Biotech Primer 090220

Healthcare: Biotechnology
" The Goldman Sachs Group, Inc.

March 14, 2006
Coverage view: Neutral
Industry primer
Biotechnology 101: We have summarized the information

crucial to understanding biotechnology companies, and provided
an overview of six major diseases and their respective markets.
See the Disclosure section of

this document for important
disclosures about transactions
in which The Goldman Sachs
Group, Inc. or an affiliate is
acting as financial advisor.
May-Kin Ho, Ph.D.
Goldman, Sachs & Co.

maykin.ho@gs.com
New York: 1-212-902-6723
Meg Malloy, CFA

meg.malloy@gs.com
New York: 1-212-902-7839
David Clayton, M.D.

david.clayton@gs.com
New York: 212-357-5742
Jeff Comisarow, M.D.

jeff.comisarow@gs.com
New York: 1-212-902-0871
Whats inside . . .
The basics
History, industry statistics, segmentation, technologies, key products, FDA approval process,
evaluation of clinical trials and reimbursement.
The valuation metrics
P/E, PEG, intrinsic value, discounted earnings, price to cash, and sales multiples.
The diseases
Markets, treatment and new drugs for six diseases with multibillion potential each: AIDS,
age-related macular degeneration, cancer, diabetes, hepatitis C, and rheumatoid arthritis.
Amritha Kasturirangan

amritha.kasturirangan@gs.com
New York: 1-212-902-5306
Charles Nguyen, CFA

charles.nguyen@gs.com
New York: 1-212-357-4164
Analysts employed by non-US
affiliates are not required to take
the NASD/NYSE analyst exam.
Global Investment Research
More resources
Terms for diseases, selected medical conferences and list of useful websites.
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Healthcare: Biotechnology Industry primer
United States
Table of contents
1 Industry profile
27 Acquired Immune Deficiency Syndrome (AIDS)
43 Age-related macular degeneration
55 Cancer: blood cancers non-Hodgkins lymphoma, multiple myeloma and leukemia
59
Non-Hodgkins lymphoma
69
Multiple myeloma
81
Leukemia
91 Cancer: solid tumors lung, colon and breast cancers

101
Lung cancer
107
Colorectal cancer
115
Breast cancer
125 Diabetes
145 Hepatitis C
159 Rheumatoid arthritis
177 Regional research team
183 Disclosures
Goldman Sachs Global Investment Research - March 14, 2006
United States
Industry profile
United States
United States
Industry profile
The biotechnology industry uses biologic processes to make products, such as
drugs, diagnostic tests and vaccines. Other applications of biotechnology include
crop improvement, animal health, industrial processing and environmental
protection.
The industry is relatively young, with the founding of the first company in the United
States in 1971 (see Exhibit 1). Since then, the industry has grown rapidly. In 2004, there
were about 4,400 biotechnology companies worldwide, about 640 (15%) of which were
publicly traded. Among the 640 public biotechnology companies, 64% were in North
America, 15% in Europe and 20% in Asia (see Exhibits 2-3). Over 70% of the companies
are involved with human health (see Exhibit 4). These companies will be the focus of this
report.
Exhibit 1:
Selected historical events for the biotechnology industry
Year
Milestone
1953
Double helical structure of DNA published (James Watson & Francis Crick)
1971
First biotech company founded (Cetus)

First complete synthesis of a gene
1973
DNA cloning techniques perfected for producing recombinant DNA (Stanley Cohen & Herbert Boyer)
1975
First monoclonal antibody produced
1978
First recombinant human insulin produced
1980
First biotech IPO (Genentech)
1982
FDA approved first biotech human insulin discovered by Genentech and sold by Eli Lilly
1983
Amgen IPO
Polymerase chain reaction (PCR) technique conceived
1986
FDA approved first recombinant vaccine for humans: hepatitis B (Chiron)

FDA approved first therapeutic monoclonal antibody (Orthoclone from Johnson & Johnson)
First field tests of transgenic plants (tobacco)
1988
First U.S. patent for a genetically altered animal, a transgenic mouse, awarded
1990
Human Genome Project launched
1992
Sales of Amgen exceeded $1B
1997
First animal cloned from an adult cell: a sheep named Dolly in Scotland.
2000
Rough draft of the human genome sequence announced
Source: Biotechnology Industry Organization.
Exhibit 2:
United States
Biotechnology industry statistics, 2004

Global
N. America
Europe
Asia
Pfizer
Revenues, $MM
54,612
44,831
7,729
2,052
50,816
R&D expense, $MM
20,887
16,483
4,151
253
7,638
Net income (loss), $MM
(5,303)
(4,725)
(94)
14,751
Number of employees
183,820
144,770
25,640
13,410
115,000
641
412
98
131
3,775
1,504
1,717
554
No. of public companies

No. of private companies
(484)
Source: Ernst & Young biotechnology reports, Goldman Sachs Research.
Exhibit 3: The US biotechnology industry at a glance

2005
1995
350
260
1,250
1,051
494
41
Revenue $B
50
13
Sales $B
37
9.3
203
46
1,035
400
191
108
Public companies
Private companies
Market capitalization $B
Products approved (cumulative)

Products in clinical studies
Employees (thousands)
Source: Biotechnology Industry Organization, Ernst & Young biotechnology reports, Goldman Sachs
Research.
United States
Exhibit 4: Biotechnology industry segmentation by product focus
Human health,
73%
Other, 11%
Agriculture/
Animal health,
9%
Industrial/
Environment,
6%
Source: Goldman Sachs Research.
The market capitalization of the US biotechnology industry approached $500 billion in

2005, up from $45 billion in 1994 (see Exhibit 5). Most of the industry is composed of
small, unprofitable companies, with only 4% of the companies having market
capitalization above $5 billion and 20% above $1 billion (see Exhibit 6).
Exhibit 5: Market capitalization of the biotechnology industry in the United States
1994-2005
Market capitalization in $B
$600
$494
$500
$400
$353
$300
$311
$225
$200
$100
$331
$206
$138
$45 $41 $52
$83 $93
$0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Source: Biotechnology Industry Organization website, Goldman Sachs Research.
United States
Exhibit 6: Biotechnology companies in the United States

by market capitalization
$0.5-1.0B, 12%
$1 - 5B, 16%
< $0.5B, 68%

> $5B, 4%
In the last decade, the US biotechnology industry achieved over 15% CAGR each in
revenues and sales. In 2004, revenues were $46 billion and sales approximated $33
billion (see Exhibit 7). The top selling products are summarized in Exhibit 8, with the
sales on products for anemia reaching $7.5 billion.
Exhibit 7:
Solid growth in biotechnology revenues
CAGR
1994-2004
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Sales $B
$7.7
$9.3
$10.8
$13.0
$14.5
$16.1
$19.3
$21.4
$24.3
$28.4
$33.3
15.8%
Revenues $B
11.2
12.7
14.6
17.4
20.2
22.3
26.7
29.6
29.6
39.2
46.0
15.2%
7.7
7.9
10.6
10.7
14.2
15.7
20.5
17.9
19.8
11.0%
Net loss $B
3.6
4.1
4.6
4.5
4.1
4.4
5.6
4.6
9.4
5.4
6.4
5.9%
No. of public companies
265
260
294
317
316
300
339
342
318
314
330
2.2%
1,311
1,308
1,287
1,274
1,311
1,273
1,379
1,457
1,466
1,473
1,444
1.0%
103
108
118
141
155
162
174
191
195
198
188
6.2%
63%
61%
54%
52%
52%
48%
53%
53%
69%
46%
43%
75
86
92
92
94
99
111
112
125
143
178
R&D expense $B
No. of companies
No. of employees (thousands)
R&D as % of Revenues
Revenue per employee ($ thousands)
9.0%
Source: Biotechnology Industry Organization website, Goldman Sachs Research.
United States
Exhibit 8: Sales of top selling biotechnology products in 2005
Product
Epogen/Procrit/Eprex
Neupogen/Neulasta
Aranesp
Enbrel
Remicade
Rituxan
NeoRecormon/Epogin
Avonex
Humira
Viread/Emtriva/Truvada
Pegasys/Copegus
Rebif
Avastin
Synagis
Betaferon
Ceredase/Cerezyme
Herceptin
Company
Amgen/JNJ
Amgen
Amgen
Amgen/Wyeth
JNJ
Genentech/Roche/Chugai *
Roche/Chugai
Biogen IDEC
Abbott
Gilead
Roche
Serono
MedImmune
Schering AG
Genzyme
WW Sales ($MM)
5,779
3,476
3,273
2,573
2,535
1,989
1,714
1,543
1,400
1,394
1,377
1,271
1,182
1,171
1,040
932
764
* Sold by Roche the EU, Genentech in the United States, and Chugai in Japan.
Source: Goldman Sachs Research estimates.
The sales of the industry have been driven by a growing pipeline. More than 200 products
have been approved for commercialization in the United States, up from 33 in 1994 (see
Exhibit 9). In 2005, the number of clinical trials exceeded 1,000, four times the number
in 1994 (see Exhibit 10). However, the risk of product development remains high, with
only about a 50-60% success rate in Phase 3 studies over the last several years, and 6070% positive FDA actions on applications for new products or indications.
United States
Exhibit 9: More biotechnology products approved by the FDA
203
Cumulative Number of Approved Products
225
193
200
176
153
175
140
126
150
113
100
125
83
100
62
75
46
33
50
24
25
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Exhibit 10: Biotechnology pipeline continues to grow
Number of products in clinical development
1,006
1000
872
915
1,035
960
811
750
800
660
600
505
400
400
250
200
130
153
165
180
192
203
190
197
208
217
74
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Phase III or II/III (late stage)
Biotech drugs versus pharmaceuticals

Traditional pharmaceuticals are relatively small and simple molecules made by
chemical processes. They are usually taken orally. However, biotechnology drugs are
generally large proteins. Because proteins are digested in the stomach, biotech drugs are
usually not effective when taken orally. They are given by injection, inhalation or other
United States
routes (see Exhibit 11). Therefore, most biotech drugs are used for late-stage patients.
Manufacturing of traditional pharmaceuticals involves relatively well defined chemical
steps. For manufacturing of biotechnology drugs, DNA, cells, enzymes, and sometimes
animals are involved. These manufacturing processes are more difficult to control than
chemical processes.
Exhibit 11: Differences between pharmaceuticals and biotech drugs
Pharmaceutical
Biotechnology
Manufacturing
Chemical processes
Cells, enzymes or other biological mechanisms
Size of molecules
Small
Large
Product composition
Chemical
Protein, DNA, RNA
Route of administration
Oral
Injected (muscles, veins, or under the skin)

Inhaled (intranasal or pulmonary)
With evolution of the industry, some biotechnology companies have developed expertise
in both chemical and biological drugs. Many pharmaceutical companies have also
increased their focus on biotech drugs. Therefore, there is often considerable overlap
between pharmaceutical and biotechnology companies with respect to their technologies
and product offerings.
United States
Valuation
Given the early commercial stage of most biotechnology companies, traditional
valuation metrics can be difficult to apply. The following are some metrics to
consider for valuation.
P/E and PEG

For large capitalization, profitable biotechnology companies, we usually use price-toearnings (P/E) multiples and P/E versus growth (PEG) ratios to valuate the companies.
The median P/E in the last 12 years was 32X and PEG was 1.4. The median relative P/E
was 1.8 (see Exhibits 12 and 13).
Exhibit 12: Biotechnology industry P/E & relative P/E
80
3.5
Nasdaq rally,
Genomics fervor
Median relative PE=1.8

Median PE= 32
70
3.0
2.5
50
2.0
40
1.5
Relative PE*
Price earnings (PE) multiple*
60
30
Concern about
patent reform
1.0
20
Series of product
failures
Clinton healthcare
reform
10
Sept 11,
2001
0.5
PE
6/05
10/05
2/05
6/04
10/04
2/04
6/03
10/03
2/03
6/02
10/02
2/02
6/01
10/01
2/01
6/00
10/00
2/00
6/99
10/99
2/99
6/98
10/98
2/98
6/97
10/97
2/97
6/96
10/96
2/96
6/95
10/95
2/95
6/94
10/94
2/94
6/93
10/93
0.0
2/93
PE Relative to S&P 500
*based on earnings excluding employee stock option expenses
Source: FactSet, Goldman Sachs Research.
10
United States
Exhibit 13: Biotechnology industry PEG ratios

3.0
Median PEG=1.4
Price-earning to growth ratio*
2.5
2.0
1.5
1.0
0.5
PEG
6/05
10/05
2/05
6/04
10/04
2/04
6/03
10/03
2/03
6/02
10/02
2/02
6/01
10/01
2/01
6/00
10/00
2/00
6/99
10/99
2/99
6/98
10/98
2/98
6/97
10/97
2/97
6/96
10/96
2/96
6/95
10/95
2/95
6/94
10/94
2/94
6/93
10/93
2/93
0.0
Median PEG
*based on earnings excluding employee stock option expenses
Source: FactSet, Goldman Sachs Research.
Intrinsic value
For each company, we also calculate its intrinsic value, which we have defined as net
cash plus the estimated net present value of marketed products based on 10-year
projections. We believe the intrinsic value suggests a trough valuation for the stock. The
difference between the current share price and intrinsic value is the implied pipeline
value.
Discounted earnings
For small, unprofitable companies, which constitute most of the industry, we use the
following approach:
1. Project earnings from products in clinical trials;
2. Estimate three-year earnings growth rates for operating income and earnings after
product launch;
3. Calculate a price/earning multiple based on average growth rate (40% cap); and
4. Establish a future stock price after launch and discount back at 30%-40% to yield a
current stock price.

We note that it is difficult to predict the success of clinical trials and the sales potential of
products in development. Therefore, the imputed current stock price should serve as a
reality check rather than precise prediction of share price because biotech stocks are
highly sensitive to investor sentiment.
11
United States
Price to cash
In the absence of reliable earnings projections, some investors also use the price to cash
ratio as a screen for valuation. We have observed that small companies with strong
fundamentals have historically not traded below 1.5X price/cash for extended time
periods.
Multiple of sales
There is a wide range of sales multiples in the industry (3X-10X). We sometimes use 5X
sales as a back of the envelope assessment of valuation.
Qualitative evaluations
For early stage companies, qualitative assessment of key factors can be helpful in
evaluating the company fundamentals. Some of the key factors we use are listed in
Exhibit 14.
Exhibit 14: Qualitative factors for assessment of biotechnology companies
1. Technologies
Quality
Broad applications
Validation by corporate partners
4. Management
Track record
Governance
Compensation
2. Market
5. Financials
Market potential
Cash position versus spending rate
Competition
Efficiency of spending
Ease of market entry by small company
Track record in raising capital
Retained rights
Other sources of support,
e.g. corporate partners
3. Development
Predictability of preclinical work
Complexity of clinical trials
Aggressive development strategies
Ease of manufacturing
Strength and depth of management
and scientific team
12
United States
Therapies based on biotechnology

The biotechnology industry began in the 18th century with blood transfusions, the earliest
form of cell-based therapy. In 1796, Edward Jenner created the first vaccine against
smallpox by injecting people with the less toxic cowpox virus to boost the immune
system. Cow-derived insulin, the first protein-based therapy, was used to treat diabetes
beginning in the 1920s.
The current era of biotechnology began with the development of technologies that
allowed recombination and cloning of DNA in the 1970s. We highlight some of the
major types of therapeutics based on biotechnology:
Replacement proteins
The first biotechnology successes were replacement proteins to treat deficiencies. In
1978, Genentech developed recombinant human insulin by inserting the gene for
human insulin into bacteria, which then served as miniature factories for insulin
production. Other examples of protein replacement therapies include Genentechs human
growth hormone, Amgens Epogen for anemia, and Genzymes Cerezyme for Gauchers
disease (see Exhibit 15).
Exhibit 15: Selected replacement proteins for therapy
Product
Company
Launch year Indication
Human insulin
Genentech/Lilly
1982
Diabetes
Human Growth Hormone
Genentech/Lilly
1985/86
Short stature
Epogen
Amgen
1989
Anemia
Neupogen
Amgen
1990
Neutropenia
Adagen
Enzon
1990
Severe combined immunodeficiency
Factor VIII
Genetics Institute*
1991
Hemophilia
*acquired by Wyeth
Source: Company reports.
Therapeutic proteins
In contrast to earlier treatments that replaced missing or flawed proteins, therapeutic
doses of naturally-occurring proteins have also been used to treat diseases (see Exhibit
16). For example, in 1987, Genentech launched recombinant tissue plasminogen
activator (tPA), or Activase, to treat heart attacks and stroke. Activase is an enzyme that
dissolves clots in the artery, restoring blood flow in blocked vessels.
13
United States
Exhibit 16: Selected therapeutic proteins

Product
Protein
Company
Launch year
Indication
IntronA
Interferon alpha
Biogen IDEC/Schering-Plough
1986
Leukemia
Activase
tPA
Genentech
1987
Cardiovascular disease
Proleukin
Interleukin-2
Chiron
1992
Kidney cancer
Pulmozyme
DNase
Genentech
1993
Cystic fibrosis
Betaseron
Interferon beta
Chiron
1993
Multiple sclerosis
Avonex
Interferon beta
Biogen IDEC
1996
Multiple sclerosis
Gonal-F
Follicular stimulating hormone
Serono
1997
Infertility
Enbrel
TNF receptor fusion protein
Amgen*
1998
Rheumatoid arthritis
*via acquisition of Immunex
Monoclonal antibodies
Antibodies are special proteins of the immune system that counteract foreign substances
called antigens. They are produced by a type of white blood cell called B lymphocytes. In
the early 1970s, technologies were developed to grow clones of B lymphocytes, thus
creating many cells that produce large numbers of the same antibody. An antibody from a
single clone of cells is termed a monoclonal antibody (MAb).
Each antibody is a Y-shaped protein made up of two regions. The variable region
(short arms of the Y) recognizes antigens, while the constant region (the long arm)
affects the way the antibody summons other immune components to respond (see
Exhibit 17).
The first monoclonal antibodies were derived from mouse lymphocytes. One significant
disadvantage of mouse or other non-human antibodies is that the immune system of the
patient might recognize them as foreign elements. The patient can produce a human
antibody against the mouse antibody, potentially neutralizing the benefit or causing
severe reactions.
As a result of the sub-optimal side effect profile of mouse antibodies, there was a shift to
chimeric antibodies generated from two species. Typically, a portion of the variable
region is derived from mice or rats, while some of the variable region and the entire
constant region are produced with human antibody components.
Over the last 10 years, there has been a shift to humanized antibodies with 90-100%
human composition. All but one segment of the variable region of humanized antibodies
are human. Recently, Abgenix and Medarex have developed technology platforms to
create fully human antibodies. The technology involves transgenic mice in which the
genes for mouse antibodies are replaced by the genes of human antibodies.
14
United States
Exhibit 17: The evolution of monoclonal antibody technology

Murine
Fully Human
Humanized
Chimeric
CDR1
CDR2
CDR3
Mouse
Human
Human
Mouse
Mouse
Human
Monoclonal antibodies can be used to supplement the natural immune response, block
receptors, bind proteins, or target specific cells for destruction. For example, Genentechs
Rituxan is a monoclonal antibody that targets CD20, a protein on the surface of
cancerous B cells, and marks them for destruction by the immune system. MedImmunes
Synagis is a monoclonal antibody for counteracting the respiratory syncytial virus that
can cause severe illness in premature infants. See Exhibit 18.
Exhibit 18: Selected monoclonal antibodies for therapy
Product
Company
Launch year
Indication
ReoPro
Johnson & Johnson*
1995
Cardiovascular disease
Rituxan
Genentech
1997
Non-Hodgkin's lymphoma
Remicade
Johnson & Johnson*
1998
Rheumatoid arthrits, Crohn's disease
Herceptin
Genentech
1998
Breast cancer
Synagis
MedImmune
1998
Respiratory syncytial virus
Humira
Abbott
2002
Avastin
Genentech
2004
Colorectal cancer
Erbitux
ImClone/Bristol-Myers Squibb
2004
Colorectal cancer
*via acquisition of Centocor
15
United States
The process of drug discovery, development and approval

Drug development is a long and risky process (see Exhibit 19). It can take over 10 years
and $800 million to develop a drug. Each drug has to be optimized, tested in animals and
then in humans before approved for marketing. Of 1,000 compounds that enter preclinical
testing, one might advance to clinical trials (human testing).
Exhibit 19: The drug approval process in the United States
Stage
Purpose
Time and scope
Preclinical Testing
Extensive laboratory and animal testing to

determine biological activity and safety.
2-3 years
Investigational New Drug

(IND) Application
IND describes results of preclinical testing.

Must be filed with FDA before initiating
clinical studies. IND becomes effective after
a 30-day waiting period at CBER and 60
days at CDER.
Phase I Clinical Studies
Determines a drug's pharmaceutical

actions, safe dosage range, how it is
processed by the body, and duration of
action.
6-12 months, 10-100

individuals, usually normal
volunteers
Phase II Clinical Studies
Controlled testing to determine optimal

dosing, effectiveness and broader safety.
1-2 years, 100-500 patients
Phase III Clinical Studies
Extensive testing to confirm effectiveness

and safety.
2-4 years, 500-5,000

patients
New Drug Application

(NDA) or Biologic License
Application (BLA)
Extensive documentation of drug structure,

preclinical and clinical data, formulation,
manufacturing details, and proposed
indications. The FDA has 60 days to accept
an application for review.
0.5-2 years for review
CBER: Center for Biological Evaluation and Research, CDER: Center for Drug Evaluation and Research.
Discovery and preclinical testing

The initial step in drug discovery is typically analyzing diseases and finding the
molecular targets or genes involved. Discovery can take two to ten years. Once a
target is identified, drug candidates are tested for activity against that target. Thousands
of candidates may be tested before finding a lead candidate. Once a lead candidate is
selected, it may be chemically or biologically altered to increase the potency and reduce
side effects.
An optimized drug candidate is moved to preclinical testing in the laboratory and
animals. These experiments evaluate the pharmacology (how the drug behaves in the
body), toxicity, effectiveness, dosage, and method of action. Preclinical testing of a

compound takes about two to three years.
16
United States
Phases of human clinical trials

Food and Drug Administration (FDA) approval must be obtained before human
testing can begin in the United States. The application for initiating clinical trials is
called an Investigational New Drug application (IND). An application becomes effective
if the FDA does not disapprove it within 30 days. The IND must also be reviewed and
approved by the Institutional Review Board (IRB) of the clinic/hospital where the human
studies will be conducted. The IRB is a committee which evaluates the risks and benefits
of clinical trials and advocates for the safety of patients and adherence to ethical
standards. The IRB is local to each institution.
In Phase I trials, the safety of the drug candidate is assessed in a small number
of healthy human volunteers, usually between about 20 and 100 people. The
studies determine how a drug is distributed, metabolized and excreted, and the
duration of its action. The drugs efficacy is not usually tested at this stage. Phase I
trials last for approximately 6 to 12 months and may be combined with Phase II trials
to accelerate the development process.
In Phase II trials, safety and efficacy are evaluated in a small number of

patients with the disease. These studies evaluate the safety, dosing regimen, and
preliminary efficacy. Phase II trials can take one to two years to complete and
include approximately 100-300 patients.
Phase III trials evaluate safety and efficacy in a large number of patients. They
usually involve 500 to over 5,000 patients in clinics and hospitals. The purpose is to
determine the safety and effectiveness of the drug when compared with a placebo
and/or another product. Phase III clinical trials take approximately two to three years
to complete and can cost $20 to $200 million.
Phase IV trials are undertaken after the drug has been launched in the market.
These studies may answer questions posed by the FDA, usually to evaluate long-term
effects. More commonly, they are used to position the product in the marketplace
and facilitate acceptance of the new drug among the medical community.
New Drug Applications (NDAs)

Prior to 2003, if a biological drug candidate was proven to be effective in clinical studies,
a Biological License Application (BLA) containing the preclinical data, clinical results,
and manufacturing and quality control procedures could be submitted to the Center for
Biological Evaluation and Research (CBER) at the FDA for review. For traditional
pharmaceuticals and some biotechnology products that are chemically similar to
conventional pharmaceuticals, reviews were performed by a different FDA division, the
Center for Drug Evaluation and Research (CDER), until 2003. For CDER, the analogous
application for commercialization of a new drug is called a New Drug Application
(NDA).
In 2003, the FDA shifted the reviews of most therapeutic biologics (biologics except for
vaccines and blood products) from CBER to CDER. The FDA has 60 days to accept an
NDA or BLA for filing. To obtain a new application on a product that has been
commercialized, a supplemental application (sBLA or sNDA) has to be submitted to the
FDA for approval.
17
United States
Final approval for commercialization depends upon satisfactory review of the preclinical,
clinical, and manufacturing issues by the FDA. Most of the time, the FDA will ask an
Advisory Committee (AC) comprised of independent experts to review the clinical
results before making a decision on approval. However, the FDA does not have to follow
the recommendation of the AC.
Accelerated review for high unmet need

Drugs that treat life-threatening diseases and demonstrate the potential to address
an unmet medical need are eligible for fast-track or accelerated review status.
Fast-track status allows companies to submit a rolling application for approval. The FDA
then expedites the review of these products with the target of completing review in six
months as opposed to 10 months for routine products.
The timeline for review by the FDA was set by the Prescription Drug User Fee Act
(PDUFA), enacted in 1992 and renewed in 1997 and 2002. Drug manufacturers often cite
the PDUFA date as the deadline for FDA review. The FDA usually tries to achieve a
decision by this date, although decisions may be delayed due to issues internal to the
FDA or problems with the application.
Orphan drug incentives for rare diseases

Orphan drug status provides exclusivity for drugs developed to treat rare
diseases. The FDA provides incentives for companies to develop drug to treat relatively
rare diseases. Drugs developed to treat diseases that affect fewer than 200,000 people are
eligible for orphan-drug status, which provides an additional seven years of patent
exclusivity for the product. Similar drugs are only allowed to enter the market if they
better efficacy or fewer side effects than the original orphan drug.
18
United States
Evaluating clinical trials

Trial design
Randomized, double-blind studies are considered the gold-standard design for
evaluating the effectiveness and side effects of new therapies. Patients are randomly
assigned to receive the drug candidate or a control treatment. Randomization minimizes
differences between groups. In a double-blind study, neither the patients nor the
investigators know who is receiving the drug candidate versus the control.
Choice of control treatment

Comparator arms are important to isolate the effect of the drug being studied. The
control subjects can either receive a placebo (an inert substance that looks like the drug
candidate) or currently available treatment. Head-to-head comparisons against the
best currently available treatment are informative in guiding therapy because they
allow for direct comparisons of efficacy and side effects.
Patient selection
The inclusion/exclusion criteria outline the reasons why individuals may or may
not qualify for participation in the trial. Common criteria include age, prior treatment,
family history, stage of disease, and other medications. These criteria determine the
extent to which the trial results are generalizable to the population at large. In addition,
trials should be conducted at multiple centers due to the potential variations in patient
care and selection.
Endpoints
Endpoints are the results against which the drug candidate and the control are
compared. Ideal end points are those that can be measured easily, objectively, and
reproducibly. They should also be clinically relevant. Because the goals of therapy vary
by disease, endpoints are specific and vary for different diseases. Overall survival is
generally considered to be the most meaningful endpoint in life-threatening disorders.
However, large and long clinical studies may be required to study survival. In cases
where clinical benefit is hard to define or quantify, surrogate endpoints may be used. For
example, the amount of HIV in the blood is often used as a surrogate marker for disease
progression in AIDS.
Intent-to-treat analysis
Over the course of the trial, patients may switch between treatment groups or drop out of
the study altogether. In a per-protocol analysis, subjects are analyzed according to the
treatment they actually received, regardless of their initial assignment group. This type
of analysis disrupts randomization. People who switch groups or drop out of a study are
likely to do so for non-random reasons. Therefore, the subjects who remain in the original
treatment arms are also no longer random. In contrast, in an intent-to-treat analysis,
subjects are analyzed based on the group to which they were originally assigned,
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United States
regardless of whether they ultimately remained in that group. Intent-to-treat analyses are
considered the most rigorous.
Statistical significance
Statistical significance is the probability that a difference between groups in the
trial occurred as a result of the intervention rather than by chance alone. Analyses of
clinical trials must account for chance or the variability of data around the true value.
When chance cannot be eliminated, statistical analysis, such as p value, can help
determine the robustness of the results. The p value is defined as the probability that the
observed results could have arisen by chance alone, and that this difference between
groups does not in fact reflect any true difference between therapies. The FDA requires
that criteria for defining statistical significance and the methodologies for analyzing the
results be specified before the clinical study begins. Statistical significance is generally
defined as p <0.05, meaning that there is less than a 5% chance that the observed results
are due to chance rather than due to the treatment.
Power
Power is the probability of detecting a difference between the drug candidate and
the control when a difference actually exists. Power depends on the sample size and
magnitude of the difference to be detected between treatment arms. Larger sample sizes
are required to detect small effects, such as rare side effects. The minimally accepted
power is generally 80%, meaning that the trial has enrolled enough people to be 80%
likely to detect a difference between the groups.
95% confidence interval

Standard deviation is a measure of the extent of variability around the mean due to
chance. The 95% confidence interval is defined as the mean plus or minus 2
standard deviations, which defines a bell-shaped frequency distribution. This
means that if the trial was repeated an infinite number of times, the mean of the study
would fall within this range 95% of the time. However, not every value within the
interval is equally likely to be the true value. The best estimate is the mean and the
likelihood gets lower the farther away from the mean. Because we do not know the true
value, the narrower the confidence interval, the better. Wide confidence intervals may
imply that the sample size is not large enough.
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United States
Reimbursement
Partly due to the high development risk and complex manufacturing cost, most
biotechnology products are relatively expensive. Many biotech drugs cost $10,000
per year; some may cost over $100,000 annually. Because of the high costs, most
patients rely on private or government-sponsored insurance plans to help defray
drug costs. The following is a summary of Medicare, Medicaid, and private
insurance plans.
Medicare
Medicare is an insurance plan sponsored by the federal government and supported by
payroll and income taxes, and beneficiary premiums. The plan covers people over 65 or
who have become disabled earlier in life, such as dialysis patients. Medicare is the largest
payer of medical services and products in the country. It is administered by the Center for
Medicare and Medicaid Services (CMS). Different parts of Medicare cover different
services.
Part A
Part A covers services that are administered by hospitals and other inpatient and postacute care. Most patients do not pay any premium for Part A coverage because it is paid
out of payroll taxes.
Part B
Part B covers outpatient services, mainly those delivered in a physicians office or
outpatient clinic. Under Part B, patients pay 20% of all costs incurred, and the
government covers the other 80%. Patients generally pay a monthly premium for
coverage under Part B. Medicare usually reimburses at a lower rate than private insurers,
although Medicares reimbursement levels may be used as a benchmark by insurers.
Medications that are injected or infused in a physicians office, such as Remicade for
rheumatoid arthritis, are covered under Medicare Part B. However, medicines injected by
the patients themselves at home, such as Enbrel for rheumatoid arthritis, were not
covered prior to 2006. With the Medicare drug benefit implemented January 2006, self
injected medicines are covered.
Under Part B, the physician purchases the medication from a drug distributor, and then
administers it to the patient. The office bills Medicare for the drug at 106% average sales
price (ASP), as well as a separate fee for the administration of the drug. If Medicare pays
more for the drug than the physician paid to acquire it, the physician keeps the difference
as profit. Reimbursement under this mechanism gives some physicians the incentive to
administer drugs in the office, and possibly one drug more than another. High volume
users may profit by purchasing the drug at a lower price from the manufacturer than
reimbursed by the insurance plan (Exhibit 20).
Medicare sets the ASP quarterly based on data submitted by the manufacturers. It is the
weighted average of all non-federal sales of a drug, net of all rebates and discounts. Use
of the ASP model creates some issues for physicians and drug manufacturers: 1)
21
United States
discounting to the physician will indirectly reduce Medicare reimbursement because

reimbursement is based on the ASP, 2) since the average selling price is an average, lowvolume physicians might be reimbursed at or below the price they paid for the drug, and
3) price increases will likely be more moderate but more frequent. Otherwise, the lag in
ASP adjustment can lead to a higher purchase price while reimbursement is still based on
the old, but lower, price.
Exhibit 20: Illustrative example of ASP reimbursement
Dr. Smith, a solo practitioner, purchases AnyAb for $1,200 from a distributor. Based
on data submitted to CMS by LS Biotech, the ASP for AnyAb is determined to be
$1,100. (Dr. Smith was paying a higher price than many larger group practices.)
Beginning in 2005, CMS reimburses AnyAb at 106% of ASP, or $1,166. Therefore,
Dr. Smith loses $34 per vial administered.
Across the street, a major oncology group has negotiated discounts based on high
volume. The group pays only $1,000 per vial of AnyAb, and generates a profit of
$166.
Competitive Acquisition Program

In response to the decrease in reimbursement, physicians may refer patients to other
centers, such as hospitals, for administration of drugs. Partly to ensure that low-volume
physicians can continue to administer drugs without financial loss, CMS plans to
implement the competitive acquisition program (CAP) in July.
The CAP gives physicians two choices for administering Part B medications: 1) the
current 106% ASP system physician purchases the medication from the manufacturer
and is reimbursed at 106% of ASP, or 2) the physician can write a prescription for the
medication and obtain the drug from a certified vendor, which handles reimbursement.
The physician is only administering the medication and is not involved in any financial
transaction. The participating CAP medication vendor would purchase the medication,
collect reimbursement (profiting from the spread) and then provide the medication at no
cost to the physician for administration. The CAP will not apply to drugs that are part of
the new Medicare Part D benefit (see below) or drugs that are self-administered.
Part C: Medicare Advantage plans

Medicare Part C gives patients the choice to forgo their coverage under Medicare Part B
and enroll in an health maintenance organization (HMO)-type plan provided by a
contracted insurance company. Medicare Advantage plans usually offer a prescription
drug plan, but may restrict access to certain physicians in the plan. This is in contrast to
Medicare Part B plans, which do not offer prescription coverage, but do offer unrestricted
access to physicians.
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United States
Part D: New drug benefit for oral drugs

Beginning January 2006, Medicare Part D will cover oral prescription drugs. This is an
expansion to the service provided under Medicare Part B. Under Part D, the government
has contracted with private insurers nationwide to develop prescription drug plans for
seniors. The government will reimburse the private insurers under a specific schedule for
each drug. NO the government pays a monthly fee to plans to provide coverage, based
on the average drug spending of a Medicare beneficiary. The insurers are free to offer
customized plans as long as the scope of coverage is equivalent or better to what the
government reimburses.
The new drug benefit under Part D should increase volume for the pharmaceutical and
biotechnology industries. However, impact on pricing long term is unclear. CMS expects
to enroll between 28 and 30 million patients in 2006. These patients should have
expanded access to drug therapies not covered before.
Under Part D, a patient pays a monthly premium for enrollment in the plan. The patient
also pays all of the first $250 of drug expenses out of pocket. The patient then pays 25%
of all costs up to $2,250 (see Exhibit 21). The patient then pays until a total of $3,600 in
out-of-pocket expenses is reached. This zone where the patient pays 100% of costs from
$2,250 to $5,100 total spending has been commonly termed the donut hole. After this
point, the drug plan pays 95% of all future drug costs, of which the government pays
80%. Federal reinsurance of such catastrophic costs could reduce private plans
incentives to control drug spending. The government has established more generous
programs for patients who meet income eligibility requirements.
Exhibit 21: Reimbursement of prescription drugs under Medicare Part D
Total Expenses
$0 - $250
Payment
Patient
Medicare
100%
0%
$250 - $2,250
25%
$2,250 - $5,100
100%
0%
5%
95%
>$5,100
75%
Source: Centers for Medicare and Medicaid Services.
Medicaid
Medicaid is a state-administered program for low-income individuals and families. The
federal government sets broad guidelines regarding eligibility, benefits and
administration, and reimburses states for roughly 57% of the programs spending. If a
patient qualifies for Medicaid, the government will reimburse physicians and hospitals
directly for care. The patient pays little or no out of pocket expense. Medicaid generally
accounts for <20% of revenue for biotech companies, partly due to the low
reimbursement levels and the absolute number of patients enrolled.
Medicaid reimbursement policies for drugs vary by state. For products purchased in a
pharmacy, reimbursement is typically set at a percentage of wholesale acquisition cost
23
United States
(WAC) or average wholesale price (AWP). Physician administered products often fall
under service payment schedules, which are usually based on Medicare payment rates.
Medicaid laws require that manufacturers pay a rebate of the greater of 15.1% or the
difference between the best price available in the private market and the Average
Manufacturer Price (AMP).
Private insurers
Patients may have one of two primary forms of insurance: an HMO or preferred provider
organization (PPO). The HMO plans are generally more restrictive and cost less then
PPO plans.
With respect to drug reimbursement, insurance plans generally divide their coverage into
tiers. Patients pay a lower co-payment for lower tiered drugs, and vice-versa. In this way,
patients may shift to less expensive drugs for the same disease. Copayments can be as
low as $2 to $5 for generic drugs and be over $1,000 per month for some biotech drugs.
Insurance plans may also restrict access to higher-priced biotechnology products by
requiring prior authorization. Before prescribing the drug for a patient, the physician must
first discuss the case with the insurance carrier. The patient must meet certain
requirements to be authorized. The additional work to the physician is unreimbursed, and
so may act as a deterrent to prescribing.
Reimbursement under Compendia listing

The Compendia are listings of currently accepted treatments, mostly for cancer. These
listings tend to be more liberal than the FDA approved indications for drugs, and are
meant to be guidelines for practicing physicians. Insurers will generally reimburse drugs
when used in accordance with these guidelines, even if the FDA has not yet granted
approval. Compendia listings generally occur 6-12 months after positive data can be
demonstrated.
There are two Compendia in the United States, the Pharmacopeia and the PDI. These
listings are compiled by physician groups and are meant as a guide for physician
treatment. The National Comprehensive Cancer Network (NCCN) is one source for
current listings.
Conferences and websites

Exhibit 22 is a list of selected medical conferences in 2006. The conferences with more
biotech relevance are shown in bold. Exhibit 23 is a list of selected websites with industry
information.
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United States
Exhibit 22: Selected medical conferences in 2006

Date
Conference*
Location
Feb 5-9
Conference on Retroviruses and Opportunistic Infections (CROI)
Denver, CO
Feb 16-18
International Stroke Conference
Kissimmee, FL
Mar 3-7
American Academy of Allergy, Asthma and Immunology (AAAAI)
Miami Beach, FL
Mar 3-7
American Academy of Dermatology (AAD)
San Francisco, CA
Mar 11-14
American College of Cardiology (ACC)
Atlanta, GA
Mar 17-26
American Academy of Orthopedic Surgeons (AAOS)
Chicago, IL
Apr 1-5
American Association for Cancer Research (AACR)
Washington, DC
Apr 1-8
American Academy of Neurology (AAN)
San Diego, CA
Apr 5-8
European Association of Urology
Paris, France
Apr 19-23
National Kidney Foundation
Chicago, IL
Apr 26-30
European Association for the study of liver diseases (EASL)
Vienna, Austria
Apr 29-May 2
Pediatric Academic Society
San Francisco, CA
Apr 30-May 4
Association for Research in Vision and Ophthalmology (ARVO)
Fort Lauderdale, FL
May 10-13
European Congress of Clinical Microbiology & Infectious disease (ECCMID)
Glasgow, UK
May 16-20
American Society of Hypertension
New York, NY
Mar 20-23
World Vaccine Congress
Washington, DC
May 20-25
American Urological Association (AUA)
Atlanta, GA
May 20-25
Digestive Diseases Week (DDW)
Los Angeles, CA
May 27-31
European Neurological Society (ENS)
Lausanne, Switzerland
Jun 2-6
American Society of Clinical Oncology (ASCO)
Atlanta, GA
Jun 9-13
American Diabetes Association (ADA)
Washington, DC
Jun 12-15
European Society of Hypertension (ESH)
Madrid, Spain
Jun 15-18
European Hematology Association (EHA)
Amsterdam, Netherlands
Jun 21-24
The European League Against Rheumatism (EULAR)
Amsterdam, Netherlands
Jul 22-27
World Transplant Congress
Boston, MA
Aug 13-18
16th International AIDS Conference
Toronto, Canada
Sep 1-6
European Federation of Neurological Societies
Glasgow, UK
Sep 2-6
European Society of Cardiology (ESC)
Barcelona, Spain
Sep 2-6
European Respiratory Society (ERS)
Munich, Germany
Sept 15-19
Association for Bone & Mineral Research (ASBMR)
Philadelphia, PA
Sep 27-30
Interscience Conference on Antimicrobial Agents & Chemotherapy (ICAAC)
San Francisco, CA
Sep 27-30
European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS)
Madrid, Spain
Sep 29-Oct 3
European Society for Medical Oncology (ESMO)
Istanbul, Turkey
Oct 8-11
American Neurological Association (ANA)
Chicago, IL
Oct 12-15
Infectious Disease Society of America (IDSA)
Toronto, Canada
Oct 21-25
American Society for Reproductive Medicine
New Orleans, LA
Oct 21-26
American College of Chest Physicians (AACP)
Salt Lake City, UT
Oct 27-31
American Association for Study of Liver diseases (AASLD)
Boston, MA
Nov 10-15
American College of Rheumatology (ACR)
Washington, DC
Nov 11-14
American Academy of Ophthalmology (AAO)/Asia Pacific Academy of Ophthalmology (APA Las Vegas, NV
Nov 12-15
American Heart Association (AHA)
Chicago, IL
Nov 14-19
American Society of Nephrology (ASN)
San Diego, CA
Dec 9-12
American Society of Hematology (ASH)
Orlando, FL
*Conferences more relevant to biotechnology are in bold
25
United States
Exhibit 23: Useful websites

Website
General websites
www.biospace.com
Description
Biotech industry information
www.cancer.gov
National Cancer Institute
www.cdc.gov
Center for disease control and prevention
www.fda.gov
Food and Drug Administration
www.guideline.gov
Clinical practice guidelines
www.nih.gov
National Institute of health (NIH)
www.pubmed.gov
Library of medical abstracts dating back to 1960s
www.biology-online.org/dictionary.asp
Biology dictionary
Clinical trials websites

www.centerwatch.com
www.clinicaltrials.gov
Industry trade organizations
www.bio.org
www.phrma.org
Worldwide directory on clinical trials

Clinical trials database. NIH website
Biotechnology industry trade organization

The Pharmaceutical Research and Manufacturers of America
Medical meeting databases

www.healthcareconferences.com
www.hon.ch/cgi-bin/confevent
Health on the Net Foundation
www.medicalconferences.com
26
United States
Acquired Immune Deficiency Syndrome (AIDS)
27
28
United States
United States
Acquired Immune Deficiency Syndrome (AIDS)

Significant progress has been made since the start of the global AIDS epidemic 25
years ago, with the commercial launch of over 25 drugs. However, AIDS still
represents a major global problem. The Human Immunodeficiency Virus (HIV)
which causes AIDS affects over 40 million people worldwide, of whom 1.2 million
are in the United States and approximately 720,000 in Western Europe. Therapies
in development improve on existing classes and provide new approaches.
Market and opportunity

The global market for AIDS therapeutics exceeds $7.7 billion, of which the United States
accounts for over $5 billion. There are three major classes of drugs: (1) nucleoside/
nucleotide reverse transcriptase inhibitors (NRTIs); (2) non-nucleoside reverse
transcriptase inhibitors (NNRTIs); and (3) protease inhibitors (PIs), representing 52%,
13% and 33% of 2005 US sales, respectively. The 2003 launch of Roche/Trimeriss
Fuzeon introduced a new class, the viral entry inhibitors.
Key factors driving market growth include: (1) new therapies with more favorable
efficacy, side effect, dosage and/or unique resistance profiles; (2) growth in incidence; (3)
broader outreach to infected but untreated patients (around 25% in the United States); and
(4) broader global penetration. Despite the many advances in treating and containing
HIV, mainly in Western countries, there is still demand for new therapies that obviate
viral resistance and a great need for broader global access to therapies.
Therapy
Patients are typically treated with a multi-drug regimen. Because the HIV virus replicates
and mutates rapidly, the development of viral resistance must be managed. The goal is to
keep viral levels as low as possible to impede the infection and lower the likelihood of
resistance. This is accomplished by using drugs from different classes.
New Agents
A number of new therapies are currently under development, including new agents in
existing classes and agents that work by very different mechanisms. Newer agents tend to
be tested and used in patients who have failed other treatment regimens. Advanced agents
include:
Gileads new single pill combining Truvada (2 NRTIs) with Bristol-Myers Squibbs
Sustiva (NNRTI). This would enable a once-daily, fixed-dose regimen in a single
pill. The companies intend to file an NDA in 2Q2006.
Pfizers Maraviroc, currently in Phase 3 development is a novel entry inhibitor.
Johnson & Johnson is developing Etavarine or TMC-125, a novel NNRTI, currently

in Phase 3.
Both Gilead and Merck have integrase inhibitors slated for Phase 2 studies.
29
United States
Panacos is conducting early testing on a new mechanism, the HIV maturation

inhibitor, PA-457 in Phase 2 clinical studies.
Events to watch
30
Gilead: Truvada rollout in Europe, Truvada and Viread label expansion and potential
share gains, Phase 2 studies with integrase inhibitor GS9137.
Pfizer is targeting an NDA submission for Maraviroc, their novel CCR5 or entry
inhibitor currently in Phase 3 trials, in treatment-experienced patients in 2006.
Emerging clinical data on new mechanisms.
Conferences:
International AIDS Conference: August 13-18, 2006.
ICAAC: September 27-30, 2006.
United States

The current global market for AIDS therapeutics exceeds $7.7 billion. The United
States represents over 60% of the worldwide market, with over $5 billion sales in
2005, up 8% from 2004. A growing patient population and introductions of new
therapeutics have contributed to overall market growth, trends which we expect
will persist.
US AIDS drug market

8% US market growth
Over 400,000 patients are on retroviral therapy in the United States and we estimate over
250,000 patients are in Europe. The US AIDS drug market grew by 18% in 2004 and by
8% in 2005 (see Exhibits 24-27). Overall sales growth for the three major classes was as
follows: 5% for the NNRTIs, 4% for the NRTIs and 13% for the PIs. Growth has been
driven partly by new and improved product introductions. Among the newer entrants
have been Bristol-Myers Squibbs Reyataz, Abbotts Kaletra, Gileads Truvada and
Glaxos Epzicom and in 2005, Boehringer Ingelheims Tipranavir.
Exhibit 24: AIDS at a glance
Patient estimates in 000s; $ millions
U.S.
Prevalence of HIV in the U.S.
Number of patients on antiretroviral therapy
1,200
> 400
2005 global sales of top-selling drugs ($MM)

Viread / Truvada (Gilead)
Combivir (GlaxoSmithKline)
Kaletra (Abbott)
Reyataz (Bristol-Myers Squibb)
Sustiva (Bristol-Myers Squibb)
Total global sales
$1,347
1,014
1,006
696
680
$4,742
2005 U.S. sales of major drug classes ($MM)

NRTIs (52% of total)
PIs (33% of total)
NNRTIs (13% of total)
Fusion inhibitor (2% of total)*
Total U.S. sales
$2,644
1,669
648
116
$5,078
* Used as non-first-line (salvage) therapy

Source: UNAIDS, IMS, Goldman Sachs Research estimates.
31
United States
Exhibit 25: Overview of US HIV/AIDS drugs market
NNRTIs
NRTIs
PIs
Fusion inhibitor
Total
2003
1,258
4,591
1,572
8
7,429
Total Prescriptions (000s)

2004
1,252
4,609
1,930
39
7,830
2005
1,258
4,050
2,202
46
7,556
% change from '04-'05

0%
-12%
14%
18%
-3%
NNRTIs
NRTIs
PIs
Fusion inhibitor
Total
2003
384
1,434
522
2
2,342
New Prescriptions (000s)

2004
372
1,426
637
11
2,447
2005
371
1,241
721
14
2,347

0%
-13%
13%
24%
-4%
NNRTIs
NRTIs
PIs
Fusion inhibitor
Total
2003
0.57
2.34
1.04
0.03
3.98
Sales $BN
2004
0.62
2.54
1.48
0.08
4.72
2005
0.65
2.64
1.67
0.12
5.08

5%
4%
13%
38%
8%
NNRTIs
NRTIs
PIs
Fusion inhibitor
$ Sales Market Share %

2003
2004
13%
54%
31%
2%
14%
59%
26%
1%
2005
13%
52%
33%
2%
Source: IMS, Goldman Sachs Research.
Exhibit 27: Market share of AIDS drugs in the United

States, by class
6.00
70%
5.00
60%
50%
4.00
2003
2004
2005
3.00
2.00
% Market Share
Sales in $ billions
Exhibit 26: Sales of drugs in the United States, by class
40%
30%
20%
1.00
10%
0.00
NNRTIs
NRTIs
PIs
Fusion inhibitor
Total
0%
HIV drug class
2003
NNRTIs
2004
NRTIs
2005
PIs
Fusion inhibitor
NRTIs: Truvada making steady gains

The nucleoside/nucleotide reverse transcriptase inhibitor (NRTI) category represents the
backbone of AIDS treatment, due to efficacy, side effect profile and low pill burden.
Consequently, NRTIs currently represent the largest category, with 52% of the AIDS
32
United States
drug market by sales (see Exhibits 28-30). Overall, NRTI sales grew by 8% in 2004 and
by 4% in 2005. Tenofovir is the most commonly prescribed NRTI, when prescriptions
for both Viread (Tenofovir) and Truvada (Tenofovir/emtriva) combination are
considered. Combivir (GlaxoSmithKline) is the second most frequently prescribed
agent.
Exhibit 28: NRTI prescriptions and sales
2003
2004
857
23
930
0
12
109
378
0
446
784
662
390
4,591
COMBIVIR
EMTRIVA
EPIVIR
EPZICOM
HIVID
RETROVIR
TRIZIVIR
TRUVADA
VIDEX
VIREAD
ZERIT
ZIAGEN
Total NRTIs
858
145
852
27
7
103
337
66
435
965
479
335
4,609
Sales ($ in millions)
% change from
04 - '05
2005
778
71
581
195
5
90
289
566
158
745
334
239
4,050
2003
-9%
-51%
-32%
622%
-35%
-12%
-14%
754%
-64%
-23%
-30%
-28%
-12%
2004
610
9
307
0
3
38
426
0
132
395
244
175
2,339
2005
643
51
303
26
2
37
412
63
131
518
186
165
2,537
% change from
04 - '05
612
25
208
173
1
34
373
506
48
407
134
122
2,644
-5%
-50%
-32%
568%
-33%
-10%
-9%
706%
-63%
-21%
-28%
-26%
4%
Exhibit 29: US Sales of selected NRTIs

$ millions
Exhibit 30: US market share of selected NRTIs
40%
700
35%
600
% Market Share by Sales
30%
500
400
300
200
25%
20%
15%
10%
100
5%
0%
COMBIVIR
EPIVIR
EPZICOM
2003
TRIZIVIR
2004
TRUVADA
VIREAD
2003
COMBIVIR
2005
EPIVIR
2004
EPZICOM
2005
TRIZIVIR
TRUVADA
VIREAD
NNRTIs: dominated by Sustiva

Only three agents make up the non-nucleoside reverse transcriptase inhibitor
(NNRTI) category, which is dominated by Bristol-Myers Squibbs Sustiva, with 74%
market share in 2005 and Viramune with 26% (see Exhibit 31). The NNRTI category
accounted for 13% of total HIV/AIDS drugs sales in 2005 and grew by 9% in 2004 and
by 5% in 2005.
33
United States
Exhibit 31: NNRTI prescriptions and sales

2003
RESCRIPTOR
SUSTIVA
VIRAMUNE
Total NNRTIs
2004
19
795
444
1,258
16
834
403
1,252
2005
12
882
363
1,258
% change from
04 - '05
-21%
6%
-10%
0%
2003
6
388
175
569
2004
2005
5
437
177
618
4
477
167
648
% change from
04 - '05
-20%
9%
-6%
5%
Source: IMS, Goldman Sachs research
PIs: New agents account for renewed growth of category

The protease inhibitor (PI) category accounted for 33% of total HIV/AIDS drugs by
sales in 2005. Overall, PI sales grew by 42% in 2004 and by 13% in 2005 (see Exhibits
32-34). Sales growth was driven in part by the launches of Lexiva (GlaxoSmithKline)
and Reyataz (Bristol-Myers Squibb) in 2003 and the launch of Aptivus (Boehringer
Ingelheim) in 2005. Growth in the newer protease inhibitors has been driven by strong
efficacy and, relative to older protease inhibitors, a lower pill burden and better side
effect profile.
Exhibit 32: PI prescriptions and sales

2003
AGENERASE
APTIVUS
CRIXIVAN
INVIRASE
KALETRA
LEXIVA
NORVIR
REYATAZ
VIRACEPT
Total PIs
80
0
184
59
572
3
222
82
371
1,572
2004
32
0
127
54
581
102
399
351
284
1,930
2005
6
9
90
62
568
174
557
493
243
2,202
% change from
04 - '05
-82%
NM
-29%
15%
-2%
69%
40%
40%
-14%
14%
2003
40
0
94
37
425
5
69
84
290
1,044
2004
16
0
69
36
439
86
264
337
233
1,479
2005
2
13
49
46
453
148
278
481
201
1,669
% change from
04 - '05
-89%
NM
-29%
28%
3%
71%
5%
43%
-14%
13%
34
United States
Exhibit 33: US sales of selected PIs

$ millions
Exhibit 34: US market share of selected PIs
45%
600
40%
500
% Market Share by Sales
35%
400
300
200
30%
25%
20%
15%
10%
100
5%
0%
APTIVUS
KALETRA
LEXIVA
2003
NORVIR
2004
REYATAZ
VIRACEPT
2005
2003
APTIVUS
KALETRA
2004
LEXIVA
NORVIR
2005
REYATAZ
VIRACEPT
35
United States
Treatment
Currently there are twenty-five FDA approved drugs which fall into four broad
mechanism-related categories. Of these, NRTIs form the backbone of therapy, with
preferred regimens consisting of NRTIs combined with either NNRTIs or with PIs.
Fuzeon, a fusion inhibitor, is an option for salvage therapy. New agents, either in
existing or in new classes, are currently under development.
Disease overview
AIDS was first observed in 1981 and the virus responsible for the disease, HIV, was
identified in 1984 (see Exhibit 35). There are two types of HIV virus, HIV-1 and HIV-2.
The HIV-1 virus is the most common cause of AIDS globally. The virus is transmitted in
three primary ways: sexual contact, blood exposure (including injected drugs and
transfusions) and transmission from infected mothers to their infants.
The HIV virus predominantly infects certain types of infection fighting cells, primarily Tcells, which have a specific type of receptor on their surface, called the CD4 receptor.
The T-cells and other infected cells play a critical role in mounting an immune defense
against the infection, mainly by stimulating the immune system to directly kill the virus
via T-cells and by triggering antibodies to form.
AIDS is typically manifest in several stages. The first stage is characterized as the acute
viremia stage, which typically lasts several weeks. At this stage, the immune system is
intact and aggressively attacks the virus. The virus is effectively sequestered to the
lymphatic system, where it insidiously destroys the immune system. This latency period
following the initial acute infection is long, often exceeding ten years. While the disease
is often asymptomatic at this stage, the patients immune system becomes steadily and
substantially depleted as the virus replicates in the lymphatic system and wipes out
immune cells.
Exhibit 35: AIDS key terms
Term
Genetics
RNA
DNA
Retrovirus
Explanation
Mutation
Resistance
Nucleotides
Ribonucleic acid; makes up the genetic material of HIV

Deoxyribonucleic acid; makes up the genetic material of human cells
Virus with a genome consisting of RNA; uses the enzyme reverse transcriptase to transcribe its genome into host
DNA
A change in the structure of genetic material
Development of viral immunity to drugs; usually brought about by mutations
Chemical compounds that form the building blocks of DNA and RNA
Viral life cycle

Viral fusion
Reverse transcriptase
Integrase
Protease
Caspase
Process by which the virus fuses with the host cell in order to insert its genetic material into the cell
A viral enzyme that transcribes HIV RNA into DNA, which can then be integrated into the host cell's DNA
A viral enzyme that integrates the newly transcribed proviral DNA into the DNA of the infected (human) cell
An enzyme that breaks down proteins; necessary for viral replication
A type of protease enzyme; necessary for normal cell death
Therapy
Viral load
Reduction in viral load
Measurement of the level of virus in the plasma; usually measured in copies / ml

Usually measured in logs, where a one-log reduction is a ten-fold reduction
Source: Clinical literature, Goldman Sachs Research.
36
United States
Standard treatment
In the United States, roughly 400,000 patients are on anti-retroviral therapy. As
discussed, this therapy typically involves three classes of retroviral drugs (see Exhibits
36-38): (1) nucleoside/nucleotide reverse transcriptase inhibitors (NRTIs); (2) nonnucleoside reverse transcriptase inhibitors (NNRTIs); and (3) protease inhibitors (PIs).
Several generations of product have been developed in each of these three classes (see
Exhibit 15). The 2003 introduction of Roche/Trimeriss Fuzeon marked the launch of the
first viral entry inhibitor.
Exhibit 36: Mechanisms of AIDS therapies
Nucleoside/Nucleotide reverse transcriptase inhibitors (NRTIs)
Block the enzyme reverse transcriptase
Incorporate into viral DNA to block replication
Non-Nucleoside reverse transcriptase inhibitors (NNRTIs)
Block the enzyme reverse transcriptase
Bind to the reverse transcriptase enzyme directly and block viral RNA from becoming DNA
Protease inhibitor (PIs)
Block the enzyme protease, which is necessary for the production and release of viral particles
Viral entry inhibitors
Block the virus from entering the cell
Exhibit 37: How AIDS therapies work
ENTRY
INHIBITORS
WORK HERE
INTEGRASE INHIBITORS
WORK HERE
MATURATION INHIBITORS WORK HERE
37
United States
Exhibit 38: Commercially available therapies for AIDS
Generic name
Abbreviation
Brand name
Year
launched
WW 2004
sales ($MM)
WW 2005E
sales ($MM)
1 tab bid or 2
caps tid
76
N/A
Videx - 2 tabs bid; 1cap

1991, Videx
qd
EC - 2000
274
174
Company
Daily dosing
Nucleoside/Nucleotide reverse transcriptase inhibitors (NRTI)

Zidovudine
AZT, ZDV
Retrovir
GlaxoSmithKline
Didanosine
ddI
Videx, Videx EC
Bristol-Myers Squibb
Stavudine
d4T
Zerit
1994
1 cap bid
272
216
Lamivudine
3TC
Epivir
GlaxoSmithKline/Shire
1995
1 or 2 tabs qd
522
471
Combivir
GlaxoSmithKline
1997
1 tab bid
1,012
1,034
275
N/A
572
783
58
N/A
535
779
48
N/A
Lamivudine/ Zidovudine
1987
Abacavir
ABC
Ziagen
GlaxoSmithKline
1999
Abacavir/ lamivudine/ zidovudine

Tenofovir
Emtricitabine
Abacavir/ lamivudine
TRZ
TDF, TDV
FTC
Trizivir
Viread
Emtriva
Epzicom
GlaxoSmithKline
Gilead
Gilead
GlaxoSmithKline
2000
2001
2003
2004
1 tab bid or 2
tabs qd
1 tab bid
1 tab qd
1 tab qd
1 tab qd
Truvada
Gilead
2004
1 tab qd
68
568
Non-Nucleoside reverse transcriptase inhibitors (NNRTI)

Nevirapine
NVP
Viramune
Delavirdine
DLV
Rescriptor
Boehringer Ingelheim
Pfizer
1996
1997
1 tab bid
4 or 2 tabs tid
341
N/A
N/A
N/A
Efavirenz
EFV
Sustiva
1998
1 tab qd
621
680
Protease inhibitors (PI)

Saquinavir
SQV
Invirase / Fortovase Roche
5 caps bid or 2
caps bid
N/A
N/A
Indinavir
Nelfinavir
IDV
NFV
Crixivan
Viracept
Merck
Pfizer (US) / Roche (EU)
255
206
328
N/A
Ritonavir
RTV
Norvir
Abbott
2 caps tid
5 tabs tid or 3
caps tid; 2 caps
bid
1996
2-4 caps bid
194
211
Ritonavir/ lopinavir
RTV / LPV
Kaletra
Abbott
2000
3 caps bid or 6
caps qd; 2 tabs
bid or 4 tabs qd
897
1,007
Atazanavir
ATV
Reyataz
2003
2 caps qd
414
696
Fosamprenavir
908
Lexiva
GlaxoSmithKline
2003
2 tabs qd/bid
112
716
Tipranavir
TPV
Aptivus
Boehringer Ingelheim
2005
2 caps bid
N/A
N/A
Fusion inhibitor
Enfuvirtide
T-20
Fuzeon
Trimeris / Roche
2003
1 injection bid
135
199
Emtricitabine/ Tenofovir
1995 / 1997
1996
1997
(qd = 1X day, bid = 2X day, tid = 3X day, tab = tablet, cap = capsule; daily dosing depends on pill strength).
Source: Company websites and Goldman Sachs Research estimates.
Treatment
The US Department of Health and Human Services (DHSS) routinely issues guidelines
for treating HIV-1 infected patients. Eradication of HIV cannot be achieved with
available antiretroviral therapies. As reflected in the DHHS guidelines, the goals of
retroviral therapy are: maximal and durable suppression of viral load, restoration and/or
preservation of immunologic function, improved quality of life, and improved morbidity
and mortality.
38
United States
Due to a high mutation rate of the HIV virus and the resulting emergence of resistance,
several classes of drugs are typically used simultaneously. For treatment-inexperienced
patients there are three different types of combination regimens (See Exhibit 39): (1)
NNRTI-based (1 NNRTI +2 NRTIs); (2) PI-based (1-2 PIs + 2 NRTIs); and (3) tripleNRTI regimens (the latter being recommended only when the first two regimens cannot
be used). Genotypic testing for the presence of mutations that confer resistance to drugs
is necessary (even in treatment-nave patients), to enable optimized treatment. Over time,
many patients experience virologic failure, which necessitates drug regimen switching.
Analysis of compliance and resistance, among other factors, is necessary to determine
optimum next regimens. The goal is to select two new agents likely to be active against
the virus, although this is not always an option because of cross resistance within drug
classes. Newer agents have the best response when used with other new agents,
preferably in different classes. For example, the newest protease inhibitor, tipranavir, has
had the best response when used with Fuzeon, a fusion inhibitor from Roche and
Trimeris.
Exhibit 39: Treatment regimen for treatment-inexperienced patients
NNRTI-based
PI-based
Triple NRTI
NNRTI
1
0
0
PI
0
1-2
0
NRTI
2
2
3
Source: Adapted from DHHS guidelines, Goldman Sachs Research.
When to start therapy, which drugs to use, and when to switch therapies has been an
evolving paradigm. Clinicians and patients have had to balance potency, side effects, pill
burden, and resistance. Data from the first protease inhibitors, which became
commercially available in 1996, suggested that treating early and aggressively was the
preferred route. However, a growing resistance problem and prolonged serious side
effects resulted for a while in treatment options evolving towards class-sparing regimens,
which delay the use of one class so that there is still a viable therapeutic option if the
patient fails initial treatment. The newer protease inhibitors have better enabled
aggressive treatment sooner. Structured treatment interruptions are sometimes used to
manage toxicity.
Therapeutic advances in formulations and dosing have improved options

Most advances in antiretroviral therapy have involved improved formulations, less
frequent dosing with fewer pills, the elimination or reduction of restrictive food
requirements and better side-effect profiles. For example, Truvada (Gilead), launched in
2004, is a combination of the NRTIs Emtriva and (Tenofovir) Viread, with a one-pill,
once-daily regimen. Tenofovir has been distinguished by being a nucleotide rather than a
nucleoside reverse transcriptase inhibitor, by having a unique resistance profile and as
has been emerging from recent clinical studies and label expansion, by also possessing
a safety profile that compares well to AZT-containing regimens. Fuzeon, launched by
Trimeris in 2003, is a novel drug with a first-in-class mechanism known as fusion
inhibition. Uptake of Fuzeon has been limited by twice-daily injection requirements and
39
United States
a high incidence of injection site reactions. Needle-less delivery may help to address the
injection site reaction problem to a certain extent.
Disadvantages of current therapy

The main drawback of current retroviral therapy is the inability to eradicate the virus,
even though viral replication can be suppressed for protracted periods. Furthermore, the
emergence of resistance provides a constant challenge to maintaining therapeutic control.
Many antiretroviral drugs have side-effects and long-term drug interactions, which may
complicate disease management. Finally, while drug formulations have improved, some
agents still entail a cumbersome regimen with a high pill burden and frequent dosing
requirements. Failure to adhere to these drug regimens adequately is a significant
contributing factor to the development of viral resistance and resulting treatment failure.
Viral resistance a chronic and significant challenge

The HIV virus replicates rapidly and is highly subject to mutations, which leads to the
rapid development of resistance. It is estimated that between 30% and 50% of infected
patients are resistant to at least one class of anti-viral agent. Virologic failure is often
correlated with the emergence of drug-specific resistance mutations. Several common
mutations that confer resistance have been identified for each class of agent.
Resistance to anti-retroviral treatments is measured by assessing mutations in the viral
genes that encode for either protease or reverse transcriptase. Primary mutations alter
the ability of a drug to bind to its viral target, thereby reducing its efficacy. Secondary
mutations enhance established resistance by improving the ability of a virus with
primary mutations to replicate, a characteristic referred to as the fitness of the virus. For
many drugs, the development of high levels of resistance requires multiple mutations.
There are two primary methods for testing for resistance: genotypic and phenotypic
testing. Periodic assessment of drug resistance is recommended for optimal patient
management.
Long-term toxicities are difficult to endure

Various PIs have been associated with elevated liver enzymes, elevated cholesterol and
triglycerides, lipodystrophy (body fat redistribution), and insulin resistance. Different
NRTIs are associated with bone marrow suppression (particularly AZT) or peripheral
neuropathy. Lamivudine (3TC) and Emtriva have low side effects, but rapidly develop
resistance. The NNRTIs are associated with increased liver enzymes and potential liver
damage.
40
United States
Pipeline improving existing classes and new approaches

In addition to potential improvements on existing classes, several novel agents that
work by novel mechanisms including new enzyme targets, novel entry inhibitors
and viral maturation inhibitors, are in development (see Exhibit 40).
Exhibit 40: Select HIV therapeutics in the pipeline
Candidate
Lead Company
Partner
Phase
Existing classes
Nucleotide reverse transcriptase inhibitors
AVX754 (formerly known as SPD-754)
MIV-210
Amdoxovir (DAPD)
Elvucitabine (ACH-126)
Racivir
Reverset (Dexelvucitabine, D-D4FC)
KP-1461
Avexa
Medivir
RFS Pharma
Achillion (private)
Pharmasset (private)
Pharmasset (private)
Koronis
Shire
GlaxoSmithKline
IIB
IIA
II
II
II
II
IB
Non-nucleotide reverse trancriptase inhibitors

Etavarine (TMC-125)
Johnson & Johnson (Tibotec)
TMC-278, Diarylpyrimidine (DAPY)
Calanolide A
Sarawak MediChem Pharmaceuticals
DOT, dioxolane thymidine
University of Georgia
GW5634 (695634)
GlaxoSmithKline
MIV-150
Medivir
Incyte
Chiron
III
IIB
I
I
I
I
GlaxoSmithKline
IIB / III
IIB
Advanced Life Sciences
Protease inhibitors
Darunavir (TMC-114)
Brecanavir (GSK-640385)

Vertex
New classes
Entry Inhibitors
UK-427 (Maraviroc)
TNX-355
SP01A
Vicriviroc
AMD-070
BMS-488043
PRO 140
Pfizer
Tanox
Samaritan Pharma
Schering-Plough
AnorMED
Progenics
Maturation inhibitors
PA-457
Panacos
Integrase inhibitors
MK-0518
GS-9137
GS-9160
Merck
Gilead
Gilead
Japan Tobacco
II
I
PC
Fusion inhibitors
TR-291144
TR-290999
Trimeris
Trimeris
Roche
Roche
PC
PC
Biogen IDEC
III
IIB
IIB
II
IB / IIA
I/II
IB
II
Source: Company data, www.clinicaltrials.gov, Goldman Sachs Research estimates.
New Enzyme Inhibitors HIV Integrase

HIV integrase is an enzyme necessary for the integration of the genetic material of the
AIDS virus into the host cell. Inhibitors of integrase represent a potential new therapeutic
class. Two companies with the most advanced candidates in this area are Gilead and
41
United States
Merck, both positioned for Phase 2 studies with lead candidates. Early clinical data
suggest strong potency, but there has been little safety or resistance data.
Viral entry inhibitors

There are two known co-receptors thought necessary for HIV to enter and infect a T-cell:
chemokine receptors CXCR4 and CCR5. Blocking these receptors has been a longsought target, but there have been hurdles in drug development with respect to
manufacturing and toxicity. Further, it is not clear whether inhibiting only one of the coreceptors will be sufficient. Among the later-stage compounds are Maraviroc in Phase 3
studies at Pfizer, and slated for potential NDA submission in 2006. Other CCR5
inhibitors in the clinic include Vicriviroc in development at Schering Plough and
PRO140 at Progenics.
Maturation inhibitors
Panacos is conducting early clinical studies with maturation inhibitor PA-457, which
blocks viral replication by precluding viral particles released from HIV-infected cells
from becoming infectious.
Evaluating clinical trials for HIV drugs

Results of therapy are primarily evaluated with plasma HIV RNA levels. The goal is a
decrease in viral load of at least 1.0-log copies/mL at eight weeks, and no detectable
virus (<50 copies/mL using the Amplicor assay) at 4-6 months. A minimally significant
change in plasma viremia is considered to be a three-fold (0.5 log10) change. A
significant decrease in CD4 T lymphocyte count is 30% from baseline (absolute). CD4
counts influence the ability to reduce viral load.
42
United States
Age-related macular degeneration
43
44
United States
United States
Age-related macular degeneration

Age-related macular degeneration (AMD), a degenerative eye disease, is the
leading cause of blindness among the elderly in the western world. Treatment for
AMD represents a multi-billion dollar opportunity. Genentechs Lucentis is
expected to enter the US market in 2006 and become the market leader.
Market opportunity
In the United States, there are about 1.8 million new cases per year of AMD. With the
rapidly aging population, the US number of people with AMD per year is expected to rise
to nearly 3 million by 2020.
Of the 1.8 million total cases, there are about 200,000 US cases of wet AMD per
year.
The two marketed biotech products for wet AMD, Visudyne (QLT/Novartis) and
Macugen (OSI Pharmaceuticals), achieved 2005 US sales of about $370 million.
With the expected launch of Genentechs Lucentis in 2006, we believe the sales
potential of drugs for wet AMD exceeds $1 billion in the United States and $2 billion
worldwide.
In 1990s, treatment was limited to photocoagulation (laser therapy) to seal the blood
vessels. However, mixed long-term efficacy, safety issues and the advent of newer
therapies has limited its use.
The current treatment paradigm is dominated by Visudyne (Photodynamic therapy)

and Macugen which were approved in 2000 and 2004, respectively. Visudyne is
often used in combination with Kenalog, a steroid, for its anti-inflammatory
properties.
Therapy
New agents
Treatments on the horizon include biologics such as Lucentis and other VEGF
blockers to inhibit the growth of new blood vessels as well as drug-delivery devices
implanted at the back of the eye.
Lucentis (Genentech) is the only drug in late stage trials which has shown a
significant improvement in vision. Macugen and Visudyne only slow the decline in
vision.
Events to watch
FDA approval of Lucentis for all subtypes of wet AMD (2H2006).
Phase 3 data on extended dosing of Lucentis (PIER study, 1H2006).
Phase 2 interim data on Evizon (study 209, 1H2006).
45
United States

Age-related macular degeneration (AMD) represents a compelling market for
biotechnology given the unmet need, increasing disease prevalence and low penetration
of current treatments. For example, the two marketed biotech products for wet AMD,
Visudyne (QLT/Novartis) and Macugen (OSI Pharmaceuticals), achieved 2005 sales of
about $370 million in the United States. With the expected launch of Genentechs
Lucentis in 2006 and an increasingly visible pipeline of new products, we believe the
sales potential of drugs for wet AMD exceeds $1 billion in the United States and $2
billion worldwide.
In the United States, there are about 1.8 million new cases per year of AMD, which is the
leading cause of blindness in people over 50 (see Exhibit 41). The National Eye Institute
estimates that with the rapidly aging population, the US number of people with AMD per
year is expected to rise by 50% to nearly 3 million by 2020.
Exhibit 41: AMD at a glance in the United States
AMD at a glance in the U.S.

Epidemiology
Number of new AMD cases per year in 2005
1.8MM
Number of new AMD cases per year in 2020
3MM
Ratio of wet AMD vs dry AMD
10-15 : 85-90
Number of new wet AMD cases per year in 2005
200,000
% of wet AMD patients diagnosed
80%
% of patients diagnosed with wet AMD in both eyes
10%
% of wet AMD patients treated in 2005
39%
Current biologics
2005 U.S. sales of Visudyne and Macugen
$367MM
Visudyne cost per year
(1)
$5,080
Macugen cost per year
(2)
$8,955
Number of patients treated with biologics in 2005
138,000 (3)
Patient characteristics
Average age of patient
Above 50
Men:Women
Ethnicity
About equal
More common in Caucasians
(1) Assumes 4 courses of treatment per year

(2) Assumes 9 courses of treatment per year
(3) As of 9/30/05
Source: Company data, National Eye Institute and Goldman Sachs Research.
46
United States
AMD affects mainly Caucasians and the elderly. More than 15% of Caucasian women
older than 80 years have neovascular AMD. See Exhibit 42.
Exhibit 42: Age and Caucasians increase risk for age-related macular degeneration
14%
12%
10%
8%
6%
4%
2%
White
Black
85
+
80
-8
4
75
-7
9
70
-7
4
65
-6
9
60
-6
4
55
-5
9
M
al
e
50
-5
4
85
+
80
-8
4
75
-7
9
70
-7
4
65
-6
9
60
-6
4
55
-5
9
Fe
m
al
e
50
-5
4
0%
Hispanic
Source: National Eye Institute.
What is age-related macular degeneration?

Macular degeneration refers to the loss of function in the central portion of the retina
(macula) that is responsible for central vision. Most cases occur as part of aging, leading
to age-related macular degeneration or AMD (see Exhibit 43).
Exhibit 43: Key terms to know
Term
Definition
Retina
Seven layers of alternating cells at the back of the eye which convert a light
signal into a neural signal
Macula
Central portion of the retina
Fovea
Central most part of the macula that produces the sharpest vision
Choroidal neovascularization
(CNV)
Growth of new blood vessels under the retina
Vascular endothelial growth

factor (VEGF)
VEGF stimulates growth of endothelial cells which form the walls of blood
vessels, thus increasing the transport nutrients and oxygen to tissue
Visual acuity
Visual acuity refers to the clarity or clearness of ones vision, a measure of

how well a person sees.
47
United States
The disease is diagnosed by imaging of the eye after intravenous injections of dyes, such
as fluorescein or indocyanine green. These imaging techniques allow the retinal specialist
to assess the location and pattern of new blood vessel growth. It can also assist in guiding
laser photocoagulation if recommended. Optical coherence tomography (OCT) is a
new imaging procedure for assessing the thickness of the retina in order to determine
treatment strategies.
There are two types of AMD

Dry AMD- 85-90% of AMD: The dry form (atrophic or non-exudative) of AMD occurs
when waste products build up beneath the retina, leading to thinning or death of macular
cells. All cases of AMD begin as the dry form, with 10%-20% progressing to the wet
form (see below). Dry AMD tends to progress slowly, leading to blindness in 15%-20%
of patients. There is no approved therapy.
Wet AMD (CNV) 10-15% of AMD: Wet AMD, also called exudative AMD, occurs
when waste products block transport of nutrients to the retina, leading to inflammation
and growth of new blood vessels beneath the retina (choroidal neo-vascularization or
CNV). These blood vessels can break, leak or bleed, causing swelling of the retina,
scarring of the macula and deterioration of vision. Wet AMD can progress rapidly,
leading to blindness in 80-90% of the affected individuals.
There are about 200,000 new cases of wet AMD each year. Over 80% of the cases are
considered subfoveal (involving blood vessel growth under the fovea). About 30% of the
patients will be affected in both eyes.
Subtypes of Wet AMD
Subfoveal CNV represents about 80-85% of all wet AMD cases and leads to severe
vision loss because it affects the area under the fovea. Subfoveal CNV can be
classified as either classic or occult based on the pattern of leakage seen by
fluorescein angiography. Classic CNV progresses more rapidly than occult CNV, but
is easier to diagnose because the blood vessels are well defined. The leakage in
occult CNV is less obvious. Many patients will have both forms of CNV. About 50%
of occult CNV will develop into classic CNV within a year.
Classic CNV can be further subdivided into predominantly or minimally classic

CNV, depending on whether more than 50% or less than 50% of the lesions are
classic, respectively. Of newly diagnosed patients, about 25% have predominantly
classic, 35% have minimally classic, and 40% have occult AMD.
Treatments for wet AMD (by mechanism of action)

In the 1990s, photocoagulation or laser therapy (discussed below) was the only treatment
with proven efficacy in clinical trials for wet AMD. The current treatment paradigm is
dominated by Visudyne and Macugen which were approved in 2000 and 2004,
respectively (see Exhibit 37). Retinal specialists use Visudyne for predominantly classic
AMD as well as for the minimally classic form where the lesions are small ( 5.4
millimeters in diameter). Visudyne did not show efficacy in occult AMD. Because
Visudyne use leads to some ocular inflammation, it is often combined with steroids such
48
United States
as Kenalog (Triamcinolone) which has anti-inflammatory properties. Kenalog is not

approved for AMD. Macugen is approved for all subtypes of AMD. The following table
demonstrates the treatment algorithm for AMD.
Exhibit 44: Treatment algorithm for AMD
Diagnosis
Dry AMD (85-90%)

No approved
treatment
Wet AMD (10-15%)
Extrafoveal/
Juxtafoveal (15-20%)
Photocoagulation
recommended
Subfoveal
(80-85%)
Predominantly
Classic (25%)
Visudyne
Visudyne/Kenalog
Macugen
(1)
Lucentis
Minimally
Classic (35%)
Lesions
(2)
4 discs
Visudyne
Visudyne/Kenalog
Macugen
(1)
Lucentis
Occult
Form (40%)
Macugen
(1)
Lucentis
Lesions
(2)
> 4 discs
Macugen
(1)
Lucentis
(1) Lucentis under FDA review

(2) 4 discs represent 5,400 microns or 5.4 millimeters in diameter
Source: Goldman Sachs research
Photocoagulation
Photocoagulation involves using a high energy light beam to seal the leaking blood
vessels. Photocoagulation is used when the affected area is small, and does not involve
the center of the macula (about 15-20% of cases). However, photocoagulation is not
selective. Therefore, normal retinal tissue may be damaged, potentially leading to some
initial loss of vision. While short-term results showed 50% reduction in risk of severe
vision loss, five-year data were less impressive, mainly due to re-growth of blood vessels.
Photo-dynamic therapy (PDT)

Visudyne (Approved; QLT Therapeutics and Novartis): Visudyne is a photosensitive
drug approved in April 2000 for predominantly classic subfoveal CNV. PDT is a twostep process that can be performed on an outpatient basis. Visudyne is injected
intravenously, followed by activation of Visudyne in the blood vessels under the retina
49
United States
with a non-thermal red light, leading to local damage and sealing of the blood vessels.
Repeat treatment as frequently as every three months may be necessary. Visudyne is
commonly used in combination with corticosteroids such as a Kenalog (triamcinolone),
which is not indicated for AMD. In Phase 3 trials of predominantly classic AMD, 67% of
Visudyne versus 40% of the placebo patients lost less than three lines of visual acuity.
Side effects for Visudyne were related to photosensitivity reactions, injection site
reactions and visual disturbances.
Angiogenesis inhibitors to block blood vessel growth

Wet AMD can be treated by inhibiting the growth of new blood vessels (angiogenesis)
beneath the retina. Vascular endothelial growth factor (VEGF) stimulates growth of
endothelial cells which form blood vessel walls and transport nutrients and oxygen to
tissue. Therefore, VEGF is an attractive drug target. There are five types or isoforms of
VEGF.
Biologics which block VEGF include Macugen (Approved; OSI and Pfizer), a
pegylated aptamer (modified oligonucleotide) that selectively binds to VEGF. Macugen
was approved in December 2004 as the first VEGF blocker for wet AMD. Macugen is
injected every six weeks intravitreally (into the back of the eye) and costs about $9,000
per year. In the Phase 3 trials, about 70% of Macugen versus 55% of patients receiving
sham injection lost less than three lines of vision at 1 year. The side effects of Macugen
were manageable and mainly related to intraocular injections, such as endophthalmitis
(severe eye infection), traumatic injury to the lens and retinal detachment.
New products to watch

Lucentis (FDA action expected 6/06; Genentech): Lucentis is a fragment of a
humanized monoclonal antibody to VEGF. It blocks all VEGF isoforms as compared to

Macugen which selectively inhibits the VEGF 165 isoform. In 2005, Genentech reported
positive Phase 3 data on Lucentis for all AMD subtypes, including minimally classic and
occult AMD (MARINA trial) as well as in predominantly classic AMD (ANCHOR trial).
In February 2006, Genentech announced positive top-line data from MARINA after two
years showing that improvements with Lucentis were maintained whereas the control
(sham injection) patients continued to deteriorate. The positive two-year MARINA data
removes some concern that the broad VEGF inhibition by Lucentis would cause longterm safety concerns. Although there were no direct comparative studies, Lucentis
seemed to be more potent than Visudyne and Macugen after one year of therapy,
especially on the improvement in vision (gaining >15 letters).
Lucentis can cause low levels (1-2%) of serious side effects including uveitis
(inflammation of the eye) and endophthalmitis after two years. Lucentis is injected into
the eye monthly, which is more frequent than for Macugen (every six weeks). However,
physicians may reduce the frequency of injection of Lucentis in maintenance therapy if
the Phase 3b results from the PIER study in 1H2006 are positive. The PIER study
evaluates maintenance therapy with injections every three months (instead of every
month) in patients. See Exhibit 45.
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United States
Exhibit 45: Comparison of Visudyne, Macugen and Lucentis

Product:
Company
Partner
Status / Phase:
Indications for wet AMD
Mechanism of action:
Delivery:
Treatment frequency:
Visudyne
QLT
Novartis
Launched 12/99
Macugen
Eyetech
Pfizer
Launched 1/05
Lucentis
Genentech
Novartis (ex-U.S.)
FDA decision 6/06
Predominantly Classic
Predominantly Classic, Minimally

Classic, and Occult
Predominantly Classic, Minimally

Classic, and Occult
Photodynamic Therapy (PDT)
Inhibits VEGF 165
inhibits all five VEGF isoforms
10 min intravenous infusion,

followed by light therapy 15 mins
after infusion
Intravitreal injection
Intravitreal injection
Every 3 months
Every 6 weeks
Every 4 weeks
Efficacy at 1 year:
67% of patients lost less than 15 70% of patients treated with 0.3mg For minimally classic/occult: 95%
letters vs. 40% in placebo
lost less than 15 letters vs. 55% in of patients had stable or improved
vision vs. 62% for sham injection.
sham injection
For predominantly classic: 9496% has stable or improved vision
vs. 64% for sham injection
Additional efficacy data:
46% of patients lost less than 15 Study 1: 57% of patients lost less
letters (3 lines) vs. 33% in
than 15 letters vs 56% for sham
placebo at 2 years
injection at 2 years
Study 2: 61% of Macugen patients
lost less than 15 letters vs 34% for
sham at 2 years
For minimally classic/occult: 90%

of patients had stable or improved
vision vs. 53% in sham injection at
2 years.
Phase III (PIER) extended dosing
data expected Q2/06
Safety:
Photosensitivity for 5 days, and Endophthalmitis (intraocular

10-30% of patients had injection infection) occurred in about 1% of
patients
site reactions / visual
disturbances
1-2% of patients have uveitis

(inflammation of the eye) and
endophthalmitis; 4% of patients
had heart attacks vs 3% in
placebo
List Price
Doses per year
Cost per year
$1,270 per injection
$995 per injection
N/A
13
$5,180
$8,995
N/A
Source: Company data and Goldman Sachs Research.
Evizon (Phase 3; Genaera): Evizon (squalamine lactate) is a small molecule derived
from the dogfish shark. It seems to have multiple mechanisms of action, including
inhibition of several angiogenic growth factors such as VEGF, integrin expression, and
reversal of the cytoskeletal formation. Evizon is injected intravenously. In June 2005,
Genaera initiated one of two Phase 3 trials (Study 301) of intravenous Evizon in patients
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with all AMD subtypes, comparing Evizon versus control for two years. Patients will
receive Evizon weekly for four weeks followed by maintenance doses every four weeks
until week 48, and further follow up of 12 months. The primary endpoint is visual acuity
at one year. We expect one-year data in late 2007/early 2008. The second Phase 3 trial
(Study 302) with identical design to study 301 should start in 2H2006. Genaera could
potentially increase the dose of Evizon in study 302 based on an additional dose ranging
efficacy study (Study 212) with data expected by 2H2006. Genaera may seek a corporate
partnership for Evizon.
Retaane (Phase 3, Alcon): Retaane, an anecortave acetate (a steroid derivative), can
reduce the production of matrix metalloprotease (MMP), an enzyme that can help
infiltration of new blood vessels. Retaane is delivered to the outer surface of the eye
every six months via a curved, blunt-tipped tube that does not pierce the eyeball. In
October 2004, Alcon announced that a Phase 3 study comparing Retaane to Visudyne did
not meet the primary endpoint of non-inferiority versus PDT at one year. In May 2005,
Alcon received an approvable letter from the FDA on Retaane for wet AMD. In October
2005, Alcon announced that Retaane was safe and demonstrated clinical equivalence to
Visudyne at 24 months. The company is in discussions with the FDA concerning next
steps. Alcon has also initiated a study of Retaane in combination with Avastin.
Photrex (Phase 3; Miravant Medical Technologies): Photrex, in Phase 3 trials for
classic and occult AMD, involves an intravenous infusion followed by light therapy to
seal blood vessels related to wet AMD. In September 2004, the FDA issued an
approvable letter on Photrex asking for another Phase 3 trial which Miravant started in
mid-2005. Visudyne involves the use of a non-thermal red light which has a longer
wavelength (689 nanometers) as compared to the light for Photrex (664 nanometers).
Longer wavelength might lead to deeper penetration of retinal tissues. Additionally,
Visudyne therapy seems to have a shorter period of photosensitivity (sensitivity to bright
light) of 5 days compared to 30 days for Photrex.
Avastin (off-label use, Genentech): There is increasing use of Avastin, a humanized
MAb against VEGF approved for colorectal cancer, for AMD. Avastin has been used
intravenously or intravitreally in small, physician-sponsored trials with good results.
Owing to the low dose for intravitreal injection, the cost of Avastin may be less than $15
per injection. Therefore, physicians are generally not billing for Avastin. However, they
can obtain a reimbursement of about $250 for each injection. We expect off-label use of
Avastin to decrease after the launch of Lucentis due to the lack of long-term safety and
efficacy from randomized studies, potential liability for physicians, and the availability of
an approved, potent therapy (Lucentis).
See Exhibit 46 for a summary of other VEGF inhibitors currently under study.
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Exhibit 46: Selected other VEGF inhibitors in clinical studies for AMD
Drugs
Company
Combretastatin
A4 Prodrug (CA4P)
Oxigene
Mechanism
of Action
Phase
Delivery
Indications
Vascular targeting agent, microtubule

inhibitor
Intravenous infusion
Myopic
macular
degeneration
1/2

inhibitor
Intravenous infusion
AMD
PC

inhibitor
Eye drops/peri-orbital injection
AMD
Gene silencing: Interfering RNA for VEGF

inhibition
Intra-ocular injection
AMD
Small molecule Inhibitor of VEGF-2
Retro-ocular injection
AMD
Cand5
Acuity
AG-013958
Pfizer
1/2
Sirna-027
Sirna Therapeutics
Gene silencing: Short interfering RNA to VEGFR- Intra-vitreal injection

1
AMD
AdPEDF
Genvec
Gene-based therapy which increases pigment

epithelium-derived factor (PDEF) protein. PDEF
protects photoreceptors damaged by fragile,
leaky, abnormal blood vessels
AMD
VEGF-trap
Regeneron
Fusion protein with

2 VEGF receptors
AMD
JSM-6427
Jerini AG
Alpha 5 Beta 1 Integrin inhibitor
Systemic infusion
AMD
PC
PC = preclinical
Source: Company data and Goldman Sachs Research..
Posurdex Intraocular Implant (Phase 3; Allergan): Posurdex system is a completely
biodegradable, extended-release polymer ocular implant that delivers therapeutic drugs to

the back of the eye, i.e., an ocular drug delivery system. Originally created by Oculex
Inc., Posurdex is being studied for macular edema and AMD. One dose may last from six
months to one year. The implants are being studied with older drugs such as
dexamethasone, however there is interest in combining them with VEGF inhibitors. The
device is implanted surgically, but the procedure is relatively simple and can be done on
an outpatient basis.
Clinical trials and evaluating response to treatment

Most clinical trials in AMD evaluate the proportion of patients with improved vision and
the mean change in visual acuity. Visual acuity refers to the clarity or clearness of ones
vision, a measure of how well a person sees. Visual acuity is measured as the size of
letters that the patient can read on a chart from 20 feet away (standard size of an eye
exam room). In other words, the smallest line that you can read on a chart is your visual
acuity. The standard eye chart used in AMD trials is the Early Treatment Diabetic
Retinopathy Study (ETDRS) eye chart. Five letters on the ETDRS eye chart equates to
one line of visual acuity.
53
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United States
Cancer: blood cancers non-Hodgkin's lymphoma, multiple myeloma and

leukemia
55
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United States
Cancer: blood cancers non-Hodgkin's lymphoma, multiple

myeloma and leukemia
The hematological (blood-related) cancers, including non-Hodgkins lymphoma
(NHL), leukemia, and multiple myeloma, arise from white blood cells that originate
in the bone marrow. These cancers interfere with normal blood cell production.
With leukemia and myeloma, the cancer cells tend to appear in the blood and bone
marrow. In lymphoma, the cancer is primarily limited to the lymph nodes.

Over 500,000 patients in the United States have blood cancers, with more than 100,000
new cases each year. The combined market for biologics was approximately $5 billion in
2005. We believe that new targeted therapies and earlier treatment of patients should
support solid growth.
Therapy
Aggressive blood cancers may be treated with chemotherapy followed by stem cell
transplant, while a watch and wait approach may be used for slow-growing cancers.
The use of monoclonal antibodies and targeted small molecules, employed alone or in
combination with chemotherapy, has increased significantly in recent years.
Sales of therapies for leukemia and lymphoma are dominated by Rituxan
(DNA/BIIB/Roche) and Gleevec (NOV). Rituxan, a monoclonal antibody to CD20, a
cell surface receptor specific to B-lymphocytes, is used in treating NHL and chronic
lymphocytic leukemia (CLL). Gleevec is an oral drug targeting an enzyme unique to
certain types of leukemia. The myeloma market is currently split between two targeted
therapies, with a third entrant expected in 2006.
New agents
Revlimid (Celgene) is expected to be approved for multiple myeloma in 2006.
Velcade (Millennium), a proteosome inhibitor, is approved for multiple myeloma.
Velcade may be submitted for FDA approval for a subtype of NHL in 2006.
Histone deacetylase inhibitors, such as Mercks Vorinostat, interfere with DNA

production, and may have applications in multiple cancers.
Tyrosine kinase inhibitors for leukemia, similar to Gleevec, are in development by

many companies, including Phase 3 trials by Novartis and Bristol-Myers Squibb.
Events to watch
Impact of the launch of Revlimid on sales of Velcade in multiple myeloma.
FDA application for Velcade in mantle cell lymphoma in 2H2006.
FDA action on dasatinib (Bristol-Myers Squibb) for chronic and acute myeloid
leukemia in 2006.
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United States
59
60
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United States
We estimate that sales of biologics to treat non-Hodgkins lymphoma (NHL) exceeded $3
billion in 2005 (see Exhibit 47). Three biologics are approved for use in NHL, with 99%
market share for Rituxan and <1% each for Zevalin (Biogen IDEC) and Bexxar
(GlaxoSmithKline). The market should continue to grow, driven by additional FDA
approvals and more retreatments.
Exhibit 47: Non-Hodgkins lymphoma at a glance
Number of patients in U.S. (prevalence)
New cases in 2005 in U.S. (incidence)
Worldwide biotech sales (2005)
Number of approved biologics
Average patient age
5 year survival
347,000
56,000
>$3B
3
50-60
37%
Approximately 350,000 patients are living with NHL in the United States, with about
56,000 new cases each year. NHL occurs more frequently with age. The average patient
is 50-60 years old.
Disease overview
Immune cells begin as stem cells in the bone marrow. Stem cells can differentiate and
mature into B-cells, T-cells, macrophages, and other functional immune cells (see Exhibit
48). T-cells, B-cells, and macrophages are the most common white blood cells that give
rise to lymphoma. Both T-cells and macrophages can fight infection and cancer by
releasing cytokines that attract other immune cells, as well as by directly attacking other
cells. B-cells are unique in their ability to produce antibodies that bind to foreign bodies.
About 80-85% of NHL cases are of B-cell origin, and the remainder are derived from Tcells. Macrophages are implicated in Hodgkins disease.
Exhibit 48: Lineage of blood cell lines
Stem cells in bone
marrow
Platelets
Neutrophils
Erythrocytes (red
blood cells)
Macrophages
Lymphocytes (white
blood cells)
T lymphocytes
B lymphocytes
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Hodgkins disease
Hodgkins disease accounts for about 8% of lymphomas. It is diagnosed based on the
presence of distinctive cancerous cells called Reed-Sternberg (RS) cells. The RS cell is
a cancerous macrophage with a characteristically large or bi-lobed nucleus. Hodgkins
disease usually arises in one lymph node and spreads to anatomically adjacent nodes.
This is in contrast to other lymphomas, which spread throughout the body.
Partly because of the way Hodgkins disease spreads, the disease is one of the most
curable types of cancer, with cure rates greater than 80%. The treatment of Hodgkins
disease is chemotherapy and radiation to the affected area. For the rest of the chapter, we
shall focus exclusively on non-Hodgkins lymphomas.
Non-Hodgkins lymphoma
NHL comprises over 20 different subsets of cancers of the lymph nodes and related
tissues. The lymphomas (see Exhibit 49) are categorized by the type of cell involved (B
cell or T cell are the most common types), and the architecture of the lymph node upon
biopsy. The most common lymphomas are diffuse large B-cell (DLBCL, 31% of all
NHL), follicular lymphoma (22%), marginal zone (5%), small lymphocytic (6%), mantle
cell (6%) and peripheral T-cell lymphoma (6%). NHL can also be characterized as low
(indolent), intermediate, and high grade (aggressive), depending on the rate of growth of
the cancer.
Exhibit 49: Lymphoma classification and treatment
Lymphoma
Prevalence
500,000
New cases/yr
65,000
Non-Hodgkin's Lymphoma
Prevalence
350,000
New cases/yr
56,000
5-yr survival
37%
B-cell/T-cell
85%/15%
Aggressive NHL
median survival
1-2 yrs
5-yr survival
50%
Treatment goal is cure
Indolent NHL
median survival >6yrs
Treatment goal is symptom relief
% Total NHL:
Follicular
22%
Marginal Zone
5%
10%
Small Lymphocytic
6%
Mantle Cell
6%
85%
Watch and wait

100%
Hodgkin's Lymphoma
Prevalence
145,000
New cases/yr
7,350
5-yr survival
88%
Diffuse Large B-Cell (DLBCL)

30%
Thymic large cell

5%
5%
Chemotherapy
Rituxan
Radiation
100%
50-60%
100%
Peripheral T-cell
6%
CHOP-R
Cyclophosphamide
Doxorubicin (Hydroxydaunomycin)
Vincristine (Oncovin)
Prednisone
Rituxan
40-50%
Relapse
Cure
Combination
therapy
Stem cell
transplant
Radio-immuno
therapy
Zevalin
Bexxar
Experimental
therapy
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Cancers derived from the cells early in the maturation pathway tend to grow faster and be
more aggressive. An example of these cancers is diffuse large B-cell lymphoma. Other
cancers, such as follicular lymphoma, derived from more mature cells, tend to be
indolent (develop slowly). If untreated, patients with aggressive lymphomas generally
have a life expectancy measured in months. In contrast, patients with indolent
lymphomas can have a median survival of 6-10 years.
Cells in the immune system can be identified by certain proteins or receptors on the
surface of the cell. These proteins are important modulators of the complex interactions
among cells. They can also serve as markers for different types of cells.
For example, CD20 (see Exhibit 50) is not found on blood stem cells or 70-80% of
plasma cells, but is found on all B-cells starting early in development. The selective
occurrence of CD20 makes it an attractive and effective target for biologic therapies.
Exhibit 50: B lymphocyte development and related cancers
Aggressive
NHL
ALL
Indolent
NHL
CLL
Multiple
Myeloma
Antibody
Immature
B cell
Stem Cell
Mature B cell
CD19
CD10
CD20
Plasma B cell
CD22
CD19
CD20
ALL: acute lymphoblastic leukemia; CLL: chronic lymphocytic leukemia.
Diagnosis and staging

Patients with NHL typically seek medical attention due to lymph node swelling. For
aggressive lymphoma, the lymph nodes can grow large rapidly. For indolent lymphomas,
the swelling can come and go even without therapy.
The diagnosis of NHL is made primarily on the basis of lymph node or bone marrow
biopsy. Bone marrow involvement occurs in approximately 30-50% of NHL. Other
important laboratory tests include blood levels of protein, calcium, and red and white
blood cells.
About 40% of patients with NHL will have B symptoms. The B symptoms are
systemic signs of disease: fever, weight loss, and night sweats. Night sweats are usually
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dramatic, with drenching of bedclothes. Weight loss is commonly defined as an

unexplained loss of >10% of body weight over six months.
The most important prognostic indicator predicting outcome of NHL is histopathology
(microscopic characteristics) of the tumor (e.g., diffuse large B-cell versus mantle cell).
Staging can be done using the Ann Arbor classification (see Exhibit 51), which classifies
lymphoma based on the degree and location of spread throughout the body. However,
because NHL spreads through the bloodstream to distant parts of the body, the stage of
disease is not well correlated with the extent of progression. In contrast, Hodgkins
disease tends to spread to adjacent sites, such that the degree of spreading is closely
correlated to the extent of disease.
Exhibit 51: Ann Arbor staging for lymphoma
Stage
I
Area of involvement
One lymph node region
IE
One extralymphatic organ or site
II
Two or more lymph node regions on the same side of the diaphragm
IIE
One extralymphatic organ or site in addition to above criteria
III
One extralymphatic organ or site (localized) in addition to criteria for stage II
IIIS
Stage III with spleen involvement
IIISE
Stage III with one extralymphatic site and spleen involvement
IV
One or more extralymphatic organs with or without associated lymph node

involvement (diffuse or disseminated); Class A patients are assymptomatic;
Class B patients have classic B symptoms
Source: Ann Arbor staging classification.
Treatment
The goal of treatment for NHL is complete remission (no remaining evidence of disease).
The specific treatment algorithm used depends on the patients health and the type of
lymphoma.
Patients with indolent NHL are rarely diagnosed at an early stage. If they are, radiation
therapy is effective in curing about 50% of patients. For advanced patients without
symptoms, earlier therapy does not seem to prolong survival. Therefore, a watch and
wait approach is often used, especially for older patients. If symptoms occur, the tumor
starts to affect other organs, or turns aggressive, CHOP chemotherapy (see Exhibit 52)
and Rituxan are commonly used in sequence or combination. Rituxan is given as an
intravenous infusion weekly for four to six weeks during induction therapy. Essentially
all patients will relapse. Therapies for relapse include combinations of drugs that are
different than those used initially, and radioimmunotherapy (radioactive antibodies) such
as Zevalin and Bexxar. In addition to CHOP, fludarabine alone or CVP combination
therapy are also used for indolent NHL.
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Exhibit 52: Common chemotherapeutic regimens in NHL

CHOP
Cyclophosphamide
Doxorubicin (Hydroxydaunorubicin)
Vincristine (Oncovin)
Prednisone
CVP
Cyclophosphamide
Vincristine
Prednisone
Patients with aggressive lymphomas need to be treated aggressively to cure the disease.
Chemotherapy plus Rituxan for six to eight cycles has become the standard of therapy for
induction, especially for patients with large or advanced tumors. To prolong remission,
Rituxan maintenance therapy has been shown to be effective for patients who had
induction therapy with CHOP, but not with CHOP + Rituxan. The choice of therapies for
relapsed patients includes: (1) combination therapy with drugs not used initially,
sometimes at high doses; (2) stem cell transplantation; and (3) experimental therapies,
including radioimmunotherapy.
Biologics for non-Hodgkin's lymphoma

There are three approved biologics for NHL (see Exhibit 53). All are based on
monoclonal antibodies against CD20, a marker found on all B-cells, but not on stem cells
or most plasma cells. Thus, targeting CD20 preserves the bone marrows ability to create
new cells as well as the ability of plasma cells to produce antibodies.
Exhibit 53: Biologics approved for treatment of NHL
Rituxan
Genentech/BiogenIdec/Roche
$3.1B
Chimeric MAb to CD20
Zevalin
BiogenIdec
$21M
Chimeric MAb to CD20 (Rituxan) bound to
radioactive Y-90
Bexxar
GlaxoSmithKline
approx $10-20M
Chimeric MAb to CD20 (tositumomab)
bound to radioactive I-131
Indication
relapsed or refractory CD20+ NHL

1st line aggressive CD20+ NHL
Treatment protocol
wkly x 4 or 8 doses
Administration
Side effects
oncologist
myelosuppression
severe infusion reactions
severe skin reactions
allergic reaction
kidney and heart damage
Step 1: Rituxan infusion and radioimaging Two steps separated by 7-14 days. Each
with Indium. Step 2 (7-9 days later): Rituxan step consists of an infusion of nonradioactive tositumomab followed by
infusion followed by Zevalin injection
Bexxar. The first step is to determine the
proper dose, which can vary among
patients.
radiation oncologist
radiation oncologist
myelosuppression
myelosuppression
myelodysplasias/cancer
myelodysplasias/cancer
mucositis
hypothyroidism
fatal infusion reactions
severe allergic reactions
severe skin reaction
Company
Sales 2005
Mechanism of action
Rituxan (DNA/BIIB/Roche)
Rituxan is a mouse-human chimeric monoclonal antibody that binds to the CD20 antigen
on B-lymphocytes. CD20 is expressed on over 90% of B-cell NHL. Rituxan is delivered
as an IV infusion once weekly for four or eight doses on an outpatient basis.
Rituxan is the standard of care for both aggressive and indolent B-cell NHL. The FDA
approved Rituxan in 1997 to treat relapsed or refractory, low-grade or follicular, CD20-
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positive, B-cell NHL. In February 2006, the indication for front line treatment of
aggressive B-cell NHL was granted.
In the United States, Genentech sells Rituxan and splits its profits with BiogenIDEC. In
Europe, Roche sells the product under the brand name MabThera and pays a royalty
(20% of sales) to Genentech, which in turn splits this royalty with BiogenIDEC.
Zevalin (BIIB)
Zevalin is an MAb to CD20 (Rituxan) bound to a radioactive isotope, yttrium-90. It was
designed to kill CD20-bearing cancer cells by radiation. It is mainly used in patients who
are not responsive to Rituxan. Zevalin is the first radioimmunotherapy approved by the
FDA.
Unlike Rituxan, which is administered by a cancer specialist, Zevalin is radioactive and
requires administration by nuclear medicine specialists or radiation oncologists. Zevalin
is administered in two steps: (1) one infusion of Rituxan to clear circulating lymphocytes
before infusion of Zevalin bound to Indium-111; and (2) seven to nine days later, one
infusion of Rituxan followed by Y-90 Zevalin. This multi-step process minimizes the
dose of radioactivity to the body.
Bexxar (GSK)
GlaxoSmithKlines Bexxar is a chimeric MAb to CD20 bound to radioactive Iodine-13.
Use of Bexxar also requires two steps, as with Zevalin. However, calculation of the
optimal dose (dosimetry) is necessary for Bexxar, but not Zevalin. The need for
dosimetry is one reason for Bexxar to be used less frequently than Zevalin. We believe
that Zevalin and Bexaar are unlikely to compete effectively against Rituxan as first-line
therapy owing to bone marrow toxicity, logistical issues associated with radioactive
MAbs, and limited potential for use in combination with chemotherapy.
What's on the horizon?

Velcade (Millennium): Possible filing in mantle cell NHL in 2H2006
Velcade is an inhibitor of the 26S proteosome (an intracellular enzyme that cleaves other
proteins, activating or deactivating them). Inhibition of the proteosome reduces the

formation of NFkB, a promoter of cell growth and division. Velcade is approved for the
second and third line treatment of multiple myeloma.
Velcade has shown limited efficacy in patients with relapsed aggressive NHL. However,
Phase 1/2 data are promising in certain indolent NHL, such as follicular cell and mantle
cell lymphomas. The company is planning a Phase 3 trial of Velcade in relapsed
follicular cell NHL to begin in the second half of 2006. Millennium also expects Phase 2
data on Velcade monotherapy in 155 patients with relapsed mantle cell lymphoma in the
first half of 2006. If positive, the company plans to file an FDA application in the second
half of 2006. Interim Phase 2 data showed a complete remission rate of 8% and an overall
response rate of 42%. Millennium is also developing next-generation proteosome
inhibitors.
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United States
Histone Deacetylase Inhibitors (Merck, Gloucester): Applications in

multiple cancers
Histones play an important role in supporting the structure of DNA in chromosomes.
Interaction of histones with the DNA determines whether the DNA remains tightly
wound in its inert state or whether it is loosely bound and ready for transcription. Histone
deacetylase inhibitors promote the inactive state of histone/DNA in tightly wound
chromosomes. When DNA cannot be transcribed, oncogenic proteins cannot be produced
and the cell may have difficulty dividing. Phase 2 trials by multiple companies are
ongoing in multiple cancers, including NHL. We expect data in 2006/7.
MAb to CD30 (Seattle Genetics, Medarex)

CD30 is a protein expressed on the surface of Reed-Sternberg cells (Hodgkins
lymphoma), the majority of anaplastic large cell lymphomas, and by varying proportions
of activated T and B cells. Both Seattle Genetics (SGEN) and Medarex (MDX) are
conducting Phase 2 trials on monoclonal antibodies to CD30 to treat anaplastic large cell
lymphoma (a type of aggressive NHL). Phase 2 data on Medarexs MDX-060 should be
available in 1H2006.
mTOR Inhibitors (Wyeth)

Wyeth is conducting Phase 2 studies on temsirolimus, an oral inhibitor of mTOR
(mammalian target of Rapamycin) in mantle cell lymphoma, breast cancer and brain
cancer. FDA filing on mantle cell lymphoma may be in 2006/7. Side effects include low
blood cell counts.
MyVAX (Genitope)
MyVax is a treatment that recruits the patients own immune system to attack the cancer.
Specific proteins expressed by the tumor are isolated and combined with a carrier protein.
The tumor protein/carrier protein complex is then injected into the patient along with an
adjuvant. The body then creates an immune response which, primed by the protein
exposure, targets the tumor. Genitope has demonstrated positive responses in small
numbers of patients in Phase 2 trials.
See Exhibit 54 for a summary of selected late-stage drug candidates for NHL.
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United States
Exhibit 54: Selected late-stage drug candidates for NHL

Company
Alfacell
Ticker
ACEL
Product
AC RN-321
Mechanism of action
ribonuclease conjugated to MAb to CD22
Boehringer
Ingelheim
private
BI 2536
enzyme inhibitor
Coley
Pharmaceutical
Group
COLY
CPG-7909
Genentech,
BiogenIDEC, Roche
Genitope
GlaxoSmithKline,
Cytokinetics
DNA/BIIB PRO70769
ROG.VX
GTOP
MYVAX
GSK/CYTK Ispinesib
Phase
2
Comments
P2 trials ongoing
P1 trials ongoing in
relapsed/refractory
aggressive NHL
TLR-9 agonist, immune stimulator
1/2
P1/2 trials ongoing
MAb to CD20 (next-generation Rituxan)
1/2
P1/2 data in 2006
immune stimulator
kinesin spindle protein inhibitor
1/2
2
P3 trials in follicular NHL

ongoing. Positive P2
results at ASH 2005
Initiated P1/2 in late
2005/early 2006
Gloucester Pharma
private
FK228
histone deacetylase inhibitor
P2 trials ongoing
Immunomedics
IMMU
epratuzumab
humanized MAb to CD22
1/2
positive P1/2 results

presented at ASH 2005
Immunomedics
IMMU
hA20
1/2
Zarnestra
farnesyl transferase inhibitor

P2 monotherapy and
comb. w/Velcade in
refractory lymphoma
P1 trials in NHL ongoing
Johnson & Johnson
JNJ
Kosan Biosciences
KOSN
17-AAG
heat shock protein 90 (HSP90) inhibitor
Medarex
MEDX
MDX-010
MAb to CTLA4 (cytotoxic T lymphocyteassociated antigen 4)
1/2
Medarex
MEDX
MDX-060
MAb to CD30
P2 data on Hodgkin's
disease/anaplastic lg cell
lymphoma 1H/06
MRK
Vorinostat
P2 trials for
follicular/mantle
cell/marginal zone
ongoing
Merck
P1/2 trials ongoing for

follicular lymphoma
Millennium
Pharmacyclics
MLNM
PCYC
Velcade
proteosome inhibitor
Motexafin gadolinium thioredoxin reductase inhibitor
3
2
expect FDA filing 2H/06

P2 trials ongoing
Seattle Genetics
SGEN
SGN-30
MAb to CD30
Wyeth
WYE
temsirolimus
rapamycin analogue/mTOR inhibitor
P2 trials ongoing for

anaplastic lg cell and
cutaneous anaplastic lg
cell lymphoma
positive P2 results in
relapsed/refractory
mantle cell lymphoma
68
United States
Multiple myeloma
69
70
United States
United States
Multiple myeloma
Multiple myeloma is a relatively small but growing market for biologics (see Exhibit
55). Only one product biotech product is approved for multiple myeloma, but two others
are used off label. We believe that the multiple myeloma market will expand in the next
few years, driven by launch of new products, increasing use of combination therapy, and
use of new agents in earlier stage patients.
Exhibit 55: Multiple myeloma at a glance

Average patient age
Estimated survival (untreated)
63,000
16,000
$550M
65
3 years
Multiple myeloma is incurable and fatal, with an estimated survival of about three years
for untreated patients. At diagnosis, the average age of patients is 65, and only 2% of
patients are under 45. Blacks are twice as commonly affected as whites, and men slightly
more than women. According to the American Cancer Society, there were 15,980 new
cases of multiple myeloma in the United States in 2005. The prevalence in the United
States is approximately 63,000 people.
Disease overview
Multiple myeloma (see Exhibit 50) is a cancer of plasma cells which are late-stage cells
in the B-lymphocyte pathway. Plasma cells are the major cell type to produce antibodies
(immunoglobulins). Plasma cells are usually found in the bone marrow and lymphoid
organs. In normal individuals, plasma cells are generally not free-floating in the
bloodstream.
Exhibit 56: Multiple myeloma key terms to know
Antibody
M protein
Monoclonal antibodies
Multiple myeloma
Osteoblasts
Osteoclasts
Plasma cell
Plasmacytoma
Complex protein designed on one end to attach to foreign particles and on the other to activate immune cells
Monoclonal antibody formed by a cancerous (multiple myeloma) plasma cell
Group of antibodies that are all derived from the same plasma cell or clone of plasma cells
Cancer of plasma cells
Cells designed to create bone
Cells designed to destroy bone
Mature immune cell that produces antibodies
Tumor made up of plasma cells, usually located outside the bone marrow
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In multiple myeloma, one clone of plasma cells begins to multiply uncontrollably,

leading to high levels of one type of antibody (i.e., myeloma or M protein). Therefore,
patients with multiple myeloma tend to have the following:
large numbers of plasma cells (>10% of total white cells) in the bone marrow.
Sometimes plasma cells can spread outside the bone marrow and form tumors
elsewhere in the body, called plasmacytomas;
M protein in the blood or urine;
anemia;
high calcium levels (hypercalcemia);
kidney failure; and
lytic (destructive) bone lesions.
The high levels of plasma cells and M protein are responsible for other
complications:
Anemia
Plasma cells normally comprise about 0.2% to 2.8% of the white blood cells in the bone
marrow, but this proportion can exceed 30% in patients with multiple myeloma. As the
bone marrow is stretched to produce the cancer cells, there is less ability to produce other
blood cells, such as red blood cells, leading to anemia. Another cause of anemia is low
production of erythropoietin by the kidneys (see below).
Kidney failure and high calcium levels

The kidneys are responsible for filtering proteins in the blood. High amounts of M
protein can clog and damage the kidneys. Chronic kidney failure can lead to anemia
(from diminished erythropoietin production) and high calcium levels in the blood (from
secondary hyperparathyroidism). Patients can eventually proceed to complete kidney
failure, requiring dialysis.
Lytic bone lesions

Lytic lesions are areas of bone that have been eroded by the myeloma. These have a
characteristic punched out appearance on x-ray. Bone destruction in multiple myeloma
can lead to bone pain and fractures. The destruction is linked to increased activity of
osteoclasts driven by (1) the hyperparathyroidism of renal failure, and (2) imbalance of
RANKL and osteoprotegerin. Osteoclasts are designed to degrade bone to its basic
elements of calcium and phosphate.
72
Osteoclasts express a receptor on the cell surface called RANK (receptor activator of
NFkB). When this receptor is activated by RANKL (RANK ligand), the osteoclast is
turned on and begins to degrade bone. RANK is inhibited by osteoprotegerin, which
is a soluble receptor that competes for RANKL, taking it out of circulation. The
activity of osteoclasts is regulated by the ratio of RANKL (activator) and
osteoprotegerin (de-activator). MM cells over-express RANKL, leading to a high
RANKL/osteoprotegerin ratio and increased osteoclast activity.
United States
Staging and diagnosis

Diagnosis of multiple myeloma requires at least two of the following three
characteristics:
M protein in blood or urine;
Infiltration of plasma cells in the bone marrow or plasmacytoma; and/or
Lytic bone lesions.
There are three classes of multiple myeloma

MGUS
Smoldering myeloma
Multiple myeloma
The lowest grade disease is referred to as monoclonal gammapathy of unknown

significance (MGUS), which is simply the detection of low levels of monoclonal immune
globulin in the blood or urine. This is generally asymptomatic and found upon routine
examination of the patient.
About 33% of these patients will progress to smouldering multiple myeloma,
characterized by the presence of >3g/dL of M protein in the serum and over 10% plasma
cells in the bone marrow. There is no end organ damage, and also usually no symptoms.
Smoldering multiple myeloma can progress to multiple myeloma, which is characterized
by the presence of plasma cells >10%, M protein >3g/dL, and signs of end-organ damage
in the form of anemia, hypercalcemia, kidney failure, and bone lesions.
See Exhibit 57 for classifications of multiple myeloma.
Exhibit 57: Classification of multiple myeloma

Disease state
Monoclonal gammopathy of unknown significance (MGUS)
Smouldering multiple myeloma (SMM)
Multiple myeloma (MM)
Definition
M protein
Earliest stage of multiple myeloma, usually
<3g/dL
detected by accident
More plasma cells and myeloma protein in
>3g/dL
blood, but no organ damage
High numbers of plasma cells and
>3g/dL
myeloma protein, end-organ failure
Plasma cells
<10%
Symptoms
none
>10%
none
>10%
anemia, renal failure,

hypercalcemia, or bone lesions
Source: Cecil Textbook of Medicine.
Patients usually begin treatment when they start to have signs of organ damage. Patients
with earlier stage, asymptomatic disease are rarely treated.
Treatment
Patients with multiple myeloma are stratified to either stem cell transplantation or no
transplant (see Exhibit 58). The former is usually reserved for younger patients, who are
better able to tolerate the procedure. The goal is to achieve complete response, or
eradication of any identifiable disease. Complete response rates correlate well with
improvement in overall survival. Most physicians will treat first-line patients with
Thalomid plus dexamethasone (a steroid), although a number of other combination
therapies may be used.
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Exhibit 58: Treatment algorithm for multiple myeloma

Diagnosis
30%
70%
Stem Cell Transplant
No Stem Cell Transplant
Pre-induction therapy
Dexamethasone (Dex)
Thalomid (Thal)
Thal/Dex
VAD
Low-dose Therapy
Melphalan and Prednisone (MP)
Thalomid + MP or Dex
Dexamethasone
VAD
Revlimid or
Velcade on protocol
Collection of Stem Cells

High dose chemotherapy with
melphalan and prednisone or
other regimen
Relapse
Transplant of cells
Relapse
15%
85%
Second stem cell transplant

100%
100%
Relapse
100%
Retreatment
Velcade
Velcade + Thal
Velcade + Revlimid
Thal + Dex
Rev + Dex
Relapse
Palliative Care or
Experimental Protocols
For transplant patients, therapy usually starts with low doses of Thalomid,
dexamethasone, VAD (vincristine + Adriamycin + dexamethasone) or other
combinations. Dexamethasone monotherapy is nearly as effective as many combinations,
and is considered to be the standard comparator for novel agents. After the multiple
myeloma cells are reduced/eliminated, stem cells from the bone marrow or blood are
collected and reserved for transplantation. Patients are then treated with high-dose
chemotherapy, usually melphalan and prednisone, to eradicate any remaining disease.
Stem cells are then infused to repopulate the bone marrow.
Some patients are treated with tandem stem cell transplants in order to improve long term
outcomes. Enough stem cells are collected to perform two transplants. Within six months,
if a complete or near-complete response is not seen with the first transplant, a second
round of high-dose chemotherapy and full-body irradiation is given, followed by a
second transplant. The success of transplantation depends largely on whether the stem
cells collected for transplant are contaminated with multiple myeloma cells. This is why
more aggressive first-line regimens are being pursued to reduce the contamination.
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Patients who are not candidates for stem cell transplantation will generally receive
chemotherapy in the form of melphalan and prednisone (MP), or MP plus Thalomid.
Melphalan is a potent drug, but one that spoils the bone marrow for stem cell
mobilization; therefore it is best suited for treatment after stem cells are collected, or in
patients unable to receive transplant.
Biotech drugs in multiple myeloma

The exact mechanism for the occurrence of multiple myeloma is poorly understood.
Therefore none of the marketed biotech drugs effective for multiple myeloma (see
Exhibit 59) are directed to a cancer target. Similarly, other earlier-stage product
candidates tend to have limited specificity for multiple myeloma.
Exhibit 59: Selected biotech drugs for multiple myeloma
U.S. sales 2005 ($MM)
Approved indication
Multiple myeloma filing
Next milestone
Mechanism of action
Route of administration
Treatment protocol
Est. end-user price/month
Side effects
Velcade
$214
2nd/3rd line treatment of multiple myeloma
Revlimid
NA
Myelodysplastic syndrome
Thalidomide
$388
Erythema nodusum leprosum
NA
Data on 1st line treatment (2H/06)
IV infusion
weekly x 6-8 cycles
Filed 1/06
FDA approval for MM (2H/06)
immune modulator
Oral
daily
Filed 2004 (approvable 11/05)

FDA approval in MM (1H/06)
immune modulator
Oral
daily
$4,000
NA
$3,000
thrombocytopenia
anemia
peripheral neuropathy
deep vein thrombosis

thrombocytopenia/neutropenia
constipation
fetal limb defects

sedation
constipation
peripheral neuropathy
thrombocytopenia/neutropenia
deep vein thrombosis
Source: Centers for Medicare and Medicaid, package inserts, Goldman Sachs Research.
Thalomid (Celgene): multiple effects including inhibition of angiogenesis

and TNF
Thalomid (thalidomide) is an orally-active small molecule immunomodulatory agent that
is used off-label in both first and second line therapy of multiple myeloma. Celgene
submitted an sNDA for the treatment of refractory multiple myeloma in 2004. In
November 2005, the FDA issued an approvable letter requesting revised product labeling,
updated safety information, and additional patient information. We expect FDA action in
1H2006.
The mechanism of action of Thalomid is not well-defined, but may relate to suppression
of TNF- production, migration of white blood cells as well as inhibition of angiogenesis.
Thalomid has a potent anti-myeloma effect without limiting the effect of stem cell
transplantation. According to company reports, over 40% of patients receive Thalomid
first line, either alone or in combination.
The Phase 3 pivotal trial (MM-003) randomized 470 patients with newly diagnosed
multiple myeloma performed to thalidomide + dexamethasone vs dexamethasone alone.
The median time to progression in the Thal/Dex group was 75.7 months vs 27.9 months
for the Dex alone group. Progression free survival was 55.7 months vs 24.3 months.
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United States
Thalomid carries a black-box warning, and must be administered as part of a structured

safety program because of the risk of birth defects (fetal limb malformations). Other side
effects of Thalomid include sedation, constipation, peripheral neuropathy and deep vein
thrombosis (DVT). In the pivotal trial, 10.3% of patients had DVT and 5.6% of patients
had pulmonary embolism (blood clots in the lung). DVT is important because clots in the
leg can break off and travel to the lung, causing serious injury or death.
Celgene generated $388 million in Thalomid sales in 2005. Approximately 95% of

Thalomid sales are from the use in blood cancers, with 85% of this in the multiple
myeloma indication.
Velcade (Millenium): Inhibits 26S Proteosome and NFkB

Velcade (bortezomib) was approved by the FDA for third-line treatment of relapsed and
refractory multiple myeloma in May 2003. Velcade works by inhibiting the 26S
proteosome (an enzyme that cleaves cellular proteins, activating or deactivating them).
Inhibition of the proteosome reduces the formation of NFkB, a promoter of cell growth
and division. Velcade is given intravenously on days 1, 4, 8, and 11 every three weeks
per cycle. Patients generally receive an average of 5.5 cycles.
In March 2005, Velcade was approved for second line multiple myeloma based on data
from the Phase 3 APEX trial. Velcade was more effective than dexamethasone in
improving time to progression, responses and survival in patients who had already
received one or more prior therapies. One-year survival was 80% for Velcade +
dexamethasone versus 66% for dexamethasone alone.
Millennium is studying Velcade alone and in combination with other therapies for firstline as well as relapsed multiple myeloma. There are currently several Phase 2 trials and
three Phase 3 trials ongoing to evaluate Velcade in first-line therapy. We estimate that at
the end of 4Q2005, Velcade had achieved approximately 10%, 45%, and 40-50%
penetration in first-, second-, and third-line therapy, respectively. For 2006-2008, we
project worldwide Velcade sales of $268 million, $303 million, and $333 million, up
27%, 13%, and 10%, respectively year over year.
The side effects of Velcade include peripheral neuropathy and lower blood cell counts.
Peripheral neuropathy can manifest as numbness, pain, tingling, or discomfort. This is
generally limited to the palms and soles of the feet, and is the most common reason to
reduce the dose of therapy or stop therapy. The neuropathy is reversible, and most
physicians advocate either dose reduction or a short break in therapy when symptoms
become a problem.
Revlimid (Celgene): an improved Thalomid

Revlimid (lenalidomide), a thalidomide analogue, was approved in December 2005 for
the treatment of myelodysplastic syndrome. The FDA included three black-box warnings
on the label of Revlimid: (1) neutropenia and thrombocytopenia; (2) deep vein
thrombosis; and (3) fetal malformations. In clinical trials, about 17% of treated patients
developed grade-3 or -4 neutropenia, although there was no significant increase in serious
infections. Thrombosis occurred in 8.5% of treated patients. Patients in these trials did
not receive anticoagulation. We expect most physicians to recommend blood thinners
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United States
(coumadin, aspirin, or heparin) to reduce the risk of thrombosis in patients taking

Revlimid or Thalomid.
Celgene filed an sNDA in January 2006 for the treatment of relapsed refractory multiple
myeloma. We expect FDA action by mid-2006. Celgene conducted two pivotal Phase 3
trials of Revlimid in relapsed refractory multiple myeloma: the MM-009 trial in the
United States and the MM-010 trial outside the United States. The two trials randomized
approximately 700 total patients with relapsed refractory multiple myeloma to Revlimid
25mg per day plus dexamethasone versus dexamethasone alone. Patients were followed
for 18 months. In both trials, the most important finding was a significant increase in
overall survival. As of December 2005, the patients in the placebo arm had a median
survival of two years, and the Revlimid-treated arm had not yet reached a median
survival (p=0.013).
Revlimid has several potential advantages over currently available therapies. The drug is
orally bio-available, unlike Velcade. Further, in contrast to Thalomid, there is no
evidence to date that Revlimid has potential issues with fetal malformations. The risk of
thrombosis appears to be manageable with oral aspirin or low-dose warfarin, two easy
and inexpensive regimens. However, pricing may limit the drugs off-label use in
multiple myeloma. We expect the treatment regimen for multiple myeloma to be about
three times more expensive than the price for treatment of myelodysplastic syndrome.
(The dose for myelodysplastic syndrome is 5-10mg, so multiple tablets must be taken to
treat multiple myeloma). At current prices, one month of Revlimid therapy for multiple
myeloma would cost approximately $17,000, versus $4,000 for Velcade and $3,600 for
Thalomid. Compendium listing in late 2006 for the 25mg dose may allow more flexible
pricing. Celgene has begun an expanded access program to patients who cannot afford
Revlimid prior to FDA approval for myeloma. This program may help convert patients to
Revlimid ahead of approval.
Multiple trials are ongoing to evaluate Revlimid as monotherapy of relapsed and
refractory multiple myeloma, as well as in combination with melphalan and prednisone
for first-line treatment of multiple myeloma in patients over 65. As more data become
available and pricing becomes more flexible, we expect Revlimid to gain share in the
multiple myeloma market.
What's on the horizon? Highlights of selected clinical-stage compounds

HSP-90 inhibitors (Kosan Biosciences, Infinity Pharmaceuticals)
Heat shock protein 90 is a molecule discovered in the 1960s that helps the cell respond
to stress. Cells that have deficiency of HSP-90 tend to die easily when in hot laboratory
conditions, hence the name. In animals, HSP-90 inhibition makes cells more fragile when
presented with stress, such as chemotherapy. Overexpression of HSP-90 has been
postulated as one way that cancer cells have extended survival and the capacity to
overwhelm the body. HSP-90 inhibitors may therefore have synergy with current
treatments, allowing more effective results from chemotherapy. Kosan Biosciences and
Infinity Pharmaceuticals (private) both are conducting early clinical trials of HSP-90
inhibitors in multiple myeloma. We expect data from these trials in 2006.
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United States
Histone Deacetylase Inhibitors (Merck, Gloucester Pharmaceuticals)

Histones are molecules that bind to and support the structure of DNA in chromosomes.
Their interaction with the DNA determines whether DNA is tightly wound in its inert
state or whether it is loosely bound and ready for transcription. Histone deacetylase
inhibitors promote the inactive state of histone/DNA in tightly wound chromosomes.
When DNA cannot be transcribed, oncogenic proteins cannot be produced and the cell
may have difficulty dividing. Multiple companies, including Merck and privately-held
Gloucester Pharmaceuticals, are in early clinical trials. We expect data in 2006.
RANK Ligand Inhibitor (Amgen)

Denosumab is a human monoclonal antibody against the RANKL protein, an important
mediator of osteoclast activity (see above). Inhibition of RANKL with denosumab
decreases the activity of osteoclasts, cells which are responsible for bone resorption.
Denosumab may have activity against the myeloma process itself; however, it is more
likely that denosumab or other inhibitors of the RANKL system will have an isolated
effect on bone destruction and hypercalcemia. A Phase 2 trial of denosumab in multiple
myeloma is ongoing.
See Exhibit 60 for a list of selected drug candidates for treating multiple myeloma.
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United States
Exhibit 60: Selected biologic drug candidates for multiple myeloma

Company
Alfacell
Ticker
ACEL
Product
AC RN-321
Mechanism of action
ribonuclease conjugated to MAb to CD22
Boehringer
Ingelheim
private
BI 2536
enzyme inhibitor
Coley
Pharmaceutical
Group
COLY
CPG-7909
Genentech,
BiogenIDEC, Roche
Genitope
GlaxoSmithKline,
Cytokinetics
DNA/BIIB PRO70769
ROG.VX
GTOP
MYVAX
GSK/CYTK Ispinesib
Phase
2
Comments
P2 trials ongoing
P1 trials ongoing in
relapsed/refractory
aggressive NHL
TLR-9 agonist, immune stimulator
1/2
P1/2 trials ongoing
MAb to CD20 (next-generation Rituxan)
1/2
P1/2 data in 2006
immune stimulator
kinesin spindle protein inhibitor
1/2
2
P3 trials in follicular NHL

ongoing. Positive P2
results at ASH 2005
Initiated P1/2 in late
2005/early 2006
Gloucester Pharma
private
FK228
P2 trials ongoing
Immunomedics
IMMU
epratuzumab
1/2

Immunomedics
IMMU
hA20
1/2

Zarnestra
farnesyl transferase inhibitor
P2 monotherapy and
comb. w/Velcade in
refractory lymphoma
P1 trials in NHL ongoing
Johnson & Johnson
JNJ
Kosan Biosciences
KOSN
17-AAG
heat shock protein 90 (HSP90) inhibitor
Medarex
MEDX
MDX-010
MAb to CTLA4 (cytotoxic T lymphocyteassociated antigen 4)
1/2
Medarex
MEDX
MDX-060
MAb to CD30
P2 data on Hodgkin's
disease/anaplastic lg cell
lymphoma 1H/06
MRK
Vorinostat
P2 trials for
follicular/mantle
cell/marginal zone
ongoing
expect FDA filing 2H/06
Merck
P1/2 trials ongoing for

follicular lymphoma
Millenium
MLNM
Velcade
Pharmacyclics
PCYC
Motexafin gadolinium thioredoxin reductase inhibitor
P2 trials ongoing
Seattle Genetics
SGEN
SGN-30
MAb to CD30
P2 trials ongoing for

anaplastic lg cell and
cutaneous anaplastic lg
cell lymphoma
Wyeth
WYE
temsirolimus
rapamycin analogue/mTOR inhibitor
positive P2 results in
relapsed/refractory
mantle cell lymphoma
79
80
United States
United States
Leukemia
81
82
United States
United States
Leukemia
We estimate the sales for leukemia treatments to be about $2 billion in 2005. Novartiss
Gleevec, a small molecule inhibitor of tyrosine kinase, is the market leader. There are
multiple product candidates under development. If effective, these agents should expand
the market.
There are approximately 150,000 patients with leukemia in the United States, with about
30,000 new cases each year (see Exhibit 61). Patients generally develop leukemia in midlife; however, acute lymphoblastic leukemia, which is usually curable with
chemotherapy, is more common in children. In this chapter, we focus primarily on adult
leukemia.
Exhibit 61: Leukemia at a glance

Average patient age
150,000
30,000
$2B
50-60
Disease overview
Leukemia, similar to lymphoma, is a cancer of the bone marrow, which includes the
precursors of white blood cells. The primary clinical difference between lymphoma and
leukemia is that leukemia cells are floating freely in the bloodstream, rather than
concentrating in lymph nodes and other tissues.
As a result of bone marrow destruction, virtually all leukemia patients develop anemia (a
deficiency of red blood cells), leukopenia (a shortage of normal white blood cells leading
to increased susceptibility to infection), and thrombocytopenia (a deficiency of platelets
resulting in bruising and easy bleeding).
The major cells affected in leukemia are the lymphocytic (B and T-lymphocytes) and the
myeloid (macrophages and neutrophils) cell lines.The acute leukemias are aggressive
cancer derived from cells early in cell development. In acute leukemias, the bone marrow
is replaced by very immature cells called blasts. Acute leukemia has a very rapidly fatal
course in untreated patients. Leukemia derived from cells later in cell maturity are
chronic leukemias, and tend to have longer courses with greater life expectancy.
Leukemia is thus classified into four main categories (see Exhibit 62): chronic
lymphocytic leukemia (CLL), chronic myelogenous leukemia (CML), acute lymphocytic
leukemia (ALL), and acute myelogenous leukemia (AML).
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United States
Exhibit 62: Classification of Leukemia

ALL
Prevalence
Incidence
2-yr survival
Acute
Immature, blast cells
Rapid progression
44,000
4,000
40%
Lymphocytic
Lymphocyte precursors
CLL
Prevalence
70,000
Incidence
9,700
5-yr survival
71%
Median survival 10yrs
Myeloid
Granulocyte precursors
Chronic
Mature cells
Slower course
AML
Prevalence
Incidence
5-yr survival
age<60
age>60
CML
Prevalence
Incidence
5-yr survival
Median survival
22,400
12,000
30%
<10%
17,000
4,600
32%
5yrs
There are few known disease mechanisms in leukemia. The best characterized is the bcrabl mutation of chromosome 22, commonly referred to as the Philadelphia
chromosome. This abnormality is found in 95% of CML and 25% of adult ALL. The
genetic translocation codes for a specific tyrosine kinase, an enzyme which can promote
DNA replication and cell division. Like lymphoma cells, leukemia cells may have
characteristic proteins on the cell surface. CD52 and CD33 have been associated with
ALL and CML, respectively.
Diagnosis
Up to 50% of patients with chronic leukemia may not have symptoms, and are diagnosed
on the basis of blood tests. Patients may present with systemic symptoms of fatigue,
malaise, weight loss, and sweating. Abdominal swelling may occur as the spleen enlarges
with cancer cells. Approximately 10% of patients with CLL will have classic B
symptoms (fever, weight loss, drenching night sweats). Patients may also have symptoms
related to pancytopenia, or failure of the bone marrow to generate cell lines. Loss of red
blood cells (anemia) causes fatigue and shortness of breath. Loss of white blood cells can
cause fevers and infection. A deficiency of platelets causes easy bruising or bleeding.
The acute leukemias, ALL and AML, tend to progress rapidly with escalating symptoms.
CML starts with an indolent course, but usually within three to five years of diagnosis
patients develop blasts indicative of AML. Once blast transformation occurs, CML has a
similar prognosis to AML. CLL is a truly indolent leukemia, and may progress for years
with few symptoms and little need for aggressive therapy.
Diagnosis of leukemia is based on blood tests, most importantly the number of various
cells in the blood. CLL can be diagnosed on the basis of high numbers of lymphocytes
(often >10X normal). Most patients with a suspected diagnosis of leukemia will receive a
bone marrow biopsy to quantify the degree of bone marrow involvement. Patients with
acute leukemia can also be diagnosed on microscopic examination of peripheral blood for
the presence of blasts.
Treatment
Treatment depends on the type of leukemia, patients age and functional status, and the
stage of disease (see Exhibit 63). The most important guide to treatment is cytogenetic
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analysis for the Philadelphia chromosome. ALL and CML patients with this genetic
mutation are likely to respond to treatment with Gleevec. Other patients will generally
receive either low dose chemotherapy (CLL) or high-dose chemotherapy followed by
stem cell transplant (ALL, CML, AML).
Exhibit 63: Selected treatment options for leukemia
AML
CLL
ALL
CML
High dose chemotherapy

Allogeneic stem cell transplant
Cytarabine + daunorubicin
Alternative regimens
Chemotherapy
Chlorambucil
Cyclophosphamide
Fludarabine
Cladribine
Corticosteroids
+ Philadelphia chromosome
Gleevec
+ Philadelphia chromosome
Gleevec

Vincristine/prednisone/daunorubicin
Alternative regimens

Allogeneic stem cell transplant
Busulfan
Cyclophosphamide
Elderly patients
Mylotarg
Salvage chemotherapy
Cytarabine
Daunorubicin
Mitoxantrone
Biologics
Rituxan (off-label)
Campath
Alternative therapies
Splenectomy
Radiation
Leukapheresis
Maintenance
6MP/MTX/Vincristine/prednisone
Relapse
Cytarabine
Idarubicin
Chemotherapy
Hydroxyurea
Busulfan
Interferon alpha
Chemotherapy and allogeneic stem cell transplant

Patients with AML or CML who can tolerate the procedure are usually referred for
allogeneic stem cell transplant. Allogeneic (from another human, usually a sibling)
transplants are effective by two mechanisms: (1) high-dose chemotherapy prior to
transplant kills most of the tumor; and (2) transplanted stem cells often mount an immune
response (graft versus tumor) against the cancer, helping to ward off relapse.
Patients with AML, ALL, or CML are usually referred for treatment soon after diagnosis
due to their aggressive course. Chemotherapy with or without stem cell transplant is
usually instituted early in the course of the acute leukemias, in the hope of achieving
complete remission or even cure by wiping out all of the cancerous cells. However,
chemotherapy is quite toxic to normal cells as well, and this treatment can be debilitating.
Treatment with chemotherapy is reserved for severe symptoms related to the chronic
leukemias, because the course of these cancers is much longer and symptoms are much
more tolerable.
Several targeted therapies have been approved for treatment of leukemia (see Exhibit 64):
Gleevec has shown significant efficacy in achieving sustained remission of CML and
ALL. Campath and Mylotarg are monoclonal antibodies approved for leukemia;
however, their efficacy has not been demonstrated in placebo-controlled randomized
trials.
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Exhibit 64: Targeted therapies marketed for leukemia
Gleevac
Mylotarg
Enzon
Cephalon
Campath
Company
Novartis
Wyeth/UCB Celltech
Oncaspar
Trisenox
Genzyme/Schering AG
Mechanism of Action
tyrosine kinase inhibitor
MAb to CD33 bound to calicheamicin
pegylated L-asparaginase
arsenic trioxide, induces apoptosis
MAb to CD52
Comment
Philadelphia chromosome +ve
relapsed CD33+ve, >60yo
refractory to native asparaginase
APML accts. for about 20% of AML
B-cell CLL refractory to alkylating
agents and fludarabine
Indication
ALL/CML
AML
ALL
APML
CLL
2005 sales
$2B
<$40M
$24M
<$20M
$38M
Gleevec (Novartis)
Patients with CML and ALL may have a specific mutation that can be targeted with
biologic therapy. Gleevec is an oral tyrosine kinase inhibitor that is selective for plateletderived growth factor. This tyrosine kinase is associated with the bcr-abl mutation
(Philadelphia chromosome) found in 95% of CML and 25% of adult ALL. Gleevecs
efficacy is unmatched in drug therapies of these leukemias in Phase 2 studies, 60% of
CML patients had a major cytogenetic response (elimination of cells exhibiting bcr-abl)
and 95% had a complete hematologic response (no clinical evidence of disease). As a
result of these impressive response rates, Gleevec is now the standard of care in treating
CML and Philadelphia chromosome-positive ALL. Gleevec is FDA approved for firstline treatment of Philadelphia chromosome-positive CML patients in chronic phase; Ph+
CML in accelerated phase, blast crisis, and non-responders to interferon therapy; and
gastrointestinal stromal tumors (GIST). Gleevec sales totaled $2 billion in 2005.
Mylotarg (Wyeth/UCB Pharma)

Mylotarg is a monoclonal antibody targeting CD33 which has been bound to
calicheamicin, a cytotoxic antibiotic. Mylotarg is approved for use in relapsed CD33+

AML in patients over 60 years of age. CD33 is found on leukemic and other blood cell
lines, but not on progenitor stem cells. Once bound to CD33, the molecule is internalized
and calicheamicin is released into the cell, where it bind to and destroys DNA, killing the
cell. Its use is generally limited to patients not candidates for chemotherapy and stem cell
transplant. Mylotarg causes severe myelosuppression. We estimate total sales in 2005 at
less than $40 million worldwide.
Campath (Genzyme/Shering AG)

Campath is a monoclonal antibody targeting CD52. CD52 is found on B lymphocytes.
Campath is approved for the treatment of B-cell CLL in patients who have been treated
with alkylating agents (chemotherapy) and have failed fludarabine. Campath causes
myelosuppression and severe infusion reactions. Sales in 2005 were approximately $38
million.
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Dasatinib (Bristol-Myers Squibb): Tyrosine Kinase Inhibitor
Bristol-Myers Squibb filed an FDA application in December 2005 for dasatinib, an
inhibitor of abl-src tyrosine kinase (similar tyrosine kinase to bcr-abl). The FDA granted
priority review in March 2006. The initial indication will be Gleevec-resistant CML and
Philadelphia chromosome +ve ALL, although we expect BMS to pursue an indication for
front line therapy as well. Goldman Sachs pharmaceuticals analyst, Jim Kelly, expects
approval in 2006, and peak sales of $650 million.
AMN107 (Novartis): Tyrosine Kinase Inhibitor

Novartiss AMN107 is a tyrosine kinase inhibitor with the same mechanism of action as
Gleevec. However, it also inhibits 32 of 33 Gleevec resistant Bcr-Abl point mutants and
is therefore being investigated initially in Gleevec resistant/intolerant CML patients. Our
European pharmaceutical analysts expect Novartis to begin Phase 3 trials of AMN107
2006, with a potential launch in 2008 based a 2007 filing. It is too early to predict which
tyrosine kinases may show better efficacy than others.
Rituxan (Genentech/BiogenIDEC/Roche): MAb to CD20

Genentech is conducting a Phase 3 trial of Rituxan in relapsed CLL. The trial started in
2004, and will enroll 650 patients randomized to fludarabine plus cyclophosphamide +/Rituxan. The endpoint is time to treatment failure. We expect data in 2006-2007.
Genasense (Genta): Bcl-2 Inhibitor. Promotes Apoptosis

Genta filed for FDA approval of Genasense for the treatment of CLL in December
2005. Genasense, an antisense molecule, inhibits the production of bcl-2, a protein
thought to impede apoptosis in cancer cells. In a pivotal study, 241 patients with CLL
were randomized to chemotherapy (fludarabine and cyclophosphamide) with or without
Genasense. The Genasense arm had a higher CR/nPR rate (17% vs. 7%, p=0.025), and a
longer median duration of response (22 months versus not yet defined, p=0.03).
See Exhibit 65 for a list of late-stage development compounds to fight leukemia. See
Exhibit 66 for a list of 2006 events related to the development of cancer therapies.
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Exhibit 65: Selected compounds in late stage development for leukemia

Drug
Dasatanib
Genasense
AMN-107
Genasense
Dacogen
Rituxan
Zarnestra
Cloretazine
Ceplene
Trisenox
Aplidin
Motexafin gadolinium
CEP-701
MLN518
epratuzumab
Company
Bristol Myers Squibb
Genta
Novartis
Genta
SuperGen/MGI Pharma
DNA/BIIB/Roche
J&J
Vion Pharma
Maxim Pharma
Cephalon
Zeltia
Pharmacyclics
Cephalon
Millenium
Immunomedics
Phase
filed
filed
3
3
3
3
3
3
3
2
2
2
2
1/2
1/2
Mechanism of action
Abl-Src tyrosine kinase receptor antagonist
antisense to Bcl-2
Bcr-Abl tyrosine kinase receptor antagonist
antisense to Bcl-2
hypomethylating agent
MAb to CD20
farnesyl protein transferase
alkylating agent
reduces free radical formation
arsenic trioxide, induces apoptosis
peptide derived from Aplidum albicans, inhibits VEGF
thioredoxin reductase inhibitor
tyrosine kinase receptor antagonist
tyrosine kinase receptor antagonist
MAb to CD22
Indication
CML/ALL
CLL
CML/ALL
AML
AML
CLL
AML
AML
AML
APML (a variant of AML)
ALL
CLL
AML
AML
ALL
Exhibit 66: Selected events in 2006

ASCO: American Society of Cancer and Oncology
ASH: American Society of Hematology
Revlimid filing for relapsed refractory MM
FDA action on Thalomid for 1st line MM
FDA action on Revlimid for relapsed refractory MM
Data on Velcade in 1st line treatment of MM
Compendium listing for Revlimid in MM
Phase 2 data on Velcade in mantle cell lymphoma
Phase 2 data on MDX-060 for indolent T cell lymphoma
FDA action on dasatinib for CML/ALL
Phase 3 trial starts for Velcade in relapsed indolent NHL
sNDA filing for Velcade in DLBCL
Phase 3 trial starts for AMN107 in CML
6/2-6/6
12/9-12/12
1/06
1H/06
2H/06
2H/06
2H/06
1H/06
1H/06
mid 2006
2H/06
2H/06
2006
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What to look for when evaluating clinical trials for treating

blood cancers
Inclusion and exclusion criteria. Patients with early- or late-stage disease, or those
with prior therapies, background therapies, or comorbidities cannot be compared
with one another across trials.
Definitions of response. Investigators are generally free to redefine response for
each trial. Use of >75% instead of >90% reduction in M protein as a definition for
very good partial response in multiple myeloma, for example, can significantly affect
the number of patients responding. The duration of response is also important. Please
see Exhibit 67 for some commonly used definitions.
Use of surrogate endpoints. Many drugs are tested in multiple myeloma, partly
because M protein is an easy biomarker to measure disease activity. Surrogate

endpoints vary among trials, but should always be linked to clinically relevant
outcomes (e.g., survival, hospitalization, etc).
Open-label versus double-blind randomized trials. A double-blind, randomized
trial is the most effective way to evaluate the true response to a drug. Results from
open-label, single-arm trials are less compelling.
Exhibit 67: Definitions of responses in clinical trials of blood cancers
Multiple Myeloma
Complete response
Near complete response
Very good partial response
Partial response
Minimal response
Stable disease
Progressive disease
Progression-free survival
Time to progression
Overall survival
No detectable M protein in serum and urine and normal percentage of plasma cells in bone marrow
Same as above, but immunofixation is positive
> 90% decrease in M protein
> 50% decrease in M protein
< 50% decrease in M protein
Stable disease parameters
> 25% increase in M protein, new bone lesions, or new plasmacytoma
Time to death or increase in tumor/cancer burden
Time to death
Lymphoma
Progression-free survival
Time to progression
Overall survival
Complete Response**

Time to death
No clinical, radiological, or other evidence of lymphoma
Partial Response**
Overall response*
Progressive Disease**
50% reduction in sum of diameters of all measurable lesions, objective disease improvement, resolution of B
symptoms
Complete response + partial response
25% or greater increase in at least one lesion, appearance of new lesions or recurrence of B symptoms
*some trials incorporate other categories, such as near complete response (nCR) or very good partial response (VGPR)
**Journal of Clinical Oncology. Lister et al. 7 (11): 1630. (1989)
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Cancer: solid tumors lung, colon and breast cancers
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United States
Cancer: solid tumors lung, colon and breast cancers

Epidemiology of solid tumors
There are over 9 million Americans living with solid tumors. In 2005, approximately
1.3 million new patients were diagnosed and 0.5 million died. Cancers of the lung,
colorectal tract and breast are the three leading causes of cancer related death (see Exhibit
68). Exhibit 69 summarizes selected terminology of solid tumors.
Exhibit 68: New cases and deaths associated with selected solid tumors in 2005
New Cases
Deaths
Lung
172,570
163,510
Colon
104,950
56,290
Rectum
40,340
Colorectal
145,290
Breast
% of Total
New Cases
Deaths
13%
29%
8%
10%
3%
0%
56,290
11%
10%
212,930
40,870
16%
7%
Pancreas
32,180
31,800
2%
6%
Prostate
232,090
30,350
17%
5%
Ovary
22,220
16,210
2%
3%
Bladder
63,210
13,180
5%
2%
Brain / Nerves
18,500
12,760
1%
2%
Kidney
36,160
12,660
3%
2%
Oral Cavity & Pha
29,370
7,320
2%
1%
Larynx
9,880
3,770
1%
1%
Head & Neck
39,250
11,090
3%
2%
Melanoma
59,580
7,770
4%
1%
Endometrium
40,880
7,310
3%
1%
Cervix
10,370
3,710
1%
1%
Thyroid
25,690
1,490
2%
0%
Testis
Other (1)
8,010
390
1%
0%
253,980
160,890
18%
28%
All sites
1,372,910
570,280
100%
100%
(1) Other includes blood cancers with 114,000 new cases and 54,000 deaths
Source: American Cancer Society and Goldman Sachs Research.
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Exhibit 69: Key terms for solid tumors

Term
Definition
Adjuvant /
Neoadjuvant therapy
Treatment given after surgical removal of the primary tumor is called adjuvant
therapy. It is intended to reduce the risk of recurrence. Neoadjuvant therapy is
given before the surgical procedure and may facilitate surgical removal.
Angiogenesis
The process by which new blood vessels are formed
Apoptosis
Normal cellular process leading to programmed cell death
EGF
Epidermal Growth Factor. Protein that stimulates cell growth and proliferation.
EGFR
Receptor for EGF
Oncogene
Mutant form of a normal gene that directs cell growth and division. An
oncogene promotes the uncontrolled growth of cancer.
Tyrosine Kinase (TK)
An enzyme involved in cellular signaling pathways that often promote cell

growth.
Receptor Tyrosine
Kinase (RTK)
Receptor tyrosine kinases (RTKs) are bound to the cell surface. They are
activated when their corresponding "ligand" binds. Examples: EGFR & VEGFR
are activated by EGF and VEGF, respectively.
Tyrosine Kinase
Inhibitor (TKI)
Small molecule that blocks the activity of a Tyrosine Kinase enzyme.
Tumor suppressor
gene
A gene that prevents cell growth. Certain mutations of the tumor suppressor
gene can lead to uncontrolled cell growth.
VEGF
Vascular endothelial growth factor. A protein that stimulates angiogenesis and

increases the permeability of blood vessels
VEGFR
Receptor for VEGF
Basic tumor biology

Cancer is a disease characterized by uncontrolled growth of cells that lose their normal
responsiveness to regulatory pathways. The transformation of cells from a normal to a
cancerous state involves the accumulation of genetic mutations. These genetic alterations
can either be acquired, such as by exposure to carcinogens, or inherited. Three main types
of genetic alterations can drive cells to become cancerous:
1. enhance genes (proto-oncogenes / oncogenes) that promote cell proliferation
2. decrease the function of genes (tumor suppressor genes) that restrain cell
proliferation
3. decrease the function of genes that drive programmed cell death (apoptosis), a
natural process of the cellular lifecycle.

Solid tumors require a dedicated blood supply for two reasons. First, solid tumors
generally cannot grow beyond 1 or 2 mm in diameter without a blood source to supply
nutrients and oxygen. Second, solid tumors use blood vessels to spread to other parts of
the body (metastasize). Tumors drive the process of new blood vessel growth
(angiogenesis) by releasing various growth factors, such as vascular endothelial
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growth factor (VEGF). VEGF plays a significant role in the growth of many types of
solid tumors.
General approaches to cancer therapy

There are three treatment options for solid tumors, which are often used in combination:
surgery, radiation and drug therapy. Anti-tumor drugs have diverse mechanisms of
action. However, four broad approaches follow from the basic tumor biology discussed
above:
1. killing of tumor cells
2. inhibition of tumor cell growth
3. reduction of the blood supply to tumors
4. stimulation of the patients immune response to fight cancer
Traditional chemotherapy acts by killing cancer cells. Biotech drugs generally use
approaches (2)-(4), but (2) and (3) have been more successful to date and will be the
focus of this chapter.
Traditional chemotherapy and supportive care

Chemotherapy is usually injected into the veins (intravenously) over a 1-3 day period in
regular cycles (e.g., every 3-6 weeks over 4-6 months). Traditional chemotherapy can be
toxic to rapidly dividing cells. Therefore, normal tissues that are frequently renewed (e.g.,
hair follicles, gastrointestinal tract, blood-forming cells) can be damaged, leading to hair
loss, nausea and diarrhea and anemia. Exhibit 70 summarizes some typical cytotoxic
drugs and Exhibit 71 shows selected therapies for some of the side effects.
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Exhibit 70: Selected drugs for chemotherapy of cancer
Tumor Type (1)

Lung Colon Breast
Class of Agent
Mechanism of action
Drug
Company
Antimetabolites
Inhibit DNA synthesis by

replacing natural DNA
building blocks
Methotrexate
5-FU
Xeloda
Gemzar
generic
generic
Roche
Eli Lilly
Alimta
Eli Lilly
X
X
X
X
X
Alkylating agents
Damage DNA
Cyclophosphamide generic
Anthracyclines
Inhibit DNA synthesis by

binding DNA
Doxorubicin
generic
Epirubicin
Doxil
generic
JNJ
X
X
Platinum compounds
Taxanes
Vinca Alkaloids
Damage DNA
cisplatin
generic
carboplatin
generic
Eloxatin
SNY
Block cell division by

promoting assembly and
stabilization of microtubules
paclitaxel
generic
Taxotere
Abraxane
SNY
APPX
X
X
Block cell division by

preventing assembly of
microtubules
Vincristine
generic
Vinorelbine
generic
(1) Examples refer to common uses of agents mentioned in this chapter.

APPX = American Pharmaceutical Partners; JNJ = Johnson & Johnson; SNY = sanofi-aventis
Source: Company reports, Goldman Sachs Research.
Exhibit 71: Selected supportive care products
Product
Generic Name
(Company)
Aloxi
Palonosetron
(MGI Pharma)
Mechanism
Block receptors that trigger
vomiting (serotonin, 5HT3
receptors)
Symptom
Treated
2005 U.S. sales

($MM)
Comments
Nausea
$249
Other 5HT3 inhibitors: Zofran (GSK) &

Kytril (Roche)
Neupogen / Neulasta have >95%
market share. Leukine (Schering AG)
has < 5%.
Neupogen
Filgrastim
(Amgen)
White blood cell growth factor
Neutropenia
(low white blood
cells)
$805
Neulasta
Pegfilgrastim
(Amgen)
White blood cell growth factor
Neutropenia
(low white blood
cells)
$1,900
Long-acting version of Neupogen
Procrit / Eprex
Epoetin alpha
(J&J)
Red blood cell growth factor
Anemia
(low red blood
cells)
$2,246
Includes sales outside of cancer
Aranesp
Darbopoeitin Alfa
(Amgen)
Red blood cell growth factor
Anemia
(low red blood
cells)
$2,104
Includes sales outside of cancer
Kepivance
Palifermin
(Amgen)
Epithelial cell growth factor
Oral mucositis
(mouth sores)
$19
Ethyol
Amifostine
(MedImmune)
Neutralizes toxic metabolites of

cisplatin
Kidney toxicity
of cisplatin
$96*
Also reduces side effects of radiation

therapy for head & neck cancer
*sales for Ethyol are worldwide
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Targeted biotechnology drugs

In contrast to chemotherapy, targeted biotech drugs are more selective in their action
on cancer. One category of molecules targeted by biotech drugs are receptor tyrosine
kinases (RTKs), which are bound to the cell membrane and are activated by ligands
(molecules that bind to receptors) acting on the cell surface. Examples of RTKs include
EGFR (epidermal growth factor receptor), HER2 (human epidermal growth factor
receptor 2) and VEGFR (vascular endothelial growth factor receptor). The EGFR and
HER2 pathways stimulate cancer cell growth while the VEGFR pathway primarily drives
angiogenesis. In cancer cells, RTK activity may increase due to genetic alterations. For
example, the number of EGFRs is higher in a variety of cancers.
The side effects of targeted therapeutics tend to be associated with the specific pathways
affected. For example, agents that target the EGFR pathway are associated with skin
rashes, because EGFR is found in normal skin. Inhibition of the VEGFR pathway is
associated with high blood pressure, blood clot formation and abnormal bleeding because
of its effects on blood vessels and the natural blood clotting process.
Selected targeted therapies being marketed or in late stage development are listed in
Exhibit 72.
Exhibit 72: Selected targeted therapies for solid tumors
Oral Small Molecule TKIs
Antibodies
2005 US
Leading Cancer Indications
Stage
Sales ($MM)
Targets
Approved
In Development
Genentech
marketed
$1,182
VEGF
Colon
Lung, Breast
Potential approvals for lung

and breast cancers in H2/06
Herceptin
Genentech
marketed
$747
HER2
Metastatic Breast
Adjuvant Breast
Expect approval in adjuvant

breast cancer in H2/06
Erbitux
ImClone / Bristol-Myers
Squibb/ Merck KGaA
marketed
$413
EGFR
Colon, head & neck
Pancreas, Lung
Panitumumab
Abgenix / Amgen
Phase 3
--
EGFR
--
Colon, head & neck
MDX-010
Medarex / Bristol-Myers
Squibb
Phase 3
--
CTLA-4
--
Melanoma
Tarceva
OSI / Genentech /
Roche
marketed
$275
EGFR
Lung, Pancreas
Ovary, Colon, others
Iressa
AstraZeneca
marketed
NM
EGFR
Lung
Ongoing lung trials
Nexavar
(Sorafenib)
Onyx / Bayer
marketed
NM
VEGFR, RAF kinase,

PDGFR, KIT, FLT-3 &
RET
Kidney
Lung, melanoma, liver
Sutent
Pfizer
marketed
NM
VEGFR, KIT, PDGFR, Gastrointestinal tract,

FLT3
Kidney
Lapatinib
GlaxoSmithKline
Phase 3
--
EGFR & HER2
Breast
Head & Neck, others
PTK787
Novarts / Schering AG
Phase 3
--
VEGFR1 & VEGFR2
--
Colon, lung, others
Drug
Company
Avastin
Comments
Expect approval in 3rd-line

colorectal cancer in H2/06
Humanized monoclonal
antibody
Withdrawn from market. Use

restricted to prior users
Lung, breast, others

Potential FDA filing for breast
cancer by late '06/early '07
Source: Company Reports and Goldman Sachs Research.
Solid tumor staging

After diagnosis, tumors are classified into different stages (staging), which guides
treatment and expectations about the course of the cancer. Staging is usually done
according to the Tumor-Node-Metastasis (TNM) system based on the following:
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1. the size of the tumor (T);

2. the degree to which the tumor has spread to nearby lymph nodes (N); and
3. the spread of the cancer to other parts of the body, i.e., metastases (M).
Cancers are usually divided into four stages. Stage I and II tumors are small and have not
spread. Stage III is more extensive and may involve spread to lymph nodes. Stage IV
tumors have spread to distant parts of the body. Drug therapy is the primary form of
treatment for Stage IV tumors, whereas surgery and radiation may be more appropriate
for earlier stage disease. A combination of techniques is often used.
Evaluating solid tumor clinical trials

There are several factors to consider when evaluating clinical trials in oncology (see
Exhibit 73). These factors can influence the outcome of various treatments and should,
therefore, be balanced across the experimental and control groups.
Exhibit 73: Selected points to consider when evaluating clinical trials in cancer
Issue
Comment
Background
therapy
The type of background therapy to which the investigational drug is added can significantly impact
clinical outcome.
Demographics
Certain demographic factors (e.g., age, gender, ethnicity and smoking status) may have more or less
favorable outcomes.
Inclusion and
exclusion
criteria
Inclusion and exclusion criteria determine which types of patients may enroll in the trial. For example,
the study protocol may specify that patients must have a certain level of performance status, number
of previous therapies or stage of tumor. Narrowly defined study groups may result in narrow product
approvals (smaller market opportunity), although cancer drugs are often used "off-label" by some
physicians.
Primary
endpoint
The success of the clinical trial will be judged based on the outcome with respect to the prespecified
primary endpoint, which is explicitly stated in the study protocol. A study that "misses" its primary
endpoint (e.g., survival), will likely be deemed unsuccessful, even if secondary enpoints (e.g., RR and
PFS) were "hit".
1. Clinical endpoints
Overall survival (OS) the time from patient randomization to death from any cause is
the gold standard measure for evaluating the efficacy of new drugs against solid
tumors. However, a number of other measures, such as progression free survival (PFS),
time to tumor progression (TTP), and response rate (RR) are also evaluated (see
Exhibit 74). Response rates are usually defined using the RECIST (Response Evaluation
Criteria in Solid Tumors) methodology. However, response rate does not always predict
overall survival. PFS and TTP are considered the next best metrics after OS. PFS,
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which includes patients who die from any cause, is considered to be a better measure than
TTP, which does not.
TTP & PFS may improve by only a few weeks by the drug candidate. Therefore,
measurements should be made frequently enough to detect the difference. For drugs that
inhibit, but not kill, cancer cells, TTP should be a better endpoint because it does not
require tumor shrinkage (response rate).
Exhibit 74: RECIST criteria to evaluate response rate and tumor progression in clinical trials
Metrics
Response Rate Metrics
Definition
Complete Response (CR)
Disappearance of all detectable cancer
Partial Response (PR)
At least 30% decrease in the sum of the longest diameters of specified tumors
Stable Disease (SD)
Small changes that do not meet the criteria for CR, PR or PD
Overall Response (OR)
CR + PR
Duration of Overall Response
The time of CR or PR (whichever is recorded first) until PD is documented.
Tumor Progression Metrics

Overall Survival (OS)
The time from patient randomization until death from any cause. The "gold standard"
endpoint.
Disease Free Survival (DFS)
The time from patient randomization until tumor recurrence or death. Often used as an
endpoint in adjuvant therapy trials.
Event Free Survival (EFS)
The time from patient randomization until tumor recurrence, death or other prespecified
events.
Progressive Disease (PD) or

tumor progression
20% increase in the sum of the longest diameters of the specified tumors and / or the
appearance of one or more new lesions
Progression Free Survival

(PFS)
The time from patient randomization until tumor progression or death. Therefore, unexpected
side effects of the drug leading to death will be counted. Differs from TTP, which excludes
patients who die without measured tumor progression. Viewed by FDA as more robust than
TTP.
Time to Progression (TTP)
The time from patient randomization to tumor progression or discontinuation from study due
to toxicity. Excludes patients who die without measured progression, whereas PFS includes
these patients. Viewed by FDA as less robust than PFS.
2. Importance of randomized studies

Partly due to the difficulty in enrolling patients and the relatively small difference in
improvement of therapy, data from studies without randomized control groups are likely
to be difficult to interpret, especially in small Phase 2 studies. Data from historical
control groups may not be reliable due to the rapidly changing standards of therapy.
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United States
3. Health status
One key consideration is the baseline level of health (i.e., performance status) of patients
enrolled. Two scales are commonly used to assess performance status, the ECOG and the
Karnofsky scales (see Exhibits 75 and 76). Most cancer trials generally enroll patients
with relatively good performance status, such as ECOG of better than 2. It is generally
more difficult to show an improvement in sicker patients.
Exhibit 75: ECOG Performance Status criteria
Description
Score
Description
Asymptomatic
80-100
Symptomatic; fully ambulatory
Able to carry on normal activity and to work; no

special care needed.
Symptomatic; in bed <50% of day
50-70
Symptomatic; in bed >50% of day
Unable to work; able to live at home and care

for most personal needs; varying amount of
assistance needed.
Bedridden
0-40
Unable to care for self; requires equivalent of

institutional or hospital care; disease may be
progressing rapidly.
Score
Source: Eastern Cooperative Oncology Group.
100
Exhibit 76: Karnofsky Performance Status criteria
Source: Karnofsky, et al.; Journal of Clinical Oncology, March 1984;

Goldman Sachs Research.
United States
Lung cancer
101
102
United States
United States
Lung cancer
Lung cancer accounted for 173,000 new diagnoses and 163,000 deaths in 2005 more
deaths than colon, breast and prostate cancers combined (see Exhibit 77). Smoking is
believed to be responsible for about 87% of lung cancers. There are two major categories
of the disease: Non-small cell lung cancer (NSCLC, ~80% of cases) and small cell
lung cancer (SCLC, ~20%). The latter is rapidly fatal if untreated. We estimate that each
year about 105,000 and 45,000 patients receive chemotherapy for first-line and relapsed
(second-line or greater) NSCLC, respectively, generating approximately $2 billion in US
sales annually.
Exhibit 77: Lung cancer key facts
Lung cancer at a glance

Number of new cases per year
173,000
Number of deaths per year
163,000
Approved biotech drugs
Tarceva, Iressa
Biologic approvals on the horizon
Avastin (H2/06)
Most common type of lung cancer
non-small cell lung cancer

(NSCLC), 80% of cases
Major types of NSCLC (% of all lung cancers)
Adenocarcinoma (30-50%);
Squamous cell (25-40%)
Source: American Cancer Society and Goldman Sachs Research.

Lung cancer is diagnosed by x-ray, CT scans and tissue biopsy. The major type of lung
cancer, NSCLC, is staged using the TNM classification system discussed earlier (see
Exhibit 78). Staging of SCLC is less helpful as most patients are diagnosed late in the
disease when the cancer has spread to other parts of the body. Therefore, surgical
treatment may be difficult.
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Exhibit 78: Stages of non-small cell lung cancer (NSCLC)
Stage
Approx.
5-year
Survival
Description
IA
Tumor is </= 3 cm and has not reached main airway. No nodal involvement.
61%
IB
Tumor >3cm or has reached a main airway or visceral pleura. No nodal involvement.
38%
IIA
Tumor has spread to nearest lymph nodes around airways or within lung and is 3 cm.
34%
IIB
Tumor has spread to nearest lymph nodes around airways or within lung and is > 3 cm.
24%
IIIA
Direct invasion of chest wall / structures or involvement of lymph nodes adjacent to affected lung.
13%
IIIB
Tumor has invaded mediastinum or tumor has spread to lymph nodes in middle of chest adjacent to
opposite lung.
5%
IV
Distant metastasis
1%
Source: American Cancer Society, NCCN, Goldman Sachs Research.
Treatment
Exhibit 79 outlines the treatment of NSCLC.
Localized (Stage I and II) tumors: Primary treatment is surgery. Radiation alone is
used for patients who are not surgical candidates but is less effective. Adjuvant
chemotherapy is becoming standard of care after surgery. The chemotherapy usually
involves a platinum based drug plus a non-platinum based drug (platinum-based
doublet).
Locoregionally advanced (Stage III) tumors: A combination of radiation, surgery and

chemotherapy is commonly used. As with localized tumors, adjuvant chemotherapy
is with platinum-based doublets.
Metastatic NSCLC where surgery is not possible (Stage IIIb/IV):

First-line therapy
The standard of care for first-line therapy of metastatic NSCLC (mNSCLC) has
been the platinum-based doublet.
Recent data demonstrated that the addition of a biologic, Avastin (Genentech /
Roche) to a platinum-based doublet could extend survival. We expect FDA
approval in 2H2006.
Second- and third-line therapy
104
Standard agents for relapsed NSCLC are chemotherapies such as Alimta,

Taxotere and a new targeted drug, Tarceva. Alimta and Tarceva each hold
about 30% market share.
United States
Exhibit 79: Treatment algorithm for non-small cell lung cancer (NSCLC)
NSCLC
20%
80%
Stage IIIb/IV
(surgery not possible)
Stage I-IIIa
Stage I-II
(localized)
Surgery +
Adjuvant
chemotherapy
Stage IIIa
(locoregionally
advanced)
Chemotherapy "doublet"
(cisplatin or carboplatin + other drug)
+/Avastin
(expect approval in H2/06)
Radiation +/Surgery +/Adjuvant chemotherapy
Relapse
Tarceva
Alimta
Taxotere
Source: Company reports, American Cancer Society, Goldman Sachs Research.

Tarceva
Tarceva (OSI Pharmaceuticals, Genentech, Roche) is approved for treatment of relapsed
NSCLC (and pancreatic cancer). Tarceva is being evaluated in Phase 3 trials for therapy
of earlier stage NSCLC patients in the first-line and adjuvant settings. The US sales
opportunity among first-line and adjuvant patients may exceed $1 billion, versus the
<$0.5 billion potential among relapsed patients. Potential approvals for front line and
adjuvant NSCLC patients may be a few years away. However, Phase 2 data on Tarceva
in first-line patients could be released in 2006. If positive, off-label use may be
stimulated.
Avastin
We expect Avastin (Genentech / Roche), which is approved for colorectal cancer, to be
filed for approval in first-line NSCLC in 2Q2006. Approval may come in 2H2006 and is
largely expected by investors. We believe the US market potential is $1.5 billion.
Erbitux
Erbitux (ImClone, Bristol-Myers Squibb, Merck KGaA) is approved for therapy of
relapsed colorectal cancer and cancer of the head and neck region. It is also being
evaluated in two separate Phase 3 clinical trials of first- and second-line NSCLC, with
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United States
data from both possibly available in 1Q2007. Assuming positive data and regulatory
review, the US sales potential may be > $1.5 billion. However, we view these trials as
high risk and have not assumed substantial sales for Erbitux in NSCLC in our model.
Telcyta
Telcyta (Telik) is a novel chemotherapy agent in Phase 2 trials for first- and second-line
NSCLC. Data from a Phase 3 study (ASSIST-2) comparing Telcyta versus Iressa in thirdline patients are expected in 2H2006. Survival is the primary endpoint. In second/thirdline NSCLC, Telcyta monotherapy has demonstrated encouraging response rate and
survival data in small Phase 2 trials. See Exhibit 80.
Exhibit 80: Selected targeted therapies for non-small cell lung cancer (NSCLC)
Drug
Company
Mechanism of Action
Status
2005 US
Comment
Sales (MM)
Tarceva
OSI Pharmaceuticals,
Genentech, Roche
small molecule inhibitor

of EGFR
Marketed
$275
Iressa
AstraZeneca
small molecule inhibitor

of EGFR
Marketed
NM
Avastin
Genentech / Roche
antibody to VEGFR
Marketed
$1,182
Approved for 1st line colorectal cancer

Limited use in NSCLC, potential approval in H2/06 ($1.5B sales
potential)
Erbitux
Squibb / Merck KGaA
antibody to EGFR
Marketed
$413
Approved for relapsed colorectal cancer & Head & Neck cancer
Limited use in NSCLC, potential P3 data in Q1/07
Telcyta
Telik
novel chemotherapy
Phase 3
--
Phase 3 data may be available in NSCLC in H2/06
Nexavar
Onyx / Bayer
Inhibitor of VEGFR &

Raf
Phase 3
--
Marketed for kidney cancer

P3 trials recently initiated in NSCLC
Zactima
AstraZeneca
VEGFR and EGFR

tyrosine kinase inhibitor
Phase 3
--
P3 studies in relapsed NSCLC are enrolling
30% and 55% shares in 2nd and 3rd line NSCLC, respectively
P3 trials ongoing in 1st and 2nd line NSCLC
No longer approved for newly diagnosed patients

P3 data in 2nd line NSCLC (Iressa vs. Taxotere) may be
available in 2007
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United States
Colorectal cancer
107
108
United States
United States
Colorectal cancer
Colorectal cancer (CRC) is the second-most common cause of cancer-related deaths in
the United States (after lung cancer). There are over 145,000 new cases and over 56,000
deaths per year (see Exhibit 81). Two targeted biotech drugs are approved for CRC:
Avastin (Genentech / Roche) and Erbitux (ImClone / Bristol-Myers Squibb / Merck
KGaA). We estimate that in 2005, the combined US sales in CRC for these two drugs
exceeded $1.3 billion. Avastin is preferred for first-line treatment while Erbitux holds
significant third-line share (see Exhibit 82). A third biologic, Panitumumab (Amgen /
Abgenix), is expected to launch in 2H2006, with estimated peak sales of $0.5 billion in
the initial indication of relapsed CRC.
Exhibit 81: Colorectal cancer key facts
Colorectal cancer (CRC) at a glance

Number of new cases per year
145,000
56,000
Approved biologics
Avastin, Erbitux
2005 US market for biologics in CRC
>$1.3B
Biologic to watch in 2006
Panitumumab
Source: American Cancer Society, Goldman Sachs Research.
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Exhibit 82: Selected targeted therapies for colorectal cancer (CRC)
Status
Approved
2005 US Sales ($MM)
Avastin
Erbitux
Panitumumab
Market
Market
FDA filing by Q1/06
February, 2004
February, 2004
H2/06 expected
1133
413
--
2005 WW Sales ($MM)
1295
679
--
Sales for CRC, in the U.S. (%)
~85%
~80%
--
Humanized MAb against VEGF
Chimeric MAb against EGFR
Fully human MAb against EGFR
Structure
Approved use(s)
1st line colorectal cancer
2nd/3rd line colorectal cancer

Head & neck cancer
Expected uses
2nd line colorectal cancer (filed in

12/05)
Breast cancer (H2/06 approval)
Lung cancer (H2/06 approval)
1st and 2nd line colorectal cancer (P3) 3rd line colorectal cancer (H2/06 approval)
1st line colorectal cancer (P3)
Lung cancer (P3)
Pancreatic cancer (P3)
Head & neck cancer (P2), lung cancer (P2)
Selected side effects
High blood pressure, blood clots,

strokes and heart attacks
Severe rash; severe allergic reactions
--
Severe rash, allergic reactions
Notes:
MAb = monoclonal antibody
Source: Company data, Goldman Sachs Research.
Disease overview
CRC is cancer of the large intestine that typically arises from gland-like polyps. The
cause of CRC is largely unknown. Age is a major risk factor for CRC. The incidence of
CRC begins to increase significantly between the ages of 40 and 50, with 90% of cases
occurring after age 50.

Symptoms of CRC include weight loss, changes in bowel movements, abdominal pain
and blood in the stool. However, many patients are symptom-free even with advanced
tumors.
CRC is usually staged at surgery as being either localized (Stage I-III) or advanced /
metastatic (Stage IV). About two-thirds of patients are first diagnosed after the onset of
symptoms, with 20% at Stage IV. The most common metastatic sites are lymph nodes,
liver and lungs, but many other sites, including bone and the brain may be involved. The
overall five-year survival rate for CRC is about 60%, but varies depending on the stage of
disease (see Exhibit 83).
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Exhibit 83: Stages of colorectal cancer (CRC) by region and 5-year survival
Stage Description
I
Localized tumor
% of initial diagnoses
Colon
Rectum
23%
34%
5-Year survival
Colon
Rectum
93%
72%
II
Tumor extends into or

through the muscle layer of
intestine without spread to
lymph nodes
31%
25%
72-85%
52%
III
Cancer spread to lymph

nodes
26%
26%
44-64%
37%
IV
Distant metastases
20%
15%
8%
4%
100%
100%
Total
Source: SEER database, National Cancer Database, American Cancer Society, Goldman Sachs Research.
Treatment options
Exhibit 85 summarizes the common approaches to treating colorectal cancer.
Stage I-III (locoregional) CRC: The primary therapy is surgery. Over 95% of Stage I
tumors are cured with surgery. For Stage III (and certain high-risk Stage II) colon
cancer, surgery is followed by chemotherapy. For rectal cancer, chemotherapy plus
radiation is common after surgery for Stage II and III disease.
Stage IV (metastatic) and unresectable CRC: As metastatic CRC is not curable,

therapy is intended to relieve symptoms, slow the spread of disease and prolong
survival.
First line. The typical first line treatment regimen involves Avastin in
combination with a chemotherapy cocktail. Xeloda is used in patients who cannot

tolerate aggressive chemotherapy. Some of the common chemotherapeutic
regimens are shown in Exhibit 84.
Second / third line. Relapsed / refractory patients (second-line therapy and
beyond), are typically treated with a chemotherapeutic regimen to which they

were not previously exposed. For example, a patient treated with an Oxaliplatincontaining regimen (e.g., FOLFOX) may be switched to one containing irinotecan
(e.g., FOLFIRI), or vice versa. Biologics are increasingly added to chemotherapy,
with about 40% share for Avastin and 25% for Erbitux. We expect Avastin share
to increase with potential approval of the indication for second-line CRC in
2H2006.
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Exhibit 84: Chemotherapies for colorectal cancer (CRC)
Chemotherapy
Regimens
Chemotherapy Agents
5-flurouracil (5-FU)
Leukovorin (LV)
Irinotecan
Oxaliplatin
5-FU / LV
Bolus
Bolus
--
--
IFL
Bolus
Bolus
Infusion
--
FOLFIRI
Infusion
Infusion
Infusion
--
FOLFOX
Infusion
Infusion
--
Infusion
What is on the horizon?

A number of targeted therapies against VEGFR or EGFR are under development for new
indications in CRC (see Exhibit 86).
112
Avastin is approved for first-line CRC. A new indication for relapsed CRC is under
FDA review, with potential approval in 2H2006.
Erbitux is approved for relapsed CRC. Phase 3 trials for first- and second-line CRC
are ongoing.
FDA approval of a new drug, Panitumumab, in third-line patients is expected in

2H2006. Panitumumab, like Erbitux, is an EGFR antibody. However, Panitumumab
appears to have more flexible dosing with possibly fewer infusion reactions. We
expect Panitumumab to have a sales potential of $0.5 billion in this indication.
Based on mixed efficacy data presented to date, we do not view PTK-787 (Novartis /
Schering AG), an oral inhibitor of VEGFR, to be a significant threat to Avastin.
United States
Exhibit 85: Simplified treatment algorithm for colorectal cancer

colorectal
cancer
80%
20%
Stage IV
Stage I-III
Stage IIb-III
Stage I-IIa
Chemotherapy +/ Avastin
Surgery
relapse
Surgery +/chemotherapy/radiation
Irinotecan
Erbitux +/- Irinotecan (13% share)
Avastin + Chemotherapy*
Exhibit 86: Selected targeted therapies for colorectal cancer (CRC)

Drug
Company
Mechanism of Action
Status
2005 US
Sales (MM)
Comment
Avastin
Genentech / Roche
Humanized antibody to
VEGFR
Marketed
$1,182
Erbitux
Squibb / Merck KGaA
Chimeric antibody to
EGFR
Marketed
$413
Panitumumab
Amgen / Abgenix
Human antibody to
EGFR
--
Expect approval in relapsed CRC in H2/06 with $0.5B sales

potential
Direct competitor to Erbitux
P3 "PACCE" trial of Avastin +/- panitumumab in Q4/06
PTK-787
Novartis / Schering AG
Oral Inhibitor of VEGFR
--
Matuzumab
Merck KGaA / Takeda
--
Lapatinib
GlaxoSmithKline
--
Nexavar
Onyx / Bayer
Humanized antibody to
EGFR
Dual kinase inhibitor of
EGFR and HER2
Oral Inhibitor of Raf,
VEGFR
--
To date, P3 data in 1st and 2nd line CRC has not been
impressive
P2 studies ongoing in CRC
Possibly more convenient dosing than Erbitux
P2 studies ongoing in CRC
P3 trials in breast cancer ongoing
Marketed for kidney cancer
P2 trials ongoing in CRC
Approved for 1st line CRC

Potential approval of relapsed CRC in H2/06 but significant offlabel use limits upside.
Approved for relapsed CRC and head & neck cancer
Expect data from CRC studies in H2/06 with $1B+ sales
potential
113
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United States
United States
Breast cancer
115
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United States
United States
Breast cancer
Breast cancer is the most common female cancer and the second most common cause of
cancer death in women (after lung cancer). In the United States, there are about 2 million
women who have been treated for breast cancer. In 2005, about 270,000 women were
diagnosed with breast cancer with 210,000 cases of invasive disease (stage I to IV) and
60,000 cases of in situ breast cancer (non-invasive). An estimated 40,000 American
women died from breast cancer in 2005. See Exhibit 87.
Exhibit 87: Breast cancer key terms
Breast cancer at a glance

Number of women who have been treated in US
2,000,000
Number of new cases of invasive breast cancer
210,000
40,000
Types of drug therapy
Chemotherapy, hormonal
therapy, biologics
Approved biologics
Herceptin
2005 US market for biologics
$747MM
Biologic approvals on the horizon
Avastin (2H2006)
Source: American Cancer Society, Goldman Sachs Research.
Genentechs Herceptin, which is approved for metastatic breast cancer and has shown
positive results in adjuvant breast cancer (expect 2H2006 approval), generated $747
million in US sales in 2005. We expect US sales of Herceptin to be approximately $1.1
billion in 2006, up 50% year-over-year, driven largely by adoption in the adjuvant
setting.
There is some off-label use of Avastin in metastatic breast cancer. This indication should
be added to the Avastin product label in 2H2006, we believe, with a >$1 billion sales
potential. A number of other biotech agents are in clinical trials and may expand the
market further.
Breast cancer biology

Genetics, hormone receptor status, and certain tumor markers can influence outcomes
and treatment decisions in breast cancer:
Genetics: Approximately 10% of breast cancers may be associated with a positive
family history. However, identified hereditary mutations are rare, with BRCA1 and
BRCA2 being the most common of such mutations. BRCA1 mutations tend to
develop hormone receptor negative tumors, which are more aggressive (see below).
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United States
Hormone receptor status: Breast cancers are dependent upon estrogen and / or
progesterone for growth. Breast cancer cells that over-express estrogen receptors
and/or progesterone receptors are hormone receptor positive (ER+ and / or PR+,
respectively). Conversely, those that lack such receptors are hormone receptor
negative (ER- and PR-). Hormone receptor positive breast cancer tends to grow
more slowly and have more treatment options (see below) and is, therefore,
associated with a better outcome than receptor negative disease.
Tumor markers: The HER2 (human epidermal receptor 2) receptor is involved in

the growth and spread of breast cancer cells. The receptor is over-expressed in about
20-30% of patients with breast cancer. HER2-positive tumors tend to be more
aggressive but are responsive to therapy with Herceptin, which is an antibody to
HER2. VEGF (vascular endothelial growth factor) stimulates angiogenesis, and
potentially aggressive breast cancer growth. EGFR (epidermal growth factor
receptor) is also over-expressed in many breast tumors and may contribute to cancer
growth.

The majority of breast cancers are initially diagnosed by an abnormal mammogram.
Ultrasound and, occasionally, MRI are used to evaluate suspicious lesions. Tissue
biopsies are required for definitive diagnosis. Examination of lymph nodes for the
presence or absence of cancer cells helps to determine whether the tumor is node
positive or node negative, respectively. Patients with node positive disease are likely to
receive imaging scans to determine if the cancer has spread to other parts of the body.
Exhibit 88 summarizes the staging of breast cancer.
Exhibit 88: Stages of breast cancer and relative 5-year survival rates
(1)
Stage Description
0
Cancer cells are located within a duct and have not invaded the surrounding
breast tissue (also called ductal carcinoma in situ, DCIS)
I
5-year
Relative
(2)
Survival
100%
Tumor is </= 2cm
100%
IIA
Tumor is </= 2cm and has spread to 1-3 axillary lymph nodes or the tumor is
between 2-5 cm but has not spread to lymph nodes
92%
IIB
Tumor is between 2-5 cm and has spread to 1-3 axillary lymph nodes or the tumor
is >5cm but has not spread to lymph nodes
81%
IIIA
Tumor is < 5cm and has spread to 4-9 axillary lymph nodes or the tumor is >5 cm
and has spread to 1-9 lymph nodes
67%
IIIB
Tumor has grown into chest wall or skin
54%
IIIC
Tumor has spread to >9 axillary nodes or to nodes around the collar bone or to
internal mammary nodes on the same side of the body as the breast cancer
--
The tumor has spread to distant organs (e.g., bone, liver, lung).
20%
IV
(3)
(1) Staging descriptions are simplified

(2) Relative survival refers to deaths from from breast cancer only
(3) 5-year survival rates are not yet available for Stage IIIC, which was defined in 2002
Source: 2003 American Joint Committee on Cancer (AJCC) staging criteria for breast cancer, American
Cancer Society and Goldman Sachs Research.
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Treatment
There are three main types of drug therapies for breast cancer: chemotherapy, hormonal
therapy and biologics. They may be used alone or in combination.
Chemotherapy: Anthracyclines (e.g., doxorubicin, epirubicin) and taxanes (Taxol,
Taxotere) are commonly used agents (Exhibit 89). Traditional chemotherapy is more
likely to be used for ER- / PR- tumors and for patients with aggressive tumors that
have spread to internal organs.
Exhibit 89: Selected chemotherapy regimens for metastatic and adjuvant breast cancer
Biologics
Selected breast
cancer regimens
Metastatic
Avastin / Taxol
Herceptin / Taxane (3)
CMF
CAF / FAC
FEC
Gemzar / Taxol
Avastin (1)
Herceptin (2)
Anthracyclines
Taxane
(Doxorubicin or (Taxol or
or Epirubicin) Taxotere)
Other Chemotherapy
CTX
MTX Gem
5-FU
+/- LV
X
X
X
X
X
X
X
X
X
X
X
Xeloda / Taxotere
Anthracycline alone
Taxane alone
Xel
X
X
X
X
X
X
X
Adjuvant
AC-T, Herceptin
AC (+/- T)
CMF
FAC / CAF
FEC
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Biologics in bold
(1) Expect approval of Avastin in 1st line metastatic breast cancer in combination with Taxol in H2/06.
(2) Herceptin is only effective in breast tumors that overexpress HER2 (~20-30%).
(3) Herceptin + Taxane can be used with or without Carboplatin
CTX = cyclophosphamide; Gem = Gemzar; MTX = methotrexate; Xel = Xeloda;
5-FU +/- LV = 5-fluorouracil with or without leucovorin
Source: National Comprehensive Cancer Network, American Cancer Society and Goldman Sachs Research.
Hormonal therapies: Hormonal therapies are generally directed at decreasing the
activity of estrogen, which tends to stimulate the growth of hormone receptor

positive breast cancer. Tamoxifen and the aromatase inhibitors (AIs) are the most
commonly used agents in this class. Hormonal therapies are more likely to be used
for ER+ / PR + cancers and slowly progressive tumors with no spread to internal
organs. Please see Exhibit 90 for selected hormonal therapies.
Biologics: Herceptin (Genentech / Roche), the only biologic approved for breast
cancer. It is a humanized monoclonal antibody that binds to the HER-2 receptor,

thereby inhibiting cancer growth and spread. The FDA approved indications are: (1)
as a single agent for HER2-positive patients with metastatic breast cancer that have
failed other therapies; and (2) in combination with Taxol in first-line metastatic
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breast cancer. There is an increase in side effects for the heart, especially when used
in combination with an anthracycline and cyclophosphamide. Based on recent strong
data, Herceptin has rapidly become a standard treatment for early stage disease after
surgery (adjuvant). We expect approval of this indication in 2H2006.
Exhibit 90: Selected hormonal therapies for breast cancer
Hormonal
Therapies
Antiestrogens
Examples
Comment
Faslodex
Pure anti-estrogen with a steroid structure.
Aromatase
Inhibitors (AIs)
Arimidex, Femara,
Aromasin
Inhibit the Aromatase enzyme involved in producing estrogens
LHRH agonists
Zoladex, Lupron
Peptide analogs of LHRH (luteinizing hormone releasing hormone) that suppress the
pituitary-ovarian axis, leading to a fall in estrogen levels.
Surgical removal of ovaries.
Ovariectomy
SERMs
Tamoxifen, Evista
Selective Estrogen Receptor Modulators. Mixed agonist / antagonist actions on estrogen

receptors in different tissues.
Sex steroid
therapies
Progestins,
androgens, estrogens
Progestins are the most commonly used
Source: Company data, American Cancer Society, Goldman Sachs Research.
Metastatic Breast Cancer

Fewer than 10% of women present with metastases (stage IV disease) at the time of
diagnosis of breast cancer. Five year survival of Stage IV patients is only about 5-10%.
Therefore, the goal of treatment is to reduce symptoms rather than to cure. The treatment
for metastatic breast cancer (Exhibit 91) can vary by physician, but in general, depends
on HER2 status, hormone receptor status and prior adjuvant treatments that may have
been received.
Taxanes or nonanthracycline-containing regimens are frequently used in first-line
metastatic breast cancer for hormone refractory patients (adjuvant anthracyclines would
have often been used previously). HER2-postitive tumors (about 20-30%) are likely to be
treated with Herceptin. Options for relapsed (second+ line) metastatic breast cancer
include anthracyclines, taxanes, Xeloda, Gemzar, 5-FU/LV, and etoposide.
Recent data indicates that Avastin (Genentech / Roche), an antibody targeting VEGF, is
effective as first-line therapy when combined with Taxol in first-line metastatic breast
cancer. Filing is expected in 2Q2006, with potential approval in 2H2006. Avastin therapy
may not be appropriate for patients with clotting or bleeding problems.
Hormonal therapy is often given as initial therapy in hormone receptor-positive
metastatic breast cancer due to its milder side effects versus chemotherapy.
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Exhibit 91: Selected approaches to treat hormone receptor positive metastatic breast cancer
Hormone receptor
positive
Hormonal therapy
Yes ~75%
No ~25%
First line, non-hormonal therapy

HER2 positive
No
75%
Yes
25%
Avastin(1) + Taxol/Taxotere
or
other chemotherapy
Herceptin(2) + Taxol/Taxotere
Second line
Chemotherapy not yet attempted
Herceptin (2)
Third line
Chemotherapy not yet attempted
Liposomal doxorubicin
Experimental therapy
(1) Expect approval of Avastin + Taxol in H2/06.
(2) Herceptin is approved as a single agent in relapsed patients and in combination with Taxol in 1st line patients.
Source: American Cancer Society, National Comprehensive Cancer Network and Goldman Sachs Research.
Adjuvant therapy (see Exhibit 92)

With breast cancer screening having become widespread, the large majority (~90%) of
breast cancers are early stage (localized, Stage I-III) at diagnosis and, therefore, are
potentially amenable to surgery and adjuvant therapy. Adjuvant therapy for early-stage
breast cancer is complex and depends on several variables (see Exhibit 92): (1) the extent
of spread to lymph nodes; (2) hormone receptor status; (3) whether the patient has
reached menopause; (4) HER2 status (20-30% of patients are HER2 positive); (5) tumor
size; and (6) tumor histology grade (microscopic appearance of cells). Other
considerations include the patients functional status and tolerance of side effects from
drugs. Adjuvant hormonal therapy (e.g., Tamoxifen, aromatase inhibitors) benefits
patients with ER-positive tumors, but not those with tumors lacking these receptors.
Until recently, adjuvant chemotherapy regimens usually involved treatment with an
anthracycline-based cocktail followed by a taxane, or vice versa. As noted earlier,
Herceptin in combination with chemotherapy has rapidly become a standard component
of adjuvant therapy.
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United States
Exhibit 92: Selected approaches to treat breast cancer after surgery (adjuvant therapy)
Node Negative, high risk*

or Node Positive
Node Negative,
low risk*
HRHR-
No
Therapy
HR+
HR+
Chemotherapy
+/- Herceptin**
Premeno.
Tamoxifen
or
Ovarian suppression
or
No therapy
Postmeno.
Premeno.
Postmeno.
AI
or
Tamoxifen -> AI
or
No therapy
Chemotherapy -> Tamoxifen

or
Ovarian suppression
Chemotherapy -> AI
or
Tamoxifen -> AI
* Lower risk: smaller tumor size (e.g., <2cm), no adverse histologic features; no lymph node involvement.
Higher risk: larger tumor size (e.g., >2cm), adverse histologic features; lymph node spread
** If HER2-positive (20-30% of cases), Herceptin may be beneficial
HR +/- = hormone receptor positive /negative; AI = Aromatase Inhibitor; ovarian suppression = ovariectomy or
LHRH antagonists; Premeno = premenopausal; Postmeno = postmenopausal
Source: Journal of Clinical Oncology, September 2003, & Goldman Sachs Research.
What's on the horizon for targeted therapies?

As discussed earlier, Avastin is likely to be the next targeted biotech drug to be approved
for breast cancer. Approval is anticipated in 2H2006. Approval of Herceptin in adjuvant
therapy is also expected 2H2006. Lapatinib, an inhibitor of EGFR and HER2 kinases, is
in Phase 3 trials for advanced breast cancer. FDA filing is expected by late 2006/early
2007. A number of other products are in Phase 2 development (see Exhibit 93). Iressa
and Tarceva target the EGFR. PTK-787, Sorafenib and Sutent have activity against
VEGFR, among other molecular markers.
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United States
Exhibit 93: Selected targeted therapies of breast cancer

Drug
Company
Mechanism of Action
Status
2005 US
Comment
Sales (MM)
Avastin
Genentech / Roche
humanized antibody to
VEGFR
Marketed
$1,182
Approved for 1st line colon cancer

Potential approval (combo with Taxol) of 1st line MBC in H2/06
Herceptin
Genentech / Roche
humanized antibody to
HER2
Marketed
$747
Approved in MBC. Expect approval in adjuvant breast cancer in

H2/06.
Lapatinib
GlaxoSmithKline
Dual kinase inhibitor of

EGFR and HER2
Phase 3
Everolimus
Novartis
mTOR inhibitor
Phase 2
Iressa
AstraZeneca
Small molecule inhibitor

of EGFR
Phase 2
Lonafarnib
Schering Plough
Farnesyl Transferase
Inhibitor
Phase 2
P2 studies in MBC ongoing
PTK-787
Novartis / Schering AG
Inhibitor of VEGFR-1, 2
and 3
Phase 2
To date, P3 data in 1st and 2nd line colon cancer has not been
impressive
Nexavar
Onyx / Bayer
Inhibitor of Raf, VEGFR2&3
Phase 2
On market for kidney cancer
Sutent
Pfizer
Inhibitor of KIT, PDGFR,

FLT3, and VEGFR
Phase 2
On market for kidney cancer and gastrointestinal stromal tumors
Tarceva
OSI Pharmaceuticals,
Genentech, Roche
Small molecule inhibitor

of EGFR
Phase 2
Encouraging P2 response rates (~35%) in first-line MBC.

Potential filing by late 2006 / early 2007
P2 studies in MBC ongoing
NM
$275
Withdrawn from market for lung cancer due to lack of survival

benefit
Approved for relapsed lung cancer and pancreatic cancer.
123
124
United States
United States
Diabetes
125
126
United States
United States
Diabetes
Diabetes can broadly be defined as an insulin disorder. In Type 1 diabetes (about
10% of all diabetes), patients cannot produce insulin. In Type 2 diabetes, patients
do not adequately respond to insulin. Type 1 diabetes is typically diagnosed in
childhood, while Type 2 diabetes is more frequently diagnosed in adulthood.
Serious complications include cardiovascular and kidney disease and blindness.

According to the Centers for Disease Control and Prevention (CDC), there were
approximately 20.8 million people with diabetes in the United States in 2005, of whom
about 70% had been diagnosed. In addition, there are estimated to be 41 million prediabetics (people with impaired glucose tolerance or impaired fasting glucose) in the
United States. Diabetes is an age-related metabolic disorder, and the incidence and
prevalence, correlated to the growing global obesity problem, has been on the rise. The
US market for diabetic drugs approximated $9 billion in 2005.
Therapy
The primary treatment for Type 1 diabetes is insulin therapy. A second option became
available in 2005, with the introduction of Amylin Pharmaceuticals Symlin. There are
several classes of oral drugs for treating Type 2 diabetes. As patients progress, many
eventually also require insulin therapy.
Top-selling oral agents include the thiazolidinediones, Takedas Actos and Glaxos
Avandia, each with 2005 US sales of over $2 billion.
Total US insulin sales in 2005 approximated $3 billion. Leading insulin providers

include Eli Lilly, Novo Nordisk and sanofi-aventis.
New Agents
Amylin/Eli Lillys Byetta, introduced in mid-2005, represented a first-in-class

mechanism for Type 2 diabetes, and we believe is at the early stage of significant
product ramp. A once weekly formulation, Exenatide LAR, in development with
Alkermes, slated for Phase III, could also significantly expand the market.
Inhaled insulin is a new area of focus with the recent FDA approval of Pfizer/sanofi
Aventis/Nektars Exubera. Other companies including Eli Lilly, Alkermes,
Mannkind and others, are in clinical studies with inhaled insulin.
Newer thiozolidinediones are in late-stage clinical development and new

mechanisms, including DPP4 inhibitors are also being pursued. Late-stage
compounds include Galida (AstraZeneca), Galvus (Novartis), and Januvia (Merck).
Events to watch
Phase III data and regulatory path for new thiazolidinediones and DPP4 inhibitors.
Roll out of Exubera and development of additional inhaled insulin candidates.
127
128
United States
New insulin analog launches in 2006
Byetta commercial ramp and development of once weekly formulation.
American Diabetes Association meeting June 2006.
European Association for the Study of Diabetes meeting September 2006.
United States
Market opportunity
Disease prevalence
According to the Centers for Disease Control and Prevention (CDC), there were
approximately 20.8 million people with diabetes in the United States in 2005, of whom
about 70% had been diagnosed (see Exhibit 94). Of these, between 90-95% have Type 2
diabetes and between 5-10% have Type 1 diabetes. The prevalence of diabetes has been
on the rise, driven in part by the growing global obesity epidemic. Between 1997-2003,
the number of new patients diagnosed with diabetes in the United States grew by 52%.
Globally, it is estimated that just under 200 million people have diabetes.
The primary treatment for Type 1 diabetes is insulin therapy. Type 2 diabetes is first
treated with diet and exercise, and then a series of oral medications, and as the disease
progresses, insulin therapy for many patients.
Exhibit 94: Diabetes key facts
Figures in millions
U.S. estimated prevalence statistics for 2005
Number of people with pre-diabetes
Number of people with diabetes
Diagnosed patients
41
21
Type 1
1.5 - 2
LTM U.S. sales of major drug classes

Insulins
Non-insulins:
Thiazolidinediones
Sulfonylureas
Biguanides
$3,454
5,643
4,167
629
562
LTM U.S. sales of top-selling non-insulins

Actos (Takeda)
Avandia (GlaxoSmithKline)
$2,259
1,908
Type 2
14
74% (of total oral sales)

11%
10%
LTM = Last twelve months

Source: Centers for Disease Control and Prevention, American Diabetes Association, IMS data, Goldman
Sachs Research estimates.
Market
The US market for insulin was approximately $3.5 billion in 2005 (latest twelve months,
from Feb 2004 Jan 2005). The insulin market is dominated by Eli Lilly, Novo Nordisk
and sanofi-aventis (see Exhibit 95). The US market for oral diabetes medications was
approximately $5.6 billion over the same period. Among the larger oral products are the
thiozolidenediones, including Actos and Avandia.
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United States
Exhibit 95: Insulin market dynamics
Price per
1000 units
Humulin
(LLY)
Novolin
(NVO)
Humalog
(LLY)
Novolog
(NVO)
Lantus
(SNY)
LLY
Franchise
NVO
Franchise
Market
$21.07
n.a.
$71.88
$74.88
$66.85
--
--
$58.67
Lantus
33.9%
26.4%
30.2%
LLY
-12.3%
-8.3%
-4.6%
NVO
27.3%
22.2%
26.3%
Market
5.9%
8.7%
13.9%
Prescription growth
Humalog + Novolog +
Combo
Combo
-7.7%
90.3%
-0.3%
49.9%
2.5%
47.6%
2004
2005
2006 YTD
Humulin
-14.8%
-12.9%
-9.0%
Novolin
10.7%
9.7%
15.2%
November
December
January
-15.2%
-14.6%
-9.0%
8.1%
7.3%
15.2%
-0.1%
-0.7%
2.5%
41.9%
40.3%
47.6%
25.3%
21.2%
30.2%
-9.5%
-9.3%
-4.6%
19.6%
18.8%
26.3%
8.1%
7.1%
13.9%
Humulin
23.2%
22.9%
22.3%
21.9%
21.6%
21.5%
Novolin
19.1%
19.4%
19.4%
19.5%
19.5%
19.9%
Humalog
15.9%
15.6%
15.6%
15.4%
15.5%
15.1%
Novolog
12.4%
12.8%
13.0%
13.3%
13.5%
13.3%
Lantus
29.4%
29.3%
29.8%
29.9%
30.0%
30.3%
LLY
39.2%
38.5%
37.9%
37.3%
37.1%
36.5%
NVO
31.5%
32.2%
32.4%
32.7%
33.0%
33.2%
Market
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Market share
August
September
October
November
December
January
Market share
50.0%
40.0%
30.0%
20.0%
10.0%
Novolin
Humalog+Combo
Novolog+Combo
Jan-06
Nov-05
Jul-05
Sep-05
May-05
Jan-05
Mar-05
Nov-04
Jul-04
Sep-04
May-04
Jan-04
Mar-04
Nov-03
Jul-03
Sep-03
May-03
Jan-03
Mar-03
Nov-02
Jul-02
Humulin
Sep-02
May-02
Jan-02
Mar-02
Nov-01
0.0%
Lantus
Source: IMS data, Goldman Sachs Research estimates.
Actos and Avandia are class leaders among oral agents. While the biguanide class
(metformin) is among the most frequently prescribed, the entry of generics has impacted
market dynamics (see Exhibits 96 and 97).
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United States
Exhibit 96: US sales of oral diabetes medications, 2003-2005

$ millions
Thiazolidinediones
Biguanides
Sulfonylureas
Meglitinides
Alpha-glucosidase inhibitors
Incretin mimetics (Byetta)
Symlin*
Total
Feb 2003 - Jan 2004

$3,058
1,002
764
129
42
Feb 2004 - Jan 2005

$3,462
701
715
141
43
$4,995
$5,062
Feb 2005 - Jan 2006

$4,167
562
629
143
44
87
12
$5,643
% of total
74%
10%
11%
3%
1%
2%
0%
100%
* Indicated for the treatment of Type 1 and Type 2 diabetes
Source: IMS data.
Exhibit 97: Oral therapeutics market share and growth trends

Glucophage Glucophage XR
(BMY)
(BMY)
Glucovance
(BMY)
Gluco Franchise
Actos
(BMY)
(LLY/Takeda)
Avandia
(GSK)
Other
Market
Price per day
$3.02
$1.82
$2.16
--
$5.43
$4.80
--
$3.45
Most recent
increase
Jan-06
Jan-06
Jan-06
--
Sep-05
Nov-05
--
--
Prescription growth
Glucovance
Gluco Franchise
Actos
Avandia1
Other2
Market
2004
2005
2006 YTD
-43.9%
-41.1%
-24.2%
-81.6%
-57.8%
-45.4%
-53.3%
-83.6%
-54.3%
-64.0%
-64.8%
-46.6%
5.6%
17.2%
28.5%
23.6%
25.2%
22.4%
23.1%
17.4%
24.2%
5.9%
13.4%
22.6%
November
December
January
-23.2%
-22.5%
-24.2%
-51.0%
-43.9%
-45.4%
-52.6%
-48.6%
-54.3%
-40.0%
-40.4%
-46.6%
16.4%
16.4%
28.5%
12.5%
16.1%
22.4%
22.1%
18.4%
24.2%
18.4%
16.3%
22.6%
Glucovance
Gluco Franchise
Actos
Avandia
Other
Market
0.4%
0.4%
0.3%
0.3%
0.3%
0.3%
1.8%
1.8%
1.6%
1.5%
1.4%
1.1%
10.4%
10.5%
9.9%
9.8%
10.1%
10.5%
14.1%
13.8%
13.3%
13.0%
13.7%
13.9%
73.6%
73.9%
75.1%
75.8%
74.9%
74.5%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Market share
August
September
October
November
December
January
0.5%
0.4%
0.4%
0.4%
0.4%
0.3%
0.5%
0.5%
0.4%
0.4%
0.4%
0.3%
Market share
35%
30%
25%
20%
15%
10%
5%
Glucophage
Actos
Nov-05
Aug-05
Feb-05
May-05
Nov-04
Aug-04
Feb-04
May-04
Nov-03
Aug-03
Feb-03
Glucovance
May-03
Nov-02
Aug-02
Feb-02
Glucophage XR
May-02
Nov-01
Aug-01
Feb-01
May-01
Nov-00
Aug-00
Feb-00
May-00
Nov-99
Aug-99
Feb-99
May-99
Nov-98
Aug-98
0%
Avandia
1 - Avandia market share and growth contains Avandamet

2 - Other includes the generic metformin formulations.
Source: IMS data, Goldman Sachs Research estimates.
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United States
Disease overview
General mechanics of glucose control
Insulin, a hormone produced in the beta cells of the pancreas, is required for the
metabolism of glucose (see Exhibit 98). Glucose is the primary energy source for the
brain. Insufficient blood glucose levels can result in coma and/or death. Consequently,
blood glucose levels are tightly regulated. Glucose metabolism is predominantly
controlled by the pancreas, the liver and the brain. When glucose rises in the bloodstream
following a meal, the pancreas secretes insulin. Insulin enables cells to use glucose. The
liver supplies glucose between meals, primarily by converting glycogen stores to glucose,
a process mediated by the hormone glucagon. When blood sugar is too low, the liver
converts glycogen stores to glucose. Too much sugar and too much insulin over a
protracted period are damaging.
Exhibit 98: Diabetes key terms
Term
Glucose
Glycogen
HbA1C
Hyperglycemia
Hypoglycemia
Insulin
Description
Simple sugar; chief energy source for the body
Main form in which carbohydrates are stored in the body
Metric used for measuring the level of glucose in the blood.
Refers to the level of glycated hemoglobin.
Abnormally high concentration of glucose in the blood
Abnormally low concentration of glucose in the blood
Hormone that enables glucose to be used
Disease classification and pathophysiology

The majority of cases of diabetes fall into two broad categories; Type 1 and Type 2
diabetes.
Type 1 diabetes is characterized by a patients inability to produce insulin because of

the destruction of pancreatic beta cells. The disease, which does have a genetic
component, is typically diagnosed in childhood or early adulthood. The primary therapy
is insulin. Amylins Symlin, introduced in 2005 can be used as an adjunct to insulin
therapy. In relatively rare cases, islet cell transplants are done.
Type 2 diabetes, traditionally called adult onset diabetes, is typically an age-related

metabolic disorder, although the prevalence among children has been rising in recent
years, with increased childhood obesity. This disease is characterized largely by a
patients inability to respond to insulin, a condition referred to as insulin insensitivity.
The body initially produces elevated insulin levels, but over time, the pancreas loses its
ability to produce sufficient insulin, and insulin supplements are often required. Type 2
diabetes is also characterized by increased glucose production by the liver (partially
owing to lessened insulin suppression).
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United States
Complications of diabetes are severe

Both elevated insulin and elevated blood sugar over time cause damage to the
cardiovascular and nervous system. Diabetes results in significant complications, or comorbid conditions with time (see Exhibit 99). Diabetes is a major cause of kidney
disease, blindness, cardiovascular disease, lipid imbalances, elevated cholesterol, nerve
damage and limb amputation.
Exhibit 99: Complications of diabetes
Heart disease and stroke
High blood pressure

Blindness
Account for ~ 65% of deaths in diabetics. Adults with diabetes have heart
disease death rates about 2-4 times higher than adults without diabetes. The
risk for stroke is 2-4 times higher.
~ 73% of diabetic adults have high blood pressure or use medication for
hypertension.
Diabetic retinopathy causes 12,000-24,000 new cases of blindness each year.
Leading cause of new cases of blindness in adults aged 20-74 years.
Kidney disease
Leading cause of kidney failure; accounted for 44% of new cases in 2002.
Nervous system disease
~ 60-70% of diabetics have mild-severe nervous system damange. Severe

cases may lead to limb amputation; > 60% of nontraumatic lower-limb
amputations occur in diabetics.
Source: Center for Disease Control; National Diabetes Fact Sheet, 2005.
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United States
Treatment
Diagnosis
There are three primary tests used to diagnose diabetes (see Exhibit 100), of which the
oral glucose tolerance test (OGTT) is the most sensitive.
Exhibit 100:
Diagnostic tests for diabetes
Test
Casual plasma glucose
Fasting plasma glucose (FPG)
Oral glucose tolerance test
Description
Blood glucose at any time of day without regard to time
since last meal
Fasting => no caloric intake for at least 8 hours
Adults fast overnight and then receive a bolus of 75g
glucose in oral solution. Blood glucose is measured at
< 2hours after ingestion and at 2 hours after ingestion.
Criteria for diabetes

200mg/dL (11.1mmol/L)
126 mg/dL (7.0mmol/L
200mg/dL (11.1mmol/L)
Source: American Diabetes Association. Diagnosis and classification of Diabetes mellitus. Diabetes Care;
29: S43-S48.
Treatment goals
The main goal of diabetes Type 1 and Type 2 therapy is to attain blood sugar or glycemic
control. The primary means of assessing long-term glucose is a measure called glycated
hemoglobin A1c (HbA1c). Typically it takes three to four months to obtain the full
impact of agents on HbA1c levels. This is so because it is based on the glucose carried on
the hemoglobin of red blood cells. Red blood cells turn over every 120 days on average.
Long-term studies in both Type 1 and Type 2 patients have demonstrated that reductions
in HbA1c are associated with reductions in a broad range of co-morbid conditions.
Without aggressive management, HbA1c levels tend to increase with time. And as longterm follow-up studies show, even with intensive management, HbA1c levels increase,
but more modestly, over time. Fasting and post-meal or post-prandial glucose levels are
also an important measure of underlying diabetes.
According to the American Diabetes Association (ADA), the HbA1c goal for patients in
general is to get to HbA1c levels at or below 7%. Based largely on the results of two
landmark studies, the DCCT study and follow-on EDIC study in Type 1 patients and the
UKPDS study in Type 2 patients, the trend has been toward more aggressive insulin use
among insulin-using patients. Data from these studies and others suggest that an
approximate 1% reduction in HbA1C translates to roughly a 40% reduction in diabetic
complications. While impacting HbA1c levels, the cost of intensive insulin management
has been increased weight gain and an elevated risk of hypoglycemia.
Treatment of Type 1 diabetes

Insulin therapy is the only treatment option for Type 1 diabetes. Intensive insulin therapy
is the preferred regimen and consists of two types of insulin; 1-2 daily injections of an
intermediate- or long-acting insulin (basal delivery), coupled with doses of rapid or veryrapid acting insulins, three or more times daily, the latter to control post-prandial
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United States
(following a meal) hyperglycemia. Insulin pumps are also used. For all patients, good
glucose monitoring is key.
Symlin (Amylin) is approved for use with insulin in Type 1 and Type 2 patients. A
synthetic form of the natural hormone amylin, Symlin works in concert with insulin to
regulate glucose. Clinical data indicate that Symlin can improve blood sugar control with
lower insulin levels. Symlin also promotes weight loss. However, because it increases the
risk of hypoglycemia and engenders 2-3 injections on top of a similar number of insulin
injections plus intensive glucose monitoring, its use has been limited.
Exubera (Pfizer, Aventis) was approved by the FDA in January 2006, as the first inhaled
form of insulin (rapid-acting) for the treatment of Type 1 and Type 2 diabetes. Uptake is
likely to be strong, particularly among patients in need of insulin therapy who are averse
to more needle-intensive regimens. Commercial launch is anticipated in mid-2006.
Treatment of Type 2 diabetes

The first step in managing a Type 2 diabetes patient is attaining glycemic control with
diet and exercise (see Exhibit 101). However, over time, patients require pharmacologic
management. Currently there are several classes of approved oral agents, each of which
works through a different mechanism (see Exhibit 102). A number of the newer drugs are
combinations of two existing classes, e.g., Metaglip, a combination of Metformin, a
biguanide, and Glipizide, a sulfonylurea. Over 6 million patients are taking oral therapy
in the United States. Eventually, many patients also require insulin therapy. Oral agents
are also used with insulin therapy. It is estimated that currently, over 3 million Type 2
patients in the United States are on insulin therapy.
Sulfonylureas
The oldest class, the sulfonylureas, work by increasing insulin secretion. These agents
work only when there are sufficient insulin-producing B-cells in the pancreas.
Sulfonylureas are indicated in patients who have failed diet and exercise therapy alone.
Commonly used sulfonylureas include short acting agent, Tolbutamide, intermediate
acting agents, Glipizide and Glicazide, and long-acting agents, Chlorpropamide,
Glyburide and Glimepiride.
Meglitinides
The meglitinides act like the sulfonylureas in that they stimulate insulin secretion.
However, they bind to different receptors and are generally more rapidly absorbed and
cleared. There are only two commercially available meglitinides: Novo Nordisks
Repaglinide (Prandin) and Novartis Nateglinide (Starlix). Repaglinide can be used in
treating patients with renal impairment.
Biguanides
The biguanide class features one main compound, Metformin, sold by Bristol-Myers
Squibb, and is now available in generic form by a range of suppliers. Metformin
increases insulin activity but does not impact pancreatic beta cells. A central activity of
metformin is to lower glucose production by the liver by potentiating insulin activity.
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United States
Metformin does not induce hypoglycemia when used as monotherapy. In addition, it is

not associated with weight gain. While metformin is a main stay of diabetes treatment, it
is contra-indicated in patients with kidney impairment owing to the potential for inducing
lactic acidosis, a rare, but potentially fatal complication. The metformin label carries a
black box warning for lactic acidosis.
(alpha)-glucosidase inhibitors
Acarbose is the main agent in this category. The (alpha)-glucosidase inhibitors work by
breaking down oligosaccharides into monosaccharides in the small intestine, thereby
lowering post-meal (prandial) glucose and delaying glucose absorption. While acarbose
is effective, it is difficult for some patients to tolerate because of flatulence.
Thiazolidinediones (TZDs)
The thiazolidinediones are the newest class of oral diabetic drugs and are broadly
thought of as insulin potentiating agents or insulin sensitizers. This class of agents
includes GlaxoSmithKline's rosiglitazone (Avandia) and Takedas pioglitazone (Actos).
The thiazolidinediones work through a receptor called the peroxisome proliferation
activated receptor gamma (PPARy), which regulates transcription factors for genes
involved in insulin action and lipid metabolism. These agents are thought to enhance
insulins ability to cause glucose uptake in muscle tissue. Some thiazolidinediones have
also demonstrated positive effects on plasma lipids, including raising HDL and lowering
LDL cholesterol. Side effects common to the class include weight gain, fluid retention
and mild general swelling.
Insulins
Insulins are used to treat type-2 diabetes patients who have failed oral agents. The
advantages of insulin are that that it produces a profound blood sugar lowering effect, has
a long safety profile, and with the advent of long- and short-acting forms, has become
easier to use. The disadvantages are that it is injectable (or requires insulin pumps),
dosing must be titrated to meals, there is risk of hypoglycemia and insulin causes weight
gain. Despite the drawbacks, clinical studies suggest that earlier and more aggressive use
of insulin is warranted. However, intensive insulin management comes at a cost: obesity
and hypoglycemia risk.
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United States
Exhibit 101: Treatment algorithm for Type 2 diabetes

Pre-screening to
identify patients with
impaired glucose
tolerance
Estimated number of patients
Patients
Pre-diabetics
Type 2 diabetics
3 million
Stage 2: Monotherapy with oral
medications:
Sulfonylureas (common)
Biguanides (common)
Alpha-glucosidase inhibitors
Failure to meet
A1C goal
Failure to meet
A1C goal
Stage 1: Diet, exercise,

weight reduction
Stage 3: Dual therapy with oral medications

Any 2 of the above
Add Byetta (currently indicated for use with Metformin and
Sulfonylureas)
6 million
Stage 4a: Triple therapy with
oral medications
Failure to meet
A1C goal
Failure to meet
A1C goal
Stage 4b: Insulin therapy +/oral medications
Stage 5: Adjust existing regimen and/or add Symlin
>3 million
Source: Clinical literature, American Diabetes Association, Goldman Sachs Research estimates.
137
Exhibit 102:
United States
Selected commonly prescribed oral diabetes therapies
Generic name
Brand name
Company
Thiazolidinediones (TZDs) - Increase the sensitivity of the body to insulin
Pioglitazone
Actos
Takeda
Rosiglitazone
Avandia
GlaxoSmithKline
Biguanides - Increase the action of insulin
Metformin
Glucophage
Metformin
Glucophage XR
Metformin
Generic
Teva, Andrx
Date introduced
1999
1999
1995
2000
2001
Incretins - enhance glucose-dependent insulin secretion

Exenatide
Byetta
Amylin
2005
Amylin replacement - suppresses post-prandial rise in glucagon

Pramlintide
Symlin
Amylin
2005
Sulfonylureas - Increase insulin secretion

Tolbutamide
Generic
Acetohexamide
Generic
Glipizide
Glucotrol (2nd gen)
Glipizide
Glucotrol XL (2nd gen)
Chlorpropamide
Diabinese
Glyburide
Diabeta (2nd gen)
Glyburide
Micronase (2nd gen)
Glyburide
Glynase (2nd gen)
Glimiperide
Amaryl (2nd gen)
Mylan
Barr Labs
Pfizer
Pfizer
Pfizer
Aventis
Pfizer
Pfizer
Aventis
Meglitinides - Increase insulin secretion

Repaglinide
Prandin
Nateglinide
Starlix
Novo Nordisk
Novartis
1950s
1990s
1995
1950s
1980s
1980s
1980s
1995
1997
2000
Alpha-glucosidase inhibitors - delay food absorption, lower post-meal glucose

Acarbose
Precose
Bayer
Miglitol
Glyset
Bayer
1997
2000
Combinations:
Pioglitazone + Metformin
Rosiglitazone + Metformin
Rosiglitazone + glimepiride
Metformin + Glyburide
Metformin + Glipizide
2005
2002
2006
2000
2002
Actoplus
Avandamet
Avandaryl
Glucovance
Metaglip
Bristol-Myers Squibb, Takeda

GlaxoSmithKline
GlaxoSmithKline
Source: Company data, Goldman Sachs Research.
Significant unmet medical need

According to the American Diabetes Association, only about 50% of patients on oral
therapy reach goal. A proprietary Goldman Sachs survey of US-based endocrinologists
published in 2005 highlighted several unmet needs in the market place. Progressive
weight gain, a side effect of three commonly used agents, sulfonylureas,
thiozolidinediones, and insulin is an increasingly difficult problem to manage. Insulin
itself was estimated to have been used only in about 25% of patients who were eligible,
for several reasons. In addition to weight gain, monitoring and injection requirements
were also issues. Some of the newer agents in development may help to address some of
these concerns (see Exhibit 103).
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Class
Established mechanisms
Mechanism
Advantage
Disadvantage
Sulfonylureas
Biguanides
Increase insulin secretion

Lower liver glucose production
Inexpensive
No weight gain, reasonable safety profile
except rare occurance of lactic acidosis,
relatively inexpensive with generics
Cause weight gain
Insulin sensitizers, more efficient Potent, differentiated mechanism

glucose utilization
Enables glucose utilization
Significantly impacts glucose control.
Insulin
Agents/companies
United States
Exhibit 103: Current agents and agents in development
Metformin (Bristol Myers Squibb), Generics
Fluid retention, weight gain
Actos (Takeda/Eli Lilly), Avandia (GSK)
Injection, frequent monitoring,

weight gain, hypoglycemia risk
Many agents - Eli Lilly, Novo Nordisk, sanofi aventis,

others
Twice daily injectable, nausea
Byetta (Amylin/Eli Lilly)
High injection and blood sugar

monitoring requirements,
hypoglycemia risk, nausea
Long-term safety not known
Symlin (Amylin)
May not obviate weight gain, fluid

retention, high regulatory hurdles
(Pargluva)
Weight neutrality disadvantage
relative to injectable GLP-1s
Galida (AstraZeneca), LY519818 (Eli Lilly), R483

(Roche)
Recently commercialized/approved agents

Incretin mimetics (GLP-1)
Amylinomimetics
Inhaled insulin
Agents in the pipeline
Enhanced TZDs dual/pan (PPARS)
DPP4 inhibitors
Long-acting GLP-1s
GLP-1 lowers blood sugar only

when glucose is high
Mimic natural amylin hormone
which co-regulates blood sugar
with insulin
Enables glucose utilization
No independent risk of hypoglycemia,

causes weight loss
Additive to insulin effect, only new option
for Type 1 patients, promotes weight loss
Obviates needle requirements
Insulin sensitizers, more efficient Receptor specificity designed to improve

glucose utilization
cardiovasular profile
GLP-1 potentiators (block GLP-1 Oral rather than injectable, weight neutral
degretation)
a plus relative to sulfonylureas and TZD
oral therapy
GLP-1 lowers blood sugar only
Reduced dosing frequency
when glucose is high
Still injectable
Exubera (Pfizer/sanofi-aventis/Nektar)
LAF 237 (Novartis), Sitagliptin (Merck), 823093

(GSK)
Exenatide LAR (Amylin/Eli Lilly/Alkermes),
Liraglutide (Novo Nordisk), PC-DAC (ConjuChem)
Source: Company data, Goldman Sachs Research estimates.
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Pipeline
A pipeline of selected new agents currently in development is shown in Exhibit 104
Exhibit 104: Select new agents in development for Type 2 diabetes
Candidate
Phase
Company
DUAL/PAN PPARS
Galida
LY519818
R483
Naveglitazar
677954
625019
LY 929
III
II
II
II
II
I
I
AstraZeneca
Eli Lilly
Roche
Ligand
GlaxoSmithKline
GlaxoSmithKline
Ligand / Eli Lilly
DPP4 Inhibitors
Galvus (LAF 237)
Januvia (MK-431)
Denagliptin
III
III
II
Novartis
Merck
GlaxoSmithKline
GLP-1
Liraglutide (NN2211)
Exenatide LAR
PC-DACTM: Exendin-4
716155
III (1)
II
I/II
I
Novo Nordisk
Amylin / Alkermes / Eli Lilly
Conjuchem / Amylin / Alkermes / Eli Lilly
GlaxoSmithKline / Human Genome Sciences
Beta3 adrenergic agonist

Solabegron
II
GlaxoSmithKline
Sodium dependent glucose transport inhibitor

189075
II
GlaxoSmithKline
Oral antidiabetic agent - novel mechanism

NN9101
Novo Nordisk
Footnotes:
Phase III to start in Feb 2006.
(1)
Inhaled products behind Exubera

Novo Nordisks AERx; Novo recently (March 7, 2006) reinitiated its Phase III program
and has acquired the technology from its partner. We expect a further update in late April
when Novo reports earnings.
Lilly and Alkermes initiated Phase III trials for their inhaled insulin device (AIR insulin)
in July 2005.
Mannkind Corporation is also conducting Phase III studies with its Technosphere Insulin
System.
KOS Pharmaceuticals has a breath-activated inhaler in Phase II
Dual / PAN PPARs

Dual and PAN Peroxisome proliferation activated receptors (PPARS) are intended to
improve upon the existing TZD classes by selectively impacting specific receptors
(alpha/gamma)to favorably impact cholesterol and triglyceride profiles. However, several
agents in this class have been hindered by unfavorable safety profiles. Edema (fluid
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retention) and weight gain have been side effects that have plagued the class. The most
advanced agent, Bristol-Myers Squibbs Pargluva, received an approvable letter from the
FDA requesting additional cardiovascular safety data because of concern over potential
cardiovascular risks in October 2005.
AstraZeneca: Galida
Galida (tesaglitazar) is currently in Phase III trials. The GALLANT program comprises
10 ongoing studies. AstraZeneca announced that data from these trials would be
presented at its Business Review Day on June 8, 2006. Assuming positive data, the
company plans to file an NDA in 2007. Discussions remain ongoing with the regulatory
authorities; early 2007 safety data will be key to further development.
Bristol-Myers Squibb: Pargluva (Muraglitazar)

In October, Bristol-Myers Squibb and its former partner Merck announced that the FDA
would need additional studies to be conducted in order to assess the safety profile of
Pargluva. These additional studies could take five years to complete. As a result, Merck
terminated its interest in Pargluva and returned all rights to Bristol-Myers Squibb.
Bristol-Myers Squibb is currently investigating options including conducting additional
studies or terminating further development of Pargluva. Given the regulatory hurdles, our
US Pharmaceutical Research team no longer forecasts any Pargluva revenues.
GLP-1 approaches tapping a natural mechanism

The glucagon-like peptide (GLP-1) is a gut hormone that plays a significant role in the
regulation of insulin and glucose. It stimulates insulin secretion and suppresses glucagon
secretion in a glucose-dependent manner, i.e., only when blood sugar levels are high
(glucagon has opposing effects to insulin, i.e. it raises blood glucose levels). Early
clinical and preclinical data suggest that GLP-1 may also have a role in preserving beta
cell function. If this is ultimately proven, which we believe would be difficult, we believe
that the therapeutic utility of the GLP-1 class would be significantly elevated.
GLP-1 has been a long sought-after therapeutic target; however, natural GLP-1 has a very
short half-life of only approximately several minutes. It has therefore been difficult to
develop a therapeutic agent around this target.
Amylin: Exenatide LAR currently in Phase II

Exenatide (marketed by Amylin as Byetta) is an incretin mimetic. As with natural GLP-
1, Exenatide works by stimulating insulin secretion in a dose-dependent manner, and by

suppressing post-prandial glucagon secretion. Exenatide has a half-life of several hours
and is indicated for use via twice-daily subcutaneous injections.
Amylin is also developing a once-weekly version of Exenatide (Exenatide LAR or longacting release); Phase II data has been released. The company is currently in discussions
with the FDA over next steps for the advancement of this compound. These will either
entail: (1) Bioequivalence studies (the shorter clinical path), or (2) Full Phase III studies,
in which two studies of several hundred patients and at least 6 months duration would be
required. An open-label study is expected to start in H1 2006. However, the main gating
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factor on timing may be the development of adequate manufacturing capabilities. Based

on manufacturing scale-up requirements, we would not expect launch before 2009.
Novo Nordisk: Liraglutide (NN-2211)

Liraglutide is a stable analog of GLP-1, administered as a once-daily subcutaneous agent
(versus twice-daily for Byetta). Novo Nordisk announced positive top-line results from a
165-patient, 14-week, Phase IIb monotherapy study in November, 2005. Patients had
previously been treated with either diet/exercise or with a single, oral antibiotic. The data
indicated that HbA1c was reduced by 1.5 2.0% versus placebo from a baseline of
around 8.5%. At the highest dose, over 45% of patients achieved the target of HbA1c
7%, versus less than 8% for the placebo group. Furthermore, at the highest dose, body
weight was reduced by approximately 3kg from a baseline of around 90kg. The
incidence of nausea was 5-10%, versus 30-40% in various Byetta studies.
The detailed results from the trial may be expected at a scientific meeting in 2006 and
potential launch may occur in the 2009 timeframe. Based on this preliminary data from a
relatively short, small study, Liraglutide appears to be at least as effective as Amylins
Byetta and has a once-daily versus twice-daily dosing schedule. However, given that
Amylins long-acting release (LAR) formulation of Byetta, which is currently in Phase II
trials, is expected to launch around the same time period, this may negatively affect the
sales outlook for Liraglutide.
ConjuChem: PC-DACTM: Exendin-4

Canadian company ConjuChem is also developing a GLP-1 compound, PC-DACTM:
Exendin-4. Exendin-4 is a modified GLP-1 analog that has been bonded to recombinant
human albumin to extend its half-life. ConjuChem reports that the compound has a halflife of up to one week and that its conjugation with albumin may prevent the
pharmacokinetic surge of drug responsible for causing nausea in patients, as well as
shielding it from immune system recognition.
ConjuChem intends to initiate a single-dose, Phase I/II trial of PC-DACTM: Exendin-4 in
Type 2 diabetics in mid-March 2006. The double-blind, single escalating dose trial will
enroll 68 patients with HbA1c levels ranging from 6.5-11%, and will consist of six
cohorts (plus two optional cohorts) and a maximum tolerated group. Preliminary data is
expected in mid-2006. Following the completion of this study, ConjuChem intends to
initiate a Phase I/II multiple dose trial.
DPP4 inhibitors novel mechanism and oral

A derivative approach of the GLP-1 analogs is to target an enzyme central to cleaving
GLP-1, called dipeptidyl peptidase 4 (DPP4). The potential advantages of this approach
are that it is amenable to oral, potential once-daily therapy. In addition, in clinical studies
so far, nausea has not been observed as a central side effects as it has with the GLP-1
approaches.
Although the DPP4 inhibitors are less advanced and Phase II studies differ somewhat
between compounds under study, the impact on HbA1c looks similar to that observed
with the GLP-1 approaches and there appears to be no increased risk of hypoglycemia.
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The disadvantages may be lack of effect on weight (GLP-1s induce weight loss) and
importantly, concern about more systemic side effects, as the DPP4 enzyme is
ubiquitous.
Novartis: Galvus (LAF-237)

Novartis is developing Galvus (LAF-237), an oral DPP4 inhibitor with the potential for
once-daily dosing. The company presented top-line data from various studies in January,
2006. Full Phase III data is expected at the American Diabetes Association meeting in
Washington, D.C. (June 9-13, 2006). Novartis intends to file an NDA in the United
States in 1Q2006 and to file in the EU in 4Q2006.
The data showed that Galvus met its primary endpoint of non-inferiority relative to
rosiglitazone (a TZD), with no weight gain; patients dosed with Galvus experienced a
1.82% reduction in HbA1c at 24 weeks compared to a 1.86% decrease in patients dosed
with rosiglitazone. The study was a 24-week study in 254 treatment-nave patients, of
whom 166 were dosed with 50mg Galvus. Baseline HbA1c was > 9%.
The data also showed that treatment with Galvus resulted in improvements in glycemic
control, with no weight gain, when added to glimepiride (a sulfonylurea). Galvus did not
meet its primary endpoint of non-inferiority in trials against metformin; however, it
demonstrated a reduction in HbA1c of approximately 1.1% when added to metformin.
This suggests that the compound may be used as second-line therapy in metformin
failures. Studies also showed that the 100mg dose (once-daily) was equivalent to the
50mg (twice daily) dose. Adverse events included a 2.4% incidence of cardiac events,
hypertension (3.4%), ECG abnormalities (9.6%) and conduction abnormalities (5.0%).
Merck: Januvia (sitagliptin)

Januvia is a once-daily DPP4 inhibitor under development at Merck. The company
announced that it expects FDA action on its NDA for Januvia by mid-October. To date,
the company has not disclosed much about the extend of its Phase III program, likely
indications or side effects, possibly due to the competitive nature of this market. Results
from the Phase III trials are anticipated at the American Diabetes Association conference
in June.

Endpoints
Assessment of the change in HbA1c level is the primary measure of efficacy.
Traditionally, statistically significant improvements of around 1% HbA1c have been
considered clinically relevant, but this measure must be placed in the context of starting
HbAlc levels (the higher, the easier to show a change), and side effects. When comparing
clinical study results it is important to consider concomitant medications (some cause
weight gain such as insulin and the TZDs), co-morbid conditions, and/or change in
HbA1c from baseline versus placebo.
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Hepatitis C
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United States
Hepatitis C
The hepatitis C virus (HCV) infects about 4 million people in the United States and
is thought to have infected over 170 million people worldwide. Chronic infection
occurs in 54 80% of cases and, over a 20 year period, leads to cirrhosis in about
10-20% of cases and liver cancer in a small fragment of patients. Despite broad
disease prevalence, there are limited treatments available.

Mainly reflecting the lack of therapeutic options, there is currently a limited commercial
market for hepatitis C treatments. The only approved treatments are alpha interferon and
ribavirin. US sales of these products in 2005 were over $1 billion (according to IMS
data); however, not all of these revenues pertain to hepatitis C, as alpha interferon is used
to treat other disorders, including hepatitis B and cancer. We believe that new therapeutic
agents could address a multi-billion dollar product opportunity.
Therapy
The approved therapies for hepatitis C are alpha interferon and ribavirin. Pegylated (long
acting alpha interferon) and combination alpha interferon/ribavirin therapies are also
available. US sales of pegylated interferons amounted to $724 million in 2005 (include
sales for non-hepatitis C indications). Treatment results in viral cure in only about 4050% of patients. Treatment uptake has been limited because of severe side-effects.
New Agents
For the first time, new agents that directly attack the hepatitis C virus (as opposed to
modifying the immune response to it) are in development. It is hoped that hepatitis C can
be better treated by directly attacking the virus and precluding its ability to replicate and
infect other cells. Companies are also developing novel immunomodulatory treatments.
Vertexs hepatitis C protease inhibitor, VX-950, looks to be among the most potent
viral inhibitors in development, based on early clinical data. Other companies
developing hepatitis C protease inhibitors include Schering Plough and
Gilead/Achillion.
Idenix is furthest along in developing a hepatitis C polymerase inhibitor,

Valopicitabine. Other companies pursuing this target include ViroPharma, with
HCV-796.
Human Genome Sciences is developing a different formulation of a long-acting

alpha interferon, Albuferon, which may enable reduced dosing frequency, improved
tolerability and possibly, improved efficacy. Phase II studies are underway.
Events to watch
Clinical and medical data from Vertex, Idenix, ViroPharma, Schering-Plough and
others.
Key meetings: Digestive Disease Week meeting in April, American Association for
the Study of Liver Disease (AASLD) in October 2006.
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Market opportunity
Fewer than half the patients with chronic hepatitis C infection are effectively treated,
partly due to limited therapeutic choices, lack of therapeutic specificity (no direct antivirals) and high side-effects (see Exhibit 105).
New direct anti-viral therapies and/or better immunomodulatory therapies may
significantly expand treatment options and the market over time. As with other viral
disorders such as AIDS, we think it likely that a multi-therapy approach would be
adopted. Several agents could address a multi-billion dollar commercial market.
Exhibit 105: Hepatitis C at a glance
Hepatitis C at a glance*
Number of infected patients (U.S.)
U.S. sales of top agents (alpha interferon, ribavirin)**
3.9 million
$1.1 billion
Estimated patients with chronic hepatitis C infection (54 - 80% of those infected)
Patients estimated to progress to cirrhosis over an average of 20 years (~ 20% of chronically infected)
Annual new patients progressing to decompensated liver disease (2-5% of cirrhosis patients)
Base population with decompensated liver disease (10-20% of cirrhosis patients)
2.1-3.1 million
420,000-620,000
8,400-31,000
42,000-124,000
Annual new patients progressing to liver cancer (0.5 - 3.0% of cirrhosis patients)
2,100-18,600
Estimated annual deaths
8,000-13,000
*Patient estimates, particularly on progression, are highly variable

** Sales include revenues from other indications
Source: Clinical literature, CDC estimates, IMS, Goldman Sachs Research estimates.
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Disease overview
Hepatitis C Virus
The hepatitis C virus is a blood-borne virus. The most common modes of infection are
through intravenous drug use, blood or organ transplant prior to 1992, occupational
hazard and less commonly, through sexual intercourse and via maternal transmission.
The rate of new infection has decreased dramatically since the early 1990s, with effective
blood screening tests. Given the roughly 20 year period over which the infection becomes
overtly manifest as liver disease, there is concern about identifying individuals who have
been infected in prior decades. The prevalence of patients with overt liver disease is
expected to increase in the coming decades.
There are six different genotypes of the hepatitis C virus (see Exhibit 106). The most
common, and the most difficult to treat is genotype 1, which is thought to account for
roughly 70-75% of cases in the United States. Other common genotypes include
genotypes 2 and 3. These genotypes are typically more amenable to treatment. Several
additional factors are associated with a more positive prognosis following infection,
including a younger age at infection, female gender, Caucasian race and intact immune
function at infection.
Exhibit 106: Key terms to know in Hepatitis C
Term
Cirrhoris
HCV RNA testing
HCV genotype
Hepatocytes
Seroconversion
Sustained viral response (SVR)
Early virologic response (EVR)
Viral reduction
Description
Liver disease (characterized by fibrotic tissue and dysfunctional hepatocytes)
Method of quantifying viral levels
1 of 6 main variations in HCV RNA (genetic) sequence
Liver cells
Development of antibodies to HCV in the serum
Absence of HCV RNA 6 months after treatment ends
2 log drop in viral load 12 weeks into treatment, good predictor of SVR
Degree of reduced virus, typically expressed in logs (1 log = a tenfold decrease)
Source: Clinical literature, Goldman Sachs Research.
Diagnosis
Hepatitis C is diagnosed by the presence of hepatitis C RNA, or HCV RNA (genetic
material) in a patients blood serum. HCV RNA is measured in logs (a log-10 change is a
10-fold increase or decrease). At-risk, or symptomatic patients, are typically first tested
for antibodies to the hepatitis C virus, which are typically detectable within 7-12 weeks
of initial infection. If antibodies are present, patients are then tested to quantify the
amount of virus present.
New diagnostic assays have significantly increased the level of viral quantification. In
patients with chronic infection, viral loads typically range from 103 to 107genomes per ml
of serum. Patients are also tested for the genotype of virus present, as the genotype will
influence treatment decisions.
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Elevated serum aminotransferase liver enzymes (ALT) levels are indicative of liver
damage, but this marker varies significantly among patients. Moreover, several factors
in addition to hepatitis can cause enzyme elevations. Liver biopsies are the only definitive
way to assess the extent of liver fibrosis and inflammatory damage. Liver biopsies are
frequently not done early because they are invasive and involve some sampling error.
Disease course
Infection with HCV results in acute hepatitis, which is typically asymptomatic. Clinical
data suggest that between 55 80% of patients with acute hepatitis C develop chronic
infection (see Exhibit 107). Chronic infection is defined as the persistence of HCV RNA
for 6 months.
Typically, it takes roughly two decades for the infection to become manifest as overt liver
disease, and progression varies significantly among patients. Even where liver disease
eventually develops, most patients are typically asymptomatic during the process.
However, the disease can also become manifest during this period as hematological or
autoimmune dysfunction. Over a period of roughly 20 years, an estimated 10-20% of
infected patients will develop cirrhosis of the liver. Cirrhosis is characterized by the loss
of functional liver cells and the emergence of fibrous tissue in the liver. Decompensated
cirrhosis is advanced liver disease, which has a five-year survival rate of around 50%.
Liver transplantation is the only effective therapy at this stage; however, recurrent
infection is frequent. Approximately 1-3% of patients with hepatitis C infection develop
liver cancer each year. The Center for Disease Control estimates that 8,000 to 13,000
deaths occur each year from chronic HCV infection.
Exhibit 107:
Disease course and treatment considerations

Patients already infected with HCV: 3.9MM
Patients chronically infected: 2.1 3.1MM (54 80%)
Patients who progress to cirrhosis over avg. of 20 yrs: 420 620,000 (~ 20%)
Annual new patients with decompensated liver

disease: 8.4-31,000 (25%)
Annual new patients with liver cancer :

2.1-18,600 (0.5-3.0%)
Deaths: 8 13,000 per year
Considerations for treatment:
HCV viral load within patient

HCV genotype
Degree of liver fibrosis
Likely patient compliance
Tolerability of drugs
Source: Clinical literature, CDC estimates, IMS, Goldman Sachs Research estimates.
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Pathophysiology an efficient virus that targets the liver

The hepatitis C virus principally invades liver cells or hepatocytes. Acute viral infection
triggers an immune response in the patient, involving the production of interferons (antiinflammatory proteins), infection-fighting T-cells, and the formation of antibodies.
Interestingly, the virus itself may not be directly toxic to its liver cell hosts, but is thought
to trigger liver damage through the immune response that the virus elicits. (To survive,
viruses must not do extensive damage to the cells that host them).
Despite its long apparent latency period, the hepatitis C virus actually multiplies and
mutates frequently. Within any given genotype, many variations in the HCV RNA arise,
resulting in high levels of what are called quasispecies within an infected patient. This
high variation may play a role in protecting the virus from the immune system and has
contributed to making it a challenge to treat.
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Treatment
Treatment goals sustained viral response
Treatment guidelines are provided by the American Association for the Study of Liver
Disease (AASLD). The primary goal of treatment is to prevent complications of the virus
by eradicating it. Simply put, the goal of therapy is to achieve a sustained viral response
or SVR, defined as the absence of HCV RNA during, and six months after, the end of
treatment.
Several clinical studies have indicated that an early virologic response (EVR) is often
predictive of ultimately achieving a sustained virologic response. An EVR is defined in
some studies as a 2-log drop 12 weeks into therapy. As mentioned, a log-10 change is a
10-fold increase or decrease. Patients whose HCV RNA levels stabilize on treatment are
referred to as non-responders. Partial responders are patients whose viral levels
decline but never become undetectable.
Current treatment options

To date, the only commercially available therapies are alpha interferon and ribavirin
(see Exhibit 108). Alpha interferon is a broad immunomodulatory agent. The two most
recently introduced versions are pegylated (attached to a polyethylene glycol unit), to
increase their circulating time (half-life) in the bloodstream. These include Roches
Pegasys (Peginterferon alfa-2a) and Schering- Ploughs Peg-Intron (Peginterferon alfa2b). Ribavirin is a small molecule compound (synthetic nucleoside) that works by
disrupting HCV replication.
Exhibit 108: Drugs used to treat chronic hepatitis C
Generic (trade name)
Combination peginterferon regimens with ribavirin:
Peginterferon alfa-2a (Pegasys, Roche)
Peginterferon alfa-2b (Peg-Intron, Schering-Plough)
Ribavirin (Rebetol, Schering-Plough or Copegus, Roche)
Regimens used in certain circumstances:
Peginterferon alfa-2a monotherapy (Pegasys, Roche)
Peginterferonalfa-2b monotherapy (Peg-Intron, Schering-Plough)
Recommended dose
180 mcg SQ once weekly, regardless of weight
1.5mcg/kg SQ once weekly
800-1200mg PO daily (in 2 divided doses), dose depending on infection, genotype, weight
Interferon alfa-2b + rivabirin (Rebetron, Schering-Plough)
180mcg SQ once weekly, regardless of weight

1.0mcg/kg SQ once weekly
Inteferon alfa-2b SQ 3mU t.i.w. Ribavirin 1000mg PO daily < or = 75kg or 1200mg daily if > 75 kg
(in 2 divided doses)
Interferon:
alfa-2a (Roferon-A, Roche)
alfa-2b (Intron-A, Schering-Plough)
consensus (Infergen, InterMune)
3mU SQ t.i.w.
3mU SQ t.i.w.
9mcg SQ t.i.w.; 15mcg t.i.w. in non-responders
Abbreviations: kd, kilodaltons; mcg, micrograms; SQ, subcutaneously; kg, kilograms; mU, million units; t.i.w. three times a week; PO, by mouth; mg, milligrams
Source: Adapted from AASLD practice guidelines, product labels.
Choice of therapy, dosing and duration of administration are determined in large part by
the hepatitis C genotype, level of liver fibrosis, drug tolerability and compliance. For
genotype 1, the standard of care is a combination of weekly subcutaneous injections of
either Pegasys or Peg-Intron, and oral ribavirin. An estimated 40-50% of genotype-1
patients are able to achieve a sustained viral response. The rates are higher (60-80%) for
genotypes 2 and 3.
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Side-effects are significant. Side-effects of alpha interferon include neutropenia
(decrease in white blood cells), thrombocytopenia (decrease in platelets), depression,

hypo- and hyperthyroidism, fatigue and nausea. Side-effects of ribavirin include
hemolytic anemia (decrease in red blood cells) and potential for birth defects.
According to the AASLD treatment guidelines
For genotype-1 HCV infection, treatment should be planned for 48 weeks, using 180
mcg of Pegasys or 1.5mcg/kg of Peg-Intron, both administered subcutaneously once
weekly, along with ribavirin doses of either 1,000 mg for those 75kg in weight, or
of 1,200 mg for those > 75kg in weight.
For genotype-2 or genotype-3, treatment should be administered for 24 weeks, using

a ribavirin dose of 800mg.
There are also recommended guidelines for re-treatment in non-responders or relapsers,

for patients co-infected with HIV and for patients with renal disease, among others.
Because of the variance in serum aminotransferase levels, the AASLD recommends
initiating individualized therapy in patients regardless of serum aminotransferase levels.
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Pipeline
A number of potential first in class agents are in development for hepatitis C (see
Exhibit 109). New direct anti-viral therapies targeting different viral enzymes that
are necessary for viral replication have shown early evidence of efficacy. Improved
formulations of alpha interferon and other new immunomodulatory approaches are
also in development.
Exhibit 109:
Selected agents under development for the treatment of Hepatitis C
PRODUCT CANDIDATES
COMPANY
PARTNER
POLYMERASE INHIBITORS
Valopicitabine (NM283)
Idenix
Novartis (option) II
Polymerase inhibitor
HCV-796
XTL-2125
ViroPharma
XTL-Biopharmaceuticals
Wyeth
Ib
I
Polymerase inhibitor (non-nucleoside)

Polymerase inhibitor
PROTEASE INHIBITORS
SCH 503034
VX-950
GS9132
Schering-Plough
Vertex
Gilead
II
II
I
Protease inhibitor
Protease inhibitor
Protease inhibitor
CASPASE INHIBITORS
IDN-6556
Pfizer
Achillion
PHASE MECHANISM OF ACTION
II
Caspase inhibitor
INTERNAL RIBOSOME ENTRY SITE (IRES) INHIBITORS

VGX-410
VGX Pharmaceuticals
II
Replication inhibitor (IRES inhibitor)
GLUCOSIDASE INHIBITORS
Celgosivir (MX-3253)
Migenix
II
Glucosidase I inhibitor
IMMUNOMODULATORS
r-interferon beta
Zadaxin (thymosin alpha 1)
Serono
SciClone Pharmaceuticals
III
III
Immunomodulator
Immunomodulator
Actilon (CPG 10101)

Albuferon
FK788
Omega interferon
ANA971
ANA975
EHC18
Locteron
Low-dose oral interferon alpha
Medusa interferon
Coley Pharmaceutical Group

Human Genome Sciences
Astellas Pharma
Intarcia Therapeutics
Anadys Pharmaceuticals
Anadys Pharmaceuticals
Enzo Biochem
Biolex Therapeutics
Amarillo Biosciences
Flamel technologies
II
II
II
II
I
I
I
I
I
I
Immunomodulator
Immunomodulator
Immunomodulator
Immunomodulator
Immunomodulator
Immunomodulator
Immunomodulator
Immunomodulator
Immunomodulator
IFN alpha-2b XL
HCV ANTIBODIES
Civacir
XTL-6865
NABI biopharmaceuticals
XTL-Biopharmaceuticals
II
I
Human polyclonal antibody

Combination of two antibodies against envelope protein
OTHER ANTI-VIRAL MECHANISMS

Viramidine
Amantadine
UT-231B
Virostat
AVI-4065
HCV-I.E.T.
Alinia
Tarvacin
Valeant
Endo Pharmaceuticals
United Therapeutics
Bioenvision
AVI BioPharma
Transition Therapeutics
Romark
Peregrine Pharmaceuticals
III
II
II
II
I/II
I/II
I
I
Ribavirin prodrug
Entry inhibitor
Inhibits viral ion channel formation
Replication inihibitor
Protein synthesis inhibitor
Inteferon enhancer
Thiazolide; replication inhibitor
Replication inihibitor
HCV VACCINES
IC41
INNO101
GI-5005
HCV/MF59 vaccine
Intercell
Innogenetics
GlobeImmune
Chiron
II
II
I
I
Vaccine
Vaccine
Vaccine
Vaccine
Sigma-Tau in
Europe
Novartis
OctoPlus
Solvay
CSL
Source: Clinicaltrials.gov website, company websites, Goldman Sachs Research.
A growing roster of new treatment approaches

Although the first genetic sequences of the HCV virus were reported in 1989, several
scientific advances were needed to enable the development of direct anti-viral agents.
Accurate cell culture systems for assessing the virus and its mechanisms of infection had
154
United States
to be developed, particularly as there are no good animal models of hepatitis C. Methods

of quantification of the virus have also been enhanced. Today, therapeutics are being
developed that directly address key enzymes essential for hepatitis C viral replication
(hepatitis C protease, polymerase, others) as well as agents that directly attack the viral
RNA. In addition, several new immunomodulatory agents are in development. Finally,
better delivery vehicles for alpha interferon as well as agents designed to obviate the sideeffects of ribavirin, are also in development.
Potential to change the treatment paradigm

Given the high rate of replication and mutation of the hepatitis C virus, which suggest a
high likelihood of resistance, we believe it likely that a multi-therapy approach will be
required. That said, early clinical data with some of the direct anti-virals, particularly the
protease inhibitors, have shown substantial potency. If the safety profile holds up in
longer clinical studies, these agents may increase the percentage of patients that get to a
sustained viral response and may also enable shorter treatment duration.
Analysis of selected pipeline agents

HCV Protease inhibitors
Vertex Pharmaceuticals VX-950 has demonstrated significant potency in small, short
studies, both as monotherapy as well in combination therapy with alpha interferon and
ribavirin (see Exhibit 110). In a Phase Ib monotherapy study of 34 HCV patients
(treatment-nave and treatment-experienced), VX-950 (oral suspension form)
demonstrated a 4.4 log reduction at the optimal dose at 14 days. In a separate Phase Ib
study with a tablet formulation in combination with alpha interferon, VX-950 plus alpha
interferon resulted in a 5.5 log drop in viral load, and VX-950 alone produced a 4.0 log
reduction at 14 days. In a 12-patient (treatment nave), 28-day study with alpha
interferon, ribavirin and VX-950, 12/12 patients got to undetectable viral load levels at 28
days. While early clinical studies preclude direct comparison among different agents
under development (among other things, baseline viral load differs), we believe these
results suggest strong anti-viral activity. Phase Ib data on Schering Ploughs protease
inhibitor, SCH 503034, monotherapy and combination therapy suggest lower potency at
the best doses tested so far 400-mg, 3X daily. It should be noted that higher dose studies
600 and 800mg are underway.
155
Company
Peg-Intron + Rebetol
ScheringPlough
Marketed 72 weeks(1)
1530
Pegasys + Ribavirin
Roche
Marketed 72 weeks(1)
453 (2)
Albuferon + Ribavirin
Human
Genome
Sciences
Vertex
II
72 weeks(3)
71 (4)
IB
14 days
34
Undetectable HCV
RNA at 24 weeks
post-treatment
Undetectable HCV
RNA < 50IU/mL on or
after week 68
Undetectable virus at
24 weeks after the
end of therapy
Viral load reduction
VX-950 + pegylated
interferon
Vertex
IB
14 days
20
SCH 503034 (protease

inhibitor)
ScheringPlough
14 days
SCH 503034 + PegIntron
ScheringPlough
Valopicitabine
(polymerase inhibitor) +
pegylated interferon
HCV-796 (polymerase
inhibitor)
Idenix
ViroPharma
VX-950 (protease
inhibitor)
Phase
Duration
Number Endpoint
patients
Drug
Select entry criteria
Select dose
Select results
Interferon-nave
1.5mcg/kg
52% achieved SVR
Interferon-nave
180mcg Pegasys 241/453 patients or 53% achieved SVR
At week 24, 30% had no detectable HCV

RNA viral load
All genotype-1 and

treatment-nave (7)
750mg every 8h
61
400mg 3x daily (6)
14 days
32
IIB
48 weeks
175
All genotype 1; failed

peginterferon-based
therapy
All genotype 1;
nonresponders to
peginterferon-based
therapy
All genotype-1 and
treatment-nave
(1) VX-950 + Peg-IFN: median 5.5log

reduction(8) (2) VX-950 alone: median
4.0log reduction (3) Peg-IFN alone: 1.0log
reduction
Mean maximum viral load reduction was
2.06log
800mg (6)
At week 4, mean HCV RNA reduction was

4.00log
IB
14 days
96
Treatment-nave
1000 mg (6)
Mean reduction in HCV RNA was 1.4 log

on day four, 1.3 log on day seven, and 0.7
log10 at day 14
Patients in this dose cohort achieved

median 4.4log reduction
400mg 3x daily (6) Mean maximum viral load reduction was

2.9log versus 1.1log reduction for PegIntron alone
(1)
72 weeks refers to 48 weeks of treatment followed by 24 weeks of follow-up.

453 patients were in the Pegasys + Copegus arm, out of a total of 1,121 patients.
(3)
Interim data presented 24 weeks into treatment. Total duration of study = 68 weeks.
(4)
Interim data presented on 71 patients at AASLD in 2005; to date, a total of 115 patients have actually been enrolled.
(5)
Medium serum viral load at study entry was 6.65log IU/mL HCV RNA (approx. 4.4 million IU/mL)
(6)
Multiple doses assessed in the study.
(7)
Medium serum viral load at study entry ranged between 6.13log and 6.48log HCV RNA (approx. 1.5 - 3 million IU/mL)
(8)
6 out of 8 patients in this arm had viral levels below the limit of quantitation (30IU/mL) and 4 out of 8 had viral levels
below the limit of detection (10 IU/mL), using the Roche TaqMan assay.
(2)
United States
Multiple doses
Failed to respond to
interferon alpha-based
treatment
All genotype 1; mix of 750mg every 8h (6)
treatment-nave and
failures to interferonbased regimes(5)
156
Exhibit 110: Summary of select clinical trials for selected Hepatitis C agents
Results not shown for all dose cohorts; Pegyasys and Peg-Intron represent current standard-of-care
United States
HCV polymerase inhibitors

With respect to polymerase inhibitors, Idenix is furthest along with NM283
(Valopicitabine). Novartis has an option to collaborate on this program.
In January 2006, Idenix disclosed positive, preliminary 28-day data from a study in
treatment-inexperienced genotype-1 patients, which demonstrated a 4-log reduction in
viral load at the high dose (800mg) plus standard doses of alpha interferon. The data were
consistent with preliminary results from an ongoing Phase IIa study in 30 treatment-nave
patients, in which combination therapy resulted in a 4.2-log viral load reduction at 24
weeks. Idenix is planning to begin Phase III studies in 2006.
ViroPharmas oral HCV-796 showed a 1.4-log reduction at day 4 out of a 14-day Phase
IB study. Additional work is underway to assess pharmacokinetics, dosing and food
effect. HCV-796 is the only non-nucleoside polymerase inhibitor in the clinic. It
addresses a different HCV target and may thus have a different resistance profile.
Depending on the dose, HCV-796 may be used in combination with other HCV
polymerase inhibitors.
Improving alpha interferon

Human Genome Sciences is currently developing a long-acting, potentially less toxic
form of alpha interferon that might have efficacy and/or dosing advantages relative to
pegylated alpha interferon. Data suggests potential for a 2-4 week dosing regimen with
Albuferon, versus the more typical once-weekly regimen with pegylated interferon.
Key considerations for new agents

While we believe that early anti-viral data are encouraging with respect to potentially
changing the treatment paradigm for hepatitis C, we note that many questions need to be
addressed. First, we would point out that there are no long-term safety data on most new
agents. Second, we know very little about differing resistance profiles. Third, dosing
duration, pill burden and frequency may also effect compliance and competitive
positioning. Fourth, manufacturing scale-up requirements could be a challenge.

Several factors should be considered in evaluating clinical studies. A true comparison
between agents can only be done in direct, head-to-head trials.
Enrollment criteria
Key considerations include genotype and prior treatment experience. Patients who have
previously failed interferon therapy are typically harder to treat. Patients with genotype-1
HCV have historically been harder to treat. Patients co-infected with HIV are more
challenging.
Measuring efficacy HCV RNA viral load and reductions

HCV RNA viral load refers to the concentration of viral genetic material in a patients
bloodstream. Viral load is typically reported in International Units per mL (IU/mL),
which provides a standardized measure for different assays. Historically, viral load levels
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United States
had been measured in number of copies of virus per milliliter (mL) of blood. There is no
standard conversion formula for converting IU/mL to and from viral copies/mL. The
most sensitive qualitative PCR assays currently can measure up to 50 IU/mL. Newer
technology, transcription mediated amplification, can measure up to 5-10 IU/mL.
Endpoints
The primary endpoint of clinical studies will be an assessment of patients who get to
sustained viral suppression during and at six months after treatment. Treatment durations
may vary between trials. Alpha interferon in genotype-1 patients is typically administered
for 48 weeks with follow up 26 weeks after that. Anti-viral agents in clinical studies, such
as VX-950, may assess shorter treatment durations.
Drug administration and dosing

The formulation of the agent (e.g., injection, pill), dose frequency and ease of dosing
(e.g., three pills per day versus one per week) affect patient adherence. Low compliance
and suboptimal plasma concentrations may foster the development of resistance. The
pharmacokinetics (PK, defined as the relationship between the dose of the drug ingested
and its concentration in the body) of new agents are particularly important. High initial
blood levels may be important for the direct anti-virals.
158
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159
160
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United States
Rheumatoid arthritis (RA) is an immune-mediated inflammatory disease that
primarily affects the joints. RA usually strikes persons between 20-50 years of age,
and affects women three times as often as men. Patients have redness, pain and
swelling primarily of the hands and wrists, which can lead to disability and
deformity.

Approximately 2.1 million people in the United States and 5 million people worldwide
are living with RA. There are six biologics approved for RA, with two of these launched
in the first half of 2006. We estimate the RA market for biologics to be $6.5 billion in
2005. With new products/uses and earlier therapy, the biologic market might approach
$10 billion in 2010.
Therapy
Patients with RA are treated with drugs to reduce inflammation, which primarily relieve
pain and swelling. Disease modifying anti-rheumatic drugs (DMARDs) are also
prescribed to slow or stop disease progression. DMARDs can be small molecules or
biologics. The most common biologic DMARDs for RA are inhibitors of tumor necrosis
factor (TNF), an important inflammatory mediator. Three TNF blockers are available
commercially, Enbrel (AMGN), Remicade (JNJ) and Humira (ABT), with combined
worldwide sales of approximately $6.5B in 2005.
New Agents
Rituxan (DNA/BIIB/Roche) is a monoclonal antibody specific to B

lymphocytes, which mediate the immune response. It was approved in the
U.S. in 1997 for non-Hodgkins lymphoma and for RA on 2/28/06.
Orencia (BMY) is a fusion protein that inhibits T cells. It was approved in

the U.S. in December 2005 and launched in February 2006.
Actemra (Roche) is a monoclonal antibody to IL-6 that has shown

encouraging results in a Japanese Phase 3 trial. Side effects include
elevated liver enzymes and lipid levels. Additional Phase 3 trials are
ongoing, with results expected in late 2006.
Cimzia (UCB Pharma/NKTR) is a pegylated fragment of humanized

antibody to TNF. Preliminary positive Phase 3 data in Crohns disease was
announced in November 2005. Phase 3 trials for RA and Crohns disease
are expected to complete in 2006, with FDA filing for RA in early 2007.
Events to watch
Phase 3 data on Actemra and Cimzia in late 2006
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United States
Penetration of new agents (Orencia vs. Rituxan) and impact on market size
and sales of TNF-blockers

Rheumatoid arthritis (RA) is an attractive market for biotechnology. The three top
biotech products generated over $6.5 billion in worldwide sales in 2005. We estimate
that the market for biologics might approach $10 billion in 2010, driven by increasing
penetration of early RA, entry of new products, and expansion into other rheumatologic
conditions. In the United States, approximately 1.2 million patients have moderate-tosevere disease, representing those eligible for therapy with biologics. Of these, roughly
260,000 have been treated with biologic agents.
Exhibit 111: Rheumatoid arthritis at a glance
Market size (top 3 biologics)
Number of patients
Patients diagnosed (U.S)
Target population for biologics
Number of biologics approved
Women:Men
Age of onset
$6.5 billion WW
2MM U.S./5MM WW
1.6MM
0.4-0.5MM
6
3:1
20s - 50s
Source:Goldman Sachs Research.
Rheumatology is the study of inflammatory joint and muscle disease. RA is the most
common rheumatologic condition (see Exhibit 115). It occurs in approximately 0.8% of
the worldwide population. Approximately 2.1 million Americans and over 5 million
patients globally have the disease. Approximately 1.6 million people in the United States
have been diagnosed with the disease and are undergoing treatment. The combined direct
and indirect cost of RA in the United States is estimated to be $20 billion per year.
However, the physician market is fairly concentrated, with fewer than 5,000 US
rheumatologists writing the majority of prescriptions.
RA most commonly develops in the third to fifth decades of life. Approximately 80% of
total cases occur between the ages of 35 and 50. The incidence is higher among women
than men (3:1 ratio) and increases with age. At age 65, nearly 5% of women and 2% of
men have the disease. Thirty-four percent of the patients seeking treatment are 65 years
of age or older.
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United States
Exhibit 112: Key terms to know in RA

Arthritis
Inflammation of joints
B lymphocytes
White blood cells that fight infection by secreting antibodies
CRP
C-Reactive Protein - non-specific blood test for inflammation
Cytokines
Molecules that act as signals between cells (e.g. TNF, interleukins)
DMARDs
(Disease Modifying Anti-Rheumatic Drugs) - any drug that slows disease progression in RA
ESR
Erythrocyte Sedimentation Rate - non-specific blood test for inflammation
Metalloprotease
Enzyme that cleaves other proteins, characterized by a metal ion at its active site.
NSAIDs
(Non-Steroidal Anti-Inflammatory Drugs) - drugs that inhibit inflammation by interfering with production of
prostaglandins
Prostaglandins
Cytokines that promote inflammation - target of NSAIDs and steroids
Rheumatology
Study of inflammatory muscle and joint disease
Synovium
Thin layer of tissue that lines a joint - primary site of inflammation in RA
T lymphocytes
White blood cells that fight infection by directly attacking cells and releasing cytokines
Disease overview
RA is a chronic, immune-mediated disorder that primarily involves the joints. The
disease typically starts with stiffness, pain and swelling of the small joints of the hands
and feet. However, any other joint of the body may be affected. Sometimes, other organs,
such as eyes, heart, lungs, and blood vessels may be involved. RA can evolve over years,
but joint damage can occur as early as three to six months after onset. Approximately
30% of patients have radiographic bone lesions at the time of diagnosis, increasing to
60% at two years. Active inflammation of the joints that lasts for a year or more after
onset can lead to irreversible damage. Therefore, early and aggressive therapy is
important.
Patients typically present to a primary care physician complaining of joint pain and
swelling. Diagnosis is based on criteria established by the American College of
Rheumatology (see Exhibit 113). A patient must have at least four of the six criteria, with
symptoms lasting at least six weeks. This excludes certain patients who may have an
acute arthritis due to other causes.
Exhibit 113: American College of Rheumatology criteria for RA
Characteristics
Morning stiffness
Arthritis of three joint areas
Arthritis of hand joints
Symmetric arthritis
Positive rheumatoid factor
Radiographic changes
Description
lasting at least one hour
fingers, wrist, elbow, knee, ankle or foot; assoc with swelling
fingers or wrist
has to be bilateral (both hands or both knees, etc)
a blood marker for RA
bony erosions around joints
Source: American College of Rheumatology.
Certain blood tests can be helpful in establishing the diagnosis of RA. The erythrocyte
sedimentation rate (ESR) and C-reactive protein (CRP) are non-specific measures of
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United States
inflammation in the body, and are often elevated in RA. Another, more specific test for
RA is the rheumatoid factor (RF). RF is an antibody that is produced in several
rheumatologic diseases, but most commonly in RA.
The cause of RA is not known. However, it involves complex interactions of various
cells, cytokines and enzymes, many of which can be targets for drug development (see
Exhibit 114). It is believed that the disease begins when an inciting antigen gains access
to the joint, triggering an immune response. The antigen could be either an exogenous
substance, such as a bacterial or viral protein, or one of the patients own proteins. The
antigenic stimulus activates a type of white blood cell, CD4+ T-lymphocytes (T-cells),
which causes inflammation in the synovium (tissue that lines joint space). (selected
biologic targets in bold)
Exhibit 114:
Selected targets for RA therapies and mechanism of action
Target
CCR1
Mechanism
Attract cells to sites of inflammation
Complement C5a
Activates neutrophils, macrophages, mast cells and basophils (inflammatory

cells)
Integrins (e.g. v3, 4)
Adhesion and migration of cells
Interferon gamma (INF)
Initiate immune response
Interleukin 1 (IL1)
Promotes inflammation via multiple pathways, including production of cytokines

and enzymes, accumulation of T cells, and developmnet of osteoclasts which
destroy bone
Interleukin 8 (IL8)
Interleukin 10 (IL10)
Turn off immune response
Stimulate T cells to produce gamma interferon
Stimulate growth and recruitment of T cells
Activates and attracts T cells
Activates fibroblasts in joint space to make tissue destructive enzymes and

cytokines
Similar to IL1 in promoting inflammatory cascade
Leukotriennes
RANK ligand
Activates osteoclasts
Signaling pathways
Interrupt receptor signals in cells
P3 MAP kinase
Nuclear factor kappa B (NFB)
Tumor necrosis factor alpha (TNF) Activate T cells, trigger production of cytokines (including IL-1), stimulate
fibroblasts/macrophages to release destructive enzymes, stimulate
development of osteoclasts which destroy bone
TNF
Turn off immune response
Once the CD4+ T-cells become activated, a complex and poorly understood cascade of
biological events take place. Antigen-activated T-cells stimulate numerous cell types,
including macrophages, B-lymphocytes, fibroblasts, chondrocytes and osteoclasts.
Activated macrophages secrete cytokines (inflammatory mediators), such as interleukin1 (IL-1), IL-6, IL-15 and Tumor necrosis factor-alpha (TNF-). T-cells directly secrete
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many of the same cytokines. IL-1 and TNF- probably have a primary role in the disease
process and are found abundantly in inflamed synovial tissue of RA patients. Cytokines
trigger other cells, such as fibroblasts, chondrocytes and osteoclasts, to release
degradative enzymes (e.g., metalloproteinases and collagenases) into the joint space.
These enzymes digest local bone and connective tissues, eroding the architecture of the
joint. Neutrophils, recruited under the influence of chemokines, also secrete damaging
proteolytic (protein-degrading) enzymes into the joint space. The net effect of this
cascade is inflammation of the joint followed by its destruction.
T-cells also activate B-cells which develop into plasma cells that secrete high numbers of
antibodies. The B-cells can have a direct effect on the synovium (thin layer of tissue that
lines the joint space) and the abnormal antibodies can cross-react with the synovium. Bcells may secrete a characteristic antibody known as rheumatoid factor (RF). The role of
rheumatoid factor in the disease process is not fully understood; however, it appears to
act, in part, through activation of complement proteins. Other antibodies, including
Immunoglobulin G and M (IgG and IgM) subtypes are elevated. Complement proteins
have multiple pro-inflammatory effects on blood vessels and leukocytes (e.g.,
macrophages), thereby causing release of inflammatory prostaglandins and cytokines.
Complement factor C5, a central component of the complement pathway, has a critical
role in sustaining inflammation. Biologics on the market and in development target many
of these intermediate steps of the inflammatory cascade.
Other conditions related to RA

A number of auto-immune diseases have similar pathology to RA (see Exhibit 115), and
may be potential markets for RA therapies. For example, Enbrel is approved for RA and
psoriatic arthritis.
Exhibit 115: Rheumatologic diseases
Disease
Ankylosing Spondylitis
Inflammatory Bowel Disease
Juvenile RA
Psoriatic Arthritis
Rheumatoid Arthritis
Systemic Lupus Erythematosis
Description
Autoimmune arthritis, typically affects spine and hips
Autoimmune inflammatory diseases of colon (Crohn's disease and Ulcerative colitis)
Similar symptoms, early onset (<18yrs old)
Similar to RA, associated with typical skin lesions of psoriasis
Autoimmune arthritis, typically affects hands, wrists, knees, feet and ankles
Autoimmune disease with rash, joint and other symptoms, usually affects young women
Millions of patients (U.S.)

On therapy
Eligible for biologics
0.4
0.1
3.0
1.0
0.05 - 0.3
0.04 - 0.25
0.6
0.2
1.6
1.0
0.5 - 2
limited
Ankylosing spondylitis (AS) is an auto-immune disease that primarily affects the spine,
hips, shoulders and knees. Unlike RA, AS is a disease not of joints but of the tendons and
ligaments that surround the joints. AS primarily affects patients in their 20s, and affects
men three times as often as women. Approximately 400,000 patients are affected in the
United States.
Crohns disease and ulcerative colitis are auto-immune diseases that affect the
intestines. Patients have erosions in the surface layers of the colon, leading to poor
absorption of nutrients and bloody diarrhea. Approximately 0.5-1 million patients in the
United States are affected.
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United States
Juvenile RA, or juvenile idiopathic arthritis, has similar features to RA and occurs in
patients under 18 years old. About half of patients will have inflammatory arthritis
affecting five or fewer joints, about 30-40% have involvement of more than five joints,
and the remainder have a systemic version of the disease with arthritis, fever, and a
diffuse rash. About 50,000 to 300,000 people have the disease in the United States.
Psoriatic arthritis, like RA, is a disease of adulthood. In addition to the skin lesions of
psoriasis, patients have an inflammatory arthritis characterized by destruction of the distal

finger joints and resorption of the fingers in some cases. There are 25,000 to 300,000
patients in the United States.
Systemic lupus erythematosus is a complex immune mediated disease that primarily
affects the skin, joints, kidneys, and the nervous system. Women age 20-40 are most
commonly affected. There are approximately 0.5 to 2.0 million patients in the United
States.
Treatment
Because there is no cure for RA, the goals of drug therapy are to control symptoms (e.g.,
joint pain, swelling and immobility) and slow/halt the progression of joint destruction.
As a last resort, reconstructive surgery may be considered for paitnets with end-stage
joint damage who fail to respond to available therapies. There are several basic categories
of drugs used (see Exhibits 116-117):
Non-steroidal anti-inflammatory drugs (NSAIDs) and COX-2 inhibitors first line;
Disease-modifying anti-rheumatic drugs (DMARDs);
166
Methotrexate and others first or second line;
Immunosuppressants;
Biologics second or third line; and
Steroids used in various stages of RA.
United States
Exhibit 116: Treatment options for RA

Drug
NSAIDs
Aspirin, Ibuprofen
COX-2 inhibitors
Celebrex
Traditional DMARDS
Methotrexate
Hydroxychloroquine
Sulfasalazine
Efficacy
Onset of Action
Major Side Effects
Administration
$/year*
<2wks
ulcers, high blood pressure, edema, kidney damage
oral, daily
$100-200
<2wks
heart, kidney
oral, daily
$1,100
3+
2+
2+
6-8 wks
2-6 wks
2-3 months
liver, blood, oral ulcers, birth defects

retinopathy, myopathy, hyperpigmentation
stomach upset, hemolysis
$170
$1,000
$280
2+
3-6 months
rash, blood, kidney
Arava (leflunomide)
2+
Immunosuppressants/Steroids
Azathioprine
2+
2-3 months
liver, rash, birth defects, diarrhea
oral, weekly
oral, twice daily
oral, 2-3x/day
IM weekly x
6mo,or oral daily
oral, daily
Gold salts
Prednisone
Biologics
Enbrel
Remicade
2-3 months
blood, immune, gall bladder
oral, daily
skin atrophy, cataracts, bone loss, avascular necrosis
oral, daily
2-4 weeks
2-4 weeks
injection site reactions, infections, cancer, neurological

infections, liver, cancer, neurological, infusion reactions
SQ, 1-2x/wk
IV, 4-8 weeks
3+
4-8 weeks
rash, injection site reactions, infections, cancer, neurological SQ, weekly
1-2+
3+
3+
1-3 months
2-4 weeks
4-8 weeks
injection site reactions, infections, cancer, antibodies

infections
infections, infusion reactions
3+
<1 week
3+
3+
Humira
Kineret
Orencia
Rituxan
SQ, daily
IV, 8 weeks
IV x 2 doses
$2,800
$4,860
$730
$190
$14,000
$18,000
$14,000
$12,000
NA
$9,500
* end-user pricing for all except biologics, which are estimated manufacturer prices
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United States
Exhibit 117: Treatment algorithm for RA

Diagnosis
Document severity of disease
Establish radiographic
progression
Start DMARD within first 3 months

Methotrexate
Leflunomide
Sulfasalazine
Hydroxychloroquine
Azathioprine
D-penicillamine
Gold (oral or intramuscular)
Minocycline
Cyclosporine
Inadequate Response
Refractory Disease, Deformity
Surgery
Change or add DMARDs
NSAIDs/COX-2s (symptom relief)

Aspirin/Advil/OTCs
Naprosyn
Celebrex
Steroids (bridging between DMARDS)

Prednisone
Dexamethasone
Solumedrol
Change or add biologics
Biologic DMARDs
TNF Blockers
Enbrel
Remicade
Humira
Alternative Biologics
Kineret
Orencia
Rituxan
NSAIDS and COX-2 inhibitors: Reduce pain and inflammation

First-line therapy for rheumatoid arthritis consists of non-steroidal anti-inflammatory
drugs (NSAIDS). The primary effect of NSAIDs is to diminish acute inflammation and
pain. But they do not alter the progression of the disease or prevent joint destruction.
Aspirin is the classic NSAID and it can be effective in the treatment of RA. However,
newer NSAIDs with more convenient dosing and better side effect profiles have largely
supplanted aspirin in the management of RA. In the early stages of disease, many
patients can be managed well on NSAIDS alone. However, as the inflammatory process
advances, NSAID monotherapy loses its effectiveness.
Traditional NSAIDs (COX-1 and COX-2)

NSAIDs inhibit cyclooxygenase (COX), the enzyme that synthesizes prostaglandins
(PGs). PGs are key mediators of both pain and inflammation and are central to the
pathophysiology of RA. Traditional NSAIDs inhibit two forms of the COX enzyme,
COX-1 and COX-2. The PGs produced by COX-1 protect the gastrointestinal tract and
regulate blood flow to the kidneys, so inhibition of this enzyme by traditional NSAIDs
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can cause gastrointestinal problems (abdominal pain, ulcers and bleeding) and reduce
kidney function. Use of NSAIDs is the most common cause of gastrointestinal ulcers in
the United States. COX-2 generates prostaglandins (PGs) that promote inflammation,
pain, and fever and, therefore, is the intended target of NSAIDs. Commonly prescribed
NSAIDs include aspirin, Advil, Motrin, Aleve, Voltaren and Lodine.
COX-2 Inhibitors
The latest generation of NSAIDs, the COX-2 inhibitors, selectively inhibit the COX-2
enzyme, with little binding to COX-1. These drugs are designed to reduce pain and
inflammation (COX-2) but avoid the gastrointestinal side effects (COX-1) of traditional
NSAIDS. Physicians generally believe that COX-2 inhibitors provide a gastrointestinal
benefit versus nonspecific NSAIDs. However, COX-2 drugs have been associated with
cardiovascular risks (heart attacks and strokes), which led to the withdrawal of Mercks
Vioxx and Pfizers Bextra from the market. Pfizers Celebrex is the only COX-2 inhibitor
currently available in the United States.
DMARDS: Disease-modifying anti-rheumatic drugs

DMARDs are so named because they not only relieve the symptoms of the disease but
also modify (i.e., slow) progressive joint damage and loss of physical function.
DMARDs are either synthetic small molecules (traditional DMARDs), such as
methotrexate, or protein-based biologics, such as the TNF-blockers (Enbrel, Remicade
and Humira). The use of DMARDs has moved earlier in the therapy of RA.
American College of Rheumatology (ACR) guidelines indicate that DMARDs should be
initiated within three months of diagnosis for the majority of patients before irreversible
joint damage sets in. Patients with resistant disease who progress on one DMARD
should be given alternative DMARDs, combinations of DMARDs and biologic DMARD
treatments.
Traditional DMARDs
Traditional DMARDs are small-molecule, as opposed to protein-based, agents. They are
heterogeneous in their chemical structures and mechanisms of action, although the latter
are generally poorly understood. The small-molecule DMARDs inhibit the proliferation
of inflammatory cells such as T and B cells at the site of disease. They also can interfere
with cell signaling, and the migration of cells to the joint itself. Due to their ability to
stop cells from dividing, many of these agents are also used to treat cancer. DMARDs do
not relieve pain and in many cases, patients must be treated simultaneously with NSAIDs
and corticosteroids. In general, these drugs have a slow onset of action, with a delay of
one to six months before there is a noticeable clinical benefit.
Methotrexate has become the favored first-line DMARD agent. The popularity of
methotrexate relative to other small-molecule DMARDs is due to several factors: (1)

early onset of action (4-6 weeks); (2) solid efficacy; (3) manageable side effects; (4)
convenient administration (oral or subcutaneous); and (5) low cost. Many trials of new
biologics use methotrexate as a control group.
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If methotrexate alone is ineffective, other small-molecule agents may be added in

combination therapy. Arava (leflunomide, SNY) is an immunomodulatory drug that
inhibits pyrimidine synthesis. Other synthetic DMARDs include drugs for treating
malaria, such as Plaquenil (hydroxychloroquine), Azulfidine (sulfasalazine), Cuprimine
(penicillamine), drugs containing gold, and cytotoxic agents such as Imuran
(azathioprine), Cytoxan (cyclophosphamide), and cyclosporine. Long-term use of these
agents is limited by their toxicities and loss of efficacy over time. Like methotrexate,
many of these agents cause hair loss and reductions in cell lines such as red blood cells,
white blood cells, and platelets.
Biologic DMARDs
Biologics are therapies that are specifically targeted at key processes in RA (see Exhibit
118). Six biologics have been approved in the United States for moderate to severe RA.
Three TNF-inhibitors (Enbrel, Remicade, and Humira) are approved for first-line
treatments in patients with early RA (typically defined as disease duration less than
three years), whereas Kineret and Orencia are approved only for second or greater line
therapy, that is moderate to severe RA patients who have failed one or more DMARDs.
Rituxan is approved only for patients who have failed one of the TNF inhibitors.
Exhibit 118: Biologic treatments for RA
Trade name
Generic name
Description
Enbrel
Humira
Etanercept
Adalimumab
Fusion protein consisting of the Human IgG1 MAb to TNF
extracellular portion of the tumor
necrosis factor (TNF) receptor
and Fc portion of human IgG1
Remicade
Infliximab
Chimeric IgG1 MAb to TNF
Orencia
Abatacept
Fusion protein consisting of the
extracellular portion of the
cytotoxic T-lymphocyte
associated antigen 4 (CTLA4)
and the Fc region of human
IgG1
NA
2005 Sales
$2.6B
$1.4B
$2.5B
Company
Partner
Target
Approved
indication(s)
Amgen
Wyeth
TNF
Moderate to severe RA
Juvenile RA
Psoriatic arthritis
Ankylosing spondylitis
Psoriasis
Abbott Laboratories
None
TNF
Psoriatic arthritis
Johnson & Johnson

None
TNF
Moderate to severe Crohn's
disease
Moderate to severe ulcerative
colitis
Psoriatic arthritis
Ankylosing spondylitis
None
T lymphocytes
Moderate to severe RA failing
DMARDs
Other indication(s)
Reiter's syndrome (Phase II)
Ankylosing spondylitis (filed

10/05, approval expected 2H
'06)
Juvenile RA (filing expected
late '06/early '07)
Psoriasis (Phase III; filing
expected in early '07)
Crohn's disease (Phase II data
and filing expected in '06)
Ulcerative colitis (Phase II/III
trial in '06)
Juvenile RA (filed 5/05)

Pediatric Crohn's disease
(Phase III)
Psoriasis (filed 9/05, expect
response 7/06)
Subcutaneous dosing in RA
(Phase I/II)
Systemic lupus
erythematosus (Phase II)
Early RA (Phase IIIb)
Approved dosing
regimen
50mg SC injection once weekly 40 mg SC injection every other

or 25 mg SC injection twice
week, recommended increasing
weekly (72-96 hours apart)
frequency to 40 mg every week
in patients not taking
concomitant methotrexate
3 mg/kg IV infusion at weeks 0, 10mg/kg IV infusion at week 0,

2 and 6 and every 8 weeks
2, 4, and every 4 weeks
thereafter, recommended
thereafter
titrating up to 10 mg/kg every 4
weeks in non-responders
Warnings
Serious infections and sepsis, Includes black box onTB

including fatalities
Injection site reactions
Rare cases of TB
Injection site reactions
Includes black box onTB and

invasive fungal infections
Infusion related reactions
Rituxan
Rituximab
Chimeric MAb to CD20
Kineret
Anakinra
Human Interleukin-1 (IL1)
receptor antagonist
$3.2B (approved for cancer only

in 2005)
None
B lymphocytes
refractory to TNF inhibitors
$0.05B
Amgen
NPS Pharmaceuticals
IL-1 receptor
Moderate to severe RA failing
DMARDs
RA (DMARD failures, Phase Osteoarthritis (Phase II)

III)
ANCA-associated vasculitis
(Phase III)
Lupus nephritis (Phase III)
Multiple sclerosis (Phase III)
Systemic lupus
erythematosus (Phase III)
Chronic lymphocytic leukemia
(Phase III)
Idiopathic thrombocytopenia
purpura (Phase II)
1000mg IV infusion on days 1 100mg SQ daily
and 15. Repeat every 6-12
months (re-dosing schedule not
defined)
Black box on infections

Infection when used
Black box on fatal infusion
concurrently with TNF-blockers reactions, tumor lysis
syndrome, and severe
mucocutaneous reactions (e.g.
oral ulcers)
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Enbrel (Amgen/Wyeth): TNF receptor fusion protein

Enbrel has the highest sales ($3.6 billion in 2005) among the biologics approved for RA,
given its first-mover advantage (in all indications, except Crohns Disease), broad
indications, long safety record, and lack of any black-box warning. The first indication of
Enbrel was for RA patients failing DMARDs, approved in 1998.
Enbrel is a fusion protein consisting of the extracellular ligand-binding portion of the
TNF receptor linked to the Fc portion of a human antibody. Enbrel serves as a free
floating receptor to mop up TNF so that there is less free TNF available to bind its
functional receptor. Enbrel is fully human, and therefore does not have a high incidence
of infusion reactions. Amgen manufactures the product and distributes it in the United
States, while Wyeth is responsible for ex-US sales.
Enbrel is approved for moderate to severe stage RA, juvenile RA, psoriasis, psoriatic
arthritis and ankylosing spondylitis. Among these conditions, RA is the most common.
Remicade (J&J): Chimeric MAb to TNF-

Remicade, $2.5 billion in 2005 sales, is a chimeric (part human and part mouse)
antibody against TNF. By binding to TNF, Remicade prevents it from interacting with its
receptor. Remicade is approved for psoriatic arthritis and ankylosing spondylitis, and is
the only biologic approved for inflammatory bowel disease. Juvenile RA and psoriasis
may be approved in 2006.
Remicade is given by intravenous infusion, whereas Enbrel and Humira are selfadministered subcutaneous injections. This has implications for reimbursement and
patient convenience. Patients who are afraid or incapable of self-injections may prefer
therapy with Remicade at infusion centers.
Intravenous infusions also have implications for reimbursement. Rheumatologists may
have a financial incentive to administer Remicade. Prior to 2006, Medicare reimbursed
drugs delivered by infusion, but not those given by self-administration. Therefore,
Remicade was preferred by Medicare patients. Under the new drug benefit plan in 2006,
self-injections are covered by Medicare. Therefore, Enbrel and Humira may gain share
among Medicare patients, which represent about 35% of RA patients.
Humira (Abbott): Humanized MAb to TNF

With $1.4 billion in 2005 sales, Humira is the third largest biologic drug for treating RA.
Humira, like Remicade, is a monoclonal antibody against TNF. However, Humira is
mostly a human antibody (humanized), while Remicade is part human and part mouse
(chimeric). Patients are more likely to develop a reaction against mouse than against
human or humanized antibodies. Of the three TNF blockers, Humira has the narrowest
label, as it is only approved for use in RA and psoriatic arthritis. As with Enbrel, Humira
is given subcutaneously. However, dosing is less frequent (once every one or two weeks
for Humira versus weekly for Enbrel).
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Kineret (Amgen): Blocks receptors to IL-1

Kineret (Amgen) is a recombinant form of human interleukin-1 receptor antagonist (IL-
1Ra). The drug works by blocking the interaction of IL-1 with its receptor. Kineret is
approved for patients who have failed one or more DMARDs. Sales are minimal ($49
million in 2005), largely because Kineret is dosed daily and appears to be less effective
than other biologics. These drawbacks have limited its use to patients who fail to respond
adequately to TNF blockers. As other agents are approved, we expect Kineret to maintain
a niche role in the treatment of RA.
Orencia (Bristol-Myers Squibb): Stimulates CTLA4 receptor to downregulate T-cells

Orencia was approved for the treatment of RA patients who have failed DMARDs in
December 2005 and launched in February 2006. Orencia is consisted of the extracellular
portion of CTLA4 (cytotoxic T-Lymphocyte-associated antigen 4) fused to the Fc portion
of human immunoglobulin. Natural CTLA4 suppresses the activation of T-cells by
blocking the interaction of CD28 on the surface of T-cells with B7 on the surface of
antigen-presenting cells. By blocking the CD28-B7 interaction that is necessary for Tcell activation, Orencia prevents T cells from being activated.
Orencia has a similar route of administration as Remicade (intravenous infusions on days
1, 15, 29); however, maintenance therapy is every four weeks instead of eight weeks for
Remicade.
Orencia was effective in Phase 3 trials of patients failing traditional DMARDs or TNF
inhibitors. Due to the shorter safety record, we patients who have failed on TNF blockers
(TNF failures) will be the earliest adopters. That said, Orencia's label does not restrict
it to TNF failures and we expect Bristol-Myers to actively pursue a broad patient group.
We estimate 2010 sales of $875 million.
Rituxan (Genentech/BiogenIDEC/Roche): Removes B-cells from

circulation
Rituxan was approved February 28, 2006, for the treatment of RA patients who are not
responsive to TNF-inhibitors. Rituxan is a chimeric monoclonal antibody to the CD-20

antigen on B-lymphocytes. Two infusions of Rituxan given on days 1 and 15 was
effective in reducing symptoms for months. The optimal retreatment schedule has not
been established. In clinical trials, most of the retreated patients received treatment six
months after the previous course and none sooner than four months. A small number of
patients have received two to five courses (two infusions per course of therapy). A Phase
3 trial is ongoing to evaluate Rituxan in patients failing DMARDs patients, although data
are not expected until 2007-2008. Rituxan has been on the market in the United States
since 1997 for the treatment of non-Hodgkins lymphoma.
The cost of two infusions of Rituxan is about $9,000, excluding infusion fees. The yearly
cost will depend on the frequency of retreatment. BiogenIDEC co-promotes Rituxan with
Genentech in the United States, while Roche has ex-US rights. We estimate the sales
potential of Rituxan for the initial RA indication to be $300-500 million.
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Corticosteroids: Appropriate for acute "flares" or as a "bridge" to DMARDs

Corticosteroids (e.g., prednisone) inhibit generation of several inflammatory cytokines
(e.g., IL-1, TNF, IL-6 and IL-8) and prostaglandins. They exert both an antiinflammatory and an immunosuppressive effect. These agents may often be the second
line of defense in RA therapy, as when they are given to a patient on NSAIDs who
suffers an acute episode of pain and inflammation. Corticosteroids can also be useful as a
temporary therapy while waiting for DMARDs to exert their effects. Less commonly,
corticosteroids may be prescribed chronically as supplemental treatment for patients not
adequately controlled on NSAIDs and DMARDs. There are many undesirable side
effects of corticosteroids that discourage chronic use at high doses. Therefore, they are
generally prescribed to relieve acute symptoms and then gradually tapered off. Side
effects include weight gain, osteoporosis, high blood pressure and diabetes. Systemic
dosing and intra-articular injections are possible routes of administration.
See Exhibit 119 for market share data for RA treatments. See Exhibit 120 for a selection
of compounds in clinical trials for RA.
Exhibit 119:
U.S. market share of biologics in RA (total sales)
60%
50%
46%
40%
Market share
38%
30%
20%
16%
10%
1%
Dec-05
Oct-05
Nov-05
Sep-05
Aug-05
Jul-05
Jun-05
Apr-05
May-05
Mar-05
Jan-05
Feb-05
Dec-04
Oct-04
Nov-04
Sep-04
Jul-04
Aug-04
Jun-04
Apr-04
May-04
Mar-04
Jan-04
Feb-04
Dec-03
0%
3 months ended
Enbrel
Remicade
Humira
Kineret
Source: IMS.
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Exhibit 120:
Candidate
BR3 soluble receptor
HuMax
PRO70769
VX-702
SCIO-469
Vitaxin
HuZAF
Pralnacasan
Tysabri
AMG-714
Eculizumab
Paxceed
LymphoStat-B
MLN 1202
Denosumab
Golimumab
IL-1 Trap
Actemra
Cimzia
United States
Selected compounds in clinical trials for RA

Company/Partner
Genmab/Medarex
Vertex
J&J
MedImmune
PDLI/BiogenIdec
Vertex/Aventis
BiogenIdec/Elan
Amgen/GenMab/Medarex
Alexion
Angiotech
HGSI/Cambridge Antibody
Millennium
Amgen/Abgenix
J&J
Regeneron
Roche/Chugai
UCB Pharma/Nektar/Enzon
Phase
1
1/2
1/2
2
2
2
2
2
2
2
2
2
2
2
2
2
3
3
3
Mechanism of action
B-cell activating factor soluble receptor
human MAb to CD20
p38 kinase inhibitor
p38 kinase inhibitor
MAb to alpha v beta 3 integrin
humanized MAb to interferon gamma
Inhibitor of IL-1 converting enzyme (ICE)
MAb to alpha 4 integrin
MAb to IL-15
inhibitor of complement C5a
inhibitor of metalloproteinase
MAb to B-lymphocyte stimulator (BLys)
T-cell and macrophage inhibitor
MAb to RANKL
MAb to TNF-alpha
IL-1 receptor fusion protein
MAb to IL-6
pegylated humanized MAb to TNF

MAb to IL-6 (Roche/Chugai)
Actemra is a monoclonal antibody to IL-6, which, like TNF-, is secreted by
macrophages to upregulate the immune response. A Phase 3 trial performed by Roches

partner, Chugai, in Japan showed that Actemra alone given every four weeks was more
effective than DMARDs in early RA patients who had not been treated with DMARDs.
Roche is conducting five pivotal studies with 6-24 months of duration outside of Japan.
However, side effects are not trivial, including liver injury, increase in blood lipids, and
infections.
MAb to IL-15 (Amgen/GenMab)

Amgen and GenMab are collaborating on AMG 714, a human monoclonal antibody to IL15, an upregulator of the immune response. In a Phase 2 trial, 57% of 110 patients
achieved ACR20 criteria. Amgen is responsible for development and commercialization
of AMG 714.
Pegylated MAb to TNF-alpha (UCB Pharma/Nektar/Enzon)

Cimzia is a pegylated fragment of a humanized MAb to TNF-alpha. UCB Pharma is
developing Cimzia in collaboration with Nektar. It is given by subcutaneous injection

every two weeks for the first three doses, followed by dosing every four weeks.
Preliminary positive Phase 3 data in Crohns disease was announced in November 2005.
An FDA application was filed on March 2, 2006. Phase 3 trials for both RA and Crohns
disease are expected to complete in 2006 with FDA filing in early 2007.
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Next Generation MAb to CD20 (Genentech/BiogenIDEC/Roche)

Genentech and BiogenIDEC will decide in H1/06 whether to start Phase 3 trials of a
human MAb to CD20 (same target as Rituxan). The new MAb may be more potent and
has fewer side effects. GenMab/Medarex are also developing a human MAb to CD20
which is in Phase 1/2 trials for RA.
VX-702 (Vertex/Kissei)
VX-702 is an oral inhibitor of P38 MAP kinase, an enzyme that mediates cellular
responses to inflammation. In March 2006, Vertex released supportive data from the
VeRA study, an international 315 patient randomized double-blind Phase 2 trial of VX702 + methotrexate vs. methotrexate alone in moderate to severe RA. At 12 weeks, 40%
of patients in the high dose VX-702 group reached ACR20, compared to 30% for
placebo. We expect Vertex to begin an international Phase 2 dose ranging study and file
an IND to begin U.S. trials in 2006.
Clinical trials and evaluating response to treatment

A. Metrics of disease activity
Response rate. The effectiveness of RA drugs is typically assessed in clinical trials
using the American College of Rheumatology (ACR) scores. The primary endpoint for
most trials is the ACR 20, which is a measure of disease activity based on the following
subjective and objective criteria (see Exhibit 121).
Exhibit 121: ACR 20 criteria
>/= 20% improvement in each measure
>/= 20% improvement in 3 of 5 measures
Tender joint count

Swollen joint count
Patient's assessment of pain
Patient's global assessment of disease activity
Physician's global assessment of disease activity
Patient's assessment of physical function
Markers of inflammation (ESR or CRP)
Source: American College of Rheumatology and Goldman Sachs Research.
The ACR 50 (50% improvement) and ACR 70 (70% improvement) are defined similarly
and are also frequently reported in clinical trials. Other outcome measures used in
clinical studies include indices of radiographic joint damage, such as the Sharp Score.
The DAS 28 is another commonly-cited metric for the assessment of disease activity. The
Disease Activity Score was developed by the European League against Rheumatism
(EULAR) and is more commonly used in Europe than in the United States. The DAS
score (or DAS28 score) differs from the ACR scoring in that the score is based on only
four variables: tender joint count, swollen joint count, ESR, and the patients own
assessment of disease activity. A score of <2.6 indicates disease remission, and an
increase of >0.6 suggests disease progression.
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Scores based on X-ray studies. The Sharp score is a quantitative assessment of the
degree of joint space narrowing and bone erosions. In clinical trials, the change in Sharp
score is often reported to reflect radiographic outcome. The Sharp method assigns
separate scores for erosions and joint space narrowing, which are combined to obtain a
total score. The scoring range for the Sharp method is from 0 to 314 or 448, depending on
which modified version of the method is used. In some trials, scores obtained from hand
radiographs are included, whereas in other studies, radiographs of both the hands and feet
are used. Importantly, ACR scores and Sharp scores are limited to use in clinical trials.
These metrics are used infrequently in the clinical setting.
Quality of life metrics. There are two quality of life metrics that are also commonly
reported in clinical trials. Quality of life is important because RA is a chronic progressive
disease that leads to disability rather than death. Most clinical trials report at least one
quality of life metric. The HAQ is a Health Assessment Questionnaire which is used to
measure how much help the patient needs in his activities of daily living. The
questionnaire is completely subjective, and is usually used either in combination with
objective measures such as ACR response, or alone to estimate the impact of disease on
quality of life. (Sample HAQ at
http://patienteducation.stanford.edu/research/haq20.html).
The EQ5D, or EuroQoL is a similar method of assessing quality of life using a

questionnaire. The EQ5D looks at five health areas comprised of three levels of
disability. The questionnaire may be either self-administered or answered in discussion
with a physician. Information on the EQ5D may be found at
http://www.euroqol.org/web/.
B. Evaluation of clinical results

It is difficult to compare data accurately from different trials without first analyzing the
design. Small changes in the patient characteristics, type of therapeutic regimen, and
other variables can skew results, making one drug look better than another. Thus, it is
important to evaluate each trial carefully before comparing one to another. It is rare that
trials are so similar in design that the results can be directly compared. Some points to
watch are:
Early versus late disease. Patients with newly diagnosed disease are likely to be
more responsive than those with advanced disease.
History of treatment with one or more biologics or DMARDS. Patients who have
failed multiple treatments may be more difficult to treat.
Background therapy. A trial that allows combination of biologics with methotrexate
or steroids, for example, is likely to demonstrate better results than biologics alone
when compared to placebo.
Placebo control. Patients treated with placebo in most arthritis and pain studies show a
relatively high response rate (20-30%). Therefore, it is important to include a proper

control group.
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Regional research team
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United States
Regional research team

Maykin Ho, Ph.D.
New York: 212-902-6723
maykin.ho@gs.com
Maykin is the biotechnology analyst and head of Healthcare for Global Investment
Research. Maykin joined the firm in 1992. She became a managing director in 1998.
Previously, she was with Dupont-Merck Pharmaceuticals and Dupont De Nemours &
Company. Maykin serves on the board of The Aaron Diamond AIDS Research Center
and the Investment Committee of the Society for Neuroscience. Maykin was a
postdoctoral fellow at Harvard Medical School from 1980 to 1982.
Meg Malloy, CFA

New York: 212-902-7839
meg.malloy@gs.com
Meg Malloy, vice president, joined Goldman Sachs in September 2000. She works in the
Healthcare Group covering the biotechnology industry. Prior to joining Goldman Sachs,
Meg was a senior biotechnology analyst at Chase H&Q for three years. She has been
following the biotechnology sector for the last ten years. Previously, Meg worked at
Needham & Co and PaineWebber. She is a CFA. Meg has an A.B. from the University of
Chicago.
Jeff Comisarow, M.D.

New York: 212-902-0871
jeff.comisarow@gs.com
Jeff Comisarow, Associate, joined Goldman, Sachs & Co. in April 2004. He works in the
Healthcare sector covering Biotechnology with May-Kin Ho. Jeff has a B.A. in
Biopsychology from The University of British Columbia, and an M.D. and MBA from
UCLA. Prior to joining Goldman, Sachs & Co, Jeff was an Associate in the Healthcare
Investment Banking Group of SalomonSmithBarney / Citigroup for 2 years.
David Clayton, M.D.

New York: 212-357-5742
david.clayton@gs.com
David Clayton, Associate, joined Goldman, Sachs & Co. in October 2005. He works on
the Biotechnology team in New York. Prior to joining the firm, David worked as an
Equity Research Analyst covering the Medical Devices and Technology sector for SG
Cowen & Company. David is board certified in internal medicine, and trained at the
Scripps Clinic and Research Institute and Boston University. David graduated from
Columbia Business School with an MBA, from UMDNJ New Jersey Medical School
with an MD, and from Stevens Institute of Technology with a BS in Chemical Biology.
Charles Nguyen, CFA

New York: 212-357-4164
charles.nguyen@gs.com
Charles Thuan Nguyen, CFA, Associate, joined Goldman Sachs & Co. in July 2003. He
works with May-Kin Ho, Ph.D. covering the biotechnology industry. Charles has a
B.A/B.S. in Finance and International Business, from Georgetown University, and is a
Chartered Financial Analyst. Prior to joining the firm, Charles was an analyst in the
healthcare investment banking group at Merrill Lynch & Co.
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Amritha Kasturirangan
New York: 212-902-5306
amritha.kasturirangan@gs
.com
Amritha Kasturirangan, Associate, joined Goldman, Sachs & Co. in July 2005. She
works in the Healthcare sector, covering Biotechnology with Meg Malloy. Prior to
joining the firm, Amritha was an analyst in the investment banking division at Dresdner
Kleinwort Wasserstein and a consultant at PriceWaterhouseCoopers. Amritha earned her
MBA from the Wharton Business School and her BA from the University of Cambridge,
United Kingdom.
Reg AC analyst certification

Each of the analysts named below hereby certifies that, with respect to each subject
company and its securities for which the analyst is responsible in this report, (1) all of the
views expressed in this report accurately reflect his or her personal views about the
subject companies and securities, and (2) no part of his or her compensation was, is, or
will be, directly or indirectly, related to the specific recommendations or views expressed
in this report: Maykin Ho, Ph.D. and Meg Malloy, CFA.
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Disclosures
181
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Goldman, Sachs & Co. oHG and or one of its affiliates is acting as financial advisor to Merck KGaA in the proposed acquisition of
Schering AG. Goldman, Sachs & Co. oHG and or one of its affiliates will receive a fee for this advisory role.
Goldman Sachs & Co., and or one of its affiliates, is acting as financial advisor to Novartis International AG in the proposed
acquisition of Chiron Corporation. Goldman Sachs & Co., and or one of its affiliates will receive a fee for this advisory role.
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe

Rating Distribution
Global
Investment Banking Relationships
OP/Buy
IL/Hold
U/Sell
OP/Buy
IL/Hold
U/Sell
26%
59%
15%
59%
53%
43%
As of January 1, 2006, Goldman Sachs Global Investment Research had investment ratings on 2,034 equity securities.
Goldman Sachs uses three ratings relative to each analyst's coverage universe - Outperform, In-Line and Underperform.
See "Ratings, Coverage Views and related definitions" below. NASD/NYSE rules require a member to disclose the
percentage of its rated securities to which the member would assign a buy, hold, or sell rating if such a system were used.
Although relative ratings do not correlate to buy, hold, and sell ratings across all rated securities, for purposes of the
NASD/NYSE rules, Goldman Sachs has determined the indicated percentages by assigning buy ratings to securities rated
Outperform, hold ratings to securities rated In-Line, and sell ratings to securities rated Underperform, without regard to the
coverage views of analysts.
Price target and rating history chart(s)

183
United States
Regulatory disclosures
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Definitions
Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months.
In-Line (IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months.
Underperform (U). We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months.
Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Goldman Sachs policy when Goldman Sachs is
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longer in effect for this stock and should not be relied upon.
Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company.
Not Covered (NC). Goldman Sachs does not cover this company.
Not Available or Not Applicable (NA). The information is not available for display or is not applicable.
Not Meaningful (NM). The information is not meaningful and is therefore excluded.
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Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12
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Ratings definitions prior to November 4, 2002

RL = Recommended List. Expected to provide price gains of at least 10 percentage points greater than the market over the next 6-18 months.
LL = Latin America Recommended List. Expected to provide price gains at least 10 percentage points greater than the Latin America MSCI
Index over the next 6-18 months. TB = Trading Buy. Expected to provide price gains of at least 20 percentage points sometime in the next 6-9
months. MO = Market Outperformer. Expected to provide price gains of at least 5-10 percentage points greater than the market over the next 618 months. MP = Market Performer. Expected to provide price gains similar to the market over the next 6-18 months. MU = Market
Underperformer. Expected to provide price gains of at least 5 percentage points less than the market over the next 6-18 months.
United States
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The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and
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Healthcare: Biotechnology

" The Goldman Sachs Group, Inc.

Biotechnology 101: We have summarized the information

See the Disclosure section of

May-Kin Ho, Ph.D.

Goldman, Sachs & Co.

Goldman, Sachs & Co.

Goldman, Sachs & Co.

Goldman, Sachs & Co.

Goldman, Sachs & Co.

Goldman, Sachs & Co.

Healthcare: Biotechnology Industry primer

91 Cancer: solid tumors lung, colon and breast cancers

Goldman Sachs Global Investment Research - March 14, 2006

Healthcare: Biotechnology Industry primer

Goldman Sachs Global Investment Research - March 14, 2006

Healthcare: Biotechnology Industry primer

Goldman Sachs Global Investment Research - March 14, 2006

Healthcare: Biotechnology Industry primer

Selected historical events for the biotechnology industry

First biotech company founded (Cetus)

First monoclonal antibody produced

First recombinant human insulin produced

First biotech IPO (Genentech)

FDA approved first recombinant vaccine for humans: hepatitis B (Chiron)

Human Genome Project launched

Sales of Amgen exceeded $1B

Rough draft of the human genome sequence announced

Source: Biotechnology Industry Organization.

Goldman Sachs Global Investment Research - March 14, 2006

Healthcare: Biotechnology Industry primer

Biotechnology industry statistics, 2004

R&D expense, $MM

Net income (loss), $MM

No. of public companies

Source: Ernst & Young biotechnology reports, Goldman Sachs Research.

Exhibit 3: The US biotechnology industry at a glance

Products approved (cumulative)

Goldman Sachs Global Investment Research - March 14, 2006

Healthcare: Biotechnology Industry primer

Exhibit 4: Biotechnology industry segmentation by product focus

Source: Goldman Sachs Research.

The market capitalization of the US biotechnology industry approached $500 billion in

Source: Biotechnology Industry Organization website, Goldman Sachs Research.

Goldman Sachs Global Investment Research - March 14, 2006

Healthcare: Biotechnology Industry primer

Exhibit 6: Biotechnology companies in the United States

< $0.5B, 68%

Source: Goldman Sachs Research.

Solid growth in biotechnology revenues

No. of public companies

Source: Biotechnology Industry Organization website, Goldman Sachs Research.

Goldman Sachs Global Investment Research - March 14, 2006

Healthcare: Biotechnology Industry primer

Exhibit 8: Sales of top selling biotechnology products in 2005

Source: Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research - March 14, 2006

Healthcare: Biotechnology Industry primer

Exhibit 9: More biotechnology products approved by the FDA

Cumulative Number of Approved Products

Source: Goldman Sachs Research.

Exhibit 10: Biotechnology pipeline continues to grow

Number of products in clinical development