S&P Pharma Industry Overview - 11252010

Industry Surveys
Healthcare: Pharmaceuticals
Herman Saftlas, Pharmaceuticals Analyst
November 25, 2010
Current Environment ............................................................................................ 1
Industry Profile ...................................................................................................... 8
Industry Trends ................................................................................................... 14
How the Industry Operates ............................................................................... 18
Key Industry Ratios and Statistics................................................................... 28
How to Analyze a Pharmaceutical Company ................................................ 30
Glossary................................................................................................................ 36
Industry References........................................................................................... 40
CONTACTS: Comparative Company Analysis ......................................................... Appendix

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CURRENT ENVIRONMENT
Generics look to impending branded patent cliff

Often viewed as the flip side of the branded pharmaceuticals business, the generic drug sector is expected to
enjoy above-average growth over the coming years. Gains should be achieved largely for the same reasons
that the branded sector is likely to remain in the doldrums. Key growth drivers for generics include a record
number of patent expirations on widely prescribed branded drugs, and mounting pressure from government
and private industry third-party customers for greater use of less expensive generic drugs.
In addition, the recently enacted federal healthcare reform legislation—aimed at reducing healthcare costs
while extending coverage to some 31 million Americans presently without medical coverage—represents a
positive driver for generics. This huge expansion of the industry’s end-user base is expected to start phasing
in during 2014, and will be especially welcomed by the generics industry, which will need new business by
that time as patent-cliff–related sales diminish.
We also expect this sector to benefit materially from the planned implementation of a new US Food and
Drug Administration (FDA) regulatory process to approve generic versions of biologics. Although no such
system presently exists in the US, a biosimilars regulatory approval system has been established in Europe.
We project the global generic drug market to expand at double-digit rates over the next few years, from a
base of $83 billion in 2009, based on data from IMS Health Inc. (IMS), a market research firm specializing
in pharmaceuticals. According to Teva Pharmaceutical Industries Ltd., the total global generics drug market
is projected to expand to between $135 billion and $150 billion by 2015. This represents a compound
annual growth rate (CAGR) of 10% over the 2009–15 period, assuming the upper end of the projected
2015 total.
Based on data provided by DataMonitor, a market research firm, worldwide generic sales by geographic
region in 2009 broke down as follows: North and South America, about 33%; Europe, 31%; and Asia-
Pacific, 36%. However, the generic penetration rates typically vary widely by country to country, reflecting
divergence in regulatory protocols, demographics, and the individual preferences of major companies
serving each market.
According to statistics provided by BCC Research, a market research firm, generics accounted for close to
18% of the German pharmaceutical market in 2008 (latest available), but only 11% in France, 10% in the
US, and 6% in Japan.
The largest company in the global generics space in 2008 (latest available) was Teva, with an estimated
18% of the market, based on data from BCC Research. Other key players, according to BCC, were the
Sandoz division of Novartis AG (10%), Mylan Inc. (6%), Watson Pharmaceuticals Inc. (6%), ratiopharm
(3%), STADA Arzneimittel AG (3%), Actavis (2%), Ranbaxy Laboratories Ltd. (2%), and all others
(50%). In June 2010, Teva acquired ratiopharm.
To appreciate the inherent substantial savings afforded to consumers via generic drugs, the Generic
Pharmaceutical Association (GPhA), an industry trade organization, has noted that the use of generic drugs
saved the US healthcare system over $834 billion in the 10 years through 2009, based on an IMS study. For
2009 alone, generics saved the nation close to $140 billion.
Patent cliff represents a key driver

Never before in its history has the generic industry faced such as huge new product opportunity as now,
with an unprecedented number of major branded blockbuster drugs losing patent protection in the US and
Europe. Based on estimates from IMS Health, the global branded drug industry stands to lose patent
protection on drugs with aggregate sales of over $142 billion over 2010–15. That projected hit is equal to
some 17% of worldwide sales in 2009, based on IMS data.
INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 1
While we expect nearly all generic drug companies to benefit from these expirations, we think major players
such as Teva, Sandoz, and Mylan are likely to reap the largest rewards, especially in the US market, which
affords first-to-file applications with six
MAJOR POTENTIAL PATENT EXPIRATIONS months of marketing exclusivity.
(Ranked by US sales)
2009 SALES Pending drug patent expirations
BRAND NAME COMPANY INDICATION (MIL. $) Below we highlight some of the larger
2010 branded drugs (with 2009 global sales
Lovenox Sanofi-Aventis Treatment/prevention of 2,700 figures) losing patent protection over the
ManB02: venous thromboembolism
MAJOR next few years.
Effexor XR Wyeth Depression, anxiety, panic 2,554
POTENTIAL disorder  2010— Sanofi-Aventis’ Lovenox
Flomax PATENT
Boehringer Benign prostatic 1,718 cardiovascular drug ($4.3 billion),
Ingelheim hypertrophy
EXPIRATIONS Merck & Co. Inc.’s Cozaar
Aricept Pfizer Alzheimer’s disease 1,464 antihypertensive ($3.6 billion), and
Cozaar Merck High blood pressure 771 Pfizer Inc.’s Effexor XR anti-
Arimidex AstraZeneca Breast cancer 697 depressant ($3.2 billion).
Hyzaar Merck High blood pressure 584
Mirapex Boehringer Parkinson’s disease, 417  2011—Pfizer’s Lipitor cholesterol
Ingelheim restless leg syndrome regulator ($11.4 billion), Bristol-
Aldara Graceway Actinic keratosis, genital 412 Myers Squibb Co.’s Plavix blood-
warts, skin cancer thinning agent ($6.1 billion), and Eli
Differin Galderma Acne 282 Lilly & Co.’s Zyprexa anti-psychotic
Astelin Meda Allergic rhinitis 209
($4.9 billion).
Fosamax Plus D Merck Osteoporosis 123
2011  2012—Novartis AG’s Diovan heart
Lipitor Pfizer High cholesterol 6,053 drug ($6.0 billion), AstraZeneca
Plavix Bristol-Myers Anti-clotting factor 5,556 Plc’s Seroquel schizophrenia drug
Squibb/Sanofi ($4.9 billion), and Merck’s Singulair
Zyprexa Lilly Schizophrenia, bipolar 1,968 asthma/allergy treatment ($4.7
disorder
billion). 
Xalatan Pfizer Glaucoma, ocular 519
hypertension  2013—Eli Lilly’s Cymbalta anti-
Protonix Wyeth Stomach ulcers, GERD 497 depressant ($3.1 billion) and
Femara Novartis Breast cancer 461 Humalog human insulin ($2.0
Caduet Pfizer High blood pressure and 362 billion).
high cholesterol
Patanol Alcon Allergic conjunctivitis 256  2014—Sanofi-Aventis’ Lantus
2012 diabetes treatment ($4.4 billion),
Seroquel AstraZeneca Schizophrenia, bipolar 3,482 and Roche Holding Ltd.’s Rituxan
disorder therapy for rheumatoid arthritis
Singulair Merck Asthma, allergic rhinitis 3,465 ($5.6 billion) and Herceptin
Actos Takeda Type 2 diabetes 2,782
treatment for breast cancer ($4.8
Lexapro Forest Depression 2,554
billion).
Levaquin Ortho-Mcneil Bacterial infections 1,632
Diovan Novartis Hypertension, CHf 1,469
Diovan HCT Novartis Hypertension 1,376
Healthcare reform to benefit generics
TriCor Abbott High triglycerides 1,350 With its emphasis on cost savings and
Lidoderm Teikoku Postherpetic neuralgia 1,064 expanded coverage, healthcare reform is
Viagra Pfizer Erectile dysfunction 1,000 a win-win situation for the generic
Geodon Pfizer Schizophrenia 975 pharmaceutical sector, in our view, since
Provigil Cephalon Narcolepsy, idiopathic 966 nearly all health insurance plans should
hypersomnolence favor its low-cost products. We also
Lunesta Sepracor Insomnia 804
expect this sector to benefit materially
Avandia GlaxoSmithKline Type 2 diabetes 436
Avapro Sanofi-Aventis Hypertension 413
from the planned implementation of a
Avalide Sanofi-Aventis Hypertension 359 new FDA regulatory process to approve
Avandamet GlaxoSmithKline Type 2 diabetes 207 generic versions of biologics (no such
Clarinex Schering Allergic rhinitis 207 system presently exists).
Atacand AstraZeneca Hypertension, CHf 162
Sources: Medco's 2010 Drug Trend Report; Standard & Poor's.
2 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

We also see heightened merger and acquisition (M&A) activity in this area, as large-capitalization branded
drug companies are likely to increase their exposure in the generic space over the coming years. We note
that Novartis already has a major position in global generics through its Sandoz division, and Pfizer markets
generics through its Greenstone division.
GENERICS DOMINATE US RX MARKET
Widely used by virtually all managed care and governmental health insurance organizations, inexpensive
generic drugs accounted for more than 70% of prescriptions written in the US in 2009, up from 57% in
2004, according to IMS Health. However, given their low cost—often 10% or less compared with branded
prices—generics represented only about 17% of total US pharmaceutical sales, according to IMS.
Generic prescriptions written increased 5.9% in 2009, continuing the fairly steady growth trend seen over the
past decade. Generic drugs have provided Americans with safe and effective lower-cost alternatives to brand
name prescription drugs. Besides the price advantage, generics’ success in the marketplace has also reflected
consumer confidence in their quality, which reflects strict FDA standards for strength, purity, and potency.
This market continues to grow, helped by patent expirations and greater inducements by managed care and
other third-party payers on patients to select generic options. However, the sector has also had its share of
problems, including some quality control manufacturing issues that have resulted in plant shutdowns and
product recalls.
On balance, we think that healthcare reform will be a net positive, but we see some initial drawbacks such
as increased Medicaid rebates, and product liability and pricing lawsuits. Finally, we believe FDA review
time for generics remains a serious problem, with a backlog of more than 2,000 abbreviated new drug
applications (ANDAs) presently before the FDA’s generic division. Moreover, review times have lengthened
significantly over the past three years, from an average of 16 months in 2006 to over 26 months in 2009.
PLANS FOR GENERIC USER FEES
Addressing the ANDA backlog issue, generic companies are attempting to have the FDA implement a user
fee system for the generic industry that would help the FDA fund additional staffing to speed up the
approval process. The proposed program, which would be similar to the branded drug sector’s Prescription
Drug User Fee Act (PDUFA), appears to have wide support among generic drug companies, consumer
groups, and the FDA itself. We note that President Obama, in his fiscal 2011 budget for the FDA, has
included funds generated from a proposed user fee program for generic drugs.
First enacted in 1992, the PDUFA provided a process for the FDA to collect fees from brand-name drug
manufacturers, with the funds used to expand FDA staffing, upgrade information technology, and speed up
the overall new drug approval process. The PDUFA has been reauthorized several times since its initial
creation, and the evidence has shown it to be highly successful in achieving its goals.
However, we do not think that the branded PDUFA system can be easily applied to the generic sector, as the
latter involves several unique complexities. One key difference between new branded drugs and generics is
that new generics typically face many patent-related obstacles before they are cleared for commercialization.
This applies even after the FDA determines that the generics themselves are safe and effective therapies.
Generic companies usually vie with one another to be the first to file a Paragraph IV ANDA, which is a
special kind of filing that seeks to invalidate targeted branded patents or otherwise show that their generic
does not infringe, thereby gaining marketing approval well before the patent on the branded drug expires.
Under Hatch-Waxman legislation, the first company to file a successful Paragraph IV ANDA is rewarded
with a lucrative six-month period of marketing exclusivity. However, when a Paragraph IV is filed, the
innovator company will invariably sue the generic company, thereby triggering a 30-month stay during
which the FDA is prevented from approving the generic.

Innovator companies also initiate counter-claims of patent infringement against generics, sometimes
delaying generic entries for years until the litigation is resolved. In addition, new generic drugs are often
blocked by other obstacles, such as Citizen Petitions filed by branded drug companies. These filings request
the FDA to use more stringent standards with respect to possible safety risks on generic copies of certain
hard-to-copy innovator drugs, since generic approvals do not require clinical trials (in essence, they just
need to show bio-equivalence).
Given such delaying tactics as the 30-month stay, Citizen Petitions, and protracted litigation—all of which
can delay generic launches for years—the usefulness of having the FDA speed up its own review of generic
drugs could become a moot point. Generic companies have expressed concerns that a user fee program
requiring upfront payments to the FDA would not necessarily speed up commercialization.
FDA and generics industry have divergent motives

In September 2010, the FDA convened a special meeting with generic industry representatives and consumer
groups to discuss ideas concerning the creation of a generic user fee program. Topics covered included the
program’s fee structure, FDA performance goals, existing ANDA applications, post-marketing surveillance,
and related issues. Although the benefits for generics are not as clear-cut as they are for branded products,
we believe that generic manufacturers are largely in favor of a reasonably priced user fee program, which
would help make the overall approval process faster and more efficient.
We think the FDA is also in favor of generic user fees, but for different reasons. Beset by much negative
publicity in recent years over unsafe generic products produced overseas, such as tainted heparin and similar
issues, the FDA is now eager to impose stricter quality controls and to conduct increased inspections at
foreign facilities, which user fees could help fund.
Although questions remain about how a new generic user fee program will be structured, especially with
regard to fees and the defined performance metrics, we believe that a consensus will be reached between
generic manufacturers and the FDA, with a workable program likely to be proposed during 2011.
BIOGENERICS: US HEALTHCARE REFORM CALLS FOR A PATHWAY
In March 2010, President Obama signed into law new healthcare reform legislation, officially known as the
Patient Protection and Affordable Care Act (PPACA), which formally authorized the FDA to establish a
regulatory pathway for the approval and marketing of biogenerics (also known as biosimilars, or follow-on
biologics). These products are generic versions of biotechnology products, meaning that they are similar in
structure and efficacy to currently marketed biotechnology drugs.
While biogenerics are now being marketed in Europe, they are not yet available in the US, as no regulatory
pathway for their development and marketing has yet been approved in this country. According to estimates
from the Generic Pharmaceutical Association (GPhA), an industry trade group, competition from
biogenerics could save patients, insurers, and the government anywhere from $42 billion to as much as
$108 billion during the first 10 years after biogenerics are cleared for marketing in the US.
A regulatory pathway would create new protocols and standards that the FDA would use to evaluate and
approve generic biologic filings. Such a regulatory pathway would provide an immediate new generics
market, which would consist of many branded biologics that are now off-patent. These include Epogen
(erythropoietin), Neupogen (filgrastim), human growth hormones, and insulin products that presently have
little or no generic competition in the US.
In addition, a relatively large amount of biotech product sales is subject to patent expiration over the next
five years. According to a recent study by Medco Health Solutions Inc., a pharmacy benefits manager,
biologics with approximately $32 billion in sales may go off-patent by the end of 2015. Some of these
products include Eli Lilly’s Humalog human insulin (estimated sales of $2.3 billion in 2010), Pfizer’s Enbrel
anti-inflammatory TNF inhibitor ($3.1 billion), and Roche’s Herceptin ($6.7 billion) and Rituxan ($6.6
billion) anticancer compounds.

A key point of contention between the branded biopharmaceutical industry and the generic companies had
related to the length of patent exclusivity that should be granted on new biopharmaceuticals. In 2009,
Congressional leaders sought a period of just five years, which generic producers supported. Citing the cost
of developing complex medicines, which academicians recently estimated at more than $1 billion per
approved drug, and the need to recoup these investments before generics enter the market, the pharmaceutical
and biotech industries claimed they needed an exclusivity period of 12 to 14 years.
The new healthcare reform legislation resolved this controversy by granting new biotech drugs 12 years of
patent-protected marketing exclusivity. While the generic industry was not happy with the longer exclusivity
period, we think key players with broad-based global manufacturing capacity stand to be net beneficiaries
of this legislation.
Major companies that we expect to reap handsome returns from biosimilars include leading generic
producers such as Sandoz (part of Novartis), Teva, Mylan, and Watson Pharmaceuticals. In recent years,
companies such as Merck, Pfizer, and Teva have launched or expanded units to develop biosimilars in
anticipation of the establishment of a formal approved pathway.
However, we believe the creation of a regulatory pathway for biologics is likely to be a more knotty issue
for the FDA, given the greater complexity and inherent instability of biotech compounds. A major difference
between biologics and conventional drugs is that large molecule biologics are made from living organisms,
while small molecule drugs are produced from chemicals.
Being more difficult to discover and manufacture, and presently not subject to generic competition in the
US, biologics typically dominate hard-to-treat diseases of the immune system such as rheumatoid arthritis,
multiple sclerosis, and cancer.
MERGER ACTIVITY PICKS UP FOR GENERICS COMPANIES
Following a record-breaking year in 2009, we expect the total value of pharmaceutical mergers and
acquisitions in 2010 to fall sharply below the record $141 billion worth of deals in 2009, based on data
from Dealogic Inc., a market research firm. However, the decline is due primarily to a drop in mega-deals in
the branded Big Pharma sector. In contrast, M&A activity in the generics space has accelerated over the
past 18 months, and is likely to remain at a relatively high level over the coming years, in our opinion.
Although business models in the generic sector are quite different from Big Pharma’s, this sector has
experienced heightened M&A activity as major generic players seek to achieve greater globalization of their
businesses to diversify the potential risks of slowing trends in individual markets. Similar to their branded
cousins, generic mergers also reflect the need to expand sales bases and improve margins through cost
economies and operating synergies.
The biggest deal in the generic sector so far in 2010 has been Teva’s acquisition of ratiopharm, which was
completed in June 2010 for about $5 billion in cash and debt. Ratiopharm is the second largest generic
manufacturer in Germany, with 2009 sales of about $2.3 billion. In order to acquire ratiopharm, Teva had
to outbid Pfizer and Atavis (an Iceland-based generics firm) in an auction contest.
We believe Teva was strongly motivated to do this deal to secure a greater footprint in the European
generics market, which we expect will grow faster than the US market over the next five years. Germany’s
generic pharmaceutical market alone, with an estimated $8.6 billion in annual sales, is the world’s second
largest, according to IMS.
We expect the deal, funded by cash on hand and new debt, to add immediately to Teva’s adjusted ADR
profits, and to be accretive to GAAP ADR earnings by the second quarter of 2011. We also expect merger
synergies to exceed $400 million over the first three years after the merger takes place. Teva expects to
spend some $15 billion to $20 billion on acquisitions through 2015, comparable to the $19 billion that it
has spent on acquisitions over the five years through 2009.

TOP US PHARMACEUTICAL COMPANIES NEW PRODUCT PIPELINES
(As of November 2010) EST. 2015
SALES
COMPANY NAME OF COMPOUND PHARMACOLOGIC CLASS TREATMENT STATUS (MIL. $)
Abbott Laboratories Bardoxolone Antioxidant inflammation modulator Chronic kidney disease Phase II 150
Briakinumab Human monoclonal antibody Crohn's disease Phase III 500
Certriad Fibrate and statin combination Cholesterol and triglycerides Filed 400
regulation
Flutiform Beta2 agonist Asthma Filed 200
Bristol-Myers Squibb Apixaban (partnered with Factor Xa inhibitor Thrombosis Phase III 1,750
Pfizer)
Belatacept Anti-b7 integrin Mab Immuno-suppression Phase III 425
transplants
DapaglifloxinTable B04: TOPSelective
US SGLT2 Inhibitor Diabetes Phase III 370
Ipilimumab Human monoclonal antibody Melanoma Phase III 700
Necitumumab PHARMACEUTICAL
(partnered Monoclonal antibody Cancer Phase III 500
with Eli Lilly)
COMPANIES NEW
Onglyza Dipeptidyl peptidase IV (DPP-IV) Diabetes Launched 650
PRODUCT inhibitor
Eli Lilly & Co. Bydureon PIPELINES Glucagon-like peptide 1 (GLP-1) Diabetes Filed 950
agonist
Effient Platelet ADP antagonist Acute coronary syndrome Approved 450
Enzastaurin Protein kinase C (PKC) inhibitor Cancer Phase III 250
Necitumumab (partnered Monoclonal antibody Cancer Phase III 500
with Bristol-Myers)
Ramucirumab Anti-VEGFrMAb Breast cancer Phase III 100
Semagacestat y-secretase inhibitor Alzheimer's disease Phase III 240
Solaneuzumab Monoclonal antibody Alzheimer's disease Phase III 150
Teplizumab Monoclonal antibody Diabetes Phase III 225
Johnson & Johnson Abiraterone Abiraterone acetate Prostate cancer Phase III 350
Bapineuzamab (partnered Anti-beta amyloid Mab Alzheimer's disease Phase III 1,100
with Pfizer)
Ceftobiprole Cephalosporin Bacterial infections Filed 850
Dacogen Pyrimidine analogue Cancer Phase III 150
Dapoxetine SSRI Premature ejeculation Filed 300
Rilpivirine Reverse transcriptase inhibitor HIV Phase III 300
Simponi (partnered with Anti-TNFa Mab Rheumatoid arthritis Launched 2,600
Merck)
Stelara Anti-IL-12 & IL-23 MAb Psoriasis Filed 780
Telaprevir Protease inhibitor Hepatitis C Phase III 1,800
Xarelto Factor Xa inhibitor Thrombosis Phase III 1,500
Merck & Co. Bocepravir HCV protease inhibitor Hepatitis C Phase III 820
Bridion Selective relaxant binding agent Novel anesthetic Phase III 650
Deforolimus (MK-8669) Rapamycin analogue (mTOR Cancer Phase III 200
inhibitor)
MK-0524B Tredaptive with simvastatin Cholesterol regulation Phase III 1,400
Odanacatib Cathepsin K inhibitor Osteoporosis Phase III 600
Org 36286 Corifollitropin alfa Infertility Phase III 200
Preladenant Adenosine A2 antagonist Parkinson's disease Phase II 300
Saphris 5HT-2/D2 antagonist Schizophrenia Approved 250
Simponi (partnered with Anti-TNFa MAb Rheumatoid arthritis Approved 2,600
Johnson & Johnson)
Telcagepant CGRP antagonist Migraine Phase III 700
TRA Thrombin receptor antagonist Acute coronary syndrome Phase III 1,500
Tredaptive Nicotinic Acid/Laropiprant Cholesterol regulation Filed 500
Pfizer Inc. Apixaban (partnered with Factor Xa inhibitor Thrombosis Phase III 1,750
Bristol-Myers Squibb)
Aprela Oestrogen agonist & SERM Osteoporosis & menopause Phase III 200
Axinitib VEGF inhibitor Cancer Phase III 550
Bapineuzamab (partnered Humanized monoclonal antibody Alzheimer's Phase III 1,100
with J&J)
Bosutinib Kinase inhibitor Leukemia Phase III 460
CP-675 Monoclonal antibody Skin cancer Phase III 550
CP-690550 JAK-3 inhibitor Immunosuppressive Phase III 1,200
CP-751 IGF-IR monoclonal antibody Cancer Phase III 200
Fesoterodine Antimuscarinic agent Incontinence Approved in 500
Europe
PF-02341066 MET tyrosine kinase inhibitor Cancer Phase III 800
Prevnar 13 Pneumococcal 13-valent Vaccine Approved 4,500
Pristiq Desvenlafaxine Depression Approved 200
Pristiq Desvenlafaxine Vasomotor symptoms Approvable 150
Relistor Mu opioid antagonist Constipation Filed 400
Viviant SERM Osteoporosis Approvable 150
Xiaflex Collagenase clostridium Peyronie's disease Phase III 320
Sources: Company reports; Standard & Poor's estimates.

European firms are also increasingly diversifying and acquiring generic drug companies, partly to provide a
balance to their branded products, many of which face generic competition. Novartis has successfully
employed this strategy with its Sandoz division, which experienced significant growth in recent years.
We see these acquisitions mirroring a rising trend toward globalization of the generics industry. In our
opinion, this diversification trend underscores difficulties at home, including an increasingly price-
competitive US market, a bottleneck of generic filings at the FDA, and other regulatory issues, contrasted
with higher margins on generics in many foreign countries and greater opportunities abroad for lucrative
generic biotech products.
Big Pharma eyes biotech to drive growth

A key defining trend, well documented in recent years, has been Big Pharma’s push into biotechnology, as
that space is believed to offer the potential to provide a wave of new products that will help offset impending
patent expirations, and drive future growth. Viewing biotechnology as the new frontier in breakthrough
therapeutics, drug companies have specifically targeted biotech firms for acquisitions and new alliances in
the face of disappointing returns from conventional small molecule pharmaceutical R&D, in our view.
Biologics are also less vulnerable to generic competition, even after their patents expire, as large molecule
biologics are by nature more difficult to replicate. In addition, costly clinical trials may deter potential
generic drugmakers from entering certain markets.
We believe this objective played a key role in the 2009 mega-mergers: Roche Holding’s $47 billion
acquisition of the remaining stock in US biotech Genentech Inc. that it did not already own, and Pfizer’s
$68 billion merger with Wyeth Pharmaceuticals, which had one of the strongest biotechnology pipelines
among large pharma players. Based on data provided by EvaluatePharma, a research firm specializing in
pharmaceutical and biotechnology equities, biotechnology products are expected to account for 48% of the
top 100 drugs of 2016, up from 31% in 2009 and 15% in 2000.
The most recent Big Pharma/biotech merger deal in 2010 has been French drugmaker Sanofi-Aventis’ $18.5
billion hostile bid for Genzyme Corp. Sanofi launched a tender offer in October and, although Genzyme
rejected the price, we believe a mutually acceptable deal could be done at a higher price. We see Genzyme’s
roster of treatments for rare genetic disorders helping to buoy Sanofi’s top line amid sales erosion due to
generic competition for Plavix and Lovenox, as well as providing long-term synergies. Even with a likely
sweetening of the offer by 7%–8%, we think the deal would provide Sanofi with earnings accretion of
around 5% in 2011 and 7% in 2012.
We believe biologics represent one of the bright spots in the pharmaceutical industry, and should continue
to spawn lucrative new therapies that bolster the sector’s sales and earnings. Fifteen of the 34 innovative
treatments approved by the FDA in 2009 were biologics, as were 10 of the 18 innovative compounds
approved by the FDA during the first half of 2010. We project 2010 growth in global biotechnology sales at
roughly double the mid-single-digit pace that we see for the pharmaceutical sector.
Looking at the mega-deals discussed above, we believe key Genentech assets that attracted Roche’s interest
were monoclonal antibodies; Avastin, a drug for colorectal, breast, and lung cancers; Rituxan, a treatment
for non-Hodgkin’s lymphoma; and Herceptin for breast cancer. In addition, Roche’s license option on
Genentech’s drug pipeline was set to expire in 2015.
Smaller deals done in recent years included Bristol-Myers Squibb Co.’s purchase of Medarex Inc. in 2009
for $2.3 billion, and Eli Lilly’s acquisition of Imclone Systems Inc. in 2008 (also $2.3 billion). We think the
motive for the acquisition of Medarex was its promising oncology and immunology pipeline, led by ipilimumab
for advanced melanoma. In Lilly’s case, we think the key attraction was ImClone’s Erbitux anticancer
therapy, plus other experimental drugs, including an advanced oncology agent similar to Erbitux. 

INDUSTRY PROFILE
Emerging markets drive global growth

Global pharmaceutical sales are expected to expand 5%–7% in 2011, to over $880 billion, primarily driven
by projected growth of 15%–17% in emerging markets, based on estimates from IMS Health Inc. (IMS), a
market research firm specializing in pharmaceuticals. Sales in China alone are forecast to advance 25%–
27% in 2011, reflecting an expanding middle class, rising standards of living, and expanded government
healthcare funding.
The projected 5%–7% global gain represents a somewhat faster pace of growth than the 4%–6% gain that
IMS has forecast for the overall market in 2010. The indicated gain in 2010 was based on projected growth
of 13%–15% in emerging markets in
GLOBAL PHARMACEUTICAL SALES, BY REGION Asia and Africa, as well as 10%–12%
SALES MARKET FORECAST gains seen for Latin America. Sales in
(BIL. $) SHARE (%) % CHG. CAGR % % GROWTH developed markets in North America and
2009 2009 2008-09 2004-09 2009-10 Europe were estimated to show increases
Table B13: GLOBAL only in the 3%–5% range in 2010.
North America 323.8 38.7 5.5 5.2 3-5
PHARMACEUTICAL
Europe 263.9 31.5 4.8 6.6 3-5
SALES,106.6
Asia, Africa, Australia
BY REGION 12.7 15.9 13.9 13-15 According to IMS, sales in the US are
Japan 95 11.3 7.6 3.9 0-2 expected to account for roughly 36% of
Latin America 47.9 5.7 10.6 10.9 10-12 the global pharmaceutical market in
TOTAL 837.3 100.0 7.0 6.7 4.6 2011, Europe 16%, Japan 11%,
CAGR-Compound annual growth rate. emerging markets 20%, and all other
Source: IMS Health Inc. areas 17%.
The robust growth projected for emerging markets is in sharp contrast to projected compound annual
growth rates of only 3%–6% for major drug markets in North America and Europe over the 2009–14
period, according to IMS. Emerging markets are expected to account for 48% of total pharmaceutical
market growth in 2013, up from an indicated 37% in 2009. Emerging markets are expected to account for
close to 20% of total worldwide pharmaceutical sales in 2011, up from 16% in 2009 and 13% in 2001.
Most developed drug markets are showing declining growth rates in pharmaceutical spending, reflecting
slowing demographic trends, weakening economies and sovereign debt issues, rising pressures on drug
LEADING PHARMACEUTICAL COMPANIES
pricing amid constrained government budgets,
and sales erosion resulting from a record
-------- US PHARMA SALES (BIL. $) ---------
number of patent expirations on branded
COMPANY 2005 2006 2007 2008 2009
blockbuster drugs over 2011–14 (known as the
1. Pfizer 34.3 34.2 31.4 27.7 27.8
2. Merck 18.7 20.6 21.9 20.1 19.8
patent cliff).
3. AstraZenecaB06: LEADING
12.4 14.5 15.2 16.1 18.3
4. GlaxoSmithKline 17.0 18.7 18.3 16.5 15.0
By geographical region, total global
PHARMACEUTICAL pharmaceutical sales in 2009 were divided as
5. Hoffman-La Roche 8.0 10.2 11.9 12.6 14.3
COMPANIES follows, based on IMS data: North America,
6. Novartis 12.6 13.6 13.5 12.2 13.4
7. Eli Lilly 8.9 9.7 10.7 12.0 13.2 38.7%; Europe, 31.5%; Asia, Africa, and
8. Johnson & Johnson 15.6 15.7 15.9 15.6 12.8 Australia, 12.7%; Japan, 11.3%; and Latin
9. Amgen 11.6 14.2 13.6 12.8 12.5 America, 5.7%. The strongest growing regional
10. Teva Pharmaceuticals 7.3 9.0 9.8 11.2 12.1 segments in 2009 were emerging markets such
Total, Top 10 146.4 160.4 162.2 156.8 159.2 as China and Latin America.
Total, US Market 247.3 270.3 280.5 285.7 300.3
Source: IMS Health Inc. Despite an impending massive loss of revenues
resulting from patent expirations, worldwide
pharmaceutical sales are expected to increase at a compound annual growth rate (CAGR) in the 5%–8%
range over 2009–14, and reach $1.1 trillion by 2014, based on an IMS forecast.

Key drivers fueling the projected gain include robust 14%–17% annual growth in emerging markets.
Research and development (R&D) discoveries and development of novel new therapies for cancer, diabetes,
HIV, multiple sclerosis, and other immune disorders are also expected to foster growth. IMS also pointed
out that patent
TOP PRESCRIPTION DRUGS expirations are
(Ranked by 2009 US sales) expected to peak in
-------------- SALES (BIL. $) --------------
2011–12, when six
DRUG COMPANY USE 2005 2006 2007 2008 2009
of the world’s 10
Lipitor Pfizer Cholesterol reducer 8.2 8.6 8.1 7.8 7.5
largest selling drugs
Nexium AstraZeneca Antiulcer
Table B02: TOP 4.3 5.1 5.4 5.9 6.3
lose patent
Plavix Bristol-Myers Squibb/Sanofi PRESCRIPTION
Antiplatelet 3.5 2.9 3.9 4.8 5.6
protection. Thus,
Advair Diskus GlaxoSmithKline Asthma 3.5 3.9 4.2 4.4 4.7
DRUGS revenue comparisons
Seroquel AstraZeneca Antipsychotic 2.5 3.0 3.4 3.8 4.2
Abilify Bristol-Myers Squibb/Otsuka Antidepressant 1.5 1.9 2.3 3.0 4.0 should be favorable
Singulair Merck Respiratory 2.5 3.0 3.4 3.5 3.7 after 2012.
Actos Takeda Antidiabetic 2.2 2.6 2.9 3.1 3.4
Enbrel Amgen Antiarthritic 2.8 3.1 3.1 Total revenue loss
3.1 3.3
Epogen Amgen Antianemia 2.9 3.2 3.0 from patent
3.0 3.2
Source: IMS Health Inc. expirations over the
2010–14 period is
expected to exceed $142 billion. Major generic inroads are expected in the areas of cholesterol regulation
(now dominated by Pfizer’s Lipitor), antipsychotics (such as Lilly’s Zyprexa and AstraZeneca’s Seroquel),
antiulcerants, and heart drugs (including Merck’s Cozaar/Hyzaar and Bristol-Myers Squibb’s Plavix).
US AND EUROPEAN PHARMA SALES SLOWING
Domestic pharmaceutical sales are projected to advance 3%–5% in 2011, comparable with gains indicated
for 2010, but below past growth rates of 5.1% in 2009 and 9.3% in 2006, according to IMS. We attribute
the sluggish growth to weakness in the overall economy, with high unemployment (resulting in more people
without insurance), patent losses, and tougher pricing. The pricing situation has been exacerbated by the
advent of US healthcare reform, which will entail new rounds of price discounting and rebates in the
Medicaid and Medicare programs.
Affected by recession-related constrained government budgets, along with sovereign debt issues, European
countries have implemented unilateral reductions in pharmaceutical pricing and utilization. Largely in view
of that trend, as well as lingering softness in national economies, pharmaceutical growth in the top five
European countries in the aggregate is expected to be only 1%–3% in 2011, totaling $135 billion to $145
billion, based on IMS estimates.
Pharmaceutical pricing reductions in Europe have been fairly widespread to date in 2010, with cuts
implemented in nearly all major countries across branded and generic sectors. France recently announced
plans to reduce its 2011 pharmaceutical budget by close to $700 million (equal to about 2% of its total
spending), while at the same time terminating tax incentives for orphan drugs. Other high-profile reductions
announced earlier this year included a program in Greece designed to save more than $2.5 billion by
reducing drug prices by over 20%; and a plan in Italy to achieve $2 billion in pharma savings through price
reductions and tightened utilization.
In contrast, pharmaceutical sales in Japan are projected to increase between 5%–7% in 2011, to the $96
billion to $100 billion range, according to IMS. Japan is a highly regulated market, where annual drug sales
generally fluctuate erratically, impacted by biennial across-the-board pharmaceutical price cuts; however, no
price cuts are expected in 2011.
Although the patent cliff starts in earnest in 2011, most of the major losses are expected to occur during the
fourth quarter of that year, with their major impact expected to be felt in 2012. Three of the world’s top 10
drugs—Pfizer’s Lipitor, Eli Lilly’s Zyprexa, and Bristol-Myers Squibb’s Plavix—lose US patent protection in
October and November 2011. Total global sales of those three products were close to $22 billion in 2009.

SPOTLIGHT ON EMERGING MARKETS
With markets in the world’s major developed nations either stagnant or showing only modest growth,
pharmaceutical manufacturers are increasing their focus on global emerging markets to provide impetus for
top line growth over the coming years.
Based on IMS forecasts, sales in 17 developing nations that IMS refers to as “pharmerging” countries—
including China, Brazil, Mexico, South Korea, Turkey, India, and Russia—are expected to grow collectively
at a compound annual rate of 14%–17% in the five years through 2014. Emerging markets are expected to
contribute nearly half of the 5%–7% total global pharmaceutical growth projected for 2011, according to
IMS. Drug sales in the 17 pharmerging countries are expected to expand by 15%–17%, to $170 billion–
$180 billion in 2011.
These markets provide opportunities…

Unlike the more developed areas of the world, developing nations are generally enjoying rapid rates of
growth in demographics and gross domestic product (GDP), and rising levels of disposable income.
Consequently, an increasing number of people in such countries are able to buy goods and services they
previously could not afford, although the larger population segments in these regions are still mostly
impoverished.
Typically, healthcare expenditures, including spending on pharmaceuticals, increase with a rising standard
of living. According to the International Monetary Fund, emerging markets comprise some 85% of the
world’s population, and they accounted for all real worldwide economic growth over the past five years.
Another factors spurring growth in these markets is that as they develop, their populations become subject
to ailments and conditions that typically affect developed nations. These include poor health behaviors such
as drinking alcoholic beverages, smoking, and rising levels of obesity, which, in turn, lead to cardiovascular
disease, cancer, diabetes, respiratory ailments, and other maladies. We believe these situations provide
multinational pharmaceutical manufacturers with opportunities to tap large new customer bases.
We also see emerging areas yielding additional benefits in terms of raw materials and production. Many
developing nations provide opportunities for attractive low labor-cost manufacturing bases, allowing
multinational drug makers to establish new manufacturing plants from which pharmaceuticals could be sold
to other emerging markets, as well as to developed countries.
…as well as challenges and obstacles

Despite the bright growth prospects for these markets, we still believe that multinational pharmaceutical
manufacturers face many challenges in emerging markets. In many developing nations, patients largely pay
for their drugs out-of-pocket, resulting in consumption curtailments during periods of economic weakness.
We also believe that drug sales in countries such as Russia and Mexico, where patients are primarily
responsible for paying for their own drugs, have been more affected by the recent recession and high
unemployment than nations such as Germany, Japan, Spain, and Turkey, where the government is the
principal source of funding.
Intellectual property rights are also a problem that must be considered. Although significant progress has
been made in recent years to protect intellectual property rights, enforcing patents will probably still remain
challenging over the foreseeable future in many areas, in our view.
From the standpoint of the large multinational pharmaceutical companies, we must also be aware of the
impact on margins and bottom line results generated from sales in emerging markets. We note that such
margins and operating profits are typically significantly lower than those realized in developed nations,
largely reflecting much lower pricing. With most pharmaceutical purchases made out-of-pocket by largely
impoverished populaces, emerging drug prices are typically at least 50% below those in Western markets.

Branded pharmaceuticals represent the largest segment of the aggregate emerging pharmaceutical sector,
accounting for 50% of an estimated $180 billion market in 2009. Other categories included original
branded drugs (28%), patented originals (17%), and commodity generics (5%).
Branded generics are essentially off-patent generics manufactured and marketed under their original brand
names. They are very popular in developing nations because the brand names are typically associated with
quality in markets where domestically manufactured drugs often lack the same level of quality control.
Unlike the prices on commodity generics in developed countries, which are typically deeply discounted by
numerous players in the market, prices on branded generics remain relatively high because of their aura of
quality and because government regulatory agencies limit the number of approved generics.
Principal emerging markets

Pharmaceutical companies have acknowledged their under-penetration of these markets, and most have
expressed their intention to accelerate sales efforts in these areas. Below we highlight prospects for key
emerging markets and the involvement that major pharmaceutical companies have in them.
 China. By far the largest emerging market is China, which has the largest population and third largest
economy in the world, with an estimated GDP of $8.7 trillion in 2009. It also has the largest
pharmaceutical market among the emerging countries. With projected drug sales growing over 25% in
2011, to close to $50 billion, China is expected to be the world’s third largest pharmaceutical market in
2011, after the US and Japan, according to IMS.
Along with a rising standard of living and an expanding middle class, we see drug sales in this huge market
also spurred by the Chinese government’s $124 billion healthcare stimulus package for 2009 through 2011,
which aims to cover 90% of the Chinese population with basic healthcare insurance. A key part of the new
healthcare stimulus program is the creation of a selected list of covered pharmaceuticals. While we think the
list will comprise mostly generics and other low-priced drugs, we believe the sheer size of the Chinese
market, with varied opportunities unfolding, offers significant growth potential for both home-based
companies and Big Pharma multinationals.
China also has a substantial market in traditional Chinese medicines (known as TCMs) and even exports
such medicines. We see such factors as China’s population of 1.3 billion people, its rapid urbanization, a
fast-rising senior population, and a growing middle class, leading the country to have many of the
conditions and chronic diseases prevalent in the developed world.
European drug makers, including AstraZeneca, Sanofi-Aventis, Bayer AG, Roche, Novartis and Novo
Nordisk, have long established themselves in China. US drug makers, such as Pfizer, Eli Lilly, Bristol-Myers
Squibb, Merck, Johnson & Johnson, and Abbott Laboratories, are more recent entrants, but have garnered
significant market share among the multinationals. However, pharmaceutical multinationals face increasing
difficulties in their penetration of China, including more local competition and government interference.
According to IMS, multinationals, in aggregate, hold only 30% of China’s drug market, while Chinese
firms, numbering over 5,000, comprise the remaining 70%. We expect these proportions over the coming
years to be relatively unchanged, but we see all participants benefiting from the significant growth projected
for the overall Chinese pharmaceutical market. While indigenous Chinese drugmakers have stronger sales
and distribution channels throughout the provinces, we still see foreign players, including AstraZeneca, Eli
Lilly, Novartis, and Pfizer, making efforts to greatly expand the number of sales reps and local sales offices.
 Brazil. The Brazilian pharmaceutical market has continued to grow at a brisk rate in recent years, fueled
by strength in its overall economy. With a population of over 200 million, Brazil is the fifth largest country
in the world in terms of population. Industry research firm Business Monitor International (BMI) valued
Brazil’s pharmaceutical market at $16.9 billion in 2008, and forecasted a CAGR of 11.9% to 2018. This
market also showed resilience during the global recession. While many countries witnessed volume
contractions for medicines over the past few quarters, Brazil’s retail pharmaceutical sales increased 19% in
the 12 months through June 2010, based on IMS data. Brazil’s pharmaceutical market was ranked as ninth

in the world in 2009, and was expected to replace the United Kingdom in eighth place in 2011, based on
IMS analysis, and then remain at that level in 2013.
Demand for drugs is supported by a rapidly growing population, which has increased at about 2% annually
over the past decade. Public insurance covers 90% of the population, with an increasing penetration of
supplementary private insurance, according to IMS. There are more than 300 pharmaceutical companies
operating in Brazil. While 20% of the companies were multinationals in 2008, according to IMS, the
multinationals are estimated to account for 75% of Brazil’s market. Most major multinationals, including
Pfizer, Eli Lilly, Novo Nordisk, Novartis, Daiichi-Sankyo, Astellas, GlaxoSmithKline, Roche, and Sanofi-
Aventis, have set up R&D and manufacturing facilities, and/or acquired or set up alliances with local
Brazilian companies.
 Russia. This large pharmaceutical market has also experienced high double-digit growth in recent years,
helped by increased government healthcare funding and expansion in the private health insurance sector.
This growth is occurring despite relatively stagnant demographics. With a population of some 141 million,
Russia is the world’s ninth largest country. However, estimated average life expectancy is 66 years, below
1955 levels, according to the World Bank. Overall, the health of the Russian people has deteriorated, and
the number of births has been lagged that of deaths. Smoking is prevalent, and chronic disease rates are high.
The World Bank noted that total healthcare spending in Russia includes a relatively large proportion of
private expenditures, reflecting out-of-pocket payments for health facilities and the purchase of
pharmaceuticals. Russia’s State Medical Guarantee Program does not cover outpatient drug benefits.
Nonetheless, the Russian pharmaceutical market has been growing at double-digit rates in the past few
years. Industry research firm Frost & Sullivan estimates that it grew 28% to $14.3 billion in 2008, partly
reflecting hospitals’ utilization of higher-priced specialty drugs, and another 13% in 2009 to $16.2 billion,
with the deceleration likely reflecting the financial crisis. Other drivers include increasing government
influence over drug prescribing, growing public and private insurance coverage, and a population that is
becoming more health conscious.
Imports account for some 70%–80% of the drugs used in Russia (in terms of market value), mostly from
Swiss, French, and German pharmaceutical companies. In an effort to boost domestic production, the
Russian Health Ministry in December 2009 initiated a program designed to have 55 “strategically
important” pharmaceuticals manufactured domestically. These drugs are currently produced by
multinationals such as Novartis, Sanofi-Aventis, Roche, and others, according to Frost & Sullivan.
 India. With an estimated population of 1.2 billion as of mid-2010, India is the world’s second largest
country. But it ranks twelfth in terms of the size of its economy, as the country has a large impoverished
rural and urban population with an underdeveloped economy. At an estimated $10 billion in annual sales,
India’s pharmaceutical market is also relatively small compared to its population size, with per capita
healthcare expenditures well below other emerging countries such as China, Russia, and Brazil.
The Indian healthcare system is dominated by private medical services, with about 70% of the hospitals
privately owned, and some 80% of total healthcare expenditures in 2009 derived from private sources,
according to Frost & Sullivan.
Healthcare spending has been growing rapidly in this country in recent years, spurred by a rising middle
class, expansion in the private medical insurance sector, and favorable government policies. According to
Frost & Sullivan, healthcare spending in India expanded from 4.9% of GDP in 2006, to 5.2% in 2009.
While only 10% of the population has health insurance, the insurance business is growing fast. In addition,
the Indian government has undertaken a number of healthcare initiatives, including a program to improve
rural health services and a national disease surveillance system.
We also expect increased foreign involvement in the Indian pharmaceutical market, reflecting recent
legislation upholding international intellectual property rights and granting a 150% tax reduction for
certain pharmaceutical R&D expenditures.

India is home to a reasonably advanced native pharmaceutical sector, albeit one specializing in generic
drugs. The Indian pharmaceutical industry ranks third worldwide by volume of production, accounting for
about 10% of the world’s total pharmaceutical output, according to Srikant Kumar Jena, Minister of State
for Chemicals and Fertilizers. According to Business Monitor International, sales of prescription drugs and
OTC medicines in India are forecast to increase from $17.1 billion in 2009, to $66.3 billion in 2019,
representing a CAGR of 15%.
Western pharmaceutical companies have been establishing their own manufacturing facilities in India, as the
cost of setting up and running a facility in India is a fraction of the cost in the West. In addition, many
multinationals have been looking to make Indian acquisitions since Japanese pharmaceutical giant Daiichi
Sankyo acquired Rambaxy Laboratories in 2008. In 2009, Sanofi-Aventis (France), Abbott Laboratories,
Pfizer, Merck AG, and Hospira all acquired Indian drugmakers. Alliances also have been struck between
Western multinationals and Indian drug makers.
Major drugmakers engaged in emerging markets

While nearly all major large-capitalization drugmakers have exposure in emerging markets, we believe that
the European companies on average have a relatively greater presence in emerging markets that their US
counterparts, probably reflecting their earlier entry and the traditional ties that exist between Europe and
developing nations in Asia. Below we highlight selected global pharmaceutical companies and their
operations in emerging markets.
 Novartis. We believe Novartis ranks above its peers in emerging markets, with that segment accounting
for 23% of the company’s pharmaceutical sales in the first quarter of 2010, 25% of its vaccines and
diagnostics revenues, and 29% of its Sandoz (generics) sales. During 2009, Novartis generated aggregate
sales growth of 17% (to $4 billion) in its top six emerging markets (Brazil, China, India, Russia, South
Korea, and Turkey). These sales comprised close to 14% of the company’s total pharmaceutical sales.
Spurred by collaborations in China and other ongoing aggressive investment activity in other emerging
countries, Novartis expects the above-mentioned six developing countries to represent over 20% of its
pharmaceutical business in 2012.
 Sanofi-Aventis. Another major player in emerging markets is Sanofi-Aventis, which derived over 25% of
its total sales from emerging markets in 2009. Emerging market revenues rose 19%, to about $10 billion,
accounting for about 25% of total consolidated sales in 2009. Especially strong growth was seen in the
company’s sales to China and Russia, which increased about 29% and 60%, respectively. Sanofi has a long
history in emerging markets: it was the first foreign drugmaker in China (1982) and has had an established
position in India for over 50 years. We expect continued robust growth for Sanofi in this sector, reflecting
organic growth in the markets themselves, plus acquisitions. During 2009 and 2010, the company made
several acquisitions in emerging markets in Eastern Europe and Latin America.
 GlaxoSmithKline. Ranking as the world’s second largest pharmaceutical company, Glaxo is also moving
aggressively in emerging markets, with pharmaceutical sales in those areas rising 20% in 2009, to $4.8 billion
(accounting for about 10% of total sales). This growth has been augmented by some 10 bolt-on acquisitions.
Glaxo’s strategy is to build positions in key markets, optimize pricing, and develop innovative partnerships in
developing markets. In recent years, the company has formed 13 alliances with local drug companies. The
company also expanded its vaccine business in emerging markets through the acquisition of Stiefel in 2009.
 AstraZeneca. Sales in emerging markets in 2009 rose 12% to $4.3 billion (13% of total revenues).
Highlighting the company’s focus on emerging markets is the fact that its sales CAGR in the BRIC
countries, Mexico, and Turkey grew 23.2% from 2004 to 2009, making it No. 1 in growth among the top
10 multinational pharmaceutical manufacturers in these markets during that period. AstraZeneca’s goal is
to continue double-digit growth, with emerging markets projected to account for 25% of sales by 2014. It
grew its employment base in emerging markets from about 5,000 in 2002 to 14,000 in 2009. In China, it is
expanding its coverage from 200 cities to 300 cities.
 Pfizer. As the world’s largest pharmaceutical company with a strong portfolio of brands, Pfizer is
uniquely situated, we believe, to capitalize on IMS Health’s projected $120 billion–$140 billion of total
growth for emerging markets in the five years through 2014. Boosted by the Wyeth acquisition, emerging
markets accounted for about $6.5 billion in 2009, equal to roughly 14% of its total sales in that year. While
the company plans expansion throughout the emerging markets spectrum, it is placing particular emphasis
on China, where Pfizer sees the market growing at a 30% annual rate. To keep pace, it expects to build its
field force from 3,300 people in 272 Chinese cities in 2010, to 5,400 in 360 cities in 2012.
 Merck. Augmented by last year’s acquisition of Schering-Plough, Merck is accelerating its emerging
markets exposure, with sales in those regions expected to account for over 25% of its pharmaceutical and
vaccine revenue in 2013, up from 17% in the first quarter of 2010. Based on IMS and other data sources, it
was ranked fifth among the large multinational pharmaceutical manufacturers in 2009 in sales to emerging
markets; it was second in Latin America (after Sanofi-Aventis), with six of the top 20 products in the region.
We expect growth to be driven by new, in-line, and mature products, as well as branded generics and other
products that we believe the company will add through local and regional partnerships or acquisitions. In
addition, since 2007, Merck has increased the number of sales reps in China by 90%, to about 3,000 today.
We also see much potential for Merck’s expanding vaccine portfolio in emerging markets, which are
estimated to account for 80% of the global vaccine preventable disease market.
INDUSTRY TRENDS
Like most industries, big brand-name pharmaceutical companies face ongoing challenges and uncertainties.
In the past few years, the industry has been subjected to heightened competition from generic drugmakers,
unprecedented pricing pressure from payers, and hard-to-control inflation in research and development
(R&D) budgets. Perhaps most importantly, however, the pharmaceutical industry has been experiencing a
decline in R&D productivity, with a relative dearth of innovative new products launched in recent years—
an area that might have offset some of the other difficulties mentioned earlier.
In addition, the overall global pharmaceutical market is fairly fragmented, with the largest company (Pfizer)
accounting for only 8% of the market. These challenges continued to plague the industry in 2009, although
ongoing improvements in early-stage product pipelines, particularly in the fields of cancer and diabetes,
offer long-term promise. In addition, new products and an aging population are likely to create a robust
future for this industry.
Nevertheless, Big Pharma (the large-capitalization pharmaceutical sector) remains in transition. Rarely have
the pressures on large pharmaceutical companies been so intense. As the industry sorts through its problems, it
is responding with major cost-cutting initiatives, including sales and marketing overhauls and the
reorganization of R&D operations. The industry is pursuing new product development in selected areas,
and is forming alliances and making acquisitions with pipeline considerations in mind.
IMS Health finds that Big Pharma companies overall have been struggling to grow, while generics firms are
doing better, although they face a period of intense competition. Biotechnology companies continue to
exhibit robust revenue growth, albeit from a much smaller base.
DEMOGRAPHIC TRENDS REMAIN FAVORABLE
Three worldwide demographic trends bode well for long-term pharmaceutical consumption: the aging of the
population in the largest markets; the lengthening of the average life expectancy; and a rising incidence of
chronic diseases. In many Western countries, the elderly population—a group with a disproportionately
greater use of prescription drugs—is growing faster than the general population.
Since seniors account for a disproportionate amount of prescription drug consumption, projected above-
average growth for the aged has positive implications for pharmaceuticals. According to the United Nations
Population Division, people aged 60 were projected to account for 22% of the total world population by
2050, up from 10.8% in 2009.

In the US, the Census Department projected that the 65 and older segment of the population will expand
from an indicated 41.7 million in 2010 to 79.3 million by 2030, when all of the baby boomers (Americans
born from 1946 through 1964) will be 65 and older. As a percentage of the total population, persons 65
and older are expected to account for close to 20% of all Americans in 2030, up from 13% in 2010. This
represents a bullish trend for the pharmaceutical industry since the elderly as a group account for roughly
one-third of prescription drug consumption.
NEW STRATEGIES FOR GROWTH
Confronting both the healthcare reform and patent cliff issues, major branded pharmaceutical companies
have embarked on a number of new strategies aimed at strengthening their top lines, as well as providing
platforms for continued long-term profit growth. One key strategy major pharmaceutical companies put
into place in late 2009 and early 2010 were several rounds of price increases. Average prices on branded
pharmaceuticals in the US increased 9.1% in 2009, versus 7.4% in 2008, according to data supplied by
Express Scripts Inc., a leading pharmacy benefit management firm.
Most of the major pharmaceutical companies have also reconfigured their R&D programs to focus on their
proven specific areas of therapeutic expertise. They are also placing renewed emphasis on the faster-growing
fields of specialty pharmaceuticals, biologics, vaccines, and, in some cases, even generics. Prices of specialty
drugs rose 9.4% in 2008 and 11.5% in 2009.
Specialty pharmaceuticals typically comprise high-priced biotech-based treatments for cancer, rheumatoid
arthritis, immune disorders, and similar conditions. Additional evidence of the industry’s shift in R&D
focus to the specialty sector is the increased number of specialty drug launches in recent years. Specialty
drugs accounted for close to 65% of new chemical entity launches in the US from 2005 through 2009,
based on data from IMS.
Nearly all large-capitalization pharmaceutical companies have also embarked on major expense
streamlining programs aimed at downsizing their corporate cost structures to meet slowing or declining
revenues. With each facing significant generic erosion and other top-line challenges, leading pharmaceutical
companies, such as Pfizer, Merck, GlaxoSmithKline Plc, Bristol-Myers Squibb, and Eli Lilly, are all in the
midst of multibillion-dollar cost-cutting programs.
Reflecting changes in marketing patterns, nearly all major drugmakers have cut back their pharmaceutical
sales forces, ending more than a decade of aggressive sales force expansion, often referred to as Big
Pharma’s “arms race.” According to Standard & Poor’s estimates, current sales force employment is
probably down 20% from a peak of 105,000 in 2005. Based on projections made by ZS Associates, a sales
strategy consulting firm, the industry’s sales force is expected to drop to 70,000 by 2015.
Along with personnel cutbacks, many drug companies are also consolidating manufacturing facilities in an
effort to eliminate excess overhead and improve productivity. Bristol-Myers Squibb, Pfizer, Merck, and Eli
Lilly have all reduced excess manufacturing capacity in recent years. While all major pharmaceutical
companies are cutting costs, Pfizer’s and Merck’s plans are probably the most extensive. Pfizer’s goal is to
generate cost reductions of $4 billion–$5 billion by the end of 2012, facilitated in large part by synergies
accruing from its 2009 acquisition of Wyeth. Helped by synergies from its 2009 acquisition of Schering-
Plough, Merck expects to achieve cost saving of about $3.5 billion by 2012.
FDA APPROVED 18 NOVEL DRUGS IN THE FIRST HALF OF 2010
While R&D productivity is still well below past levels, the total number of approvals of new molecular
entities (NMEs) and of novel biologics in the first half of 2010 totaled 18, up from only eight in the first
half of 2009. The gain came from the biologics space, with 10 novel products approved, versus five in the
comparable 2009 period. Pharmaceutical NMEs increased to eight, from three.

Approvals during the first half of 2010 included new treatments for Type 2 diabetes, multiple sclerosis,
cancer, osteoporosis, and various other conditions. Some of the more promising new products, in our
opinion, include Victoza, Prolia, and Prevnar 13, described below.
RECENT NEW MOLECULAR ENTITIES APPROVED*  Victoza. Generically

THERAPEUTIC APPROVAL known as liraglutide,
TRADE NAME GENERIC NAME APPLICANT POTENTIALS DATE this drug from Novo-
Gilenya fingolimod Novartis P 9/21/10 Nordisk AS is a once-
Ella ulipristal acetate HRA Pharma S 8/13/10 daily injection treatment
Lastacaft alcaftadine Vistakon S 7/28/10
B12: RECENT NEW for Type 2 diabetes. The
Pharmaceuticals
Natazia MOLECULAR ENTITIES Bayer Healthcare
dienogest; estradiol S 5/6/10 drug, approved in
APPROVED
valerate January 2010, is
Zortress everolimus Novartis S 4/20/10 intended to help lower
Asclera polidocanol Chemische Fabrik S 3/30/10 blood sugar levels in
Kreussler persons with Type 2
Carbaglu carglumic acid Orphan Europe P 3/18/10
VPriv velaglucerase alfa Shire Human Genetic P 2/26/10
diabetes, who have
Victoza liraglutide recombinant Novo Nordisk S 1/25/10 difficulty making
Votrient pazopanib GlaxoSmithKline S 10/19/09 insulin, a hormone that
Folotyn pralatrexate Allos Therapeutics PO 9/24/09 prevents sugar buildup
Telavancin telavancin Theravance S 9/11/09 in the blood. Victoza is
Bepotastine bepotastine besilate Ista Pharmaceuticals S 9/8/09 in a class of medicines
Besilate
Sabril vigabatrin Lundbeck SO 8/21/09
known as glucagon-like
Saphris asenapine Organon S 8/13/09 peptide-1 (GLP-1)
Livalo Tablets pitavastatin Kowa Research S 8/3/09 receptor agonists that
Onglyza saxagliptin Bristol Myers Squibb S 7/31/09 help the pancreas make
Effient prasugrel Eli Lilly P 7/10/09 more insulin after a
Multaq dronedarone hcl Sanofi Aventis P 7/1/09
meal is eaten. We
Besifloxacin HCL besifloxacin Bausch & Lomb S 5/28/09
Samsca tolvaptan tablets Otsuka America S 5/19/09
estimate sales of this
Fanapt iloperidone Vanda Pharmaceuticals S 5/6/09 drug could exceed $1.5
Ulesfia benzyl alcohol Sciele Pharma S 4/9/09 billion in 2015.
Coartem artemether 20mg/ Novartis PO 4/7/09
lumefantrine 120mg  Prolia. In June 2010,
Affinitor everolimus Novartis P 3/30/09
the FDA granted
Uloric febuxostat Takeda S 2/13/09
marketing approval of
Savella Tablets milnacipran hcl tablets Cypress Bioscience S 1/14/09
this monoclonal
*Excludes diagnostic NMEs and some biologics. P-Priority review: significant improvement compared
antibody treatment of
with marketed products, in the treatment or prevention of a disease. S-Standard review: drug appears
menopausal women
to have therapeutic qualities similar to those of one or more already marketed drugs. O-Orphan drug.
Source: US Food and Drug Administration. with osteoporosis who
are at a high risk for
fractures. We believe Prolia compares favorably in efficacy and safety with existing therapies, while offering
convenient twice-annual dosing, which could improve patient compliance. The drug is currently undergoing
Phase III studies for other uses, including the treatment of bone loss caused by cancer therapy. Prolia has
also been approved in Europe. We project Prolia sales of close to $2.5 billion by 2015.
 Prevnar 13. In February 2010, the FDA approved Pfizer’s Prevnar 13, a pneumococcal 13-valent
conjugate vaccine for pediatrics. This vaccine, which Pfizer obtained through its 2009 acquisition of Wyeth,
will be the successor to Prevnar, a pneumococcal 7-valent conjugate vaccine. The new vaccine protects
against six additional types of the disease-causing bacteria (it is called Prevnar 13 because it fights 13
different types of streptococcus pneumoniae). We forecast sales of this vaccine of over $5 billion by 2015.
Promise in the pipeline

We think there is still significant potential in the industry’s R&D pipeline, which should drive good growth
for the industry once it passes the high-patent-expiration years of 2011 and 2012. Based on data provided
by the Pharmaceutical Research and Manufacturers of America (PhRMA), a trade group, the industry had
some 2,900 compounds under development in 2009, up from 1,800 compounds in 1999.

The recent total includes 750 oncology compounds, including many for common lung and breast cancers;
277 for heart disease and stroke; 300 for rare diseases, including treatments of immune system disorders,
epilepsy and cystic fibrosis; and 104 for HIV/AIDS. Selected R&D compounds with especially bright
prospects, in our opinion, include the following:
 Xarelto. Xarelto (rivaroxaban) is a novel oral anticoagulant discovered and developed by Bayer AG. US
marketing rights to the drug were granted to the Ortho-McNeil division of Johnson & Johnson. A member
of a new class of Factor Xa inhibitors, the drug was found to be effective in the prevention of blood clots
after knee and hip replacements. Given expected wider applications of this blood-thinning agent in the years
ahead, we expect Xarelto sales to exceed $1 billion annually by 2013.
 Bapineuzumab. Bapineuzumab, a humanized monoclonal antibody acting on the nervous system, has the
potential, in our opinion, to become a disease modifying agent in the treatment of Alzheimer’s disease.
Developed by Elan Pharmaceuticals and Wyeth (now part of Pfizer), this compound is presently in Phase III
trials. Johnson & Johnson recently acquired Elan’s 50% interest in bapineuzumab. If Phase III results come
in as expected, we see multibillion-dollar sales potential for this compound.
Other new compounds under development that are promising, in our opinion, include the following:
 Darapladib (from GlaxoSmithKline) and anacetrapib (Merck)—cholesterol-regulating agents
 SCH 530348 (Merck)—an oral thrombin-receptor antagonist blood-thinning agent for acute
coronary syndrome
 Asenapine (Merck)—a new HT2A/D2 receptor antagonist for schizophrenia
 Silenor and Somaxon (Sanofi-Aventis)—new anti-insomnia agents
 Indacaterol (Novartis)—a long-acting beta2 agonist inhaler for chronic obstructive pulmonary
disease (COPD)
 Dapagliflozin (Bristol-Myers Squibb)—a Type 2 diabetes treatment
DTC ADVERTISING SHRINKING
Total direct-to-consumer (DTC) pharmaceutical advertising spending increased 3.9% in 2009, to about
$4.8 billion, following a decline in recession-impacted 2008, based on data from Kantar Media, a leading
provider of advertising and marketing information. The gain in 2009 was achieved despite a 12% decline in
total advertising expenditures, according to Kantar. We see the rise in pharmaceutical marketing outlays
commensurate with the gains seen in prescription trends and pharmaceutical sales in 2009, which were
generally better than expected.
New launches, which are usually a key driver of DTC advertising, also showed some improvement in 2009.
We also attribute better DTC volume to increases in selling, general, and administrative (SG&A) spending.
While print and broadcast media continue to dominate DTC advertising, we are also seeing an increasing
volume of advertising dollars directed to the Internet, where interactive communication is available for
patients via email.
Historically, DTC has been highly successful in promoting pharmaceutical brand recognition in competitive
markets, especially for so-called lifestyle drugs such as antidepressants, painkillers, and erectile dysfunction
agents. Studies also confirmed DTC effectiveness as persons suffering from various medical conditions
generally recall seeing DTC ads for drugs treating those conditions.
Reflecting an attempt to reduce the level of persons abusing prescription drugs and to achieve significant
cost savings, there has been a clamor by some in Washington for a moratorium on DTC advertising for new
products. While noting that occasionally DTC is useful in informing consumers about new therapies, DTC
critics argue that these promotions are used primarily by the drug companies to boost sales of their established
products, instead of less expensive generic alternatives, and that the cost of these ads dramatically increases
the nation’s drug spending. However, we do not expect restrictive DTC legislation to emerge, given the
benefits that DTC provides for patients and consumers.

HOW THE INDUSTRY OPERATES
The modern pharmaceutical industry emerged during the 1920s and 1930s, with key discoveries and the
synthesis of sulfa antibacterials, penicillin and other antibiotics, and various other compounds, as well as
the emergence of large-scale production capabilities. Industry output expanded markedly during World War
II, in response to the growing demand for penicillins and related anti-infectives.
In the postwar years, greater industry investment in research and development (R&D) led to important
scientific breakthroughs in new therapeutics and vaccines. During this period, corporations capitalized on
the discovery of tranquilizers, amphetamines, advanced antibiotics, and the Salk polio vaccine.
Today, the pharmaceutical industry derives most of its profits from a broad base of compounds used to
treat infections, cardiovascular conditions, depression, inflammatory disease, and other chronic conditions.
In recent years, most leading drugmakers have also collaborated with biotechnology firms to develop novel
therapies based on recombinant deoxyribonucleic acid (DNA) technology, monoclonal antibodies, and
genomics research. Such joint efforts are
LEADING THERAPY CLASSES IN US SALES
expected to yield important new therapies for a
(Ranked by 2009 US sales, in billions of dollars)
variety of diseases and medical conditions over
----------------- SALES (BIL. $) -----------------
the coming years. Oncology, for example, has
CLASS 2005 2006 2007 2008 2009
benefited from these scientific advances and is
1. Antipsychotics 10.2 11.4 12.8 14.2 14.6
Table B03: LEADING now the fastest-growth segment of the drug
2. Lipid regulators
THERAPY 17.9 CLASSES 19.6 16.2 14.5 14.3
IN industry in terms of sales.
3. Proton pump inhibitors 12.7 13.5 14.0 13.8 13.6
US SALES
4. Antidepressants 10.0 10.4 9.2 9.5 9.9
About 59% of all US workers had health
5. Angiotensin II antagonists 4.9 5.7 6.5 7.5 8.4
insurance provided by their employers in 2009,
6. Monoclonal antibodies 3.9 5.7 6.6 7.3 8.0
7. Anti-arthritics 3.6 4.4 4.8 5.6 6.3
based on the 2009 Employer Health Benefits
8. Erythropoietins 8.5 9.8 8.4 6.9 6.3 survey published by the Henry J. Kaiser Family
9. Analogs of human insulin 2.4 3.1 3.8 5.0 6.3 Foundation (KFF), a private nonprofit
10. Anti-platelets 3.7 4.1 4.4 5.2 6.0 foundation focused on US healthcare issues. Of
Total, Top 10 77.8 87.7 86.7 89.5 93.7 those with health insurance, some 98% were
Total US Market 247.3 270.3 280.5 285.7 300.3 covered under managed care plans, with
Source: IMS Health Inc.
conventional fee-for-service coverage
representing the balance. In the managed care
segment, 60% were in preferred provider organization programs (PPOs), 20% in more rigid but less costly
health maintenance organizations (HMOs), 10% in point-of-services (POS) plans, and the remainder in
other types. With PPOs, patients select providers from the insurer’s network or pay more to go outside of
the network; with HMOs, they use the network’s providers, which are paid a set monthly fee per patient.
As the cost of medical care continues to rise, employer-sponsored health plans are forcing patients to
shoulder a larger portion of their expenses. Drug spending is a key target of these programs’ efforts to rein
in costs. Although prescription drug spending still accounts for a relatively small component of total
national healthcare expenditures, accounting for about 10% of the total tab, the pace of growth has slowed
in recent years. After peaking in 1999 at 18.1%, the growth rate fell to an indicated 5.2% in 2009. While
utilization continues to climb, the slowdown in spending growth is due to a greater reliance on cheaper
generic drugs, a decline in the number of innovative new drugs (which tend to be more expensive than older
drugs) coming to market, and increased utilization management by payers.
MCOs are implementing tiered cost-sharing formulas and increasing drug copayments. In 2009, about 89%
of all workers covered by employer-sponsored plans had plans with some kind of tiered cost sharing (most
offering three or four options), up from 27% in 2000, according to the KFF. The added out-of-pocket
expense has prompted consumers to choose less costly generic drugs, and, among the elderly and the poor,
either to purchase cheaper versions of their drugs from outside the US or to forgo the use of high-priced
medications. Increasingly, the plans also require pharmacists to dispense generics when available or—in
therapeutic categories for which a choice of branded drugs exists—a preferred brand for which the plan has
negotiated an attractive discount.

Although it faces challenges, the pharmaceutical industry is still among the world’s most profitable. The
average return on sales for companies in the S&P Pharmaceuticals Index was 15.9% in 2008, versus a
return of only 4.5% for the S&P Industrials Index. We note, however, that due to lack of new products,
generic competition, and pricing constraints, the drug industry’s profitability has eroded in recent years (the
net return on the S&P Pharmaceuticals Index was 18.7% in 2002). Historically, the industry has rejuvenated
itself by developing premium-priced breakthrough therapies that have opened up entirely new markets.
HIGH RISK, HIGH REWARDS
Financially, drug manufacturing is a high-risk business: for every 5,000 compounds discovered, only one
ever reaches the pharmacist’s shelf. The odds against making a profit are steep as well: fewer than a third of
marketed drugs achieve enough commercial success to recoup their R&D investments. However, when a
drugmaker launches a new compound that is widely accepted in the marketplace, the economic rewards can
be immense. This is the primary reason for the industry’s hefty profit margins.
To optimize R&D efforts and achieve maximum returns, pharmaceutical companies spent much of the
1990s and early 2000s focusing on developing blockbuster products. The drug companies aggressively
marketed these to primary care physicians, who prescribed them to broad patient populations. If, in
contrast, the companies developed compounds with benefits similar to those of drugs already on the market
(known as “me-too” drugs), they were not likely to be rewarded by the current cost-conscious managed
care market. The model is slowly changing, as R&D efforts turn to drugs that are prescribed by specialist
physicians and target narrower patient populations.
DRUGS’ PREDICTABLE LIFE CYCLES
Drugs have widely different development processes, but their product life cycle nearly always follows a
stable, long-term pattern. In the US, after the average period of 10 years or more for discovery,
development, testing, and approval by the US Food and Drug Administration (FDA), a branded ethical
(prescription) drug will have a commercial life of about a decade. The life cycle is similar in Western Europe
and Japan, the two other major areas of the world where the majority of new drug discovery and
development take place.
Drugs usually require several years of sales build-up to reach their full commercial potential. Physicians
have to become comfortable with the product and its approved application, while companies often continue
conducting clinical trials that will enable them to receive FDA approval for additional indications.
In some cases, companies benefit as doctors start to use their drugs for off-label (or unapproved)
indications; these sometimes represent a hefty proportion of a drug’s total revenues. Eventually, rival drugs
similar in action may enter the market, or major customers may opt to replace the drug with less expensive
compounds in the same therapeutic class. The latter tactic, referred to as “therapeutic substitution,” is
especially popular with HMOs and other managed care companies.
REGULATION: FDA OVERSEES US MARKET
The Food and Drug Administration is responsible for regulatory oversight of the pharmaceuticals and
medical technologies industries in the United States. The agency, which began operations in the mid-1800s,
did not acquire even modest regulatory powers until 1906. Over time, in response to events, Congress has
strengthened the FDA’s oversight.
A defining moment for pharmaceutical regulation and for the medical field in general came when Congress
passed the Food, Drug, and Cosmetic Act of 1938. This landmark legislation outlined the framework for
the pharmaceutical approval process in the United States. The law required, for the first time, that drugmakers
submit evidence of a product’s safety based on clinical trials. It also required that a drug’s label state its
contents, how it should be administered, and its possible side effects.

Following an outbreak in Europe of severe birth defects caused by thalidomide, Congress passed the Kefauver-
Harris Drug Amendments of 1962 to require that manufacturers demonstrate both the safety and the efficacy
of new drugs before receiving approval for commercial sale in the United States. In addition, this legislation
required that drugs be produced according to specified guidelines for “good manufacturing practices” and that
manufacturing plants be subject to FDA approval and periodic inspection.
The most significant drug legislation since then was the FDA Modernization Act of 1997, which sped the
approval of new drugs for life-threatening illnesses and improved the overall efficiency of the FDA. The law
also extended the popular Prescription Drug User Fee Act (PDUFA), a program initiated in 1992 that charges
drugmakers a fee for filing new drug applications (NDAs). Because the funds were used to hire new FDA
personnel, the program has been credited with significantly reducing new drug approval times.
The latest version of PDUFA, which Congress renewed in September 2007 as part of a broader law
addressing FDA reforms, calls for user fees to generate nearly $400 million in revenues a year from fiscal
2008 through fiscal 2012, as well as an additional $225 million for drug safety monitoring programs. The
1997 law allowed seriously ill patients easier access to experimental compounds and provided new
incentives for the development of pediatric
FDA APPROVALS* medicines. It also expanded the drug
(Number of drugs)
companies’ ability to disseminate information
150 on off-label uses of new and existing drugs.
125 Chart H02: FDA In 2005, following a series of high-profile
100
APPROVALS studies showing that some popular drugs for
arthritis (Vioxx) and depression (Effexor and
75
the class of therapeutics known as selective
50 serotonin reuptake inhibitors, or SSRIs) have
25
potentially unacceptable side effects, the FDA
began a series of initiatives to improve its
0 drug safety evaluation processes. These
1994 95 96 97 98 99 00 01 02 03 04 05 06 07 08 2009
initiatives included the establishment of an
New Drug Applications (NDAs) Office of Drug Safety (ODS), which is
New Molecular Entities (NMEs) responsible for postmarketing surveillance
*Includes tentative NDA approvals under the President's Emergency Plan and other drug safety issues. Nonetheless,
for AIDS Relief, starting in 2007. critics, including some congressional leaders
Source: US Food & Drug Administration. and FDA insiders, worried that the office
would not be independent of the agency, and,
therefore, would not have the authority to bring problematic side effects to the agency’s attention once
products are on the market.
How new drugs enter the US market

As the principal federal agency responsible for enforcing US food and drug laws, the FDA regulates the
introduction of new drugs. The agency also monitors the manufacture, transport, storage, and sale of all
food, biologic, cosmetic, and medical device products in the United States.
The FDA requires that pharmaceutical manufacturers perform extensive testing to prove that their products
are safe and effective before it will sanction commercial sale. All animal and human tests, which often last
for years and cost many millions of dollars, are conducted by manufacturers, often in conjunction with
colleges or universities, the National Institutes of Health (the medical research agency of the US Department
of Health and Human Services), or similar research institutions. Legislation passed in September 2007
requires the FDA to keep track of severe adverse events and the safety and effectiveness of drugs that are
already on the market.
Identifying and testing candidate drugs

R&D is the lifeblood of the pharmaceutical industry. Drugmakers become industry leaders by spending
large sums on R&D in order to produce a steady stream of successful products. Ethical pharmaceuticals are
patent-protected for a finite number of years, however, so the pharmaceutical industry must continually find
new drugs to ensure future growth. Companies with R&D programs that falter often end up struggling,
particularly if they face generic competition for their key drugs. Some weakened companies have merged with
larger, more successful companies in order to stay afloat. Those that come up with hit products prosper.
Searching for innovative products is difficult in almost any industry. It is especially challenging in the
pharmaceuticals industry, because products come from highly complex fields, such as molecular biology and
biochemistry, and involve the intricate workings of the human body. The quest for new pharmaceuticals
must combine an understanding of complex human chemistry and physiology with knowledge of all life
sciences. Intuitive acumen is also needed to form theories about new therapeutic modalities.
Working from a set of hypotheses on how certain compounds might interact in the body, researchers
synthesize new compounds to combat particular diseases. Often, proteins, segments of proteins, or genes
(isolated by molecular biologists) or new chemicals (discovered by analytical chemists) form the basis for
new drugs.
Once candidate molecules are identified, they are studied in test tubes and in animals to determine their side
effects, efficacy, and properties (such as how long the body takes to absorb them). Animal tests (usually on
mice and rats) are conducted to determine any possible side effects and efficacy. Most of the candidates are
eliminated at this stage, because they have unacceptable side effects or do not function as expected. Often,
hundreds of compounds are tested before researchers find one promising enough to advance to human clinical
trials. When such trials are indicated, a company must first submit an investigational new drug (IND)
application to the FDA, informing the agency that human studies will start in 30 days unless it objects.
Since the mid-1980s, the industry’s R&D expenditures have risen sharply, both in dollar terms and as a
percentage of total sales. The Pharmaceutical Research and Manufacturers of America (PhRMA), an
industry trade group, estimated that industry investment in drug development by PhRMA members totaled
an estimated $45.7 billion in 2009. Company-financed domestic R&D outlays by PhRMA member
companies were estimated at 16.0% of US pharmaceutical sales in 2009, in line with the average over the
past two decades. In contrast, the average US manufacturing firm spends less than 5% of sales on R&D.
The FDA requires drugs to undergo three phases of clinical testing on humans:
 Phase I. In this phase, a small number of healthy people get moderate doses of the drug in order to
test the drug’s safety, safe dosing range, and mechanism of action. If this initial test is successful, the
subjects’ dosage is slowly increased to determine its safety at higher levels.
 Phase II. During Phase II, a larger group of subjects, which have the disease or condition that the
drug is intended to treat, is tested in placebo-controlled clinical trials. Phase II researchers look for
efficacy and continue to study safety and optimal dosing.
 Phase III. Drugs that pass the first two hurdles then undergo Phase III trials. At this level, the most
complex and rigorous tests are performed on still larger groups of ill patients to ascertain the drug’s
safety, effectiveness, and optimum dosage regimens. Usually, Phase III procedures employ
randomized, double-blind studies with placebo control. This means that one group of patients is
given the drug while another group receives an inert substance. Neither the patients nor their
doctors are aware of which patients are actually receiving the drug being tested.
According to FDA estimates, of 20 drugs entering clinical testing, 13 to 14, on average, will successfully
complete Phase I. Of those, about nine will finish Phase II, but only one or two are likely to survive the Phase
III trials. Even after a drug successfully completes Phase III, there is the possibility that the FDA will deem the
data insufficient for approval. Ultimately, only one of the original 20 may be approved for marketing.
When the clinical research on a drug is complete, the manufacturer submits an NDA to the FDA. The
application compiles the research completed during the three trial phases and includes full details of the
product’s formula, production, labeling, and intended use. NDAs are typically voluminous documents,
sometimes exceeding 50,000 pages. Recently, many firms have taken advantage of the FDA’s new policy of
accepting electronic filings via e-mail.

In recent years, the FDA has delayed approvals of an increasing number of NDAs by sending applicants
“approvable” letters—requests for additional information. These requests, usually made for safety reasons,
often delay the agency’s decisions for months to years, with the time period dependant on the complexity of
the data sought. Following receipt of an approvable letter, manufacturers sometimes drop development of a
product; others choose to invest additional resources in order to get the drug on the market.
In February 2008, Novartis AG’s Type 2 diabetes drug Galvus won marketing clearance from European
health authorities, with liver monitoring requirements. In the US, however, Galvus has met obstacles. In
February 2007, the FDA issued an approvable letter on the drug, but added that it would require additional
trials of the drug in patients with kidney damage before it would consider approval. In January 2008,
Novartis said the FDA was requesting a very large study, and that given the cost and uncertain outcome, the
company decided to step back from the US for now and concentrate on developing a European market for
Galvus. The absence of Galvus in the US has helped spur sales of Merck’s similar Januvia diabetes franchise,
with sales that we expect to reach some $3.1 billion in 2010, up from $2.5 million in 2009.
In July 2007, the FDA sent Wyeth an approvable letter for Pristiq, a new drug indicated for menopause-
associated hot flashes, because of concerns about serious cardiovascular and liver side effects. In this case,
the agency also requested an additional clinical trial that will last a year or longer. In mid-March 2008,
Wyeth withdrew its European Union (EU) application for Pristiq to treat menopausal symptoms, following
risk-benefit questions raised by European regulators. However, Pristiq won FDA approval for depression in
early March 2008.
After a drug is approved, manufacturers often submit supplemental NDAs containing additional clinical
trial results, in order to obtain approval for additional indications. The FDA determines label content,
which must include a detailed description of the drug and its chemical composition, indications,
contraindications, and side effects.
Postmarket surveillance
Traditionally, the FDA has required companies to conduct postmarket surveillance, though in reality few
companies do so, despite recent interest in expanding such programs. Preclinical studies usually identify
common toxicities, but postmarket surveillance can be important for picking up rare side effects or other
unexpected developments, which are apparent only after the drug is widely used. Postmarket surveillance is
sometimes referred to as Phase IV testing. In the past, companies often viewed postmarket studies as a
marketing tool, using data generated from such studies to support new applications for expanded
indications and improve their relationships with scientific leaders and patient groups.
In the past, the FDA rarely undertook measures against a drug for safety reasons once the drug was on the
market. However, if the safety or efficacy of a drug already on the market was in question, the FDA could
be more stringent: it could order a company to recall selected lots of a product, or, in a worst-case scenario,
it could ask a manufacturer to withdraw a product from the market. These actions could result from
adverse events, defective packaging, misleading labeling, failure to meet content uniformity tests, loss of
sterility, subpotency, or lack of evidence of effectiveness.
The FDA’s attitude toward monitoring drugs already on the market has been evolving rapidly. Following
the Vioxx scandal in 2004, the agency began placing a greater emphasis on postmarket drug safety. The
Office of Drug Safety set up an independent Drug Safety Oversight Board (DSOB), consisting of scientific
experts, although both the ODS and the DSOB have maintained low profiles to date.
The FDA also requires companies that undertake postmarket surveillance of certain drugs (either voluntarily
or at the FDA’s request) to report on the progress of their commitments. The Food and Drug Administration
Amendments Act of 2007 (FDAAA), signed into law in September 2007, requires manufacturers to work
with the FDA to establish a risk management plan as part of the NDA process. Specifics of the plan are still
being worked out, but it has the potential to significantly increase the value of Phase IV studies.

Exceptions for life-and-death situations
Experimental drugs still in clinical trials are sometimes made available to seriously ill patients through the
FDA’s Treatment IND program or its compassionate use protocol. The Treatment IND lets manufacturers
provide unapproved drugs to patients who meet specific criteria if no other therapies are available. The
compassionate use protocol enables patients with life-threatening diseases to have access to experimental
drugs, provided Phase I trials have been completed, even if those patients are not part of the clinical trial. At
least 40 drugs have been granted IND treatment status since this policy was enacted in 1987, many of which
were for acquired immune deficiency syndrome (AIDS) or cancer.
In July 2007, the FDA and Novartis designed a Treatment IND program for Novartis’ drug Zelnorm, which
treats irritable bowel syndrome in combination with constipation for women aged 55 or younger. The FDA
agreed to give Zelnorm this status after it requested, for safety reasons, that Novartis suspend marketing of
the drug to a broader population in March 2007.
New drugs targeting serious or life-threatening diseases that lack adequate treatments can also receive
expedited review by the FDA under its Subpart E regulation. In this situation, the FDA can approve the
drug based on results of a Phase II trial, although the manufacturer still must conduct a postapproval
outcomes study. In recent years, several new breakthrough protease inhibitors for the treatment of human
immunodeficiency virus (HIV) and AIDS were approved only a few months after their applications were
filed. Novartis’s important drug Gleevec, for treating chronic myeloid leukemia, was also approved on an
accelerated basis, based on results of three large Phase II studies.
Another piece of legislation designed to help both patients with rare diseases and the drug industry is the
Orphan Drug Act. Enacted in 1983 to foster the development of drugs to treat diseases afflicting “small”
populations (i.e., those with fewer than 200,000 patients), this law provides research grants, tax breaks, and
exclusive marketing rights to manufacturers of drugs aimed at patient markets that would otherwise be too
small to justify commercial development.
More than 300 drugs developed with help from the Orphan Drug Act are currently on the market, treating
about 25 million Americans. Ironically, several orphan drugs—including Gleevec, GlaxoSmithKline’s
Retrovir AZT AIDS drug, Amgen Inc.’s Epogen antianemia drug, and Genentech Inc.’s Protropin human
growth hormone—subsequently became blockbuster products. The orphan drug Myozyme, which the FDA
approved as the first-ever treatment for Pompe disease, a rare enzyme deficiency, was approved in 2006,
and generated impressive sales of $325 million in 2009 and $296 million in 2008. In total, the FDA
approved 17 orphan drugs in fiscal 2009, down from 13 in fiscal 2008.
REGULATION OUTSIDE THE UNITED STATES
The pharmaceutical industry is global; thus, a company seeking to maximize a drug’s potential files for its
approval in many countries. Big pharmaceutical companies usually seek to get their products on the market
in Europe, which is the world’s second largest pharmaceutical market.
Companies filing for regulatory approval in the EU can either apply through a centralized EU procedure
that enables them to sell their approved products in all EU countries, or file on an individual country basis.
The London-based European Medicines Agency (EMEA) reviews all applications submitted under the
centralized process and recommends them to the European Commission, which grants final marketing
authorization. Under EU rules, implemented in November 2005, the centralized process must be used for
biologically derived therapies (those made from living cells) and for all medicines addressing certain
therapeutic areas, such as cancer, AIDS, diabetes, and neurodegenerative diseases.
The alternative, known as the “mutual recognition” procedure, allows drugmakers with a medicinal
product already approved in one EU country to petition other countries to accept the product. Should an
EU country refuse to recognize the original country’s authorization, the matter is submitted to an EMEA
scientific committee for arbitration.

In Japan, the Ministry of Health, Labor, and Welfare supervises new drug approvals. Although it is
improving, the approval process moves much more slowly in Japan than in the United States and Europe.
Many drugs do not reach the Japanese people until they have been on the market in Western countries for
several years. Nevertheless, Japan, as the world’s third largest pharmaceutical market, remains important to
US companies. The Japanese health ministry has publicly committed itself to reducing approval times, which
is expected to strengthen Japan’s pharmaceutical companies.
PROHIBITIVE BARRIERS TO ENTRY
The branded prescription pharmaceutical industry has barriers to entry that are among the highest of any
US industry. Economic, regulatory, and legal obstacles block potential new competitors. As noted earlier,
the arduous processes of new drug discovery, development, and regulatory filing require heavy R&D
expenditures. All told, development of a new drug can take 10 years or more, at a total cost of more than
$800 million (a total that includes the costs of unsuccessful compounds).
To enable manufacturers to recoup these investments and earn a satisfactory rate of return, most developed
nations entitle new drugs to patent protection. A patent can be issued either on a drug’s chemical structure
(a composition patent, which is generally stronger) or on its method of manufacture or synthesis (process
patent). Sometimes the patent offices grant a “use patent,” which lets the holder manufacture and market
the compound for a specific therapeutic purpose and prevents competitors from using the drug in the same
way; this kind of patent tends to be more vulnerable to competitors’ challenges in court.
Some countries are better than others at issuing and enforcing patents. The World Trade Organization
(WTO), an international group set up in 1995 to establish rules for conducting international trade, requires
members to recognize patents. Under WTO rules, new pharmaceutical patents extend for 20 years from the
application date. The previous system granted protection for 17 years from the date of patent issuance.
However, given the length of time it takes to bring a product from the application stage to market, patent
protection for most products is effectively reduced to only eight to 10 years.
China, India, and other developing countries in Asia have been particularly notorious for ignoring foreign
companies’ patents. Their attitude has harmed business relationships and angered countries (and companies)
that do adhere to international patent laws. However, because they wanted to belong to the WTO, China
and India have begun to officially recognize international patents: China has done so since 2001, and India
has done so since the beginning of 2005. Their commitment to reform is important because US companies,
under ever-greater pressure in the West, see these countries as potentially huge markets, with attractive
demographics and rapidly expanding economies.
PRICING REFLECTS PRODUCT STRENGTHS, MARKET CHARACTERISTICS
Many factors affect the pricing of new pharmaceuticals. These include the relative efficacy and safety profile
of a drug versus its rivals, the size of its market, the competition it faces, and its development costs. In the
United States, breakthrough therapies treating life-threatening conditions can command premium prices,
well above those for existing products. New drugs that are not significant improvements to existing
alternatives are usually priced within parameters set by similar drugs already on the market. This paradigm
differs from other parts of the world, where government price controls limit how much drugmakers can
charge for their products.
Drug pricing varies widely among different classes of trade—that is, different kinds of payers. Large-scale
buyers, such as hospital chains and other institutional customers, usually pay well below list price, because
their huge volume purchases enable them to negotiate heavy discounts. Government organizations, such as
the Department of Defense and the Department of Veterans Affairs, and programs such as Medicaid, for
example, typically negotiate some of the steepest discounts for drugs. Wholesale distributors and pharmacy
chains for the retail (or individual physician/patient) market, however, pay prices for drugs that are at the
higher end of the scale.

Historically, drugmakers have raised prices to private customers to compensate for the discounts they give
to managed care customers—a practice known as cost shifting. In recent years, several pharmacy chains and
pharmacy trade associations have sued leading drug manufacturers, charging illegal price fixing and
restraint of trade.
Medicaid, a US federal/state program that pays for medical services (including prescription drugs) for 55
million low-income patients, accounted for an indicated 9.1% of US drug sales in 2009, based on estimates
made by the government’s Centers for Medicare & Medicaid Services (CMS). Under the current Medicaid
rebate program, drugmakers are required to reimburse state Medicaid programs for either 22.1% of sales or
the difference between prices charged to Medicaid and the best price the drugmaker offers a nongovernmental
customer, whichever is higher. With the enactment of the Medicare Part D prescription drug coverage in
2005, most of the elderly indigent population whose drug costs were previously covered by Medicaid were
shifted into Medicare Part D.
AFTER PATENTS EXPIRE COMES THE GENERIC STAGE
In the US, a prescription drug’s patent protects it for 20 years, but during more than half of that time, the
drug is likely to be in development. Typically, patents expire eight to 10 years after a drug comes on the
market. At that time, generic drugs—the chemical equivalents of a branded drug—usually appear
immediately, and prices fall rapidly. Once this happens, the profitability of the branded drug generally
erodes, particularly in the United States. (In contrast, in Japan and some European countries, generic drugs
are only slightly less expensive than branded ones.)
Generic drug companies do not have the same high costs of R&D, tough regulatory approval, and sales and
marketing as the proprietary companies, so they can afford to discount their products. Generics manufacturers
set prices depending on the kind of molecule they are making, how easy it is to manufacture, and, most
importantly, how many generic competitors they expect to face. When some easy-to-manufacture blockbuster
drugs go off patent, half a dozen or more generic competitors may enter the market simultaneously at prices
that are as much as 80% or more below brand pricing. In less competitive situations, involving drugs that
maintain some barrier to entry (such as special manufacturing skills) or those that have exclusivity for a
limited time post-launch (see the “Hatch-Waxman Act” in the following text), fewer competitors come into
the market at the same time, and pricing, at least initially, is more stable. As more competitors enter the field,
prices drop even further.
The Hatch-Waxman Act

The modern generics drug industry originated largely as a result of the enactment of the Drug Price
Competition and Patent Term Restoration Act of 1984 (commonly known as the Hatch-Waxman Act). This
watershed legislation simplified the generic drug approval process by allowing new generics to be filed
under an expedited format called the abbreviated new drug application (ANDA). This filing format requires
only that new generics demonstrate their bioequivalence to the branded drugs they replace, rather than
undergo the rigorous clinical trials required for original products.
An amendment to the Hatch-Waxman Act provided for 180 days of marketing exclusivity for the first
generic to file for FDA approval and challenge in court the patent of a branded drug. This provision is the
source of much tension between brand name and generics manufacturers. A generics company can launch its
product without interference from other generics companies as soon as it receives FDA approval. However, if
a company launches a drug before the innovator’s patent expires or is invalidated, it runs the risk of paying
treble damages (three times sales) in the event that a court upholds the patent. Until 2005, the threat of paying
large amounts of damages deterred nearly all generics companies from launching copies of an innovative drug
until either a high court declared a patent invalid or the patent expired on schedule.
In recent years, however, many generic firms have become more aggressive, and commenced “at risk”
launches—i.e., before receiving a final court ruling invalidating a patent. An example of this was Teva
Pharmaceutical Industries Ltd.’s launch of a generic version of Wyeth’s popular Protonix heartburn
medication in December 2007. We think companies now are more willing to undertake at-risk launches
because they believe they are more likely to prevail in patent litigation, based on a number of favorable
decisions in recent years. To date, no generics company that has launched a product at-risk has had to pay
treble damages. Often, companies take an at-risk launch after lower courts ruled against the brand-name
company. However, this is not always the case, as happened with Teva’s Protonix launch.
In August 2006, the subtleties of the “launch-at-risk” strategy were highlighted in an unusual situation in
which Apotex Inc., a Canadian generics company, commercialized a generic copy of Plavix, a best-selling
anticoagulant developed by French drugmaker Sanofi-Aventis, before the drug’s patent expired. Apotex was
not worried about the consequences of such a maneuver because Bristol-Myers Squibb Co., which markets
the drug in the US, and Sanofi-Aventis had previously agreed that they would not seek a hefty penalty if
Apotex were to undertake such a maneuver. (The complicated motivation for this strange agreement is
described in detail in the November 2006 issue of Healthcare: Pharmaceuticals Industry Survey.)
Nonetheless, Bristol-Myers Squibb and Sanofi-Aventis were able to stop Apotex after several weeks, but not
before Apotex flooded retailers’ shelves with its generic, which caused Sanofi-Aventis and Bristol-Myers
Squibb to lose hundreds of millions of dollars in sales.
In June 2007, a US district court upheld the validity of the main Plavix patent—a decision immediately
appealed by Apotex. Industry experts believe the lower-court ruling all but ensures that Plavix is protected
until its patent expiration in November 2011. In December 2008, an appeals court upheld Bristol’s Plavix
patent. We believe Apotex will have to pay damages, but they will probably not be substantial due to the
agreement signed in 2006 by Apotex, Sanofi-Aventis, and Bristol-Myers Squibb.
In September 2007, an appeals court decision involving Neurontin, Pfizer’s best-selling antiepilepsy drug, left
several generics manufacturers vulnerable to hefty fines. The court overturned a lower court decision, from
2005, in favor of the generics companies, and it ordered a trial to determine if the companies are infringing
Pfizer’s formulation patent covering gabapentin, the active ingredient in Neurontin. This case, which is still
pending, stands out because the generics companies took a greater-than-average risk by launching their
products in 2004—before the lower court had made a ruling. While some on Wall Street are predicting that a
Pfizer victory is a long shot, the penalties (in case Pfizer wins) could be large because the drug is popular—it
generated about $2 billion in sales in 2004—and because generics have been on the market since then.
For a generics manufacturer, the advantages of having six months of exclusivity are enormous. Because
competition is limited, the generics supplier has to offer only a slight discount to the branded drug; in many
cases, this enables the generics company to rack up hefty profits. Without the 180-day exclusivity, the
company would likely face a price-sensitive, highly competitive market for that product.
To compensate the branded drug industry for greater competition from generics, the Hatch-Waxman Act
granted patent extensions for branded products. An additional five years of protection was granted to new
chemical entities, and three more years were given to new approved formulations or new uses for existing
drugs. New formulations often encompass controlled-release or pediatric versions of the branded drugs.
Sustained- or controlled-release dosing typically provides greater efficacy, fewer side effects, and patient
compliance benefits.
The Medicare Prescription Drug Improvement and Modernization Act of 2003, best known for expanding
Medicare coverage to prescription drugs for the first time, significantly modified the Hatch-Waxman Act.
The new rules affected the expenditure of money—from tens of millions to hundreds of millions of dollars—
as they clarified confusion over which generics companies are entitled to exclusivity if several companies
appear to be eligible at the same time, and if the start dates of the exclusivity period appear to be uncertain.
The FDA approved 682 generics in fiscal 2007, a 30% year-on-year increase. The rapid rise in applications
led to a huge backlog of new approval applications; the FDA estimated that more than 850 generic
applications were filed in fiscal 2008. Some 91 first-time generics were approved in 2008. In response to the
backlog, the agency plans to speed up the review process.
A new Generic Initiative for Value and Efficiency (GIVE) program was launched in October 2007. This
program uses additional funding from the FDAAA to add more trained reviewers and revamp the way that
the agency prioritizes applications. Instead of basing reviews on order of submission, it looks at reviews

based on patent expiration date: those targeting brand-name drugs with patents close to expiration will get
priority over those that are directed at drugs with patents expiring later.
Going over-the-counter
In the US, innovator companies sometimes apply to the FDA for permission to switch a prescription product
to over-the-counter (OTC), or nonprescription, status, if they expect that product will shortly face generic
competition. Marketing an OTC version of a drug broadens the drug’s commercial appeal and extends its
economic life. The strategy works best for popular products used for common, minor maladies. Only the
original manufacturer—or a licensee—can market the product under that franchise. Other companies may
sell the product on a private-label basis once the product’s patents expire. About 60% of all drugs sold in
the US are OTC, according to IHS Global Insight, an economic, financial, and political forecaster.
OTC products face more straightforward, free-market forces of supply and demand than do prescription
pharmaceuticals, whose pricing that is affected by heavy discounting to third-party providers and government
agencies. Consumers’ sensitivity to prices is also greater with OTC products, because they usually pay for
OTC drugs out-of-pocket, and most insurance plans do not reimburse for OTC drugs. These drugs are free
from the time-consuming, safety-related recordkeeping that the FDA requires for prescription products.
Compared with the prescription products that they replace, products switched to OTC status have lower
margins. However, because OTC drugs are mass-marketed products, manufacturers often make up the
difference in volume. In addition, popular consumer medications can have long shelf lives; this bolsters
margins by minimizing waste.
Some of the more successful prescription-to-OTC switches in recent years include Schering-Plough Corp.’s
Claritin (a nonsedating antihistamine); Merck’s Pepcid and GlaxoSmithKline’s Zantac 75 (heartburn
remedies); Schering-Plough’s Gyne-Lotrimin and Johnson & Johnson’s Monistat 7 (vaginal yeast infection
treatments); Johnson & Johnson’s Imodium A-D (antidiarrhea medicine); and The Procter & Gamble Co.’s
Aleve, Wyeth’s Advil, and Bristol-Myers Squibb’s Nuprin (analgesics). AstraZeneca Plc’s best-selling
heartburn drug Prilosec also went OTC in 2001.
In June 2007, the first OTC diet pill, Alli, went on the market in the US. GlaxoSmithKline’s Consumer
Health business is selling the drug, which is a low-dose version of Xenical, a prescription diet drug made
and sold globally by Roche Holding Ltd. GlaxoSmithKline received FDA approval for the drug in February
2007, after considerable debate. Xenical, which reduces the amount of fat the body absorbs from food, is
effective in weight loss only if used with diet and exercise.
LIABILITY ISSUES
Inevitably, pharmaceutical companies are subject to lawsuits alleging adverse side effects from their
medications. Some product liability cases are consolidated into class-action suits. A.H. Robins, a once-large
pharmaceutical and medical products company, was driven into bankruptcy in 1985 by huge liabilities
stemming from its sale of intrauterine contraceptive devices that were later deemed unsafe.
Wyeth was the target of thousands of lawsuits following the recalls in 1997 of its diet drugs Redux and
Pondimin. Pondimin (generically known as fenfluramine) is the “fen” part of the now-banned “fen-phen”
weight-loss cocktail. As the end of 2007, more than 99% of plaintiffs had agreed to enter into settlement
discussions with the company, which had taken charges of $21.1 billion (as of year-end 2007) in order to
pay for a trust fund, litigation, and other costs associated with the diet drug litigation.
In November 2007, Merck agreed to pay $4.85 billion to plaintiffs who contend that they suffered heart
attacks and strokes after taking the company’s painkiller Vioxx. The settlement would cover federal and state
lawsuits filed against the company since 2004 alleging adverse cardiac events that resulted from taking Vioxx.
(Merck pulled Vioxx from the market in September 2004.) In July 2008, Merck noted that this settlement,
which also applies to tolled claims, was signed by the parties after several meetings with three of the four
judges overseeing the coordination of more than 95% of the US lawsuits. In terms of claimants, some 48,500

of approximately 50,000 individuals who registered eligible injuries had submitted some or all of the materials
required for enrollment in the settlement program as of mid-July 2008.
Product liability and insurance coverage for potential damages are increasingly important issues in the
industry. Liability risk is often mentioned as a growing cost within the healthcare system. There have been
many calls for legislative reform to address this, including proposals to limit a manufacturer’s liability if the
FDA has approved a drug or device.
KEY INDUSTRY RATIOS AND STATISTICS

 National healthcare expenditures. Annual estimates of all healthcare spending in the United States are
released by the Centers for Medicare & Medicaid Services (CMS) each January. The data are structured
according to the type of expenditure, including such categories as hospital care, physician care, and drugs
and other medical nondurables. The annual report, entitled Health, United States, includes detailed
information on the sources of funds for each segment. A summary of this report also appears in each
January/February issue of the policy journal Health Affairs.
Total domestic expenditures for prescription drugs were roughly $234.1 billion in 2008. According to the
latest available data from the CMS, expenditures for 2009 were estimated at $246.3 billion.
Changes in funding from government and private sources are important to observe. For example, federal,
state, and local government funding represented some 37% of US spending on pharmaceuticals in 2008
(mostly from Medicare), compared with about 17% in 1990. The implementation in January 2006 of
Medicare Part D, which extended Medicare coverage to outpatient retail pharmacy prescription drugs, was
the key factor behind the increased proportion of government funding. In May 2009, Medicare’s board of
trustees estimated the cost of Part D to exceed $900 billion over the 2009–18 period. Medicare paid for
22% of all US prescription drug costs in 2008, up from 18% in 2006. All government sources accounted for
37% of all the money spent on all prescription drugs in 2008, including programs under Medicare, Medicaid,
and the Department of Veterans Affairs.
Health, United States publishes statistics showing rates of change in total healthcare spending and by
segment. Proportional changes in pharmaceutical spending can be measured against other healthcare sectors
to determine the industry’s relative growth.
Between 1990 and 2003, spending on prescription drugs grew at an average annual rate of 12.4%,
outpacing the 7.0% rate of growth for overall healthcare spending. CMS data show that prescription drug
spending in 2006 rose 8.5%, largely reflecting the phase-in of Medicare Part D. However, drug spending
growth slowed to 3.2% in 2008. We attribute the attrition partly to the effects of the recession in the US
and patent expirations.
A dearth of new drugs—combined with generic competition for several popular brands, a slowdown in
price increases, and more stringent measures by managed care organizations to migrate members to cheaper
generic drugs—has helped to keep a brake on rising drug costs, according to the Center for Studying Health
System Change, a research group.
 Medicare and Medicaid spending. Changes in government spending and reimbursement rates can have
significant ramifications for drugmakers that derive sizable sales from Medicare or Medicaid patients. The
CMS provides information on spending and reimbursement rates for Medicaid and Medicare.
According to CMS data, aggregate spending for Medicare was $469 billion in 2008, up from $432 billion in
2007, equal to over 42% of all public funding. Medicaid expenditures in 2008 were $344 billion, up from
$329 billion in 2007. The implementation of the Medicare drug benefit that began in January 2006 caused
a decline in Medicaid spending on drugs in 2006, and a parallel rise in total Medicare spending in that year.
Indigent elderly who were previously eligible for Medicaid reimbursement for prescription drugs—about 6.5

million people—are now part of the Medicare Part D program. In general, this is an advantage for the
pharmaceutical industry, because Medicare pays higher prices for drugs than Medicaid.
 Consumer price index (CPI). The

CONSUMER PRICE INDEXES—DRUGS
(1982-84=100)
CPI, compiled by the US Department of
Labor, tracks price inflation in key
450 segments of the economy, including
400 medical care. The medical care
350
H01: CPI component is further subdivided into
300 for Drugs products and services, with prescription
250 and nonprescription drug statistics
200 broken down separately.
150
100 During the 1980s, prescription drug
1995 96 97 98 99 00 01 02 03 04 05 06 07 08 09 2010 prices surged at an average annual rate
All items Prescription drugs OTC preparations of 9.6%, compared with a 4.1% rate
OTC-Over the counter. for the CPI. By the early 1990s,
Source: Bureau of Labor Statistics. excessive drug cost inflation began to
receive heightened political attention,
PRODUCER PRICE INDEXES FOR and leading drugmakers feared price
SELECTED PRESCRIPTION DRUG PRODUCTS
controls. Although prices continued to
(2001=100)
outpace the CPI, the pace of inflation
PRODUCT 2005 2006 2007 2008 2009 2010* slowed in the 1990s.
Cancer therapy 115.5 119.5 118.3 118.2 120.1 118.0
Analgesics† Table B01:110.3
108.1 PRODUCER113.0 118.7 126.9 136.4
Between 1990 and 2003, prescription
Cardiovasculars 119.5INDEXES
PRICE 123.0 125.4
FOR 133.2 142.4 157.9drug prices increased at an average
Bronchial therapy 118.9 121.1
SELECTED 123.7 129.1 135.8 146.7
PRESCRIPTION annual rate of 3.9%, compared with a
Digestive antispasmodic/DRUG PRODUCTS
2.4% rise in the CPI. In 2009, they
antisecretories 118.7 127.2 134.8 142.6 151.5 160.9
increased at an annual rate of 3.4%,
Broad & medium spectrum
matching a rise in the overall medical
antibiotics 119.5 126.4 134.6 142.2 144.9 145.4
inflation rate for the same period,
*Through September. †Contains prescription and non-prescription analgesics.
Sources: US Department of Labor; Standard & Poor's.
according to the Bureau of Labor
Statistics. These rates included
generics, which are a growing part of consumption but weigh down the average because they cost a fraction
of the price of innovative drugs.
 Research and development (R&D) as a percentage of sales. As new drugs represent the lifeblood of the
pharmaceutical industry, the percentage of a company’s sales that it devotes to R&D can have an important
impact on future trends in sales and earnings. For the drug industry overall, this percentage in the aggregate
is higher than for any other industry. The Pharmaceutical Research and Manufacturers of America, an
industry trade group, reported that R&D spending by members, both in the US and abroad, totaled an
estimated $45.8 billion in 2009, down from $47.4 billion (revised) in 2008.
 Foreign currency exchange. US drugmakers derive close to two-fifths of their total sales from non-US
customers. They carefully monitor fluctuations in the value of the dollar relative to foreign currencies, as
such changes can have a substantial impact on their sales and earnings. Assuming all other variables remain
constant, a rise in the dollar’s value (compared with other major world currencies) lowers sales and
earnings, because foreign sales translate into fewer dollars. A stronger dollar also makes US goods more
expensive abroad, while products manufactured elsewhere become more competitive in the United States.
When the dollar is weak, the opposite occurs: exchange rates enhance drugmakers’ sales and earnings, and
price competitiveness improves.
The dollar experienced a general advance against the euro through the first half of 2010, but tended to
show more uneven patterns during the third quarter. The dollar-to-yen relationship also showed a similar
pattern to euro/dollar movements during the first nine months of 2010.

HOW TO ANALYZE A PHARMACEUTICAL COMPANY
In evaluating a pharmaceutical company, there are important factors to consider. The most meaningful
factors are its products, markets, and financial health.
RESEARCHING THE BUSINESS
A thorough examination of the company’s products and markets is the first step in the analysis. A
pharmaceutical firm’s drug portfolio is the main ingredient of its success.
Does the company sell primarily prescription or nonprescription products? Prices and profit margins of
prescription drugs are significantly higher than those of nonprescription drugs, which are essentially mass-
marketed consumer products. Patent protection is an important consideration for prescription drugs,
whereas the success of nonprescription or over-the-counter (OTC) drugs is more closely linked to brand-
name recognition and promotional spending levels.
For both prescription and nonprescription drugmakers, company size and market share are important
considerations. Pharmaceutical firms must have the critical mass to support heavy spending on research and
development (R&D), as new product development is crucial to future success. In addition, these companies
have to maintain a large sales force to market drugs in key domestic and foreign markets. Smaller drug
companies, and even larger ones that depend heavily on one or two products, are more vulnerable to
eventual patent expirations and competition from rival drugs.
With respect to market share, does the company dominate any key markets? Key markets are those with a
large population whose chronic condition requires a daily regimen of maintenance therapy, thus offering the
greatest sales opportunities. Medications for high blood pressure, elevated cholesterol levels, depression,
ulcers, diabetes, and arthritis are examples. Oncology, once a niche therapeutic segment, is now exceedingly
attractive because of its technological advances, growth rate, and profitability.
Prescription and nonprescription drug companies vary widely by the type of pharmaceuticals they offer and
the markets that they serve. Does the company have a narrow or a broad product line? A broad product line
is more desirable because greater diversification makes the company less dependent on a single product. It
also makes the company more resilient to economic cycles and competition.
Prescription drugmakers, however, focus their product development and marketing efforts on select
therapeutic areas. For many decades, Wyeth (formerly American Home Products) has dominated the female
hormone replacement market with its Premarin family of products, while Pfizer Inc. has captured the lead in
the growing cholesterol-reduction market with its popular drug Lipitor. Sometimes drugmakers create new
markets with their discoveries, such as Pfizer’s Viagra treatment for erectile dysfunction and Merck & Co.
Inc.’s Proscar treatment for enlarged prostate glands. Launched in 2006, Merck’s Gardasil vaccine for
preventing infection with human papillomavirus (HPV)—believed to be the main cause of cervical cancer—
has the potential to build a new market, in our opinion.
Nonprescription drugmakers do not have to fund major R&D projects, but they must maintain large
advertising budgets to promote their products, which tend to face more competition than branded
prescription drugs. As a result, most of the major firms have just a handful of truly successful product lines.
Sales growth is slow for these businesses, with success highly dependent on the manufacturer’s clout in the
marketplace and overall market share.
If a prescription drugmaker has a diversification or acquisition program, has this been a plus or a minus?
The program should be carefully analyzed to determine whether its initial objectives are being met or
whether the program is hurting the company’s performance. In general, large pharmaceutical companies
regularly turn to smaller, more entrepreneurial companies as sources of innovation. Business development—
the process of scouting for attractive deals and negotiating terms—is an integral part of a company’s
operating expertise and core strategy.

Prescription drugmakers
As noted earlier, most major prescription drugmakers tend to focus on a few specific therapeutic markets.
Pfizer and Merck, for example, have carved out major stakes in the huge global antihypertensive and
cholesterol-lowering drug markets by releasing a steady stream of new products in recent years. Eli Lilly &
Co. achieved phenomenal success in antidepressants with Prozac, which dominated the market for more
than a decade until 2000, when it was overtaken by Pfizer’s Zoloft. Eli Lilly’s sales of Prozac eroded sharply
following the loss of patent protection in August 2001. GlaxoSmithKline Plc has maintained dominance in
respiratory drugs with its Advair and Flovent drugs.
In a healthcare market dominated by managed care, a company’s relative size and the breadth of its product
offerings have become increasingly important. Health maintenance organizations, preferred provider
organizations, hospital chains, and other large-scale pharmaceutical purchasers prefer to deal with a limited
number of large drug manufacturers that can offer them “one-stop shopping.”
There are other factors when analyzing a prescription drugmaker. Questions to ask include the following:
 When do the patents on the company’s most important drugs expire? If the expiration dates are within
the next few years, is the company adequately preparing to make up for the revenues lost to generics
competition? If a company loses its marketing exclusivity on key drugs without earning adequate profits
from new products, it can find itself in difficult economic straits. Many of the leading US drugmakers,
including Bristol-Myers Squibb Co., Merck, and Pfizer, are presently contending with fierce generics
competition, with a wave of major drugs going off patent through 2011.
 Have R&D efforts been productive? In terms of R&D, the larger, well-funded firms typically have the
advantage of being able to hire top scientists and to conduct more clinical trials, which are necessary to
develop new drugs. Most leading drugmakers spend between 14% and 18% of their revenues on R&D.
However, their success rates—in terms of lucrative new drugs—differ markedly. In addition, R&D
productivity can be cyclical, with firms that generated a series of significant new products experiencing
troughs before rebounding. In the 1990s, Merck and Pfizer had highly productive R&D programs, each
spawning a number of blockbuster drugs.
More recently, we think Merck has rejuvenated its pipeline with the launch of blockbusters such as
Gardasil, and Januvia, a promising new treatment for Type 2 diabetes. Pfizer also launched several promising
drugs such as Lyrica for neuropathic pain and Chantix for smoking cessation. However, we think both
Pfizer and Merck face steep patent challenges at the beginning of the next decade. Specifically, Merck’s
Cozaar/Hyzaar cardiovascular (sales of $3.6 billion in 2009), lost patent protection in 2010, and Pfizer’s
Lipitor cholesterol-lowering agent (sales of $11.4 billion in 2009) will lose patent protection in 2011.
In the present managed care environment, companies with new drugs that are both therapeutic
breakthroughs and cost effective hold the keys to success. New products that provide essentially identical
results to existing therapies are less likely to reap big commercial rewards.
 Has the company formed any promising alliances? Large firms often benefit from alliances with smaller
biotechnology and biopharmaceutical firms working on potentially lucrative new drugs. Conversely, a
smaller company may find it necessary to team up with a larger partner to fund the clinical trials and
commercialization of its discoveries.
Business ventures with foreign companies can be a source of new products. For example, many drugs
popular in the United States today were discovered by European and Japanese firms, but they are marketed
by US drugmakers under royalty arrangements. Pfizer’s Lipitor drug is sold under license from Sankyo Co.
Ltd. of Japan.
Many companies also maintain relationships with scientists at leading medical colleges or other
organizations, such as the federal government’s National Institutes of Health (NIH), which can funnel
experimental products to drugmakers. Bristol-Myers Squibb and GlaxoSmithKline, for example, have
obtained major new drugs from these sources.

 What is the company’s international business profile? The United States remains the most important
market for US drugmakers, as well as for many foreign drug companies, because of its size and lack of
government-imposed price constraints. Nonetheless, pharmaceutical markets elsewhere represent an
attractive source of growth. Indeed, pharmaceutical sales in developing nations are expanding much faster
than are those in the domestic market.
Although the level of foreign business varies from company to company, the US pharmaceuticals industry
currently derives about two-fifths of its revenues from sales outside the United States. Because many
countries exercise strict price controls, foreign markets contribute a lower portion of profits than of sales.
Which foreign markets has the company entered or does it plan to enter? Drugmakers should evaluate
foreign markets carefully with respect to their individual risks and profit potential. In addition, it is
important to assess the possible impact of changes in currency exchange rates.
How diversified is the firm’s foreign business? Foreign markets differ widely by level of pharmaceutical
utilization, degree of government control over pricing, and the acceptance of clinical research from outside
sources. Japan, for example, with the highest per capita consumption of prescription drugs in the world, is
the largest single market outside the United States. However, the Japanese government generally requires
across-the-board drug price cuts every few years.
 How effective is the company in working with the FDA? Because all drugs sold in the United States must
first be cleared by the US Food and Drug Administration (FDA), a firm must be able to work with the
agency and understand its criteria. Here again, size and experience can help. Most large, well-established
drug companies are adept at working with the agency, while many smaller or newer firms are less proficient
and often encounter major snags in obtaining approval for their products.
Besides new drug applications, the FDA also inspects and monitors pharmaceutical plants for product
integrity and quality control. (Several generic drugmakers ran into problems in this area a number of years
ago.) In addition, the agency is expanding its role in postmarket surveillance of drug safety.
 How effective is the company at working with third-party government and private payers?
Reimbursement is crucial for the commercial success of a product. Private and public payers alike are taking
an increasingly hard line in evaluating the cost effectiveness of recently approved drugs. In Europe, several
governments have established semi-independent organizations to make recommendations on whether a new
drug should be reimbursed—and in some controversial cases, they have argued against coverage. The United
States has not taken this approach, although it is considering the establishment of a reimbursement
evaluation organization. US payers are increasingly differentiating drugs within the same class and placing
them in separate tiers, with varying contributions from patients, aimed at giving patients incentives to use
certain drugs. The ability to negotiate fair deals with Medicare over reimbursement for prescription drugs is
also likely to be increasingly important to drug companies in the future.
Nonprescription drugmakers
While the prescription drug market depends on research-intensive innovation to differentiate among
products and bolster sales, the nonprescription segment depends much more on consumer-directed
marketing. The main factors that must be considered in evaluating a nonprescription drug company include
the relative strength of its product offerings, its ability to develop new products, competitive pressures in
each market segment, and the manufacturer’s ability to support product sales through effective advertising
and promotional campaigns.
Companies with a strong presence in both prescription and nonprescription sectors typically generate the most
successful OTC products, because most of the leading OTC medications on the market today started their
lives as ethical, or prescription, drugs. Nonprescription drugmakers strive to cultivate broad consumer loyalty.
For example, Johnson & Johnson’s Tylenol, launched as an OTC product in 1955, remains the best-selling
nonprescription product in the US. This highly regarded analgesic has successfully fought off rival painkillers
and cheaper private-label acetaminophen products, thanks to effective advertising that has built unmatched

brand loyalty. The product has even survived recalls due to tampered packaging and reports of possible liver
damage from overdosing or adverse reactions when combined with alcohol.
Strong recognition for an original brand also gives the manufacturer an ability to expand sales through line
extensions. Leading OTC products, such as Tylenol, Advil, Bayer, and Motrin, have successfully broadened
their consumer appeal through the addition of specialized formulations for children, combinations with
other products, and extra-strength versions.
ANALYZING FINANCIAL STATEMENTS
Once the analyst has reviewed a company’s products and markets, a look at its financial statements is in
order. The income statement contains some key figures and ratios (described below). Balance sheet and cash
flow data provide further insight into a company’s financial position and performance. Individual company
statistics should be compared with those of rival companies and industry averages.
The income statement

When looking at a pharmaceutical company’s income statement, it is important to examine trends in sales
growth; profit margins; R&D and selling, general, and administrative (SG&A) expenses; and return on equity.
 What are the company’s sales trends? Examine the company’s recent and historical sales performance.
Has sales growth been consistent or volatile? How has growth been achieved: through volume, pricing,
acquisitions, or through a combination of these?
 How wide are operating margins? Drug companies characteristically have high operating profit margins
(operating earnings before depreciation and nonoperating items as a percentage of sales). Margins have
contracted from their highs of about 40% in the early 1990s, due to reduced pricing flexibility. However,
drug margins still exceed overall averages in other industries by a wide margin, averaging 32% in 2008,
versus 17% for corporations in the S&P 500 Composite Stock index.
The high margins reflect drugmakers’ very low raw material costs and SG&A expenses per dollar of sales that
are less than average. Although substantial costs are incurred during a drug’s R&D phase, once those costs
have been covered, most revenues flow to the bottom line. Companies that can consistently develop value-
added, widely used drugs with long lives can command margins well above the industry average.
It is important to note that companies can temporarily pump up margins by crimping R&D spending. While
this tactic can provide short-term earnings improvement, it also undermines a drugmaker’s ability to
develop the new products needed to support future growth.
Changes in a company’s margins over a period of years can reveal management’s effectiveness in improving
the company’s profitability. Restructuring and cost-streamlining efforts often can play a major role in
boosting a company’s profit margins.
 What are the company’s pretax and net returns? Drug industry pretax and net income returns have
historically been above the averages in other industries. While the gap narrowed in recent years, as pharma
margins contracted under more constrained managed care pricing and as patents expired, pharmaceutical
margins still exceed the overall healthcare industry by a wide margin. Drugmakers’ net earnings as a
percentage of sales averaged about 16% between 2004 and 2008, versus an average of 6.4% for the S&P
500 over the same period.
The drug business is less capital intensive than most other industries, and it tends to have lower interest
expense and depreciation as a percentage of sales. Drugmakers’ profit margins also have been augmented by
lower tax rates, R&D credits, and tax credits from manufacturing operations in Ireland and other areas.
Lower-than-average drug industry tax rates also reflect the large portion of sales derived from countries
with tax rates below those of the United States. Past tax credits from manufacturing operations in Puerto
Rico now have been largely eliminated.

A company’s geographic business mix should be examined to determine how its blended tax rate compares
with others in the industry. But before comparing different companies’ net returns, make sure that the
reported results are truly comparable. Although current accounting standards require that discontinued
operations be segmented out, nonrecurring items (such as restructuring charges, asset sales gains, foreign
exchange gains and losses, and similar nonoperating items) are often buried in the category of “other
income/expenses” and must be factored out when making comparisons. Accounting practices also vary for
inventory and depreciation.
 What is the return on stockholders’ equity? Return on equity (ROE), or net earnings as a percentage of
average stockholders’ equity, is viewed as a key measure of management’s effectiveness in the pharmaceutical
industry. The drug industry’s average ROE of 19% between 2004 and 2008 ranked among the highest of all
industries. The lofty ratio is essentially a function of the industry’s relatively high profit margins. The
comparable level for the S&P 500 was 12%.
Cash flow
Another way of looking at profits is cash flow—essentially, net earnings plus depreciation and other
noncash charges. It provides a useful gauge of a company’s capacity to finance capital projects. Cash flow as
a percentage of sales for drugmakers is close to 23%, almost double the average percentage for US
industrial companies.
The source and application of funds statement shows how a company allocates its cash flow, which is often
a leading indicator of future growth. Firms investing heavily in acquisitions and capital projects are
preparing to expand the business. Those paying out more in dividends are rewarding investors but retaining
less cash for future growth.
Balance sheet
The balance sheet is a snapshot of a company’s financial condition at a specific moment in time, so it should
be examined to determine a company’s financial health. For pharmaceutical companies, most balance sheet
analysis focuses on liquidity. To assess a company’s short-term liquidity, analysts look at its level of cash
and marketable securities. Companies with large liquid assets also are better situated to make timely
acquisitions.
A reliable check for liquidity is the current ratio, which measures the ratio of current assets to current
liabilities. A healthy working capital ratio is essential to ensure that the company can adequately meet its
current liabilities. This ratio always should be greater than 1.0. Any meaningful degradation in these items
from previous reporting periods may signal a liquidity problem.
Debt leverage varies significantly among drugmakers. An appropriate debt load largely depends on a drug
company’s product line and the strength of its projected new product stream. The ratio of long-term debt to
total capital from 2004 to 2008 was 21%, less than half the average for US industrial companies.
VALUATION MEASURES
Investors typically use various valuation metrics to help them determine a stock’s worth. Common
measurements usually include multiples of key income statement entries such as sales, earnings and
EBITDA, often in ratios combined with past or future growth rates. Valuations can also encompass a
number of balance sheet metrics, such as return on assets (ROA), return on equity (ROE), and return on
invested capital (ROIC). While these metrics can be very useful, one must also take into account that stock
valuations are also influenced by various external factors, such as investor sentiment on stocks in general,
competition from bonds and other investments, industry conditions, and other considerations.
Along with other industrial sectors, the price/earnings (P/E) ratio—the stock price divided by either the
latest four quarters of earnings per share (EPS), or by the projected forward four quarters of EPS—is
typically the most commonly used valuation method. This ratio is useful in evaluating a company’s
performance relative to other firms in the same industry, as well as to companies in other sectors.

Over much of the past decade, drug stocks commanded above-average P/E ratios, largely reflecting above-
average growth rates and high profit margins driven by blockbuster drugs. In more recent years, however,
P/E multiples in the branded pharmaceutical space have contracted significantly, as generics began to grab
the market share of products whose patents have expired. In addition, the sector has also been hurt by a
tougher global pricing environment, reflecting efforts by governments and other third-party payers to save
money by curtailing utilization and reducing prices of high-priced branded drugs.
A variant of the P/E ratio is the P/E to growth or PEG ratio, which aims to improve on the simple P/E by
adjusting it to a company’s past or future growth rate. A company’s PEG is then examined with peer PEGs
to determine if a stock is undervalued or overvalued. A lower than average PEG may identify undervalued
stocks, while higher than average PEGs often indicates the reverse.
Another key valuation metric applied widely with pharmaceutical stocks is discounted cash flow (DCF)
analysis. This tool models projections of a company’s future cash flows, discounted by a weighted average
cost of capital to derive at a per share present value for any given firm. If the calculated per share DCF value
is higher than the current stock price, the stock may be an undervalued investment opportunity.
Similar to DCF analysis, another tool commonly used in analyzing pharmaceutical and biotechnology
companies is net present value (NPV) analysis. This metric is often specifically used to determine the value
of a company’s new drug R&D pipeline. NPV and DCF analyses may also play a key role in selecting
potential acquisition opportunities. 

GLOSSARY
180-day exclusivity—A generics company that is the first to file a completed abbreviated new drug application (ANDA) that
contains a challenge to the patent of the brand-name drug gets 180 days of exclusivity; that is, only that generics company is
allowed to market the generic product for six months following the expiration of the branded drug’s patent. In some cases, two
generics companies share exclusivity if they filed patent challenges for different doses. The maker of the brand-name drug also
has the right to market an "authorized generic" following patent expiration. (See Authorized generic.)
Abbreviated new drug application (ANDA)—The application filed for approval of generic drugs by the US Food and Drug
Administration (FDA). ANDAs require substantially less information than do new drug applications (NDAs) for prescription drugs,
because applicants have to prove only that their products are identical (bioequivalent) to the brand products. (See
Bioequivalence.)
Active pharmaceutical ingredient (API)—A component of a drug that provides pharmacological activity and is important to
the product’s efficacy. The ability to get access to cheap, reliable APIs is an important competitive advantage for generics
companies that do not make their own APIs.
Agonist—A drug that promotes certain kinds of cellular activity by binding to a cell’s receptor.
Amino acids—The building blocks of proteins. Amino acids include alanine, aspartic acid, glutamic acid, and additional
compounds.
Anesthetic—A drug used to induce unconsciousness or to numb a local area of the body.
Antagonist—A drug that prevents certain types of cellular reactions by blocking substances from binding to a cell’s receptor.
Antibody—A protein produced by certain types of white blood cells to deactivate foreign proteins.
Antigen—Any substance that induces a body’s immune response.
Authorized generic—A generic version of a branded drug, made by the manufacturer or by a company that has been approved
by the manufacturer. It is identical to the branded drug but has a different label. Innovator manufacturers use authorized generics
to take some of the profits that are gained by generics companies from 180-day exclusivities.
Autoimmune disease—A condition, such as multiple sclerosis, in which the body produces antibodies against its own tissues.
Bioavailability—The percentage of a drug’s active ingredient that reaches a patient’s bloodstream and body tissues.
Bioequivalence—Drugs that have the same rate and extent of absorption into the body when administered at the same dose
and under similar conditions are described as bioequivalent. Such products can be substituted for each other without a dosage
adjustment to obtain the same therapeutic effect.
Biogeneric—Also known as follow-on proteins or biosimilars, these are copies of therapeutic proteins launched after patent
expiration of the main active ingredient. Like traditional generics, they have the same qualitative and quantitative composition,
active substances, and pharmaceutical forms as the innovative product. Unlike traditional generics, however, they are not
identical and are likely to require independent proof of efficacy and safety.
Bioinformatics—A system whereby biological information, especially genetic data, is collected, stored, and accessed via
computers and electronic media.
Biological—A medicine (e.g., vaccine, antigen, serum, or plasma) made of large protein molecules that are derived from living
organisms or their byproducts, not from chemicals; also called a biologic.

Biotechnology—Generally, biotechnology refers to any technological application that uses biological systems, living
organisms, or derivatives to make or modify products and processes. The approach differs from traditional drug development,
which relies on synthetic chemistry and results in small-molecule, easy-to-administer treatments that come in pills and tablets.
Biotech products consist of larger molecules that are harder for the body to absorb and thus often have special administration
requirements, such as injections.
Breakthrough drug—A compound that represents a major therapeutic advance because its chemical composition or mode of
action is significantly different than that of existing drugs.
Bronchodilator—A drug used to widen the bronchioles (tubular extensions within the lungs) to aid in respiration.
Chemotherapy drugs—Drugs that work systemically to treat cancers by killing cells. Usually, these drugs are indiscriminate
and kill both healthy and cancerous cells throughout the body.
Chromosomes—Microscopic threadlike components in the nucleus of a cell that carry hereditary information in the form of
genes.
Clinical trials—A series of carefully defined tests through which experimental drugs are administered to humans to determine
their safety and efficacy.
Clotting factors—Proteins involved in the normal clotting of blood.
Combination therapy—The use of two or more drugs that together have greater therapeutic power in treating illness and
diseases than either drug used alone.
Corticosteroids—Natural steroid hormones secreted by the adrenal glands, or synthetic copies of those hormones, used to
treat inflammation and other conditions.
Data exclusivity—In the United States, a five-year period during which generic companies and the FDA cannot use data
submitted by a brand name company to evaluate a generic version of a patented drug. Other countries use different time frames.
Deoxyribonucleic acid (DNA)—The basic molecule that contains genetic information for most living systems. The DNA
molecule consists of four nucleotide bases (adenine, cytosine, guanine, and thymine) and a sugar-phosphate frame arranged in
two connected strands, forming a double helix.
Enzyme—A protein that controls chemical reactions in the human body.
Ethical drugs—Medicines requiring a doctor’s prescription.
Fast track—An expedited review status granted by the FDA for experimental drugs that target serious or life-threatening
diseases and have the potential to address "unmet medical needs."
Formulary—A select list of drugs that a healthcare insurer has approved for reimbursement. Formularies often categorize drugs
into levels, or tiers, depending on the extent to which the insurer wants to encourage members to use that drug (in other words,
the extent to which the insurer will reimburse for the drug).
Gene—The basic determinant of heredity, genes are chromosomal segments that direct the syntheses of proteins and conduct
other molecular regulatory functions.
Generic drug—A compound that contains the same active ingredients as a branded drug. A company cannot market a generic
version of a rival’s branded product until its patent expires.
Genomics—The study of genes and their functions, including mapping genes within the genome, identifying their nucleic acid
structures, and investigating their functions.
Growth factors—Proteins responsible for regulating cell proliferation, function, and differentiation.

Hatch-Waxman Act—A series of amendments to the Federal Food, Drug, and Cosmetic Act (passed in 1984) that shortened
the new generic drug approval process and provided for patent extensions on branded drugs; formally known as the Drug Price
Competition and Patent Term Restoration Act.
Hormone—A chemical produced by a gland and released in the bloodstream.
Immunomodulator—A drug that attempts to modify the immune system.
Influenza—Contagious disease caused by any of several viruses (Types A, B, and C) and characterized by inflammation of the
respiratory tract, fever, and muscle pain. Humans and animals can catch different versions of the virus and sometimes spread
them between species. Type A, in particular, mutates rapidly and causes severe disease.
Investigational new drug (IND)—An experimental new compound that has successfully completed animal studies and has
been approved by the FDA to proceed to human trials.
Managed care—A supervised system of financing and providing healthcare services for a defined population group. Health
maintenance organizations (HMOs) are currently the most popular form of managed care.
Monoclonal antibodies—Large protein molecules produced by white blood cells, which seek out and destroy harmful foreign
substances.
Neurotransmitter—A compound designed to act upon the transfer of electrical impulses in the nervous system.
New active substance (NAS)—A chemical, biological, or radiopharmaceutical substance that is intended for use in a
prescription medicine but which has not yet received government approval for use in humans.
New chemical entity (NCE)—A new molecular compound that has not yet received government approval for use by humans;
excludes biologic compounds and vaccines.
New drug application (NDA)—The formal filing that drug makers submit to the FDA for approval to market new drugs. The
document must contain clinical evidence of the compound’s safety and efficacy.
New molecular entity (NME)—An NCE or biological product, intended for use in a prescription medicine, that has not
received government approval for use in humans.
Orphan drug—A drug designed to treat rare diseases afflicting a relatively small patient population. The US government gives
drugmakers special incentives to encourage the development of such drugs.
Outcomes management—The practice of evaluating the relative success and cost-efficiency of various medical products and
services. It is typically employed by HMOs and other managed care providers to justify the choice or coverage of a particular type
of therapy. Pharmaceutical companies utilize data obtained from outcomes management for marketing purposes and to
determine future directions for research and development.
Over-the-counter (OTC) drugs—Compounds sold in pharmacies and other outlets without need of a prescription; also known
as proprietary medications.
Pandemic—A disease appearing worldwide. An epidemic disease spreads rapidly through a community; an endemic disease is
native to a particular country or region and is generally under control in that region.
Pharmacogenomics—The study of how an individual’s genetic composition affects the response to drugs. It combines
traditional pharmaceutical sciences, such as biochemistry, with the knowledge of genes, proteins, and single nucleotide
polymorphisms.
Pharmacokinetics—Analysis of a drug’s absorption and distribution in the body, its chemical changes in the body, and how it
is stored and eliminated.

Recombinant DNA technology—The process of creating new DNA by combining components of DNA from different
organisms. Usually, the new DNA is incorporated into therapeutic substances.
Serious adverse event (SAE)—Any negative side effect of medication that leads to hospitalization or disability, or that is life-
threatening or irreversible.
Therapeutic substitution—A policy that some managed care organizations employ to substitute less expensive drugs for more
expensive ones in the same therapeutic class, even though the drugs use different modes of action.
Treatment IND—An FDA program that allows experimental drugs (INDs) that treat life-threatening diseases to be made
commercially available to very sick patients before the drugs obtain formal FDA approval.
Virus—Simple pathogens made only of a protein coating and genetic material (DNA and ribonucleic acid). Much smaller than
bacteria, viruses straddle the line between living and nonliving. They are inert and dormant until they are absorbed into a living
host, where they reproduce inside cells by combining their genetic material with that of the host cells. The flu virus, which has
eight genes that rapidly mutate, comes in many strains, which vary in their infectiousness and potency. 

INDUSTRY REFERENCES
PERIODICALS Pharmaceutical Executive
http://www.pharmexec.com/pharmexec
BioCentury Monthly; covers trends and developments in the
http://www.biocentury.com pharmaceutical industry.
Weekly; covers the pharmaceutical and biotechnology
industries, with an emphasis on timely analysis of industry- Scrip World Pharmaceutical News
related news events. http://www.pjbpubs.com/scrip/index.htm
Twice-weekly newsletter; covers prescription and over-the-
Drug Topics counter (OTC) medicines, and biotechnology news.
http://www.drugtopics.modernmedicine.com
Monthly; covers drugs and retail pharmacies. BOOKS
FDA Consumer Health, United States

http://www.fda.gov/fdac/default.htm http://www.cdc.gov/nchs
Monthly; aimed at consumers, with articles on the FDA and Annual survey of national trends in public health statistics.
medical topics.
The Merck Manual of Diagnosis and Therapy,
F-D-C Reports: The Pink Sheet 18th Ed.
http://www.fdcreports.com http://www.merck.com/pubs
Weekly newsletter; covers trade in, and regulation of, Detailed information for physicians on various diseases and
pharmaceuticals and biotechnology. medical conditions, and on therapeutics for treating them.
IN VIVO: The Business and Medicine Report Parexel’s Pharmaceutical R&D Statistical
The RPM Report Sourcebook
Start-Up magazine http://www.parexel.com
http://www.windhover.com Annual recap of drug industry research and development
Monthly newsletters devoted to strategic and financial (R&D) spending, drugs in development, and regulatory
analysis of the pharmaceutical, biotech, and devices statistics.
industries, with an emphasis on deal-making trends and
corporate strategy. Physicians’ Desk Reference
http://www.medec.com
MedAdNews Annual compendium listing commercial prescription drugs
R&D Directions and their FDA-approved prescribing information.
http://www.pharmalive.com
The first is a monthly publication covering pharmaceutical TRADE ASSOCIATIONS
advertising; the second publishes 10 times a year and
reports on new drugs under development, as well as overall BIO
trends in pharmaceutical R&D activity. http://www.bio.org
Trade association representing the country’s leading
Medical Marketing & Media biotechnology companies in business, legislative, and
http://www.mmm-online.com regulatory affairs.
Monthly; covers trends in drug marketing and advertising,
regulation, and related topics. Consumer Healthcare Products Association (CHPA)
http://www.chpa-info.org
New England Journal of Medicine Represents manufacturers and distributors of OTC
http://www.nejm.org medicines and dietary supplements; promotes industry
Weekly; publishes detailed scientific articles on medical interests in legislative and regulatory arenas; and publishes
treatments and health issues. information on the OTC drug industry.

Generic Pharmaceutical Association National Institutes of Health (NIH)
http://www.gphaonline.org http://www.nih.gov
Trade association representing manufacturers and Government agency consisting of 27 institutes and centers;
distributors of generic drugs in legislative, regulatory, and provides major R&D funding in the life sciences in the US,
related matters. and maintains databases of clinical trial results and
research publications.
Pharmaceutical Research and Manufacturers of
America (PhRMA) US Food and Drug Administration (FDA)
http://www.phrma.org http://www.fda.gov
Trade association representing the country’s leading US government agency charged with overseeing the food
research-based pharmaceutical and biotechnology and pharmaceutical industries; controls and supervises the
companies in legislative and regulatory affairs; publishes approval of new drugs and the manufacture and sale of
pertinent industry statistics. marketed drugs.
RESEARCH FIRMS
Decision Resources Inc.

http://www.decisionresources.com
A market research and publishing firm focusing on the
pharmaceutical and biotechnology industries.
Henry J. Kaiser Family Foundation

http://www.kff.org
A private nonprofit foundation focused on US healthcare
issues; publishes studies on a variety of healthcare topics.
IMS Health Inc.

http://www.imshealth.com
Market research firm specializing in pharmaceuticals.
The National Institute for Health Care Management

Foundation
http://www.nihcm.org
Nonprofit, nonpartisan group that conducts research on
healthcare issues.
GOVERNMENT AGENCIES
Centers for Medicare & Medicaid Services (CMS)

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

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

COMPARATIVE COMPANY ANALYSIS — HEALTHCARE: PHARMACEUTICALS
Operating Revenues
Million $ CAGR (%) Index Basis (1999 = 100)
Ticker Company Yr. End 2009 2008 2007 2006 2005 2004 1999 10-Yr. 5-Yr. 1-Yr. 2009 2008 2007 2006 2005
PHARMACEUTICALS‡
ABT [] ABBOTT LABORATORIES DEC 30,764.7 29,527.6 D 25,914.2 22,476.3 22,287.8 C 19,680.0 D 13,177.6 8.8 9.3 4.2 233 224 197 171 169
AGN [] ALLERGAN INC DEC 4,503.6 4,403.4 3,938.9 A,C 3,063.3 A 2,319.2 2,045.6 1,452.4 12.0 17.1 2.3 310 303 271 211 160
BMY [] BRISTOL-MYERS SQUIBB CO DEC 18,808.0 D 20,597.0 D 19,348.0 D 17,914.0 19,207.0 D 19,380.0 A,C 20,222.0 (0.7) (0.6) (8.7) 93 102 96 89 95
ENDP † ENDO PHARMACEUTICALS HLDGS DEC 1,460.8 A 1,260.5 1,085.6 909.7 A 820.2 615.1 138.5 26.6 18.9 15.9 1,054 910 784 657 592
FRX [] FOREST LABORATORIES -CL A # MAR 4,112.0 3,845.1 3,718.3 3,360.3 A 2,912.1 3,113.8 881.8 16.6 5.7 6.9 466 436 422 381 330
HITK § HI TECH PHARMACAL CO INC # APR 168.2 109.3 62.0 59.0 78.0 67.7 26.7 20.2 19.9 53.8 630 410 232 221 292
JNJ [] JOHNSON & JOHNSON DEC 61,897.0 63,747.0 61,035.0 53,194.0 50,434.0 47,348.0 A 27,471.0 A 8.5 5.5 (2.9) 225 232 222 194 184
KG [] KING PHARMACEUTICALS INC DEC 1,776.5 1,565.1 A 2,136.9 1,988.5 1,772.9 1,304.4 D 348.3 A 17.7 6.4 13.5 510 449 614 571 509
LLY [] LILLY (ELI) & CO DEC 21,836.0 20,378.0 A 18,633.5 A 15,691.0 14,645.3 13,857.9 A 9,912.9 D 8.2 9.5 7.2 220 206 188 158 148
MRX † MEDICIS PHARMACEUT CP -CL A DEC 571.9 517.8 A 457.4 349.2 376.9 303.7 116.9 A 17.2 13.5 10.5 489 443 391 299 322
MRK [] MERCK & CO DEC 27,428.3 A 23,850.3 24,197.7 22,636.0 22,011.9 23,430.2 32,714.0 (1.7) 3.2 15.0 84 73 74 69 67
MYL [] MYLAN INC DEC 5,090.5 5,137.6 2,178.8 H 1,611.8 A 1,257.2 1,253.4 790.1 20.5 32.4 (0.9) 644 650 276 204 159
PRX § PAR PHARMACEUTICAL COS INC DEC 1,193.2 A 578.1 769.7 D 725.2 432.3 D 690.0 A 80.3 31.0 11.6 106.4 1,486 720 958 903 538
PRGO † PERRIGO CO JUN 2,006.9 D 1,817.2 1,447.4 A 1,366.8 1,024.1 A 898.2 877.6 F 8.6 17.4 10.4 229 207 165 156 117
PFE [] PFIZER INC DEC 49,934.0 A 48,341.0 A 48,209.0 A 48,201.0 A,C 51,298.0 A 52,516.0 A,C 16,204.0 11.9 (1.0) 3.3 308 298 298 297 317
SLXP § SALIX PHARMACEUTICALS LTD DEC 232.9 178.8 268.2 208.5 154.9 A 105.5 3.1 NM 17.2 30.3 7,530 5,780 8,672 6,742 5,008
VPHM § VIROPHARMA INC DEC 310.4 232.3 A 203.8 167.2 132.4 22.4 0.0 NM 69.2 33.6 ** ** ** ** NA
WPI [] WATSON PHARMACEUTICALS INC DEC 2,793.0 A 2,535.5 2,496.7 1,979.2 A 1,646.2 1,640.6 689.2 A 15.0 11.2 10.2 405 368 362 287 239
HEALTH CARE DISTRIBUTORS‡

ABC [] AMERISOURCEBERGEN CORP SEP 71,760.0 70,189.7 D 66,074.3 61,203.1 54,577.3 D 53,179.0 9,807.4 A 22.0 6.2 2.2 732 716 674 624 556
CAH [] CARDINAL HEALTH INC JUN 99,512.4 D 91,091.4 86,852.0 D 81,363.6 D 74,910.7 65,053.5 25,033.6 A,F 14.8 8.9 9.2 398 364 347 325 299
MCK [] MCKESSON CORP # MAR 108,702.0 106,632.0 101,703.0 92,977.0 D 88,050.0 D 80,514.6 36,712.5 A,C 11.5 6.2 1.9 296 290 277 253 240
MWIV § MWI VETERINARY SUPPLY SEP 941.3 831.4 710.1 A 606.2 A 496.7 394.3 NA NA 19.0 13.2 ** ** ** ** NA
OMI † OWENS & MINOR INC DEC 8,037.6 7,243.2 D 6,800.5 5,533.7 A 4,822.4 4,525.1 3,186.4 A 9.7 12.2 11.0 252 227 213 174 151
PDCO [] PATTERSON COMPANIES INC # APR 3,237.4 3,094.2 2,998.7 2,798.4 2,615.1 2,421.5 1,040.3 12.0 6.0 4.6 311 297 288 269 251
PMC § PHARMERICA CORP DEC 1,841.2 A 1,947.3 A 1,217.8 A NA NA NA NA NA NA (5.4) ** ** ** ** NA
PSSI § PSS WORLD MEDICAL INC # MAR 2,055.2 1,952.7 1,855.8 1,741.6 1,619.4 1,473.8 1,793.5 A 1.4 6.9 5.2 115 109 103 97 90
HSIC † SCHEIN (HENRY) INC DEC 6,538.3 D 6,394.9 D 5,920.2 D 5,153.1 4,635.9 A,C 4,060.3 A 2,285.7 A 11.1 10.0 2.2 286 280 259 225 203
OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS

AZN ASTRAZENECA PLC -ADR DEC 33,187.0 F 32,215.0 F 30,270.0 A,F 26,999.0 A,F 24,143.0 F 21,741.0 F 17,950.0 A,C 6.3 8.8 3.0 185 179 169 150 135
ELN ELAN CORP PLC -ADR DEC 820.9 761.8 516.4 497.3 426.7 D 464.0 1,007.8 (2.0) 12.1 7.8 81 76 51 49 42
GSK GLAXOSMITHKLINE PLC -ADR DEC 47,092.9 A 36,391.1 A 46,017.9 A 46,089.8 A 37,854.9 A 39,191.8 A 13,711.3 13.1 3.7 29.4 343 265 336 336 276
NVS NOVARTIS AG -ADR DEC 44,267.0 A 41,459.0 A 38,072.0 D 36,031.0 A,C 32,212.0 A 28,247.0 A 21,643.3 A 7.4 9.4 6.8 205 192 176 166 149
TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 13,899.0 11,085.0 A 9,408.0 8,408.0 A 5,250.4 4,798.9 A 1,282.4 A 26.9 23.7 25.4 1,084 864 734 656 409
VRX VALEANT PHARMACEUTICALS INTL DEC 821.5 A 758.3 A 843.9 1,068.8 935.5 D 886.5 151.8 A,F 18.4 (1.5) 8.3 541 500 556 704 616
Note: Data as originally reported. CAGR-Compound annual growth rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.
**Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change.
D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.
HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies
Net Income
Million $ CAGR (%) Index Basis (1999 = 100)
Ticker Company Yr. End 2009 2008 2007 2006 2005 2004 1999 10-Yr. 5-Yr. 1-Yr. 2009 2008 2007 2006 2005
PHARMACEUTICALS‡
ABT [] ABBOTT LABORATORIES DEC 5,745.8 4,734.2 3,606.3 1,716.8 3,372.1 3,175.8 2,445.8 8.9 12.6 21.4 235 194 147 70 138
AGN [] ALLERGAN INC DEC 621.3 578.6 501.0 (127.4) 403.9 377.1 188.2 12.7 10.5 7.4 330 307 266 (68) 215
BMY [] BRISTOL-MYERS SQUIBB CO DEC 3,239.0 3,155.0 1,968.0 1,585.0 2,992.0 2,378.0 4,167.0 (2.5) 6.4 2.7 78 76 47 38 72
ENDP † ENDO PHARMACEUTICALS HLDGS DEC 266.3 261.7 227.4 137.8 202.3 143.3 3.3 NM 13.2 1.8 NM NM NM 4,228 NM
FRX [] FOREST LABORATORIES -CL A # MAR 682.4 767.7 967.9 454.1 708.5 838.8 112.7 19.7 (4.0) (11.1) 606 681 859 403 629
HITK § HI TECH PHARMACAL CO INC # APR 31.1 9.8 (5.1) (2.0) 11.5 8.3 1.7 33.8 30.3 217.0 1,839 580 (301) (120) 677
JNJ [] JOHNSON & JOHNSON DEC 12,266.0 12,949.0 10,576.0 11,053.0 10,411.0 8,509.0 4,167.0 11.4 7.6 (5.3) 294 311 254 265 250
KG [] KING PHARMACEUTICALS INC DEC 92.0 (333.1) 183.2 288.6 116.6 (50.6) 45.7 7.3 NM NM 201 (730) 401 632 255
LLY [] LILLY (ELI) & CO DEC 4,328.8 (2,071.9) 2,953.0 2,662.7 2,001.6 1,810.1 2,546.7 5.4 19.1 NM 170 (81) 116 105 79
MRX † MEDICIS PHARMACEUT CP -CL A DEC 76.0 10.3 70.4 (75.8) 65.0 30.8 41.4 6.2 19.8 639.1 183 25 170 (183) 157
MRK [] MERCK & CO DEC 12,901.3 7,808.4 3,275.4 4,433.8 4,631.3 5,813.4 5,890.5 8.2 17.3 65.2 219 133 56 75 79
MYL [] MYLAN INC DEC 232.6 (181.2) (1,138.0) 217.3 184.5 203.6 154.2 4.2 2.7 NM 151 (117) (738) 141 120
PRX § PAR PHARMACEUTICAL COS INC DEC 77.6 (45.9) 51.1 6.7 11.8 29.2 (1.8) NM 21.6 NM NM NM NM NM NM
PRGO † PERRIGO CO JUN 141.1 135.8 73.8 71.4 (353.0) 80.6 1.5 NM 11.9 3.9 NM NM 4,773 4,618 NM
PFE [] PFIZER INC DEC 8,621.0 8,026.0 8,213.0 11,024.0 8,094.0 11,332.0 3,199.0 10.4 (5.3) 7.4 269 251 257 345 253
SLXP § SALIX PHARMACEUTICALS LTD DEC (43.6) (47.0) 8.2 31.5 (60.6) 6.8 (4.6) NM NM NM NM NM NM NM NM
VPHM § VIROPHARMA INC DEC (11.1) 67.6 95.4 66.7 113.7 (19.5) (29.5) NM NM NM NM NM NM NM NM
WPI [] WATSON PHARMACEUTICALS INC DEC 222.0 238.4 141.0 (445.0) 138.2 151.3 178.9 2.2 8.0 (6.9) 124 133 79 (249) 77

ABC [] AMERISOURCEBERGEN CORP SEP 511.9 469.1 493.8 468.0 291.9 468.4 70.9 21.9 1.8 9.1 722 661 696 660 412
CAH [] CARDINAL HEALTH INC JUN 1,142.8 1,315.9 839.7 1,244.7 1,046.7 1,524.7 456.3 9.6 (5.6) (13.2) 250 288 184 273 229
MCK [] MCKESSON CORP # MAR 1,263.0 823.0 989.0 968.0 737.0 (156.7) 184.6 21.2 NM 53.5 684 446 536 524 399
MWIV § MWI VETERINARY SUPPLY SEP 24.9 19.9 16.9 13.8 4.6 2.5 NA NA 58.1 25.0 ** ** ** ** NA
OMI † OWENS & MINOR INC DEC 116.9 101.3 72.7 48.8 64.4 60.5 28.0 15.4 14.1 15.4 418 362 260 174 230
PDCO [] PATTERSON COMPANIES INC # APR 212.3 199.6 224.9 208.3 198.4 183.7 64.5 12.7 2.9 6.3 329 310 349 323 308
PMC § PHARMERICA CORP DEC 42.2 5.0 (24.1) NA NA NA NA NA NA 744.0 ** ** ** ** NA
PSSI § PSS WORLD MEDICAL INC # MAR 69.4 58.0 56.8 50.5 44.3 39.4 22.2 12.1 12.0 19.6 313 262 256 228 199
HSIC † SCHEIN (HENRY) INC DEC 308.4 251.0 235.0 183.1 162.4 128.2 50.3 19.9 19.2 22.9 613 499 467 364 323

AZN ASTRAZENECA PLC -ADR DEC 7,521.0 6,101.0 5,595.0 6,043.0 4,706.0 3,813.0 956.0 22.9 14.6 23.3 787 638 585 632 492
ELN ELAN CORP PLC -ADR DEC (162.3) (35.2) (665.9) (408.7) 508.2 (368.3) 335.8 NM NM NM (48) (10) (198) (122) 151
GSK GLAXOSMITHKLINE PLC -ADR DEC 8,942.0 6,727.7 10,346.1 10,554.9 8,059.5 8,246.5 2,924.8 11.8 1.6 32.9 306 230 354 361 276
NVS NOVARTIS AG -ADR DEC 8,400.0 8,125.0 6,518.0 6,992.0 6,130.0 5,767.0 4,439.3 6.6 7.8 3.4 189 183 147 158 138
TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 2,000.0 635.0 1,952.0 546.0 1,072.3 331.8 117.8 32.7 43.2 215.0 1,697 539 1,657 463 910
VRX VALEANT PHARMACEUTICALS INTL DEC 176.5 199.9 195.5 215.5 246.8 161.0 62.5 10.9 1.9 (11.7) 282 320 313 345 395
Note: Data as originally reported. CAGR-Compound annual growth rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600.
#Of the following calendar year. **Not calculated; data for base year or end year not available.
Return on Revenues (%) Return on Assets (%) Return on Equity (%)
Ticker Company Yr. End 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005
PHARMACEUTICALS‡
ABT [] ABBOTT LABORATORIES DEC 18.7 16.0 13.9 7.6 15.1 12.1 11.5 9.5 5.3 11.6 28.5 26.9 22.7 12.1 23.5
AGN [] ALLERGAN INC DEC 13.8 13.1 12.7 NM 17.4 8.7 8.7 8.1 NM 15.8 14.1 14.9 14.6 NM 30.1
BMY [] BRISTOL-MYERS SQUIBB CO DEC 17.2 15.3 10.2 8.8 15.6 10.7 11.3 7.6 5.9 10.2 23.9 27.7 19.2 15.0 27.9
ENDP † ENDO PHARMACEUTICALS HLDGS DEC 18.2 20.8 21.0 15.2 24.7 12.0 14.3 14.7 10.0 17.4 20.3 21.6 19.5 14.6 27.0
FRX [] FOREST LABORATORIES -CL A # MAR 16.6 20.0 26.0 13.5 24.3 12.0 15.8 23.7 13.4 20.8 15.2 19.6 28.7 15.9 24.3
HITK § HI TECH PHARMACAL CO INC # APR 18.5 9.0 NM NM 14.7 24.2 10.2 NM NM 12.6 28.1 12.2 NM NM 14.5
JNJ [] JOHNSON & JOHNSON DEC 19.8 20.3 17.3 20.8 20.6 13.7 15.6 14.0 17.2 18.7 26.4 30.2 25.6 28.6 29.9
KG [] KING PHARMACEUTICALS INC DEC 5.2 NM 8.6 14.5 6.6 2.4 NM 5.4 9.2 4.0 4.0 NM 7.6 13.5 6.1
LLY [] LILLY (ELI) & CO DEC 19.8 NM 15.8 17.0 13.7 15.3 NM 12.1 11.4 8.1 53.2 NM 24.1 24.5 18.4
MRX † MEDICIS PHARMACEUT CP -CL A DEC 13.3 2.0 15.4 NM 17.2 7.1 0.9 6.2 NM 6.1 11.7 1.7 12.9 NM 12.5
MRK [] MERCK & CO DEC 47.0 32.7 13.5 19.6 21.0 16.2 16.3 7.0 9.9 10.6 33.2 42.3 18.3 25.0 26.3
MYL [] MYLAN INC DEC 4.6 NM NM 13.5 14.7 0.9 NM NM 7.1 9.2 3.2 NM NM 17.8 14.0
PRX § PAR PHARMACEUTICAL COS INC DEC 6.5 NM 6.6 0.9 2.7 10.5 NM 6.4 0.9 1.6 17.2 NM 11.9 1.7 3.0
PRGO † PERRIGO CO JUN 7.0 7.5 5.1 5.2 NM 5.5 6.0 4.0 4.1 NM 15.2 16.1 10.6 11.6 NM
PFE [] PFIZER INC DEC 17.3 16.6 17.0 22.9 15.8 5.3 7.1 7.1 9.5 6.7 11.7 13.1 12.1 16.1 12.1
SLXP § SALIX PHARMACEUTICALS LTD DEC NM NM 3.1 15.1 NM NM NM 2.3 10.4 NM NM NM 2.9 12.2 NM
VPHM § VIROPHARMA INC DEC NM 29.1 46.8 39.9 85.9 NM 7.4 15.8 15.4 37.1 NM 11.7 21.0 18.0 75.6
WPI [] WATSON PHARMACEUTICALS INC DEC 7.9 9.4 5.6 NM 8.4 4.6 6.7 3.9 NM 4.4 8.7 12.0 8.0 NM 6.4

ABC [] AMERISOURCEBERGEN CORP SEP 0.7 0.7 0.7 0.8 0.5 4.0 3.8 3.9 3.9 2.5 18.9 16.1 13.6 11.1 6.8
CAH [] CARDINAL HEALTH INC JUN 1.1 1.4 1.0 1.5 1.4 4.7 5.6 3.6 5.5 4.8 13.9 17.4 10.6 14.6 12.6
MCK [] MCKESSON CORP # MAR 1.2 0.8 1.0 1.0 0.8 4.7 3.3 4.1 4.3 3.7 18.4 13.4 16.0 15.9 13.2
MWIV § MWI VETERINARY SUPPLY SEP 2.6 2.4 2.4 2.3 0.9 7.6 6.8 6.8 6.6 2.7 12.8 11.7 11.7 12.8 10.0
OMI † OWENS & MINOR INC DEC 1.5 1.4 1.1 0.9 1.3 6.6 6.2 4.5 3.3 5.4 16.0 15.5 12.5 9.2 13.3
PDCO [] PATTERSON COMPANIES INC # APR 6.6 6.5 7.5 7.4 7.6 9.3 9.5 11.2 10.8 11.0 16.2 18.2 18.9 15.9 17.6
PMC § PHARMERICA CORP DEC 2.3 0.3 NM NA NA 6.0 0.7 NA NA NA 12.2 1.6 NA NA NA
PSSI § PSS WORLD MEDICAL INC # MAR 3.4 3.0 3.1 2.9 2.7 8.0 6.9 7.1 6.7 6.4 18.4 17.0 15.9 13.8 14.1
HSIC † SCHEIN (HENRY) INC DEC 4.7 3.9 4.0 3.6 3.5 8.3 7.3 7.6 6.7 6.5 15.1 13.5 14.5 13.6 13.9

AZN ASTRAZENECA PLC -ADR DEC 22.7 18.9 18.5 22.4 19.5 14.8 12.9 14.4 22.1 18.7 41.1 39.8 37.2 41.8 33.6
ELN ELAN CORP PLC -ADR DEC NM NM NM NM 119.1 NM NM NM NM 18.0 NM NA NA NM 122.1
GSK GLAXOSMITHKLINE PLC -ADR DEC 19.0 18.5 22.5 22.9 21.3 14.1 11.3 18.5 21.8 17.9 64.4 43.9 54.5 66.2 66.2
NVS NOVARTIS AG -ADR DEC 19.0 19.6 17.1 19.4 19.0 9.7 10.6 9.1 11.1 10.9 15.6 16.3 14.4 18.8 18.4
TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 14.4 5.7 20.7 6.5 20.4 6.0 2.3 8.9 3.5 10.7 11.3 4.2 15.7 6.4 18.8
VRX VALEANT PHARMACEUTICALS INTL DEC 21.5 26.4 23.2 20.2 26.4 9.6 11.7 9.8 10.2 13.2 13.8 16.0 15.0 17.1 21.7
Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.
Debt as a % of
Current Ratio Debt / Capital Ratio (%) Net Working Capital
PHARMACEUTICALS‡
ABT [] ABBOTT LABORATORIES DEC 1.8 1.5 1.5 0.9 1.5 33.0 33.3 34.8 33.3 23.4 109.8 159.9 192.1 NM 115.1
AGN [] ALLERGAN INC DEC 3.8 3.3 3.0 3.2 1.7 23.5 28.7 28.6 33.2 3.5 65.0 103.9 112.9 109.1 7.4
BMY [] BRISTOL-MYERS SQUIBB CO DEC 2.2 2.2 1.2 1.6 1.8 29.3 34.9 29.2 41.9 42.3 80.2 81.8 257.1 190.4 155.1
ENDP † ENDO PHARMACEUTICALS HLDGS DEC 2.7 3.1 2.7 3.1 1.9 17.3 24.8 0.0 0.0 0.2 39.9 46.6 0.0 0.1 0.4
FRX [] FOREST LABORATORIES -CL A # MAR 4.7 4.6 4.8 3.9 5.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
HITK § HI TECH PHARMACAL CO INC # APR 6.7 3.8 6.0 5.8 7.5 0.0 0.3 0.0 0.0 0.0 0.0 0.4 0.0 0.0 0.0
JNJ [] JOHNSON & JOHNSON DEC 1.8 1.6 1.5 1.2 2.5 13.7 15.6 13.6 4.7 5.0 46.2 60.0 70.0 52.8 10.8
KG [] KING PHARMACEUTICALS INC DEC 2.3 1.7 4.0 2.7 1.3 12.5 30.7 13.7 14.9 0.0 53.6 145.5 29.3 37.9 0.0
LLY [] LILLY (ELI) & CO DEC 1.9 0.9 2.3 1.9 1.9 40.8 40.4 25.0 24.0 33.4 112.1 NM 66.8 75.8 113.5
MRX † MEDICIS PHARMACEUT CP -CL A DEC 2.5 2.7 1.9 6.2 7.1 19.6 21.9 22.5 47.1 48.0 39.0 55.0 40.0 82.4 75.5
MRK [] MERCK & CO DEC 1.8 1.3 1.2 1.2 1.6 18.6 15.5 15.7 21.1 19.2 126.8 79.1 140.5 221.4 66.2
MYL [] MYLAN INC DEC 1.9 2.1 1.5 3.4 4.5 58.0 61.2 52.2 48.2 45.9 318.1 316.9 445.3 96.7 73.9
PRX § PAR PHARMACEUTICAL COS INC DEC 2.4 1.6 1.7 1.3 3.0 0.0 0.0 0.0 0.0 34.9 0.0 0.0 0.0 0.0 65.7
PRGO † PERRIGO CO JUN 2.3 2.4 1.9 1.8 1.8 45.2 45.5 43.1 46.2 49.7 134.1 133.4 191.8 217.6 244.6
PFE [] PFIZER INC DEC 1.7 1.6 2.1 2.2 1.5 28.5 11.6 9.1 6.5 7.7 176.7 49.6 29.2 21.7 47.2
SLXP § SALIX PHARMACEUTICALS LTD DEC 3.0 2.6 2.3 3.8 3.2 14.5 23.2 5.1 0.0 0.0 28.9 66.6 14.3 0.0 0.0
VPHM § VIROPHARMA INC DEC 11.2 8.3 22.0 16.0 2.5 13.3 24.8 33.5 0.0 0.0 34.1 78.8 42.1 0.0 0.0
WPI [] WATSON PHARMACEUTICALS INC DEC 1.7 3.0 2.6 1.8 5.5 24.3 26.5 30.7 37.4 20.9 160.1 84.5 123.4 196.6 52.7

ABC [] AMERISOURCEBERGEN CORP SEP 1.1 1.1 1.1 1.2 1.3 30.2 30.5 28.4 20.9 18.2 248.2 236.5 143.2 62.5 49.2
CAH [] CARDINAL HEALTH INC JUN 1.4 1.4 1.3 1.3 1.3 26.1 30.7 30.1 22.1 19.9 74.6 96.8 112.1 76.4 69.5
MCK [] MCKESSON CORP # MAR 1.3 1.2 1.2 1.2 1.3 23.3 27.0 22.7 22.3 14.0 51.0 74.7 73.6 66.0 28.3
MWIV § MWI VETERINARY SUPPLY SEP 2.2 1.9 2.0 1.9 1.5 0.0 0.1 0.1 0.2 0.4 0.0 0.1 0.2 0.3 0.8
OMI † OWENS & MINOR INC DEC 1.9 2.0 1.9 1.9 1.8 21.1 34.2 31.6 44.1 28.5 32.5 55.8 54.4 72.6 50.4
PDCO [] PATTERSON COMPANIES INC # APR 3.3 2.8 2.1 2.3 2.1 25.8 29.6 33.1 8.3 14.0 66.8 87.0 101.2 25.5 48.0
PMC § PHARMERICA CORP DEC 4.2 3.6 3.7 NA NA 39.3 42.9 44.4 NA NA 76.7 88.1 93.1 NA NA
PSSI § PSS WORLD MEDICAL INC # MAR 2.9 2.4 1.9 2.7 2.4 31.5 40.1 31.0 28.3 30.0 52.9 71.6 61.9 49.5 56.9
HSIC † SCHEIN (HENRY) INC DEC 2.0 1.7 2.0 2.0 2.2 9.1 11.3 18.2 22.7 27.1 21.6 30.2 46.6 54.6 56.9

AZN ASTRAZENECA PLC -ADR DEC 1.3 1.2 1.1 1.8 2.0 27.5 36.1 36.4 6.0 7.0 149.3 383.3 573.9 14.5 16.0
ELN ELAN CORP PLC -ADR DEC 4.5 2.3 4.4 2.0 6.7 74.6 114.7 128.8 89.4 86.3 169.9 460.7 246.5 194.6 177.0
GSK GLAXOSMITHKLINE PLC -ADR DEC 1.4 1.7 1.3 1.5 1.4 56.5 62.8 39.6 31.8 39.3 271.2 210.0 215.4 128.0 143.8
NVS NOVARTIS AG -ADR DEC 1.7 1.3 1.6 1.3 1.4 12.3 3.8 1.2 1.4 3.5 61.0 49.8 6.3 12.7 21.6
TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 1.6 1.3 1.8 1.9 2.4 17.0 23.4 19.1 28.2 22.0 95.0 188.0 74.6 128.5 54.6
VRX VALEANT PHARMACEUTICALS INTL DEC 1.4 1.8 1.9 2.6 2.5 18.8 0.0 0.0 23.5 25.3 335.0 0.0 0.0 61.9 100.3
Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)
PHARMACEUTICALS‡
ABT [] ABBOTT LABORATORIES DEC 15 - 11 20 - 15 25 - 21 45 - 35 23 - 17 42 46 54 104 50 3.8 - 2.7 3.1 - 2.3 2.6 - 2.1 3.0 - 2.3 2.9 - 2.2
AGN [] ALLERGAN INC DEC 31 - 17 37 - 15 42 - 32 NM - NM 36 - 22 10 11 12 NM 13 0.6 - 0.3 0.7 - 0.3 0.4 - 0.3 0.4 - 0.3 0.6 - 0.4
BMY [] BRISTOL-MYERS SQUIBB CO DEC 16 - 11 17 - 10 32 - 26 33 - 25 17 - 14 77 97 112 138 73 7.3 - 4.7 9.7 - 5.7 4.4 - 3.5 5.6 - 4.2 5.4 - 4.2
ENDP † ENDO PHARMACEUTICALS HLDGS DEC 12 - 7 13 - 7 21 - 15 34 - 20 21 - 12 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
FRX [] FOREST LABORATORIES -CL A # MAR 15 - 8 17 - 8 19 - 11 38 - 25 21 - 15 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
HITK § HI TECH PHARMACAL CO INC # APR 11 - 2 14 - 4 NM - NM NM - NM 33 - 11 0 0 NM NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
JNJ [] JOHNSON & JOHNSON DEC 15 - 10 16 - 11 19 - 16 18 - 15 20 - 17 43 39 44 39 36 4.2 - 3.0 3.4 - 2.5 2.7 - 2.4 2.6 - 2.1 2.1 - 1.8
KG [] KING PHARMACEUTICALS INC DEC 33 - 15 NM - NM 30 - 13 17 - 13 37 - 16 0 NM 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
LLY [] LILLY (ELI) & CO DEC 10 - 7 NM - NM 23 - 18 24 - 20 33 - 27 50 NM 63 65 83 7.2 - 4.8 6.6 - 3.3 3.5 - 2.8 3.2 - 2.7 3.1 - 2.5
MRX † MEDICIS PHARMACEUT CP -CL A DEC 22 - 6 NM - 54 32 - 20 NM - NM 32 - 22 12 89 10 NM 10 2.0 - 0.6 1.7 - 0.6 0.5 - 0.3 0.5 - 0.3 0.5 - 0.3
MRK [] MERCK & CO DEC 7- 4 17 - 6 41 - 28 23 - 16 17 - 12 27 42 101 75 72 7.6 - 4.0 6.7 - 2.5 3.6 - 2.5 4.8 - 3.3 6.0 - 4.3
MYL [] MYLAN INC DEC 62 - 31 NM - NM NM - NM 25 - 18 27 - 19 0 NM NM 24 30 0.0 - 0.0 0.0 - 0.0 0.9 - 0.5 1.3 - 1.0 1.6 - 1.1
PRX § PAR PHARMACEUTICAL COS INC DEC 12 - 4 NM - NM 21 - 11 NM - 64 NM - 62 0 NM 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
PRGO † PERRIGO CO JUN 27 - 12 30 - 19 46 - 20 24 - 19 NM - NM 14 13 22 22 NM 1.2 - 0.5 0.7 - 0.5 1.1 - 0.5 1.2 - 0.9 1.2 - 0.8
PFE [] PFIZER INC DEC 15 - 9 20 - 12 23 - 19 19 - 15 27 - 18 65 108 97 63 69 6.9 - 4.2 9.0 - 5.3 5.2 - 4.2 4.3 - 3.4 3.7 - 2.6
SLXP § SALIX PHARMACEUTICALS LTD DEC NM - NM NM - NM 96 - 44 28 - 14 NM - NM NM NM 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
VPHM § VIROPHARMA INC DEC NM - NM 16 - 8 13 - 5 24 - 7 10 - 1 NM 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
WPI [] WATSON PHARMACEUTICALS INC DEC 19 - 11 14 - 9 25 - 18 NM - NM 28 - 21 0 0 0 NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

ABC [] AMERISOURCEBERGEN CORP SEP 16 - 8 17 - 9 21 - 16 21 - 18 31 - 19 12 10 7 4 4 1.5 - 0.8 1.1 - 0.6 0.5 - 0.4 0.2 - 0.2 0.2 - 0.1
CAH [] CARDINAL HEALTH INC JUN 12 - 8 17 - 8 36 - 26 26 - 21 29 - 22 19 14 18 9 6 2.4 - 1.5 1.8 - 0.8 0.7 - 0.5 0.4 - 0.4 0.3 - 0.2
MCK [] MCKESSON CORP # MAR 14 - 7 23 - 9 20 - 15 17 - 14 22 - 12 10 16 7 7 10 1.4 - 0.7 1.7 - 0.7 0.5 - 0.4 0.5 - 0.4 0.8 - 0.5
MWIV § MWI VETERINARY SUPPLY SEP 20 - 10 27 - 12 31 - 21 30 - 19 58 - 43 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
OMI † OWENS & MINOR INC DEC 17 - 11 22 - 14 25 - 16 29 - 23 21 - 16 33 32 38 49 32 3.0 - 1.9 2.3 - 1.5 2.3 - 1.5 2.2 - 1.7 2.0 - 1.5
PDCO [] PATTERSON COMPANIES INC # APR 16 - 9 22 - 9 24 - 17 25 - 19 37 - 23 6 0 0 0 0 0.6 - 0.4 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
PMC § PHARMERICA CORP DEC 16 - 10 NM - 76 NM - NM NA - NA NA - NA 0 0 NM NA NA 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 NA - NA NA - NA
PSSI § PSS WORLD MEDICAL INC # MAR 19 - 11 22 - 15 25 - 18 29 - 20 25 - 16 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
HSIC † SCHEIN (HENRY) INC DEC 16 - 10 23 - 11 24 - 17 26 - 21 25 - 17 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

AZN ASTRAZENECA PLC -ADR DEC 9- 6 12 - 8 16 - 11 17 - 12 17 - 12 40 45 47 37 35 7.0 - 4.4 5.8 - 3.8 4.1 - 2.9 3.1 - 2.1 3.0 - 2.0
ELN ELAN CORP PLC -ADR DEC NM - NM NM - NM NM - NM NM - NM 24 - 2 NM NM NM NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
GSK GLAXOSMITHKLINE PLC -ADR DEC 12 - 8 21 - 12 16 - 13 16 - 13 19 - 16 53 83 55 46 54 6.8 - 4.3 6.9 - 3.9 4.3 - 3.4 3.5 - 3.0 3.5 - 2.8
NVS NOVARTIS AG -ADR DEC 15 - 9 17 - 12 21 - 18 21 - 17 21 - 17 46 43 39 30 34 5.1 - 3.0 3.7 - 2.5 2.1 - 1.8 1.7 - 1.4 1.9 - 1.6
TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 25 - 18 62 - 44 19 - 12 62 - 41 27 - 15 26 61 15 42 15 1.5 - 1.1 1.4 - 1.0 1.3 - 0.8 1.0 - 0.7 1.0 - 0.6
VRX VALEANT PHARMACEUTICALS INTL DEC 14 - 8 12 - 5 22 - 11 21 - 11 18 - 9 58 120 164 37 32 7.0 - 4.2 22.6 - 10.1 15.2 - 7.6 3.4 - 1.8 3.6 - 1.8
Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)
PHARMACEUTICALS‡
ABT [] ABBOTT LABORATORIES DEC 3.71 3.06 2.34 1.12 2.17 2.17 1.51 1.24 (1.17) 2.89 57.39 - 41.27 61.09 - 45.75 59.50 - 48.75 49.87 - 39.18 50.00 - 37.50
AGN [] ALLERGAN INC DEC 2.05 1.90 1.64 (0.44) 1.54 4.82 1.76 0.72 0.87 5.34 64.08 - 35.41 70.40 - 28.95 69.15 - 52.50 61.51 - 46.28 55.25 - 34.51
BMY [] BRISTOL-MYERS SQUIBB CO DEC 1.63 1.60 1.00 0.81 1.53 4.10 3.31 2.26 1.83 2.28 26.62 - 17.23 27.37 - 16.00 32.35 - 25.73 26.41 - 20.08 26.60 - 20.70
ENDP † ENDO PHARMACEUTICALS HLDGS DEC 2.27 2.12 1.70 1.03 1.53 4.99 6.36 7.75 5.85 4.24 26.14 - 15.75 28.48 - 13.87 35.85 - 26.04 34.75 - 21.06 31.93 - 19.02
FRX [] FOREST LABORATORIES -CL A # MAR 2.25 2.53 3.08 1.43 2.11 14.58 11.94 10.19 8.93 7.69 32.76 - 18.37 42.76 - 19.23 57.97 - 34.89 54.70 - 36.18 45.21 - 32.46
HITK § HI TECH PHARMACAL CO INC # APR 2.61 0.87 (0.45) (0.17) 0.96 8.79 6.52 5.75 6.73 6.61 29.64 - 4.32 12.57 - 3.46 13.59 - 8.50 32.13 - 11.64 31.50 - 10.21
JNJ [] JOHNSON & JOHNSON DEC 4.45 4.62 3.67 3.76 3.50 7.04 5.35 5.12 3.67 8.64 65.41 - 46.25 72.76 - 52.06 68.75 - 59.72 69.41 - 56.65 69.99 - 59.76
KG [] KING PHARMACEUTICALS INC DEC 0.38 (1.37) 0.75 1.19 0.48 4.46 3.22 6.51 5.41 3.66 12.45 - 5.86 12.60 - 6.98 22.25 - 9.75 20.00 - 15.15 17.99 - 7.50
LLY [] LILLY (ELI) & CO DEC 3.94 (1.89) 2.71 2.45 1.84 5.30 2.45 10.10 9.94 9.77 40.78 - 27.21 57.52 - 28.62 61.00 - 49.09 59.24 - 50.19 60.98 - 49.47
MRX † MEDICIS PHARMACEUT CP -CL A DEC 1.29 0.18 1.26 (1.39) 1.18 6.45 5.03 6.16 5.00 2.98 27.82 - 7.85 27.02 - 9.66 39.94 - 25.37 40.31 - 22.57 37.67 - 26.30
MRK [] MERCK & CO DEC 5.67 3.66 1.51 2.04 2.11 (0.17) 7.97 7.37 7.00 7.48 38.42 - 20.05 61.18 - 22.82 61.62 - 42.35 46.37 - 31.81 35.36 - 25.50
MYL [] MYLAN INC DEC 0.31 (1.05) (4.49) 1.01 0.80 (8.44) (9.56) (11.28) 2.75 2.76 19.21 - 9.65 15.49 - 5.75 22.90 - 12.93 25.00 - 18.65 21.69 - 15.21
PRX § PAR PHARMACEUTICAL COS INC DEC 2.30 (1.38) 1.48 0.20 0.35 10.49 8.82 9.98 8.84 8.24 27.93 - 8.57 24.33 - 7.80 30.68 - 16.61 38.70 - 12.80 43.81 - 21.64
PRGO † PERRIGO CO JUN 1.53 1.46 0.80 0.77 (4.57) 4.76 4.52 4.30 3.83 3.12 40.94 - 18.54 43.08 - 27.72 36.86 - 16.09 18.69 - 14.42 19.89 - 12.76
PFE [] PFIZER INC DEC 1.23 1.19 1.19 1.52 1.10 (2.53) 2.71 3.41 3.65 1.89 18.99 - 11.62 24.24 - 14.26 27.73 - 22.24 28.60 - 22.16 29.21 - 20.27
SLXP § SALIX PHARMACEUTICALS LTD DEC (0.88) (0.98) 0.17 0.68 (1.55) 3.11 1.22 2.11 2.73 3.24 25.86 - 6.14 10.47 - 5.07 16.38 - 7.50 18.72 - 9.77 22.79 - 13.85
VPHM § VIROPHARMA INC DEC (0.14) 0.95 1.37 0.97 2.56 1.70 (0.11) 5.35 4.15 2.99 14.55 - 3.79 15.16 - 8.00 18.39 - 7.11 23.44 - 7.07 24.36 - 1.67
WPI [] WATSON PHARMACEUTICALS INC DEC 2.11 2.32 1.38 (4.37) 1.32 (2.81) 6.51 3.56 0.10 8.81 40.25 - 23.05 32.70 - 20.17 33.91 - 25.02 35.27 - 21.35 36.93 - 27.99

ABC [] AMERISOURCEBERGEN CORP SEP 1.70 1.46 1.34 1.14 0.69 (0.50) (0.53) 0.43 3.10 3.69 26.58 - 13.75 24.30 - 13.33 28.28 - 21.10 24.48 - 20.08 21.09 - 13.24
CAH [] CARDINAL HEALTH INC JUN 3.20 3.67 2.13 2.96 2.43 7.30 4.26 4.12 8.52 8.20 39.87 - 24.87 62.25 - 27.79 76.15 - 56.41 75.74 - 61.15 69.64 - 52.85
MCK [] MCKESSON CORP # MAR 4.70 2.99 3.40 3.25 2.42 12.59 7.39 7.64 9.10 13.36 64.98 - 33.13 68.40 - 28.27 68.43 - 50.80 55.10 - 44.60 52.89 - 30.13
MWIV § MWI VETERINARY SUPPLY SEP 2.06 1.65 1.43 1.28 0.46 13.13 10.94 10.15 8.28 5.23 42.21 - 20.37 45.11 - 20.16 44.60 - 30.00 38.61 - 23.79 26.49 - 19.78
OMI † OWENS & MINOR INC DEC 1.87 1.65 1.21 0.81 1.09 7.86 6.58 5.06 3.89 4.19 32.25 - 20.13 36.67 - 23.27 29.68 - 19.90 23.49 - 18.31 22.39 - 17.47
PDCO [] PATTERSON COMPANIES INC # APR 1.79 1.70 1.70 1.52 1.44 5.34 3.60 2.64 4.42 3.45 28.34 - 16.08 37.78 - 15.75 40.08 - 28.32 38.28 - 29.61 53.85 - 33.21
PMC § PHARMERICA CORP DEC 1.39 0.17 (1.13) NA NA 4.57 4.35 3.97 NA NA 21.69 - 13.97 25.83 - 12.99 23.20 - 13.22 NA - NA NA - NA
PSSI § PSS WORLD MEDICAL INC # MAR 1.20 0.97 0.88 0.75 0.67 4.58 3.55 3.20 3.63 3.10 22.89 - 13.19 21.72 - 14.97 21.83 - 16.11 21.60 - 14.74 16.65 - 10.76
HSIC † SCHEIN (HENRY) INC DEC 3.47 2.82 2.65 2.08 1.87 10.65 8.83 7.40 6.05 5.51 56.92 - 33.55 63.62 - 32.08 63.45 - 45.82 54.08 - 42.82 45.93 - 32.70

AZN ASTRAZENECA PLC -ADR DEC 5.19 4.20 3.74 3.86 2.91 (0.70) (4.08) (4.21) 7.46 7.04 47.61 - 29.96 49.85 - 32.58 59.47 - 42.21 66.49 - 44.90 50.13 - 34.72
ELN ELAN CORP PLC -ADR DEC (0.32) (0.07) (1.42) (0.94) 1.23 0.43 (1.28) (1.45) (1.02) (1.18) 9.13 - 4.61 37.45 - 4.99 24.90 - 11.70 19.42 - 11.88 29.93 - 3.00
GSK GLAXOSMITHKLINE PLC -ADR DEC 3.52 2.59 3.75 3.74 2.84 (0.83) 0.14 2.97 4.09 2.28 43.47 - 27.15 54.64 - 31.02 59.98 - 47.49 58.40 - 50.03 53.80 - 44.17
NVS NOVARTIS AG -ADR DEC 3.70 3.59 2.81 2.98 2.63 19.94 17.22 16.83 8.54 8.43 56.42 - 33.34 61.30 - 41.80 60.36 - 51.19 61.60 - 51.72 54.71 - 45.63
TEVA TEVA PHARMACEUTICAL INDS-ADR DEC 2.29 0.81 2.54 0.72 1.73 2.82 (0.68) 4.42 1.47 4.76 56.88 - 41.05 50.00 - 35.89 47.14 - 30.81 44.71 - 29.22 45.91 - 26.78
VRX VALEANT PHARMACEUTICALS INTL DEC 1.11 1.25 1.22 1.35 1.55 (0.51) 2.41 3.52 3.14 1.31 15.50 - 9.26 14.90 - 6.65 26.48 - 13.20 28.28 - 14.51 27.28 - 13.74
J-This amount includes intangibles that cannot be identified.
The analysis and opinion set forth in this publication are provided by Standard & Poor’s Equity Research Services and are prepared separately from any other analytic activity of Standard & Poor’s.
In this regard, Standard & Poor’s Equity Research Services has no access to nonpublic information received by other units of Standard & Poor’s.
The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.

S&amp;P Pharma Industry Overview - 11252010

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Industry Surveys

November 25, 2010

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

Industry Profile ...................................................................................................... 8

Industry Trends ................................................................................................... 14

How the Industry Operates ............................................................................... 18

Key Industry Ratios and Statistics................................................................... 28

How to Analyze a Pharmaceutical Company ................................................ 30

CONTACTS: Comparative Company Analysis ......................................................... Appendix

Standard & Poor’s

Global Industry Surveys

Standard & Poor’s Industry Surveys

Generics look to impending branded patent cliff

Patent cliff represents a key driver

2 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

GENERICS DOMINATE US RX MARKET

PLANS FOR GENERIC USER FEES

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 3

FDA and generics industry have divergent motives

BIOGENERICS: US HEALTHCARE REFORM CALLS FOR A PATHWAY

4 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

MERGER ACTIVITY PICKS UP FOR GENERICS COMPANIES

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 5

6 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

Big Pharma eyes biotech to drive growth

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 7

Emerging markets drive global growth

8 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

US AND EUROPEAN PHARMA SALES SLOWING

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 9

These markets provide opportunities…

…as well as challenges and obstacles

10 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

Principal emerging markets

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 11

12 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

Major drugmakers engaged in emerging markets

DEMOGRAPHIC TRENDS REMAIN FAVORABLE

14 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

NEW STRATEGIES FOR GROWTH

FDA APPROVED 18 NOVEL DRUGS IN THE FIRST HALF OF 2010

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 15

RECENT NEW MOLECULAR ENTITIES APPROVED*  Victoza. Generically

Promise in the pipeline

16 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

DTC ADVERTISING SHRINKING

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 17

18 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

HIGH RISK, HIGH REWARDS

DRUGS’ PREDICTABLE LIFE CYCLES

REGULATION: FDA OVERSEES US MARKET

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 19

How new drugs enter the US market

Identifying and testing candidate drugs

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 21

22 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

REGULATION OUTSIDE THE UNITED STATES

INDUSTRY SURVEYS HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 23

PROHIBITIVE BARRIERS TO ENTRY

PRICING REFLECTS PRODUCT STRENGTHS, MARKET CHARACTERISTICS

24 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

AFTER PATENTS EXPIRE COMES THE GENERIC STAGE

The Hatch-Waxman Act

26 HEALTHCARE: PHARMACEUTICALS / NOVEMBER 25, 2010 INDUSTRY SURVEYS

S&P Pharma Industry Overview - 11252010

S&P Pharma Industry Overview - 11252010