Feeding the Pipeline IX: Looking Up and Out from the Bottom of...

Feeding the Pipeline IXOctober, 2008 - Pg. 1

© Defined Health 2008

Feeding the Pipeline IX: Looking Up and Out from the Bottom of the Cliff

Ed Saltzman Defined Health









© CartoonStock.com. Reprinted with permission.

TOM



March 16, 2008

JPMorgan Acts to Buy Ailing Bear Stearnsat Huge Discount

September 17, 2008

Fed’s $85 Billion Loan Rescues Insurer

October 6, 2008, 8:28 am

The Last Days of Lehman Brothers



Toxic “Assets”



New Jersey Chose FirstNumber of Superfund sites in NJ = 116 Number of Investment Banks in NYC

epa.gov (116 sites = 114 + 2 proposed)



And You Thought Blockbusters Were a Bad Business Model

The New York Times



And You Thought Blockbusters Were a Bad Business Model

In the case of a default, Party A may have to track

down the final party in the insurance agreement.

However, this party may or may not be in a

position to pay the bond's full value .

The New York Times



Meanwhile, Something More Shocking than the Fall of Lehman Happened in Paris

Viehbacher to replace Le Fur as Sanofi CEO By Caroline Jacobs and Ben Hirschler ( - Reuters - Wednesday, September 10, 2008

PARIS/LONDON: French drugmaker Sanofi-Aventis on Wednesday named GlaxoSmithKline executive Chris Viehbacher as its new CEO, ousting former research head Gerard Le Fur after less than two years in the job. Shares in Sanofi extended gains on the news, fuelled by hopes that the changeover will bring a fresh strategy at the group, which has struggled recently to get new drugs to market. Sanofi said Viehbacher, 48, would take the helm from December 1, while Le Fur would continue to work in scientific areas within the group. "It's a pretty bold and, frankly, surprising move," said Tim Anderson, an industry analyst at Sanford Bernstein. "It's fairly material that they are bringing an outsider into this role because it has been an insular company that's felt like it has been run by a very small core group of insiders, and it just hasn't worked terribly well." The news had been expected since Tuesday, when a person familiar with the situation said that Viehbacher, Glaxo's North American head, would take a top job at Sanofi and was likely to replace Le Fur. Sanofi has been the laggard of the European pharmaceuticals sector in recent years and the company has a poor reputation for delivery, following a series of product setbacks. Le Fur only took over as chief executive of Sanofi in January 2007, but industry analysts and people close to the company said relations with Sanofi's powerful chairman Jean-Francois Dehecq had been strained. Dehecq was responsible for building Sanofi into the world's third-largest drugmaker through a string of mergers over 30 years.SHAREHOLDER MOVESOil giant Total and cosmetics group L'Oreal, which together own more than a fifth of Sanofi's shares, are thought by analysts to have pushed for a change at the top of Sanofi to reinvigorate the company's performance. Officials at both Total and L'Oreal declined to comment. But Total's cont.

"It's a pretty bold and, frankly, surprising move ," said Tim Anderson, an industry analyst at Sanford Bernstein. "It's fairly material that they are bringing an outsider into this role because it has been an insular company that's felt like it has been run by a very small core group of insiders, and it just hasn't worked terribly well ."



GSK's Viehbacher to replace Le Fur as Sanofi CEO09.10.08, 4:17 PM ET

SACREBLEU! Mon Dieu! ??



Though Not as Bad as Wall Street, Pharma Has Also Suffered from Toxic Assets

Burrill & Company - Biotech 2007: A Global Transformation, Nov07



Toxic Assets: Also a Problem for Pharma

VIOXX



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Merck, based in Whitehouse Station, N.J., has begun paying a $4.85 billion settlement to end about 50,000 lawsuits brought by people claiming Vioxx cause heart attacks, ischemic strokes or death. It still faces other litigation over the former blockbuster arthritis treatment.

Drug giant Pfizer Inc. has reached an $894 million deal to end most of the lawsuits over its two prescription pain relievers, the popular Celebrex and a similar drug, Bextra, no longer on the market.

Producing Quite a Windfall

$894 million deal ends pain of Pfizer's lawsuitsBy LINDA A. JOHNSON 10.17.08, 8:09 AM ET



But Pharma’s Biggest Problem Today is Terminal Assets

RIPRIPMevacor1987 1987 1987 1987 ---- 2

001200120012001

RIPRIP

1998 1998 1998 1998 ---- 2011201120112011

RIPRIPZocor

1988 1988 1988 1988 ---- 2005200520052005

RIPRIPLipitor

1997 1997 1997 1997 ---- 2010201020102010

Advair

RIPRIPDiovan

1996 1996 1996 1996 ---- 2012201220122012

RIPRIPPlavix

1998 1998 1998 1998 ---- 2011201120112011

RIPRIPEffexor

1994 1994 1994 1994 ---- 2008200820082008



Today’s Terminal Assets Once Drove Enormous Success in Pharma

10%

8%

6%

11%10%

12%

9%8%

12%

9%

7%

9%

4%

17%

7%

17%

14%

3%

12%

9%

7%

4%

11%

4%

11%10%

16%

16%

16%

16%

4%

5%

13%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1975

A-198

5A19

86A-1

991A

1992

A19

93A

1994

A19

95A

1996

A19

97A

1998

A19

99A

2000

A20

01A

2002

A20

03A

2004

A20

05A

2006

A20

07E

% Sales Growth

% EPS Growth

Top-Line Sales Growth versus EPS: Pharmaceutical Industry (1975-2007)

EvaluatePharma



Pharma’s Quest to Maximize Revenue from Terminal Assets Before Their Demise Led to Some Destructive Habits

Worth1000.com



Pharma’s Destructive Habit #1: DTC Advertising

“I prescribe Sarscasma to

all of my patients. Sure,

some of them don’t really

need it, but I’m just tired

of hearing their crap.”

Dr. Phil N. Goode, MD

sarcasm relief capsules

Onion.com, sarcasma.com, utube, NBC, adbusters.org



0%

2%

4%

6%

8%

10%

12%

14%

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

CPI vs Pharma Annual Price Increases

Pharma’s Destructive Habit #2: Aggressive Price Increases

Bureau of Labor Statistics



Pharma’s Destructive Habit #3: Unconscionable and Illegal “Patent” Extensions

Bristol-Myers Will Settle Antitrust Charges by U.S. March 8, 2003

Bristol-Myers Squibb will submit to tough new restrictions on its business tactics to settle antitrust charges by the Federal Trade Commission, the agency said today. Bristol-Myers agreed to a 10-year ban on its past practice of filing new patent listings thatautomatically lock out generic competitors to a particular drug for 30 months at a time. The ban resolves charges by the F.T.C. that Bristol-Myers illegally thwarted cheaper versions of three of its drugs, the anti-anxiety drug BuSpar and the cancer drugs Taxol and Platinol, the agency said. The commission's chairman, Timothy Muris, told a news conference, ''Bristol's illegal conduct protected nearly $2 billion in yearly sales from the three monopolies, forcing cancer patients and others to overpay by hundreds of millions of dollars for important and often life-saving medications.'' The patent restriction comes on top of a $670 million settlement Bristol-Myers reached in January to resolve similar antitrust charges regarding BuSpar and Taxol, filed by a group of state attorneys general, as well as several generic drug manufacturers and pharmacy chains. Bristol-Myers was accused of delaying generic competition by filing new patents for the three drugs that did not meet the standard for listing in the Orange Book of patent-protected drugs published by the Food and Drug Administration. The five-member commission voted unanimously to accept the settlement, which will be subject to public comment for 30 days. Bristol-Myers can still file suit against a generic drug company for patent infringement under the settlement. The company said in a statement the restrictions should not significantly affect protection of its intellectual property, nor adversely affect its financial position.

Bristol-Myers agreed to a 10-year ban on its past practice of filing new patent listings that automatically lock out generic competitors to a particular drug for 30 months at a time.



Pharma’s Destructive Habit #3: Unconscionable and Illegal “Patent” Extensions

Bristol-Myers Will Settle Antitrust Charges by U.S. March 8, 2003

Bristol-Myers Squibb will submit to tough new restrictions on its business tactics to settle antitrust charges by the Federal Trade Commission, the agency said today. Bristol-Myers agreed to a 10-year ban on its past practice of filing new patent listings thatautomatically lock out generic competitors to a particular drug for 30 months at a time. The ban resolves charges by the F.T.C. that Bristol-Myers illegally thwarted cheaper versions of three of its drugs, the anti-anxiety drug BuSpar and the cancer drugs Taxol and Platinol, the agency said. The commission's chairman, Timothy Muris, told a news conference, ''Bristol's illegal conduct protected nearly $2 billion in yearly sales from the three monopolies, forcing cancer patients and others to overpay by hundreds of millions of dollars for important and often life-saving medications.'' The patent restriction comes on top of a $670 million settlement Bristol-Myers reached in January to resolve similar antitrust charges regarding BuSpar and Taxol, filed by a group of state attorneys general, as well as several generic drug manufacturers and pharmacy chains. Bristol-Myers was accused of delaying generic competition by filing new patents for the three drugs that did not meet the standard for listing in the Orange Book of patent-protected drugs published by the Food and Drug Administration. The five-member commission voted unanimously to accept the settlement, which will be subject to public comment for 30 days. Bristol-Myers can still file suit against a generic drug company for patent infringement under the settlement. The company said in a statement the restrictions should not significantly affect protection of its intellectual property, nor adversely affect its financial position.

''Bristol's illegal conduct protected nearly $2 billion in yearly sales from the three monopolies, forcing cancer patients and others to overpay by hundreds of millions of dollars for important and often life-saving medications.''



Pharma’s Request to Replace Terminal Assets Led to Even More Seriously Destructive Habits

© CartoonStock.com. Reprinted with permission.



$27,000SandozCiba-Geigy1996

$11,000Boehringer MannheimRoche1997

$12,000SynthelaboSanofi1998

$31,155AstraZeneca1998

$26,355Pharmacia & UpjohnMonsanto1999

$84,083Warner LambertPfizer1999

$6,900KnollAbbott2000

$78,000SmithKlineGlaxo2000

$7,800DuPont PharmaBMS2001

$58,966PharmaciaPfizer2002

Deal Value ($millions)

AcquireeAcquirerDate

Seriously Destructive Habit #1: M&A

Windhover Information



$5,600SchwarzUCB 2006

$65,000AventisSanofi2004

$2,200SumitomoDainippon2005

$6,100AltanaNycomed2006

$13,300SeronoMerck2006

$21,500Schering AGBayer2006

$4,300TanabeMitsubishi2007

$14,430OrganonSchering-Plough2007

Deal Value ($millions)

AcquireeAcquirerDate

Destructive Habit #1: M&A

Windhover Information



Destructive Habit #2: Larger and Less Productive R&D Empires

Pfizer Research at Groton, CT • 160–acre site, 2.7 million ft2 facility space• Largest pharmaceutical research facility of

its kind in the world

Company website



Big Pharma R&D: More Destructive than Productive

*NDAs and NMEs are from US onlyParexel's Pharmaceutical R&D Statistical Sourcebook 2008/2009; DH analysis.



But Pharma’s Most Destructive Habit Was Denial

© www.cartoonstock.com. Used with permission.



Denial was Complicated by Optimism



Part D Sounded Like a Windfall

A Windfall From Shifts to MedicareJuly 18, 2006By MILT FREUDENHEIM

The pharmaceutical industry is beginning to reap a windfall from a surprisingly lucrative niche market: drugs for poor people. And analysts expect the benefits to show up in many of the quarterly financial results that drug makers will begin posting this week. The windfall, which by some estimates could be $2 billion or more this year, is a result of the transfer of millions of low-income people into the new Medicare Part D drug program that went into effect in January. Under that program, as it turns out, the prices paid by insurers, and eventually the taxpayer, for the medications given to those transferred are likely to be higher than what was paid under the federal-state Medicaid programs for the poor.

About 6.5 million low-income elderly people or younger disabled poor people were automatically transferred into the Part D program for drug coverage. Because their other health needs are still covered by Medicaid, they are called dual eligibles. The advent of Part D has not affected the drug coverage for the 45 million other low-income people whose drugs are still paid for under state Medicaid programs. Those programs closely monitor drug prices, and drug makers often typically end up paying rebates to the states. It is too early to calculate the full effect of the shift of the former Medicaid patients now covered by Part D. But analysts expect it to generate hundreds of millions of additional dollars this year for the drug companies, which have long chafed under the pricing restraints of the state programs. cont.

The windfall, which by some estimates could be $2 billion or more this year , is a result of the transfer of millions of low-income people into the new Medicare Part D drug program that went into effect in January.



But Has Turned Into a Trickle

Analysis: Fewer prescriptions filledPosted on Mon, Sep. 22, 2008By Miriam Hill

People are picking up fewer prescription drugs and visiting their doctors less often as the economy pinches pocketbooks, according to analyst research. The drug industry is often thought to be invulnerable to a recession because people are reluctant to skip doctors' visits or stop taking medications. But the number of prescriptions dispensed in the second quarter of this year fell almost 2 percent from a year earlier. That followed a 0.5 percent drop in the first quarter of this year, the first time that number has been negative since 1996, according to data provider IMS Health Inc. Its research did not go back further than 1996."The bottom line for 2008 is a significant decline in prescription growth," said Diana Conmy, corporate director of market insights for IMS. For the 12 months ending in July, doctors' visits droppped about 1.2 percent, IMS said. Many factors contributed to the changes, she said. Drug companies have introduced fewer new products. High-profile stories about dangerous drug side effects may have made doctors and consumers wary of prescribing and taking drugs.The Food and Drug Administration also has slowed the pace at which it approves new drugs. Corporate cutbacks have shrunk paychecks and pushed up co-pays for prescriptions and doctor visits. In the late 1990s, yearly prescription growth peaked at 9 percent, IMS said."Pharmaceutical companies have been used to much higher growth rates than we're seeing now," Conmy said. cont.

But the number of prescriptions dispensed in the second quarter of this year fell almost 2 percent from a year earlier . That followed a 0.5 percent drop in the first quarter of this year, the first time that number has been negative since 1996, according to data provider IMS Health Inc.



Faced with dwindling growth rates in the US and Europe, drug companies are turning their attention towards emerging pharmaceutical markets where recent economic booms have fuelled double-digit growth. However, although the patient potential of these countries is enormous, foreign pharmaceutical companies are currently tapping into only a fraction of the market.

Poor access to drugs in countries like India and China, and to an extent in Russia, Brazil and Turkey limits the potential market available to pharmaceutical groups. Nevertheless, many companies are keen to get a foothold as the purchasing power of the booming middle class is rising, driving market growth. Governments are improving public provision of healthcare, and more individuals can pay for drugs out of pocket, so the largest companies are ready to profit, compensating for lower growth in mature markets.

Double-digit rates of growthWith slowing growth rates in western pharmaceutical markets, the fast growing emerging markets may be necessary as new sustainable sources of revenue growth. Some of the countries that have attracted the most attention are Brazil, Russia, India, China and Turkey. Although the current pharmaceutical market values in these countries are not impressive compared to more mature markets, most are experiencing tremendous growth rates compared to the modest 4-6% growth seen in

The Promise of Emerging Markets

Big Pharma rushing for foothold in emerging markets despite challenges13th March 2008

Faced with dwindling growth rates in the US and Europe, drug companies are turning their attention towards emerging pharmaceutical markets where recent economic booms have fuelled double-digit growth . However, although the patient potential of these countries is enormous , foreign pharmaceutical companies are currently tapping into only a fraction of the market .

Feeding the Pipeline VIIIOctober, 2007 - Pg. 33




On the other hand, India's booming middle class, created by the growth of the services industry, accounts for only a tiny proportion of the total population and still has significant growth potential. However, the country's poor infrastructure may limit future growth.Insufficient IP protection and low public fundingDespite the passing of the Patent Act of 2005, recognizing product and not only process patents for pharmaceuticals, India has failed to deliver on its initial promise of improved intellectual property protection. Since the Patent Act was passed patent applications for Eli Lilly's Forteo (teriparatide), Novartis's Glivec (imatinib) and AstraZeneca's Iressa (gefitinib) were rejected mostly on the grounds of prior known use, or incremental innovation that is not recognized in India. Despite Novartis's appeal to the Chennai High Court the initial decision was upheld. Multinational pharma companies active in India are now reconsidering their portfolio of marketed drugs and may decide to focus on more mature products. In view of the court's decision on Glivec, there is concern that the trend for rejecting the patents of life-saving drugs may continue.

However, in December 2007 Pfizer's HIV/AIDS drug Celzentry (maraviroc) became the first known HIV/AIDS drug to get a patent in India. Although this event may signal a change in the tide for patent protection in India, post-grant opposition from local manufacturers and patient groups could still result in the decision being overturned.China also failed to improve its IP laws and, in a move that surprised the industry, Brazil issued a compulsory license for Merck's HIV/AIDS drug Sustiva (efavirenz) in May 2007. Thailand has also issued a line of compulsory licenses and should this trend continue in other countries, or expand beyond HIV/AIDS drugs, it may seriously undermine the position of foreign pharma.Another major obstacle to the higher uptake of branded drugs in emerging markets is poor access to pharmaceuticals through public health provision. However, as their economies strengthen, many of these countries are investing in improving access and quality of healthcare to their citizens: Turkey, Brazil, Russia and China have all made steps to improve access to healthcare services through public systems. The potential impact of increased public healthcare spending on the uptake of drugs produced by global pharma is twofold. First of all, increased access to healthcare facilities means the population is more likely to receive prescriptions and purchase drugs. Added to this, patients will have wider access to drugs through expanded reimbursement on the public health systems.A clear example of how expansion of the reimbursement system can influence market growth can be seen in Russia. The introduction of the federal reimbursement system (the DLO) has fuelled rapid market growth, reaching double digits in 2005 and 2006. However, sustainability of such systems is key; poor planning and high demand are threatening the future of the DLO.

Price controls threaten potential A major challenge for pharma operating in emerging markets is tight drug price controls. In 2004, Turkey introduced a reference pricing system that resulted in it having lower drug prices than any other European country, and this has impacted market growth negatively. Other countries, such as Brazil and India, also have different mechanisms for price controls that may be expanded in the future.China is implementing a strategy of price cuts on reimbursable drugs. This practice is leaving global pharma with a choice of opting out of price cuts, thereby losing the reimbursable status that would reduce their market penetration, or sticking to their reimbursable status with lower margins, and hoping that the pricing environment will improve and that drug consumption will grow. Russia is an exception, with virtually free drug pricing. Consequently drug prices in Russia are among the highest in Europe, however, this may change in the future if the recently introduced reimbursement system becomes unable to cope with growing demand.Although tight drug price controls and poor IP protection threaten the potential of many emerging markets, global pharma is becoming increasingly active in these countries as the potential for higher healthcare spending in the future is outweighing any potential setbacks.In addition, the preference for foreign brands exhibited by the rising middle class in many emerging market countries, especially in India and China, is translated into healthcare, thus enabling branded companies to compete with generics in certain market segments. Therefore, emerging markets present new opportunities for mature drugs whose sales are declining in major western markets, which is a highly attractive option, especially at a time when many drugs are on the verge of patent expiry.

Is Offset by Some Disturbing “Small Print”


Insufficient IP protection and low public funding:

Despite the passing of the Patent Act of 2005 , recognizing product and not only process patents for pharmaceuticals, India has failed to deliver on its initial promise of improved intellectual property protection.



On the other hand, India's booming middle class, created by the growth of the services industry, accounts for only a tiny proportion of the total population and still has significant growth potential. However, the country's poor infrastructure may limit future growth.Insufficient IP protection and low public fundingDespite the passing of the Patent Act of 2005, recognizing product and not only process patents for pharmaceuticals, India has failed to deliver on its initial promise of improved intellectual property protection. Since the Patent Act was passed patent applications for Eli Lilly's Forteo (teriparatide), Novartis's Glivec (imatinib) and AstraZeneca's Iressa (gefitinib) were rejected mostly on the grounds of prior known use, or incremental innovation that is not recognized in India. Despite Novartis's appeal to the Chennai High Court the initial decision was upheld. Multinational pharma companies active in India are now reconsidering their portfolio of marketed drugs and may decide to focus on more mature products. In view of the court's decision on Glivec, there is concern that the trend for rejecting the patents of life-saving drugs may continue.

However, in December 2007 Pfizer's HIV/AIDS drug Celzentry (maraviroc) became the first known HIV/AIDS drug to get a patent in India. Although this event may signal a change in the tide for patent protection in India, post-grant opposition from local manufacturers and patient groups could still result in the decision being overturned.China also failed to improve its IP laws and, in a move that surprised the industry, Brazil issued a compulsory license for Merck's HIV/AIDS drug Sustiva (efavirenz) in May 2007. Thailand has also issued a line of compulsory licenses and should this trend continue in other countries, or expand beyond HIV/AIDS drugs, it may seriously undermine the position of foreign pharma.Another major obstacle to the higher uptake of branded drugs in emerging markets is poor access to pharmaceuticals through public health provision. However, as their economies strengthen, many of these countries are investing in improving access and quality of healthcare to their citizens: Turkey, Brazil, Russia and China have all made steps to improve access to healthcare services through public systems. The potential impact of increased public healthcare spending on the uptake of drugs produced by global pharma is twofold. First of all, increased access to healthcare facilities means the population is more likely to receive prescriptions and purchase drugs. Added to this, patients will have wider access to drugs through expanded reimbursement on the public health systems.A clear example of how expansion of the reimbursement system can influence market growth can be seen in Russia. The introduction of the federal reimbursement system (the DLO) has fuelled rapid market growth, reaching double digits in 2005 and 2006. However, sustainability of such systems is key; poor planning and high demand are threatening the future of the DLO.

Price controls threaten potential A major challenge for pharma operating in emerging markets is tight drug price controls. In 2004, Turkey introduced a reference pricing system that resulted in it having lower drug prices than any other European country, and this has impacted market growth negatively. Other countries, such as Brazil and India, also have different mechanisms for price controls that may be expanded in the future.China is implementing a strategy of price cuts on reimbursable drugs. This practice is leaving global pharma with a choice of opting out of price cuts, thereby losing the reimbursable status that would reduce their market penetration, or sticking to their reimbursable status with lower margins, and hoping that the pricing environment will improve and that drug consumption will grow. Russia is an exception, with virtually free drug pricing. Consequently drug prices in Russia are among the highest in Europe, however, this may change in the future if the recently introduced reimbursement system becomes unable to cope with growing demand.Although tight drug price controls and poor IP protection threaten the potential of many emerging markets, global pharma is becoming increasingly active in these countries as the potential for higher healthcare spending in the future is outweighing any potential setbacks.In addition, the preference for foreign brands exhibited by the rising middle class in many emerging market countries, especially in India and China, is translated into healthcare, thus enabling branded companies to compete with generics in certain market segments. Therefore, emerging markets present new opportunities for mature drugs whose sales are declining in major western markets, which is a highly attractive option, especially at a time when many drugs are on the verge of patent expiry.

Is Offset by Some Disturbing “Small Print”


Multinational pharma companies active in India are now reconsidering their portfolio of marketed drugs and may decide to focus on more mature products. In view of the court's decision on Glivec, there is concern that the trend for rejecting the patents of life-saving drugs may continue .

China also failed to improve its IP laws and, in a move that surprised the industry



And Are a Long Term Fix if Anything

$0

$5

$10

$15

$20

$25

$30

Voveran Corex HumanMixtard

Taxim Becosules

NovartisNSAID

PfizerCough Syrup

N. NordiskInsulin

AlkemAntibiotic

PfizerVitamin B/C

$US Millions Top 5 Selling Drugs in India*Yearly estimated sales

*12-month sales extrapolated from March 2008 salesnews.in.MSN.com: Novartis Vs Pfizer: Voveran leads, Corex follows, May 05, 2008



Pharma’s Denial Finally Reached Its Peak Just Before the Change at the Top

Dr. Garnier says Glaxo is poised to break its R&D dry spell. He has overhauled the way its scientists are organizedand says the changes will help the company bring innovative drugs to the market.

"When we get around to 2011 and 2012, we'll be in a much stronger situation . We'll have fewer products going generic and more in terms of new products," he says.

Dr. Garnier says the company now has a full pipeline that can deliver a stream of new drugs to market over the next few years.



All of a Sudden, Denial is No Longer in Vogue

…the biggest change in the past five years is an acute and profound realization of the major challenges in front of us. And the willingness to grab them by the horns and deal with them, rather than pretend that we will spend a bit more money and try a little harder and find this big blockbuster that’s going to save the situation.

~ Moncef Slaoui, Chairman, R&D, GSKSeptember 2008

In Vivo, September 2008



And Denial May Truly Now Be Over - Finally!

"The earlier you recognize the bad news, the better."

~ Jean-Marc HuetBMS’ new CFO, September 2008



Unfortunately, Destructive Habits + Denial has Pushed Pharma to the Edge of a Frightening Cliff

-300

-250

-200

-150

-100

-50

0

2008 2009 2010 2011 2012 2014

Rev

enue

($

Bill

ions

)

WW Sales at Patent RiskEstimated Cumulative Losses

$234 bn Rx Revenues At Risk to Generics by 2014

SG Cowen, EvaluatePharma



So, as an Alternative to This



Some Pharma CEOs are Looking for a Softer Landing



Food Science Group

Schneider WW Medical Tech

Cultor, 1996

Thus Diversification, Long Out of Fashion in Pharma

J&J, 2006

Energizer, 2002

Spin Off, 2004

Boston Scientific, 1998

Company website



Is Undergoing a Revival

From Pharma's Strategic Divide: Focus or DiversifyIn Vivo, September 2008

“You can't escape from the de-rating of this sector for the last 7-8 years," GSK's new CEO Andrew Witty told investors and analysts. "Or the obvious uncertainty about the next few years, with $200 billion or more in expiries and no clarity to predict" the replacement products from the R&D labs. The point of GSK'sdiversification, he said, is to "find ways to deliver more reliable growth with less risk," delivering better-than-recent returns without having to "hope that the next R&D product is going to save the day. That's an important change."


“You can't escape from the de-rating of this sector for the last 7-8 years," GSK's new CEO Andrew Witty told investors and analysts. "Or the obvious uncertainty about the next few years, with $200 billion or more in expiries and no clarity to predict" the replacement products from the R&D labs. The point of GSK'sdiversification, he said, is to "find ways to deliver more reliable growth with less risk," delivering better-than-recent returns without having to "hope that the next R&D product is going to save the day. That's an important change."

In Vivo September 2008



The Argument for Diversification Goes Like This

Pharma Index

JNJ

Yahoo Finance



And This


While much of Big Pharma drags around unexciting PE ratios (Sanofi at about 9.5; Novartis at 11.9; and Merck, 15), the three diversified stars (JNJ, Roche, Abbott) are trading between 17 and 21 times earnings. Less discussed are Bayer AG (pharma, diagnostics, consumer, material sciences, agriculture) and Merck KGAA (chemicals, consumer, pharma) which have done comparatively well from a shareholder perspective (Merck shares have tripled in the last five years; Bayer is up 150%) but get relatively little valuation leverage from their earnings (they trade at the lowest PEs of the Big Pharma group). "Those companies that show greater diversity seem to be rewarded by the market," sums up Pfizer's SVP, business development and strategy William S. Ringo.

In Vivo September 2008



I think I’ll have a Golden Aspirin

Because There is Evidently Nothing Better to Do

cont.



I think I’ll have a Golden Aspirin

Because There is Evidently Nothing Better to Do

cont.

C'est que la mission confiée au nouvel homme fort de Sanofi-Aventis estclaire : il doit muscler une recherche jugée défaillante, accélérer l'essor dansles pays émergents, et diversifier le groupe dans les aliments santé, fauted'autre relais de croissance. Translation:

This is the mission assigned (by the main shareholders Total and L'Oreal) to the new boss of Sanofi-Aventis:

He must beef up research activity considered to be failing; accelerate the expansion in emerging markets; and diversify the group in nutraceuticals, for lack of other growth drivers.



There is Nothing Inherently Wrong With Diversification

Except that:

• It’s an old idea: Pharma tried it before and pretty much stunk at it, see Generics, Dx, Devices, Disease Management, PBMs



Investors Would Thus Prefer to Diversify on Their Own

Windhover, MarketWatch



Instead of Entrusting the Job to Pharma Management

InVivo, Sept. 2008; Pharma's Strategic Divide: Focus or Diversify


Noted one major Pharma fund manager: "For a pharma, I think diversification is the way to go. OTC and generic growth is almost double the pharma business. But as an investor, that's different. I'd rather do my own diversification."



Others are Touting Shrinkage as an Alternative to Diversification

1,200 1,2001,500 1,780 1,980 2,000

2,600 2,890

3,7504,300

5,000 5,0005,500

6,100

7,600

10,000

ABT

MRK

Nycom

ed LLY

Sanof

i Ave

ntis

UCBAM

GN

GSKNov

artis

BMS

Wye

th

JNJ

SGPBay

er

AZN PFE

Job Cuts in Top 16 Pharmas, 2007-2008 (September)

Pharmalot: Data from January 2007 through Sept 2008. Does not reflect upcoming Banyu (Merck) job cuts



Combined With Sharpened Focus

Big Pharma prunes R&D as times get toughReuters - Published: September 30, 2008

LONDON/NEW YORK, (Reuters) - Faced with sickly investment returns, the world's top drugmakers are taking the knife to research and development. GlaxoSmithKline disclosed plans Tuesday to cut up to 850 jobs in research and development, on top of 350 such cuts announced by the drug maker in June, while Pfizer Inc revealed its decision to drop efforts to develop medicines for heart disease, obesity and bone health. The moves promise to be the latest examples of a trend toward rethinking leaner R&D operations that analysts expect to gather pace on both sides of the Atlantic. "There is a feeling that bigger is not better and you have to concentrate your innovation. Trying to do everything doesn't seem to have worked," said Ben Yeoh, an industry analyst at Dresdner Kleinwort. "A lot of companies are thinking along these lines."

The pharmaceutical industry is exploring ways to improve productivity because many companies have brought few successful medicines to market, despite spending billions of dollars a year on research and development. Drug companies initially focused on sales, marketing and manufacturing, but are now turning to research to generate savings.

"What the industry now is focused on is reallocation of scarce resources in R&D," said Deutsche Bank AG (nyse: DB - news - people ) analyst Barbara Ryan. "They have to behave like portfolio managers and identify the best opportunities for a finite pool of capital.“ Some companies have already made strategic decisions. AstraZeneca Plc (nyse: AZN - news - people ) spun off much of its research on medicines for gastrointestinal diseases into a new company called Albireo, backed by private equity, in February. Others moved even earlier. cont.

"There is a feeling that bigger is not better and you have to concentrate your innovation. Trying to do everything doesn't seem to have worked ," said Ben Yeoh, an industry analyst at Dresdner Kleinwort. "A lot of companies are thinking along these lines."



Combined With Sharpened Focus

Big Pharma prunes R&D as times get toughReuters - Published: September 30, 2008

LONDON/NEW YORK, (Reuters) - Faced with sickly investment returns, the world's top drugmakers are taking the knife to research and development. GlaxoSmithKline disclosed plans Tuesday to cut up to 850 jobs in research and development, on top of 350 such cuts announced by the drug maker in June, while Pfizer Inc revealed its decision to drop efforts to develop medicines for heart disease, obesity and bone health. The moves promise to be the latest examples of a trend toward rethinking leaner R&D operations that analysts expect to gather pace on both sides of the Atlantic. "There is a feeling that bigger is not better and you have to concentrate your innovation. Trying to do everything doesn't seem to have worked," said Ben Yeoh, an industry analyst at Dresdner Kleinwort. "A lot of companies are thinking along these lines."

The pharmaceutical industry is exploring ways to improve productivity because many companies have brought few successful medicines to market, despite spending billions of dollars a year on research and development. Drug companies initially focused on sales, marketing and manufacturing, but are now turning to research to generate savings.

"What the industry now is focused on is reallocation of scarce resources in R&D," said Deutsche Bank AG (nyse: DB - news - people ) analyst Barbara Ryan. "They have to behave like portfolio managers and identify the best opportunities for a finite pool of capital.“ Some companies have already made strategic decisions. AstraZeneca Plc (nyse: AZN - news - people ) spun off much of its research on medicines for gastrointestinal diseases into a new company called Albireo, backed by private equity, in February. Others moved even earlier. cont.

What the industry now is focused on is reallocation of scarce resources in R&D," said Deutsche Bank AG analyst Barbara Ryan. "They have to behave like portfolio managers and identify the best opportunities for a finite pool of capital."



The Effect of Focus May Be Dramatic

Pfizer to drop development of drugs for hyperlipide mia, atherosclerosis, and heart failureOctober 2, 2008

New York, NY - Pfizer is getting out of the cholesterol-lowering game to focus on what it perceives to be more lucrative diseases, according to an internal memo obtained by Forbes. And for the most part, the chosen "disease areas" don't include the heart. In the memo, Martin Mackay, president of Pfizer Global Research & Development (R&D), informed his staff that the company plans to "exit" the fields of atherosclerosis/hyperlipidemia, heart failure, obesity, and peripheral arterial disease.Instead, the company, whose cholesterol-lowering drug atorvastatin (Lipitor) is the world's top-selling drug, says it is turning its attention and R&D dollars to cancer, diabetes, Alzheimer's, pain remedies, and mental health as its "higher-priority areas." The news comes in the wake of the flop of Pfizer's hoped-for new flagship, torcetrapib, a CETP inhibitor that was widely predicted to be the company's next blockbuster drug. While CV drugs have been the major moneymakers for Pfizer in recent years, those days are drawing to a close. In addition to Lipitor, which will lose patent protection in 2011, Pfizer's other major player in the CV drug arena is Norvasc (amlodipine), which came off patent in 2007. Among the lower-priority "disease areas" where the company says it will continueworking are thrombosis and transplant, the memo notes. cont.

Martin Mackay, president of Pfizer Global

Research & Development (R&D), informed his staff that the company plans to "exit" the fields of atherosclerosis/hyperlipidemia, heart failure, obesity, and peripheral arterial disease.



The Effect of Focus May Be Dramatic

Cumulative Value of Revenues from Pfizer’s 2008 Pipelineby Tx Area to 2014

Note: Non risk-adjustedEvaluatePharma

12%

10%

9%

6% 1%

62%

Oncology

CNS

Systemic Anti-infectives

Gastro-Intestinal

Musculoskeletal

Endocrine



+Roussel Uclaf

++

+

+

+

Good News: At Least After Decades of This



+

+

+

And This



+

+

+

And This



And This



And Still Rumors of More to Come

Pipeline match for possible Bristol-Myers Squibb and Sanofi-Aventis mergerJan 31, 2007 - By Mike Nagle

Bristol-Myers Squibb and Sanofi-Aventis could join forces to become the world's largest pharmaceutical company, according to media reports this week.

Bayer bid a rumor, Pfizer woes not a rumorPosted on Sept 9, 2008



And A Lot of Pharma CEOs Bracing for the Plunge



There Has Not Been No Major Pharma/Pharma M&A Since This One



By Turning Away From Consolidation, Pharma Cos May Actually be Doing Something Very Important for Their Survival and Eventual Prosperity

Nothing was ever done so systematically as nothing is being done now.

~ Thomas Woodrow Wilson



Shrinking!



The Shrinking Process will be Painful but Pharma Ca n Learn Something From a Great Football Coach Who Hated to Lose



But Nevertheless Realized the Benefit of Really Losing Big

~ Woody Hayes / Ohio State

'There's nothing that cleanses your soul like getting the hell kicked out of you.'



The Hell is Getting Kicked Out of Pharma

Payers, Politicians& Regulators Pharma



Even Before Going Off the Cliff, the Hell is Getting Kicked Out of Pharma



LCM Strategy Used To Be a No Brainer: Yesterday’s Successful Follow-Ons

EvaluatePharma, DH analysis

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Prilosec Nexium Celexa Lexapro

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But Payers are Kicking the Hell out of These Products Now

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Roche Cuts Price on Tarceva in the U.K.October 3, 2008, 1:04 pmPosted by Jacob Goldstein

British regulators have been taking a hard line toward new cancer drugs that typically extend life by a few weeks or months at a cost of tens of thousands of dollars. The latest evidence comes from a deal Roche cut to sell the lung cancer drug Tarceva at a discount in the U.K.Under the deal, the cost of administering the drug and managing side effects will be about $10,600 per patient, Dow Jones Newswires reports. That figure is comparable to the cost of administering Taxotere, a cancer drug sold by Sanofi-Aventis, and it’s a discount of more than $1,000 from the Tarceva’s standard price. Last year, Johnson & Johnson made a creative deal with NICE, the U.K. body that decides what drugs are worth the money: J&J said it would cover the cost of Velcade for multiple myeloma patients who did not benefit from the drug.Other cancer drugs simply haven’t cleared the bar. This summer, NICE said a whole new crop of drugs for kidney cancer were too expensive for the benefit they provide. The drugs — Pfizer’s Sutent, Wyeth’s Torisel, Nexavar from Onyx and Bayer and Avastin from Roche and Genentech — typically cost around $50,000 per patient and extend patients’ lives by a few weeks or months, on average.

Under the deal, the cost of administering the drug (Tarceva) and managing side effects will be about $10,600 per patient, Dow Jones Newswires reports. That figure is comparable to the cost of administering Taxotere , a cancer drug sold by Sanofi-Aventis, and it’s a discount of more than $1,000 from the Tarceva’sstandard price.




Roche Cuts Price on Tarceva in the U.K.October 3, 2008, 1:04 pmPosted by Jacob Goldstein

British regulators have been taking a hard line toward new cancer drugs that typically extend life by a few weeks or months at a cost of tens of thousands of dollars. The latest evidence comes from a deal Roche cut to sell the lung cancer drug Tarceva at a discount in the U.K.Under the deal, the cost of administering the drug and managing side effects will be about $10,600 per patient, Dow Jones Newswires reports. That figure is comparable to the cost of administering Taxotere, a cancer drug sold by Sanofi-Aventis, and it’s a discount of more than $1,000 from the Tarceva’s standard price. Last year, Johnson & Johnson made a creative deal with NICE, the U.K. body that decides what drugs are worth the money: J&J said it would cover the cost of Velcade for multiple myeloma patients who did not benefit from the drug.Other cancer drugs simply haven’t cleared the bar. This summer, NICE said a whole new crop of drugs for kidney cancer were too expensive for the benefit they provide. The drugs — Pfizer’s Sutent, Wyeth’s Torisel, Nexavar from Onyx and Bayer and Avastin from Roche and Genentech — typically cost around $50,000 per patient and extend patients’ lives by a few weeks or months, on average.

This summer, NICE said a whole new crop of drugs for kidney cancer were too expensive for the benefit they provide.




UK's NICE turns down Glaxo Tyverb offerTue Oct 14, 2008 7:18am EDT

LONDON (Reuters) - Britain's healthcare cost effectiveness watchdog NICE has rebuffed GlaxoSmithKline's latest bid to get its drug Tyverb - for women with advanced breast cancer - into the state health system, the company said on Tuesday.

Glaxo said as part of the ongoing appeal it had offered to run a 12-week trial in women with advanced breast cancer to show the drug is good value for money. In June, Glaxo received formal European marketing authorization for its new breast cancer pill Tyverb.

Tyverb -- which is already sold as Tykerb in the United States -- is designed to be given in combination with Roche's Xeloda for treating breast cancer patients whose tumors overexpress the HER2 protein.Glaxo is seeking to convince NICE, which determines whether drugs are cost-effective, to overturn an earlier draft recommendation that the medicine should not be included in the state health system.

NICE is expected to make a final decision at a meeting on November 19/

Glaxo said as part of the ongoing appeal it had offered to run a 12-week trial in women with advanced breast cancer to show the drug is good value for money .



And This is the Republican Candidate

McCain, who has described himself as "the biggest enemy of the pharmaceutical industry in Washington," has been particularly vocal on re-importation."Why shouldn't we be able to re-import drugs from Canada?" he asked during the New Hampshire republican debates in January. "It's because of the power of the pharmaceutical companies.""Don't turn the pharmaceutical companies into the bi g bad guys ," countered Mitt Romney, the former presidential candidate who has since dropped out of the race."Well, they are," said McCain.

money.cnn.com



Pharma Even Has New Non-Traditional Adversaries



September 15, 2008Paul C. LlewellynKaye Scholer LLP425 Park AvenueNew York, New York 10022

Dear Mr. Llewellyn,

I am in receipt of your letters dated September 9, 2008 and September 11, 2008, which I have read carefully. I strongly resent the tone of these letters and in particular, the repeated use of the word “threatened”. Our ongoing and long-planned tour to New York and twelve others major cities across the United States are not threats. As you can read in the PR Week Magazine issue of September 8, 2008, we planned this tour, along with the use of the Viagra logo, a long time ago. Our goal is to promote our "Voter Awareness Program" by featuring signs on our fighter jet cockpits encouraging people to go out and vote. In an effort to serve both the New York community and the country, the mock-up missile with the Viagra logo will also carry our slogan, "Practice Safe Politics". The plan is to distribute condoms with the candidates’ images as we drive around. These condoms were purchased by us from www.PracticeSafePolicy.com and will be given out for free.We have no demands, requests, or business with the company you represent, or any other company for that matter. The information given to your client, its media group, and you was simply intended as a professional courtesy. We just wanted to let you know of our project. Furthermore, please allow me to remind you that on the 8th of September I personally approached the head of Pfizer’s security team on 42nd street with one of the five missile mock-ups we will be displaying during our tour. I invited him to inspect it and handed him a folder that included among others my

cont.

I strongly resent the tone of these letters and in particular, the repeated use of the word “threatened”.



September 15, 2008Paul C. LlewellynKaye Scholer LLP425 Park AvenueNew York, New York 10022

Dear Mr. Llewellyn,

I am in receipt of your letters dated September 9, 2008 and September 11, 2008, which I have read carefully. I strongly resent the tone of these letters and in particular, the repeated use of the word “threatened”. Our ongoing and long-planned tour to New York and twelve others major cities across the United States are not threats. As you can read in the PR Week Magazine issue of September 8, 2008, we planned this tour, along with the use of the Viagra logo, a long time ago. Our goal is to promote our "Voter Awareness Program" by featuring signs on our fighter jet cockpits encouraging people to go out and vote. In an effort to serve both the New York community and the country, the mock-up missile with the Viagra logo will also carry our slogan, "Practice Safe Politics". The plan is to distribute condoms with the candidates’ images as we drive around. These condoms were purchased by us from www.PracticeSafePolicy.com and will be given out for free.We have no demands, requests, or business with the company you represent, or any other company for that matter. The information given to your client, its media group, and you was simply intended as a professional courtesy. We just wanted to let you know of our project. Furthermore, please allow me to remind you that on the 8th of September I personally approached the head of Pfizer’s security team on 42nd street with one of the five missile mock-ups we will be displaying during our tour. I invited him to inspect it and handed him a folder that included among others my

cont.

Our goal is to promote our "Voter Awareness Program" by featuring signs on our fighter jet cockpits encouraging people to go out and vote. In an effort to serve both the New York community and the country, the mock-up missile with the Viagra logo will also carry our slogan, "Practice Safe Politics". The plan is to distribute condoms with the candidates’ images as we drive around.



personal information, Social Security number, and New York driver’s license number should he need to contact me. Regrettably, rather than handle this matter with the appropriate circumspection, he rushed to enlist the services of a corporate attorney bully who instead of relying on common sense, aggressively uses harassment and extortion to intimidate ordinary citizens. Anyone who reads your letters will tell you that Melvyn Weiss with lipstick is still Melvyn Weiss. Although in your case it is more like Robert Simels. Threatening to take harmful action when you are CLEARLY aware there are no grounds for such amounts to criminal harassment and extortion. You are cognizant of the fact we are not selling, marketing, or promoting the Viagra name, nor are we in any way, shape, or form benefiting from it. Viagra has become a common household term the same way Kleenex has, and it is as such that we are using it. As a matter of fact, why sue me when you never sued Mr. Jacky Mason? For months, he had a Broadway show in which he told and retold the following joke on stage: "I took this morning Viagra with prune juice - I now don't know if I am coming or going…"As a former IDF (Israeli Defense Force) serviceman, a savvy businessman, and a law-abiding American citizen, I do not take threats lightly, especially not when they come from a corporate attorney bully who has no regard for freedom of speech and expression. As a matter of fact, I find it rather ironic that you chose to send me the second letter on 9-11. Here you are attempting to terrorize me into surrendering my rights on the anniversary of the worst terrorist attack this country has ever endured. How much lower can you go?In spite of your threats, our national tour will continue as planned. You may wish to follow its progress in the press. In the meantime please, Allez vous faire foutre avec votre Viagra.

Respectfully,Arye SachsJetAngel.com, Chief Fun Officer

Threatening to take harmful action when you are CLEARLY aware there are no grounds for such amounts to criminal harassment and extortion.





As a matter of fact, why sue me when you never sued Mr. Jacky Mason? For months, he had a Broadway show in which he told and retold the following joke on stage: "I took this morning Viagra with prune juice - I now don't know if I am coming or going…"





In spite of your threats, our national tour will continue as planned. You may wish to follow its progress in the press.

In the meantime please, Allez vous faire foutre avec votre Viagra.





Perhaps Getting the Hell Kicked Out of It Will Eliminate Some of “Old Pharma’s” Bad Habits

Bad habits are like chainsthat are too light to feeluntil they are too heavy to carry.

~ Warren Buffet



And Prove to be Exactly the “Soul Cleansing” Pharma Needs




The Plunge Will Be Hell for Pharma but Things Surely Could Be Worse

www.bigcharts.com: 1-year historical chart

Lehman

Pfizer

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Projected Rx Revenues for Top 10 Pharma Companies

EvaluatePharma

Despite a Sharp Plunge in Rx Revenues



Some Businesses Face a Steeper Plunge




Indeed Pharma Could Fund 25% of the Wall Street Bailout!

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Cash and Cash Equivalents ($B) - Top 15 Pharma

EvaluatePharma

$US Billion



A Smaller, Detoxified Pharma Will Be a Hungrier Pharma

“It's not the size of the dog in the fight, it's the size of the fight in the dog.”

~ Mark Twain

P.S. Woody would have loved that quote



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EvaluatePharma

Could Spending Less $ for R&D?

Projected Pharma R&D SpendBased on Constant Percentage of Rx Sales



*NDAs and NMEs are from US only

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Parexel's Pharmaceutical R&D Statistical Sourcebook 2008/2009; DH analysis



If Size Doesn’t Matter?

From the November 2004 presentation entitled: Pharma R&D in India -The Promise of Sustainable Innovation, by Dr. K. Anji Reddy (Chairman, Dr. Reddy’s Laboratories):

“In 2000, two of Merck’s biggest rivals had sealed mergers. As you well know, Glaxo was combining with Smithkline and Pfizer had gobbled up Warner Lambert. Their research budgets became much larger than Merck’s and the sheer scale of operations was thought to be a guarantee of success in innovation. Scolnick thought about the implications and studied the research output of Merck’s own sites across the world. And let me quote what he had to say . . ”:

“The thing that’s really most striking was that the sizeof the site has nothing to do with its productivity , absolutely nothing. There’s no correlation. None.”



Why Maintain Empires?

Pfizer Research at Groton, CT • 160–acre site, 2.7 million ft2 facility space• Largest pharmaceutical research facility of

its kind in the world

Company website



Smallness May Improve Pharma’s Dreadful PR

A New Corporate Villain - Drugmakers?A number of charges against the pharmaceutical indu stry damages its credibility and further erodes public support.By Gregory M. LambThe Christian Science Monitor

Big Pharma is in danger of joining Big Oil and Big Tobacco as one of the bad boys of American industry. A slew of revelations have stung drugmakers in recent months - from charges of hiding unflattering clinical trials to studies showing a link between the use of antidepressants in children and suicidal thoughts. The companies' stance against allowing Americans to buy cheaper drugs in Canada has further eroded public support. Now, a steady stream of critical books - with titles such as "On The Take" and "The $800 Million Pill" - lambastes the way the companies do business. "It's obviously frustrating," says Jeff Trewhitt, a spokesman for the Pharmaceutical Research and Manufacturers of America (PhRMA), the industry trade group. "We think it's the result of a barrage of distorted allegations, and we are trying to fight back." The charges have "obscured the fact that the US pharmaceutical and biotechnology research industry is the most innovative ... in the world," he says, supplying 60 to 70 percent of the world's new medicines.

Big Pharma is in danger of joining Big Oil and Big Tobacco as one of the bad boys of American industry.



A Little Less of the Old Big Pharma Arrogance Couldn’t Hurt

If it works, it will be the biggest blockbuster ever.� Hank McKinnell, CEO – On Blockbusters, 2005

People who advocate that, don’t understand our business.� Hank McKinnell, CEO – On Blockbusters, 2005

As for those who argue that the blockbuster model is a bust, he had sharp words:

In reference to the Lipitor + torcetrapib combination:

Business Week



Could Smallness Bring Back a Lower Bar?

$100 M

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Thus Leading to Better Portfolio Decisions

$100 M

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Instead of Always Trying to Do This?

$100 M

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Smallness + Focus May Drive More Consolidation - This Time of Pipelines

• For now, all of Pharma is “in” cancer

• But Lilly committed for a long time with the ImClone purchase

• Other Pharma’s with less extensive pipelines might consider selling to those more invested in cancer at “ImClone valuations”



$3.2 B

$3.0 B

Eye of the Beholder: Same Pipeline but Differing Valuations

Approved drugs

~40% of the revenues of:

● Erbitux (Royalties, License, Mfg)

● Erbitux Lifecycle (Royalties, License, Mfg)

Pipeline drugs● IMC1121b (P3) ● IMC 11F8 (Finished P2) *● IMC-A12 (P1I)● IMC-18F1 (P1)● IMC-3G3 (P1)

* Rights Option to BMS

LLY’s$70/share

BMY’s$62/share

$2.3 B

Shareholders$46/share

$0.8 B

Value for one IMCL Phase III $1.48bn $1.143bn $0.493bnValue for one IMCL Phase II $0.494bn $0.382bn $0.164bnValue for one IMCL Phase I $0.247bn $0.191bn $0.083bn

Cash less debt $0.3 B

Company Documents; EvaluatePharma

$0.3 B $0.3 B

$3.2 B $3.2 B



From a Shots on Goal Perspective, These Cancer Pipelines Look Like ImClone’s than Pfizer’s

3

Launched Phase III Phase II

2 1Wyeth

Phase I

-

4* 1 -Schering-Plough 2

*Including Peg-Intron and Intron A

EvalutePharma



Lipitor

Pharma’s Enormous Scale Made its Products and Approach Impersonal



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Pharma’s Scale was a Perfect Match for Assembly Line Medicine



But a Smaller Pharma Might Be More Comfortable in a World Moving to Less Impersonal Medicine



Of Course, a Good Soul Cleansing May Seem Boring to Some Pharma Executives Nostalgic for Some of the Old Action

© www.cartoonstock.com: Used with permission.



It is Surely Pretty Scary to Hang Back and Watch This

$1.1B$1.6B

$5.4B

$3.4B

$4.0B

$3.5B

$6

$3.9B$1.5B

$12.8B $2.0B

$1.9B



But Pharma Has Long Had One Healthy Habit That it Will Now Do a Lot More Of



But Pharma Has Long Had One Healthy Habit That it Will Now Do a Lot More Of

Externalization



Externalization is One Good Habit Pharma Will Never Kick

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EvaluatePharma

Pharma Sales by Product Derivation



Circa 2001: A gathering of pharma industry licensing executives looking for late stage compounds with sales potential > $1 billion

Pharma’s Externalization Habit Began With Its Quest to Replace its Terminal Assets



Approved12,526 LipitorPfizer1997

Phase II3,575 CrestorAstraZeneca1998

Phase III2,150Remicade-ex USSchering-Plough1998

Filed1,220 Aciphex/ParietJ&J1997

Filed1,339TriCorAbbott1997

Phase II631ProtonixWyeth1996

Phase II2,567RituxanGenentech1995

Phase III959Copaxonesanofi-aventis1995

Phase III2,057Eloxatinsanofi-aventis1994

Phase III1,834Flomax/AlnaBI1994

Phase III1,502AtacandAstraZeneca1994

Phase III5,523PlavixBMS1993

Phase II1,304AvaproBMS1993

Phase II3,562CozaarMerck & Co1989

Phase II67Coreg IR/KredexGlaxoSmithKline1987

Status at Deal Date

2008 ($ M)ProductCompanyYear

Externalization v1: Licensing In Late




Externalization v2: Licensing In Late (and Large)

$3.9

$11.7

$5.2

$1.3

$9.0

$6.8

2014 WW Sales

($US billions)

$2.6

$4.8

$5.2

$2.4

$4.4

$6.4

2008 WW Sales

($US billions)

Mar 1995

Jul 2003opt-in

Oct 1999

Aug 1985

Mar 2001

Jul 2002

Date of Deal or Acq

MarketedWyethImmunex, Amgen

Enbrel

Phase IIIAbbottKnollHumira

Phase IIIRocheIDEC, Genentech

Rituxan

Phase IIRocheGenentechAvastin

MarketedJ&JCentocorRemicade

PreclinicalJ&JAmgenProcrit/Eprex

Phase at Deal or Acq

Pharma Acquirer

Biotech Originator

Product

Top Large Molecule Products Acquired/Licensed by Ph arma

Evaluate Pharma, ReCap



Externalization v3: Licensing In Early

0

20

40

60

80

100

120

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Number of Early Stage Pre-clinicaland Phase I Deals

Through October 2008

MedTrack



Yet Even After 3 Decades of Alliances, Pharma R&D Remains Astoundingly Internalized

0

10

20

30

40

50

60

70

80

90

100

2003 2005 2006

% R&D SpendUncategorized

% R&D Spend onLicensed-In Projects

% R&D Spend on Self-Originated Project

Percentage of In-Licensed Revenues

Self-originated vs. Licensed-in US R&D Spend

EvaluatePharma, PhRMA website



So Despite Great Success with In-Licensing, Pharma’s Externalization Efforts Remain in Their Infancy



Because Historically, Pharma Had a Huge “Not Invented Here” Problem Versus Other Industries

0

1000

2000

3000

4000

5000

6000

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2005 2007

Number of Alliances1985-19945,557

SOFTWARE INDUSTRY

PHARMA-BIOTECH INDUSTRY

207

ReCap, Intl J of Entrepreneurship and Innovation Management 2001 - Vol. 1, No.3/4 pp. 444-462



Man Bites Dog: Alliances, a Routine Matter in Other R&D Intensive Industries Remain Newsworthy in Pharma

Next Level of Change in Alliance ManagementHosted by Cambridge Healthtech Institute



Dog Bites Man: Alliance Networks are SOP in Some Other High Growth Industries



Externalization v1-v3: Pharma’s Style in “Alliances” Favored Control over Collaboration



Control Was Easy to Obtain Due to a Certain “Capital Advantage”

Pharma Biotech



Big Pharma Cos Saw Their Many Alliance “Partners” a s Part of Their Empire, not Their Network

www.wikipedia.com



Paradoxically, The Greatest Deal Ever Was Anti-Control



Externalization v4: Pharma Will Seek Neither to Control or to Stay Away

• Instead, they will be more humble, effective and valuable collaborators



Externalization v4: Newer, Smaller Pharma Will be a More Humble Collaborator

© www.cartoonstock.com; Used with permission.



Pharma’s Newly Reduced Size Should Stop the Old Temptation to Kick Smaller Biotechs Into Line



And Pharma is Itself Becoming a Less Control Oriented Place

Triple therapy : Andrew Witty of GSK has a three-part prescription for the pharmaceuticals giantAug 14th 2008 - Reuters

IT IS a rare company boss, let alone one who has just got the top job, that can get away with likening his firm’s culture to a police state. But Andrew Witty, the new boss of GlaxoSmithKline (GSK), a British pharmaceuticals giant, somehow manages to pull it off. He invokes that analogy—tentatively, to be fair—to explain the cultural transformation he wants to see at GSK: away from today’s excessively regimented, rule-based approach towards the “utopia” of a simplified, values-based culture that trusts employees to do the right thing. Mr Witty gets away with it in part because he is amiable. He is certainly very different from his abrasive predecessor, Jean-Pierre Garnier, who retired in May after a tumultuous term as chief executive. Mr Witty has already set the tone for a more open style of management. Whereas J.P., as his predecessor was known, often seemed arrogant, Mr Witty began his tenure with a listening tour. J.P. controversially insisted on living in Philadelphia; Mr Witty is not only based at GSK’s headquarters in London, but he even plans to move his office next to the staff canteen so he can be more accessible.The new boss can also joke about police states because his loyalty to GSK is unquestioned. Having spent nearly his entire professional career at the firm, he is the ultimate insider. By contrast, two years ago Pfizer, GSK’s American rival, picked Jeffrey Kindler, a lawyer with little pharmaceuticals experience, as its new boss. Perhaps needing to build up credibility and knowledge of his firm, Mr Kindler took his time crafting a turnaround plan. MrWitty, however, has already announced big changes at GSK. Driving this strategic revamp is his desire to “derisk” the firm to provide reliable growth with less volatility. His plan has three components. First, he wants to end the obsession with blockbusters, which he likens to “finding a needle in a haystack right when you need it”. The industry’s reliance on risky blockbusters, he reckons, makes it vulnerable to “sudden torpedoes” in the form of lawsuits from generics firms, or regulatory crackdowns like the one that recently hit Avandia, GSK’s big diabetes drug. Instead he wants researchers to look for many more potential drugs, both small and large, that can make up a more reliable pipeline. This, he reckons, will make GSK’s drug-discovery efforts more akin to a nimble fleet of destroyers, rather than two or three vulnerable battleships. Second, Mr Witty wants the firm to expand its businesses beyond prescription-drug sales in the rich world, so that its revenue streams are more diversified. To this end, he has announced a big push into emerging markets, which many drugs giants had hitherto seen as mere charity cases. He is also taking the firm into the branded-generics business through a deal with Aspen of South Africa, which should help smooth out GSK’s earnings volatility. Third, and most controversially, Mr Witty has been sitting down with his biggest customers to ask them what future products they are willing to pay for. This might seem like common sense in any other industry, but it has been heresy in the drugs trade. In the past Big Pharma innovated as it saw fit, and big payers (such as Britain’s National Health Service, or America’s “pharmacy-benefit managers” and insurers), then coughed up for its pricey pills. But now health services and insurers are refusing to reimburse fully for drugs that are deemed to provide poor value for money. Britain has even set up an official agency, the National Institute for Health and Clinical Excellence (NICE), to do explicit cost-benefit analyses of this sort.

It is a rare company boss, let alone one who has just got the top job, that can get away with likening his firm’s culture to a police state.






He invokes that analogy—tentatively, to be fair—to explain the cultural transformation he wants to see at GSK: away from today’s excessively regimented, rule-based approach towards the “utopia” of a simplified, values-based culture that trusts employees to do the right thing. Mr Witty gets away with it in part because he is amiable. He is certainly very different from his abrasive predecessor, Jean-Pierre Garnier, who retired in May . .






. . he wants to end the obsession with blockbusters, which he likens to “finding a needle in a haystack right when you need it”.



Yesterday’s NIH-Ridden Pharmas Wanted Nothing to Do With Being a Biotech Company

In a way, we’re a biotech company hidden within what’s called a large pharma company.

� John Lechleiter, CEO, Lilly March 2008

Become a Top-Tier

Biotherapeutics Company

Company websites, Press releases



Externalization v4: Pharma’s Obsession with Large Molecules will Make Them HumbleCollaborators



Wyeth

Roche

Novartis

Schering-Plough

GSK

J&J

Sanofi-Aventis

Lilly

Abbott

BMS

Bayer-Schering

AstraZeneca

Merck

Pfizer

Wyeth

Roche

Novartis

Schering-Plough

GSK

J&J

Sanofi-Aventis

Lilly

Abbott

BMS

Bayer-Schering

AstraZeneca

Merck

Pfizer

Large Pharma is Becoming Large Molecule Pharma

Pfizer

Merck

AstraZeneca

Bayer-Schering

BMS

Abbott

Lilly

Sanofi-Aventis

J&J

GSK

Schering-Plough

Novartis

Roche

Wyeth

< 10% 10% - 25% > 25%

1997 Percent2008 Percent

Share of Late-Stage (P2+) Biologics in the Pipeline

In Vivo (Know Thy R&D) 2005, ADIS, EvaluatePharma, DH analysis



Because Today’s Pharma CEOs Keep Staring at This

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

Lipi

tor

Adva

irD

iova

nPl

avix

Nex

ium

Zypr

exa

Sero

quel

Sing

ulai

rPl

avix

Acip

hex

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

Hum

iraLa

ntus

Her

cept

inN

eula

sta

Avas

tinEn

brel

NN

Insu

linR

ituxa

nPr

ocrit

Epo

gen

2004-2007 Growth of the Top 10 Small and Large Molecules (ranked by 2007 sales)

Top 10 Small Molecules Top 10 Large Molecules

EvaluatePharma

862%



And This

Large Molecule vs. Small Molecule Attrition

InVivo, January 2005; Know Thy R&D Enemy: The Key to Fighting Attrition.



Pharma Be Humble: In Large Molecule Innovation, the Upstart Completely Outclassed the Big Bad Champ



The Scorecard is, Frankly, Lopsided

Not including Insulin

15

78

Big PharmaNon-Big Pharma

4

13

Big PharmaNon-Big Pharma

Currently Marketed Large Molecule Products by Originator

Oncology Large MoleculesAll Large Molecules

EvaluatePharma, FDA



Pharma Knows This: First Generation of Biological Therapeutics Were Not Invented Here



But Rather Here



Today’s Pharma CEOs Know This: Next Generation Biologicals Won’t Be Invented Here Either



But More Likely Here



Interview by Laurie Sullivan, December 2007 in PharmaWeek

Externalization v5: Next Generation BioPharma!

The distinction between biotech and pharmaceutical companies is becoming increasingly blurred. By looking at the partnerships that have been formed over the last 10–15 years, employees’ training and backgrounds, and new business models, it is becoming increasingly clear that this blurring has produced an interesting and potentially fertile ground for the discovery of new medicines. Partnerships between biotechnology and pharmaceutical companies have played a crucial role in fertilizing that ground, as well as engendering the thinking that is leading to the next generation of biopharma. Additionally, understanding the level to which any company has developed skills and capabilities which were previously solely in the domain of the other segment leads to a deeper understanding of what kind of partnering can be accomplished.

~ Jeremy Levin, SVP of External Science, Technology and Licensing, BMS



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