M

1
MA Pharmaceuticals
PBIRG 2001 Annual General Meeting May 23,
2001 Memphis, TN
Roger Longman Windhover Information Norwalk CT
06854 203-838-4401
2
Consolidation Must Be Seen in a Broader Context
of...

• Pipeline productivity
• Prices for late-stage in-licensing
• Strategic myopia

3
The biggest and most important industry deals
generally stem from a problem of productivity.
4
The Pfizer Situation1999

• The Warner-Lambert Lipitor co-promotion
• 205mm upfront, milestones 50 of ongoing costs
  one of three quids
• Years 1-7, Pfizer gets 44.5 of revenues if
  baseline sales achieved 31.5 years 8-10
• W-L can exit at year 6 for any reason at year 4
  for change in control (Pfizer gets 75 of what it
  would be otherwise owed)
• Losing 25 of ones share of the biggest drug in
  the world is a big number!
• Warner could leverage its year 6 exit option for
  another drug, particularly since it had begun to
  lose confidence in eletriptan.

Source Windhovers Strategic Transactions
Database
5
Revealing the Real Downside of the Lipitor Deal

• If Pfizers own pipeline doesnt produce, what
  will it do to supplement its 25 of the biggest
  drug in the world?
• The Trovan disaster
• Pfizers late-stage pipeline problems of 99
• Droloxifene (dropped for breast cancer in phIII)
• Darifenacin (dropped for irritable bowel in
  phIII)
• Zopolrestat (dropped for diabetic neuropathy in
  phIII)
• Eletriptan (80mg dose non-approvable)

Source IN VIVO, November 1999
6
Pfizer Would Have Trouble Supplementing Pipeline
with New Co-Promotions

• Few new blockbuster products available that can
  make up for its pipeline losses
• Unclear the available late-stage quids it can
  offer to a partner
• Eletriptan and inhaled insulin both partnered
  leaving ziprasidone--now Geodon, but at that
  time, as Zeldox, somewhat problematic thanks to
  its 1998 non-approvable letter

Source IN VIVO, November 1999
7
With No Other Choice, Pfizer Reverses Course

• Negotiates for acquisition of Searle
• Launches hostile bid for Warner
• Downsides
• Hurts status as partner of choice
• Must create long-term success through
  consolidation without damaging short-term
  performance--when there are few earlier models of
  success
• Pfizer itself hasnt done significant previous
  pharma acquisitions

Source IN VIVO, November 1999
8
The Situation 2001

• Pfizer 30bb in sales
• Meeting earnings targets thru consolidation
  synergies
• Less clear which new drugs will provide dramatic
  sustained growth
• A few clinical disappointments (Agourons cancer
  drug)
• Major new co-promotions signed by competitors
• Novartis Zelmac goes to Bristol Celltechs
  CDP-870 to Pharmacia
• Several companies dropped out of Spiriva bidding
  due to BIs insistence on a short-term deal
• Rumors of next acquisition already flying

9
Pfizers Situation is Big Pharmas Situation

• Near term pipeline gaps
• Harvest of genomics still years ahead
• But increasing pressures on pricing of current
  products worldwide
• Fear that the Third World price reductions will
  come to the US
• Medicare drug benefits
• Increasing dependence on US market
• Meanwhile Wall Street is demanding double-digit
  earnings growth
• The hostile threat

10
MA solves the most important of these problems,
at least in the near term, through cost-savings.

• The three-year solution.

11
MA Activity in Pharma
Source Windhovers Strategic Transactions
Database
12
But Most Big Pharma Consolidation Does Little
Else Beyond First Three Years

• Mergers fuel marketing arms race, do not clearly
  increase marketing productivity
• Marketing spend at largest companies creeping up
  to 40 of sales
• No clear RD productivity gains from larger
  budgets
• No top executives seriously argue that deals are
  RD driven
• Rarely alter total pipeline prospects
• Companies with rich pipelines too expensive to be
  taken over

13
Then again, it aint easy to find new products
any other way, either.
14
The JJ ModelBuy Mid-Sized Underexploited
Pipelines

• Centocor (7/99) 4.9bb acquisition (Source HQ)
• ReoPros value 1.25bb (5 x 99 est. sales of
  480mm) x 50 (since Lilly takes 50 of sales)
• Retavases value 770 8.5 x estd 99 sales and
  2.4 x price Centocor paid Roche 18 mos. earlier
• Remicades value 2bb (15 x estd 99 sales 7 x
  estd 285mm 00 sales approved only for Crohns
  disease--but data supports approval for RA)
• But JJ was right on Remicade 500mm sales 2000
  340 increase over 1999.
• Same with Alza? (4/01) 13.1bb--21x sales
• Figures 40 growth for top three products under
  JJ (Concerta, Ditropan, Doxil330 of total
  607mm product contract sales)

15
But most companies arent interested in niche
products.

• So they pay MA prices for in-licensed products.

16
The Increasing Cost of Late-Stage Deals
Source Windhovers Strategic Transactions
Database
17
Bigger and Riskier Deals

• Novartis/Bristol on Zelmac vs. Pfizer/Warner on
  Lipitor
• Bigger relative economics
• two quids vs. one quid similar cash lower
  royalties
• For smaller-market drug
• 2-4bb in IBS vs. 8-10 bb in cholesterol
  lowering
• With less available data (one Zelmac ph III trial
  complete, one ongoing vs. all Lipitor ph III
  trials complete)
• Merck KGAA/GlaxoSmithKline on Paxil follow-on
  EMD-68843
• Ph II product with no superior efficacy data

Source Windhovers Strategic Transactions
Database
18
Increasing Deal Values
Source Windhovers Strategic Transactions
Database
19
Increasing Competition for Important Late-Stage
Products from Big Biotech

• Theyve been living on the edge for years.
  Were concerned about risks in trials,
  manufacturing, the marketplace. They obsess less
  about these risks. And the companies with a
  greater tolerance for risk will overtake those
  companies doing things the old fashioned
  way.--Sr. Pharma Exec.
• Genentech
• OSI, Actelion (bosentan and tezosentan),
  Cor/Schering
• Amgen
• Praecis, Immunomedics, Synergen
• ImmunexAbgenixs EGFR inhibitor
• BiogenElans Antegren

20
The size can create co-promotion partner of
choice idea is a myth!

• In part because product lines of the mega-merged
  companies are too wide to avoid internal
  competition with in-licensed product.

21
Whos Got the Leverage?

• Mid-sized biotech-based drug companies
• Growth is easier for smaller companies
• Easier to grow 20 annually on 500mm in sales
  than 10 on 20bb in sales
• Wider variety of development choices than Big
  Pharma
• Dont need to limit themselves to 1bb products
• Unafraid of large molecules
• Similar access to discovery resources and
  probably greater ability to integrate them into
  RD process
• Big Pharma
• Money always talks

22
Squeezing the Traditional MiddleSell-Out or
Bust-Out

• Pipeline problems of Big Pharma without the cash
• Selling out is easiest and can be lucrative
  BASF, DuPont
• Bust out is expensive and risky
• PG tries to buy Warner/AHP--began 50 price
  decline, ouster of CEO
• Abbott/BASF
• Difficult to cut costs in Europe
• One main clinical candidate (D2E7 see
  comparative value of Pharmacia/Celltech)
• Major ongoing costs (375-400mm in interest
  expense which is half estimated peak sales for
  D2E7)
• But Abbott needed European presence, pipeline,
  and large-molecule capacities

23
Acquisition that Works

• Reinvention
• Financial sophistication
• Strength adds strength

24
Novartis Nearly New

• Marketing is almost completely new
• Most top corporate marketing execs new to
  organization
• Thomas Ebeling, Andrew Kay
• Many key country/local marketing managers
• Paolo Costa, Kurt Graves (US), Adrian Adams (UK),
  Giacomo di Nepi (Italy), Masahiro Michisuji
  (Japan)
• New global branding religion
• Diovan up 54--early evidence of renewed effort
• RD still largely Sandoz
• But major renovation of phase III IV efforts
• With a huge dollop of good luck (6 of 7 ph III
  products reached target profiles Zelmac,
  Starlix, Gleevec/Glivec
• Original thinking around pricing Glivec/Gleevec
• But all for naught if launches underperform
• Particular questions on Starlix

SOURCE IN VIVO 1/2001
25
Roche/Genentech

• 60 acquisition in 1990 leaves independent,
  infuses cash, but takes ROW marketing rights
  option to acquire remainder at capped price
• Now accounts for gt10 of Roches total sales
• Reacquisition and Divestiture
• Buys remainder (33) at 82.50/sh (3.7bb)
  immediately sells 16 of new shares at 97/sh
  (1.9bb) then same amount at 143.50/sh
  (2.9bb)and so on
• Roche financial income accounted for 30 of
  total income in 2000

SOURCE Windhovers Strategic Transactions
Database
26
Intrabiotech Deals Can Work Because...

• Buying companies for capabilities, not cost
  reductions
• Buyer generally adds credibility and financial
  stability to sellers program, allowing for
  step-up in deal value when comes time to sign a
  Big Pharma partnership
• Buyers can afford to go after niche products Big
  Pharmas believe they cant afford

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Intrabiotech MA Alkermes

• Acquisitions
• Enzytech (1992 29mm)
• Medisorb (1996 7mm)
• Advanced Inhalation (1999 106mm)
• Even after late-stage failure of major alliances
  with Schering and JJ, broad platform enables it
  to maintain market cap

SOURCE Windhovers Strategic Transactions
Database
28
Alkermes Acquisition of AIRA Tidy Profit for
Advanced Inhalations Shareholders
SOURCE Windhovers Strategic Transactions
Database
29
But Alkermes Now in a Position to
ChallengeSpecialty Pulmonary Players

• AIR had three feasibility deals
• But questionable whether it could convert them on
  its own because no human proof of principle, no
  manufacturing
• If AIRs technology didnt work, no fall back
• Alkermes bet investors willing to accept dilution
  for broader base
• And Alkermes shares rose after transaction--fully
  paying for dilution
• Because of Alkermes greater credibility, able to
  turn feasibility deals into full-scale programs
  with GSK, Lilly (on insulin) and MedImmune

SOURCE Windhovers Strategic Transactions
Database
30
Other Exemplary Intra-Biotech Deals

• Genzyme/GelTex
• RenaGel Welchol
• Amgen/Synergen
• IL-1ra (now key RA and, possibly, sepsis program)
• Millennium
• ChemGenics (1/97--89mm--4.625/MLNM sh)
• Leukosite (10/99--585mm 8.25/MLNM sh)
• Cambridge Discovery (7/00--53mm, cash)
• Current MLNM price 45 (market value 9.5bb)

SOURCE Windhovers Strategic Transactions
Database
31
Biotech MA
SOURCE Windhovers Strategic Transactions
Database
32
Hope v. Reality
Source Windhovers Strategic Transactions
Database
33
Intrabiotech MA Potential Solution

• But so far largely done for late-stage
  products...
• Chiron/Pathogenesis 729mm cash (Tobi)
• Elan/Liposome 675mm (Evacet)
• Genzyme/Geltex 1bb (Renagel, WelChol)
• And/or at relatively low prices...
• For every Evotec/Oxford Assymetry (475mm in
  stock) theres Targeted Genetics/Genovo
  (68.9mm) Antigenics/Aquila (40mm) or
  CeNeS/Cambridge Neuro (40.8m)
• And therefore are seen as admissions of failure
• And intrabiotech MA always managerially
  difficult
• Who will be CEO, CFO, CSO?

Source Windhovers Strategic Transactions
Database
34
To Make Big Pharma Mergers Work Requires Real
Reinvention

• Most acquirers have serious long-term problems
  most acquisition targets likewise problematic.
• Attractive targets are attractive either because
  plenty of costs to cut or for pipeline /or
  growing products
• Former deals work for max. of 3 years without
  reinvention
• Latter deals too expensive (Sanofi at PE45x
  Lilly at highest PEG in industry)
• But while acquirer willing to restructure target,
  not usually willing to restructure itself
• Mergers generally involve weaker companies--and
  create unwillingness to restructure X 2

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So What Do We Expect from Dealmaking in the Next
Few Years?

• Continuing intrabiotech MA (particularly of
  one-technology players), without significantly
  shrinking the total number of biotechs
• The start-up machine runs by itself
• Continuing consolidation among Big Pharma
• Survival dealmaking will be increasingly
  expensive
• New models of Pharma MA must be created
• Big Pharma will learn how to do deals for maximum
  value
• If they dont, we will see the arrival of the
  Disrupters

36
The Disrupters?

• Big Pharmas unwilling to restructure can make
  attractive targets for large-cap outsiders
• Particularly those with strong information
  systems applicable to target marketing perhaps
  discovery/development
• Ability to finance deal
• With debt (Big Pharma balance sheets
  extraordinarily unleveraged)
• Saving on ballooning marketing costs
• The GE multi-divisional, goal-oriented management
  style

SOURCE IN VIVO The Disrupters 4/01