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F R I E D M A N
B I L L I N G S
R A M S E Y
THE PHARMA, BIOTECH AND
DEVICE COLLOQUIUM
Princeton University
Princeton, NJ
June 7, 2005
2005
2001
June
M O
N T H
F R I E D M A N
B I L L I N G S
R A M S E Y
KEYS TO RESTORING THE
FINANCIAL STRENGTH OF THE
PHARMA INDUSTRY
David Moskowitz, RPh, MBA
Senior Vice President and Healthcare Senior Analyst
Friedman, Billings, Ramsey Group, Inc.
2005
2001
June
M O
N T H
Disclaimer
•
•
•
•
•
•
Friedman, Billings, Ramsey Inc. conducts equity research on Astra Zeneca Plc. (AZN), Bristol Meyers
Squibb (BMY), Merck (MRK), Pfizer (PFE), Wyeth (WYE), Schering-Plough (SGP) and Eli Lilly (LLY).
The analyst(s) responsible for this research report has received and is eligible to receive compensation,
including bonus compensation, based on Friedman, Billings, Ramsey & Co. Inc.'s ("FBRC") overall
operating revenues, including revenues generated by FBRC’s investment banking department.
Our brokers and analysts may make recommendations to their clients and our affiliates may make
investment decisions that are contrary to the recommendations contained in a research report. Such
recommendations or investment decisions would be based on the particular investment strategies, risk
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In the normal course of its business, FBRC seeks to perform investment banking and other services for
various companies and to receive compensation in connection with such services. As such, investors should
assume that FBRC intends to seek investment banking or other business relationships with the companies.
Additional information on the securities mentioned in this report is available upon request. The information
concerning the relationship of FBRC and the assigned analyst(s) to this issuer is accurate. Because of
individual client objectives, the report should not be construed as advice designed to meet the particular
investment needs of any investor. Any opinions expressed herein are subject to change. The report is not to
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time to time, FBRC, its affiliated entities and their respective directors, officers, employees or members of
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Commentary regarding the future direction of financial markets is illustrative and is not intended to predict
actual results, which may differ substantially from the opinions expressed herein. References to “median”,
“consensus”, “street”, etc., estimates of economic data refer to the median estimate of economists polled by
Bloomberg L.P.
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 3
Major Pharmaceutical Stock Performance
(12/29/00 - 5/26/05)
110.000
100.000
90.000
80.000
70.000
60.000
Includes: ABT, AVE, AZN, BMY, GSK, JNJ, LLY, MRK, NVS, PFE, SGP, SNY/AVE, WYE
*As of market close on 5/26/2005
Source: FactSet and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 4
4/29/2005
2/28/2005
12/29/2004
10/29/2004
8/29/2004
6/29/2004
4/29/2004
2/29/2004
12/29/2003
10/29/2003
8/29/2003
6/29/2003
4/29/2003
2/28/2003
12/29/2002
10/29/2002
8/29/2002
6/29/2002
4/29/2002
2/28/2002
12/29/2001
10/29/2001
8/29/2001
6/29/2001
4/29/2001
2/28/2001
12/29/2000
50.000
Average Return on Equity
of Major U.S. Pharma
50%
40%
30%
20%
10%
0%
1997
1998
1999
Source: FactSet and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 5
2000
2001
2002
2003
2004
Major Pharma Gross Margins
90.00%
85.00%
80.00%
75.00%
70.00%
65.00%
60.00%
2000
2001
WYE
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 6
2002
SGP
MRK
2003
PFE
BMY
2004
LLY
AZN
Average
2005E
Historical P/E Comparison—S&P 500 vs.
Index of Major Pharmaceutical
FBR
22
21
20
19
18
17
16
15
14
13
12
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
2002 2002 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005
Pharma Average P/E Multiple
Source: FactSet and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 7
S&P P/E Multiple
Major Factors Affecting Profitability
•
•
•
•
•
•
Brand drug patent expirations/challenges
Formulary management
Fewer new product launches
Rising cost of clinical trials
In-licensing deals
Company specific issues
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 8
Estimated Sales of Major Drug Products Facing
Patent Expiration/Challenges ($ in billions)
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
2001 2002
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Total U.S. sales at risk Potential for delayed generics
Potential for earlier generics
(6% CAGR until patent expiry)
*Products with $100 million in U.S. sales or more
Source: FDA Orange Book, Company reports, NDC Health, and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 9
Major Global Pharmaceutical Stock Performance
vs. AMEX Healthcare Payer Index (HMO)
160.00%
140.00%
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
-20.00%
Large Cap Pharma
5/16/05
3/16/05
1/16/05
11/16/04
9/16/04
7/16/04
5/16/04
3/16/04
1/16/04
11/16/03
9/16/03
7/16/03
5/16/03
3/16/03
1/16/03
11/16/02
9/16/02
7/16/02
5/16/02
-40.00%
HMO
Includes: ABT, AZN, BMY, GSK, JNJ, LLY, MRK, NVS, PFE, SGP, SNY/AVE, WYE
Source: FactSet and FBR Research
*As of market close 5/20/2005
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 10
Total Drug Industry NDA Filings vs. AMEX
DRG Index
140
60%
50%
130
120
30%
20%
110
10%
100
0%
-10%
90
-20%
80
-30%
1995
1996
1997
1998
1999
NDA Filings
Source: FDA, FactSet, Bridge, and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 11
2000
2001
AMEX DRG Annual Return
2002
2003
2004
Annual Return
40%
Rising Drug Development Costs
• Tufts University Estimate - $800M per drug
(CAGR13.25%)
• FBR estimated R&D growth (2000-2008 CAGR 9.6%)
• Average 16.5% of drug company sales
• Late-stage trials more expensive – 30% of R&D expense
for clinical trials
• More patients/more requirements per patient
• FDA getting more safety conscious – emphasis on followup and safety evaluations – more Phase IV studies
• “Output is decreasing per company and per dollar”
(FBR 2005 Pharma Management Survey)
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 12
In-Licensing On The Rise (need footnotes)
Drivers:
•
•
•
•
R&D productivity crisis
Increased exposure to patent expiry
Misaligned corporate strategies and product portfolios
Change in R&D technologies outpace technology adoption rates
Statistics:
• In-licensed product revenue grew from 16% to 22% of top-ten drug
company revenues from 1996 – 2001
• Pharma companies spent $2.8 billion on biotech in-licensing deals in
2001 (Datamonitor)
• The number of in-licensing deals quadrupled from 1996-2001 (IMS
Health)
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 13
What’s being done?
• Stronger IP protection
• Medicare drug benefit increases patient access
• In-licensing: Additional revenues offset lower
profitability and may improve ROI
• Cost efficiencies
• Drug development efficiencies
• Outsourcing (CAGR 15.5% ’03-’08)
• Signs of pipeline productivity increases
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 14
NDA Filings for Top Drug Companies
(2004–2009)
80
70
60
50
40
30
20
10
0
2004
2005
2006
Source: Company reports and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 15
2007
2008
2009
Drug Pipeline Productivity
(year-over-year change)
2004
Company
Pipeline NPV (millions)
Phase III
Phase II
Total
Launches
ABT
$5,839
-1
-2
-3
0
GSK
$5,602
8
28
36
1
Roche
$5,287
2
1
3
0
WYE
$4,620
-1
-2
-3
1
JNJ
$4,369
2
1
3
0
BMY
$4,273
2
1
3
1
Akzo Nobel/Organon
$2,976
4
-3
1
0
FRX
$2,204
1
0
1
0
SNY-AVE
$1,327
3
11
14
3
MRK
$1,173
2
-4
-2
1
NVS
$1,152
4
3
7
1
NVO
$1,037
1
-1
0
0
Bayer
$682
-2
-2
-4
0
Lundbeck
$384
1
-1
0
0
SGP
-$882
0
2
2
1
AZN
-$3,951
0
1
1
0
LLY
-$15,547
0
-1
-1
3
PFE
-$25,900
-1
10
9
3
-$5,356
25
42
67
15
Total change
Source: Company reports and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 16
Estimated Drug Development Pipeline NPV
by Company (avg. 19% of total market cap)
$60,000
$50,000
$40,000
$30,000
$20,000
Source: Company reports and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 17
Lundeck
Bayer
FRX
Novo
SGP
Akzo
AZN
LLY
Roche
JNJ
ABT
WYE
BMY
MRK
NVS
SNY
GSK
$0
PFE
$10,000
Estimated Sales Following Launch of Products
Filed in the Specified Year after Year 1 and Year 5
Source: Company reports and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 18
Ratio of Estimated Drug Company
Pipeline NPV to 2004 Sales
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
Source: Company reports and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 19
AZN
Roche
JNJ
SGP
Bayer
LLY
ABT
BMY
Novo
SNY
WYE
PFE
MRK
GSK
NVS
FRX
Akzo
Lundeck
0
Estimated Present Value of Drug Industry
Revenues from the Medicare Rx Drug Benefit
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total U.S. Rx expenditures (billions)
192.7
210.03
228.99
253.70
277.07
303.53
331.94
362.95
396.51
436.86
Normal Growth rate
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
Demographic growth 65+
1.0%
1.1%
1.2%
1.5%
2.4%
1.9%
1.8%
1.6%
3.9%
3.2%
Sales estimates with Part D Benefit
Medicare bill increment in drug spending
1.7%
Discount rate
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
2004 dollars
192.7
190.94
189.25
190.61
189.24
188.47
187.37
186.25
184.98
185.27
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total U.S. Rx expenditures (billions)
192.7
210.03
228.99
249.81
272.82
298.87
326.85
357.38
390.43
430.16
Normal Growth rate
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
8.6%
Demographic growth 65+
1.0%
1.1%
1.2%
1.5%
2.4%
1.9%
1.8%
1.6%
3.9%
3.2%
Discount rate
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
2004 dollars
192.7
190.94
189.25
187.69
186.34
185.57
184.50
183.39
182.14
182.43
Without Part D Benefit
Medicare bill increment
Medicare Rx Impact (billions)
$
2.92
$
2.90
$
2.89
$
2.88
$
2.86
$
2.84
$
2.84
Est. PV of Additional Sales From Drug Benefit $20.13 billion
*Based on FBR estimates
Total U.S. Rx expenditures (billions) based on NDC Health retail estimates of $235B in 2004
less 18% to allow for manufacturer discounts and rebates (18% est. discount is based on
retail $ from NDC compared with actual company reported sales on select products).
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 20
Source: FBR Research, NDC Health, and CMS
Medicare Spending Estimates (2005–2014)
2005
2006
2010
2012
2014
Spending as a % of GDP
2.7%
3.3%
3.5%
3.7%
4.0%
Spending as a % of NHE
17.2%
20.4%
20.2%
20.3%
20.8%
Spending as a % of U.S.
General Revenues
36.8%
42.8%
44.5%
45.6%
47.9%
Source: 2005 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and
Federal Supplementary Medical Insurance Trust Fund; CMS, Office of the Actuary, National
Health Statistic Group, February 2005; FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 21
Medicare Drug Benefit—Exposure and
Opportunity Index for Major Pharma
AZN
PFE
Product Differentiation
GSK
ABT
NVS
BMY
SNY
JNJ
SGP
LLY
WYE
Exposure to Medicare Drug Benefit
Source: Company reports and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 22
MRK
Major Pharma SG&A expense as a % of Sales
90.00%
85.00%
80.00%
75.00%
70.00%
65.00%
60.00%
2000
2001
WYE
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 23
2002
SGP
MRK
2003
PFE
BMY
2004
LLY
AZN
Average
2005E
Major Pharma R&D expense as a % of Sales
22.00%
20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
2000
2001
WYE
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 24
2002
SGP
MRK
2003
PFE
BMY
2004
LLY
AZN
Average
2005E
Total Prescriptions (U.S.)
310,000,000
300,000,000
290,000,000
280,000,000
270,000,000
260,000,000
250,000,000
Monthly Total Prescriptions
Source: NDC Health and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 25
3-Month Running Average
Trend
2005-01
2004-10
2004-07
2004-04
2004-01
2003-10
2003-07
2003-04
2003-01
2002-10
2002-07
2002-04
2002-01
2001-10
2001-07
2001-04
2001-01
240,000,000
Estimated Global Sales Growth for Top
Drug Companies (2004–2016)
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2004A
2005
2006
2007
2008
Source: Company reports and FBR Research
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 26
2009
2010
2011
2012
2013
2014
2015
2016
Trade-offs Likely To Accompany Restored
Financial Strength
• Sales growth recovery anticipated after 2006
• Aging populations, improved access, baby boomers
• Gross margins likely to continue to decline due to patent
losses, Medicare pricing, in-licensing, global penetration
• Profitability remains under pressure, R&D and cost
efficiencies will be relied upon
• Pharmacoeconomic arguments will become more
important, proof of value to patients
• New business model - PCP vs. Specialty
• As always - drug pipeline holds the key to long-term
financial strength, on both the top and bottom lines
The Pharma, Biotech and Device Colloquium
June 7, 2005
Slide 27