global pharma market

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Gnostam Pharma Report 26th March 2012

Performance Through Independent Research

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EXECUTIVE SUMMARY:

Pharma blockbuster drug sales make up more of the overall sales of the large Pharma groups than ever before, as the winner takes all nature of the blockbuster drugs squeezes the rest of the market and intensifies the competition in the “generic drug” area. The rate of growth of prescription blockbuster drugs now accounts for ¾ of the entire prescription drug market.

The new frontier for Pharma is so called Pharmacogenomics. Pharmacogenomics aims to develop rational means to optimize drug therapy, with respect to the patients' Genotype, to ensure maximum efficacy with minimal adverse effects. Such approaches promise the advent of "personalized medicine"; in which drugs and drug combinations are optimized for each individual's unique genetic

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makeup.

There are several block-buster drugs that are being developed by the major Pharma companies’ world wide that will substitute the current existing top 10 drug earners. Pfizer will loose its dominant position in the industry because its biggest drug, the cholesterol drug, Lipitor currently worth $10.9 is off patent since November 2011.

However this trend is changing. As can be seen in the table below, Roche in 2014 will be the biggest beneficiary of global drug sales, with the cancer drugs being the biggest drugs in the world. This is partially because of the loss of patents by Pfizer’s Lipitor and Bristol Myers Plavix, both cholesterol drugs, and

Changes in the Global Pharma Market: new drug launches and drugs coming off patent

Source: IMS Health forecast, World Drug Situation, WHO

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Individual Investments in Com

panies with high prospective M

ega Drug Potential

March 26

th 2012

Subject to Change at any time:

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partially a result of the shift away from small molecule drugs of the past to the larger protein biologicals such as cancer and HIV drugs, which are significant both for their ability to slow the rate of progress of cancer and other debilitating diseases, [HIV] and for their cost which tends to be 10 times that of the early cancer drugs like Taxol, breast cancer.

The other great area of growth is that of vaccines. Prevnar, a conjugate pneumococcal vaccine, and Gardasil, for prevention of cervical cancer, are the first two blockbuster vaccines

As mentioned, the greatest innovation in new drugs has been in the area of Cancer treatment, which will become the biggest selling market for drug companies. This is because Cancer has proven to have endless mutations and can be treated effectively as for HIV, with cocktails of drugs that “tell” the DNA in the affected cells to stop growing, reducing if not completely arresting the disease. The other areas of development for drugs are Diabetes, Hepatitis-C, HIV, and Multiple

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Sclerosis.

The companies with the best drug pipelines’ are Roche, Glaxo Smith Kline, Biogen, Gilead, and several smaller companies like Qiagen, Questcor, Spectrum Pharmaceuticals, and Vertex. We will discuss the opportunities for investment in more detail in this paper.

Introduction:

This report examines the growth of Biotech drugs relative to their more tradition molecule drugs, which have produced some of the greatest gains for investors in the Pharmaceutical Industry over the last 20 years.

The double promise of biotechnology and genomics, especially if delivered through molecule nanotechnology has been perhaps oversold, as is usually the case in emerging technologies.

This paper attempts to lay out some more sensible strategies that an investor might pursue in this space.

Source: IMS Health forecast, World Drug Situation, WHO

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BIOTECHNOLOGY DRUG DEVELOPMENT:

Biggest Markets for Drug Research:

1. Cancer: There have been very substantial gains in the knowledge of how cancer actually evolves. As cancer is a DNA disorder, the research into the evolution of the disease inside the cells that are affected has been the key to detecting the changes in each patient. The trigger of the DNA damage in a cancer cell can be random, a genetic weakness of the patient, as well as external influences. The new drugs that have been developed work on a cellular level, and therefore cam be personalized, aimed at particular changes taking place in cells. In order for the genetic evolution in cancer cells not to lead to cancerous cells that are resistant to drugs, these new drugs, [Vemurafenib~Roche, Glaxo~Dabafenib] target a mutation in a gene called B-Raf, present in more than ½ of malignant melanomas, inhibiting growth beyond the point of healthy cells, [reducing abnormal growth as with cancerous cells]. These new dugs have absolutely huge economic potential, dwarfing the Cholesterol Drugs from Pfizer and Astra Zeneca.

2. Diabetes: represents the pharmaceutical

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industry's fastest-growing market. The costs of preventing and treating the condition worldwide are forecast to rise from $376 billion in 2010 to $490 billion by 2030, says new research.

285 million people, or 6.4% of the world's adult population, are currently estimated to be living with diabetes, and this figure is set to explode to 438 million (7.8% of the global adult population) by 2030, Frost & Sullivan has reported.

The world's biggest diabetes populations are in India, where 50.8 million live with the condition, and China (43.2 million). 70% of cases are currently found in low- and middle-income countries, with prevalence ranging from 10.2% in the western Pacific to 3.8% in the African region, according to K Srinivas Sashidar, research analyst at Frost & Sullivan.

As well as the significant global burden of treating and preventing diabetes, the condition imposes a number of economic burdens, including lost productivity and foregone economic growth, he adds.

The 40-59 age group is currently most affected by diabetes, but by 2030 this

Exhibit 1. Drugs of major Pharma Co.’s off, or coming off patent

Source: WHO, IMS Health

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dominance is expected to shift to 60-79-year-olds. An increase in the number of patients with the type 2 form of the disease, plus the emergence of a number of potential new drug treatments, is expected to raise competition in the marketplace, says the report.

The main segments of the market are insulin and oral anti-diabetes treatments. While metformin remains the first line of choice among the latter segment, new forms of co-therapies, glucagon-like peptide (GLP) agonists, dipeptidyl peptidase (DPP)-IV inhibitors and sodium-dependent glucose (co) transporter (SGLT) inhibitors are expected to become strong competitors in the near future.

ECONOMICS OF DRUG DEVELOPMENT:

“Pharmacogenomics holds great promise to shed scientific light on the often risky and costly process of drug development...we intend to do all we can to use it to promote the development of medicines. By providing practical guidance on how to turn the explosion of pharmacogenomic information into real

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evidence on new drugs, we are taking an important step toward that goal." (FDA News PO3-89, 2003)

The pharmaceutical industry is using pharmacogenomics in its drug-development pipeline by correlating quantitative measures derived from treatment-specific diagnostic testing and the associated therapeutic outcome, allowing for FDA Phase IIA/IIB of clinical trials with the aim of accelerating and facilitating the development of new molecules. This has reduced costs, as there is less need for defining diagnostic markers to select or predict individual patients who will respond to therapies. Tests based on the genotype of an individual can be considered as a type of biomarker test. The term biomarker can be referred to any characteristic that can be measured as an indicator of a normal biologic

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process, a pathogenic process or a pharmacologic response to a therapeutic agent. Biomarkers have been proposed as powerful tools, given their capability of bridging animal and human data, guiding drug dose and adjustments, increasing safety in animal models and in early clinical development, and establishing initial proof of efficacy in proof-of-concept studies.

To be successful tools in clinical practice, biomarkers should present high-positive and negative-predictive values, be simple, easy to repeat, sourced from easily accessible body fluids and tissues, and cost effective.

The predictive nature of biomarkers can be translated in the field of pharmacogenomics. Contrast this with testing in human patients, which might reach a high level of accuracy and precision, but will be a less cost–

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effective method due to, accessibility and management of data implementation into clinical practice.

The main criticism of the Pharmagenomics model is that it creates more opportunities for high returns on capital for the “owners” of the discovery process, but it does little in terns of disease prevention. In fact there is almost no incentive to prevent disease, just find a patentable cure for bad diseases that arise from bad patient habits.

Cancer Drugs:

Cancer is very heterogeneous, varying both genetically and phenotypically among patients who have identical types and stages of

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the disease. Furthermore, a significant proportion of breast cancer patients are not responding to chemotherapy uniformly, something that is likely to be genetically determined.[14] Individualized therapies for various types of solid tumors are now a reality. The first steps have involved the evolution of tumor classification, disease prognosis, molecularly targeted treatment and response to therapy based on molecular features. In this regard, diagnostic tests have been developed and are now readily available for several treatment procedures in cancer patients.

Diabetes Drugs:

The first drug from the GLP-1 pathway to receive European Commission approval was Eli Lilly/Amylin's Byetta (exenatide), while Novo Nordisk's Victoza (liraglutide) is the first GLP-1 analogue with 97% similarity to natural gut hormone. Various longer-acting formulations of GLP-1 analogues are now

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under development.

Currently-available DPP-IV inhibitors include Merck & Co's Januvia (sitagliptin), Bristol-Myers Squibb/AstraZeneca's Onglyza (saxagliptin) and Novartis' Galvus (vildagliptin), and others are in development. Also, numbers of SDLT2 inhibitors and glucokinase activators - new classes of investigational drugs for the treatment of type 2 diabetes - are currently in clinical testing, says the study.

Turning to the insulin market, which is dominated by modern insulin’s and analogues, Mr Sashidar says he expects effective insulin analogues and long-acting insulin’s to raise their market share in future, with competition likely to increase with the introduction of biosimilars. The biggest gain in this market will accrue most likely to Novo Nordisk, which is set to benefit the most from the huge epidemic of diabetes, especially in emerging markets. Hepatitis C:

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Hepatitis C is one of the most serious infectious diseases in the world. Hepatitis C virus infects an estimated 170 million people worldwide. It is a major cause of liver cirrhosis, end-stage liver disease and hepatocellular carcinoma. It is also a leading cause of liver transplant in the USA. The virus is primarily transmitted parenterally, but there is significant mother-to-child transmission. Partly due to the virus's genetic diversity, it evades the host immune response and it has been difficult to identify candidate vaccines. However, significant advances have been made in the treatment of chronic hepatitis C virus infection. Currently, the combination of pegylated interferon-alpha and ribavirin is the standard treatment for

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chronic hepatitis C virus infection, and leads to long-term eradication of the virus in approximately 54% of people. Treatment response is dependent on the infecting genotype, with 76 to 80% of those with genotypes 2 and 3, but only approximately 40% with genotype 1 or 4 achieving a sustained virologic response. The company that has the best patentable pipeline for the treatment of this global epidemic is Vertex Pharamceutcals, [VRTX]. CONCLUSIONS: As molecule drugs come off patent, the traditional Pharma blockbusters are becoming more and more difficult to substitute. The effect of this reduction I

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“patentable” molecules, has been the rise of generics which have significantly impacted the cost of prescription drugs. It has been estimated that had Lipitor not lost their patent, overall prescription drugs, sales for Pfizer would have 12% higher just for Lipitor in 2007, see Exhibit 5. The United States is the leader in medical research, including pharmaceutical development. U.S. drug prices are among the highest in the world, and drug innovation is correspondingly high. In 2000 U.S. based firms developed 29 of the 75 top-selling drugs; firms from the second-largest market, Japan, developed eight, and the United Kingdom contributed 10. France, which imposes price controls, developed three. Murray Aitken of IMS Healthcare Insight, the premier economic research body in Pharma economics has suggested that: 1. Overall spending in drugs is going to rise less than 8% pa for period to 2017, as generics become far more available. However an increasing amount of the benefits to drug companies will come from very few blockbuster drugs. 2. This implies hard times for small molecule manufacturers. Sales growth us likely to slow and put pressure on research budgets and force many mergers. Reduced revenues are constraining innovation. 3. Greater use of generics will bring costs savings to the healthcare industry. From 2003-

Sources & References: IMS Healthcare Insight, Norwalk Connecticut, Murray Aitken. Ernst Berndt, MIT Professor in Applied Economics. Professor David Cutler, Economics Dept, Harvard University. Caves, M. Whinston, and M. Hurwitz, “Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical Industry,” Brookings Papers on Economic Activity 1 (1991): 1–48 ; E. Berndt, I. Cockburn, and Z. Griliches, “Pharmaceutical Innovations and Market Dynamics: Tracking Effects on Price Indexes for Anti-depressant Drugs,” Brookings Papers on Economic Activity: Microeconomic 2 (1996): 133–188 ; and E. Berndt, M. Kyle, and D. Ling, “The Long Shadow of Patent Expiration: Generic Entry and Rx-to-OTC Switches,” in Scanner Data and Price Indexes, ed. R. Feenstra and M. Shapiro (Chicago: University of Chicago Press, 2003), 229–267.

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2007 there was a 22% reduction on drug costs as competition from generics has had a major influence on what patients consume, and their health outcomes. 4. There will probably be more pressure on FDA to relax some standards on experimental drugs developed by new start ups, and more focus on a “venture approach to drug development, [as with Bristol Myers Squibb, buying into late stage Phase II pipelines of niche busters, that can be used in “drug cocktail approaches” for serious diseases such as HIV, Hepatitis and most of all cancer. 5. The focus on the reduction of the growth in healthcare spending costs, suggests that since the greatest component of new costs in healthcare arise from specialists driven healthcare and relative equipment, that the pressure will be increasingly placed by private healthcare insurers on specialist networks to justify the explosion of treatments which not always result in better patient healthcare results, which is most cases are best if preventative measures are used, rather than the latest and most expensive technologies developed by specialist networks.

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Most common transmission method of Hepatitis C

Area of the world most affected by increased mortality from hepatitis C . The dark red are >100 occurrences for 100,000 inhabitants. The orange > 30 for 100,000 inhabitants

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Gnostam LLC performance Graphs

Gnostam was established February 4th 2004. Since inception the annualized rate for return for a client portfolio managed by Gnostam LLC has returned a total 8.4%% to February 29th 2012.

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Disclaimer:

The information and any statistical data contained herein have been obtained from sources which we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice. Gnostam LLC and/or its shareholders, directors, officers and/or employees, may have long or short positions or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The securities mentioned in this report may not be suitable for all types of investors. ALL investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made by the Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the successful performance of an investment and we are expressly prohibited from guaranteeing accounts against losses arising from market conditions.

Past performance is no guarantee of future results, and current performance may be lower or higher than the performance data quoted.

Investment Disclaimer All investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made. All products sold are subject to market risk and may result in the entire loss to the client's investment. (For example: excessive withdrawals may result in the depletion of your account). Please understand that any losses are attributed to market forces beyond the control or prediction of Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the successful performance of an investment and we are expressly prohibited from guaranteeing accounts against losses arising from market conditions.

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