Generics

Legal System: Data Show Court Side More Often With Generics
–
–

Creative legal strategies from generic companies
On average, generic challengers won 70% of the litigation
Potential Windfall for Patent Challengers
–
–
Risk/Benefit analysis encourages litigation
Enormous financial rewards for 6 month exclusivity
• Generic Prozac
• Generic Prilosec
Refer to important disclosures at the end of this report
Outlook & Opportunity:
The Era of Generics Has Come
Patent Exposure: Enormous Opportunity for Generic Substitution
Worldwide Revenue for Products Off-Patent Yr. 2001-06
6.0%
20,000
16,000
4.0%
12,000
8,000
2.0%
4,000
-
0.0%
2001A
2002E
2003E
Revenue Off Patent
Top 5 brands
% of Total Rev.
WW Rev. (US $ mm)
24,000
2001
2002
1
Prozac (Eli Lilly)Prilosec (AstraZeneca)
2
Pepcid (Merck) Augmentin (Glaxo)
2004E
2005E
2006E**
Patent Rev. as % of Total Rev
2003
2004
2005
2006
Cipro (Bayer)
Allegra (Aventis)
Zithromax (Pfizer)
Zocor (Merck)
Wellbutrin (Glaxo)
Celexa (Forest)
Amaryl (Aventis)
Zoloft (Pfizer)
3
Mevacor (Merck)
Claritin (Schering)
Flonase (Glaxo)
Diflucan (Pfizer)
Biaxin (Abbott)
Pravachol (BMY)
4
Alphagan (Allergan)
Prinivil (Merck)
Accupril (Pfizer)
Paraplatin (BMS)
Basen (Takeda)
Ambien (Sanofi)
Monopril (BMS)
Epogin (Chugai) Harnal (Yamamouchi)
5
Elocon (Schering) Zestril (AstraZeneca)
Refer to important disclosures at the end of this report
Zofran (Glaxo)
Source: Merrill Lynch Research
Outlook & Opportunity:
The Era of Generics Has Come
Many Blockbusters May Lose Patent Earlier Than Expected
Selected List of Recent Patent Litigation:

Against
Favor
Mix
Pending
Norvasc
Fosamax
Prilosec
Wellbutrin
Augmentin
Neurontin
Claritin
Zyprexa
Prozac
Premarin
Taxol
Plavix
Buspar
Allerga
Paxil
Lipitor
Rebetol
Vioxx

All are blockbuster drugs. Some have expiration beyond 2010.
Refer to important disclosures at the end of this report
Outlook & Opportunity:
The Era of Generics Has Come
Patent Exposure for Major U.S. Pharmaceutical Companies
Manufacturers Product
BMY
Paraplatin
Exposure
(% of Pharma Revs)
4%
BMY
Plavix
15%
Trial in 2Q04
LLY
Zyprexa
25%
Trial begins January ‘04
MRK
Fosamax
8%
Generic Appeal Decision
PFE
Norvasc
6%
PFE Appeal & Citizen’s Petition
PFE
Neurontin
7%
Trial in Fall ‘03
SGP
Rebetol
12%
Settlement Discussions Ongoing
WYE
Premarin
10%
Trade Secret Ruling
Forthcoming
Litigation Status
Generic Appeal Decision 4Q
Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Outlook & Opportunity:
The Era of Generics Has Come
Patent Exposure for Major EU Pharmaceutical Companies
Exposure
(% of Pharma Revs)
25%
CAGR%
13%
Possible CAGR%
Assuming Exposures
5%
Sanofi-Synthelabo
29%
15%
5%
Roche
9%
19%
17%
Aventis
16%
13%
5%
AstraZeneca
11%
19%
16%
GlaxoSmithKline
18%
10%
10%
Manufacturers
Novartis
Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Case Study: Dr. Reddy’s
A Company Has Emerged As A Major Player in Generic Industry

Before 1995, Domestic Focus and API Suppliers

Acquired Cheminor, American Remedies, and Set Up its U.S. Subsidiary in
Late-90s to Gain Access to the U.S. Market

U.S. IPO in 2001

Increased Internal R&D in Proprietary Drugs

Major Paragraph IV Challenges for 6 Month Exclusivity (10 total)
–
Prozac, Zyprexa, Plavix

A Respected Generic Player in the Global Market

2003 Sales: $380M (+25%, ex-fluo.), Net Income: $74M, GM: 57%

CAGR (3 yr.) +31%, US +55%

Market Cap: $1.9B
Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Case Study: Dr. Reddy’s
A Company Has Emerged As A Major Player in Generic Industry
$30.00
$25.00
$20.00
$15.00
01-Aug-2003
23-May-2003
14-Mar-2003
03-Jan-2003
25-Oct-2002
16-Aug-2002
07-Jun-2002
29-Mar-2002
18-Jan-2002
09-Nov-2001
31-Aug-2001
22-Jun-2001
13-Apr-2001
$10.00
Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
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Refer to important disclosures at the end of this report