Current state of the pharmaceutical industry – is there hope ... - BioNJ

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Dec 5, 2012 (4 years and 4 months ago)

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Jami Rubin


212
-
357
-
7536

Goldman, Sachs & Co.

jami.rubin@gs.com



The growing convergence of Pharma and Biotech





BioNJ Conference :



August 12, 2010


All market prices are as of August 9, 2010 close

Goldman Sachs Global Investment Research

2

Today’s agenda




Decade review: Pharma net loser; Biotech net winner




Challenges facing Major Pharma




Pharma headwinds now spilling over to Biotech




Valuation convergence between Pharma and Biotech



Goldman Sachs Global Investment Research

3

Pharma
28%
Diversified Healthcare
20%
Generic Pharma
5%
Biotech
12%
Managed Care
8%
MedTech
18%
CROs
1%
Supply Chain
8%
Major Healthcare sectors: 2010
Pharma
62%
Diversified Healthcare
15%
Generic Pharma
1%
Biotech
8%
Managed Care
4%
MedTech
7%
CROs
0%
Supply Chain
3%
Major Healthcare sectors: 2000
Major Pharma has become Minor Pharma

Significant loss of market cap from 2000
-
2010




Note: IPOs and spin
-
offs may distort comparability.




Source: FactSet


*Biotech’s growth excludes Genentech, Medimunne, and Chiron, which
were acquired between 2000 and 2010.


HC aggregate
market cap
shrank $283 bn,
attributable to a
reduction of
$592 bn in
Pharma

Goldman Sachs Global Investment Research

4

$918,346
$326,585
$
-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
2000
2010
Market cap ($'000)
Pharma
Over the last decade,

Pharma has been a big net loser…


Source: FactSet

Down 64%

Goldman Sachs Global Investment Research

5

$99,390
$144,106
$
-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
2000
2010
Market cap ($'000)
Biotech
…while Biotech has been a big net winner


Source: FactSet

Up 45%


*Biotech’s growth excludes Genentech, Medimunne, and Chiron, which
were acquired between 2000 and 2010.

Goldman Sachs Global Investment Research

6

Today’s agenda




Decade review: Pharma net loser; Biotech net winner




Challenges facing Major Pharma




Pharma headwinds now spilling over to Biotech




Valuation convergence between Pharma and Biotech



Goldman Sachs Global Investment Research

7

0%
5%
10%
15%
20%
25%
30%
R&D as % of sales
How did we get into this dilemma?

Rising cost of R&D

Source: Company data, Goldman Sachs Research estimates

Over $280 billion spent on R&D over last decade

Goldman Sachs Global Investment Research

8

How did we get into this dilemma?

Diminishing new product output

Source: FactSet

New product launches have been disappointing

Vytorin
Januvia
Zyprexa
Cymbalta
Humira
Simponi
Onglyza
Effient
Multaq
Savella
Bystolic
-
50
100
150
200
250
300
350
400
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Sales ($'000)
Quarterly sales post launch
Vytorin
Januvia
Zyprexa
Cymbalta
Humira
Simponi
Onglyza
Effient
Multaq
Savella
Bystolic
Source: Company data



Goldman Sachs Global Investment Research

9

0
10
20
30
40
50
60
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004*
2005*
2006*
2007*
2008*
2009*
How did we get into this dilemma?

Regulatory hurdles getting higher



Source: FDA


* *Beginning in 2004, these figures include new BLAs for therapeutic biologic products transferred from CBER to CDER

FDA NME approvals

Goldman Sachs Global Investment Research

10

How did we get into this dilemma?

Daunting patent cliff

2010
-
2014: $92 billion in sales coming off patent (1/3 of total)

Source: IMS Health

19
12
27
26
8
19
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
0
5
10
15
20
25
30
2009
2010
2011
2012
2013
2014
% of prior year's sales
Sales ($ billion)
2010
Aricept, Flomax, Taxotere
2011
Lipitor, Avair Diskus,
Plavix, Zyprexa, Levaquin
2012
Seroquel, Singulair, Actos,
Lexapro, Diovan, Geodon
2013
Oxycontin, Aciphex
2014
Nexium, Cymbalta,
Celebrex, Copaxone
Key product s in expiry years
Goldman Sachs Global Investment Research

11

-
5,000
10,000
15,000
20,000
25,000
30,000
1/95
11/95
9/96
7/97
5/98
3/99
1/00
11/00
9/01
7/02
5/03
3/04
1/05
11/05
9/06
7/07
5/08
3/09
1/10
11/10
9/11
7/12
5/13
3/14
1/15
11/15
Large Cap Pharma R&D Spend ($'000)
(20,000)
(15,000)
(10,000)
(5,000)
-
5,000
10,000
15,000
20,000
25,000
30,000
Net Innovation ($'000)
Net innovation
Lrg Cap Pharma
How did we get into this dilemma?

Declining R&D productivity: status quo or inflection point?

Note: Net innovation in a given year represents peak life cycle sales for each drug launched that year, less prior
year sales for each drug expiring that year.

BOOM PERIOD

LOST DECADE OF

INNOVATION

WILL PHARMA TAKE THE

RED PILL OR BLUE PILL?

Source: Goldman Sachs Research, FactSet, company data

Factor Xa’s

Alzheimers

HDL

Hepatitis C

Vaccines

Oncology

Obesity

Diabetes

HIGH UNMET NEEDS TARGETED

Reallocation of

capital?

R&D Spend

Poor capital allocation

Goldman Sachs Global Investment Research

12

How did we get into this dilemma?

Healthcare reform


increased government intervention



US government now pays for 50% of the $2.5 trillion in national health spending























Government share of national health spending (NHE)


Total versus pharmaceutical spending, 1965
-
2019E

0%
10%
20%
30%
40%
50%
60%
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Total spending
Pharma spending
Source: CMS National Health Expenditure (NHE), historical and projected.

Goldman Sachs Global Investment Research

13

How did we get into this dilemma?

Healthcare reform


increased government intervention



Worsening state of the European economies brings incremental pricing pressure














Remains a very fluid situation that is difficult to assess but represents a real headwind


Cited by several management teams during 2Q earnings calls, at least in 2010 and 2011


Reimbursement cuts could be magnified by reference pricing, parallel importation and
increased generic market share











0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Healthcare spending growth
Primary deficit
Primary deficit
Healthcare spending growth
German
Unification
Germany as an example of how
government deficits lead to decline
in healthcare spending growth

Source: Datastream, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research

14

How did we get into this dilemma?

Comparative effectiveness will lead to drugs based on
performance and outcome


Shift from surrogate endpoints (i.e, LDL, Hba1C) to clinical outcomes (i.e,
heart attacks, mortality)



Cholesterol drugs (Vytorin has been significantly hurt by lack of outcomes)


Diabetes drugs (need cardiovascular outcomes trials; has slowed the development of
PPAR gammas, etc.)


Oncology drugs must show overall survival benefits


Goldman Sachs Global Investment Research

15

Today’s agenda




Decade review: Pharma net loser; Biotech net winner




Challenges facing Major Pharma




Pharma headwinds now spilling over to Biotech




Valuation convergence between Pharma and Biotech



Goldman Sachs Global Investment Research

16

But now, many headwinds that challenged Pharma
are creeping over to Biotech

Pharma

FDA

EU Pricing

Generics

HC Reform

Rising R&D
cost

Declining
R&D
productivity

Patent cliff

Source: Goldman Sachs Research

Biotech headwind
(current or near
-
term)

Goldman Sachs Global Investment Research

17

Pharma headwinds spilling over to Biotech



Generics:
FDA’s approval of Momenta’s generic Lovenox is reflective of what the FDA is
willing to do with generic biologics, in our view


truncating biotech product “tail.”







Healthcare reform:
US legislation legalizes a biosimilar pathway


EU Pricing:
Major biotech companies all acknowledged seeing increasing pricing EU
pressure (except for orphan drugs).


Patent cliff:
Effectively, GILD’s entire revenue base is small
-
molecule and exposed to
generics by 2018
-
2021. Biosimilar pathway now also exposes all biologic drugs.


FDA:
Longer approval times (REMS, AdComs), longer and bigger trials, tougher hurdles
for supplementary indications


Source: Goldman Sachs Research estimates, Company data.

Product
Type of Drug
Key Patent Expiration
Generic Risk
Enbrel
Fusion protein
2012
+
Avonex
Protein
2013
++
Cerezyme
Protein
2013
++
Epogen
Protein
2013
+++
Neupogen
Protein
2013
+++
Copaxone
Complex mixture
2014
++++
Fabrazyme
Protein
2015
++
Humira
Antibody
2016
+
Rituxan
Antibody
2018
+
Goldman Sachs Global Investment Research

18

Today’s agenda




Decade review: Pharma net loser; Biotech net winner




Challenges facing Major Pharma




Pharma headwinds now spilling over to Biotech




Valuation convergence between Pharma and Biotech



Goldman Sachs Global Investment Research

19

17.3x
9.0x
27.3x
13.5x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
Jan
-
07
Mar
-
07
May
-
07
Jul
-
07
Sep
-
07
Nov
-
07
Jan
-
08
Mar
-
08
May
-
08
Jul
-
08
Sep
-
08
Nov
-
08
Jan
-
09
Mar
-
09
May
-
09
Jul
-
09
Sep
-
09
Nov
-
09
Jan
-
10
Mar
-
10
May
-
10
Jul
-
10
Pharma
Biotech
Headwind spill
-
over leads to Pharma
-
biotech
valuation convergence




AMGN:

15.5x to 10.3x

BIIB:

19.3x to 11.4x

CELG:


53.3x to 17.4x

GENZ:

19.7x to 18.9x

GILD:

25.4x to 9.3x

Up on take
-
out

speculation

Source: Factset data

Goldman Sachs Global Investment Research

20

Pharma acquisitions in biotech is one of the drivers
behind the convergence



Pharma companies have been hungry for biotech assets over last few years
to offset patent expirations.


Sanofi Aventis’ speculated bid for Genzyme could spark another potential
round of M&A as unencumbered and quality assets become ever rarer


Further biotech acquisitions would be one “saving grace” for biotech
valuations that Major Pharma does not have


However, Major Biotech is now emerging as acquirers themselves, not
potential targets as was seen a few years ago

Deal
Acquirer
Chiron
Novartis
2/9/2005
$5.7 bn
Icos
Eli Lilly
10/17/2006
$2.49 bn
MedImmune
AstraZeneca
4/23/2007
$15.2 bn
Genentech
Roche
7/21/2008
$46.8 bn
ImClone
Eli Lilly
10/6/2008
$5.76 bn
Medarex
Bristol Myers
7/22/2009
$2.07 bn
Announcement
date
Transaction size
Source: Factset data

Deal
Acquirer
Abgenix
Amgen
12/14/2005
$2.10 bn
Myogen
Gilead
10/2/2006
$2.20 bn
Pharmion
Celgene
11/18/2007
$2.5 bn
CV Therapeutics
Gilead
3/12/2009
$1.3 bn
Abraxis
Celgene
6/30/2010
$3.60 bn
Announcement
date
Transaction size
Goldman Sachs Global Investment Research

21

Over $100 bn in Biotech market capitalization has
been acquired since 2005

Source: Company data, FactSet.

Companies acquired by biotech since 2005
Companies acquired by pharma since 2005
* Companies acquired in 2009
Note: Market cap of acquired companies based on undisturbed stock price prior to announcement of transaction
Public Biotech Companies (>$2.0bn in Market Cap)
$86.2
$56.6
$42.8
$28.2
$15.6
$15.3
$9.4
$9.0
$8.3
$6.5
$5.6
$5.4
$5.2
$4.9
$4.5
$4.3
$4.2
$3.4
$3.4
$3.3
$3.1
$2.7
$2.2
$0
$20
$40
$60
$80
$100
Genentech*
Amgen
Gilead
Sciences
Celgene
Biogen Idec
Genzyme
Serono
MedImmune
Vertex
ImClone
Millennium
Actelion
Cephalon
HGSI
Alexion
Dendreon
Chiron
Elan
MGI
OSI
United
Therapeutics
Amylin
New River
Public Biotech Companies (<$2.0bn in Market Cap)
$2.1
$2.1
$1.9
$1.8
$1.8
$1.6
$1.5
$1.3
$1.3
$1.1
$1.1
$1.1
$1.0
$1.0
$1.0
$0.9
$0.9
$0.9
$0.8
$0.8
$0.7
$0.7
$0.7
$0.7
$0.7
$0.7
$0.7
$0.6
$0.6
$0.6
$0.6
$0.6
$0.5
$0.5
$0.4
$0.4
$0.4
$0.4
$0.4
$0.3
$0.3
$0.3
$0.3
$0.2
$0.2
$0.2
$0.2
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
BioMarin
Regeneron
Pharmion
Onyx
ICOS
Abgenix
Myogen
Medivation
Cubist
Seattle
Genetics
Medarex*
Vicuron
ID Biomedical
Transkaryotic
Therapies
Viropharma
Cougar *
Isis
PDL
Cambridge
Antibody
CV Thera.*
Genmab
Exelixis
Theravance
Alnylam
Allos
Vivus
InterMune
Halozyme
AMAG
Tanox
Eyecare
Bone Care
Geron
Sirna
Enzon
Medicines
Co.
Zymogenetics
Affymax
ImmunoGen
Orexigen
Arena
NeuTec
AnorMED
Xenoport
CoTherix
Ligand
GTx
Goldman Sachs Global Investment Research

22

Take
-
home questions



What will pharma and biotech multiples look like going forward?


We think they are likely to continue to converge between pharma, biotech, and generics as the once
distinct commercial lines between these industries blur


What will the M&A outlook be for biotech assets? Who will be the acquirers (Major
Pharma, Major Biotech)?


What will the spend be to support biosimilars? Who will participate?


Clinical trials, sales/marketing promotion suggest participants need significant capital


How high is the hurdle in biosimilars for more complex biologics?


We see antibodies (like Rituxan, Avastin, Herceptin, Remicade, Synagis, Humira) and fusion proteins
(like Enbrel) as the least at
-
risk, as they are extremely difficult to characterize


Will the FDA pendulum (increasing safety focus, at times at expense of efficacious
drugs) swing back the other way?


In our view, FDA’s staunch safety stance may soften but unlikely to return to that of Pharma’s hey day


Will R&D productivity reach an inflection point upwards?



Goldman Sachs Global Investment Research

23

Price targets, time periods, risks, and
methodologies

Source: Goldman Sachs Research estimates.

Ticker
Ratings
Price as of
8/09/2010
Price Target
Timeframe
Price target methodology
Risks
Pharmaceuticals, Large-cap - Rubin
ABT
Neutral
$50.88
$58.00
12 months
P/E
Upside:
- Successful business development reaccelerates growth profile
Downside:
- Competitive risks to Humira growth
- Longer term healthcare reform
BMY
Buy
$26.51
$30.00
12 months
P/E
Downside:
- Pipeline failures (e.g.apixaban, belatacept)
- Failure to find sufficient number of business development deals to grow past patent cliff
JNJ
Neutral
$60.05
$60.00
12 months
P/E
Upside:
- Pharma outperformance
Downside:
- Delays in key product launches
- Downward earnings revisions
LLY
Sell
$36.96
$32.00
12 months
P/E
Upside:
- Success of midstage pipeline, which includes many high risk, high reward candidates that are
on the cutting edge of science
- Management's ability to cut costs fast enough to offset some of the patent cliff
MRK
Neutral
$35.36
$40.00
12 months
P/E
Upside:
- Greater expected cost structuring and cash return to shareholders
- Pipeline successes
Downside:
'- Potential to lose to JNJ in arbitration over rights to Simponi & Remicade
- Results of IMPROVE-IT
- Phase III TRA data
- Failure to successfully integrate Schering resulting in disruption in R&D productivity
PFE
Buy
$16.42
$19.00
12 months
P/E
Downside:
- Management's inability to achieve cost cutting goals
- Failure to commercialize pipeline assets
- Overpaying for business development deals in attempt to cover the 2012 revenue "gap"
Goldman Sachs Global Investment Research

24

Analyst certification



I, Jami Rubin, hereby certify that all of the views expressed in this
report accurately reflect my personal views about the subject
company or companies and its or their securities. I also certify that
no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed in this
report.

Disclosures

August 10, 2010

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are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report

ad
ding or reiterating an Investment List membership.

Coverage groups and views:
A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/re
sea
rch/hedge.html. The
analyst assigns one of the following coverage views which represents the analyst’s investment outlook on the coverage group
rel
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Attractive (A).

The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and
/o
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The
investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or va
lua
tion.

Cautious (C).

The investment outlook over the
following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.



Not Rated (NR).
The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in

an advisory

capacity in a merger or
strategic transaction involving this company and in certain other circumstances
. Rating Suspended (RS).

Goldman Sachs Research has suspended the investment rating and price
target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or

po
licy constraints around publishing, an investment rating or
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ied

upon.
Coverage Suspended (CS).

Goldman Sachs has
suspended coverage of this company.
Not Covered (NC).

Goldman Sachs does not cover this company.


Not Available or Not Applicable (NA).

The information is not available for
display or is not applicable.
Not Meaningful (NM).

The information is not meaningful and is therefore excluded.



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