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Merrill Lynch Biotechnology Eric J. Ende, M.D. (212) 449-1915 [email protected] Refer to Important Analyst Disclosures Beginning on Page 21 Investors should assume that Merrill Lynch is seeking or will seek investment banking or other business relationships with the companies in this report. Agenda Biotech Product Revenues Accelerating Biotechnology Medicines in Development - By Therapeutic Category Biotechnology Medicines in Development - By Product Category Potential Blockbuster Upcoming Drug Approvals Sales Estimates for Top Selling Drugs Product Revenue Trends YTD Biotech Performance Biotech Drivers Industry Investment Thesis Biotech Product Revenues Accelerating Biotechnology is a young industry that was virtually nonexistent prior to 1980. By 1990 biotech revenues had reached $3B, climbing to $8B in 1992, $18B in 2000 and $35B in 2001. We estimate that product revenues for the industry will total approximately $47B in 2005. Biotech Medicines in Development - By Therapeutic Category AIDS/HIV/Related Conditions 21 Autoimmune Disorders 26 Blood Disorders Cancer/Related Conditions Diabetes/Related Conditions 10 Digestive Disorders 17 Eye Conditions Genetic Disorders 10 Growth Disorders 4 Heart Disease 15 Infectious Disease 47 Infertility Neurologic Disorders 22 Respiratory Disorders 19 Skin Disorder 15 Transplantation Other 3 There are 371 biotechnology drugs in development by 144 companies and the National Cancer Institute for nearly 200 diseases Currently 95+ biotechnology drugs approved 178 2 2 6 28 Biotech Medicines in Development - By Product Category Angiogenesis Inhibitors 6 Interferons 11 Antisense 9 Interleukins 10 Cellular Therapy 13 Monoclonal Antibodies 75 Colony Stimulating Factors 2 Recombinant Human Proteins 18 Gene Therapy 16 Recombinant Soluble Receptors 4 Growth Factors 9 Signaling 7 Human Growth Hormones 3 Vaccines 98 Immune-based Therapy 6 Others 84 Potential Blockbuster Upcoming Drug Approvals Drug Indication Expected Approval Cialis Erbitux Avastin Tarceva Macugen Indiplon Erectile Dysfunction Colorectal Cancer Colorectal Cancer Non Small Cell Lung Cancer Age Related Macular Degeneration Insomnia YE 2003 Early 2004 1Q 2004 2H 2004 Early 2005 1H 2005 Antegren Preos Lucentis Multiple Sclerosis Osteoporosis Age Related Macular Degeneration 2H 2005 2H 2005 1H 2006 Sales Estimates for Top Selling Drugs of Large Cap Biotechs Company Drug Indication 2003E 2004E AMGN Aranesp/Epogen Anemia $3.85 B $4.67 B AMGN Neulasta/Neupogen Neutropenia $2.53 B $2.99 B AMGN Enbrel RA $1.21 B $1.65 B BGEN Avonex MS $1.13 B $1.17 B DNA/IDPH Rituxan NHL $1.52 B $1.88 B GILD Viread HIV $586 M $804 M MEDI/ABT Syangis RSV $866 M $ 968 M Source: Merrill Lynch Estimates Product Revenue Trends Large Cap Biotech revenues expected to double over the next 5 years YTD Biotech Performance NBI vs. NASDAQ: 45.0% vs. 33.8% Large Caps: 48.5% Mid Caps: 48.3% Small Caps: 42.0% Therapeutics: 49.9% Genomics/Tools: 28.3% Bottom-Line: Investors are focused on product driven companies Biotech Drivers Clinical Data - New Drug Classes FDA Issues - More drug approvals Product Launches Legal Issues - Patents Reimbursement Money Flows - Supply & Demand Manufacturing Industry Investment Thesis - STRONG FUNDAMENTALS + STRONG MONEY FLOW = BTK MOVING HIGHER - FDA BECOMING MORE ACCOMMODATING: A more risk-tolerant FDA under the leadership of Mark McClellan has resulted in faster approvals, which are occurring with greater frequency. Following 5 product approvals thus far in 2003, we expect another 5 approvals. - AVASTIN DATA IMPROVES INVESTOR SENTIMENT: Positive data for Avastin, which improves survival in front-line metastatic colorectal cancer patients, has helped to validate biotechnology and has improved investor sentiment. - DNA & AMGN FIRING ON ALL CYLINDERS: For the first time in many years, both Amgen and Genentech, the two largest and highest profile biotech companies, are performing well with strong sustainable growth and upside to estimates. - MONEY FLOW POSITIVE: For the first time in 15 months, money flow into Healthcare/Biotech mutual funds turned positive in April. - VALUATIONS STILL WITHIN NORMAL RANGE: Biotechs tend to trade between a P/E of 25x and 50x and a PEG of 1.2x and 2.0x. Biotech stock valuations are still below the high end of the range. - FOCUS ON COMPANIES WITH ACCELERATING FUNDAMENTALS: Focus on companies that generate strong and sustainable earnings growth of at least 20%, and those that should be able to surprise to the upside in quarterly revenues and market opportunities for its drugs. Also, focus on companies that are not yet profitable but should become earnings/product-driven in 12 months. Merrill Lynch Pharmacy Benefit Managers Tom Gallucci (212) 449-5711 [email protected] Specialty Drug Costs - Historically Not A Focus... In the Past, Payors Have Typically Not Focused on Specialty Costs Associated with Chronically-ill Patients Patients Using Specialty Drugs = Just 1% of Patient Population Specialty Drug Costs = Just 11% of Total Drug Spend Managing Specialty Drug Costs Can Initially Be Difficult Many Specialty Drugs Have Little Competition and Orphan Status in the U.S Market Specialty-Related Therapies Can Be Complex Roughly 70% of Specialty Drug Claims are Covered by Medical Benefits, Rather Than Their Drug Benefit Typically Such Claims are Paper-based, Which is Inefficient and Further Limits the Potential to Manage Related Costs But Payors Increasingly Seeking to Control Costs Overall Drug Spend Remains High, And Payors Continue to Explore Opportunities to Limit the Trend Specialty Drugs Are Expensive by Nature & Growing Rapidly Average Therapy Costs Between $8,000 and $300,000 Annually The Average Specialty Patient Spends About $70K Annually Specialty Drug Costs are Growing in Excess of 20% Annually, and Represent a Growing Portion of Total Drug Spend Given the Pipeline of Biotech Drugs, Rapid Growth of the Specialty Market is Likely to Continue for the Foreseeable Future As Specialty Costs Have Not Been Managed Historically, They Are Naturally Becoming a Focus for New Cost Savings by Payors Specialty Drugs Are Complex… Specialty Patients/Drugs Are Unique Patients are Typically Chronic Patients, May Require Therapy for a Lifetime Injectables can be Unpleasant, Difficult and Time-Consuming to Administer; Products are Typically Unstable, Requiring Temperature Control and Reconstitution in Many Cases Side Effects Often Lead to Poor Patient Compliance 40% of Chronic Patients Treated with Injectables will Quit within First 18 Months of Therapy 30% of Patients on Therapy Miss 25% of Injections Reimbursement Can Be Especially Complicated Coverage is Mixed Between Medical and Drug Benefits And Patients Often Require Additional Services Specialty-Related Diseases Are Often Complex and Patients Have Non-Traditional Needs Clinical Expertise in a Variety of Unique Disease States Special Handling and Delivery Systems for Distribution to both Physician and Patient Setting Pharmaceutical Care Management Patient Education and Ongoing Support The Current System Is Inadequate... Retail Stores not Well Equipped To Handle Specialty Drugs; Patient Require More Time/Attention Than Most Retail Pharmacists can Provide Given the Complexity of Administering Drugs, and Frequent Side Effects Drugs Often Require Special Handling Claims System Mostly Paper-Based, Versuss Electronic For Traditional Drugs Inefficient, More Costly Little Tracking/Control or Control PBMs Are Well-Positioned To Manage Specialty Increased Involvement With Specialty Drugs Represents a Natural Evolution of PBM Involvement Along the Healthcare Continuum PBMs Can Apply Traditional Cost Management Techniques to Specialty Negotiate Better Drug Pricing Through Increased Buying Power Electronic Claims, Tracking PBMs Offer Additional Value-Added Services Clinical Programs Specialty Pharmacy Disease Management PBM’s Offer Expertise Across a Broad Range of Disease States such as Hemophilia, Growth Hormone, Multiple Sclerosis, Hepatitis C, RSV, Pulmonary Hypertension, Gaucher Disease, and Fabry Disease PBM Tools Drive Significant Savings, Better Care PBM Specialty Network Savings Can Average 15% off AWP for Products Covered Under the Medical Benefit PBMs Drive Market Share, Direct Patients to Exclusive Providers Administrative Savings Range Between 2-4% Eliminates Paper Claims No Retail Dispensing Fees No Supply Charges and Shipping Costs Improved Quality of Care Better Compliance With Drug Administration Fewer Medical Complications, Driving Better Health and Lower Medical Costs PBM Specialty Programs Offer Broad Benefits Payors Substantial Cost Savings Healthier, More Satisfied Plan Members Patients Comprehensive Screening on Drug-to-Drug Interactions Helps Improve Patient Safety Clinical and Reimbursement Support Improved Patient Outcomes Through Better Compliance Manufacturers PBM-based Pharmacy Provides One Stop Shop For All Drugs Better Data Reporting Analysis on Specialty Products Potential Market Share Gains Important Disclosures Investment Rating Distribution: Health Care Group (as of 30 September 2003) Coverage Universe Percent Count Percent Inv. Banking Relationships* Count Buy 80 46.24% Buy 25 31.25% Neutral 82 47.40% Neutral 15 18.29% Sell 11 6.36% Sell 1 9.09% Investment Rating Distribution: Global Group (as of 30 September 2003) Coverage Universe Percent Count Percent Inv. Banking Relationships* Count Buy 962 40.56% Buy 328 34.10% Neutral 1206 50.84% Neutral 318 26.37% Sell 204 8.60% Sell 44 21.57% * Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months. OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 same/lower (dividend not considered to be secure); and 9 - pays no cash dividend. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from investment banking revenues. Copyright 2003 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. 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Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.