pharmaceutical industry update: challenges, opportunities, & outlook bin li, ph.d., mba equity...
TRANSCRIPT
Pharmaceutical Industry Update: Challenges, Opportunities, & Outlook
Bin Li, Ph.D., MBAEquity Research Analyst Global PharmaceuticalsMerrill Lynch
Refer to important disclosures at the end of this report
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OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS,indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected totalreturn (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low andMedium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risksecurities - 0-20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators ofpotential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered to besecure); and 9 - pays no cash dividend.
Copyright 2002 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use ordisclosure is prohibited. This report has been prepared and issued by MLPF&S and/or one of its affiliates and has been approved forpublication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by the FSA; has been consideredand distributed in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under theAustralian Corporations Law; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC;and is distributed in Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which areregulated by the Monetary Authority of Singapore. The information herein was obtained from various sources; we do not guarantee itsaccuracy or completeness. Additional information available.
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Refer to important disclosures at the end of this report
IntroductionIntroduction
Current Industry Overview
Issues & Challenges
Positives & Catalysts
Therapeutic Analysis
Outlook & Opportunity
Case Study
Refer to important disclosures at the end of this report
Current Status: 2002… Slowdown From 2001Current Status: 2002… Slowdown From 2001
2002 % Constant $ Growth
Const.$ Bil %Share 2002 CAGR 97- 01
SOURCE: IMS HEALTH,MIDAS, retail and hospital where available
LATIN AMERICA 16.5 4.1 - 10.4 + 0.6
A/A/A 31.8 7.9 + 10.6 + 9.9
JAPAN 46.9 11.7 + 1.0 + 3.5
EUROPE 102.4 25.5 + 8.1 + 7.6
NORTH AMERICA 203.6 50.7 + 11.7 + 14.2
WORLDWIDE 401.2 100.0 + 8.2 + 9.5
10 Strategic Markets 336.5 83.8 + 9.0 + 10.5
World Audited MarketWorld Audited Market
Refer to important disclosures at the end of this report
10 Strategic Markets: U.S. Is the Key Growth Driver10 Strategic Markets: U.S. Is the Key Growth Driver
+9.0%10 Key Markets
$336.5 Bil
Constant Dollars* Pharmacy Market Only
+11.5%USA
$195.6 Bil
+14.5%CANADA$8.0 Bil
+1.0%JAPAN
$46.9 Bil
+4.0%FRANCE$19.2 Bil
+5.2%ITALY
$13.2Bil
+8.0%GERMANY$20.3 Bil
+11%SPAIN$8.7 Bil
+7.4%EUROPE$75.0 Bil
+7.4%EUROPE$75.0 Bil
% Constant $ Growth
+9.5%MEXICO*$6.1 Bil
SOURCE: IMS HEALTH
+11.4%UK
$13.7 Bil
+8.4%BRAZIL*$4.1 Bil
Refer to important disclosures at the end of this report
U.S. & Europe Dominate Growth
-20
-10
0
10
20
30
40
50
60
70
80
90
100
1997 1998 1999 2000 2001*
NorthAmerica
Europe (All)
JapanA/A/A
LatinAmerica
Constant Dollars. Includes panels w/o six years of dataSource: IMS HEALTH
Ten Key Markets
% Contribution to Absolute Growth
Refer to important disclosures at the end of this report
Key Industry Challenges & IssuesKey Industry Challenges & Issues
Pipeline
Patent
Price
Promotion
Politics
Refer to important disclosures at the end of this report
Key Industry Issues: Pipeline, Patent, Price, Promotion, & PoliticsKey Industry Issues: Pipeline, Patent, Price, Promotion, & Politics
Pipeline Drought: Approvals Declined Despite Increased R&DPipeline Drought: Approvals Declined Despite Increased R&D
NME Approvals Have Declined Since 1996
50
100
150
200
250
300
350
400
450
500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E
Inde
xed
R&
D, S
ales
, & N
ME
(199
0=10
0)
R&D Spending ($Bn)
Total US Sales ($Bn)
NME Approvals
Refer to important disclosures at the end of this report
Key Industry Issues: Pipeline, Patent, Price, Promotion, & PoliticsKey Industry Issues: Pipeline, Patent, Price, Promotion, & Politics
Patent Exposure: Enormous Pressure from Patent Expirations Patent Exposure: Enormous Pressure from Patent Expirations
Top 5 brands 2001 2002 2003 2004 2005 2006
1 Prozac (Eli Lilly)Prilosec (AstraZeneca) Cipro (Bayer) Allegra (Aventis) Zithromax (Pfizer) Zocor (Merck)
2 Pepcid (Merck) Augmentin (Glaxo) Wellbutrin (Glaxo) Celexa (Forest) Amaryl (Aventis) Zoloft (Pfizer)
3 Mevacor (Merck) Claritin (Schering) Flonase (Glaxo) Diflucan (Pfizer) Biaxin (Abbott) Pravachol (BMY)
4 Alphagan (Allergan) Prinivil (Merck) Accupril (Pfizer) Paraplatin (BMS) Basen (Takeda) Ambien (Sanofi)
5 Elocon (Schering) Zestril (AstraZeneca) Monopril (BMS) Epogin (Chugai) Harnal (Yamamouchi) Zofran (Glaxo)
Worldwide Revenue for Products Off-Patent Yr. 2001-06
-
4,000
8,000
12,000
16,000
20,000
24,000
2001A 2002E 2003E 2004E 2005E 2006E**
WW
Rev. (U
S $
mm
)
0.0%
2.0%
4.0%
6.0%
% o
f To
tal R
ev.
Revenue Off Patent Patent Rev. as % of Total Rev
Refer to important disclosures at the end of this report
Key Industry Issues: Pipeline, Patent, Price, Promotion, & PoliticsKey Industry Issues: Pipeline, Patent, Price, Promotion, & Politics
Price & Politics: Pressure From All Levels, Every Direction Price & Politics: Pressure From All Levels, Every Direction Private Sector:
– Rising HMO Rx co-pays (increased co-pay reduces drug utilization)– Heavier discounts and higher rebates– Retail chains suing for differential discount rates
Federal: – Medicare Part B, Medicaid price control (FTC & DOJ are investigating
pharmaceutical industry pricing and marketing practices. The government is focused on drug
company “inducements” that may have improperly influenced sales of products)
– Drug Reimportation - back to agenda
0%
5%
10%
15%
20%
25%
Had Not Filled One Rx Taken Smaller Dose Taken Rx LessFrequently
$0.00$5.00
$10.00$15.00$20.00$25.00$30.00$35.00
1996 2001
Generic (Preferred) Branded (Preferred)
Branded (Non-Formulary)
Source: Harris Survey and IMS
Refer to important disclosures at the end of this report
Key Industry Issues: Pipeline, Patent, Price, Promotion, & PoliticsKey Industry Issues: Pipeline, Patent, Price, Promotion, & Politics
Price & Politics: Pressure From All Levels, Every Direction Price & Politics: Pressure From All Levels, Every Direction
State: – Maine Rx - entitlement to Medicaid type discounts – States suing for overcharging Medicare for cancer drugs – States forming purchasing groups to demand discounts
Suffolk County - inflated AWP prices to overcharge
Foreign Government:– Japan: price downward revision coming soon– Italy: 5% price cut; regional formularies; reference pricing– Germany: increased parallel importing; generic substitution, reference
pricing; 6% cut– France: increased generic substitution; reduced reimbursement (but
better for NCEs)
Refer to important disclosures at the end of this report
Key Industry Issues: Pipeline, Patent, Price, Promotion, & PoliticsKey Industry Issues: Pipeline, Patent, Price, Promotion, & Politics
Promotion: Increased Spending Due To Intense Competition Promotion: Increased Spending Due To Intense Competition
Sales force has doubled in 6 years
Marketing cost also doubled (DTC is the fastest growth component)
30,000
40,000
50,000
60,000
70,000
80,000
1996 1997 1998 1999 2000 2001 2002
# o
f S
ale
s R
ep
s
02
46
810
1214
1618
20
1995 1996 1997 1998 1999 2000 2001
Retail Value of Samples Office-Based PromotionHospital-Based Promotion Journal Advertising
DTC Advertising
Refer to important disclosures at the end of this report
Key Industry Issues: Pipeline, Patent, Price, Promotion, & PoliticsKey Industry Issues: Pipeline, Patent, Price, Promotion, & Politics
Generic Competition: Faster Substitution & High Litigation Risk Generic Competition: Faster Substitution & High Litigation Risk
Selected List of Recent Patent Litigation:
Against Favor Mix Pending
Norvasc Fosamax Prilosec Wellbutrin
Augmentin Neurontin
Claritin Zyprexa
Prozac Premarin
Taxol Plavix
Buspar Allerga
Paxil Lipitor
Rebetol Vioxx
All are blockbuster drugs. Some have expiration beyond 2010.
Refer to important disclosures at the end of this report
Despite the Issues, Industry Still Has Growth PotentialDespite the Issues, Industry Still Has Growth Potential
Industry Positives Support A Healthy Growth Industry Positives Support A Healthy Growth
Political Environment – Republic President and Congress Favor Market Approach for Drug Price
Medicare Rx Reform – The President and Congress Still Pushing for the Bill– $400-500 Bn for Rx over 10 years
Changes in FDA– New FDA commissioner and PDUFA III– Other Initiatives: improved transparency, better communication,
shortened approved times, and new cGMP rules
Demographic Trends Underpin Long-Term Revenue Growth Patent Pressure Will Ease in the Next Few Years Pipeline Candidates Have Increased Overall, Pipeline to Patent Profile (P2P) Should Improve
Refer to important disclosures at the end of this report
Demographic Trends Underpin Long-Term GrowthDemographic Trends Underpin Long-Term Growth
By the Year 2006, 30% of the US Population Will Be 50+ Years OldBy the Year 2006, 30% of the US Population Will Be 50+ Years Old
Source: Census Bureau Estimates and Forecasts, 2001
26.0%
27.0%
28.0%
29.0%
30.0%
2000 2001 2002 2003 2004 2005 2006
% of US Population Age >50
Refer to important disclosures at the end of this report
Demographic Trends Underpin Long-Term GrowthDemographic Trends Underpin Long-Term Growth
Major Diseases Are Under-diagnosed and Under-treatedMajor Diseases Are Under-diagnosed and Under-treated
Diagnosis 12 Month Visits (Mil)
Hypertension 53.6Diabetes 25.1Hyperlipidemia 14.7Osteoarthritis 11.4Hypercholesterol 8.9Dermatophytosis Nail 7.8Cataracts 7.3Menopause 7.2Esophagitis 7.1Depression 7.0
Refer to important disclosures at the end of this report
Number of Product in Development Has Been Steadily ClimbingNumber of Product in Development Has Been Steadily Climbing
2870 30673474 3328 3454 3396 3500
418461
528 561 630 651 714733
742
816 871911 992
1135427
442
499 477469 449
486
0
1000
2000
3000
4000
5000
6000
1995 1996 1997 1998 1999 2000 2001
Nu
mb
er
of
Dru
gs
Preclinical Phase I Phase II Phase III
Drug Candidates by Clinical Trial Phase Drug Candidates by Clinical Trial Phase
Source: Pharmaprojects
Refer to important disclosures at the end of this report
Pipeline to Patent Ratio Is ImprovingPipeline to Patent Ratio Is ImprovingNew Product Rev. Will Offset Off-patent Rev. Loss in 2004New Product Rev. Will Offset Off-patent Rev. Loss in 2004
Source: Merrill Lynch Research
US Major Pharmaceuticals: Net Incremental Revenue (= Current - Previous Yr.)
-$10,000
-$5,000
$0
$5,000
$10,000
$15,000
2003 2004 2005 2006 2007 2008
Incremental Rev. Gain from New Products (current vs. previous yr)
Incremental Rev. Loss Due to Patent Expiration (current vs. previous yr)
Net Incremental Revenue
Refer to important disclosures at the end of this report
Industry Earnings Growth OutlookIndustry Earnings Growth OutlookLong-Term Earnings Growth Is Expected To Be Around 10%Long-Term Earnings Growth Is Expected To Be Around 10%
Source: Merrill Lynch Research
BMY LLY MRK PFE SGP WYE Average
2001 12% 4% 8% 24% -4% 15% 12%
2002 -36% -8% -2% 21% -10% 2% -3%
2003E 8% 2% 9% 13% -69% 13% -4%
2004E 1% 13% 8% 19% 23% 11% 13%
2005E 4% 18% 10% 12% 29% 10% 14%
2006E -2% 15% 0% 4% 26% 10% 9%
2007E 6% 14% 2% 1% 18% 7% 8%
2008E 4% 14% 1% 1% 17% -4% 6%
CAGR (03-08) 3% 15% 4% 7% 23% 6% 10%
IBES LTG 10% 13% 8% 14% 8% 11% 11%
Refer to important disclosures at the end of this report
Therapeutic Analysis - 2002 OverviewTherapeutic Analysis - 2002 OverviewCardiovascular and Central Nervous System Drugs Still DominateCardiovascular and Central Nervous System Drugs Still Dominate
Source: Merrill Lynch Research
WW Revenue (US $M) 2001A 2002E Growth
1 Cardiov ascular 51,155 55,112 8%
2 CNS 38,146 42,447 11%
3 Infectious Diseases 31,855 32,935 3%
4 Respiratory 18,513 19,717 7%
5 Gastrointestinal 17,355 18,984 9%
6 Oncology 15,671 17,102 9%
7 Endocrine & Metabolic 15,401 14,197 -8%
8 Hematology 11,742 13,949 19%
9 Rheumatology 10,167 10,688 5%
10 Musculoskeletal 5,185 6,084 17%
11 Urology 4,288 4,913 15%
12 Women's Health 4,008 4,110 3%
13 Transplantation 3,222 3,351 4%
14 Ophthalmology 2,714 2,942 8%
15 Dermatology 2,265 2,134 -6%
Refer to important disclosures at the end of this report
Therapeutic Analysis - Disease CategoryTherapeutic Analysis - Disease CategoryHealthy Growth for Most Treatment Classes. Decline Due to Generics Healthy Growth for Most Treatment Classes. Decline Due to Generics
Source: Merrill Lynch Research
High Growth Category - New Products: Lipid Lowering, Asthma etc. Slow Growth Category - No New Products: Hypertension, Ulcers, etc. Declining Category - Generic Substitution: Diabetes, Antibiotic, etc.
Disease Category 2001A 2002E Growth
1 Hypertension, CHF 22,858 23,868 4%
2 Lipid Lowering 18,345 20,552 12%
3 Antibiotic 17,957 16,307 -9%
4 GERD, Ulcers 16,001 16,922 6%
5 Cancer 15,492 16,932 9%
6 Diabetes 11,453 10,102 -12%
7 Depression 11,145 11,716 5%
8 Arthritis 10,156 10,665 5%
9 Asthma/COPD 9,041 9,980 10%
10 Allergy, Rhinitis 8,458 8,688 3%
Refer to important disclosures at the end of this report
Therapeutic Analysis - Drug ClassTherapeutic Analysis - Drug ClassStatin, Anti-ulcerant & Blood Growth Factor Top the Chart Statin, Anti-ulcerant & Blood Growth Factor Top the Chart
Source: Merrill Lynch Research
High Growth Category - New Products: blood growth factor, antipsychotic Slow Growth Category - No New Products: COX-2 inhibitor, antihistamine Declining Category - Generic Substitution: ACE inhibitor, Ca blocker
Drug Class 2001A 2002E Growth
1 Statin 17,792 19,856 12%
2 Anti-ulcerant (PPI) 13,259 14,800 12%
3 Blood growth factor* 8,689 10,387 20%
4 Anti-depressant/SSRI 8,112 8,040 -1%
5 ACE inhibitor 7,534 7,159 -5%
6 COX-2 inhibitor 6,915 7,370 7%
7 Ca blocker 6,801 6,685 -2%
8 Antipsychotic** 6,612 7,944 20%
9 Antihistamine 6,584 6,586 0%
10 Angiotensin II antagonist 5,092 6,402 26%
Refer to important disclosures at the end of this report
Therapeutic Analysis - Top 10 Drugs Therapeutic Analysis - Top 10 Drugs Statin Drugs Are the Winners, PPIs Are Still Around Statin Drugs Are the Winners, PPIs Are Still Around
Source: Merrill Lynch Research
Blockbuster drugs are highly concentrated in global giants - Pfizer has 3, Merck has 2 of the top 10, AstraZeneca, Abbott, Lilly, Glaxo, J & J, Amgen have the rest
Major pharmaceutical firms blockbuster strategy
Brand Name 2001A 2002E Growth
1 Lipitor 6,832 8,444 24%
2 Zocor 6,670 7,210 8%
3 Prilosec/Losec 5,684 4,638 -18%
4 Celebrex 4,360 4,230 -3%
5 Prevacid 3,771 4,004 6%
6 Norvasc 3,582 3,805 6%
7 Procrit/Eprex 3,429 4,098 20%
8 Zyprexa 3,087 3,692 20%
9 Paxil 2,990 3,268 9%
10 Vioxx 2,555 2,671 5%
Refer to important disclosures at the end of this report
Therapeutic Analysis - Growth OutlookTherapeutic Analysis - Growth Outlook
CNS, Oncology, Urology, Musculoskeletal Will Lead the GrowthCNS, Oncology, Urology, Musculoskeletal Will Lead the Growth
Source: Merrill Lynch Research
11%
14%
6%
15%
4%3%
8%
-1%
12%
6%6%
22%
6%
20%
11%
7%
0%
5%
10%
15%
20%
25%
Car
diov
ascu
lar
CN
S
Infe
ctio
usD
isea
ses
Res
pira
tory
Gas
troi
ntes
tinal
Onc
olog
y
End
ocrin
e &
Met
abol
ic
Hem
atol
ogy
Rhe
umat
olog
y
Mus
culo
skel
etal
Uro
logy
Wom
en's
Hea
lth
Tra
nspl
anta
tion
Oph
thal
mol
ogy
Der
mat
olog
y
Mis
cella
neou
s
2001-05 CAGR for All Therapeutic Categories = 9%
Refer to important disclosures at the end of this report
Therapeutic Analysis - Drug Class Growth ForecastTherapeutic Analysis - Drug Class Growth Forecast
Lead Table Will Be Significantly Different in 3 Years Lead Table Will Be Significantly Different in 3 Years
Source: Merrill Lynch Research
High growth class: crowded, competitive, but new launches expand the market Slow or negative class: mature class and generic competition
Drug Class 2002E 2005E Growth
1 Statin 19,856 26,085 10%
2 Anti-ulcerant (PPI) 14,800 15,585 4%
3 Blood growth factor* 10,387 14,938 15%
4 Anti-depressant/SSRI 8,040 10,333 6%
5 ACE inhibitor 7,159 5,614 -7%
6 COX-2 inhibitor 7,370 9,991 10%
7 Ca blocker 6,685 6,077 -3%
8 Antipsychotic** 7,944 11,320 14%
9 Antihistamine 6,586 4,127 -11%
10 Angiotensin II antagonist 6,402 9,546 17%
Refer to important disclosures at the end of this report
Therapeutic Analysis - Next Wave of New MedicinesTherapeutic Analysis - Next Wave of New Medicines
100 for AIDS (40 antivirals, 15 Vaccines, etc.)
400 for Cancer (70 for Lung Cancer, 60 for Breast Cancer, 55 for Colon Cancer, 50 for Skin
Cancer, and 50 for Prostate Cancer)
200 for Heart Disease and Stroke (20 for Stroke, 20 for Congestive Heart Failure, 10 for
Hypertension, 10 for Hyperlipidemia, etc.)
200 for Neurologic Disease (40 for Pain, 30 for Brain Tumors, 25 for Alzheimer’s Disease,
17 for Parkinson’s Disease, 16 for Multiple Sclerosis)
800 for Elderly (40 for Respiratory, 20 for Diabetes, 20 for Rheumatoid Arthritis, 20 for
Depression, etc.)
>1,000 New Medicines in R&D Stage for Major Diseases:>1,000 New Medicines in R&D Stage for Major Diseases:
Refer to important disclosures at the end of this report
Therapeutic Analysis - CardiovascularTherapeutic Analysis - Cardiovascular
Hypertension – New guideline will expand patient base (140/90 to 120/80 mm Hg)– Old treatment dominated by generics (diuretics, beta-blockers) – Branded ACE inhibitors & Ca blockers converted to generics – New class dominated by branded drugs (ARB)– Lack of innovative treatment (only Inspra)
Lipid-lowering – Statin: still the biggest class ($20B/yr) and growing at a healthy pace– Statin: new competitor (Crestor) expected to challenge Lipitor, Zocor etc– Statin: generics eroding market share and will grow significantly beyond 2006– New Class: Zetia
Refer to important disclosures at the end of this report
Therapeutic Analysis - CNSTherapeutic Analysis - CNS
Antidepressant – SSRI: Prozac expired, Paxil, Celexa, Zoloft will follow– SNRI: new entrant (Cymbalta)– Still Needs New Class: Sub-P antagonist
Antipsychotics – Atypicals: crowded and relative new class (Zyprexa, Risperdol, Seroquel,
Geodon, Abilify)
Alzheimer’s and Parkinson’s Disease– No effective treatment but market potentials are enormous– Alzheimer’s: cholinesterase inhibitor (Aricept, Reminyl) & memantine
Refer to important disclosures at the end of this report
Therapeutic Analysis - DiabetesTherapeutic Analysis - Diabetes Epidemic Type 2 Diabetes
– Increased 60% in 1990’s (16 million and climbing)– 20% of the elderly (>60 yrs) have diabetes– Underlying the epidemic: Obesity– Diabetic complications
• microvascular: retinopathy (visual loss), nephropathy (renal failure)• macrovascular: MI, PVD, stroke• combined/metabolic: neuropathy, cardiomyopathy, foot ulcers
Anti-diabetic Agents– Sulfonylurea (glyburide, glipizide), Metformin (Glucophage) have been genericized and widely
prescribed – Glitazone (Actos, Avandia), Alpha-glucosidase inh. (acarbose), insulin secretion enhancer
(mitiglinide) are becoming popular– Insulin
• old generation could face first batch of bio-generics• new generations of insulin: inhaled (Exubera), glucagon-like (exenatide)
– Many new emerging classes: PPAR agonist, beta-3 agonist, aldose reductase inhibitor, dipeptidylpeptidase IV inihibitor
Refer to important disclosures at the end of this report
Therapeutic Analysis - OncologyTherapeutic Analysis - Oncology
New Development Stemmed from Scientific Breakthroughs Accommodative Regulatory Agency
– FDA new policy for accelerated review/approval– CDER & CBER combined– New standard for approval (survival is not the only primary endpoint)
Market Demand – No cure cancer therapy available – Unsatisfied physicians and patients will try everything available (off-label)
Excellent Field for New Biologics– Add-on is the new way of treatment– Pricing is more attractive than other drugs
Generics Have Few Opportunity– Regulatory route for biogenerics not clear
Refer to important disclosures at the end of this report
Outlook & Opportunity:2003 ApprovalsOutlook & Opportunity:2003 Approvals
Source: Merrill Lynch Research
Company Product Sales 2006E Indication Status
Abbott Labs Uprima 90 Erectile dy sfunction Filed
Alcon Vigamox 75 Anti-infectiv e (ey es) Approv ed
Bristol-My ers Squibb Rey ataz 478 HIV/AIDS Approv ed
Eli Lilly Sy mby ax (OFC) 338 Biopolar Depression Filed 4Q:02
Eli Lilly Cialis 605 Sex ual Dy sfunction Approv able
Eli Lilly Cy mbalta 971 Depression Approv able
Eli Lilly Dulox etine 291 Stres Urinary Incontinence (SUI) Filed 4Q:02
Merck Emend 295 Emesis Approv ed
Pfizer Somav ert 240 Grow th Hormone Deficiency Approv ed
Pfizer Dy nastat 99 Surgical Pain Filed
Schering-Plough Asmanex 490 Asthma Approv able
Watson Pharmaceuticals Ox y trol 125 Urinary Incontinence Approv ed
Wy eth InductOs 39 Bone Repair & Regeneration Filed
Wy eth Flumist 728 Intranasal Flu Vaccine Approv ed
Gilead Cov iracil 331 HIV/AIDS Filed
AstraZeneca Crestor 2066 Hy perlipidemia Approv ed
AstraZeneca Iressa 700 Cancer (NSCLC) Approv ed
Glax oSmithKline Lev itra 524 Sex ual Dy sfunction Approv ed
Glax oSmithKline Ariflo 190 COPD Filed
Glax oSmithKline Bex x ar 95 Cancer Filed
Nov artis Enablex 600 Urinary Incontinence Filed
Nov artis My ofortic 330 Organ Transplant Filed
Nov artis/Genentech Xolair 326 Asthma Approv ed
Nov artis Certican 230 Organ Transplant Filed
Roche Fuzeon 464 HIV/AIDS Approv ed
Sanofi-Sy nthelabo Xatral OD 545 BPH (Benign Prostatic Hy pertrophy ) Approv able
Shire Fozrenol 170 Hy perphosphatemia Approv able
Fujisaw a Funguard 320 Antifungal Filed
Ky orin/Allergan Zy mar 67 Sy nthetic Antibacterial Approv ed
Refer to important disclosures at the end of this report
Outlook & Opportunity:Further Look at 2003 ApprovalsOutlook & Opportunity:Further Look at 2003 Approvals
First-In-Class: 5 out of 25 (20%)– Long development time and costly, may not return the investment
Me-Too Drugs: 13 out of 25 (72%)– Shorter R&D time: no target identification & validation– Lower regulatory hurdle: clear clinical protocol (well-defined clinical endpoints), FDA
familiarity– Market familiarity: compete on moderate improved efficacy, incremental safety benefit– Higher marketing cost: market share battle between incumbent and new players– In general, 2nd or 3rd entrant may still gain significant share
• 3 out of 13 me-too drugs are either 2nd or 3rd (e.g. Cialis, Levitra)– Later entrants may not become blockbuster
• 10 out of 13 belong to this category• but there are some exceptions (Crestor…the market is big enough)
New Formulation/Delivery Technology: 2 out of 25 (8%)– Viable business model that many mid size pharmaceutical companies rely on
Break Down of the 25 Expected New Products...Break Down of the 25 Expected New Products...
Refer to important disclosures at the end of this report
Development for First-in-Class Drug is Long and CostlyDevelopment for First-in-Class Drug is Long and Costly
4 8 12
Discovery(2-10 years)
Preclinical TestLaboratory and animal testing
Phase I20-80 healthy volunteers used todetermine safety and dosage
Phase II100-300 patient volunteers used to look for efficacy and side effects
Phase III1,000-25,000 patient volunteers used to monitor
diverse reactions to long-term use
FDA Review/Approval
Additional Postmarketing TestingYears
0 16
Compound Success Rates by Stage
5,000-10,000 screened
250enters preclinical testing
250enters preclinical testing
5enters clinical testing
5enters clinical testing
1approved by the FDA
1approved by the FDA
Compound Success Rates by StagesCompound Success Rates by Stages
Refer to important disclosures at the end of this report
Me-Too Drug May Save 25% Cost & 2-5 Years of Development Time Me-Too Drug May Save 25% Cost & 2-5 Years of Development Time
Expenditures Est.
Target Identification
TargetValidation
Screen
Development
Primary
Screening
Secondary
Screening
Preclinical
Studies
Phase I Phase II Phase IIILead
Optimization
Regulatory
Submission
and Review
Early
Discovery
Compound Discovery
and Development Clinical Trials
$14 B $19 B $19.4 B
Average Time = 14.2 yrs; Average Cost = $820 MAverage Time = 14.2 yrs; Average Cost = $820 M
GenomicsFunctional GenomicsProteomicsBioinformaticsGene sequencingGene chip
Novel assay technologiesCombinatorial chemistryHigh-throughput screeningToxicology screeningMedicinal chemistry
Information Systems
Refer to important disclosures at the end of this report
Outlook & Opportunity:The Era of Generics Has ComeOutlook & Opportunity:The Era of Generics Has Come
Favorable Political Environment and Legislation– Government budget pressure (federal and state budget deficit)– Increasing drug cost for private payors (HMO, employers)– High profile patent abuses by branded pharmaceutical companies– Hatch-Waxman and the new Medicare Rx bill
• No clinical trial, only bio-equivalent study and CMC• 6 months exclusivity and 30 months stay
Enhanced FDA Division for Generics Legal System: Data Show Court Side More Often With Generics
– Creative legal strategies from generic companies– On average, generic challengers won 70% of the litigation
Potential Windfall for Patent Challengers– Risk/Benefit analysis encourages litigation– Enormous financial rewards for 6 month exclusivity
• Generic Prozac• Generic Prilosec
The Balance Has Shifted to GenericsThe Balance Has Shifted to Generics
Refer to important disclosures at the end of this report
Outlook & Opportunity:The Era of Generics Has ComeOutlook & Opportunity:The Era of Generics Has Come
Patent Exposure: Enormous Opportunity for Generic Substitution Patent Exposure: Enormous Opportunity for Generic Substitution
Worldwide Revenue for Products Off-Patent Yr. 2001-06
-
4,000
8,000
12,000
16,000
20,000
24,000
2001A 2002E 2003E 2004E 2005E 2006E**
WW
Rev. (U
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2.0%
4.0%
6.0%
% o
f To
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ev.
Revenue Off Patent Patent Rev. as % of Total Rev
Top 5 brands 2001 2002 2003 2004 2005 2006
1 Prozac (Eli Lilly)Prilosec (AstraZeneca) Cipro (Bayer) Allegra (Aventis) Zithromax (Pfizer) Zocor (Merck)
2 Pepcid (Merck) Augmentin (Glaxo) Wellbutrin (Glaxo) Celexa (Forest) Amaryl (Aventis) Zoloft (Pfizer)
3 Mevacor (Merck) Claritin (Schering) Flonase (Glaxo) Diflucan (Pfizer) Biaxin (Abbott) Pravachol (BMY)
4 Alphagan (Allergan) Prinivil (Merck) Accupril (Pfizer) Paraplatin (BMS) Basen (Takeda) Ambien (Sanofi)
5 Elocon (Schering) Zestril (AstraZeneca) Monopril (BMS) Epogin (Chugai) Harnal (Yamamouchi) Zofran (Glaxo)Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Outlook & Opportunity: The Era of Generics Has ComeOutlook & Opportunity: The Era of Generics Has Come
Many Blockbusters May Lose Patent Earlier Than ExpectedMany Blockbusters May Lose Patent Earlier Than Expected
Selected List of Recent Patent Litigation:
Against Favor Mix Pending
Norvasc Fosamax Prilosec Wellbutrin
Augmentin Neurontin
Claritin Zyprexa
Prozac Premarin
Taxol Plavix
Buspar Allerga
Paxil Lipitor
Rebetol Vioxx
All are blockbuster drugs. Some have expiration beyond 2010.
Refer to important disclosures at the end of this report
Outlook & Opportunity: The Era of Generics Has ComeOutlook & Opportunity: The Era of Generics Has Come
Patent Exposure for Major U.S. Pharmaceutical CompaniesPatent Exposure for Major U.S. Pharmaceutical Companies
Manufacturers ProductExposure(% of Pharma Revs) Litigation Status
BMY Paraplatin 4% Generic Appeal Decision 4Q
BMY Plavix 15% Trial in 2Q04
LLY Zyprexa 25% Trial begins January ‘04
MRK Fosamax 8% Generic Appeal Decision
PFE Norvasc 6% PFE Appeal & Citizen’s Petition
PFE Neurontin 7% Trial in Fall ‘03
SGP Rebetol 12% Settlement Discussions Ongoing
WYE Premarin 10% Trade Secret RulingForthcoming
Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Outlook & Opportunity: The Era of Generics Has ComeOutlook & Opportunity: The Era of Generics Has Come
Patent Exposure for Major EU Pharmaceutical CompaniesPatent Exposure for Major EU Pharmaceutical Companies
ManufacturersExposure
(% of Pharma Revs) CAGR%Possible CAGR%
Assuming Exposures
Novartis 25% 13% 5%
Sanofi-Synthelabo 29% 15% 5%
Roche 9% 19% 17%
Aventis 16% 13% 5%
AstraZeneca 11% 19% 16%
GlaxoSmithKline 18% 10% 10%
Source: Merrill Lynch Research
Refer to important disclosures at the end of this report
Case Study: Dr. Reddy’sCase Study: Dr. Reddy’sA Company Has Emerged As A Major Player in Generic IndustryA Company Has Emerged As A Major Player in Generic Industry
Source: Merrill Lynch Research
Before 1995, Domestic Focus and API Suppliers Acquired Cheminor, American Remedies, and Set Up its U.S. Subsidiary in
Late-90s to Gain Access to the U.S. Market U.S. IPO in 2001 Increased Internal R&D in Proprietary Drugs Major Paragraph IV Challenges for 6 Month Exclusivity (10 total)
– Prozac, Zyprexa, Plavix
A Respected Generic Player in the Global Market 2003 Sales: $380M (+25%, ex-fluo.), Net Income: $74M, GM: 57% CAGR (3 yr.) +31%, US +55% Market Cap: $1.9B
Refer to important disclosures at the end of this report
Case Study: Dr. Reddy’sCase Study: Dr. Reddy’sA Company Has Emerged As A Major Player in Generic IndustryA Company Has Emerged As A Major Player in Generic Industry
Source: Merrill Lynch Research
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Refer to important disclosures at the end of this report
DisclosuresDisclosuresIn Germany, this report should be read as though Merrill Lynch has acted as a member of a consortium which has underwritten the
most recent offering of securities during the last five years for companies covered in this report and holds 1% or more of the sharecapital of such companies.
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