Eight Thoughts On Biosim

SCB Biosimilars Conference Call

December 9, 2008

Ronny Gal

Specialty Pharma Analyst

SEE DISCLOSURE APPENDIX O

F THIS REPORT FOR 

DISCLOSURES AND ANALYST CERTIFICAT
Biologics: Too Big To Ignore

28 Molecules make up 87.2% of value of biologics

242928

0.2%

12.6%

87.2%

$112 billion

$100 million 

- $1 billion

Peak Sales:

G

Brand PeaN

a

m

e

> 

A

vastin 

Enbrel Re

micade 

Humira Ritux

an 

H

erceptin 

Lantus Epogen/

Procri 

Neulasta N

o

v

olog 

Erbitu

x

Aranesp Reco

mbinate

Lucentis 

Pea

81 molecules

$1 Billion +

< $100 

million

Regulation Of Commoditization process Is N

Regulation Of Commoditization process Is 

N

ote: 81 molecules in

clud

e all products appro

ved under BLA and 

biologics appro

ved under NDA. Peak sales 

models (SCB 

or consensus, as a

v

ailable Source: 

F

DA, Tho

mpson, Zachs, Bernstein estimates and ana
Comp

Ready, SetÖFor A Marathon, Not A Sprint

lexity 

P

P

Regulatory 

Approval

Regulatory 

Approval

US Legislation US Legislation

Source: Bernstein estimates and analysis
Eight Thoughts On Biosimilars

!US legislation: Details Matter!The FDA: The unknown regulatory hurdle!Market structure: PBM as the king-makers!Costs: Time and money, capacity at a pre!Targets: Now, Later and Never!Market share: Benchmarks and wrinkles!Market participants: The usual and unusu!Impact on the Generic Group: Is It All Wo
US Legislation: Watch For Details To DetStructure

Approval 

Requirements

Approval 

Requirements

ï Agree

ment: FDA will determine requ

ï Definition of Biologic still open (vaccï Innovators want to tack on process rdocs, clinical trial, all patent resolutioï Generics want requirements for time

dates, citizen petition)

Approval 

Standards

Approval 

Standards

ï ëBiosimilarí standard largely agreed 

ï Will there be an interchangeability st

ï Will there be Bio-better standard?

ï Sill unclear what approval means, exnaming)

Data exclusivity 

periods

Data exclusivity 

periods

ï More t

han 5 years, less than 12. call 

ï Fair exclusivity for second generatioï Will there be an exclusivity for first t

Patent resolution 

pathway

Patent resolution 

pathway

ï Both sides need patent resolution ahï BUT, topic is poorly understoodï Current ideas f

or pathway look very 

ï Could delay p

athway creation

Source: Bernstein estimates and analysis
The FDA ñ Mixed Signals

Agency is clearly interested in Biosimilars

Engaged

ï Involved in debateï Proactively divided reviewing responsibilities

hGH ï Approved under 505j, may have received interchangea

LMWH ï FDA may approve without pivotal trials, EMEA regulate 

mAb ï FDA staffers do not see big difference from other molec

But record shows agency usually takes conservative road, afor conservative choices here

AMPh /

Premarin / LMWH

ï The FDA has shown inability to resolve citizen petition 

Myozyme ï Significant requirements due to change in facility

Cautionary

Stories

ï Eprexï Raptiva (Xoma to DNA facility)ï Insulin Merval (EU ñ PK/PD)

Complex 

mechanisms

ï What you donít knowï Multiple effects

Source: Bernstein estimates and analysis
The FDA: What Will Influence Approvabil

Multiple 

innovators

Sing

innova

Favorable 

Clear mechanism 

of action 

Poo

Unders

Not Immunogenic Immuno

Surrogate 

markers No surro

Acute use Chroni

Will The FDA Accept EU data ? Will The FDA Accept EU data ?

Source: Bernstein estimates and analysis
Market Structure ñ PBM As The King-MakTakes All Markets?

Patient

Physician

1

Patient visits doctor, 

diagnosed with MS, 

prescribed Avonex

2 Prescription 

intercepted, or reported

3

The call: Doc, have 

you considered 

Mylan-nex?

4

Let me 

patch yo

through t

Mylan

5 Mylan MSL visit

6

Doc 

prescribes Mylan-nex

More PBM 

clout with 

docs

Requires better 

technology

Capital investment, 

brand, ongoing R&D

Note: conceptual example. Source: Bernstein estimates and analysis
Mammalian faci

1 Chemistry, Manufacturing and ControlsSource: Corporate reports and Bernstein estimates and analysis

Factory

CMC

1

Clinical trials

Regulatory Affairs

IP and litigation

Initial marketing

Total

30

40

60

50

196

8 8

USD, Millions

Factory

CMC

1

Clinical trials

300

40

60

USD, Millions

Costs (I): Not A Low Cost Proposition

Bacterial facility
Costs (II): The CapEx Dilemma

Building mammalian capacit

y makes CFO uneasy

ï $420M upfront: $300M to build, $30M/yr while in trials * 4 yea

X (risk of approval)+ (risk of FDA or court delay*$30M/yr)

Outsourcing or sharing capacity is relatively attractive ï Global peak demand f

or Herceptin: 500kg/yr, Enbrel: 400kg/

ï Can be achieved in ~20,000L production facilityï Modern facilities at 80,000L

180 kg

(1.5 mg /L /Batch)

2-3 g/L

300 kg

(2.5 mg /L /Batch)

5-7 g/L

720 kg

(6 mg /L /Batc

h

Current 2010 2015 

Large Scale 

(20,000L* 6 batches

/ Yr)

Mid Scale 

(late clinical) 10 g/L 

Small Scale

(early clinical) 5-7 g/L 10 g/L 20 g/L 

Source: Lonza; industry e

xperts, SCB estimates and analysis
Targets: Where Are They In Development

INFb INFa

Insulin

(Gen 1)

Factor 7 

Enbrel TNFa Ab Rituxan

Herceptin

Avastin

Conception Conception Pre-clinical Pre-clinical Clinical Clinical

hGH

(delivery)

EPO

(modified)

Insulin

(modified)

G-CSF

(modified) Factor 8 

Derailed / 

Delay

e

d

?

?

?

?

Vaccines 

Source: Market discussions, SCB estimates and analysi

s
Targets: Antibodies On The Horizon

Development products take seven yearsï hGH: Sandoz project started 1996, clinic in 2000, submitted ï EPO: Sandoz project started 1998, clinic in 2002, ready for sStart now to support í15-í20 productsï Assuming multi-year litigationï Enbrel progra

ms running, turning to antibodies

EMEA seeking industry consult

a

tion to establish guidelines

ï ìthere is a reason we are doing itîRegulatory experience with antibodies expandingï Bulky, complex but..ï Both industry and regulatory gathering expe

rience

Match innovators process or go for a breakthrough?... Or Boï The Biosimilar dilemma

Development for í15-í20 window begins now Development for í15-í20 window begins now

Source: Bernstein estimates and analysis
Market Share (I) ñ What Is The Right Benc

3%

14%

36%

59%

70%

85%

Generic/biosimilar market share, Percent

EPO 

Biosimilar 

GRD

(current)2

Therapeutic 

substitution 

(Lipitor)3

Diprivan

(propofol) 

Anticonvulsant

(Lamictal) 

Actiq 

(fentanyl) 

hGH 

Biosimilar

US 

(current)1

1 Market share for Omnitrope and Tev-tropin2 Market share for Binocrit, Abseamed, Epoetin alfa Hexal, Retacrit/Silapo in the ESA market3 Therapeutic substitution impact from pravastatin and simvastatinSources: IMS Health; Potomac Research; Bernstein estimates and analysis
Market share (II) ñ There is always a wrin

Long duration of treatment

Public Payor

Private Payor hGH

INFa/b

EPO (ESRD)

EPO (Cancer)

TNF Ab

AvastinHerceptinRituxanFertility

Clotting factorsInsulinERT

Immunogenic, poorly understood 

Strong patientcompany relationship

Margins only on designer insulin

Tough to make

Source: Bernstein estimates and analysis
Market Participants (I) ñ The Usual Suspe

Disclosed 

R&D 

progra

m Manufacturing

Regulated 

markets Bio- Innovative 

regulatory

Innovativ

marketing

SandozTevaMylanHospiraWatsonStadaReddy

Source: Bernstein estimates and analysis
Market Participants (II) ñ The Unusual Su

Disclosed R&D 

program

Regulated 

markets BioManufacturing Innovative regulatory Inno

mar

Motivation 

Entry to Biologicals? Merck

Capacitypla

y

?

LonzaBIIBHGSI

Compete with clients?Bio-betters?Dual strategy?

Bio-betters as tie breakers ? Bio-betters as tie breakers ?

Wyeth

Source: Bernstein estimates and analysis
Is It All Worth ? (I)

Contribution to generic EBITBA per $1B branded sales

Conservative scenario Moderate scenario 

$1B $1B 

20% 50% 80% 70% 

Biosimilar revenue ($M) $160M $350M Marginal SG&A/R&D (% rev)Biosimilar EBITDA ($M)

25% 27.5% 12.5% 14% $104M $205M 

Notional branded salesBiosimilar share (%)Biosimilar price (% of BRx)Biosimilar COGS (% rev)

Source: Bernstein estimates and analysis; A ëback of the envelopeí analysis
Is It All Worth It? (II)

Contribution to generic EBITBA

29%

Conservative scenario

$6.64B$3.36B$2.88B$3.74B$5.99B$7.95B20%80%

$4.89B

25%12.5%$3.06B$30.56B$10.65B

Moderate scenario

$6.64B$3.36B$2.88B$3.74B$5.99B$7.95B

50%70%

$10.69B

27.5%

14%

$6.25B

$30.56B

59%

$10.65B

Biosimilar revenue ($B) Biosimilar EBITDA ($B)Branded sales1-EPO-hGH-Interferon alfa-Interferon beta-Neulasta/Neupogen-EnbrelTotal BRx sales ($B)Biosimilar share (%)Biosimilar price (% of BRx)Biosimilar COGS (% rev)Marginal SG&A/R&D (% rev)Generic industry EBITDA ($B)2Percent industry EBITDA

1 SCB 2015 estimates2 Estimated 2009 EBITDA for Teva (incl. Barr), Mylan, Watson, Sandoz, Ranbaxy, Reddyís, Actavis, Stada, Ratiopharm, Perrigo, Par, SSource: Bernstein estimates and analysis
Disclosure Appendix

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SURE

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orecasts of relativ

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ers

a

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h

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nges -

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g

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utp

erform: Stock

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utpace t

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e market index b

y more t

h

a

n 15 p

p in t

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e year

a

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Mar

k

et-P

erform: Sto

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arket ind

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Underperfor

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erform

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ce of the m

ark

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a

•A

s of 10/09/2008, Ber

n

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s

w

ere distribute

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ollow

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utp

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u

y - 53.6

%; Mark

Underperfor

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aboratori

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ats

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urrently ma

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12-Month Rating History

a

s of 12/2/2

0

0

8

A

G

N -

O (IC) 3/2/2006

B

R

L -

O (

UG) 5/9/2007

CEPH -

M (

D

G) 8/15/2006

F

RX -

O (

U

G) 10/16/2008, M (IC) 3/2/2006

MYL -

O (

UG) 11/15/2007

SEPR -

M (IC) 3/2/2006

TEVA -

O (IC) 3/7/2006

W

PI -

M (IC) 3/7/2006

Rating Guide: O -

Outp

erform, M -

M

ark

et-P

erform, U -

Underp

erform

Rating Actio

ns: IC - Initi

ated Cov

era

g

e, DC -

Dropped Cov

era

g

e, UG -

Upgrad

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D

o

w

n

gra

d

e
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A

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