Money Talks: How the Financial Community Evaluates Our PerformanceWhat are the Hurdles of the Future

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Money Talks How the Financial Community
Evaluates Our Performance--What are the Hurdles
of the Future

• 2000 PBIRG Annual General Meeting
• Naples, Florida - May 24, 2000
• Sushant Kumar, Ph.D.
• Mehta Partners LLC
• E-mail kumar_at_mpglobal.com

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Mehta Partners Mission

• To lead in worldwide biopharmaceutical
• investments by maintaining an in-depth
• understanding and global perspective on
• the industry, and to work closely with
• investors and senior managers to enhance
• their strategic choices

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Mehta Partners

• Mehta Partners offers
• Institutional Advisory (IA) Timely insights,
  perspectives, and several investment
  recommendations annually to institutional money
  managers to act upon, rather than react to.
• Asset Management (AM) Fund management with
  focused, long term and near term investments in
  the global bio-pharmaceutical and healthcare
  sector.
• Strategic Advisory (SA) Strategic and financial
  advice to senior industry management by serving
  as an ongoing extension of their team and, when
  appropriate, concluding transactions for them.
• We fulfill our mission and serve the needs of our
  clients by
• building long-term relationships,
• delivering rigorous and insightful services in an
  understated style, and
• fostering team spirit and open communications.

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Biopharmaceuticals A Good Business

• Favorable social/economic environment
• Aging population
• Dynamic emerging economies around the world
• Cost containment and managed care systems
• Drugs to represent the most cost effective
  healthcare option
• Healthcare relatively insolated from business
  cycles

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Pharma Industry is Relatively Young
Only 2 Generations Since Penicillin

• Serendipity still plays an important role
• New science beginning to yield drugs that go
  beyond treating just the symptoms
• 1,000 salespeople in 1970s to 5,500 today
• Social services and reimbursement constrained due
  to inefficiencies of the healthcare system

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Industry could look very different in 2010

• Definition of diseases target driven (e.g.
  GPIIb/IIIa receptor, not cardiovascular)
• New drugs in months for tens of millions, not 10
  years and 100s of millions
• Predictive therapies, drugs cost-benefits proven
• Educated consumer, internet
• Human contact only at third stage

Data? Analysis ? Information ? Knowledge ?
Perspective ? Decision
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Some Fundamental Questions First

• How will science advance?
• How critical will scale become?
• How will physician prescribing be influenced?
• Who will pay for new medicines?
• How will expectations evolve in the financial
  markets?

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• Critical Skill Set Still Remains the Same
• Research (R)
• Development (D)
• Marketing/Manufacturing (M)

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What is on the Horizon?

• R Substantial tool kit will be required for
  research to expedite discovery and ensure broad
  patents. Assembling the tool kit will be costly
  but once assembled, R costs per molecule will
  decline.
• D Development will be less expensive and less
  risky as science becomes more predictive.
  Regulators become partners in the process.
• M Marketing will require a less intense
  onslaught as consumers get connected and better
  informed, regulators accelerate many more new
  drugs for sub-patient populations, and 6000 rep
  sales forces become unnecessary.

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As a Result, In R

• Big companies will continue to internalize all
  research tools
• Smaller (non-technology) companies will use
  alliances or Contract Science Organizations
  (CSOs) to efficiently access all tools
• CSOs with comprehensive discovery skills will
  emerge

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As a Result, In D

• Big companies will pay larger for better
  understood early stage programs
• Wall Street will reward Biotech companies with
  early stage (but high quality) pipelines
• CSOs / CROs will help guide clinical/
  pre-clinical development of Biotech companies

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As a Result, In M

• Smaller companies will choose to go alone more
  frequently
• Big Pharma Big Pharma co-promotion alliances
  limited by the frequency of block-busters
• Emerging markets will become much more important

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Cost Per Marketed Drugin 2010 Compared to Today

• R ? - growing tool kit increases efficiency
• (costs are already declining)
• D ? - targeted sub-populations, better
  understood targets
• M ? - predictive therapies,
• informed consumer

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Key To Success

• Understanding the drivers of market value
• Capitalizing on explosive scientific progress
  genomics to miniaturization - reinventing the
  development and marketing paradigms
• Questioning everything seeking value

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Common Goal
The Creation of Value Turning scientific success
into financial success
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The Global Biopharmaceutical IndustryMarket
Value is the Currency of Measure
12/31/97
08/31/99
August 31, 1999 Rank 1. Merck 2. Pfizer 3.
Johnson Johnson 4. Bristol-Myers 5. Novartis 9.
Schering-Plough 15. American Home Products 16.
Takeda 21. Pharmacia Upjohn 40. Chiron 50.
Kyowa Hakko . Millennium . Affymetrix Top 50
companies Next 230 280 Global companies
Market Value ( Million) 130,443 97,892 88,471 94
,250 111,919 46,699 49,648 24,988 19,329 2,920 1,9
34 434 695 1,345,377 820,050 1,541,464
Market Value ( Million) 160,126 148,527 141,199 1
39,845 105,056 77,787 55,289 44,003 26,648 5,929 3
,379 1,721 1,952 1,903,747 124,426 2,028,243
Note Ranking is below Top 50 Source Mehta
Partners
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How to Value an Organization

• Develop market value ratios to
• current market share
• future market share
• pharmaceutical RD employees pharmaceutical
  RD spending

Going Beyond the Traditional Valuation Measures
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Valuation Measures for Timely Selection
Note Data as of August 31, 1999 Source Mehta
Partners
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Company Ranking by Market Value
Source Mehta Partners
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Worldwide Pharmaceutical Market
7
7
709
US Billion
7
506
7
9
6
294
7
337
294
275
257
236
Source IMS, Mehta Partners
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The Creation of Value

• The rise of a companys stock market position
• will reflect
• the rise of its business position

Focus on Market Share
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Who is Gaining Market Share?

• How do we quantify the relative value of the
  market share?
• How do we go beyond the near-term (more
  obvious) projections and achieve a better
  perspective into the future?

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Financial Valuation Measures

• Price-to-sales multiple
• Price-to-operating profits multiple
• Price-to-earnings multiple
• Price-to-cash flow
• Price-to-book value