Over the last 30 years large pharmaceutical companiesenjoyed unprecedented success. Unfortunately, the almosteffortless growth and profitability the industry experiencedthroughout the 1990s cannot be expected to continue in adramatically altered 21st century marketplace. To managecurrent challenges and ensure future success, pharmaceuticalexecutives must understand how the market is changingand identify new strategies to respond, compete, andgrow. Strategies that guaranteed success during the past20 or 30 years will not guarantee success in the future.

TRANSITIONS IN GLOBAL PHARMACEUTICALMARKETINGThe past decade has yielded a number of significanttransitions in global pharmaceutical marketing, particularlythose related to the growth rate, markets, and R&D focus.

Growth rate. Throughout the 1980s and 1990s a double-digit annual growth rate in the pharmaceutical market wasthe norm. Over the past 8 years, however, the growth ratehas dropped to the low-to-mid single digits. Major marketshave moderated, while growth has accelerated in the“pharmerging” markets (China, Brazil, Mexico, SouthKorea, Turkey, India, Russia). The U.S. remains the largestmarket (projected to be 39 percent of the total market in2008), but its contribution to global growth has decreasedsignificantly.

Market segments. The focus of growth and innovation inthe pharmaceutical marketplace has changed dramatically.In the past, the developed market was driven by primarycare needs for drugs to treat conditions that affected largenumbers of patients: infectious diseases, GI disorders, highcholesterol, and high blood pressure. Now the momentumhas shifted dramatically. The number of new product

launches has decreased and the market is dominatedincreasingly by specialty driven products. In 2008, theprimary care segment will decrease globally for the firsttime, and specialty categories will drive 70 percent of totalglobal growth. This has already become apparent in theU.S., where growth in the primary care categories decreasedby 4 percent during the first quarter of the year. The currentmarket is driven by needs for innovative, molecularly targetedproducts designed to treat small groups of patients withmore complicated diseases: cancer, rheumatoid arthritisand immune disorders. The global dynamics of changingdemographics, epidemiology and economic development,particularly in the pharmerging markets, will bring newsources of pharmaceutical growth and revenue.

The decline of the blockbuster. The decline of theblockbuster drug represents one of the most dramatictransitions in pharmaceutical marketing. Ten years ago,blockbusters accounted for only 9.8 percent of growth butby the middle of this decade they accounted for 44.3percent. Focusing R&D efforts on blockbusters involvedhuge costs that were justified by multi-billion dollar salespotential and favorable regulatory and pricing frameworks.Now the tide has changed. R&D targets in the blockbustercategories have diminished. Favorable pricing has eroded,and safety and regulatory review has increased the cost of

21st CENTURY PHARMAManaging current challenges to ensure future growthExecutive Summary of June 12, 2008 IMS Pharma Strategy Series Webinar

Pharmaceutical manufacturers have not respondedto marketing transitions as rapidly as they should.The solution to today’s challenges requires newbusiness models to seize new opportunities andprofit from them.

bringing a primary care therapy to market (and keeping itthere). Generics are now replacing the current stock ofblockbuster drugs at a faster rate than new block-busterlaunches. Within the next five years, $129 billion of brandedpharmaceuticals will face generic competition. As theavailability of blockbuster platforms has decreased,pharmaceutical executives are redirecting R&D budgetsand manufacturing strategies to niche indications. Advancesin molecular technology allow the development of targeteddrugs used for smaller numbers of patients. Even in verybroad categories, the “one size fits all” approach has beenreplaced by a preference for narrowly targeted productsdesigned for populations of high unmet needs. Butchange has come slowly and in some cases has beenmet with reluctance.

“When we look at the proposed changes in R&D andmarketing strategy, we have to ask ourselves: are theyaggressive enough? How dramatically will these changesaffect the company five years from now? I’d like to see theseagendas being questioned at a much more significant levelthan they are now,” said Jerry Cacciotti, IMS Vice President.

CHANGES IN KEY MARKETING FUNDAMENTALSThe transitions in global pharmaceutical marketing havebeen driven by changes in several key fundamentals:

Safety issues and regulatory actions. The standard of carefor all patients has risen dramatically; consequently thestandard of proof is higher than ever before. New drugapplications are scrutinized more closely, and more drugsnow require black box warnings. The FDA approval processis becoming more demanding and more conservative. Formany therapeutic categories, approval almost alwaysrequires data to show that the proposed new drugs aresafer and/or more effective than existing agents. Clinicaltrials are becoming increasingly complex and expensive.

Increased power from patients and third-party payers.With the advent of direct-to-consumer advertising andInternet information, consumers are more educated aboutdrugs than ever before. Widespread publicity about problemswith drugs once considered safe by the FDA, such ashormone replacement therapy and COX-2 inhibitors, hasmade consumers wary. Today consumers are less willing toaccept risks that the FDA might consider reasonable. Theywant more complete data about clinical trials and thecalculated risks of drug efficacy and safety. The formularyacceptance of third-party payers, including Medicare andMedicaid, exerts perhaps the greatest influence on whichdrugs will be prescribed.

Changes in intellectual property (IP) protection.Traditional pharmaceutical IP is under threat.Pharmaceutical companies in the U.S. and Europe areexperiencing increasingly aggressive patent litigation,shortening the time of patent protection and acceleratingthe entry of generic versions. Legislators tend to supportthis approach, considering generics a means to reduce thebloated budgets for drug therapies. In the pharmergingmarkets, IP regimes are new and thus untested. Thesocial contract that influences the major markets is being

Significant Transitions in the GlobalPharmaceutical Market

TRANSITION LATE 20TH CENTURY TRENDS EARLY 21ST CENTURY TRENDS

Growth Rate Double-digit Low/mid single-digit

Markets Developed, primary Emerging, specialist-driven

care-driven

R&D Focus Limited portfolios of block- Broad-based portfolios:

busters: small molecules for innovative biologics for small

large groups of patients with goups of patients with

chronic diseases requiring higher-burden diseases

primary care requiring specialist care

% Contributionto Growth US$

34%

66%

% Market Share

Primary care-driven

Specialist-driven

60%

40%

2007

0

5

10

15

20

25

%GR

OWTH

CON

STAN

TU

S$

Primary care-driven

Specialist-driven

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Primary care growth

Specialty care growth

In 2008, the PrimaryCare-driven Segment WillDecline Globally for theFirst Time Ever

Source: IMS Health, MIDAS, MAT Dec 2007

threatened by compulsory licensing, ineffective enforcement,and a more tolerant attitude toward IP infringement.

Evolving economics. As genericization accelerates, themajor markets are facing a multi-year drag on growth, atthe same time that R&D costs are reaching new heights.

Clinical trials are being scrutinized more closely by the FDAand European regulators, and consumers are more cautiousafter hearing about safety problems with marketed drugs.While drug companies continue to maintain very largeR&D infrastructures required to produce blockbuster drugs,pharma portfolios contain a large proportion of in-licenseddrugs. Expensive R&D engines aren’t producing at the ratethey once did. As a result, many companies are earning lessfrom new products than they are paying for the R&D todevelop those products, and inefficient product developmenthas dramatically increased the cost of capital.

NEED FOR A NEW BUSINESS MODELPharmaceutical manufacturers have not responded tomarketing transitions as rapidly as they should. Too manyexecutives are delaying asking the serious questions, wishingthat the situation would be different and resisting signs that

change is needed. The solution to today’s challenges requiresnew business models to seize new opportunities and profitfrom them.

New models must consider the positive and negativetransformations in pharma. Positive trends include anincreased share of the healthcare budget for pharma-cotherapy, rapid implementation of healthcare informationtechnology, increased diagnosis of asymptomatic conditions,improved rates of compliance and persistence, and expandedpatient access to healthcare. Negative trends includegovernment healthcare policy reforms, increasing concernsabout drug safety, more aggressive cost containment inEurope and Japan, and the general global economicslowdown.

A new business model for pharma might include thefollowing changes:

Resize the sales force and implement new sales models.Consider sharing a sales force with a partner. Benefit fromthe advantages of using the Internet to increase detailingopportunities. More and more, physicians are relying onthe Internet rather than pharmaceutical representatives tosupply information about new products or new indications,a trend that is likely to accelerate as younger, technology-savvy physicians replace older, technophobes.

According to Mary Tanner, Founder, Life Sciences Partners,“Traditionally physicians relied on pharmaceutical represen-tatives to supply information about new drugs or newindications. Now they can choose to learn via the Internet.”

Implement a flexible and efficient corporate structure.Restructure the corporation to focus strictly on pharma byoutsourcing all non-critical activities, including non-pharmaceutical manufacturing divisions. Downsize ifnecessary; creating a smaller and more flexible cost

“The dramatic success of the industry has led toa dramatic increase in the standard of care. Late-stage trials are failing because the standard of proofis so high that trials have become increasinglycomplex and expensive.”

— Mary TannerFounder, Life Sciences Partners

In Terms of Field Force Growth, Restructuringhas Finally Begun to Have an Impact ...

50,000

70,000

80,000

90,000

100,000

60,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

100,232

1997

SALE

SRE

PRES

ENTA

TIVE

S

And Almost Every Major Pharma Company isAddressing the Challenge in Some Way

Making changes to senior management 15 out of 18 companies

7 out of 18 companies

5 out of 18 companies

Pursuing divestitures & acquisitions

Restructuring the current sales force

structure will help to reduce vulnerability to revenuevolatility. Maximize productivity by partnering andportfolio risk sharing to optimize the use of existinglaboratory and production technologies.

Shift product portfolio focus. Create a niche focus byoffering a broad portfolio of products in biotechnology andspecialty therapy areas, working with a licensing ortechnology partner to develop expertise and credibility.Provide innovative ways to formulate or deliver existingdrugs. Profit from today’s advances in medicine: behaviormodification, patient mentoring and evidence-basedtreatments. Consider selling medical outcomes rather thanonly pills or injections. Study the needs of consumers andintroduce lifestyle programs that incorporate existing ornew drugs or delivery systems. Develop techniques toimprove compliance and persistence. Divest unprofitableor non-strategic products.

“Traditionally the industry has derived value from a pill oran injection, but today the real advances in medicine are inbehavior modification, mentoring and evidence-basedmedicine. We need to target research toward these areas,”said Cacciotti.

“At some point it may become more advantageous to theindustry to sell outcomes rather than pills. We need to beready for this,” added Richard Evans, Vice President, AVOSLife Sciences.

Maximize the commercial value of new products. Investin original R&D, supplemented by licensing or acquisition,to produce products based on breakthrough scientificinnovations. Recognize that a product with a narrowindication can yield substantial profits. Understand when itis financially appropriate to abandon a new molecule.

Pursue profitable growth in emerging markets. Increasethe product portfolio by acquiring strong products orpartners from outside the U.S.

FUTURE OF PHARMADespite the challenges of the changing marketplace, analystsare optimistic about the long term future of pharma. Medicalscience will continue to advance, more will be discoveredabout the molecular effects of disease, new compounds willbe discovered that not only treat disease, but possibly toalter genes so that disease can be avoided. Demographics

and socioeconomic conditions also favor innovations inhealthcare. As societies grow richer they will demand accessto more and better therapies. Accelerated use of healthcareinformation technology, increased diagnosis of asymptomaticconditions, and expanded access and coverage will improvepatient adherence to pharmacotherapy. As the populationages, more people will need more drugs to treat theconditions of age, including coronary artery disease,diabetes and Alzheimer’s.

Despite the positive long term outlook, maturing marketsin many segments make it clear that a new business modelis needed. But it is not yet clear what that model shouldlook like. Most pharmaceutical companies are experimentingin some way. IMS research suggests that of the top 18pharma companies, 15 were involved with some type ofrestructuring, seven have had major divestitures and/oracquisitions, and five have had changes in senior manage-ment. Companies are resizing and restructuring sales forcesto align with more specialized product portfolios. They areimplementing new sales models, leveraging the Internetand relationship marketing. Most realize that in addition toreaching physicians they have to establish new channels toreach consumers and to influence payers. Still others arediversifying with more aggressive licensing and acquisition,expanded geographic, and divestiture of non-strategicproducts to narrow focus and reduce costs.

Said Evans, “Diversification is fine. It helps to mitigate risksand may help to lower the cost of capital in certain periods.But it is not a big enough effect to repair the underlyingcore pharmaceutical problem.”

There is no easy answer for pharma, but some things areclear. Serial restructuring has proven inadequate because ithas not produced sufficient productivity gains or enough

“In many companies R&D returns are lower thanthe cost of capital. It’s irrational for firms to commitcapital to R&D unless long-term returns are at leastproviding a risk adjusted return that is greater thanthe cost of capital.”

— Richard EvansVice President, AVOS Life Sciences

GIVEN THE SHIFTING LANDSCAPE, WILL MOREDRAMATIC, STRUCTURAL CHANGES BE REQUIRED?

Downsizing by more than 50% to reflect futureproduct portfolio & market realities

Faster migration away from the integratedbusiness model

More aggressive licensing & acquisition to accessproduct portfolios and geographic coverage to

provide scale and focus

Accelerated divestiture of non-strategic productsto drive focus

Further consolidation to remove excess cost

Webcast Presenters

Jerry Cacciotti leads the SDG Life Sciences unit of IMS. Specializingin corporate portfolio strategy, Cacciotti has led clients through majorstrategy transitions — from decisions on entering new regions orbusiness sectors, to exiting or investing in multi-billion-dollar franchises,to realigning business strategies at the broadest level. He has supportedclients through the M&A process, supporting transactions worthhundreds of billions of dollars, and has extensive experience invaluation and negotiation strategy.

Cacciotti also has led significant engagements involving most therapeuticcategories, particularly in oncology, respiratory, and cardiovasculartherapy, and has worked with clients in Europe, North America, andJapan. His recent work has focused on frameworks to integrate strategicchoices with shareholder and financial market expectations.

Prior to joining SDG Life Sciences, Jerry held positions in finance withCentennial Partners and Trammell Crow. Earlier in his career, he was aforeign policy analyst and press officer within the U.S. government.

Cacciotti holds a B.A. and M.B.A. from Stanford University.

Richard Evans served as a Senior Analyst covering the U.S.pharmaceuticals industry at Sanford C. Bernstein & Co., LLC, from1998 until 2006. He was twice ranked first amongst his peers for drugstock selection by Bloomberg, and in 2006 was ranked amongst thetop 20 stock pickers on Wall Street by Bloomberg. Dr. Evans wasnamed to the Institutional Investor’s All-America Research Team formuch of his tenure, ranking first for major pharmaceuticals in 2006.His work has been highlighted in various major media outlets,including The Wall Street Journal, Barron's, The New York Times,Fortune, CNN, CBS, and Frontline.

Previously, he was a member of senior management at Roche,serving most recently as vice president, Business Policy and AccountManagement. In this capacity, he was responsible for Roche's commercialinteractions with large organized buyers such as hospitals, hospitalpurchasing groups, managed-care organizations and governments. Hisresponsibilities also included those areas of the company which define

and support account interactions, namely account management,customer marketing, pricing, contract administration, pharmaco-economics, and distribution. During his seven years at Roche, Dr. Evansalso served as the head of Business Development and Strategic Planning,and as product director for the company's injectable anesthetics. Heearned a doctorate in Veterinary Medicine from North Carolina StateUniversity in 1988 and a master's of Public and Private Managementfrom Yale University in 1991.

Mary C. Tanner has devoted 22 years to the healthcare andconsumer products industry, as a Senior Managing Director at LehmanBrothers and Bear Stearns, both global investment banks. Tannerretired from Bear Stearns in 2004 and founded Life Sciences Partners,which specializes in healthcare investment and strategic advisory work.During her 22 years at Lehman and Bear Stearns, Tanner led orsupervised over 575 transactions, including 220 mergers, acquisitionsand divestitures with a total disclosed value of $275+ billion. Amongthese were 14 large pharmaceutical mergers, including transactionsbetween Rhone-Poulenc and Rorer, Rhone-Poulenc and Fisons, MarionLaboratories and Merrell Dow, Hoechst and Marion Merrill Dow, Sanofiand Sterling Drug, Sanofi and Synthelabo, BASF and Boots, Amgenand Immunex, Pfizer and Pharmacia and Sanofi and Aventis. Tanner alsodeveloped a large practice in the biotechnology industry as it emergedover the last 20 years, including the transactions between Roche andGenentech, Cetus and Chiron, Chiron and Behring Vaccines and others.

Tanner is a member of the Board of Evotec AG (Frankfurt listed),Synvista Therapeutics (AMEX listed), and Acute Pain Therapy, Ltd(Canada) and a member of the Dean’s Council of the Yale Schoolof Medicine.

flexibility in cost structures to predict and manage volatilityin revenue. Most changes in programs undertaken thus farhave fallen short, and more dramatic experimentation isneeded: downsizing by 50 percent, migrating away fromthe integrated business model, and outsourcing wholesections of the value chain. Pharma must analyze everyaspect of the business, with the goal of doing many smallthings better. Expectations must be realistic. No singlechange will guarantee a return to 1990s levels of growthand profitability.

It is now clear that the success template of the last 20years no longer applies. The winners in the future will profitbecause they have developed an integrated and deliberatestrategy for moving forward. In the face of uncertainty,

smart players will take dramatic action to reduce costs,improve flexibility and to adapt to more cyclical markets.There will be much more experimentation with new modelsfor innovation, development, and commercialization ofdrug therapies. The definition of ‘product’ will berethought, as drugs become part of much morecomprehensive medical solutions.

On a global basis, the market for pharmaceutical drugshas reached only a fraction of its potential. There is stillsubstantial unmet need, and drug therapies comprise onlya small portion of the $4.5 trillion spent on healthcare.Therapeutic breakthroughs will still be rewarded in themarketplace. With creative, focused management, pharmacan continue its success well into the 21st century. •

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