pharmaceutical and biotech...

PHARMACEUTICAL and BIOTECH COMPANIES

Safe Haven or Sitting Ducks?

Jim Webster MBA CFAMarch 25, 2009

Before We Begin: Life Sciences 101

• The life science industry has cured more mice than people.• It is not necessary to understand how a drug works for

approval.• Sugar (placebo) pills have made many people feel better.• The healthcare industry generally talks about “treatments”

and not ‘cures”.• New medicines are not necessarily better than older

medicines- but the marketing companies want you to think so!!

• The best day in the life of a generic product is the first day of launch.

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Before We Begin: Life Sciences 101• Life Science companies depend on innovation to survive.• New products depend on patent-protection to be

successful.• Our system of intellectual property is evolving through

judicial interpretation and public policy to be less favorable to investors.

• Biotech products have a unique patent and regulatory landscape that is preventing introduction of generics (biosimilars). This will change.

• The cost of developing a new chemical entity or biologic has been estimated to be around $1.7 billion.

• The growing cost of US healthcare is an unsustainable model.

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Pharma/Biotech Stocks Performed Relatively Well in 2008

Source: Credit Suisse, 01/08/2009

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Pharma’s Relative Valuation is Near its Lowest since 1993

Source: Credit Suisse, 01/08/2009

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Pharmaceutical P/E Ratios Have Been Dropping

Source: Cowen & Company, October 2008

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Biotechs are Trading at Lowest Price in Decades

Source: Oppenheimer , 01/29/2009

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Investors are being Offered pay to Stick Around

Source: Defined Health , 04/2008

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Pharma’s 2009 Growth Expected To Better than S&P 500 Growth

Source: Credit Suisse, 01/08/2009

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But Declining Growth in Pharma Sales and Earnings

EvaluatePharma; Defined Health analysis

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Growth in Elderly Population Supports Long Term Outlook

Percentages represent 65+ share of total US population

HHS Administration on Aging; U.S. Census Bureau 11

So Demand For New Drugs Is Not Going Away

Pharmaceutical Research and Manufacturers of America (PhRMA)

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Oncology, Anti-Infectives, Cardiology = 50% of Market

2013 Projection: Therapeutic Categories

Oncology21%

Anti-infectives17%

Cardiology12%

Arthritis9%

Respiratory7%

CNS6%

MS 3%

Other17%

Diabetes8%

Cowen: 09/2008

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Trends in Select Therapeutic Areas through 2013

• Alzheimer’s Disease: Wyeth/Elan could dominate this category

• Next generation drugs focus on underlying disease mechanism

• Huge market potential but high risk of failure

• Arthritis/Inflammation: Abbott, Amgen and JnJ

• Biologics are now well entrenched with little threat from new entrants

• Cardiology (cholesterol): AstraZeneca and Sanofi-Aventis

• Patent expirations will lead to negative sales growth

• Interest persists in drugs that raise HDL and prevent atherosclerosis

14Source: Cowen 09/2008

• Diabetes: Novo Nordisk, Merck, Eli Lilly and Sanofi Aventis

• Insulin will remain cornerstone of treatment for diabetics

• Oral DPP-IV inhibitors could be next oral diabetes blockbusters

• Concerns persist about safety

• Infectious Disease: GSK, Merck, Gilead and Sanofi-Aventis

• Novel antivirals hold varying degrees of promise

• New vaccines have reinvigorated the sector

• Oncology: Amgen, Genentech, Roche and Novartis

• Numerous companies have rapidly emerging portfolios

• Targeted therapies (biologics) are changing the landscape

Trends in Select Therapeutic Areas through 2013

15Source: Cowen 09/2008

Selected Patent Expirations 2008-2012Brand Name Manufacturer WW Sales1 Expires2 Therapeutic Area

Arimidex Astrazeneca $ 1,730 Jun-08 OncologyZometa Novartis 1,297 Aug-08 OncologyCasodex Astrazeneca 1,335 Oct-08 OncologyValtrex GSK 1,869 Jun-09 Infectious DiseasePrimaxin Merck 764 Sep-09 Infectious DiseaseCozaar Merck 3,350 Feb-10 CardiovascularEffexor Wyeth 3,794 Jul-10 Central Nervous SystemGemzar Eli Lilly 1,592 Nov-10 OncologyXalatan Pfizer 1,604 Mar-11 OphthalmologyZyprexa Eli Lilly 4,761 Apr-11 Central Nervous SystemTemodar Schering-Plough 861 May-11 OncologyLipitor Pfizer 12,675 Jun-11 CardiovascularAvapro Bristol Meyers Squibb 2,683 Sep-11 CardiovascularSeroquel Astrazeneca 4,171 Sep-11 Central Nervous SystemPlavix Bristol Meyers Squibb 8,075 Nov-11 CardiovascularViagra Pfizer 1,764 Mar-12 Erectile dysfunctionDiovan/HCT Novartis 5,012 Mar-12 CardiovascularAtacand Astrazeneca 1,287 Jun-12 Cardiovascular

Singulair Merck 4,266 Aug-12 Respiratory

1Medtrack ($MM) 2Cowen & Co.

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The Plunge Over the Patent Cliff Could be Fatal

.Defined Health

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Because Of The Lack Of Ready Replacements

.Defined Health

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Sales and EPS at Risk Varies by Company

Cowen & Co.

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Pharma R&D Spending Outpaces Results

US Drug Approval Trends and Yearbook 2008/2009; FDA

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While Compounds in Development Continue to Grow….

Parexel Bio/Pharmaceutical R&D Statistical Sourcebook 2008/2009

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Success Rates Remain Low

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Pharma “Buys” Innovation Through Partnering

Burrill & Company

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Alliance Values Rising

Early Stage includes Research, Preclinical and Phase I

Recombinant Capital

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Big Pharma Is Doing Earlier Stage Deals

Windhover; Burrill & Company; Nature Biotechnology Volume 26, Number 7

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Internally Developed Products Less Successful Than In-Licensed Products

Parexel Bio/Pharmaceutical R&D Statistical Sourcebook 2007/2008; Defined Health analysis

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In-Licensed Products

EvaluatePharma; Defined Health analysis

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In-Licensed Revenues To Almost Triple

EvaluatePharma; Defined Health analysis

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Pharma / Biotech M&A Activity

Thomson SDC, deal values greater than $50mm

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Investor Worries on New Drug Policy Have Grown

Burrill & Company

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Healthcare Reform

• Cost-Effective Treatment protocols: a new government body will compare and recommend/authorize the most cost effective treatments

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What Is Big Pharma’s New Plan?

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Big Pharma Charts New Territory

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Pharma’s Playbook Has Pitfalls

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• Buy early biotechs and as many as possible:– Big risk that pharma will overpay!

• Externalize innovation:– Fear of losing control!

• Cut costs:– What are they really good at?

• Collaborate with the competition:– Easier said than done!

• Harvest innovation:– Need plenty of patience… and capital!

Big Pharma Is Doomed If It Tries To Solve Its Innovation Problem Internally

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Pharma Consolidation Has Not Produced More Drugs

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The Reality of Scale

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Exception that Proves the Rule: JnJ Proves Pure Play Pharma Model May a Bad Idea

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Shifts are Underway for Big Pharma

• Focus on big molecules like a biotech company (AstraZeneca)

• Go into biosimilars or generics (Merck; Novartis)• Expand into new therapeutic areas (Novartis)• Focus on emerging markets (GSK)• Acquire (Pfizer)• Any combination of the above

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But Does the Future Look This?

1985-20121985-20121985-2012

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What New Shoe Fits Biotech?

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Biotech Is more Innovative than Pharma

FDA; Defined Health; Capital Royalty analysis

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New Biotech Products Smaller than Current Ones

EvaluatePharma; Defined Health analysis

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Big Biotech Also Faces Innovation Challenges

EvaluatePharma; Parexel

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Biotech Pioneers Were Able To Tap Public Markets Quickly

Today’s IPO markets are closed

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Today’s Biotech Investors Do Not Have the Patience

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Today’s New Biotechs Have Limited Vision

Defined Health47

• Pharma stocks are more of a defensive portfolio choice due to benchmark importance (8% of S&P), liquidity and a relative lowerrisk of negative earnings revisions.

• The 2012 patent cliff is driving a reset of sector capacity and sourcing of growth. Fundamental uncertainties persist as to longer term growth……

• Only 32 of every 100 prescriptions written in the U.S. are for brands. By 2012 that will fall to 20, elucidating the need to reduce infrastructure and improve mix to offset the generic threat.

• Pricing power is eroding.

• In-licensing strategy partially offsets high cost of product development and poor R&D productivity.

• Marketing to the primary care market has become largely uneconomic with smaller products.

Conclusion for Pharma: Safe Haven?

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Conclusion for Biotech: Safe Haven?

• Large caps, and certain mid caps, will continue to be viewed as safe haven investments, with dependable earnings, solid cash positions, and fewer near-term patent expirations.

• Expect some M&A and partnership activity which will drive upside for select companies.

• Appointment of a new FDA Commissioner will be key in establishing some direction and stability for the agency.

• Healthcare policy reform and progress towards legislation on biosimilars will be important to watch.

• Looming cash crunch for small biotechs.

• Somewhat more successful at innovation- but still a problem.

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Safe Haven? Or In Need of Rescue?

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Special Situations to Watch

• Acquisitions recently announced:

• Pfizer (PFE) buying Wyeth (WYE) ($68B)

• Merck (MRK) buying Schering–Plough (SGP) ($48B)

• Roche buying Genentech (DNA) ($47B)

• Will Carl Icahn extract value out of Biogen Idec (BIIB)?

• Will Vertex (VRTX), Acorda (ACOR), Amylin (AMLN), Arena (ARNA), OSI (OSIP) be acquired? (tangible products)

• Will AstraZeneca (AZN), Sanofi-Aventis (SNF), BMS (BMS) and JnJ (JNJ) go shopping?

• Abbott (ABT), Gilead (GILD), Celgene (CELG), Genzyme (GENZ) and JnJ (JNJ) appear to be well managed.

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Contact Information:

Jim Webster MBA CFAIndependent Consultantwww.websterexec.com

713-478-8913jrwebster@comcast.net