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Please see General Disclaimers on the last page of this report.

Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 12

Industry Trends ................................................................................................... 13

How the Industry Operates ............................................................................... 23

Key Industry Ratios and Statistics ................................................................... 31

How to Analyze a Pharmaceutical Company ................................................ 33

Glossary ................................................................................................................ 40

Industry References ........................................................................................... 43

Comparative Company Analysis ...................................................................... 45

This issue updates the one dated July 2014.

Industry Surveys Healthcare: Pharmaceuticals Jeffrey Loo, CFA, Health Care Sector Equity Analyst

DECEMBER 2014

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S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; and Lucy Fato, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / DECEMBER 2014 1

CURRENT ENVIRONMENT

Mergers and acquisitions take center stage

Mergers and acquisitions (M&A) took center stage within the pharmaceutical sub-industry in 2014. Actavis plc kicked off the buying binge in February when it agreed to acquire Forest Laboratories in a deal valued at $25 billion, which was completed in July. This acquisition came on the heels of Actavis’ recently completed $8.5 billion acquisition of Warner Chilcott plc in October 2013. April brought on a flurry of activities. First, Mylan Inc. reported that it had made a second bid for Sweden-based Meda AB for $6.7 billion, which was rejected by Meda and its biggest shareholder. Then Valeant Pharmaceuticals International, Inc., perhaps the most prolific acquirer in the industry, teamed up with Bill Ackman’s Pershing Square Capital Management, and proposed to acquire Allergan, Inc. in a combination of cash and stock valued at about $47 billion or $157 per share. Allergan, however, rejected the offer and adopted a shareholder rights plan (also known as a poison pill), which would be triggered if any investor acquires a stake of 10% or more in the company. Pershing Square had reported a 9.7% stake in Allergan. Allergan had also allegedly reviewed other defensive tactics, including seeking out white knights to acquire them, while also reportedly considering the tactic of pursuing a sizeable acquisition themselves.

Not to be outdone, Pfizer, Inc. also disclosed in April that it held discussions with AstraZeneca between November 2013 and January 2014 regarding its potential acquisition of AstraZeneca. The company also revealed that it had offered AstraZeneca £46.6 per share amounting to £59 billion ($76.60 per share or $99 billion) in a combination of cash (30%) and stock (70%), but it was rebuffed, as AstraZeneca plc deemed that the offer significantly undervalued the company. Pfizer’s offer was the largest proposed foreign takeover of a UK company in history, and it raised numerous political controversies in the US and the UK focused primarily on potential personnel reduction and on taxes. Subsequently, in May 2014, Pfizer raised its offer on two separate occasions. The initial increase was £50 per share, amounting to £63 billion ($84.50 per share or $106 billion), which was followed by the company’s final offer of £55 per share or £66 billion ($92.48 per share or $119 billion). AstraZeneca rejected both proposals, and Pfizer announced that it had elected not to put forth another bid. Under the UK takeover code, Pfizer must wait six months before submitting another bid for AstraZeneca, or up to three months if AstraZeneca invites a new bid.

Amid these proposed mega transactions, in April 2014, GlaxoSmithKline plc, Novartis AG, and Eli Lilly and Company entered into a series of transactions valued at about $28.5 billion. Novartis agreed to acquire GlaxoSmithKline’s oncology drug unit for $16.0 billion, and to sell its vaccine unit (excluding influenza) to GlaxoSmithKline for $7.1 billion. The two firms also agreed to combine their consumer health units in a joint venture owned 63.5% by GlaxoSmithKline and 36.5% by Novartis. Separately, Novartis agreed to sell its animal health unit to Eli Lilly for $5.4 billion.

In late May, Valeant increased the cash portion of its offer for Allergan, lifting the value of its bid to about $49.4 billion or $166.16 per share. The company also added a contingent value right (CVR) that could potentially add up to $25 a share based on the net sales of Allergan’s DARPin, an experiment drug compound currently in Phase II trials to treat age-related macular degeneration. Valeant also pledged approximately $400 million to continue the development of DARPin and to retain the employees developing DARPin. Then, in a surprising move just two days later, Valeant once again raised the cash portion of its offer, increasing the total bid to about $54 billion or $181 per share. Also in an unusual twist, Pershing Square agreed to exchange its Allergan shares for Valeant stock at a specific exchange ratio, valuing its Allergan holding at $161 per share or approximately $600 million, lower than what other shareholders would receive. Allergan’s board rejected this proposal as well. Pershing Square has commenced the process to call a special meeting in an effort to remove and replace the majority of Allergan’s board.

In July, AbbVie Inc. reached an agreement to acquire Shire plc, following its fifth bid valued at $53.6 billion, consisting of £24.4 ($41.80) per share in cash and 0.9 AbbVie shares for each Shire share. Shire shareholders will own 25% of new AbbVie, which will reincorporate in the UK. While we see limited

2 HEALTHCARE: PHARMACEUTICALS / DECEMBER 2014 INDUSTRY SURVEYS

product synergies, the deal would diversify AbbVie’s product line and the company thinks it can now lower its tax rate to 13% from its current rate of 22%. The combined company would have sales of about $24 billion. Also in July, Mylan was finally successful in an acquisition bid when it entered into an agreement to acquire Abbott Laboratories’ established generic drug business in developed markets outside the US for $5.3 billion, and to establish its headquarters in the Netherlands.

Finally, in November, after months of legal maneuverings and a well-publicized public relations battle, Allergan finally found a white knight when it agreed to be acquired by Actavis for $66 billion or $219 a share consisting of $129.22 in cash and 0.3683 Actavis shares for each Allergan share. The combination will create a top 10 pharmaceutical firm with pro forma revenue of $23 billion. This agreement also ended the tumultuous struggle among Allergan, Valeant, and Pershing Square.

S&P Capital IQ (S&P) thinks that this onslaught of transactions, in addition to strengthening pipelines, expanding market share, entering new geographies, and tapping new therapeutic indications, is a way for acquirers and potential acquirers to lower their tax rates by acquiring sizeable foreign companies through a tactic known as a tax inversion. US companies have exploited a loophole in the tax laws by merging or acquiring foreign firms and transferring their official address to a foreign country.

Under US tax laws, if a company transfers at least 20% of its shares to a foreign firm and establishes its headquarters in a foreign country, it can avoid paying US taxes on foreign profits when it repatriates those profits back into the US. Those profits are currently taxed at the US corporate tax rate of around 35%, less a foreign tax credit. Instead, the newly combined company and its tax requirements would fall under the jurisdiction of the foreign country. For example, Pfizer stated that it planned to open a new parent holding company that would have been based in the UK, which currently has a corporate tax rate of 21%, and which is expected to decrease to 20% in 2015. This lower corporate tax rate would save Pfizer billions of dollars over the next several years. However, there was an outcry in the US regarding these tax inversions. Some in Congress proposed to make tax inversion more difficult by increasing the threshold to 50% from the current 20%. With a raised threshold, a US acquirer would essentially need to acquire a company larger than itself.

In September, the Treasury Department issued new rules in an effort to curtail the plethora of tax inversion deals. The new Treasury Department rules, which became effective immediately, make tax inversion deal less financially attractive by imposing new taxes on foreign earnings if those earnings are “loaned” to another foreign subsidiary. These so-called “hopscotch” loans will now be considered taxable dividends. Shortly after the new Treasury Department rules, several proposed tax inversion deals were terminated or restructured. For instance, AbbVie decided to terminate its proposed $53.6 billion acquisition of Shire plc and elected to pay a hefty $1.64 billion break-up fee to Shire. Mylan restructured its proposed acquisition of Abbott Labs’ established generic drugs unit in developed markets outside of the US. Abbott Labs will receive a 22% stake in the new company, up from 21% as originally agreed upon.

However, we note that companies that completed inversions before the new Treasury Department rules have a competitive advantage over US-based companies for future M&A transactions, as they have already established a lower corporate tax rate in the country where they are domiciled. Actavis and Valeant are two prime examples, and both companies are currently the industry’s most prolific acquirers.

PHARMACEUTICAL STOCKS MODESTLY OUTPERFORMING

Pharmaceutical stocks have modestly outperformed the broader market recently. In 2013, the S&P Pharmaceuticals sub-industry stock index rose 32.5%, while the S&P 1500 composite stock index rose 30.1%. However, the Health Care Sector index rose a more impressive 39.7% in 2013. Year to date through December 5, 2014, the S&P Pharmaceuticals sub-industry stock sector gained 23.7%, outperforming the S&P 1500 Composite Stock Index, which rose 11.6%, but underperforming compared with the Healthcare Sector Index, which gained 26.3%.


Among the big pharmaceutical firms, Eli Lilly, Pfizer, and Merck, share prices rose 8.2%, 26.2% and 26.8%, respectively, in 2013, underperforming the pharmaceuticals sub-industry, the healthcare sector, and the broader S&P 1500 index.

On the other hand, Valeant, Actavis, Forest Laboratories, and Bristol-Myers Squibb were among the best performing pharmaceuticals stocks in 2013, rising 96.4%, 95.3%, 70.0%, and 69.9%, respectively. However, year to date through December 5, 2014, Bristol-Myers’ and Pfizer’s shares increased 14.1% and 4.4%, respectively. In the same period, Forest Labs rose 57.9% (primarily due to its acquisition by Actavis), and Teva Pharmaceuticals rose 44.4%, following its modest gain of 10.9% in 2013. Given the robust pipelines of leading drugmakers and initiatives by the US Food and Drug Administration (FDA) to enhance operational efficiencies, we think that investors are optimistic about the pharmaceutical sector, and we expect the momentum to continue due to a number of positive catalysts.

The FDA created one positive change in the industry when it ramped up the approval of new drugs. Year to date through December 3, 2014, the FDA approved 35 new molecular entities (NMEs). In 2013, the agency approved 27 NMEs, which is higher than the 24 yearly average approvals during 2003–2011. The highest number of NME approvals in the last decade was recorded at 39 in 2012.

There has been increased funding under the new Prescription Drug User Fee Act (PDUFA) and new productivity measures to streamline the process. Bearing this in mind, we expect the number of NME

approvals to remain high in 2014 and 2015. There is also evidence that company research and development (R&D) pipelines appear more robust, particularly in cancer, immune diseases, and other areas representing unmet medical needs. The 2014 American Society of Clinical Oncologists (ASCO) conference, held in June 2014, highlighted numerous clinical programs that we think hold potential to emerge as significant advances in the treatment of cancer.

According to EvaluatePharma, a leading pharmaceutical market research firm, drugs that had annual worldwide sales of about $33 billion lost patent protection in 2013. Patent losses led to bleak 2013 numbers for some of the Big Pharma companies (i.e., those companies in the large-capitalization pharmaceutical sector). For instance, Pfizer, which lost patent protection for Lipitor, the world’s best-selling drug in 2011, saw its revenue decline 10.4% in 2012 and a further 5.8% in 2013.

The big four pharmaceutical companies in the US (Pfizer, Merck, Eli Lilly, and Bristol-Myers Squibb) saw sales decline 8.1% in 2012 and a further 4.9% in 2013, on average. The patent-cliff

challenges have waned slightly in 2013 and 2014, and most of the large pharmaceutical companies are expected to post better sales going forward. On the other hand, generic drug manufacturers have benefited significantly from the slew of patent expirations. For example, Actavis’ sales, aided in part by acquisitions,

Table B02: MAJOR POTENTIAL PATENT EXPIRATIONS

MAJOR RECENT AND POTENTIAL PATENT EXPIRATIONS(Ranked by US sales)

2013 US SALES

BRAND NAME COMPANY INDICATION (MIL. $)

2013Cymbalta Eli Lilly Depression, anxiety,

nerve/musculoskeletal pain, f ibromyalgia

5,084

Humalog Eli Lilly Diabetes 2,611Niaspan Abbvie Cholestrol reduction 650Procrit Johnson & Johnson Red blood cell stimulator 1,364Asacol Warner Chilcott Ulcerative colitis 795Xeloda Roche Oncology 1,629Zometa Novartis Bone cancer 600Avodart GlaxoSmithKline Benign prostatic

hyperplasia1,341

Aciphex Johnson & Johnson Heartburn and GERD 470

2014Copaxone Teva Multiple Sclerosis 4,328OxyContin Purdue Pharma Pain 2,000NovoRapid Novo Nordisk Diabetes 3,001Symbicort AstraZeneca Asthma and COPD 3,483Restasis Allergan Chronic dry eye 940Evista Lilly Osteoporosis 1,050Prezista Johnson & Johnson HIV 1,673Nasonex Merck Allergic rhinitis 1,335Risperdal Const Johnson & Johnson Psychosis 1,318Loestrin Actavis Contraception 240Actonel Actavis Osteoporosis 590

GERD-Gastroesophageal reflux disease. COPD-chronic obstructive pulmonary disease.Sources: EvaluatePharma; company reports.


increased a robust 29.0% in 2012, while Mylan and Teva’s sales both rose 10.9%. EvaluatePharma still notes that $259 billion of worldwide drug sales may be lost because of patent expiration for the period of 2014–2020. However, only 46% of this potential loss is expected to materialize, which compares with the 64% cannibalization that occurred between 2007 and 2013.

Another patent cliff is coming in 2015, when drugs generating annual sales of nearly $66 billion will lose patent protection. However, according to EvaluatePharma, the impact in 2014 and 2015 will be softened considerably due to some important differences compared with 2012. First, the big blockbusters coming off patent are biologics, which should remain relatively free from generic competition, since there is still no formal FDA pathway to approve biosimilars or generic copies of biotech drugs. Protection from genetic competition is assured despite the 2010 Patient Protection and Affordable Care Act (ACA)—also known as the healthcare reform or Obamacare—that authorized the FDA to establish a regulatory pathway for the approval and marketing of biosimilars. In addition, producing a biosimilar is significantly more challenging than copying a chemical based small molecule, which is why the FDA issued draft guidance that includes a requirement for biosimilars to undergo clinical trials. These clinical trials are not required for traditional pharmaceutical generics, and would significantly increase the cost and time required to produce a biosimilar. With these challenges, S&P expects that there will be significantly fewer companies with the capability or interest in manufacturing biosimilars. Even so, we think many biotech companies such as Amgen, Biogen Idec would pursue deals to develop and market biosimilars, effectively aiding their sales as well as limiting the price discount anticipated for biosimilars.

OBAMACARE: A NET POSITIVE FOR BIG PHARMA

In our view, the ACA, commonly referred to as Obamacare, will have a net positive impact on the sector, despite provisions that put pressure on pharmaceutical pricing and utilization. We think that the program will result in market expansion as it covers presently uninsured Americans.

The Obama Administration reported in April 2014 that eight million Americans signed up for health insurance via the healthcare exchanges, far exceeding the Congressional Budget Office (CBO) projection. This was an unexpected accomplishment, and a complete turnaround, following the disastrous start to kick off the healthcare exchanges back in late fall 2013, when technological glitches hampered access. The technological issues and challenges were so pervasive that the CBO lowered its estimate on the number of people enrolling for insurance through the exchanges from seven million people (five million newly insured and two million previously insured) to six million people, with only four million newly insured. Even with the lower estimate, many analysts were still skeptical that the enrollment number of six million could be reached. We estimate that market expansion stemming from healthcare reform could generate an aggregate total of over $110 billion in incremental sales and $30 billion in profits for the US pharmaceutical industry over the next 10 years.

We expect that the branded sector will feel pressure from renewed efforts by government and private third-party payers to reduce hyperinflationary pricing. These measures include greater emphasis on generic usage, with changes in three-tier insurance plans tailored to encourage generic or formulary use. Increasing pressure on off-label or unapproved drug usage (which is permitted with physician discretion), and a greater push on therapeutic substitution are also negatives on the pricing front. The eventual passage of a new FDA pathway for the approval of generic biologics, often referred to as biosimilars, represents another factor that could potentially weigh on the branded sector.

NEW DRUGS, COST SAVINGS DRIVE PROFIT GROWTH

New drugs and cost-saving measures taken to improve margins are expected to drive profit growth for key players in the industry. Year to date through December 3, 2014, the FDA approved 35 NMEs compared with the 27 NMEs approved in full-year 2013. Although the 27 NMEs approved in 2013 were below the 39 NMEs approved in 2012, it was still above the average of 26 NMEs approved from 2004–2012. We view the drug industry’s pipeline favorably, and are optimistic that NME approvals will remain at a similar level over the next several years.


Prospects for key players Pfizer. We expect 2014 sales to decline about 4% from $51.5 billion in 2013. The company’s largest-selling drug is now Lyrica, a treatment for nerve pain and epileptic seizures, with sales of $4.6 billion in 2013. Other major products include Prevnar/Prevnar 13 vaccines (with sales of $4.0 billion); Enbrel, a treatment for moderate to severe plaque psoriasis and rheumatoid arthritis sold outside the US and Canada ($3.8 billion); and Celebrex, a COX-2 inhibitor therapy for arthritis and pain ($2.9 billion). Lipitor cholesterol-lowering agent had been Pfizer’s largest-selling drug for many years, but sales fell sharply following the expiration of US marketing exclusivity in November 2011. Lipitor sales totaled $2.3 billion in 2013, down from $3.9 billion in 2012. Other key drugs sold include Viagra, which generated total sales of $1.9 billion in 2013; Zyvox for infection ($1.3 billion); Norvasc for hypertension ($1.2 billion); Sutent for kidney cancer ($1.2 billion); Premarin for female hormone replacement treatment ($1.1 billion); and BeneFIX for certain types of hemophilia ($832 million).

Merck. We expect 2014 sales to decline 3.0% to $42.6 billion from 2013, largely reflecting sales erosion in off-patent drugs such as Singulair, Propecia, and Temodar. On the plus side, we see firmer trends for the Januvia/Janumet diabetes franchise, driven by greater penetration of foreign markets. Sales of Remicade and Simponi immunology drugs should also benefit from geographic expansion and new indications. Vaccine sales should rise on increased demand for Gardasil HPV vaccine. Finally, we see modest growth for animal health and consumer lines. In May 2014, Merck agreed to sell its consumer care unit, which includes brands such as Claritin, Afrin, and Coppertone, to Bayer AG for $14.2 billion.

Bristol-Myers. We expect sales to decline 5.0% to $15.5 billion in 2014 from $16.4 billion the previous year, due to generic erosion in Sustiva and Abilify. However, growth in newer products, such as Eliquis anticoagulant, Orencia for rheumatoid arthritis, and Onglyza and Bydureon treatments for Type 2 diabetes, should partially offset some of the sales decline. We also see robust gains for Bristol-Myer’s expanding oncology franchise, which includes Sprycel for leukemia and Yervoy for metastatic melanoma.

Eli Lilly. We expect sales to decline 14.3% to $19.8 billion in 2014, largely reflecting the December 2013 loss of patent protection for the Cymbalta antidepressant, which had sales of $5.1 billion in 2013. The generic erosion in the Evista osteoporosis line, which had sales of $1.1 billion in 2013, also contributed to the decline in sales. We estimate that sales for Cymbalta and Evista in 2014 will reach about $1.5 billion and $500 million, respectively (which is more than a 50.0% drop compared with sales in 2013). On the plus side, we see continued gains in established products such as Humalog, Forteo, and Alimta. We expect contributions from new launches (subject to FDA review and approval), including Trajenta for Type 2 diabetes. On April 24, 2014, the FDA approved Cyramza for stomach cancer. We also see growth opportunities in Japan, emerging markets, and animal health.

AbbVie. We expect sales in 2014 to grow 3.0% to $19.4 billion. The gain should largely reflect robust sales of Humira for rheumatoid arthritis. We expect Humira sales to increase 13% to $12 billion, helped by higher prices, greater penetration of emerging markets, and new indications. We also see higher sales for Synthroid thyroid treatment, Creon pancreatic enzyme, and Synagis respiratory therapy, as well as contributions from new launches, including Duopa for Parkinson’s disease. However, we expect lower sales of off-patent products, such as the Tricor/Trilipix and Niaspan lipid-lowering lines, and older antiviral drugs.

Johnson & Johnson. We expect sales to grow 5.2% in 2014 to $75.0 billion, and 2.2% in 2015 to $76.6 billion. S&P thinks that the key growth engine will be pharmaceuticals, fueled by gains in newer drugs such as Xarelto blood-thinning agent and Invokana for Type 2 diabetes. We also see robust gains for Johnson's expanding oncology portfolio, which includes Zytiga for prostate cancer, Velcade for multiple myeloma, and Imbruvica for leukemia (which the FDA approved in February 2014). Sales of Oylsio to treat hepatitis C are expected to benefit from the liver society guidelines that recommend prescribing Oylsio in conjunction with Sovaldi, Gilead Sciences’ leading hepatitis C drug.


FDA MOVES TO ENHANCE EFFICIENCY

A promising innovation (introduced in the FDA Safety & Innovation Act of 2012) allows the FDA to designate a drug as a “breakthrough therapy,” which permits faster approval of drugs that represent

significant advances over existing treatments and in areas of particular need.

In January 2013, the FDA granted its first breakthrough drug designations to two drugs under development by Vertex Pharmaceuticals: its cystic fibrosis (CF) drug Kalydeco, and Kalydeco in combination with investigational agent VX-809. Kalydeco is currently approved for a small subset of CF patients, while the combined therapy began Phase III study in early 2013 for a larger patient subgroup. While details of the impact of such designations on the approval timeline have not yet been worked out, the FDA in February 2013 suggested that the designation could result in approvals for drugs that have completed only Phase I study, the earliest stage of development.

According to the Tufts Center for the

Study of Drug Development (CSDD), the FDA approved 30% of the 113 breakthrough therapy designation applications, 10% are still pending, and 60% were rejected. Between October 1, 2013 and May 31, 2014, there were a total of 20 requests received by the FDA for the said designation; only three of these were granted, 15 requests had already been denied, and two more requests are still pending. S&P assumes that such programs would need to be designed to establish their potential benefits over existing therapies earlier in clinical study than is typically seen, and would need to show longer-term benefits in order to maintain such an early approval.

Table B12: Recent NMEs approved

RECENT NEW MOLECULAR ENTITIES APPROVED - 2014*(as of December) THERAPEUTIC APPROVAL

TRADE NAME GENERIC NAME APPLICANT POTENTIALS DATE

Blincyto Blinatumobab Amgen P 12/3/14Esbriet Pirfenidone Intermune P 10/15/14Ofev Nintedanib Boehringer Ingelheim P 10/15/14Lumason Sulfur hexafluoride lipid-type ABracco S 10/10/14Akynzeo Netupitant; palonosetron hydr Helsinn Healthcare S 10/10/14Harvoni Ledipasvir; sofosbuvir Gilead Sciences P 10/10/14Trulicity Dulaglutide Eli Lilly S 9/18/14Movantik Naloxegol oxalate AstraZeneca P 9/16/14Keytruda Pembrolizumab Merck Sharp Dohme P 9/4/14Cerdelga Eliglustat tatrate Genzym P 8/19/14Plegridy Peginterferon beta-1a Biogen Idec S 8/15/14Belsomra Suvorexant Merck S 8/13/14Orbactiv Oritavancin diphosphate Medicines S 8/6/14Jardiance Empaglif lozin Boehringer Ingelheim S 8/1/14Striverdi Respimat Olodaterol hydrochloride Boehringer Ingelheim S 7/31/14Zydelig Idelalisib Gilead Sciences S 7/23/14Kerydin Tavaborole Anacor S 7/7/14Beleodaq Belinostat Spectrum S 7/3/14Sivextro (tablet) Tedizolid phosphate Cubist P 6/20/14Sivextro (injection) Tedizolid phosphate Cubist P 6/20/14Jublia Efinaconazole Dow S 6/6/14Dalvance Dalbavancin hydrochloride Durata P 5/23/14Entyvio Vedolizumab Takeda S 5/20/14Zontivity Vorapaxar sulfate Merck Sharp Dohme S 5/8/14Zykadia Ceritinib Novartis P 4/29/14Sylvant Siltuximab Janssen Biotech S 4/23/14Cyramza Ramucirumab Eli Lilly S 4/21/14Tanzeum Albiglutide Glaxosmithkline S 4/15/14Otezla Apremilast Celgene S 3/21/14Impavido Miltefosine Knight P 3/19/14Neuraceq Florbetaben f-18 Piramal Imaging S 3/19/14Myalept Metreleptin for injection Amylin S 2/24/14Northera Droxidopa Lundbeck S 2/18/14Vimizim Elosulfase alfa Biomarin S 2/14/14Hetlioz Tasimelteon Vanda P 1/31/14Farxiga Dapaglif lozin Astrazeneca S 1/8/14*Excludes diagnostic NMEs and some biologics. P- Priority review: significant improvement compared

with marketed products, in the treatment or prevention of a disease. S- Standard review: drug appears

to have therapeutic qualities similar to those of one or more already marketed drugs. O- Orphan drug.

Source: US Food and Drug Administration.


RESURGENCE OF R&D PIPELINES

Given the robust product pipeline of companies throughout the next decade, we think that positive investor perceptions are a key driver of strength in big pharmaceutical stocks. According to the EvaluatePharma “World Preview 2014, Outlook to 2020” report, the R&D pipeline is strong, with a total net present value of $418.5 billion. Some of the emerging R&D products that we think investors are getting excited about include the following:

Imbruvica. Pharmacyclics, Inc. and Johnson & Johnson developed this drug and received the FDA’s approval for the treatment of patients with chronic lymphocytic leukemia (CLL) who have received at least one prior therapy; for the treatment of CLL patients with del 17p, a genetic mutation; and for the treatment of patients with mantle cell lymphoma, who have received at least one prior therapy. On October 20, 2014, Janssen Research & Development submitted a supplemental New Drug Application (NDA) for Imbruvica to the FDA. This would be the fourth indication for Imbruvica, extending the treatment to patients with Waldenström's macroglobulinemia, a rare type of B-cell lymphoma.

ABT333 and ABT-450. In April 2014, AbbVie sought FDA approval for its all-oral drug, interferon-free regimen for the treatment of adult patients with chronic genotype 1 (GT1) hepatitis C virus (HCV) infection. In May 2013, the FDA granted Breakthrough Therapy designation to AbbVie’s investigational direct-acting antiviral combination with and without ribavirin for the treatment of GT1 HCV infection. The designation is based on positive data from Phase 2b clinical trials conducted on 571 patients infected with HCV GT1. AbbVie is developing ABT-450, which was discovered during the company’s ongoing collaboration with Enanta Pharmaceuticals, Inc., for use in combination with AbbVie’s other investigational medicines to treat patients with hepatitis C. The combined AbbVie investigational regimen of ABT-333 and ABT-450 co-formulated with ABT-267 interrupts the HCV replication process.

BMS 791325. Bristol-Myers Squibb is developing a three-drug combination: asunaprevir (BMS-650032), an NS3 protease inhibitors; daclatasvir (BMS-790052), an NS5A complex inhibitor; and BMS-791325, a non-nucleoside NS5B polymerase inhibitor. However, the company has decided not to pursue FDA approval of the dual regimen of daclatasvir and asunaprevir for the treatment of HCV genotype 1b patients. The company will pursue FDA approval of daclatasvir, which is being investigated globally for the treatment of HCV patients.

Bococizumab. This drug is being developed by Pfizer to reduce low-density lipoprotein (LDL) cholesterol by blocking a protein called PCSK9; it started late-stage trials in October 2013. One of the trials looks specifically at some very high-risk patients: those unable to get their LDL cholesterol levels below 100, even with statin therapy. If the drug can show itself effective at improving outcomes for the high-risk group, payers could see it as a money-saving bet. In March 2014, Pfizer announced its Phase 2b results of a 24-week program, and highlighted that Bococizumab has drastically reduced LDL cholesterol in statin-treated adults with high cholesterol. The Phase 3 trials, expected to be completed in the next three years, consist of two cardiovascular outcome studies and multiple lipid-lowering studies in more than 22,000 patients.

Palbociclib. In May 2013, the FDA granted Breakthrough Therapy designation to this drug, which is being developed by Pfizer for treatment of breast cancer. Patients with advanced, estrogen-receptor positive, HER2-negative disease treated with letrozole (the standard anti-estrogen treatment; trade name Femara) plus palbociclib had significant increases in progression-free survival. In February 2014, Pfizer reported that the final results of Phase 2 PALOMA-1 trials for palbociclib and letrozole showed positive results in curing metastatic breast cancer. On October 3, 2014, the company filed an NDA for palbociclib, and the drug has been granted priority review status by the FDA.

Nivolumab. The FDA has granted breakthrough status and priority review to Bristol-Myers Squibb’s immune-oncology drug for advanced melanoma. The review is expected to be completed by March 2015. FierceBiotech, an online source of biotechnology news, reported that analysts were impressed with survival results in a Phase II study that saw a 15% response rate and a 41% survival rate at the one-year mark. Investigators at Bristol-Myers said that historically, the percentage of the patients still alive at the one-year mark was between 5% and 18%.


Empagliflozin. Boehringer Ingelheim and Eli Lilly jointly developed this drug for the oral treatment of Type 2 diabetes. Data from the drug’s Phase III clinical trial has shown that empagliflozin, in combination with metformin, was effective in controlling diabetes-related elevated glucose levels. Five months after Boehringer Ingelheim corrected manufacturing problems that caused the FDA to say no in March 2014, the FDA approved Jardiance (empagliflozin) tablets as a treatment option for the improvement of glycemic control in adults with Type 2 diabetes.

BACE inhibitor. AstraZeneca and Eli Lilly announced on September 16, 2014 their agreement to develop and market AZD3293, a beta secretase cleaving enzyme (BACE) inhibitor. This drug is used to fight Alzheimer’s disease by preventing the production of amyloid beta, a toxic protein found clustered in the brains of patients. Following the positive results of Phase I, the companies are fast tracking the second and

Table B04: TOP US PHARMACEUTICAL COMPANIES NEW PRODUCT PIPELINES

TOP US PHARMACEUTICAL COMPANIES NEW PRODUCT PIPELINES(As of December 2014, ranked by stage of development and estimated sales) EST. 2020

SALES

COMPANY NAME OF COMPOUND PHARMACOLOGIC CLASS TREATMENT STATUS (MIL. $)

AbbVie Duopa Levodopa-carbidopa gel Parkinson's disease Launched 670Interferon Free Combo Protease inhibitor Hepatitis C Filed 2,200Elagolix Gonadotropin-releasing hormone Endometriosis Phase III 480Daclizumab Anti-interleukin receptor Multiple sclerosis Phase III 500Elotuzumab (partnered w ith Bristol-Myers Squibb)

Human monoclonal antibody Multiple myeloma Phase III 180

RG7601/ABT-199 Bcl-2 inhibitor Leukemia Phase III 1,000

Bristol-Myers Squibb Yervoy Human monoclonal antibosy Melanoma Launched 2,300Eliquis (w ith Pfizer) Factor Xa inhibitor Thrombosis Launched 3,900Nulojix T-cell costimulation blocker Transplant rejection Launched 190Nivolumab Anti-FD-1 Oncology Launched 6,600Daklinza Protease and NS5A inhibitors Hepatitis C Launched 930Elotuzumab Human monoclonal antibosy Multiple myeloma Phase III 630

Eli Lilly & Co. Effient Flatelet ADP antagonist Acute coronary syndrome Launched 300Axiron Hormonal Testosterone deficiency Launched 40Dulaglutide GLP-1 angonist Diabetes Launched 1,200Bassaglar Insulin glargine Diabetes Filed 560Empaglif lozin & Linagliptin

SGLT2 & DPP-IV inhibitor Type 2 diabetes Filed 210

Solaneuzumab Monoclonal antibody Alzheimer's disease Phase III 520Necitumumab Human IgG1 monoclonal antibody Lung cancer Phase III 510

Johnson & Johnson Invokana SGLT2 inhibitor Type 2 diabetes Launched 3,000Zytiga Abiraterone acetate Prostate cancer Launched 2,900Stelara Anti-IL-12 & IL-23 MAb Psoriasis Launched 3,500Xarelto Factor Xa inbibitor Thrombosis Launched 3,400Imbruvica BTK inhibitor Leukemia Launched 2,400Simponi Anti-TNFa Mab Rheumatoid arthritis Launched 2,300Invega Sustenna Paliperidone palmitate Schizophrena Launched 2,200Simeprevir Protease inhibitor Hepatitis C Launched 40

Merck & Co. Simponi Anti-TNFa Mab Rheumatoid arthritis Launched 1,700Bridion Selective relaxant binding agent Novel anesthetic Launched 760Victrelis HCV protease inhibitor Hepatitis C Launched 30Dulera Formoterol fumarate Asthma Launched 720Suvorexant Orexin inhibitor Insomnia Launched 500Januvia DDP-4 inhibitor Type 2 diabetes Launched 4,200Odanacatib Cathepsin K inhibitor Osteoporosis Phase III 660MK-5172/MK-8742 Protease inhibitor Hepatitis C Phase III 2,500MK-3475 Anti-PD-1 Advanced melanoma Phase 1b 1,500

Pfizer Inc. Xeljanz JAK-3 inhibitor Immunosuppressive Launched 1,700BeneFIX Factor IX human recombinant Coagulation agent Launched 1,000Xalkori ALK inhibitor Cancer Launched 870Inlyta VEGF inhibitor Cancer Launched 830Eliquis (w ith Bristol-Myers Squibb)

Factor Xa inhibitor Thrombosis Launched 1,600

Palbociclib Cyclin-dependent kinase inhibitor Oncology Filed 3,100Dacomitinib Tyrosine kinase inhibitor Lung cancer Phase III 40

Sources: Company reports; S&P Capital IQ estimates.


third Phase of clinical trials in patients with early Alzheimer’s. Eli Lilly will lead and will work with researchers from AstraZeneca’s Innovative Medicines Unit for neuroscience, while AstraZeneca will handle manufacturing. Under the agreement, Eli Lilly will pay AstraZeneca $500 million in development and regulatory milestone fees.

Orphan drugs on the rise “Orphan” drugs pertain to rare diseases that affect 200,000 or fewer Americans. In 2013, the FDA approved nine orphan drugs, or 33% of all NMEs approved last year, a significant number considering patients with rare diseases often have few or no drug treatment options. These FDA-approved drugs are used in the treatment of pulmonary arterial hypertension, CLL, mantle cell lymphoma, multiple myeloma, and non-small cell lung cancer. An example is Kalydeco—an oral medication for the treatment of the

genetic disorder CF. Vertex Pharmaceuticals Inc. forecasts that its total revenues will reach $570–$600 million in 2014, with Kalydeco net revenues of $470–$500 million. In 2013, Kalydeco’s net revenues reached $371.3 million.

According to EvaluatePharma, the orphan drugs segment is an area that is exhibiting superior R&D productivity, and is expected to generate attractive returns in the future. Orphan drugs have a lower cost of development and a better ability to fetch a premium

price, compared with other medicines, making the segment an appealing research area for both large and small pharmaceutical companies. EvaluatePharma estimates that by 2018, orphan drugs will account for $127 billion in sales, which represents 16% of the entire worldwide prescription market (excluding generics).

Oncology therapies emerge as a hot R&D space Global spending on cancer drugs increased at a compound annual growth rate (CAGR) of 5.4%, with $91 billion spent in 2013, notably lower compared with 14.2% during 2003–2008, according to the IMS Institute for Healthcare Informatics. Despite a surge in innovative and targeted therapies for cancer patients, growth in cancer drug spending moderated on the back of fewer breakthrough therapies for large patient populations, patent expiries, reduced use of supportive care medicines, and stronger payer management.

According to the IMS, innovation in cancer therapies is becoming more targeted while pharmaceutical company investments remain high. Similar to targeted therapies, many of the new oncology drugs are targeted to small patient population and are focused on lung and breast cancer, as well as on tumor types with lower prevalence (e.g., ovarian, stomach, and liver cancers, and leukemia). Cancer therapies make up 30% of preclinical and Phase I clinical development products. In addition, a total of 22 NMEs launched in the past two years have been contributing to the therapies, as innovation finds its way to improve patient care in such areas as melanoma.

Melanoma, a form of skin cancer, is one cancer that S&P thinks has gained increasing attention. Bristol-Myers Squibb made a significant investment in such research with its acquisition of Medarex in 2009 for $2.4 billion. Medarex brought ipilimumab, the breakthrough melanoma drug now sold under the Yervoy name, to Bristol. More recently, Bristol has been studying a combination therapy of ipilimumab with an experimental antibody called nivolumab, which Bristol hopes will be a more powerful melanoma therapy. Nivolumab is among the first in a new class of antibodies that block the action of a protein called PD-1, and enhance the body’s immune system T-cell response. Yervoy has been on the market for several years as a

Chart H02: FDA APPROVALS

0

25

50

75

100

125

150

1999 00 01 02 03 04 05 06 07 08 09 10 11 12 13 ɤ2014

FDA APPROVALS* (Number of drugs)

New Drug Applications (NDAs) New Molecular Entities (NMEs)

*Includes tentative NDA approvals under the President's Emergency Plan for AIDS Relief, starting in 2007. ɤ as of October onlySource: US Food & Drug Administration.


treatment for advanced melanoma and generated sales of around $960 million in 2013, with sales expected to rise to $1.2 billion in 2014.

According to the company, the combination regimen achieved an objective response rate of 40% among the 53 patients enrolled in the study. Additionally, in close to a third of the patients, tumors were reduced more than 80% in 12 weeks. We think the combination approach represents a potential significant improvement in the melanoma treatment paradigm and over Yervoy alone, which has shown response rates closer to 10%. Bristol has already begun a Phase III study of its combination therapy for melanoma in order to maintain its leadership position. The FDA has granted nivolumab with “Fast Track” review status for advanced melanoma, as well as for kidney cancer and lung cancer.

The 2014 ASCO conference highlighted numerous clinical programs that we think hold potential to represent significant advances in cancer treatment. S&P anticipates that several of these programs will continue to generate significant attention following the annual meeting. In our view, another highlight of this year’s conference was advancement in the treatment of chronic lymphocytic leukemia (CLL), the second most prevalent blood cancer. According to the American Cancer Society, CLL accounts for nearly one-third of all leukemias and will afflict nearly 16,000 Americans annually, killing nearly 5,000. Given this prevalence, we see CLL as being among the most competitive markets in the cancer space, with a plethora of rivals studying the disease, as well as other hematological conditions.

Swiss global pharmaceutical bellwether Roche Holding Ltd is fast tracking another treatment. Its monoclonal antibody obinutuzumab (GA-101) has received the newly created FDA “Breakthrough Therapy” designation and has the potential to succeed Roche’s current blockbuster drug Rituxan, which generated global sales of around CHF6 billion ($5.8 billion) in 2013. (Rituxan’s key patents expire in 2018, making the drug a major target among firms seeking to develop biosimilar drugs.) In a study presented at the ASCO meeting, obinutuzumab in combination with chemotherapy performed much better than chemotherapy alone or in combination with Rituxan.

We note that the FDA has been more accommodating in its approval practices over the past few years, and that cancer drugs have historically seen a more favorable regulatory bias from the agency, as many currently approved regimens offer modest survival benefits, requiring new therapeutic options after others have failed.

DIABETES DRUGS: SECOND BESTSELLERS

According to EvaluatePharma, the diabetes medications group was the second best-selling therapeutic category in the US in 2013, and one of the fastest growing, with worldwide sales of about $38.4 billion in 2013; it is forecast to grow to about $68.9 billion by 2020. The increasing number of Type 2 diabetes patients and the switch to newer treatments is driving the lucrative US diabetes market. In 2013, an estimated 25 million adults in the US (nearly 11% of the population) were suffering from diabetes, of which 95% were Type 2 diabetes patients. Based on forecasts made by the International Diabetes Federation, there were 382 million people in the world suffering from diabetes in 2013, with that number projected to reach 592 million by 2035.

New medicines/treatments being developed include the following: A once-weekly medicine to increase the levels of GLP-1, in order to reduce the imbalance between

insulin and glucose that is responsible for Type 2 diabetes Reducing insulin resistance by modulating genes causing insulin sensitization Mitigating cardiovascular risk using two proteins that control the expression of genes that cause lipid

homeostasis and insulin resistance Addressing the problem of diabetic neuropathy, the painful nerve damage that often accompanies diabetes

ROBUST GROWTH ALSO SEEN FOR GLOBAL VACCINES

The global market for vaccines has grown at a much faster pace than the pharmaceutical market over the last few years and we expect this trend to continue going forward. According to IMS Health Inc. (IMS), a market research firm specializing in pharmaceuticals, the global vaccine market grew at a 23% CAGR from


$9 billion in 2005 to $25 billion in 2010, compared with pharmaceutical market growth of 6% in the same period. The firm further expects the market to grow 10% annually from the current $40 billion to reach $68 billion by 2018. IMS expects therapeutic vaccines for cancer, human immunodeficiency virus (HIV), and Alzheimer’s disease to account for a larger share of global vaccine sales, reaching 22% in 2023. The main driver of growth will be more coverage through inclusion in national immunization programs, innovative partnerships between public and private vaccine stakeholders, and rising prices in the developed markets.

In April 2014, major pharmaceutical companies announced a series of deals amounting to $28.5 billion, to focus on particular areas: Novartis AG on cancer, GlaxoSmithKline plc on vaccines, and Eli Lilly on animal health. GlaxoSmithKline will buy Novartis’ global vaccines business, except influenza vaccines, for $5.25 billion. The company will also divest its oncology portfolio, including related R&D activities and rights, to GlaxoSmithKline’s AKT inhibitor, and grant rights for future cancer treatments to Novartis for an aggregate cash consideration of $16 billion. Novartis, on the other hand, is going to sell its animal health unit to Eli Lilly for $5.4 billion. Subject to approvals, the transaction is expected to be completed by the first half of 2015.

Amid active deals in global vaccine business, companies around the world are bent on fast tracking the development of vaccines to fight the Ebola virus, which has claimed more than 4,500 lives this year. In October 2014, GlaxoSmithKline said in a statement that the development of the vaccine candidate is “progressing at an unprecedented rate,” with Phase 1 safety trials underway in the US, UK, Mali, and Switzerland. The company obtained the vaccine candidate when it acquired biotechnology company Okairos in 2013. Since then, it has been working with the US National Institutes of Health to develop this vaccine candidate to fight Ebola. An international consortium, consisting of the Wellcome Trust, the Medical Research Council, and the UK government, is funding the trials.

INDUSTRY OUTLOOK

S&P’s outlook for the pharmaceutical industry for 2014 is neutral. Although the sector continues to face top-line pressure from patent expiration on a number of top-selling drugs and from foreign exchange fluctuations, we think that overall industry profits should hold up relatively well, helped by expanding sales of new innovative drug therapies and margin improvements accruing from cost restructurings and merger synergies. Earnings per share (EPS) comparisons should also benefit from common share repurchases.

While we see recently implemented healthcare reform legislation continuing to negatively affect industry profitability, we see benefits accruing from significant expansion of the market stemming from new coverage provided to up to 26 million–28 million currently uninsured Americans from 2014 through 2019.

Despite near-term effects from patent expirations and regulatory pressures on drug pricing, we still think long-term prospects for the industry remain favorable. Pharmaceuticals remains one of the widest-margin US industries, with prospects enhanced by demographic growth in the elderly (which account for about 33% of industry sales) and new drugs stemming from discoveries in genomics and biotechnology. Year to date through December 5, 2014, the S&P Pharmaceuticals Index increased 23.7%, versus an 11.6% rise in the S&P 1500 Composite Index. We expect prospects for the generic/specialty drug group to remain favorable. We see a large number of major drugs losing patent protection over the next few years, providing significant opportunities for this group.


INDUSTRY PROFILE

Moving on from patent cliff, industry sales to exceed $1 trillion

By 2020, global pharmaceutical sales are expected to exceed $1 trillion, for the first time in the industry’s history. This represents an average growth of 5.1% per year from 2013 to 2020, according to EvaluatePharma’s “World Preview 2014, Outlook to 2020.” The report’s consensus forecast took into account the top 500 pharmaceutical and biotechnology companies in the world. Growth outlook improved after years of sales stagnation, when a record number of patents on branded blockbuster drugs expired (known as the “patent cliff”). The industry is seeing an increasing proportion of sales from biological products, which will help soften the impact of declining sales due to patent expirations.

Among the developed markets of US, Europe, and Japan, prescription drug sales collectively increased only 0.7% in 2013, with Japan performing the strongest at 3.2%. However, the yen’s depreciation against the dollar had a negative impact of around $15 billion on Japan’s contribution to the global market in 2013.

In emerging markets, global pharmaceutical sales are expected to show robust growth through 2017, led by China, and they are estimated to reach a compound annual growth rate (CAGR) of 10%–13%.

Overall growth in emerging markets in the 2008–2012 period reached a CAGR of 15%, compared with 3.0% for the US and 2.4% for Western Europe. Drug sales in these markets showed only modest gains, due to

patent expirations and pricing pressures associated with healthcare reform in the US and austerity pricing in Europe.

According to the IMS Institute estimates, sales in the US accounted for roughly 34% of the global pharmaceutical market in 2012, followed by Western Europe (15%) and Japan (12%). Emerging markets accounted for 23%, and all other areas, 16%. The firm also expected robust growth between 2013 and 2017 for emerging markets, in sharp contrast to projected CAGRs of only 1%–4% for the major drug markets in North

America and Western Europe, according to the IMS Institute. Emerging markets are expected to account for about 32% of total worldwide pharmaceutical sales in 2017, up from just 23% in 2011. Developed markets such as the US and Western Europe will contribute around 44% in 2017, compared with a much higher 49% in 2012. The IMS Institute expected the global pharmaceutical market to reach $1.2 trillion by 2017.

Most developed drug markets are showing declining growth rates in pharmaceutical spending, reflecting slowing demographic trends, weakening economies and sovereign debt issues, rising pressures on drug pricing amid constrained government budgets, and sales erosion resulting from patent expirations.

Key drivers fueling the projected gain include 10%–13% annual growth in emerging markets. Research and development (R&D) and discoveries of new therapies for cancer, diabetes, human immunodeficiency virus (HIV), multiple sclerosis, and other immune disorders are also expected to foster growth.

Total revenue loss from patent expirations over the 2012–2016 period is expected to total about $127 billion. Major generic inroads are expected in the areas of cholesterol regulation (now dominated by Pfizer’s Lipitor), antipsychotics (such as Eli Lilly’s Zyprexa and AstraZeneca’s Seroquel), anti-ulcerants, and heart drugs (including Merck’s Cozaar/Hyzaar and Bristol-Myers Squibb’s Plavix).

Table B13: GLOBAL PHARMACEUTICAL SALES, BY REGION

GLOBAL PHARMACEUTICAL SALES, BY REGION

2012

% OF - - - - - - CAGR (%) - - - - - -

TOTAL 2012 E2017 2008- 12 2013- E17

United States 34.0 328.2 350-380 3.0 1-4Western Europe* 15.4 148.7 140-170 2.4 0-3Japan 11.5 111.3 90-120 3.0 2-5Canada 2.3 22.0 20-30 3.1 1-4South Korea 1.2 11.3 10-20 6.3 3-6Emerging Markets** 23.2 223.9 370-400 15.0 10-13Rest of World 12.4 120.0 125-155 4.7 2-5

TOTAL 100.0 965.4 1,105-1,275 5.4 3-6

CAGR-Compound annual grow th rate. *Includes France, Germany, Italy, Spain,

and the UK. **Includes China, Brazil, Russia, India, and 17 other countries.Source: IMS Institute for Healthcare Informatics.

- - - - SALES (BIL. $)- - - -


PRICING, PATENT, HEALTHCARE SUPPORT 2013 US PHARMA SALES

In 2013, total spending on medicines in the US reached $329.2 billion, which represented an increase of 3.2% over the prior year on a nominal basis and 1.0% on a real per capita basis, as reported in April 2014 by the IMS Institute.

Growth in the US pharmaceutical sales is driven by an increase in the price of drugs, lower patent expiration, and an increase in the use of healthcare services by patients. According to the IMS Institute, the year also witnessed an increase in the overall per capita utilization levels, with an increase in patient office visits, hospitalization and prescriptions filled.

The IMS Institute highlighted that overall retail prescription use rose 1.6%, whereas on a per capita basis, there was an increase of 0.9% in 2013. Patient visits to specialists increased 4.9%, and rose 9.5% for

seniors. However, patient visits to physicians fell about 0.7%. Total spending on drugs increased from $319.1 in 2012 to $329.2 billion in 2013. Patent expiries reduced drug spending by $19 billion in 2013, compared with $29 billion in 2012, while price increases on branded drugs added $4 billion in spending growth in 2013 compared with the previous year.

INDUSTRY TRENDS

Big brand-name pharmaceutical companies are facing heightened competition from generic drugmakers, unprecedented pricing pressure from payers, and inflation in research and development (R&D) budgets. However, we think that with new products and an aging population, the industry is likely to see a robust future. Ongoing improvements in early-stage product pipelines, particularly in the fields of cancer, hepatitis C, and diabetes, offer long-term promise in 2014, despite the challenges that had plagued the industry both in 2011 and in 2012.

Big Pharma, the large-capitalization pharmaceutical sector, remains in transition. Rarely have the pressures on large pharmaceutical companies been so intense. As the industry sorts through its problems, it is responding with major cost-cutting initiatives, including sales and marketing overhauls and the reorganization of R&D operations. The industry is pursuing new product development in selected areas, and is forming alliances and making acquisitions with pipeline considerations in mind.

IMS Health finds that Big Pharma companies overall have been struggling to grow, while generics firms are doing better despite intense competition. Biotechnology companies continue to exhibit robust revenue growth, albeit from a much smaller base.

EMERGING MARKETS TO DRIVE SECTOR GROWTH

With markets in the world’s major developed nations either stagnant or showing only modest growth, pharmaceutical manufacturers are increasing their focus on emerging markets. Economists have projected that emerging markets will account for over two-fifths of global gross domestic product (GDP), and 80% of the world’s population by 2015. With respect to the worldwide pharmaceutical industry, industry observers have forecast that emerging markets will drive up to 90% of the sector’s growth through 2020. Although

B06: LEADING PHARMACEUTICAL COMPANIES

LEADING PHARMACEUTICAL COMPANIES(Ranked by 2013 US sales)

- - - - % CHG - - - -

COMPANY 2011 2012 2013 2011- 12 2012- 13

1. Pfizer 24.3 19.7 18.6 (18.93) (5.58)2. Roche 13.8 14.8 16.3 7.25 10.143. Novartis 16.1 15.3 15.3 (4.97) 0.004. Merck & Co 17.1 17.0 14.9 (0.58) (12.35)5. Amgen 11.5 12.8 14.0 11.30 9.376. Johnson & Johnson 12.4 12.4 13.9 0.00 12.107. Sanofi 14.5 12.8 12.9 (11.72) 0.788. Eli Lilly 13.0 12.3 12.9 (5.38) 4.889. GlaxoSmithKline 11.3 11.1 11.3 (1.77) 1.80

10. AstraZeneca 13.1 10.6 9.7 (19.08) (8.49)Total, Top 10 147.1 138.8 139.8 (5.64) 0.72

Total, US Market 211.6 205.8 208.1 (2.74) 1.12Source: EvaluatePharma

- - - US PHARMA SALES (BIL. $) - - -


patent expiration and threats from generic drugs have put pressure on some pharmaceutical companies, we see profitability and growth in emerging markets.

Based on IMS Health forecasts, sales in 17 developing nations are expected to grow collectively at a compound annual rate of 10%–13% through 2017. The IMS refers to these as “pharmerging” countries, which include China; Brazil, India, and Russia (Tier II); and Mexico, Turkey, Poland, Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan, and Vietnam (Tier III). Drug sales in the pharmerging countries totaled $224 billion in 2012, and they are expected to have sales of between $370 billion and $400 billion by 2017. Further, total spending by pharmerging economies exceeded spending by the EU5 nations (Germany, France, Italy, Spain, and the UK) over the past two years, and it is expected to account for as much as 32% of global spending by 2017. The growth in emerging markets is largely being fueled by spending on generic drugs. Global spending on generic drugs is expected to reach $420 billion–$432 billion by 2017, of which around 55%–58% will be coming from developing markets. Emerging markets are expected to increase their spending on pharmaceuticals by around $146 billion–$176 billion in that time.

Opportunities in emerging markets Developing nations are generally enjoying rapid rates of growth in demographics and GDP, and rising levels of disposable income. Thus, an increasing number of people in these countries are able to buy goods and services they previously could not afford, although the larger population segments in these regions are still mostly impoverished.

Healthcare expenditures, including spending on pharmaceuticals, typically increase with a rising standard of living. According to the International Monetary Fund, an international financial organization, emerging markets comprise some 85% of the world’s population, and they accounted for all real worldwide economic growth over the past five years.

Another factor spurring growth in the emerging markets is that as they develop, their populations become subject to ailments and conditions that typically affect developed nations. These include poor health behaviors such as drinking alcoholic beverages, smoking, and rising levels of obesity, which, in turn, lead to cardiovascular disease, cancer, diabetes, respiratory ailments, and other maladies. S&P thinks that these situations unlock opportunities for multinational pharmaceutical manufacturers to tap large new customer bases.

We also see emerging areas yielding additional benefits in terms of raw materials and production. Many developing nations provide opportunities for attractive low labor-cost manufacturing bases, allowing multinational drugmakers to establish new manufacturing plants from which pharmaceuticals could be sold to other emerging markets, as well as to developed countries.

Principal emerging markets Pharmaceutical companies have acknowledged their under-penetration of these markets, and most have expressed their intention to accelerate sales efforts in these areas. Below we highlight prospects for key emerging markets and the involvement that major pharmaceutical companies have in them.

China. With the largest population and second-largest economy in the world, China is by far the largest emerging market. According to the World Bank, China had a GDP of $9.4 trillion dollars in 2013. It also has the largest pharmaceutical market among the emerging countries. Drug sales increased over 50% from $44.1 billion in 2010, to close to $81.7 million in 2012 (latest available), and the market grew at a compound annual growth rate (CAGR) of 22.3% during 2008–2012. IMS Health projects the Chinese pharmaceutical market to grow at a CAGR of 14%–17% between 2013 and 2017.

Along with a rising standard of living and an expanding middle class, we see drug sales in this huge market also spurred by the Chinese government’s $124 billion healthcare stimulus package aimed at providing healthcare coverage for close to 90% of the Chinese population. A key part of the new healthcare stimulus program is the creation of a selected list of covered pharmaceuticals. Growth in Chinese healthcare spending should reflect expanding coverage for the nation’s 1.4 billion inhabitants, rapid urbanization, and a fast-


rising senior population. According to IMS Health, per capita spending on pharmaceuticals in China is expected to reach $175 in 2017 (based on the 2005 dollar exchange rate and population).

According to the IMS, multinationals, in aggregate, hold only 30% of China’s drug market, while Chinese drug firms, numbering over 5,000, comprise the remaining 70%. We expect these proportions to be relatively unchanged over the coming years, but see all participants benefiting from the significant growth projected for China’s overall pharmaceutical market. While indigenous Chinese drugmakers have stronger sales and distribution channels throughout the provinces, we still see foreign players—including AstraZeneca, Eli Lilly, Novartis, and Pfizer—making efforts to greatly expand the number of sales reps and local offices.

Brazil. Fueled by strength in its overall economy in the past five years, the Brazilian pharmaceutical market has continued to grow at a brisk rate. With a population of over 190 million, Brazil is the world’s fifth largest country in terms of population. The IMS projects a CAGR of 11%–14% between 2013 and 2017 for the Brazilian pharmaceutical market, and valued Brazil’s pharmaceutical market at $28.5 billion in 2012 (latest available). We estimate a CAGR in the low double digits through the end of the decade for the Brazilian drug sector.

Demand for drugs is supported by a rapidly growing population, which has increased at about 2% annually over the past decade. Public insurance covers 90% of the population, with an increasing penetration of supplementary private insurance, according to the IMS. More than 300 pharmaceutical companies are operating in Brazil, of which an estimated one-fifth are multinationals. However, given their much larger size than local drug companies, multinationals are estimated to account for 75% of Brazil’s market.

According to GlobalData, a research and consulting firm, Brazil is emerging as a manufacturing hub for pharmaceutical and biotechnology companies, with the market forecasted to grow from $12.4 billion in 2007 to $58.8 billion in 2020, representing a CAGR of 12.7%. Further, research firm GBI Research believes that generics manufacturers will be the major beneficiaries of this growth. Sales of generic drugs accounted for only 24% of the overall Brazilian pharmaceutical market in 2012 (latest available), compared with Europe and the US, where generics account for almost 50.0% of industry sales.

Russia. In recent years, this large pharmaceutical market has also experienced high double-digit growth, helped by increased government healthcare funding and expansion in the private health insurance sector, and despite relatively stagnant demographics. Russia stands as the world’s ninth largest country, with a population of over 143 million. Overall, the health of the Russian people has deteriorated in recent years, and the number of births has lagged that of deaths. Smoking is prevalent and chronic disease rates are high.

The World Bank noted that total healthcare spending in Russia includes a relatively large proportion of private expenditures, reflecting out-of-pocket payments for health facilities and the purchase of pharmaceuticals. Russia’s State Medical Guarantee Program does not cover outpatient drug benefits.

Nonetheless, the Russian pharmaceutical market has been growing at double-digit rates in the past few years. According to the IMS Institute, Russia’s market was valued at $17.1 billion in 2012, and grew at a CAGR of 17.7% between 2008 and 2012. The market is expected to grow at a CAGR of 8%–11% between 2013 and 2017, and reach between $23 billion and $33 billion by 2017. We attribute the growth to hospitals’ utilization of higher-priced specialty drugs, increasing government coverage of drug therapies, and a population that is becoming more health-conscious. In terms of market value, imports account for some 70%–80% of the drugs used in Russia, mostly from Swiss, French, and German pharmaceutical companies. In an effort to boost domestic production, the Russian Health Ministry has initiated a program to have a select list of strategically important pharmaceuticals manufactured domestically.

India. With an estimated population of over 1.2 billion, India is the world’s second-largest country; however, it ranks tenth in terms of the size of its economy (nominal GDP), according to the World Bank, as the country has a large impoverished rural and urban population with an underdeveloped economy. At an estimated $10 billion in annual sales, India’s pharmaceutical market is also relatively small compared with its population size, with per capita healthcare expenditures well below other emerging countries such as China, Russia, and Brazil. India is believed to have the largest middle class population globally. However,


the segment has an annual household income in the range of $5,000–$22,000. The lower income thus translates into lower per capita healthcare expenditures.

Private medical services dominate the Indian healthcare system, with about 70% of the hospitals privately owned, and some 80% of total healthcare expenditures derived from private sources. In addition, healthcare spending has been growing rapidly in this country in recent years, spurred by a rising middle class, expansion in the private medical insurance sector, and favorable government policies. With only 10% of the population covered by health insurance, we see significant expansion in coverage spurring growth in healthcare services and pharmaceuticals in the years ahead. The Indian government has also initiated a program to improve rural health services and a national disease surveillance system. We also expect increased foreign involvement in the Indian pharmaceutical market, reflecting recent legislation upholding international intellectual property rights and granting a 150% tax reduction for certain pharmaceutical R&D expenditures.

India is home to a reasonably advanced native pharmaceutical sector, albeit one specializing in generic drugs. The Indian pharmaceutical industry ranks third worldwide by volume of production, accounting for about 10% of the world’s total pharmaceutical output, according to Srikant Kumar Jena, Minister of State for Chemicals and Fertilizers. According to the IMS Institute, the Indian pharmaceutical market stood at $14 billion in 2012 (latest available). IMS Health expects the Indian pharmaceutical market to grow at a CAGR of 11%–14% between 2013 and 2017.

Western pharmaceutical companies have been establishing their own manufacturing facilities in India, as the cost of setting up and running a facility in India is a fraction of the cost in the West. In addition, many multinationals have been looking to make Indian acquisitions since Japanese pharmaceutical giant Daiichi Sankyo acquired Ranbaxy Laboratories in 2008. In 2009, Sanofi-Aventis, Abbott Laboratories, Pfizer, Merck AG, and Hospira Inc. all acquired Indian drugmakers. Alliances also have been struck between Western multinationals and Indian drugmakers.

DEMOGRAPHICS SHAPE PHARMACEUTICAL CONSUMPTION

The three worldwide demographic trends that bode well for long-term pharmaceutical consumption are the aging of the population in the largest markets, the lengthening of the average life expectancy, and a rising incidence of chronic diseases. In many Western countries, the elderly population—a group with a disproportionately greater use of prescription drugs—is growing faster than the general population.

Since seniors account for a disproportionate amount of prescription drug consumption, projected above-average growth for the aged has positive implications for pharmaceuticals. According to the UN Population Division, people aged 60 and up were projected to account for 21.1% of the total world population by 2050, up from 12.0% in 2014.

In the US, the Census Department projected that the 65-and-older segment of the population will expand from an indicated 40.3 million in 2010 (latest available) to 72.7 million by 2030, when all of the baby boomers (Americans born from 1946 through 1964) will be 65 and older. As a percentage of the total population, persons 65 and older are expected to account for close to 20% of all Americans in 2030, up from 13% in 2010. This represents a bullish trend for the pharmaceutical industry since the elderly as a group account for roughly one-third of prescription drug consumption.

BIOTECHNOLOGY REMAINS KEY TO BIG PHARMA

Despite the fact that the pharmaceutical sector has been a little late to the party, S&P thinks the industry’s recent push into biotechnology reflects a sense of urgency to obtain valuable biotech assets focused on unmet medical needs. Large drugmakers have made significant new investments in the biotech space, either through outright acquisitions or through in-licensing and partnership deals with smaller biotech firms.

With conventional R&D yielding below-par returns, biotechnology is now viewed as the new frontier in breakthrough therapeutics. Biologics are also less vulnerable to generic competition, even after their patents


expire, as large molecule biologics are by nature more difficult to replicate. In addition, costly clinical trials may deter potential generic drugmakers from entering certain markets. Finally, no regulatory process to approve generic biologics is presently in place in the US, although the US Food and Drug Administration (FDA) issued draft guidance on the review process for biosimilar drugs in February 2012, followed by a public hearing for comments from the stakeholders in May. In March 2013, the FDA made recommendations to industry representatives with respect to upcoming formal meetings between the agency and biosimilar product sponsors or applicants.

S&P thinks that the need to achieve greater positions in biotechnology played a key role in French drugmaker Sanofi-Aventis’ $20 billion acquisition of Genzyme Corp., completed in April 2011, as well as in three major mega mergers that were completed in 2009. The latter included Roche Holding’s $47 billion acquisition of the remaining stock in US biotech Genentech Inc. that it did not already own, and Pfizer’s $68 billion merger with Wyeth Pharmaceuticals, which had one of the strongest biotechnology pipelines among large pharma players.

Based on data from EvaluatePharma, a pharmaceutical and biotechnology research firm, sales from biotechnology products are expected to grow around 52%, from $154 billion in 2012 to $234 billion by 2018, when they will account for about 25% of the world prescription and over-the-counter (OTC) drug market, up from 21% in 2012. Biotechnology products are expected to account for 51% of the top 100 drugs of 2018, up from 39% in 2012 and 15% in 2000. According to EvaluatePharma, Roche is in first place on its list of top 10 companies ranked by worldwide prescription drug sales from biotechnology.

ROSY FORECAST FOR GENERICS

According to Express Scripts Lab’s “The 2013 Drug Trend Report Highlights” published in April 2014, generic medications will moderate any substantial increase in drug costs. S&P projects above-average growth for the generic drug sector over the coming years, with gains largely attributable to the same reasons that the branded sector is likely to remain in the doldrums. The main growth drivers for generics include a record number of patent expirations on widely prescribed branded drugs, and mounting pressure from government and private industry third-party customers for greater use of less expensive generic drugs. Inexpensive generic drugs are widely used by virtually all managed care and governmental health insurance organizations, and accounted for 86% of prescriptions written in the US in 2013, up from 57% in 2004, according to IMS Health. However, given their low cost—often 10% or less compared with branded prices—generics represented less than 30% of the total US pharmaceutical sales in 2013.

Another key positive driver for generics is the new federal healthcare reform legislation, which is aimed at reducing healthcare costs while extending coverage to some 31 million Americans presently without medical coverage. This huge expansion of the industry’s end-user base starts this year, and is especially welcomed by the generics industry, which will need new business by the time patent-cliff-related sales diminish.

Looking further down the road, we also expect this sector to benefit materially from the planned implementation of a new US FDA regulatory process to approve generic versions of biologics. Although no such system presently exists in the US, a biosimilars regulatory approval system has been established in Europe. However, in March 2012, the Faster Access to Specialized Treatments (FAST) Act was introduced to modernize the accelerated approval process followed by the FDA to provide patients suffering from life-threatening diseases with a faster access to innovative therapies. The Biotechnology Industry Organization (BIO) greeted the approval with the hope that the law, once enacted, would bode well for the development of biotech products.

We project the global generic drug market to expand at double-digit rates over the next few years, from an estimated base of $260 billion in 2012, to about $427 billion by 2016. Our projection implies a CAGR of 10% over the years 2012 through 2017, well ahead of the mid-single CAGR that we forecast for the overall pharmaceutical sector over the same period.

The largest company in the global generics space in 2013 was Teva Pharmaceutical Industries Ltd., with an estimated 14.5% of the market, based on a recent report by EvaluatePharma. According to


EvaluatePharma, other key players were Novartis AG (11.7%), Actavis Inc. (9.5%, reflecting the October 2012 merger of Watson Pharmaceuticals and Actavis), Mylan Inc. (8.4%), Sanofi (3.6%), Daiichi Sankyo (3.4%), Hospira (3.4%), and all others (45.5%).

To illustrate the substantial savings that consumers get from generic drugs, the Generic Pharmaceutical Association (GPhA), an industry trade group, noted that the use of generic drugs saved the US healthcare system over $1.2 trillion in the 10 years through 2012, based on an IMS study. For 2012, (latest available) alone, generics saved the nation close to $217 billion, up from $188 billion in 2011.

Patent cliff represents a key driver Never before in its history has the generic industry faced such as huge new product opportunity as now, with an unprecedented number of major branded blockbuster drugs losing patent protection in the US and Europe. According to a June 2013 report released by EvaluatePharma, global pharmaceutical sales of $230 billion are at risk from 2013 through 2018, with an expected cumulative sales loss of about $114 billion over the same period as generics encroach on a slew of patent-expired branded blockbuster drugs.

While we expect nearly all generic drug companies to benefit from these expirations, we think major players such as Teva, Sandoz, and Mylan are likely to reap the largest rewards, especially in the US market, which affords first-to-file applications with six months of marketing exclusivity

Healthcare reform to benefit generics With its emphasis on cost savings and expanded coverage, healthcare reform is a win-win situation for the generic pharmaceutical sector, in our view, since nearly all health insurance plans should favor its low-cost products. We also expect this sector to benefit materially from the planned implementation of a new FDA regulatory process to approve generic versions of biologics (no such system presently exists).

We also see increasing merger and acquisition (M&A) activity in this area, as large-capitalization branded drug companies are likely to increase their exposure in the generic space over the coming years. We note that Novartis already has a major position in global generics through its Sandoz division. Pfizer and Merck also have representation in generics.

This market continues to grow, helped by patent expirations and greater inducements by managed care and other third-party payers on patients to select generic options. However, the sector has also had its share of problems, including some quality control manufacturing issues that have resulted in plant shutdowns and product recalls.

In the long term, we think that healthcare reform will be positive, although we see some initial drawbacks such as increased Medicaid rebates, and product liability and pricing lawsuits. However, we think that FDA review time for generics remains a serious problem, with a backlog of more than 2,700 Abbreviated New Drug Applications (ANDAs) before the FDA’s generic division in 2011. Median review time in 2013 was 304 days in the US, compared with 342 days in Japan and 478 days in Europe.

Regulatory issues affecting generics Addressing the ANDA backlog issue, the FDA implemented a user fee system for the generic industry that would help the FDA fund additional staffing to speed up the approval process. The program, known as the Generic Drug User Fee Act (GDUFA), is similar to the branded drug sector’s Prescription Drug User Fee Act (PDUFA); it was signed into law in July 2012, and was implemented on October 1. GDUFA has wide support among generic drug companies, consumer groups, and the FDA itself. PDUFA provided a process for the FDA to collect fees from brand-name drug manufacturers, with the funds used to expand FDA staffing, upgrade information technology, and speed up the overall new drug approval process. As of January 2014, the FDA was able to clear 45% of the 2,500 applications that were pending just before the authorization of GDUFA.

The PDUFA has been reauthorized several times since its initial creation, and the evidence has shown it to be highly successful in achieving its goals. While we think the branded PDUFA system cannot be easily


applied to the generic sector, given unique complexities applicable to branded drugs, we still think a modified PDUFA program is likely to be implemented.

Another key issue involves the establishment of a regulatory pathway for the approval and marketing of biogenerics (also known as biosimilars, or follow-on biologics). These products are generic versions of biotechnology products—similar in structure and efficacy to currently marketed biotechnology drugs. While biogenerics are now being marketed in Europe, they are not yet available in the US because no regulatory pathway for their development and marketing has yet been approved.

According to a study by Medco Health Solutions Inc., a pharmacy benefits manager (which merged with Express Scripts in April 2012), biologics with approximately $32 billion in sales may go off patent by the end of 2015. Some of these products include Eli Lilly’s Humalog human insulin, Pfizer’s Enbrel anti-inflammatory tumor necrosis factor (TNF) inhibitor, and Roche’s Herceptin and Rituxan anticancer compounds.

The FDA is currently working on framing the guidelines for biosimilars. Under the Patient Protection and Affordable Care Act (ACA) of 2010, in conjunction with the Health Care and Education Reconciliation Act (HCERA) of 2010, an abbreviated licensing procedure for biosimilars was established.

According to the GPhA, an industry trade group, about 150 biologic drugs have lost patent protection, or are close to expiration. Currently, biosimilars are available in 11 countries in the world, while the US is still waiting for an approval process to be formalized.

TRENDS IN THERAPEUTIC MARKETS

While R&D productivity still trails the high levels seen in the past, it is our view that the global pharmaceutical industry has made significant strides in R&D development, especially in the areas of oncology, heart disease, Type 2 diabetes, multiple sclerosis, and rheumatoid arthritis. In this section, we review key products, recent sales performances trends, and forecasts for selected therapeutic markets, along with new products introduced or under development.

Mental health. Representing the third-largest therapy area in terms of spending ($23.8 billion) in 2013, IMS Health highlighted a 5.2% decline in the mental health therapeutic category (which includes

antidepressants and antipsychotics) in the same year. In 2013, IMS Health also revealed that dispensed prescriptions and sales for the mental health therapeutic class were at $519 million and $23.8 billion, respectively. The gap between prescriptions and sales reflects a market that is largely comprised by generics, with nearly all leading branded products now off patent.

Antidepressants consist mostly of selective serotonin reuptake inhibitors (SSRIs), such as Prozac, Paxil, and Zoloft (and generic versions). A newer class of antidepressants, called serotonin-norepinephrine reuptake inhibitors (SNRIs), are used to treat major depression, as well as anxiety disorders, obsessive-compulsive conditions, attention deficit/hyperactivity disorder (ADHD), and

neuropathic pain. SNRIs act upon and increase the levels of both serotonin and norepinephrine, two neurotransmitters that are involved in mood disorders.

US antidepressant sales have dropped about $2.6 billion over the last five years, from $12 billion in 2008 to $9.4 billion in 2013, according to the IMS Institute. In 2012, Lexapro lost patent protection and $2.2

Table B03: LEADING THERAPY CLASSES IN US SALES

LEADING THERAPY CLASSES IN US SALES(Ranked by 2013 US sales)

- - - - - - - - - - - - - - - - - SALES (BIL. $) - - - - - - - - - - - - - - - - -

CLASS 2009 2010 2011 2012 2013

1. Oncologics 21.6 22.6 24.1 25.5 27.92. Antidiabetics 15.9 18.6 20.7 21.7 24.33. Mental Health 29.0 31.1 32.2 25.1 23.84. Respiratory 18.1 19.8 21.7 21.5 20.45. Pain 17.3 17.6 17.9 18.0 18.76. Autoimmune 9.7 11.3 13.0 15.1 17.97. Lipid Regulators 18.6 19.8 21.3 16.5 13.68. Antihypertensives 15.4 15.6 14.0 13.2 12.59. HIV Antivirals 8.2 9.4 10.4 11.4 12.5

10. Multiple Sclerosis 5.0 6.1 7.6 8.8 10.6Total, Top 10 158.8 171.9 182.9 176.8 182.2

Total US Market 300.1 315.7 328.5 319.1 392.2

Source: IMS Health Inc.


billion in sales. Greater use of generics, and negative publicity concerning the use of these drugs by adolescents, has hurt sales growth in this segment in the last two years. Forest Laboratories’ Lexapro SSRI also lost its patent protection in March 2012.

While most of the older SSRIs are now available as generics, two leading SNRIs, Eli Lilly’s Cymbalta and Pfizer’s Pristiq, are patent protected. A new drug, Viibryd, from Forest Laboratories, was approved by the FDA in January 2011. Clinical data for the antidepressant has shown that, unlike other antidepressants, the drug does not lower sex drive or cause weight gain in patients.

On the other hand, antipsychotics have been one of the stronger central nervous system (CNS) segments, with US sales rising 12.7% to $18.2 billion in 2011, according to the IMS. Although growth has slowed somewhat from past years, demand for these drugs continues to reflect expansion of the overall schizophrenia patient market and new indications for existing therapies in such areas as bipolar disorder and mental illness associated with Alzheimer’s and Parkinson’s diseases. Key branded, patent-protected drugs in this category include AstraZeneca’s Seroquel, Eli Lilly’s Zyprexa, and Bristol-Myers Squibb’s Abilify. Johnson & Johnson’s Risperdal has been off patent since 2008. With patents on other major products in this category expected to expire over the next six years, we see the dollar value of this market declining through 2015.

Antidiabetes drugs. IMS Health pegged the diabetes medications group as the second best-selling therapeutic category in the US in 2013, and one of the fastest growing, with domestic sales increasing by about 12.1% in 2013, to $24.3 billion. EvaluatePharma estimated global growth of diabetes drugs at a CAGR of 8.9% over the 2012–2018 period, with the worldwide diabetic market growing from $36.3 billion in 2012 to $60.6 billion in 2018. According to IMS Health, going forward, oral antidiabetic agents will be in greater use due to an emphasis on convenience and efficacy of treatment.

New medicines/treatments being developed include the following: a once-weekly medicine to increase the levels of GLP-1, in order to reduce the imbalance between insulin and glucose that is responsible for Type 2 diabetes; reducing insulin resistance by modulating genes causing insulin sensitization; mitigating cardiovascular risk using two proteins that control the expression of genes that cause lipid homeostasis and insulin resistance; and addressing the problem of diabetic neuropathy, the painful nerve damage that often accompanies diabetes.

According to a 2014 report from EvaluatePharma, Novo Nordisk will retain its position as the market leader in the antidiabetes market, with its global market share expected to account for more than 30% by 2020. Novo will see strong growth in its core insulin franchise, which includes Tresiba (a long-acting insulin degludec) and Victoza (a long-acting GLP-1 agonist). Early in 2014, Bristol-Myers Squibb sold its diabetes business to AstraZeneca, which is forecast to be the fifth-biggest player in this segment by 2020. Johnson & Johnson is expected to rise through the ranks by 2020, as company growth strengthens on the back of recently approved Invokana.

Antivirals. One of the main areas of research within antivirals is hepatitis C. The hepatitis C virus (HCV) is transmitted by blood from an infected person, and it can lead to permanent liver damage and, in some cases, death. According to the World Health Organization (WHO), about 150 million people worldwide are chronically infected with the hepatitis C virus and more than 350,000 die each year from HCV-related liver diseases, such as cirrhosis and cancer. More than three million Americans have HCV, but most do not know they are infected because they do not look or feel sick. In China, a high 3.2% HCV infection rate, according to the WHO, translates to an estimated 43 million Chinese with the virus. There is no vaccine to prevent infection from HCV.

The standard treatment for HCV has been a combination of interferon and ribavirin, such as Pegasys and Copegus (from Roche Holdings) and Pegintron (Merck). More recently, two new oral protease inhibitor antivirals reached the market: Incivek (developed by Vertex Pharmaceuticals and Johnson & Johnson) and Victrelis (Merck), both approved by the FDA in May 2010. Both are administered with ribavirin and interferon, but because they target the HCV virus itself instead of trying to strengthen the immune system, they offer the potential for better cure rates and fewer side effects.


Other medications undergoing clinical trials show promise for treating HCV infection more effectively than standard drug therapy. Abbott Laboratories has a combination hepatitis C drug without interferon that is expected to hit the market in 2015; the drugmaker projects potential annual sales of more than $2 billion. According to a company press release dated October 15, 2012, the drug showed a 99% patient cure rate in a mid-stage study and a 93% cure rate for patients not assisted by any other treatment. In November 2012, the company started enrollment for Phase III clinical trials. However, we think Abbott will likely have to run larger clinical trials showing efficacy and safety before it can seek FDA approval.

According to EvaluatePharma’s 2014 report, Gilead Sciences will account for a 48% market share of antiviral sales by 2020, with sales forecast to increase 13% annually from 2013 to 2020. Gilead’s newly launched HCV product, Sovaldi, is forecast to generate sales of more than $8 billion by 2020. EvaluatePharma said the Sovaldi franchise may garner additional $2.8 billion sales upon the approval of combination follow-on product, Ledipasvir-Sofosbuvir, which the FDA approved in October 2014.

Cardiovasculars. This broad-based category includes treatments for heart attacks, hypertension, angina, coagulation, arrhythmia, and elevated cholesterol levels. Heart drugs are a high priority for many leading drug companies, given the large number of patients who take them and the therapies’ life-saving potential. In addition, patients must remain on these medications for life, which creates a stable level of demand. Cardiovascular disease causes about 30% of all deaths in most developed nations of the world. One in five Americans suffers from some type of cardiovascular problem.

However, the cardiovascular drug market in dollars has been shrinking in recent years, reflecting an influx of inexpensive generics resulting from patent expirations on widely used antihypertensive agents, and cholesterol-reducing agents such as Merck’s Zocor and Bristol-Myers Squibb’s Pravachol. Pfizer’s Lipitor, the leading cholesterol treatment, was the biggest-selling drug in the world in 2011, with sales of $10.8 billion. However, after losing US patent protection in November 2011, Lipitor’s sale declined 56% to $4.8 billion in 2012, and was no longer the largest-selling drug in the world. Another leading drug, which still has many years of patent life, is AstraZeneca’s Crestor.

According to EvaluatePharma, worldwide sales of cardiovascular medicines totaled more than $84.9 billion in 2011. However, EvaluatePharma expects this market to decline by a compound annual rate of –5% over the years 2011 through 2018, largely reflecting the effects of patent expirations. In 2013, worldwide sales of cardiovascular medicines declined to $58.3 billion, and EvaluatePharma expects sales to decline to $40.1 billion by 2020.

Biopharmaceutical companies are currently working on 215 new medicines to cure heart disease and stroke, according to Pharmaceutical Research and Manufacturers of America (PhRMA). Among these 215 medicines, 30 are for heart failure, 29 for lipid disorders, 19 for stroke, and 17 each for high blood pressure and ischemic disorders. Some new treatments being developed include the following: human stem cells that form new heart muscle to restore cardiac function; a new anticoagulant that will prevent deep vein thrombosis by controlling clot formation; a gene-based therapy that will treat heart failure by using a patient’s own cells; and a drug that will prevent the transfer of good cholesterol (HDL) into bad cholesterol (LDL).

Based on estimates made by Decision Resources, a biopharmaceutical research and analytics firm, the market for atrial fibrillation (a heart condition that often leads to stroke) would grow from $2.7 billion in 2011 to around $9.2 billion by 2021. Xarelto, a new oral anticoagulant developed by Bayer and J&J, won approval in early November 2011 as a next-generation treatment for atrial fibrillation; it had already been approved in July to prevent strokes in patients receiving hip and knee replacements. Pradaxa, a similar drug developed by Boehringer Ingelheim for the prevention of strokes in patients suffering from atrial fibrillation, received FDA approval in October 2010.

Treatments for hypertension, or high blood pressure, represent another important area, with more than 60 million Americans and 100 million people worldwide living with elevated blood pressure. It is generally an asymptomatic condition, but if left untreated, it can lead to stroke, aneurysm, heart attack, and kidney failure. However, most of the key therapies are now largely generic, and global sales of antihypertensive drugs are expected to decline over the coming years, with inexpensive generics capturing the bulk of this


market. According to EvaluatePharma, global sales of antihypertensives are expected to shrink to $26.2 billion in 2018, from $37.7 billion in 2012.

Oncology drugs. Once the province of specialty pharmaceutical companies and biotech startups because of its size and the limited efficacy of available products, oncology has been one of the fastest growing therapeutic categories. In fact, EvaluatePharma stated in its 2014 report that oncology is now the largest and fastest growing segment, and that it will remain the largest segment, with an annual growth of 11.2% and more than $153 billion in sales in 2020. In-line products and potential new entrants are forecast to offset major expiries over this period. Eliquis and Xarelto—factor Xa inhibitors—are expected to drive a 10.4% annual growth in the anticoagulant segment and account for almost $9 billion new sales in 2020. We think a good portion of the growth in oncology drugs will reflect new launches of anticancer therapies, growth in emerging markets, and increased rate of success in R&D initiatives.

Mainstream pharmaceutical manufacturers see oncology as one of the most attractive growth areas. They are investing heavily in it for several reasons: scientific breakthroughs that are helping to identify truly effective novel therapies, the recent introduction of a few key drugs that broke the $1 billion sales barrier, and the limitations of their once stalwart traditional primary care markets.

According to PhRMA, the drug industry’s principal trade association, biopharmaceutical companies are currently working on 981 cancer medicines, all of which are either in clinical trials or under review by the FDA. The total includes 121 being developed for lung cancer, 111 for breast cancer, 94 for prostate cancer, and 66 for colorectal cancer. The new treatments under development include the following: a medicine that will disrupt the metabolism of cancer cells by stopping the energy supply from glucose to these cells; a medicine that will develop an immune response to melanoma; a first-line treatment that will kill specific cancer cells and enable the patient’s immune system to kill remaining cancer cells; and a therapy that will use nanotechnology to facilitate medicine delivery to the patient.

Roche Holding Ltd., with its 2009 acquisition of Genentech, currently ranks as the world’s leading oncology firm. Its key products include Rituxan, a treatment for non-Hodgkin’s lymphoma; Avastin, a humanized monoclonal antibody used to treat a broad range of different cancers and other conditions; and Herceptin, a treatment for breast cancer. In June 2012, the FDA approved Perjeta, another drug by Roche. The drug is used for the treatment of metastatic breast cancer, along with Herceptin (trastuzumab) and docetaxel chemotherapy. Other key oncology drugs include Gleevec (Novartis), a SRC-ABL kinase inhibitor; and Erbitux (marketed by Eli Lilly, Bristol-Myers Squibb, and Merck KGaA), a treatment for colorectal cancer, and head and neck cancers. A relative newcomer is Sutent (Pfizer), which has been approved for kidney cancer and one form of gastrointestinal cancer.

Rheumatoid arthritis. Rheumatoid arthritis (RA) is one of the most common and serious forms of arthritis, affecting 1.3 million Americans, according to the Arthritis Foundation. RA is mainly characterized by inflammation of the lining (synovium) of the joints, which causes swelling that can result in pain, and, ultimately, deformity. RA is most common in women and onset typically occurs between the ages of 40 and 60. According to PhRMA’s “Medicines in Development for Arthritis” 2011 report, the number of Americans diagnosed with some form of arthritis will reach around 67 million by 2030, with the aging of the baby boomer generation.

Primary treatments include nonsteroidal anti-inflammatory drugs (NSAIDs) and Disease-Modifying Antirheumatic Drugs (DMARDs), particularly methotrexate. Biologics are typically used in combination with DMARDs in second-line and third-line treatment regimens by modifying the immune system by inhibiting proteins called cytokines, which contribute to inflammation. According to EvaluatePharma, the market for antirheumatics is expected to grow at a CAGR of 3.5% over the years 2013 through 2020, reaching $57.1 billion in 2028, up from $44.9 billion in 2013, helped by new product launches. EvaluatePharma also expects AbbVie to remain the No. 1 global player in antirheumatics in 2020, with sales of $12.5 billion, or 22% of the entire market.

According to PhRMA, biopharmaceutical research companies in the US are developing 198 medicines to treat lupus, muscle disorders, osteoarthritis, osteoporosis, RA, and other related disorders. Among the new


treatments being developed are a new monoclonal antibody that will produce antibodies against the body’s own cells and tissues, thus activating the body’s immune system; a cure for RA by stopping a certain enzyme responsible for signaling activation of cytokines and growth factors that are found in greater volume in patients with RA; and a first-in-class medicine to treat the pain associated with osteoarthritis by inhibiting a gene-encoding protein that causes inflammatory pain.

HOW THE INDUSTRY OPERATES

The modern pharmaceutical industry emerged during the 1920s and 1930s, with key discoveries and the synthesis of sulfa antibacterials, penicillin and other antibiotics, and various other compounds. Large-scale production capabilities also started during that period. In response to the growing demand for penicillin and related anti-infectives, industry output expanded markedly during World War II.

In the postwar years, greater industry investment in research and development (R&D) led to important scientific breakthroughs in new therapeutics and vaccines. During this period, corporations capitalized on the discovery of tranquilizers, amphetamines, advanced antibiotics, and the Salk polio vaccine.

Today, the pharmaceutical industry derives most of its profits from a broad base of compounds used to treat infections, cardiovascular conditions, depression, inflammatory disease, and other chronic conditions. Most leading drugmakers have also collaborated with biotechnology firms to develop novel therapies based on recombinant deoxyribonucleic acid (DNA) technology, monoclonal antibodies, and genomics research. Such joint efforts are expected to yield important new therapies for a variety of diseases and medical conditions over the coming years. Oncology, for example, has benefited from these scientific advances and is now the fastest-growth segment of the drug industry in terms of sales.

About 57% of all US workers had health insurance provided by their employers in 2013, based on the 2013 Employer Health Benefits survey published by the Henry J. Kaiser Family Foundation (KFF), a private nonprofit foundation focused on US healthcare issues. Of those with health insurance, some 99% were covered under managed care plans, with conventional fee-for-service coverage representing the balance. In the managed care segment, 57% were in preferred provider organization programs (PPOs), 14% in more rigid but less costly health maintenance organizations (HMOs), 9% in point-of-services (POS) plans, and the remainder in other types. With PPOs, patients select providers from the insurer’s network or pay more to go outside of the network; with HMOs, they use the network’s providers, which are paid a set monthly fee per patient.

As the cost of medical care continues to rise, employer-sponsored health plans are forcing patients to shoulder a larger portion of their expenses. Drug spending is a key target of these programs’ efforts to rein in costs. Although prescription drug spending still accounts for a relatively small component of total national healthcare expenditures, accounting for about 10% of the total tab, the pace of growth has slowed. After peaking in 1999 at 18.1%, the growth rate declined about 0.8% in 2012. While utilization continues to climb, the slowdown in spending growth is due to a greater reliance on cheaper generic drugs, a decline in the number of innovative new drugs (which tend to be more expensive than older drugs) coming to market, and increased utilization management by payers.

Managed care organizations are implementing tiered cost-sharing formulas and increasing drug copayments. In 2013, about 92% of all workers covered by employer-sponsored plans had plans with some kind of tiered cost sharing (most offering three or four options), up from 27% in 2000, according to the KFF. The added out-of-pocket expense has prompted consumers to choose less costly generic drugs, and, among the elderly and the poor, either to purchase cheaper versions of their drugs from outside the US or to forgo the use of high-priced medications. Increasingly, the plans also require pharmacists to dispense generics when available or—in therapeutic categories for which a choice of branded drugs exists—a preferred brand for which the plan has negotiated an attractive discount.

Although the pharmaceutical industry faces challenges, everything taken into account, it is still among the world’s most profitable.


HIGH RISK, HIGH REWARDS

Drug manufacturing is a high-risk business: for every 5,000 compounds discovered, only one reaches the pharmacist’s shelf. The odds against making a profit are steep as well: Fewer than a third of marketed drugs achieve enough commercial success to recoup their R&D investments. However, when a drugmaker launches a new compound that is widely accepted in the marketplace, the economic rewards can be immense. This is the primary reason for the industry’s hefty profit margins.

To optimize R&D efforts and achieve maximum returns, pharmaceutical companies spent much of the 1990s and early 2000s focusing on developing blockbuster products. The drug companies aggressively marketed these to primary care physicians, who prescribed them to broad patient populations. If, in contrast, the companies developed compounds with benefits similar to those of drugs already on the market (known as “me-too” drugs), they were not likely to be rewarded by the current cost-conscious managed care market. The model is slowly changing, as R&D efforts turn to drugs that are prescribed by specialist physicians and that target narrower patient populations.

PREDICTABLE LIFE CYCLES OF DRUGS

Drugs have widely different development processes, but their product life cycle nearly always follows a stable, long-term pattern. In the US, after the average period of 10 years or more for discovery, development, testing, and approval by the US Food and Drug Administration (FDA), a branded ethical (prescription) drug will have a commercial life of about a decade. The life cycle is similar in Western Europe and Japan, the two other major areas of the world where the majority of new drug discovery and development takes place.

Drugs usually require several years of sales build-up to reach their full commercial potential. Physicians have to become comfortable with the product and its approved application, while companies often continue conducting clinical trials that will enable them to receive FDA approval for additional indications.

In some cases, companies benefit as doctors start to use their drugs for off-label (or unapproved) indications; these sometimes represent a hefty proportion of a drug’s total revenues. Eventually, rival drugs similar in action may enter the market, or major customers may opt to replace the drug with less expensive compounds in the same therapeutic class. The latter tactic, referred to as “therapeutic substitution,” is especially popular with HMOs and other managed care companies.

FDA OVERSEES US MARKET

The FDA is responsible for regulatory oversight of the pharmaceuticals and medical technologies industries in the US. The agency, which began operations in the mid-1800s, did not acquire even modest regulatory powers until 1906. Over time, in response to events, Congress has strengthened the FDA’s oversight.

A defining moment for pharmaceutical regulation and for the medical field in general came when Congress passed the Food, Drug, and Cosmetic Act of 1938. This landmark legislation outlined the framework for the pharmaceutical approval process in the US. The law required, for the first time, that drugmakers submit evidence of a product’s safety based on clinical trials. It also required that a drug’s label state its contents, the way it should be administered, and its possible side effects.

Following an outbreak in Europe of severe birth defects caused by thalidomide, Congress passed the Kefauver-Harris Drug Amendments of 1962 to require that manufacturers demonstrate both the safety and the efficacy of new drugs before receiving approval for commercial sale in the US. In addition, this legislation required that drugs be produced according to specified guidelines for “good manufacturing practices,” and that manufacturing plants be subject to FDA approval and periodic inspection.

The most significant drug legislation since then was the FDA Modernization Act of 1997, which sped the approval of new drugs for life-threatening illnesses and improved the overall efficiency of the FDA. The law also extended the popular Prescription Drug User Fee Act (PDUFA), a program initiated in 1992 that


charges drugmakers a fee for filing New Drug Applications (NDAs). Because the funds were used to hire new FDA personnel, the program has been credited with significantly reducing new drug approval times.

The latest version of PDUFA came into effect on October 1, 2012. On June 26, 2012, Congress passed PDUFA V in the form recommended by the FDA. It would add over $40 million in new user fees, and bring total expenditures paid by pharmaceutical companies for fiscal 2013 to $693 million. The earlier version had been renewed in September 2007 as part of a broader law addressing FDA reforms, calls for user fees to generate nearly $400 million in revenues a year from fiscal 2008 through fiscal 2012, as well as an additional $225 million for drug safety monitoring programs. The 1997 law allowed seriously ill patients easier access to experimental compounds and provided new incentives for the development of pediatric medicines. It also expanded the drug companies’ ability to disseminate information on off-label uses of new and existing drugs.

In 2005, following a series of high-profile studies showing that some popular drugs for arthritis (Vioxx) and depression (Effexor and the class of therapeutics known as selective serotonin reuptake inhibitors, or SSRIs) have potentially unacceptable side effects, the FDA began a series of initiatives to improve its drug safety evaluation processes. These initiatives included the establishment of an Office of Drug Safety (ODS), which is responsible for post-marketing surveillance and other drug safety issues. Nonetheless, critics, including some congressional leaders and FDA insiders, worried that the office would not be independent of the agency, and, therefore, would not have the authority to bring problematic side effects to the agency’s attention once products are on the market.

How new drugs enter the US market As the principal federal agency responsible for enforcing US food and drug laws, the FDA regulates the introduction of new drugs. The agency also monitors the manufacture, transport, storage, and sale of all food, biologic, cosmetic, and medical device products in the US.

The FDA requires that pharmaceutical manufacturers perform extensive testing to prove that their products are safe and effective before it will sanction commercial sale. All animal and human tests, which often last for years and cost many millions of dollars, are conducted by manufacturers, often in conjunction with colleges or universities, the National Institutes of Health (the medical research agency of the US Department of Health and Human Services), or similar research institutions. Legislation passed in September 2007 requires the FDA to keep track of severe adverse events and the safety and effectiveness of drugs that are already on the market.

Identifying and testing candidate drugs R&D is the lifeblood of the pharmaceutical industry. Drugmakers become industry leaders by spending large sums on R&D in order to produce a steady stream of successful products. However, ethical pharmaceuticals are patent protected for a finite number of years, so the pharmaceutical industry must continually find new drugs to ensure future growth. Companies with R&D programs that falter often end up struggling, particularly if they face generic competition for their key drugs. Some weakened companies merge with larger, more successful companies in order to stay afloat. Those that come up with hit products prosper.

Searching for innovative products is difficult in almost any industry. It is especially challenging in the pharmaceuticals industry, because products come from highly complex fields, such as molecular biology and biochemistry, and involve the intricate workings of the human body. The quest for new pharmaceuticals must combine an understanding of complex human chemistry and physiology with knowledge of all life sciences. Intuitive acumen is also needed to form theories about new therapeutic modalities.

Working from a set of hypotheses on how certain compounds might interact in the body, researchers synthesize new compounds to combat particular diseases. Proteins, segments of proteins, or genes (isolated by molecular biologists) or new chemicals (discovered by analytical chemists) are often the basis of new drugs.

Once candidate molecules are identified, they are studied in test tubes and in animals to determine their side effects, efficacy, and properties (such as how long the body takes to absorb them). Animal tests (usually on mice and rats) are conducted to determine any possible side effects and efficacy. Most candidates are


eliminated at this stage, because they have unacceptable side effects or do not function as expected. Often, hundreds of compounds are tested before researchers find one promising enough to advance to human clinical trials. When such trials are indicated, a company must first submit an investigational new drug (IND) application to the FDA, informing the agency that human studies will start in 30 days unless it objects.

The FDA requires drugs to undergo three phases of clinical testing on humans:

Phase I. In this phase, a small number of healthy people get moderate doses of the drug to test the drug’s safety, safe dosing range, and mechanism of action. If this initial test is successful, the subjects’ dosage is slowly increased to determine its safety at higher levels.

Phase II. During Phase II, a larger group of subjects, which have the disease or condition that the drug is intended to treat, is tested in placebo-controlled clinical trials. Phase II researchers look for efficacy and continue to study safety and optimal dosing.

Phase III. Drugs that pass the first two hurdles then undergo Phase III trials. At this level, the most complex and rigorous tests are performed on still larger groups of ill patients to ascertain the drug’s safety, effectiveness, and optimum dosage regimens. Usually, Phase III procedures employ randomized, double-blind studies with placebo control. This means that one group of patients is given the drug while another group receives an inert substance. Neither the patients nor their doctors are aware of which patients are actually receiving the drug being tested.

According to FDA estimates, of 20 drugs entering clinical testing, 13 to 14, on average, will successfully complete Phase I. Of those, about nine will finish Phase II, but only one or two are likely to survive the Phase III trials. Even after a drug successfully completes Phase III, there is the possibility that the FDA will deem the data insufficient for approval. Ultimately, only one of the original 20 may be approved for marketing.

When the clinical research on a drug is complete, the manufacturer submits an NDA to the FDA. The application compiles the research completed during the three trial phases and includes full details of the product’s formula, production, labeling, and intended use. NDAs are typically voluminous documents, sometimes exceeding 50,000 pages. Recently, many firms have taken advantage of the FDA’s new policy of accepting electronic filings via e-mail.

In recent years, the FDA has delayed approvals of an increasing number of NDAs by sending applicants “complete response letters” (formerly known as approvable letters), which typically inform applicants of some type of deficiency with their filings and usually are accompanied with requests for additional information. These requests, usually made for safety reasons, often delay the agency’s decisions for months to years, with the amount of time dependent on the complexity of the data sought. Following receipt of a complete response letter, manufacturers sometimes drop development of a product; others choose to invest additional resources in order to get the drug on the market.

After a drug is approved, manufacturers often submit supplemental NDAs containing additional clinical trial results, in order to obtain approval for additional indications. The FDA determines label content, which must include a detailed description of the drug and its chemical composition, indications, contraindications, and side effects.

Postmarket surveillance Traditionally, the FDA has required companies to conduct postmarket surveillance, though in reality few companies do so, despite recent interest in expanding such programs. Preclinical studies usually identify common toxicities, but postmarket surveillance can be important for picking up rare side effects or other unexpected developments, which are apparent only after the drug is widely used. Postmarket surveillance is sometimes referred to as Phase IV testing. In the past, companies often viewed postmarket studies as a marketing tool, using data generated from such studies to support new applications for expanded indications and improve their relationships with scientific leaders and patient groups.

In the past, the FDA rarely undertook measures against a drug for safety reasons once the drug was on the market. However, if the safety or efficacy of a drug already on the market was in question, the FDA could


be more stringent: it could order a company to recall selected lots of a product, or, in a worst-case scenario, it could ask a manufacturer to withdraw a product from the market. These actions could result from adverse events, defective packaging, misleading labeling, failure to meet content uniformity tests, loss of sterility, sub-potency, or lack of evidence of effectiveness.

The FDA’s attitude toward monitoring drugs already on the market has been evolving rapidly. Following the Vioxx scandal in 2004, the agency began placing a greater emphasis on postmarket drug safety. The Office of Drug Safety set up an independent Drug Safety Oversight Board (DSOB), consisting of scientific experts, although both the ODS and the DSOB have maintained low profiles to date.

The FDA also requires companies that undertake postmarket surveillance of certain drugs (either voluntarily or at the FDA’s request) to report on the progress of their commitments. The Food and Drug Administration Amendments Act of 2007 (FDAAA), signed into law in September 2007, requires manufacturers to work with the FDA to establish a risk management plan as part of the NDA process. Specifics of the plan are still being worked out, but it has the potential to significantly increase the value of Phase IV studies.

Exceptions for life-and-death situations Experimental drugs still in clinical trials are sometimes made available to seriously ill patients through the FDA’s Treatment IND program or its compassionate use protocol. The Treatment IND lets manufacturers provide unapproved drugs to patients who meet specific criteria if no other therapies are available. The compassionate use protocol enables patients with life-threatening diseases to have access to experimental drugs, provided Phase I trials have been completed, even if those patients are not part of the clinical trial. Over 40 drugs have been granted IND treatment status since this policy was enacted in 1987, many of which were for acquired immune deficiency syndrome (AIDS) or cancer.

New drugs targeting serious or life-threatening diseases that lack adequate treatments can also receive expedited review by the FDA under its Subpart E regulation. In this situation, the FDA can approve the drug based on results of a Phase II trial, although the manufacturer still must conduct a post-approval outcomes study. In recent years, several new breakthrough protease inhibitors for the treatment of human immunodeficiency virus (HIV) and AIDS were approved only a few months after their applications were filed. Novartis’s important drug Gleevec, for treating chronic myeloid leukemia, was also approved on an accelerated basis, based on results of three large Phase II studies.

Another piece of legislation designed to help both patients with rare diseases and the drug industry is the Orphan Drug Act. Enacted in 1983 to foster the development of drugs to treat diseases afflicting “small” populations (i.e., those with fewer than 200,000 patients), this law provides research grants, tax breaks, and exclusive marketing rights to manufacturers of drugs aimed at patient markets that would otherwise be too small to justify commercial development.

More than 300 drugs developed with help from the Orphan Drug Act are currently on the market, treating about 25 million Americans. Ironically, several orphan drugs—including Gleevec, GlaxoSmithKline’s Retrovir AZT AIDS drug, Amgen Inc.’s Epogen antianemia drug, and Genentech Inc.’s Protropin human growth hormone—subsequently became blockbuster products. The orphan drug Myozyme, which the FDA approved as the first-ever treatment for Pompe disease, a rare enzyme deficiency, was approved in 2006, and it generated impressive sales of $412 million in 2010. In total, the FDA approved nine orphan drugs in 2013.

REGULATION OUTSIDE THE US

The pharmaceutical industry is global; thus, a company seeking to maximize a drug’s potential files for its approval in many countries. Big pharmaceutical companies usually seek to get their products on the market in Europe, which is the world’s second-largest pharmaceutical market.

Companies filing for regulatory approval in the EU can either apply through a centralized EU procedure that enables them to sell their approved products in all EU countries, or file on an individual country basis. The London-based European Medicines Agency (EMEA) reviews all applications submitted under the centralized process and recommends them to the European Commission, which grants final marketing


authorization. Under EU rules, implemented in November 2005, the centralized process must be used for biologically derived therapies (those made from living cells) and for all medicines addressing certain therapeutic areas, such as cancer, AIDS, diabetes, and neurodegenerative diseases.

The alternative, known as the “mutual recognition” procedure, allows drugmakers with a medicinal product already approved in one EU country to petition other countries to accept the product. Should an EU country refuse to recognize the original country’s authorization, the matter is submitted to an EMEA scientific committee for arbitration.

In Japan, the Ministry of Health, Labor, and Welfare supervises new drug approvals. Although it is improving, the approval process moves much more slowly in Japan than in the US and Europe. Many drugs do not reach the Japanese people until they have been on the market in Western countries for several years. Nevertheless, Japan, as the world’s third largest pharmaceutical market, remains important to US companies. The Japanese health ministry has publicly committed itself to reducing approval times, which is expected to strengthen Japan’s pharmaceutical companies.

PROHIBITIVE BARRIERS TO ENTRY

The branded prescription pharmaceutical industry has barriers to entry that are among the highest of any US industry. Economic, regulatory, and legal obstacles block potential new competitors. As noted earlier, the arduous processes of new drug discovery, development, and regulatory filing require heavy R&D expenditures. All told, development of a new drug can take from 10 to 15 years, at a total cost of up to $1.2 billion (a total that includes the costs of unsuccessful compounds).

To enable manufacturers to recoup these investments and earn a satisfactory rate of return, most developed nations entitle new drugs to patent protection. A patent can be issued either on a drug’s chemical structure (a composition patent, which is generally stronger) or on its method of manufacture or synthesis (process patent). Sometimes the patent office grants a “use patent,” which lets the holder manufacture and market the compound for a specific therapeutic purpose and prevents competitors from using the drug in the same way; this kind of patent tends to be more vulnerable to competitors’ challenges in court.

Some countries are better than others are at issuing and enforcing patents. The World Trade Organization (WTO), an international group set up in 1995 to establish rules for conducting international trade, requires members to recognize patents. Under WTO rules, new pharmaceutical patents extend for 20 years from the application date. The previous system granted protection for 17 years from the date of patent issuance. However, given the length of time it takes to bring a product from the application stage to market, patent protection for most products is effectively reduced to only eight to 10 years.

China, India, and other developing countries in Asia have been particularly notorious for ignoring foreign companies’ patents. Their attitude has harmed business relationships and angered countries (and companies) that do adhere to international patent laws. However, because they wanted to belong to the WTO, China and India have begun to officially recognize international patents: China has done so since 2001, and India has done so since the beginning of 2005. Their commitment to reform is important because US companies, under ever-greater pressure in the West, see these countries as potentially huge markets, with attractive demographics and rapidly expanding economies.

PRICING REFLECTS PRODUCT STRENGTHS, MARKET CHARACTERISTICS

Many factors affect the pricing of new pharmaceuticals. These include the relative efficacy and safety profile of a drug versus its rivals, the size of its market, the competition it faces, and its development costs. In the US, breakthrough therapies treating life-threatening conditions can command premium prices, well above those for existing products. New drugs that are not significant improvements to existing alternatives are usually priced within parameters set by similar drugs already on the market. This paradigm differs from the other parts of the world, where government price controls can limit how much drugmakers can charge for their products.


Drug pricing varies widely among different classes of trade (i.e., different kinds of payers). Large-scale buyers, such as hospital chains and other institutional customers, usually pay well below list price; their huge volume purchases enable them to negotiate heavy discounts. Government organizations, such as the Department of Defense and the Department of Veterans Affairs, and programs such as Medicaid, typically negotiate some of the steepest discounts for drugs. Wholesale distributors and pharmacy chains for the retail (or individual physician/patient) market, however, pay drug prices that are at the higher end of the scale.

Historically, drugmakers have raised prices to private customers to compensate for the discounts they give to managed care customers—a practice known as cost shifting. In recent years, several pharmacy chains and pharmacy trade associations have sued leading drug manufacturers, charging illegal price fixing and restraint of trade.

Medicaid, a US federal/state program that pays for medical services (including prescription drugs) for 55 million low-income patients, accounted for an indicated 9.1% of US drug sales in 2009, based on estimates made by the government’s Centers for Medicare & Medicaid Services (CMS). Under the current Medicaid rebate program, drugmakers are required to reimburse state Medicaid programs for either 22.1% of sales or the difference between prices charged to Medicaid and the best price the drugmaker offers a nongovernmental customer, whichever is higher. With the enactment of the Medicare Part D prescription drug coverage in 2005, most of the elderly indigent population whose drug costs were previously covered by Medicaid was shifted into Medicare Part D.

AFTER PATENTS EXPIRE COMES THE GENERIC STAGE

In the US, a prescription drug’s patent protects it for 20 years, but during more than half of that time, the drug is likely to be in development. Typically, patents expire eight to 10 years after a drug comes on the market. At that time, generic drugs—the chemical equivalents of a branded drug—usually appear immediately, and prices fall rapidly. Once this happens, the profitability of the branded drug generally erodes, particularly in the US. (In contrast, in Japan and some European countries, generic drugs are only slightly less expensive than branded ones.)

Generic drug companies do not have the same high costs of R&D, tough regulatory approval, and sales and marketing as the proprietary companies, so they can afford to discount their products. Generics manufacturers set prices depending on the kind of molecule they are making, how easy it is to manufacture, and, most importantly, how many generic competitors they expect to face. When some easy-to-manufacture blockbuster drugs go off patent, half a dozen or more generic competitors may enter the market simultaneously at prices that are as much as 80% or more below brand pricing. In less competitive situations, involving drugs that maintain some barrier to entry (such as special manufacturing skills) or those that have exclusivity for a limited time post-launch (see the “Hatch-Waxman Act” in the following text), fewer competitors come into the market at the same time, and pricing, at least initially, is more stable. As more competitors enter the field, prices drop even further.

The Hatch-Waxman Act The modern generics drug industry originated largely as a result of the enactment of the Drug Price Competition and Patent Term Restoration Act of 1984 (commonly known as the Hatch-Waxman Act). This watershed legislation simplified the generic drug approval process by allowing new generics to be filed under an expedited format called the Abbreviated New Drug Application (ANDA). This filing format requires only that new generics demonstrate their bioequivalence to the branded drugs they replace, rather than undergo the rigorous clinical trials required for original products.

An amendment to the Hatch-Waxman Act provided for 180 days of marketing exclusivity for the first generic to file for FDA approval and challenge in court the patent of a branded drug. This provision is the source of much tension between brand-name and generics manufacturers. A generics company can launch its product without interference from other generics companies as soon as it receives FDA approval. However, if a company launches a drug before the innovator’s patent expires or is invalidated, it runs the risk of paying treble damages (three times sales) in the event that a court upholds the patent. Until 2005, the


threat of paying large amounts of damages deterred nearly all generics companies from launching copies of an innovative drug until either a high court declared a patent invalid or the patent expired on schedule.

In recent years, however, many generic firms have become more aggressive, and commenced “at-risk” launches—i.e., before receiving a final court ruling invalidating a patent. An example of this was Teva Pharmaceutical Industries Ltd.’s launch of a generic version of Wyeth’s popular Protonix heartburn medication in December 2007. We think companies now are more willing to undertake at-risk launches because they believe they are more likely to prevail in patent litigation, based on a number of favorable decisions in recent years. To date, no generics company that has launched a product at risk has had to pay treble damages. Often, companies take an at-risk launch after lower courts ruled against the brand-name company. However, this is not always the case, as happened with Teva’s Protonix launch.

In August 2006, the subtleties of the “launch-at-risk” strategy were highlighted in an unusual situation when Apotex Inc., a Canadian generics company, commercialized a generic copy of Plavix, a best-selling anticoagulant developed by French drugmaker Sanofi-Aventis, before the drug’s patent expired. Apotex was not worried about the consequences of such a maneuver because Bristol-Myers Squibb Co., which markets the drug in the US, and Sanofi-Aventis had previously agreed that they would not seek a hefty penalty if Apotex were to undertake such a maneuver. (The complicated motivation for this strange agreement is described in detail in the November 2006 issue of Healthcare: Pharmaceuticals Industry Survey.) Nonetheless, Bristol-Myers Squibb and Sanofi-Aventis were able to stop Apotex after several weeks, but not before Apotex flooded retailers’ shelves with its generic, which caused Sanofi-Aventis and Bristol-Myers Squibb to lose hundreds of millions of dollars in sales.

In June 2007, a US district court upheld the validity of the main Plavix patent—a decision immediately appealed by Apotex. Industry experts believe the lower-court ruling all but ensures that Plavix is protected until its patent expiration in November 2011. In December 2008, an appeals court upheld Bristol’s Plavix patent. We think Apotex will have to pay damages, but they will probably not be substantial, due to the agreement signed in 2006 by Apotex, Sanofi-Aventis, and Bristol-Myers Squibb.

For a generics manufacturer, the advantages of having six months of exclusivity are enormous. Because competition is limited, the generics supplier has to offer only a slight discount to the branded drug; in many cases, this enables the generics company to rack up hefty profits. Without the 180-day exclusivity, the company would likely face a price-sensitive, highly competitive market for that product.

To compensate the branded drug industry for greater competition from generics, the Hatch-Waxman Act granted patent extensions for branded products. An additional five years of protection was granted to new chemical entities, and three more years were given to new approved formulations or new uses for existing drugs. New formulations often encompass controlled-release or pediatric versions of the branded drugs. Sustained- or controlled-release dosing typically provides greater efficacy, fewer side effects, and patient compliance benefits.

The Medicare Prescription Drug Improvement and Modernization Act of 2003, best known for expanding Medicare coverage to prescription drugs for the first time, significantly modified the Hatch-Waxman Act. The new rules affected the expenditure of money—from tens of millions to hundreds of millions of dollars—as they clarified confusion over which generics companies are entitled to exclusivity if several companies appear to be eligible at the same time, and if the start dates of the exclusivity period appear to be uncertain.

A new Generic Initiative for Value and Efficiency (GIVE) program was launched in October 2007. This program uses additional funding from the FDAAA to add more trained reviewers and revamp the way that the agency prioritizes applications. Instead of basing reviews on order of submission, it looks at reviews based on patent expiration date: those targeting brand-name drugs with patents close to expiration will get priority over those that are directed at drugs with patents expiring later.

Going over the counter In the US, innovator companies sometimes apply to the FDA for permission to switch a prescription product to over-the-counter (OTC), or nonprescription, status, if they expect that product will shortly face generic


competition. Marketing an OTC version of a drug broadens the drug’s commercial appeal and extends its economic life. The strategy works best for popular products used for common, minor maladies. Only the original manufacturer—or a licensee—can market the product under that franchise. Other companies may sell the product on a private-label basis once the product’s patents expire. About 60% of all drugs sold in the US are OTC, according to IHS Global Insight, an economic, financial, and political forecaster.

OTC products face more straightforward, free-market forces of supply and demand than do prescription pharmaceuticals, whose pricing that is affected by heavy discounting to third-party providers and government agencies. Consumers’ sensitivity to prices is also greater with OTC products, because they usually pay for OTC drugs out-of-pocket, and most insurance plans do not reimburse for OTC drugs. These drugs are free from the time-consuming, safety-related recordkeeping that the FDA requires for prescription products.

Compared with the prescription products that they replace, products switched to OTC status have lower margins. However, because OTC drugs are mass-marketed products, manufacturers often make up the difference in volume. In addition, popular consumer medications can have long shelf lives; this bolsters margins by minimizing waste.

Some of the more successful prescription-to-OTC switches in recent years include Schering-Plough Corp.’s Claritin (a nonsedating antihistamine); Merck’s Pepcid and GlaxoSmithKline’s Zantac 75 (heartburn remedies); Schering-Plough’s Gyne-Lotrimin and Johnson & Johnson’s Monistat 7 (vaginal yeast infection treatments); Johnson & Johnson’s Imodium A-D (anti-diarrhea medicine); and The Procter & Gamble Co.’s Aleve, Wyeth’s Advil, and Bristol-Myers Squibb’s Nuprin (analgesics). AstraZeneca plc’s best-selling heartburn drug Prilosec also went OTC in 2001.

LIABILITY ISSUES

Inevitably, pharmaceutical companies are subject to lawsuits alleging adverse side effects from their medications. Some product liability cases are consolidated into class-action suits. A.H. Robins, a once-large pharmaceutical and medical products company, was driven into bankruptcy in 1985 by huge liabilities stemming from its sale of intrauterine contraceptive devices that were later deemed unsafe.

Wyeth was the target of thousands of lawsuits following the recalls in 1997 of its diet drugs Redux and Pondimin. Pondimin (generically known as fenfluramine) is the “fen” part of the now-banned “fen-phen” weight-loss cocktail. As the end of 2007, more than 99% of plaintiffs had agreed to enter into settlement discussions with the company, which had taken charges of $21.1 billion (as of year-end 2007) in order to pay for a trust fund, litigation, and other costs associated with the diet drug litigation.

In November 2007, Merck agreed to pay $4.85 billion to plaintiffs who contend that they suffered heart attacks and strokes after taking the company’s painkiller Vioxx. The settlement would cover federal and state lawsuits filed against the company since 2004 alleging adverse cardiac events that resulted from taking Vioxx. (Merck pulled Vioxx from the market in September 2004.) During 2009, Merck completed the payment of $4.85 billion in settlement funds, covering the majority of Vioxx cases.

Product liability and insurance coverage for potential damages are increasingly important issues in the industry. Liability risk is often mentioned as a growing cost within the healthcare system. There have been many calls for legislative reform to address this, including proposals to limit a manufacturer’s liability if the FDA has approved a drug or device.

KEY INDUSTRY RATIOS AND STATISTICS

National healthcare expenditures. Annual estimates of healthcare spending in the US are released by the Centers for Medicare & Medicaid Services (CMS) each January. The data are structured according to the type of expenditure, including such categories as hospital care, physician care, and drugs and other medical nondurables. The annual report, entitled “Health, United States,” includes detailed information on the


sources of funds for each segment. A summary of this report also appears in each January/February issue of the policy journal, Health Affairs.

For 2013–2023, total health spending is projected to grow at an average rate of 5.7%, faster than the expected annual growth in gross domestic product (GDP). While health-spending growth slowed in 2013 at 3.6%, the expected growth for 2014 is 5.6%, according to the latest CMS forecast, as health insurance is expected to cover 9 million Americans predominantly through Medicaid or the Health Insurance Marketplaces over the long term.

Changes in funding from government and private sources are important to observe. For example, federal, state, and local government funding represented some 37% of US spending on pharmaceuticals in 2008 (mostly from Medicare), up from about 17% in 1990. The January 2006 implementation of Medicare Part D,

which extended Medicare coverage to outpatient retail-pharmacy prescription drugs, was the key factor in the increased share of government funding. In May 2009, Medicare’s board of trustees estimated the cost of Part D to exceed $900 billion over the 2009–2018 period. Medicare paid for 22% of all US prescription drug costs in 2008, up from 18% in 2006. All government sources (including Medicare, Medicaid, and the Department of Veterans Affairs) accounted for 37% of the money spent on all prescription drugs in 2008.

“Health, United States” publishes statistics showing rates of change in total healthcare spending and by segment. Proportional changes in pharmaceutical spending can be measured against other healthcare sectors to determine the industry’s relative growth.

Between 1990 and 2003, spending on prescription drugs grew at an average annual rate of 12.4%, outpacing the 7.0% rate of growth for overall healthcare

spending. CMS data show that prescription drug spending in 2006 rose 8.5%, largely reflecting the phase-in of Medicare Part D. However, drug-spending growth slowed to 3.2% in 2008. We attribute the attrition partly to the effects of the recession in the US and patent expirations.

A dearth of new drugs—combined with generic competition for several popular brands, a slowdown in price increases, and more stringent measures by managed care organizations to migrate members to cheaper generic drugs—has helped to slow rising drug costs, according to the Center for Studying Health System Change, a research group.

Medicare and Medicaid spending. Changes in government spending and reimbursement rates can have significant ramifications for drugmakers that derive sizable sales from Medicare or Medicaid patients. The CMS provides information on spending and reimbursement rates for Medicaid and Medicare.

H01: CPI for Drugs

Table B01: PRODUCER PRICE INDEXES FOR SELECTED PRESCRIPTION DRUG PRODUCTS

PRODUCER PRICE INDEXES FORSELECTED PRESCRIPTION DRUG PRODUCTS(2001=100)

PRODUCT 2008 2009 2010 2011 2012 2013 2014

Cancer therapy 118.2 120.1 117.6 117.8 119.3 114.6 106.4Analgesics† 118.7 126.9 137.2 145.6 157.0 179.9 218.3Cardiovasculars 133.2 142.4 159.1 176.5 194.1 214.0 235.3Bronchial therapy 129.1 135.8 146.9 157.1 170.7 184.8 190.2Digestive antispasmodic/

antisecretories 142.6 151.5 160.8 156.2 156.8 163.1 172.4Broad & medium spectrum

antibiotics 142.2 144.9 145.4 152.7 156.4 156.9 172.8

*Data through September.Sources: US Department of Labor; S&P Capital IQ.

100

150

200

250

300

350

400

450

500

2004 05 06 07 08 09 10 11 12 13 2014*

CONSUMER PRICE INDEXES—DRUGS (1982-1984=100)

All items Prescription drugs OTC preparationsOTC-Over the counter.*Data through September.Source: Bureau of Labor Statistics.


According to CMS estimates, Medicare spending will grow 4.2% in 2014, reflecting an unexpected increase in use and intensity of Medicare services, along with slow increases in payment rates. However, growth in Medicare spending is projected to slow to 2.7% in 2015, due to lower payments to Medicare Advantage.

Medicaid expenditures in 2013 were estimated at $436.6 billion, up 4.8% from $397.7 billion in 2010, which in turn were up 5.9% from $375.4 billion in 2009. For 2014, Medicaid expenditures were estimated to reach $490 billion. The implementation of the Medicare drug benefit that began in January 2006 caused a decline in Medicaid spending on drugs in 2006, and a parallel rise in total Medicare spending in that year. Indigent elderly who were previously eligible for Medicaid reimbursement for prescription drugs—about 6.5 million people—are now part of the Medicare Part D program. In general, this is an advantage for the pharmaceutical industry, because Medicare pays higher prices for drugs than Medicaid.

Consumer price index (CPI). The CPI, compiled by the US Department of Labor, tracks price inflation in key segments of the economy, including medical care. The medical care component is further subdivided into products and services, with prescription and nonprescription drug statistics broken down separately.

During the 1980s, prescription drug prices surged at an average annual rate of 9.6%, compared with a 4.1% rate for the CPI. By the early 1990s, excessive drug cost inflation began to receive heightened political attention, and leading drugmakers feared price controls. Although prices continued to outpace the CPI, the pace of inflation slowed in the 1990s.

Between 1990 and 2003, prescription drug prices increased at an average annual rate of 3.9%, compared with a 2.4% rise in the CPI. In 2009, they increased at an annual rate of 3.4%, matching a rise in the overall medical inflation rate for the same period, according to the Bureau of Labor Statistics. These rates included generics, which are a growing part of consumption but weigh down the average because they cost a fraction of the price of innovative drugs. As of October 2014, the CPI had risen 0.2% over the last 12 months, while the prices for prescription drugs were up 0.7% over the same period.

Research and development (R&D) as a percentage of sales. As new drugs represent the lifeblood of the pharmaceutical industry, the percentage of a company’s sales that it devotes to R&D can have an important impact on future trends in sales and earnings. For the drug industry overall, this percentage in the aggregate is higher than for any other industry. Pharmaceutical Research and Manufacturers of America (PhRMA), an industry trade group, reported that R&D spending by members, both in the US and abroad, totaled an estimated $51.1 billion in 2013, up from $49.6 billion in 2012.

Foreign currency exchange. US drugmakers derive close to two-fifths of their total sales from non-US customers. They carefully monitor fluctuations in the value of the dollar relative to foreign currencies, as such changes can have a substantial impact on their sales and earnings. Assuming all other variables remain constant, a rise in the dollar’s value (compared with other major world currencies) lowers sales and earnings, because foreign sales translate into fewer dollars. A stronger dollar also makes US goods more expensive abroad, while products manufactured elsewhere become more competitive in the US. When the dollar is weak, the opposite occurs: exchange rates enhance drugmakers’ sales and earnings, and price competitiveness improves.

HOW TO ANALYZE A PHARMACEUTICAL COMPANY

In evaluating a pharmaceutical company, the most important factors to consider are its products, markets, and financial health.

RESEARCHING THE BUSINESS

A thorough examination of the company’s products and markets is the first step in the analysis. A pharmaceutical firm’s drug portfolio is the main ingredient of its success.


Does the company sell primarily prescription or nonprescription products? Prices and profit margins of prescription drugs are significantly higher than those of nonprescription drugs, which are essentially mass-marketed consumer products. Patent protection is an important consideration for prescription drugs, whereas the success of nonprescription or over-the-counter (OTC) drugs is more closely linked to brand-name recognition and promotional spending levels.

For both prescription and nonprescription drugmakers, company size and market share are important considerations. Pharmaceutical firms must have the critical mass to support heavy spending on research and development (R&D), as new product development is crucial to future success. In addition, these companies have to maintain a large sales force to market drugs in key domestic and foreign markets. Smaller drug companies, and even larger ones that depend heavily on one or two products, are more vulnerable to eventual patent expirations and competition from rival drugs.

With respect to market share, does the company dominate any key markets? Key markets are those with a large population, whose chronic condition requires a daily regimen of maintenance therapy, thus offering the greatest sales opportunities. Medications for high blood pressure, elevated cholesterol levels, depression, ulcers, diabetes, and arthritis are examples. Oncology, once a niche therapeutic segment, is now exceedingly attractive because of its technological advances, growth rate, and profitability.

Prescription and nonprescription drug companies vary widely by the type of pharmaceuticals they offer and the markets that they serve. Does the company have a narrow or a broad product line? A broad product line is more desirable because greater diversification makes the company less dependent on a single product. It also makes the company more resilient to economic cycles and competition.

Prescription drugmakers, however, focus their product development and marketing efforts on select therapeutic areas. For many decades, Wyeth (formerly American Home Products) has dominated the female hormone replacement market with its Premarin family of products, while Pfizer Inc. has captured the lead in the growing cholesterol-reduction market with its popular drug Lipitor. Sometimes drugmakers create new markets with their discoveries, such as Pfizer’s Viagra treatment for erectile dysfunction and Merck & Co. Inc.’s Proscar treatment for enlarged prostate glands. Launched in 2006, Merck’s Gardasil vaccine for preventing infection with human papillomavirus (HPV)—believed to be the main cause of cervical cancer—has the potential to build a new market, in our opinion.

Nonprescription drugmakers do not have to fund major R&D projects, but they must maintain large advertising budgets to promote their products, which tend to face more competition than branded prescription drugs. As a result, most of the major firms have just a handful of truly successful product lines. Sales growth is slow for these businesses, with success highly dependent on the manufacturer’s clout in the marketplace and overall market share.

If a prescription drugmaker has a diversification or acquisition program, has this been a plus or a minus? The program should be carefully analyzed to determine whether its initial objectives are being met or whether the program is hurting the company’s performance. In general, large pharmaceutical companies regularly turn to smaller, more entrepreneurial companies as sources of innovation. Business development—the process of scouting for attractive deals and negotiating terms—is an integral part of a company’s operating expertise and core strategy.

Prescription drugmakers As noted earlier, most major prescription drugmakers tend to focus on a few specific therapeutic markets. Pfizer and Merck, for example, have carved out major stakes in the huge global antihypertensive and cholesterol-lowering drug markets by releasing a steady stream of new products in recent years. Eli Lilly & Co. achieved phenomenal success in antidepressants with Prozac, which dominated the market for more than a decade until 2000, when it was overtaken by Pfizer’s Zoloft. Eli Lilly’s sales of Prozac eroded sharply following the loss of patent protection in August 2001. GlaxoSmithKline plc has maintained dominance in respiratory drugs with its Advair and Flovent drugs.


In a healthcare market dominated by managed care, a company’s relative size and the breadth of its product offerings have become increasingly important. Health maintenance organizations (HMOs), preferred provider organizations (PPOs), hospital chains, and other large-scale pharmaceutical purchasers prefer to deal with a limited number of large drug manufacturers that can offer them “one-stop shopping.”

There are other factors when analyzing a prescription drugmaker. Questions to ask include the following:

When do the patents on the company’s most important drugs expire? If the expiration dates are within the next few years, is the company adequately preparing to make up for the revenues lost to generics competition? If a company loses its marketing exclusivity on key drugs without earning adequate profits from new products, it can find itself in difficult economic straits. Many of the leading US drugmakers, including Bristol-Myers Squibb Co., Merck, and Pfizer, sustained significant patent expiration losses in 2011 and 2012. However, expiration losses in 2013 were below those of the prior two years. Losses are expected to recover again in 2015.

Have R&D efforts been productive? In terms of R&D, the larger, well-funded firms typically have the advantage of being able to hire top scientists and to conduct more clinical trials, which are necessary to develop new drugs. Most leading drugmakers spend between 14% and 18% of their revenues on R&D. However, their success rates—in terms of lucrative new drugs—differ markedly. In addition, R&D productivity can be cyclical, with firms that generated a series of significant new products experiencing troughs before rebounding. In the 1990s, Merck and Pfizer had highly productive R&D programs, each spawning a number of blockbuster drugs.

More recently, we think Merck has rejuvenated its pipeline with the launch of blockbusters such as Gardasil, and Januvia, a promising new treatment for Type 2 diabetes. Pfizer also launched several promising drugs such as Lyrica for neuropathic pain and Chantix for smoking cessation. However, we think both Pfizer and Merck face steep patent challenges at the beginning of the next decade. Specifically, Merck’s Cozaar/Hyzaar cardiovascular drug (sales of $3.6 billion in 2009) lost patent protection in 2010, while the company’s asthma drug, Singulair (worldwide sales of $5 billion in 2010), lost patent protection in August 2012. Pfizer’s Lipitor cholesterol-lowering agent (sales of $10.7 billion in 2010, or 18% of total biopharmaceutical revenues) lost US patent protection in October 2011. Eli Lilly’s antidepressant drug, Cymbalta (worldwide sales of $4.9 billion) lost patent protection in December 2013.

In the present managed care environment, companies with new drugs that are both therapeutic breakthroughs and cost effective hold the keys to success. New products that provide essentially identical results to existing therapies are less likely to reap big commercial rewards.

Has the company formed any promising alliances? Large firms often benefit from alliances with smaller biotechnology and biopharmaceutical firms working on potentially lucrative new drugs. Conversely, a smaller company may find it necessary to team up with a larger partner to fund the clinical trials and commercialization of its discoveries.

Business ventures with foreign companies can be a source of new products. For example, many drugs popular in the US today were discovered by European and Japanese firms, but they are marketed by US drugmakers under royalty arrangements. Pfizer’s Lipitor drug is sold under license from Sankyo Co. Ltd. of Japan.

Many companies also maintain relationships with scientists at leading medical colleges or other organizations, such as the federal government’s National Institutes of Health (NIH), which can funnel experimental products to drugmakers. Bristol-Myers Squibb and GlaxoSmithKline, for example, have obtained major new drugs from these sources.

What is the company’s international business profile? The US remains the most important market for US drugmakers, as well as for many foreign drug companies, because of its size and lack of government-imposed price constraints. Nonetheless, pharmaceutical markets elsewhere represent an attractive source of growth. Indeed, pharmaceutical sales in developing nations are expanding much faster than are those in the domestic market.


Although the level of foreign business varies from company to company, the US pharmaceuticals industry currently derives about two-fifths of its revenues from sales outside the US. Because many countries exercise strict price controls, foreign markets contribute a lower portion of profits than of sales.

Which foreign markets has the company entered or does it plan to enter? Drugmakers should evaluate foreign markets carefully with respect to their individual risks and profit potential. In addition, it is important to assess the possible impact of changes in currency exchange rates.

How diversified is the firm’s foreign business? Foreign markets differ widely by level of pharmaceutical utilization, degree of government control over pricing, and the acceptance of clinical research from outside sources. Japan, for example, with the highest per capita consumption of prescription drugs in the world, is the largest single market outside the US. However, the Japanese government generally requires across-the-board drug price cuts every few years.

How effective is the company in working with the FDA? Because all drugs sold in the US must first be cleared by the US FDA, a firm must be able to work with the agency and understand its criteria. Here again, size and experience can help. Most large, well-established drug companies are adept at working with the agency, while many smaller or newer firms are less proficient and often encounter major snags in obtaining approval for their products.

Besides New Drug Applications (NDAs), the FDA also inspects and monitors pharmaceutical plants for product integrity and quality control. (Several generic drugmakers ran into problems in this area a number of years ago.) In addition, the agency is expanding its role in postmarket surveillance of drug safety.

How effective is the company at working with third-party government and private payers? Reimbursement is crucial for the commercial success of a product. Private and public payers alike are taking an increasingly hard line in evaluating the cost effectiveness of recently approved drugs. In Europe, several governments have established semi-independent organizations to make recommendations on whether a new drug should be reimbursed—and in some controversial cases, they have argued against coverage. The US has not taken this approach, although it is considering the establishment of a reimbursement evaluation organization. US payers are increasingly differentiating drugs within the same class and placing them in separate tiers, with varying contributions from patients, aimed at giving patients incentives to use certain drugs. The ability to negotiate fair deals with Medicare over reimbursement for prescription drugs is also likely to be increasingly important to drug companies in the future.

Nonprescription drugmakers While the prescription drug market depends on research-intensive innovation to differentiate among products and bolster sales, the nonprescription segment depends much more on consumer-directed marketing. The main factors that must be considered in evaluating a nonprescription drug company include the relative strength of its product offerings, its ability to develop new products, competitive pressures in each market segment, and the manufacturer’s ability to support product sales through effective advertising and promotional campaigns.

Companies with a strong presence in both prescription and nonprescription sectors typically generate the most successful OTC products, because most of the leading OTC medications on the market today started their lives as ethical, or prescription, drugs. Nonprescription drugmakers strive to cultivate broad consumer loyalty. For example, Johnson & Johnson’s Tylenol, launched as an OTC product in 1955, remains the best-selling nonprescription product in the US. This highly regarded analgesic has successfully fought off rival painkillers and cheaper private-label acetaminophen products, thanks to effective advertising that has built unmatched brand loyalty. The product has even survived recalls due to tampered packaging and reports of possible liver damage from overdosing or adverse reactions when combined with alcohol.

Strong recognition for an original brand also gives the manufacturer an ability to expand sales through line extensions. Leading OTC products, such as Tylenol, Advil, Bayer, and Motrin, have successfully broadened their consumer appeal through the addition of specialized formulations for children, combinations with other products, and extra-strength versions.


ANALYZING FINANCIAL STATEMENTS

Once the analyst has reviewed a company’s products and markets, a look at its financial statements is in order. The income statement contains some key figures and ratios (described below). Balance sheet and cash flow data provide further insight into a company’s financial position and performance. Individual company statistics should be compared with those of rival companies and industry averages.

The income statement When looking at a pharmaceutical company’s income statement, it is important to examine trends in sales growth; profit margins; R&D and selling, general, and administrative (SG&A) expenses; and return on equity.

Sales trends. Examine the company’s recent and historical sales performance. Has sales growth been consistent or volatile? How has growth been achieved: through volume, pricing, acquisitions, or through a combination of these?

Operating margins. Drug companies characteristically have high operating profit margins (operating earnings before depreciation and non-operating items as a percentage of sales). Margins have contracted from their highs of about 40% in the early 1990s, due to reduced pricing flexibility. However, drug margins still exceed overall averages in other industries by a wide margin, averaging 34% in 2012, versus 19.8% for corporations in the S&P 500 Stock index. The high margins reflect drugmakers’ very low raw material costs and SG&A expenses per dollar of sales that are less than average. Although substantial costs are incurred during a drug’s R&D phase, once those costs have been covered, most revenues flow to the bottom line. Companies that can consistently develop value-added, widely used drugs with long lives can command margins well above the industry average.

It is important to note that companies can temporarily pump up margins by crimping R&D spending. While this tactic can provide short-term earnings improvement, it also undermines a drugmaker’s ability to develop the new products needed to support future growth.

Changes in a company’s margins over a period of years can reveal management’s effectiveness in improving the company’s profitability. Restructuring and cost-streamlining efforts often can play a major role in boosting a company’s profit margins.

Pretax and net returns. Drug industry pretax and net income returns have historically been above the averages in other industries. While the gap narrowed in recent years, as pharma margins contracted under more constrained managed care pricing and as patents expired, pharmaceutical margins still exceed the overall healthcare industry by a wide margin. Drugmakers’ net earnings as a percentage of sales averaged about 15.5% between 2008 and 2012, versus an average of 6.2% for the S&P 500 over the same period.

The drug business is less capital-intensive than most other industries, and it tends to have lower interest expense and depreciation as a percentage of sales. Drugmakers’ profit margins also have been augmented by lower tax rates, R&D credits, and tax credits from manufacturing operations in Ireland and other areas (though we note that past tax credits from manufacturing operations in Puerto Rico now have been largely eliminated). The drug industry’s lower-than-average tax rates also reflect the large portion of sales derived from countries with tax rates below those of the US.

A company’s geographic business mix should be examined to determine how its blended tax rate compares with others in the industry. However, before comparing different companies’ net returns, make sure that the reported results are truly comparable. Although current accounting standards require that discontinued operations be segmented out, nonrecurring items (such as restructuring charges, asset sales gains, foreign exchange gains and losses, and similar non-operating items) are often buried in the category of “other income/expenses” and must be factored out when making comparisons. Accounting practices also vary for inventory and depreciation.

Return on stockholders’ equity. In the pharmaceutical industry, return on equity (ROE), or net earnings as a percentage of average stockholders’ equity, is viewed as a key measure of management’s effectiveness.


The drug industry’s average ROE of 16.5% between 2008 and 2012 ranked among the highest of all industries. The lofty ratio is essentially a function of the industry’s relatively high profit margins. The comparable level for the S&P 500 was 10.7%.

Cash flow Another way of looking at profits is cash flow—essentially, net earnings plus depreciation and other noncash charges. It provides a useful gauge of a company’s capacity to finance capital projects. Cash flow as a percentage of sales for the larger drugmakers was around 24.2% in 2013, versus around 7.7% for the S&P 500.

The source and application of funds statement shows how a company allocates its cash flow, which is often a leading indicator of future growth. Firms investing heavily in acquisitions and capital projects are preparing to expand the business. Those paying out more in dividends are rewarding investors but retaining less cash for future growth.

Balance sheet The balance sheet is a snapshot of a company’s financial condition at a specific moment in time, so it should be examined to determine a company’s financial health. For pharmaceutical companies, most balance sheet analysis focuses on liquidity. To assess a company’s short-term liquidity, analysts look at its level of cash and marketable securities. Companies with large liquid assets also are better situated to make timely acquisitions.

A reliable check for liquidity is the current ratio, which measures the ratio of current assets to current liabilities. A healthy working capital ratio is essential to ensure that the company can adequately meet its current liabilities. This ratio always should be greater than 1.0. Any meaningful degradation in these items from previous reporting periods may signal a liquidity problem.

Debt leverage varies significantly among drugmakers. An appropriate debt load largely depends on a drug company’s product line and the strength of its projected new product stream. The ratio of total debt to total capital in 2013 was about 27.7%.

VALUATION MEASURES

Investors typically use various valuation metrics to help them determine a stock’s worth. Common measurements usually include multiples of key income statement entries such as sales, earnings and Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA), often in ratios combined with past or future growth rates. Valuations can also encompass a number of balance sheet metrics, such as return on assets (ROA), ROE, and return on invested capital (ROIC). While these metrics can be very useful, one must also take into account that stock valuations are also influenced by various external factors, such as investor sentiment on stocks in general, competition from bonds and other investments, industry conditions, and other considerations.

Along with other industrial sectors, the price/earnings (P/E) ratio—the stock price divided by either the latest four quarters of earnings per share (EPS), or by the projected forward four quarters of EPS—is typically the most commonly used valuation method. This ratio is useful in evaluating a company’s performance relative to other firms in the same industry, as well as to companies in other sectors.

Over much of the last decade, drug stocks commanded above-average P/E ratios, largely reflecting above-average growth rates and high profit margins driven by blockbuster drugs. In more recent years, however, P/E multiples in the branded pharmaceutical space have contracted significantly, as generics began to grab the market share of products whose patents have expired. In addition, the sector has been hurt by a tougher global pricing environment, reflecting efforts by governments and other third-party payers to save money by curtailing utilization and reducing prices of high-priced branded drugs.

A variant of Price/Earnings To Growth (PEG) ratio, which aims to improve on the simple P/E by adjusting it to a company’s past or future growth rate. A company’s PEG is then examined with peer PEGs to determine if a stock is undervalued or overvalued. A lower-than-average PEG may identify undervalued stocks, while higher than average PEGs often indicates the reverse.


Another key valuation metric applied widely with pharmaceutical stocks is discounted cash flow (DCF) analysis. This tool models projections of a company’s future cash flows, discounted by a weighted average cost of capital to derive at a per share present value for any given firm. If the calculated per share DCF value is higher than the current stock price, the stock may be an undervalued investment opportunity.

Similar to DCF analysis, another tool commonly used in analyzing pharmaceutical and biotechnology companies is net present value (NPV) analysis. This metric is often specifically used to determine the value of a company’s new drug R&D pipeline. NPV and DCF analyses may also play a key role in selecting potential acquisition opportunities.


GLOSSARY

180-day exclusivity—The first generics company to file a completed Abbreviated New Drug Application (ANDA) challenging the patent of a brand-name drug gets 180 days of exclusivity; only that company can market the generic for six months following the expiration of the branded drug’s patent. Two generics companies can share exclusivity if they filed patent challenges for different doses. The maker of the brand-name drug also has the right to market an “authorized generic” following patent expiration.

Abbreviated New Drug Application (ANDA)—The application filed for approval of generic drugs by the US Food and Drug Administration (FDA). ANDAs require substantially less information than do New Drug Applications (NDAs) for prescription drugs, because applicants have to prove only that their products are identical (bioequivalent) to the brand products. (See Bioequivalence.)

Active pharmaceutical ingredient (API)—A component of a drug that provides pharmacological activity and is important to the product’s efficacy. The ability to get access to cheap, reliable APIs is an important competitive advantage for generics companies that do not make their own APIs.

Agonist—A drug that promotes certain kinds of cellular activity by binding to a cell’s receptor.

Amino acids—The building blocks of proteins. Amino acids include alanine, aspartic acid, glutamic acid, and additional compounds.

Antagonist—A drug that prevents certain types of cellular reactions by blocking substances from binding to a cell’s receptor.

Antibody—A protein produced by certain types of white blood cells to deactivate foreign proteins.

Antigen—Any substance that induces a body’s immune response.

Authorized generic—A generic version of a branded drug, made by the manufacturer or by a company that has been approved by the manufacturer. It is identical to the branded drug but has a different label. Innovator manufacturers use authorized generics to take some of the profits that are gained by generics companies from 180-day exclusivities.

Autoimmune disease—A condition, such as multiple sclerosis, in which the body produces antibodies against its own tissues.

Bioavailability—The percentage of a drug’s active ingredient that reaches a patient’s bloodstream and body tissues.

Bioequivalence—Drugs that have the same rate and extent of absorption into the body when administered at the same dose and under similar conditions are described as bioequivalent. Such products can be substituted for each other without a dosage adjustment to obtain the same therapeutic effect.

Biogeneric—Also known as follow-on proteins or biosimilars, these are copies of therapeutic proteins launched after patent expiration of the main active ingredient. Like traditional generics, they have the same qualitative and quantitative composition, active substances, and pharmaceutical forms as the innovative product. Unlike traditional generics, however, they are not identical and are likely to require independent proof of efficacy and safety.

Bioinformatics—A system whereby biological information, especially genetic data, is collected, stored, and accessed via computers and electronic media.

Biological—A medicine (e.g., vaccine, antigen, serum, or plasma) made of large protein molecules that are derived from living organisms or their byproducts, not from chemicals; also called a biologic.

Biotechnology—Any technological application that uses biological systems, living organisms, or derivatives to make or modify products and processes. The approach differs from traditional drug development, which relies on synthetic chemistry and results


in small-molecule, easy-to-administer treatments that come in pills and tablets. Biotech products consist of larger molecules that are harder for the body to absorb and thus often have special administration requirements, such as injections.

Breakthrough drug—A compound that represents a major therapeutic advance because its chemical composition or mode of action is significantly different than that of existing drugs.

Chemotherapy drugs—Drugs that work systemically to treat cancers by killing cells. Usually, these drugs are indiscriminate and kill both healthy and cancerous cells throughout the body.

Clinical trials—A series of carefully defined tests through which experimental drugs are administered to humans to determine their safety and efficacy.

Combination therapy—The use of two or more drugs that together have greater therapeutic power in treating illness and diseases than either drug used alone.

Corticosteroids—Natural steroid hormones secreted by the adrenal glands, or synthetic copies of those hormones, used to treat inflammation and other conditions.

Data exclusivity—In the US, a five-year period during which generic companies and the FDA cannot use data submitted by a brand-name company to evaluate a generic version of a patented drug. Other countries use different time frames.

Deoxyribonucleic acid (DNA)—The basic molecule that contains genetic information for most living systems. The DNA molecule consists of four nucleotide bases (adenine, cytosine, guanine, and thymine) and a sugar-phosphate frame arranged in two connected strands, forming a double helix.

Enzyme—A protein that controls chemical reactions in the human body.

Fast track—An expedited review status granted by the FDA for experimental drugs that target serious or life-threatening diseases and have the potential to address “unmet medical needs.”

Formulary—A select list of drugs that a healthcare insurer has approved for reimbursement. Formularies often categorize drugs into levels, or tiers, depending on the extent to which the insurer wants to encourage members to use that drug (in other words, the extent to which the insurer will reimburse for the drug).

Gene—The basic determinant of heredity, genes are chromosomal segments that direct the syntheses of proteins and conduct other molecular regulatory functions.

Generic drug—A compound that contains the same active ingredients as a branded drug. A company cannot market a generic version of a rival’s branded product until its patent expires.

Genomics—The study of genes and their functions, including mapping genes within the genome, identifying their nucleic acid structures, and investigating their functions.

Growth factors—Proteins responsible for regulating cell proliferation, function, and differentiation.

Hormone—A chemical produced by a gland and released in the bloodstream.

Immunomodulator—A drug that attempts to modify the immune system.

Influenza—Contagious disease caused by any of several viruses (Types A, B, and C) and characterized by inflammation of the respiratory tract, fever, and muscle pain. Humans and animals can catch different versions of the virus and sometimes spread them between species. Type A, in particular, mutates rapidly and causes severe disease.

Investigational new drug (IND)—An experimental new compound that has successfully completed animal studies and has been approved by the FDA to proceed to human trials.


Managed care—A supervised system of financing and providing healthcare services for a defined population group. Health maintenance organizations (HMOs) are currently the most popular form of managed care.

Monoclonal antibodies (MAbs)—Large protein molecules produced by white blood cells, which seek out and destroy harmful foreign substances.

Neurotransmitter—A compound designed to act upon the transfer of electrical impulses in the nervous system.

New active substance (NAS)—A chemical, biological, or radiopharmaceutical substance that is intended for use in a prescription medicine but which has not yet received government approval for use in humans.

New chemical entity (NCE)—A new molecular compound that has not yet received government approval for use by humans; excludes biologic compounds and vaccines.

New drug application (NDA)—The formal filing that drugmakers submit to the FDA for approval to market new drugs. The document must contain clinical evidence of the compound’s safety and efficacy.

New molecular entity (NME)—An NCE or biological product, intended for use in a prescription medicine, that has not received government approval for use in humans.

Orphan drug—A drug designed to treat rare diseases afflicting a relatively small patient population. The US government gives drugmakers special incentives to encourage the development of such drugs.

Outcomes management—The practice of evaluating the relative success and cost-efficiency of various medical products and services. It is typically employed by HMOs and other managed care providers to justify the choice or coverage of a particular type of therapy. Pharmaceutical companies utilize data obtained from outcomes management for marketing purposes and for determining future directions for research and development (R&D).

Over-the-counter (OTC) drugs—Compounds sold in pharmacies and other outlets without need of a prescription; also known as proprietary medications.

Pandemic—A disease appearing worldwide. An epidemic disease spreads rapidly through a community; an endemic disease is native to a particular country or region and is generally under control in that region.

Pharmacogenomics—The study of how an individual’s genetic composition affects the response to drugs. It combines traditional pharmaceutical sciences, such as biochemistry, with the knowledge of genes, proteins, and single nucleotide polymorphisms.

Pharmacokinetics—Analysis of a drug’s absorption and distribution in the body, its chemical changes in the body, and how it is stored and eliminated.

Recombinant DNA technology—The process of creating new DNA by combining components of DNA from different organisms. Usually, the new DNA is incorporated into therapeutic substances.

Therapeutic substitution—A policy that some managed care organizations employ to substitute less expensive drugs for more expensive ones in the same therapeutic class, although the drugs use different modes of action.

Treatment IND—An FDA program that allows experimental drugs (INDs) that treat life-threatening diseases to be made commercially available to very sick patients before the drugs obtain formal FDA approval.

Virus—Simple pathogens made only of a protein coating and genetic material (DNA and ribonucleic acid). Much smaller than bacteria, viruses straddle the line between living and nonliving. They are inert and dormant until they are absorbed into a living host, where they reproduce inside cells by combining their genetic material with that of the host cells. The flu virus, which has eight genes that rapidly mutate, comes in many strains, which vary in their infectiousness and potency.


INDUSTRY REFERENCES

PERIODICALS

BioCentury http://www.biocentury.com/Home Weekly; covers the pharmaceutical and biotechnology industries, with an emphasis on timely analysis of industry-related news events.

Drug Topics http://drugtopics.modernmedicine.com Monthly; covers drugs and retail pharmacies.

FDA Consumer http://www.fda.gov/ForConsumers/default.htm Monthly; aimed at consumers, with articles on the FDA and medical topics.

F-D-C Reports: The Pink Sheet https://www.pharmamedtechbi.com/publications/the-pink-sheet Weekly newsletter; covers trade in, and regulation of, pharmaceuticals and biotechnology.

IN VIVO: The Business and Medicine Report The RPM Report Start-Up magazine https://www.pharmamedtechbi.com/publications/in-vivo Monthly newsletters devoted to strategic and financial analysis of the pharmaceutical, biotech, and devices industries, with an emphasis on deal-making trends and corporate strategy.

Medical Marketing & Media http://www.mmm-online.com Monthly; covers trends in drug marketing and advertising, regulation, and related topics.

New England Journal of Medicine http://www.nejm.org Weekly; publishes detailed scientific articles on medical treatments and health issues.

Pharmaceutical Executive http://www.pharmexec.com Monthly; covers trends and developments in the pharmaceutical industry.

SCRIP Intelligence http://www.scripintelligence.com/home An online daily news and analysis service for the global pharmaceutical and biotechnology industries.

BOOKS

Health, United States http://www.cdc.gov/nchs Annual survey of national trends in public health statistics.

Merck Manuals http://www.merckmanuals.com Detailed information for physicians on various diseases and medical conditions, and on therapeutics for treating them.

Parexel’s Pharmaceutical R&D Statistical Sourcebook http://www.parexel.com Annual recap of drug industry research and development (R&D) spending, drugs in development, and regulatory statistics.

Physicians’ Desk Reference http://www.pdr.net Annual compendium listing commercial prescription drugs and their FDA-approved prescribing information.

TRADE ASSOCIATIONS

Biotechnology Industry Organization (BIO) http://www.bio.org Trade association representing the country’s leading biotechnology companies in business, legislative, and regulatory affairs.

Consumer Healthcare Products Association (CHPA) http://www.chpa.org Represents manufacturers and distributors of OTC medicines and dietary supplements; promotes industry interests in legislative and regulatory arenas; and publishes information on the OTC drug industry.

https://www.pharmamedtechbi.com/publications/the-pinksheet


Generic Pharmaceutical Association http://www.gphaonline.org Trade association representing manufacturers and distributors of generic drugs in legislative, regulatory, and related matters.

Pharmaceutical Research and Manufacturers of America (PhRMA) http://www.phrma.org Trade association representing the country’s leading research-based pharmaceutical and biotechnology companies in legislative and regulatory affairs; publishes pertinent industry statistics.

RESEARCH FIRMS

Decision Resources Inc. http://www.decisionresources.com A market research and publishing firm focusing on the pharmaceutical and biotechnology industries.

EvaluatePharma http://www.evaluategroup.com/public/EvaluatePharma-Content.aspx Provides consensus forecasts from leading industry analysts, and analysis of the pharmaceutical and biotechnology healthcare sectors.

Frost & Sullivan http://ww2.frost.com Business research & consulting firm offering comprehensive coverage of the major healthcare market sectors.

Henry J. Kaiser Family Foundation (KFF) http://www.kff.org A private nonprofit foundation focused on US healthcare issues; publishes studies on a variety of healthcare topics.

IMS Health Inc. http://www.imshealth.com/portal/site/imshealth Market research firm specializing in pharmaceuticals.

The National Institute for Health Care Management Foundation http://www.nihcm.org Nonprofit, nonpartisan group that conducts research on healthcare issues.

GOVERNMENT AGENCIES

Centers for Medicare & Medicaid Services (CMS) http://cms.gov A division of the US Department of Health and Human Services, the CMS administers the Medicare and Medicaid programs and sets rates at which program providers are compensated.

National Center for Health Statistics (NCHS) http://www.cdc.gov/nchs A division of the Centers for Disease Control and Prevention, the NCHS provides US data on diseases, pregnancies, births, mortality, and other categories.

National Institutes of Health (NIH) http://www.nih.gov Government agency consisting of 27 institutes and centers; provides major R&D funding in the life sciences in the US, and maintains databases of clinical trial results and research publications.

US Food and Drug Administration (FDA) http://www.fda.gov US government agency charged with overseeing the food and pharmaceutical industries; controls and supervises the approval of new drugs and the manufacture and sale of marketed drugs.


COMPARATIVE COMPANY ANALYSIS

Operating Revenues

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

PHARMACEUTICALS‡ABBV [] ABBVIE INC DEC 18,790.0 18,380.0 17,444.0 15,637.7 A NA NA NA NA NA 2.2 ** ** ** ** NAACT [] ACTAVIS PLC DEC 8,677.6 A 5,914.9 A 4,577.0 A 3,566.9 2,793.0 A 2,535.5 1,457.7 A 19.5 27.9 46.7 595 406 314 245 192AKRX § AKORN INC DEC 317.7 256.2 A 136.9 A 86.4 75.9 93.6 45.5 21.5 27.7 24.0 698 563 301 190 167AGN [] ALLERGAN INC DEC 6,300.4 A,C 5,806.1 5,419.1 4,919.4 A 4,503.6 4,403.4 1,771.4 A 13.5 7.4 8.5 356 328 306 278 254BMY [] BRISTOL-MYERS SQUIBB CO DEC 16,385.0 17,621.0 21,244.0 19,484.0 18,808.0 D 20,597.0 D 20,894.0 (2.4) (4.5) (7.0) 78 84 102 93 90

DEPO § DEPOMED INC DEC 134.2 A 90.8 133.0 82.1 57.7 28.5 1.0 NM 36.3 47.8 13,666 9,248 13,541 8,357 5,879ENDP † ENDO INTERNATIONAL PLC DEC 2,616.9 D 3,027.4 2,730.1 A 1,716.2 A 1,460.8 A 1,260.5 595.6 16.0 15.7 (13.6) 439 508 458 288 245HSP [] HOSPIRA INC DEC 4,107.1 4,092.1 4,057.1 3,917.2 A 3,879.3 3,629.5 2,623.7 4.6 2.5 0.4 157 156 155 149 148IPXL § IMPAX LABORATORIES INC DEC 511.5 583.7 512.9 879.5 358.4 210.1 55.3 24.9 19.5 (12.4) 925 1,055 927 1,590 648JNJ [] JOHNSON & JOHNSON DEC 71,312.0 A 67,224.0 A 65,030.0 61,587.0 61,897.0 63,747.0 41,862.0 A 5.5 2.3 6.1 170 161 155 147 148

LCI § LANNETT CO INC JUN 151.1 123.0 109.0 125.2 119.0 72.4 42.5 13.5 15.8 22.8 356 289 256 295 280LLY [] LILLY (ELI) & CO DEC 23,113.1 22,603.4 24,286.5 23,076.0 21,836.0 20,378.0 A 12,582.5 6.3 2.6 2.3 184 180 193 183 174MNK [] MALLINCKRODT PLC SEP 2,204.5 2,056.2 2,021.8 NA NA NA NA NA NA 7.2 ** ** ** ** NAMDCO § MEDICINES CO DEC 687.9 A 558.6 484.7 437.6 404.2 A 348.2 A 85.6 23.2 14.6 23.1 804 653 566 511 472MRK [] MERCK & CO DEC 44,033.0 A 47,267.0 48,047.0 45,987.0 27,428.3 A 23,850.3 22,485.9 D 7.0 13.0 (6.8) 196 210 214 205 122

MYL [] MYLAN INC DEC 6,909.1 A 6,796.1 6,129.8 5,450.5 A 5,090.5 5,137.6 1,374.6 17.5 6.1 1.7 503 494 446 397 370PRGO [] PERRIGO CO PLC JUN 3,539.8 A 3,173.2 A 2,755.0 D 2,268.9 A 2,006.9 D 1,817.2 826.0 F 15.7 14.3 11.6 429 384 334 275 243PFE [] PFIZER INC DEC 51,452.0 D 58,986.0 A,C 67,425.0 A,C 67,791.0 A 49,934.0 A 48,341.0 A 45,188.0 A 1.3 1.3 (12.8) 114 131 149 150 111PBH § PRESTIGE BRANDS HOLDINGS # MAR 601.9 624.0 441.1 336.5 A,C 302.0 D 312.7 87.9 A 21.2 14.0 (3.5) 685 710 502 383 344SGNT § SAGENT PHARMACEUTICALS INC DEC 244.8 183.6 152.4 74.1 29.2 NA NA NA NA 33.3 ** ** ** ** NA

SLXP † SALIX PHARMACEUTICALS LTD DEC 933.8 735.4 540.5 A 337.0 232.9 178.8 55.8 32.5 39.2 27.0 1,673 1,318 968 604 417ZTS [] ZOETIS INC DEC 4,584.0 4,368.0 4,259.0 3,612.0 NA NA NA NA NA 4.9 ** ** ** ** NA

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 87,959.2 D 79,489.6 D 80,217.6 77,954.0 71,760.0 70,189.7 D 49,657.3 5.9 4.6 10.7 177 160 162 157 145CAH [] CARDINAL HEALTH INC JUN 101,093.0 107,552.0 102,644.2 A 98,502.8 D 99,512.4 D 91,091.4 56,737.0 A,C 5.9 2.1 (6.0) 178 190 181 174 175MCK [] MCKESSON CORP # MAR 137,609.0 A 122,455.0 122,734.0 112,084.0 D 108,702.0 106,632.0 69,506.1 7.1 5.2 12.4 198 176 177 161 156MWIV § MWI VETERINARY SUPPLY SEP 2,347.5 2,075.1 A 1,565.3 A 1,229.3 A 941.3 831.4 341.7 21.3 23.1 13.1 687 607 458 360 275OMI † OWENS & MINOR INC DEC 9,071.5 8,908.1 8,627.9 8,123.6 8,037.6 7,243.2 D 4,244.1 7.9 4.6 1.8 214 210 203 191 189

PDCO [] PATTERSON COMPANIES INC # APR 4,063.7 3,637.2 3,535.7 3,415.7 3,237.4 3,094.2 1,969.3 A 7.5 5.6 11.7 206 185 180 173 164PMC § PHARMERICA CORP DEC 1,757.9 1,832.6 A 2,081.1 A 1,847.3 A 1,841.2 A 1,947.3 A NA NA (2.0) (4.1) ** ** ** ** NAHSIC † SCHEIN (HENRY) INC DEC 9,560.6 8,940.0 8,530.2 7,526.8 6,538.3 D 6,394.9 D 3,353.8 A,C 11.0 8.4 6.9 285 267 254 224 195

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 26,286.0 A,F 28,688.0 A,F 34,368.0 F 33,981.0 F 33,187.0 F 32,215.0 F 19,049.0 F 3.3 (4.0) (8.4) 138 151 180 178 174ELN ELAN CORP PLC -ADR DEC NA 0.2 D 660.7 D 1,169.7 820.9 761.8 762.1 NA NA NA NA 0 87 153 108GSK GLAXOSMITHKLINE PLC -ADR DEC 46,433.7 A 44,575.8 A 43,498.9 A 44,459.8 A 47,092.9 A 36,391.1 A 38,388.8 A 1.9 5.0 4.2 121 116 113 116 123NVS NOVARTIS AG -ADR DEC 57,920.0 56,617.0 A 58,683.0 A 50,624.0 A 44,267.0 A 41,459.0 A 24,864.0 A 8.8 6.9 2.3 233 228 236 204 178TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 20,314.0 20,317.0 18,312.0 16,121.0 A 13,899.0 11,085.0 A 3,276.4 20.0 12.9 (0.0) 620 620 559 492 424

VRX VALEANT PHARMACEUTICALS INTL DEC 5,769.6 A,C 3,546.6 A 2,464.5 A 1,182.3 A 821.5 A 758.3 A 823.7 21.5 50.1 62.7 700 431 299 144 100

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data ref lect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a f iscal year change.


Net Income

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

PHARMACEUTICALS‡ABBV [] ABBVIE INC DEC 4,128.0 5,275.0 3,433.1 4,177.9 NA NA NA NA NA (21.7) ** ** ** ** NA ACT [] ACTAVIS PLC DEC (750.4) 97.3 260.9 184.4 222.0 238.4 202.9 NM NM NM (370) 48 129 91 109AKRX § AKORN INC DEC 52.4 35.4 43.0 21.8 (25.3) (7.9) (12.3) NM NM 48.0 NM NM NM NM NM AGN [] ALLERGAN INC DEC 1,268.9 1,098.8 934.5 0.6 621.3 578.6 (52.5) NM 17.0 15.5 NM NM NM NM NM BMY [] BRISTOL-MYERS SQUIBB CO DEC 2,563.0 1,960.0 3,709.0 3,102.0 3,239.0 3,155.0 3,106.0 (1.9) (4.1) 30.8 83 63 119 100 104

DEPO § DEPOMED INC DEC 43.3 (29.8) 70.7 3.9 (22.0) (15.3) (30.0) NM NM NM NM NM NM NM NM ENDP † ENDO INTERNATIONAL PLC DEC (535.5) (740.3) 187.6 259.0 266.3 261.7 69.8 NM NM NM (767) (1,061) 269 371 382HSP [] HOSPIRA INC DEC (8.3) 44.2 (9.4) 357.2 403.9 320.9 260.4 NM NM NM (3) 17 (4) 137 155IPXL § IMPAX LABORATORIES INC DEC 101.3 55.9 65.5 250.4 50.1 18.7 (14.2) NM 40.2 81.2 NM NM NM NM NM JNJ [] JOHNSON & JOHNSON DEC 13,831.0 10,853.0 9,672.0 13,334.0 12,266.0 12,949.0 7,197.0 6.8 1.3 27.4 192 151 134 185 170

LCI § LANNETT CO INC JUN 13.3 3.9 (0.3) 7.8 6.5 (2.3) 11.7 1.3 NM 237.3 114 34 (2) 67 56LLY [] LILLY (ELI) & CO DEC 4,684.8 4,088.6 4,347.7 5,069.5 4,328.8 (2,071.9) 2,560.8 6.2 NM 14.6 183 160 170 198 169MNK [] MALLINCKRODT PLC SEP 57.8 141.3 157.0 NA NA NA NA NA NA (59.1) ** ** ** ** NA MDCO § MEDICINES CO DEC 15.5 51.3 127.9 104.6 (76.2) (8.5) (16.9) NM NM (69.7) NM NM NM NM NM MRK [] MERCK & CO DEC 4,404.0 6,168.0 6,272.0 861.0 12,901.3 7,808.4 6,589.6 (3.9) (10.8) (28.6) 67 94 95 13 196

MYL [] MYLAN INC DEC 623.7 640.8 536.8 345.1 232.6 (181.2) 334.6 6.4 NM (2.7) 186 192 160 103 70PRGO [] PERRIGO CO PLC JUN 441.9 393.0 340.6 224.1 141.1 135.8 54.0 23.4 26.6 12.5 818 727 630 415 261PFE [] PFIZER INC DEC 11,380.0 9,490.0 8,697.0 8,266.0 8,621.0 8,026.0 1,639.0 21.4 7.2 19.9 694 579 531 504 526PBH § PRESTIGE BRANDS HOLDINGS # MAR 72.6 65.5 37.2 29.2 31.3 (186.8) 4.2 33.0 NM 10.9 1,736 1,566 890 698 747SGNT § SAGENT PHARMACEUTICALS INC DEC 29.6 (16.8) (26.4) (24.5) (30.5) NA NA NA NA NM ** ** ** ** NA

SLXP † SALIX PHARMACEUTICALS LTD DEC 143.0 64.2 87.4 (27.1) (43.6) (47.0) (20.1) NM NM 122.6 NM NM NM NM NM ZTS [] ZOETIS INC DEC 504.0 436.0 245.0 110.0 NA NA NA NA NA 15.6 ** ** ** ** NA

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 493.4 708.2 706.6 636.7 511.9 469.1 441.2 1.1 1.0 (30.3) 112 161 160 144 116CAH [] CARDINAL HEALTH INC JUN 335.0 1,070.0 966.2 587.0 1,142.8 1,315.9 1,411.9 (13.4) (23.9) (68.7) 24 76 68 42 81MCK [] MCKESSON CORP # MAR 1,359.0 1,338.0 1,403.0 1,130.0 1,263.0 823.0 646.5 7.7 10.6 1.6 210 207 217 175 195MWIV § MWI VETERINARY SUPPLY SEP 62.8 53.5 42.6 33.4 24.9 19.9 4.3 30.7 25.8 17.5 1,452 1,235 984 772 575OMI † OWENS & MINOR INC DEC 110.9 109.0 115.2 110.6 116.9 101.3 53.6 7.5 1.8 1.7 207 203 215 206 218

PDCO [] PATTERSON COMPANIES INC # APR 200.6 210.3 212.8 225.4 212.3 199.6 149.5 3.0 0.1 (4.6) 134 141 142 151 142PMC § PHARMERICA CORP DEC 18.9 22.9 23.4 19.2 42.2 5.0 NA NA 30.5 (17.5) ** ** ** ** NA HSIC † SCHEIN (HENRY) INC DEC 431.6 388.1 367.7 325.8 308.6 251.0 139.5 12.0 11.4 11.2 309 278 264 234 221

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 2,556.0 6,297.0 9,983.0 8,053.0 7,521.0 6,101.0 3,036.0 (1.7) (16.0) (59.4) 84 207 329 265 248ELN ELAN CORP PLC -ADR DEC NA (363.9) (230.3) (324.7) (162.3) (35.2) (815.4) NA NA NA ** NM NM NM NM GSK GLAXOSMITHKLINE PLC -ADR DEC 9,009.6 7,423.6 8,174.0 2,515.1 8,942.0 6,727.7 8,021.8 1.2 6.0 21.4 112 93 102 31 111NVS NOVARTIS AG -ADR DEC 9,175.0 9,505.0 9,113.0 9,794.0 8,400.0 8,125.0 5,016.0 6.2 2.5 (3.5) 183 189 182 195 167TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 1,269.0 1,963.0 2,759.0 3,331.0 2,000.0 635.0 691.0 6.3 14.9 (35.4) 184 284 399 482 289

VRX VALEANT PHARMACEUTICALS INTL DEC (866.1) (116.0) 159.6 (208.2) 176.5 199.9 (27.3) NM NM NM NM NM NM NM NM

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available.


Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

PHARMACEUTICALS‡ABBV [] ABBVIE INC DEC 22.0 28.7 19.7 26.7 NA 14.7 22.6 16.8 NA NA 105.1 67.7 24.6 NA NAACT [] ACTAVIS PLC DEC NM 1.6 5.7 5.2 7.9 NM 0.9 4.2 3.1 4.6 NM 2.6 7.6 5.8 8.7AKRX § AKORN INC DEC 16.5 13.8 31.4 25.3 NM 13.1 10.5 20.6 24.3 NM 22.7 19.7 35.1 34.8 NMAGN [] ALLERGAN INC DEC 20.1 18.9 17.2 0.0 13.8 12.8 12.4 11.1 0.0 8.7 20.6 19.7 18.6 0.0 14.1BMY [] BRISTOL-MYERS SQUIBB CO DEC 15.6 11.1 17.5 15.9 17.2 6.9 5.7 11.6 10.0 10.7 17.8 13.3 23.4 20.3 23.9

DEPO § DEPOMED INC DEC 32.3 NM 53.2 4.7 NM 13.3 NM 56.3 4.4 NM 39.1 NM 109.6 20.1 NMENDP † ENDO INTERNATIONAL PLC DEC NM NM 6.9 15.1 18.2 NM NM 3.3 8.1 12.0 NM NM 10.1 16.0 20.3HSP [] HOSPIRA INC DEC NM 1.1 NM 9.1 10.4 NM 0.7 NM 6.2 7.6 NM 1.5 NM 12.3 18.4IPXL § IMPAX LABORATORIES INC DEC 19.8 9.6 12.8 28.5 14.0 10.9 6.7 8.8 37.0 8.5 13.5 8.6 11.8 68.6 26.3JNJ [] JOHNSON & JOHNSON DEC 19.4 16.1 14.9 21.7 19.8 10.9 9.2 8.9 13.5 13.7 19.9 17.8 17.0 24.9 26.4

LCI § LANNETT CO INC JUN 8.8 3.2 NM 6.2 5.5 8.2 2.6 NM 5.9 5.4 11.1 3.6 NM 9.4 8.9LLY [] LILLY (ELI) & CO DEC 20.3 18.1 17.9 22.0 19.8 13.5 12.0 13.4 17.3 15.3 28.9 28.9 33.5 46.2 53.2MNK [] MALLINCKRODT PLC SEP 2.6 6.9 7.8 NA NA 1.8 5.0 NA NA NA 3.7 7.7 NA NA NAMDCO § MEDICINES CO DEC 2.3 9.2 26.4 23.9 NM 1.1 6.2 21.9 24.7 NM 2.1 9.3 29.4 35.0 NMMRK [] MERCK & CO DEC 10.0 13.0 13.1 1.9 47.0 4.2 5.8 5.9 0.8 16.2 8.6 11.5 11.5 1.5 33.2

MYL [] MYLAN INC DEC 9.0 9.4 8.8 6.3 4.6 4.6 5.4 4.6 2.0 0.9 19.9 18.8 15.1 6.6 3.2PRGO [] PERRIGO CO PLC JUN 12.5 12.4 12.4 9.9 7.0 9.4 10.9 10.8 8.0 5.5 21.1 23.3 26.0 22.3 15.2PFE [] PFIZER INC DEC 22.1 16.1 12.9 12.2 17.3 6.4 5.1 4.5 4.1 5.3 14.4 11.6 10.2 9.3 11.7PBH § PRESTIGE BRANDS HOLDINGS # MAR 12.1 10.5 8.4 8.7 10.4 4.1 3.7 2.6 3.2 3.9 13.9 14.9 9.7 8.4 10.0SGNT § SAGENT PHARMACEUTICALS INC DEC 12.1 NM NM NM NM 12.3 NM NM NM NA 16.1 NM NM NA NA

SLXP † SALIX PHARMACEUTICALS LTD DEC 15.3 8.7 16.2 NM NM 5.9 4.0 8.1 NM NM 22.0 11.6 18.4 NM NMZTS [] ZOETIS INC DEC 11.0 10.0 5.8 3.0 NA 7.9 7.3 4.5 NA NA 20.3 11.3 6.9 NA NA

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 0.6 0.9 0.9 0.8 0.7 2.9 4.7 4.8 4.5 4.0 20.7 26.6 24.3 22.5 18.9CAH [] CARDINAL HEALTH INC JUN 0.3 1.0 0.9 0.6 1.1 1.3 4.5 4.5 2.6 4.7 5.5 17.7 17.4 8.4 13.9MCK [] MCKESSON CORP # MAR 1.0 1.1 1.1 1.0 1.2 3.1 3.9 4.4 3.8 4.7 17.4 19.3 20.0 15.3 18.4MWIV § MWI VETERINARY SUPPLY SEP 2.7 2.6 2.7 2.7 2.6 8.4 8.9 8.8 8.3 7.6 16.0 16.4 15.8 14.7 12.8OMI † OWENS & MINOR INC DEC 1.2 1.2 1.3 1.4 1.5 4.9 5.2 6.1 6.2 6.6 11.1 11.5 13.0 13.6 16.0

PDCO [] PATTERSON COMPANIES INC # APR 4.9 5.8 6.0 6.6 6.6 7.2 7.8 8.0 9.0 9.3 14.0 15.2 14.5 15.0 16.2PMC § PHARMERICA CORP DEC 1.1 1.2 1.1 1.0 2.3 2.1 2.7 2.9 2.6 6.0 4.2 5.3 5.9 5.1 12.2HSIC † SCHEIN (HENRY) INC DEC 4.5 4.3 4.3 4.3 4.7 7.9 7.7 7.9 7.8 8.3 16.0 15.4 15.2 14.2 15.1

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 9.7 21.9 29.0 23.7 22.7 4.7 11.8 18.3 14.5 14.8 10.9 26.8 43.0 36.7 41.1ELN ELAN CORP PLC -ADR DEC NA NM NM NM NM NA NM NM NM NM NA NM NM NM NMGSK GLAXOSMITHKLINE PLC -ADR DEC 19.4 16.7 18.8 5.7 19.0 13.1 11.3 12.7 3.7 14.1 85.6 67.7 62.5 16.8 64.4NVS NOVARTIS AG -ADR DEC 15.8 16.8 15.5 19.3 19.0 7.3 7.9 7.6 9.0 9.7 12.8 14.1 14.1 16.2 15.6TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 6.2 9.7 15.1 20.7 14.4 2.6 3.9 6.2 9.3 6.0 5.6 8.7 12.5 16.2 11.3

VRX VALEANT PHARMACEUTICALS INTL DEC NM NM 6.5 NM 21.5 NM NM 1.3 NM 9.6 NM NM 3.6 NM 13.8

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.


Debt as a % ofCurrent Ratio Debt / Capital Ratio (%) Net Working Capital


PHARMACEUTICALS‡ABBV [] ABBVIE INC DEC 2.6 2.3 1.2 2.2 NA 73.8 79.7 0.3 0.0 NA 130.3 170.6 2.5 NM NAACT [] ACTAVIS PLC DEC 1.3 1.4 1.4 2.2 1.7 45.1 56.2 18.1 21.4 24.3 747.3 535.2 116.2 103.8 160.1AKRX § AKORN INC DEC 2.8 3.7 5.5 3.4 1.2 29.5 34.0 38.4 0.0 13.2 101.1 90.7 79.0 0.0 132.9AGN [] ALLERGAN INC DEC 4.3 4.1 4.2 2.6 3.8 24.5 20.6 22.2 24.4 23.6 51.5 45.0 49.0 62.2 65.0BMY [] BRISTOL-MYERS SQUIBB CO DEC 1.5 1.2 2.0 2.0 2.2 34.4 31.9 25.1 25.3 29.2 123.2 528.8 71.3 81.5 80.2

DEPO § DEPOMED INC DEC 2.1 2.6 2.7 2.4 2.4 0.0 0.0 0.0 0.0 12.1 0.0 0.0 0.0 0.0 4.7ENDP † ENDO INTERNATIONAL PLC DEC 1.7 1.1 1.6 1.8 2.7 80.2 66.1 56.9 34.8 17.3 291.9 NM 514.2 167.7 39.9HSP [] HOSPIRA INC DEC 2.4 2.7 3.0 2.7 2.9 37.1 35.9 36.8 35.0 39.3 104.4 98.6 99.4 110.9 103.8IPXL § IMPAX LABORATORIES INC DEC 4.3 3.8 3.8 4.1 1.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0JNJ [] JOHNSON & JOHNSON DEC 2.2 1.9 2.4 2.1 1.8 14.6 14.5 18.1 13.6 13.7 43.4 52.6 41.2 37.8 46.2

LCI § LANNETT CO INC JUN 3.5 2.6 2.7 1.8 2.0 4.3 5.5 6.4 3.1 9.0 7.0 9.9 12.1 7.2 19.9LLY [] LILLY (ELI) & CO DEC 1.5 1.6 1.6 2.1 1.9 19.2 27.2 28.8 35.3 40.8 100.3 118.7 102.8 87.5 112.1MNK [] MALLINCKRODT PLC SEP 2.3 2.2 2.1 NA NA 37.0 0.5 0.6 NA NA 117.0 1.8 2.4 NA NAMDCO § MEDICINES CO DEC 3.4 5.6 3.1 3.8 2.8 18.8 27.8 0.0 0.0 0.0 56.6 36.4 0.0 0.0 0.0MRK [] MERCK & CO DEC 2.0 1.9 2.0 1.9 1.8 26.6 21.7 20.5 20.0 19.2 115.3 98.5 91.7 115.3 126.8

MYL [] MYLAN INC DEC 1.5 1.8 1.4 2.0 1.9 69.0 59.6 54.1 56.3 58.1 500.7 312.3 445.4 300.8 318.1PRGO [] PERRIGO CO PLC JUN 3.0 2.8 2.3 1.5 2.3 43.9 41.5 36.2 45.0 45.2 129.6 116.3 113.5 197.0 134.1PFE [] PFIZER INC DEC 2.4 2.1 2.1 2.1 1.7 23.0 23.2 25.5 26.5 28.6 92.7 94.6 117.8 120.6 176.7PBH § PRESTIGE BRANDS HOLDINGS # MAR 2.1 1.7 2.3 2.0 2.0 54.6 59.1 66.3 48.6 40.0 NM NM NM 912.3 521.4SGNT § SAGENT PHARMACEUTICALS INC DEC 3.7 3.6 2.4 1.6 1.6 0.0 0.0 2.8 0.0 0.0 0.0 0.0 3.5 0.0 0.0

SLXP † SALIX PHARMACEUTICALS LTD DEC 5.5 4.6 2.7 5.5 3.0 67.6 57.8 35.1 44.6 14.5 86.9 92.4 95.5 57.7 28.9ZTS [] ZOETIS INC DEC 2.4 2.6 2.7 2.6 NA 74.3 10.5 12.5 15.9 NA 187.5 29.2 39.2 51.5 NA

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 1.0 1.0 1.0 1.1 1.1 37.6 37.1 25.3 31.3 30.2 NM NM 268.4 159.5 248.2CAH [] CARDINAL HEALTH INC JUN 1.2 1.2 1.2 1.3 1.4 37.2 27.4 26.8 26.1 26.1 115.9 72.5 73.8 56.1 74.6MCK [] MCKESSON CORP # MAR 1.1 1.1 1.1 1.2 1.3 47.7 38.1 30.7 33.2 23.3 291.3 249.4 160.3 98.8 51.0MWIV § MWI VETERINARY SUPPLY SEP 1.8 1.7 2.0 1.8 2.2 0.0 0.0 0.1 0.4 0.0 0.0 0.0 0.2 0.6 0.0OMI † OWENS & MINOR INC DEC 1.7 1.8 2.1 2.0 1.9 16.7 17.7 18.5 19.4 21.1 29.0 30.6 26.8 29.5 32.5

PDCO [] PATTERSON COMPANIES INC # APR 2.6 3.0 2.6 3.3 3.3 31.7 32.8 33.2 24.3 25.8 83.1 79.4 83.0 60.8 66.8PMC § PHARMERICA CORP DEC 2.7 4.0 4.4 3.6 4.2 31.3 40.0 41.5 39.0 39.3 84.1 93.7 84.1 90.9 76.7HSIC † SCHEIN (HENRY) INC DEC 1.8 1.8 1.8 1.9 2.0 11.5 13.1 10.7 12.0 9.1 35.1 39.6 36.3 39.5 21.6

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 1.3 1.4 1.5 1.5 1.3 24.8 26.3 22.0 25.7 27.7 200.5 182.9 94.6 109.0 149.3ELN ELAN CORP PLC -ADR DEC NA 2.6 1.8 1.9 4.5 NA 50.8 42.6 86.7 74.6 NA 102.6 276.1 289.5 169.9GSK GLAXOSMITHKLINE PLC -ADR DEC 1.1 1.0 1.1 1.3 1.4 66.8 68.3 58.0 60.7 58.1 997.2 NM NM 456.8 271.2NVS NOVARTIS AG -ADR DEC 1.2 1.2 1.0 1.1 1.7 12.2 15.3 16.0 16.8 12.3 269.3 348.6 NM 708.4 61.0TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 1.1 1.3 1.0 1.2 1.6 30.4 32.2 29.2 15.0 17.1 591.9 337.8 NM 175.0 95.0

VRX VALEANT PHARMACEUTICALS INTL DEC 1.5 1.5 1.5 1.5 1.4 69.8 68.0 55.9 35.4 18.8 NM NM NM NM 335.0



Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

PHARMACEUTICALS‡ABBV [] ABBVIE INC DEC 21 - 13 11 - 10 NA - NA NA - NA NA - NA 62 0 NA NA NA 4.8 - 2.9 0.0 - 0.0 NA - NA NA - NA NA - NAACT [] ACTAVIS PLC DEC NM- NM NM- 71 35 - 24 35 - 25 19 - 11 NM 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0AKRX § AKORN INC DEC 48 - 23 46 - 28 26 - 11 27 - 5 NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0AGN [] ALLERGAN INC DEC 27 - 19 27 - 22 29 - 22 NM- NM 31 - 17 5 5 7 NM 10 0.2 - 0.2 0.2 - 0.2 0.3 - 0.2 0.4 - 0.3 0.6 - 0.3BMY [] BRISTOL-MYERS SQUIBB CO DEC 35 - 21 31 - 26 16 - 11 16 - 12 16 - 11 113 116 61 53 77 5.4 - 3.2 4.4 - 3.7 5.3 - 3.7 4.3 - 3.4 7.3 - 4.7

DEPO § DEPOMED INC DEC 14 - 7 NM- NM 8 - 3 96 - 33 NM- NM 0 NM 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0ENDP † ENDO INTERNATIONAL PLC DEC NM- NM NM- NM 28 - 16 17 - 9 12 - 7 NM NM 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0HSP [] HOSPIRA INC DEC NM- NM NM- NM NM- NM 28 - 22 20 - 8 NM 0 NM 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0IPXL § IMPAX LABORATORIES INC DEC 17 - 10 32 - 22 28 - 14 6 - 2 17 - 3 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0JNJ [] JOHNSON & JOHNSON DEC 20 - 14 18 - 16 19 - 16 14 - 12 15 - 10 53 61 64 44 43 3.7 - 2.7 3.9 - 3.3 3.9 - 3.3 3.7 - 3.2 4.2 - 3.0

LCI § LANNETT CO INC JUN 72 - 10 38 - 27 NM- NM 22 - 11 36 - 16 0 0 NM 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0LLY [] LILLY (ELI) & CO DEC 13 - 11 15 - 10 11 - 9 8 - 7 10 - 7 45 53 50 43 50 4.1 - 3.4 5.1 - 3.6 5.9 - 4.7 6.1 - 5.1 7.2 - 4.8MNK [] MALLINCKRODT PLC SEP 55 - 42 NA - NA NA - NA NA - NA NA - NA 0 NA NA NA NA 0.0 - 0.0 NA - NA NA - NA NA - NA NA - NAMDCO § MEDICINES CO DEC NM- 89 28 - 19 8 - 5 8 - 3 NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0MRK [] MERCK & CO DEC 34 - 27 24 - 18 19 - 14 NM- NM 7 - 4 116 83 76 543 27 4.2 - 3.4 4.6 - 3.5 5.3 - 4.1 5.0 - 3.7 7.6 - 4.0

MYL [] MYLAN INC DEC 27 - 17 19 - 13 20 - 12 34 - 24 62 - 31 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0PRGO [] PERRIGO CO PLC JUN 33 - 21 29 - 21 28 - 17 28 - 15 27 - 12 7 7 7 10 14 0.4 - 0.2 0.3 - 0.3 0.4 - 0.3 0.6 - 0.4 1.2 - 0.5PFE [] PFIZER INC DEC 19 - 15 21 - 16 20 - 15 20 - 14 15 - 9 57 69 72 70 65 3.8 - 3.0 4.2 - 3.4 4.8 - 3.7 5.1 - 3.5 6.9 - 4.2PBH § PRESTIGE BRANDS HOLDINGS # MAR 26 - 14 17 - 9 18 - 11 21 - 12 17 - 6 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0SGNT § SAGENT PHARMACEUTICALS INC DEC 25 - 13 NM- NM NM- NM NA - NA NA - NA 0 NM NM NM NA 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 NA - NA NA - NA

SLXP † SALIX PHARMACEUTICALS LTD DEC 39 - 18 51 - 34 32 - 17 NM- NM NM- NM 0 0 0 NM NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0ZTS [] ZOETIS INC DEC 35 - 29 NA - NA NA - NA NA - NA NA - NA 19 0 NA NA NA 0.7 - 0.6 NA - NA NA - NA NA - NA NA - NA

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 33 - 20 16 - 13 17 - 13 15 - 11 16 - 8 39 19 17 14 12 2.0 - 1.2 1.5 - 1.2 1.3 - 1.0 1.2 - 0.9 1.5 - 0.8CAH [] CARDINAL HEALTH INC JUN 69 - 42 14 - 12 17 - 14 24 - 18 12 - 8 111 28 29 44 19 2.7 - 1.6 2.4 - 2.0 2.1 - 1.7 2.4 - 1.8 2.4 - 1.5MCK [] MCKESSON CORP # MAR 28 - 16 18 - 13 15 - 12 16 - 13 14 - 7 16 14 14 16 10 1.0 - 0.6 1.1 - 0.8 1.2 - 0.9 1.3 - 1.0 1.4 - 0.7MWIV § MWI VETERINARY SUPPLY SEP 37 - 22 28 - 15 26 - 18 24 - 13 20 - 10 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0OMI † OWENS & MINOR INC DEC 22 - 16 18 - 16 20 - 14 19 - 15 17 - 11 55 51 44 40 33 3.4 - 2.5 3.3 - 2.8 3.1 - 2.2 2.8 - 2.2 3.0 - 1.9

PDCO [] PATTERSON COMPANIES INC # APR 22 - 17 18 - 14 19 - 14 17 - 13 16 - 9 34 28 26 22 6 2.0 - 1.5 2.0 - 1.6 1.9 - 1.4 1.7 - 1.3 0.6 - 0.4PMC § PHARMERICA CORP DEC 36 - 19 20 - 12 21 - 13 33 - 11 16 - 10 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0HSIC † SCHEIN (HENRY) INC DEC 23 - 16 19 - 15 18 - 14 17 - 14 16 - 10 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 29 - 22 10 - 8 7 - 6 10 - 7 9 - 6 137 57 37 43 40 6.3 - 4.7 7.2 - 5.8 6.6 - 5.1 6.0 - 4.5 7.0 - 4.4ELN ELAN CORP PLC -ADR DEC NA - NA NM- NM NM- NM NM- NM NM- NM NA NM NM NM NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0GSK GLAXOSMITHKLINE PLC -ADR DEC 14 - 12 16 - 14 14 - 11 44 - 32 12 - 8 65 82 68 202 53 5.5 - 4.5 5.9 - 5.2 6.1 - 4.8 6.2 - 4.6 6.8 - 4.3NVS NOVARTIS AG -ADR DEC 21 - 17 16 - 13 17 - 13 14 - 10 15 - 9 65 63 62 46 46 3.8 - 3.0 4.8 - 3.9 4.6 - 3.6 4.5 - 3.2 5.1 - 3.0TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 28 - 24 21 - 16 18 - 11 17 - 13 25 - 18 86 46 29 20 26 3.5 - 3.1 2.8 - 2.2 2.5 - 1.6 1.6 - 1.1 1.5 - 1.1

VRX VALEANT PHARMACEUTICALS INTL DEC NM- NM NM- NM NM- 54 NM- NM 14 - 8 NM NM 0 NM 58 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 9.4 - 4.2 7.0 - 4.2


20092013 2012 2011 2010


Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)


PHARMACEUTICALS‡ABBV [] ABBVIE INC DEC 2.58 3.33 2.18 2.66 NA (2.32) NA NA NA NA 54.78 - 33.33 37.07 - 32.51 NA - NA NA - NA NA - NA ACT [] ACTAVIS PLC DEC (5.27) 0.77 2.10 1.51 2.11 (39.61) (37.26) 1.90 0.97 (2.81) 170.51 - 82.02 91.47 - 55.00 73.35 - 50.47 52.20 - 37.26 40.25 - 23.05AKRX § AKORN INC DEC 0.54 0.37 0.45 0.24 (0.28) 1.03 0.92 0.69 0.89 0.38 26.16 - 12.44 16.87 - 10.52 11.77 - 4.87 6.50 - 1.27 2.69 - 0.73AGN [] ALLERGAN INC DEC 4.28 3.64 3.07 0.00 2.05 8.19 7.73 6.55 5.39 4.53 116.45 - 81.33 97.09 - 81.28 89.25 - 68.03 74.94 - 55.25 64.08 - 35.41BMY [] BRISTOL-MYERS SQUIBB CO DEC 1.56 1.17 2.18 1.80 1.63 3.48 (1.70) 4.29 4.17 3.94 54.49 - 32.50 36.34 - 30.64 35.44 - 24.97 28.00 - 22.24 26.62 - 17.23

DEPO § DEPOMED INC DEC 0.76 (0.53) 1.30 0.07 (0.43) 0.96 1.04 1.91 0.44 0.30 10.77 - 4.99 7.15 - 4.75 10.40 - 4.20 6.73 - 2.32 6.40 - 1.62ENDP † ENDO INTERNA TIONA L PLC DEC (4.73) (6.40) 1.61 2.23 2.27 (23.58) (27.44) (26.33) (4.35) 4.99 67.63 - 25.00 39.29 - 25.49 44.53 - 26.02 38.20 - 19.19 26.14 - 15.75HSP [] HOSPIRA INC DEC (0.05) 0.27 (0.06) 2.15 2.51 10.43 10.26 9.10 7.11 5.96 42.60 - 28.71 38.49 - 28.62 59.20 - 26.92 60.49 - 47.48 51.40 - 21.21IPXL § IMPAX LABORATORIES INC DEC 1.51 0.85 1.02 4.04 0.83 10.81 9.02 8.65 7.45 3.14 25.50 - 14.41 27.25 - 18.40 28.75 - 14.46 22.39 - 7.20 13.97 - 2.60JNJ [] JOHNSON & JOHNSON DEC 4.92 3.94 3.54 4.85 4.45 8.26 4.91 8.37 8.97 7.04 95.99 - 70.30 72.74 - 61.71 68.05 - 57.50 66.20 - 56.86 65.41 - 46.25

LCI § LANNETT CO INC JUN 0.47 0.14 (0.01) 0.32 0.27 4.37 3.78 3.53 3.27 2.80 33.95 - 4.86 5.29 - 3.72 5.95 - 3.41 7.00 - 3.66 9.74 - 4.25LLY [] LILLY (ELI) & CO DEC 4.33 3.67 3.90 4.58 3.94 12.47 9.16 7.59 6.90 5.30 58.40 - 47.53 53.99 - 38.30 41.92 - 33.46 38.08 - 32.02 40.78 - 27.21MNK [] MALLINCKRODT PLC SEP 0.98 2.35 2.61 NA NA 5.22 NA NA NA NA 53.80 - 41.00 NA - NA NA - NA NA - NA NA - NA MDCO § MEDICINES CO DEC 0.27 0.96 2.39 1.98 (1.46) (3.13) 8.38 7.54 4.86 2.66 39.40 - 24.01 26.95 - 18.06 20.00 - 12.33 15.43 - 6.82 16.77 - 6.15MRK [] MERCK & CO DEC 1.49 2.03 2.04 0.28 5.67 4.67 3.90 2.65 0.82 (0.17) 50.42 - 40.83 48.00 - 36.91 37.90 - 29.47 41.56 - 30.70 38.42 - 20.05

MYL [] MYLAN INC DEC 1.63 1.54 1.25 0.69 0.31 (10.40) (6.07) (6.23) (5.73) (8.44) 44.73 - 27.38 28.50 - 20.21 25.46 - 15.49 23.63 - 16.55 19.21 - 9.65PRGO [] PERRIGO CO PLC JUN 4.71 4.22 3.69 2.45 1.53 (0.00) 3.23 3.41 (1.34) 4.76 157.47 - 98.79 120.78 - 90.18 104.70 - 62.31 68.38 - 37.46 40.94 - 18.54PFE [] PFIZER INC DEC 1.67 1.27 1.11 1.03 1.23 (0.88) (1.30) (2.21) (1.72) (2.53) 32.50 - 25.33 26.09 - 20.75 21.90 - 16.63 20.36 - 14.00 18.99 - 11.62PBH § PRESTIGE BRANDS HOLDINGS # MAR 1.41 1.29 0.74 0.58 0.63 (19.73) (20.79) (23.30) (11.56) (6.83) 36.69 - 19.48 21.92 - 11.07 13.62 - 8.15 12.42 - 6.99 10.59 - 3.92SGNT § SAGENT PHARMACEUTICALS INC DEC 1.01 (0.60) (0.97) (0.91) (1.14) 6.97 4.54 4.88 (6.17) (4.88) 25.68 - 13.39 23.48 - 12.62 29.23 - 13.50 NA - NA NA - NA

SLXP † SALIX PHARMACEUTICALS LTD DEC 2.31 1.09 1.49 (0.47) (0.88) 2.58 (1.02) (2.40) 4.34 3.11 90.73 - 41.52 55.99 - 37.52 48.33 - 25.64 49.05 - 23.53 25.86 - 6.14ZTS [] ZOETIS INC DEC 1.01 0.87 0.49 0.22 NA (1.69) NA NA NA NA 35.42 - 28.81 NA - NA NA - NA NA - NA NA - NA

HEALTH CARE DISTRIBUTORS‡ABC [] AMERISOURCEBERGEN CORP SEP 2.14 2.80 2.59 2.26 1.70 (5.13) (4.66) 0.01 0.39 (0.50) 71.38 - 43.01 44.02 - 35.48 43.47 - 33.91 34.72 - 25.66 26.58 - 13.75CAH [] CARDINA L HEALTH INC JUN 0.98 3.10 2.77 1.64 3.20 1.18 5.40 4.53 8.48 7.30 67.75 - 41.06 44.49 - 36.91 47.06 - 37.53 39.29 - 29.69 39.87 - 24.87MCK [] MCKESSON CORP # MAR 5.93 5.71 5.70 4.37 4.70 (30.05) (9.12) (1.69) 3.79 12.59 166.57 - 96.67 100.00 - 74.89 87.32 - 66.61 71.49 - 57.23 64.98 - 33.13MWIV § MWI VETERINA RY SUPPLY SEP 4.96 4.24 3.42 2.73 2.06 24.49 20.23 17.35 13.87 13.13 184.00 - 110.01 119.05 - 64.08 90.24 - 59.95 65.84 - 36.21 42.21 - 20.37OMI † OWENS & MINOR INC DEC 1.76 1.72 1.82 1.76 1.87 10.04 9.41 9.74 8.80 7.46 38.55 - 28.62 31.49 - 26.97 35.71 - 25.87 32.80 - 25.68 32.25 - 20.13

PDCO [] PATTERSON COMPANIES INC # APR 1.99 2.04 1.93 1.91 1.79 6.03 5.41 5.14 6.32 5.34 44.39 - 34.34 36.42 - 29.00 36.93 - 26.19 32.84 - 24.13 28.34 - 16.08PMC § PHARMERICA CORP DEC 0.64 0.78 0.80 0.64 1.39 1.49 1.78 3.38 3.01 4.57 22.85 - 11.84 15.54 - 9.03 16.45 - 10.43 20.95 - 6.88 21.69 - 13.97HSIC † SCHEIN (HENRY) INC DEC 5.02 4.44 4.08 3.62 3.47 8.52 6.22 5.80 6.27 10.65 116.07 - 81.59 82.91 - 64.74 74.98 - 58.50 62.63 - 50.96 56.92 - 33.55

OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONSAZN ASTRAZENECA PLC -ADR DEC 2.04 4.99 7.33 5.60 5.19 (2.23) (2.09) 1.86 0.84 (1.00) 59.67 - 44.46 49.27 - 39.72 52.54 - 40.89 53.53 - 40.30 47.61 - 29.96ELN ELAN CORP PLC -ADR DEC NA (0.61) (0.39) (0.56) (0.32) NA 0.89 1.14 (0.31) 0.43 18.20 - 9.37 15.27 - 9.64 14.02 - 5.73 8.24 - 4.25 9.13 - 4.61GSK GLAXOSMITHKLINE PLC -ADR DEC 3.73 3.02 3.25 0.99 3.52 (4.49) (5.87) (2.21) (1.93) (0.98) 54.00 - 43.68 47.69 - 41.68 45.85 - 36.28 43.13 - 32.15 43.47 - 27.15NVS NOVARTIS AG -ADR DEC 3.76 3.93 3.83 4.28 3.70 6.38 3.17 1.63 (0.75) 15.40 80.55 - 63.51 64.40 - 51.20 64.82 - 51.60 60.07 - 43.48 56.42 - 33.34TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 1.49 2.25 3.10 3.72 2.29 (3.41) (4.47) (7.26) 1.07 2.82 41.74 - 36.26 46.65 - 36.63 57.08 - 35.00 64.95 - 46.99 56.88 - 41.05

VRX VALEANT PHARMACEUTICALS INTL DEC (2.70) (0.38) 0.52 (1.06) 1.11 (52.49) (35.32) (23.66) (14.76) (0.51) 118.25 - 59.34 61.11 - 42.47 57.24 - 28.06 30.80 - 13.64 15.50 - 9.26

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. J-This amount includes intangibles that cannot be identif ied.

The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poor’s.

In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poor’s.

The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.


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Notice to all Non US Residents: S&P Capital IQ’s Industry Surveys may be distributed in certain localities, countries and/or jurisdictions (“Territories”) by independent third parties or independent intermediaries and/or distributors (the “Intermediaries” or “Distributors”). Intermediaries are not acting as agents or representatives of S&P Capital IQ. In Territories where an Intermediary distributes S&P Capital IQ’s Industry Surveys, the Intermediary, and not S&P Capital IQ, is solely responsible for complying with all applicable regulations, laws, rules, circulars, codes and guidelines established by local and/or regional regulatory authorities, including laws in connection with the distribution of third-party investment research, licensing requirements, supervisory and record keeping obligations that the Intermediary may have under the applicable laws and regulations of the territories where it distributes the Industry Surveys. 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