Current State of the Biopharma Industry &

Future Outlook

A discussion highlighting key trends currently

impacting the US Life Sciences industry

October 8th, 2014

Nitin Mittal

Deloitte Consulting LLP

Life Sciences Landscape Overview

- 3 -

Global Life Sciences Snapshot

Pharmaceuticals

$959 billion 2.4% growth rate

Leading area —

Oncology

Biotechnology

$232.5 billion 9.6% growth rate

Leading areas —

Oncology, autoimmune,

infectious diseases

Medical Technology

$349 billion 2.6% growth rate

Leading area —

In vitro diagnostics

Sector Overview

Growth Drivers

Health care spending

5.3% annual spending

increase on health expected

globally over next five years

Demographics Increasing life expectancy

projected to increase global

population above 65 years of

age by around 10% Sources: DTTL Global Life Sciences and Health Care Industry Group analysis of IMS Health data, September 2013; IBISWorld Industry Report L6724-GL,Global Biotechnology, April

2013; EvaluateMedTech World Preview 2013, Evaluate Ltd., 2013

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Americas

– Favorable economic trends

– Expected growth in aging population

– Rising incidence of chronic diseases

Pharmaceutical Sector Geographic Analysis

45%

25%

18%

12%

Americas Europe

Asia/Africa/Australia Japan

Sources: DTTL Global Life Sciences and Health Care Industry Group analysis of IMS Health data, September 2013; EIU Healthcare World Outlook; EIU Database; United Nations

World Population Prospects - The 2012 Revisions, http://ega.un.org/unpd/wpp/index.htm; Forbes India.

http://forbesindia.com/article/universal-health-care/indias-primary-health-care-needs-quick-reform/34899/1; Espicom Pharma Market Factbook and EIU Database

Global Pharmaceutical Sales,

by region — 2012

Europe

– Continued budgetary pressures

– Higher than the global average

proportion of the aging population

Asia / Africa / Australia

– Economic and demographic trends

continue to boost demand, e.g.,

• India’s expansion of its primary care

policy priority and spending

• China’s 2020 goal of universal access to

basic medical and health services

Regional Notes

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Current US Pharmaceutical Tailwinds

1

2

3

4

5

Greater clarity on Affordable Care Act (ACA)

implementation and its impacts

Increasingly better at capitalizing on

emerging market opportunities

Incorporation of real-world evidence into

strategic thinking and decision-making

Substantial US aging population growth;

average life expectancy is lengthening

Rising incidence of chronic diseases and

better identification of rare diseases

6 Expansion of insurance coverage to

millions of uninsured Americans under ACA

Forecasted

revenue increases

for drug makers

Healthcare Evolution and Life Sciences

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Two major drivers are redefining the healthcare industry

Delivery System

Transformation

Rising Consumerism

Search for Scale

Changing Value

Proposition

New Financial Realities

Market Drivers Market Response

New Regulatory

Framework

Affordability of

Health Care

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Significant regulatory-driven change will continue

2017+

“New Normal”

Comparative effectiveness/

real world evidence

Delivery system realignment

Value over volume

Retail insurance market

Consumerism

Rules, Regulations, and

New Funding

2010-2013

Insurance compliance

Coordination of healthcare

agencies

Excise taxes on

biopharmaceutical

companies and payers

Patient Centered Outcomes

Research Institute (PCORI)

Source: Deloitte Center for Health Solutions analysis of the Patient Protection and Affordable Care Act (P.L. 111-148)

Mandates, Pilots, and

Exchanges

Insurance reform

Independent Payment

Advisory Board (IPAB)

Accountable care

organizations (ACOs)

Payment reform

Care coordination

Quality reporting

2014-2016

Today

Health reform is changing the basis of stakeholder competition and collaboration

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This evolution will lead to expanded healthcare coverage

and growth in individual coverage through exchanges E

nd

of

Ye

ar

En

roll

me

nt

(mil

lio

ns)

ACA Coverage Changes1

Baseline Scenario

2012 2016

4M Other 15M Ind.

152M

Group

43M

Medicaid

48M

Medicare

53M

Uninsured

4M Other

143M

Group

54M

Medicaid

54M

Medicare

33M

Uninsured

22M HIX

5M Ind.

Rise in government sponsored programs

and “choice-based” markets (HIX)

Limited decline in employer-sponsored

programs – some will exit and others will

move to defined contribution

Health plans will offer a broader portfolio

of “less rich” benefit packages while

expanding coverage

Growth in “choice-based” programs

increase importance of patient’s

awareness and understanding

Key Takeaways for

Life Sciences

Source: Deloitte healthcare reform coverage model scenario analysis

- 10 -

Plans and providers are evolving their business models

to adapt to the changing legislation and market trends

Provider

Consolidation

Low margins and reform pressures are

causing providers to merge, reducing local

competition and increasing pricing leverage

Hospital-owned medical groups saw >65%

growth in physician employment over the past

decade

– Physicians are seeking negotiation power with

payers, income security, and work-life balance

Rise of

Accountable

Care Models

606

0

250

500

750

Q4 '10 Q4 '11 Q4 '12 Q4 '13

TotalCount ofACOs

Source: 1. NEJM (http://www.nejm.org/doi/full/10.1056/NEJMp1101959); 2. Employing Physicians: The Future is Now, Medical Group Management Association 2011; Deloitte 2013

Survey of U.S. Physicians; 3. Health Affairs, “Accountable Care Growth In 2014: A Look Ahead”, Jan 2014); 4. Optum Health (2013); 5. Pharmacy Benefit Management

Institute (2013)

Growth of ACOs3

Provider organizations are aligning incentives

and payment around value-based care to

standardize treatment decisions

At the end of 2013, there were 606 public and

private ACOs in the market, representing a

145% CAGR over the last three years

74% of hospital CEOs say that their

organizations will be part of an ACO within the

next five years4

0%

10%

20%

30%

40%

50%

2000 2004 2008 2012

PCPs

Specialists

Hospital-Employed

Physicians1

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As plans and providers change the way they operate,

new questions regarding the market emerge

Prior Model Future Model New Market

Questions

Consolidation Fragmented plans and

providers

Consolidated plans,

consolidating

providers

What new

stakeholders are

emerging in the

ecosystem?

How will utilization

decisions be made?

Who will be involved

in the decision

making process?

How will regulatory

obligations influence

market behaviors?

How will the number

of addressable

customers change in

the future?

Decision-

Making Physician-driven

Highly centralized,

guidelines-driven

Reimbursement Volume-based Outcomes-based,

focus on risk sharing

Transparency Limited metrics

tracking, focus on

observable processes

Metrics tracking

quality, outcomes;

tied to incentives

Physician

Access

Few restrictions on

detailing

Access restricted by

systems and groups

Volume Focus Value Focus

Source: Deloitte analysis

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Trend in Pharmacy Benefit Spend for Specialty vs. Non-Specialty

(CVS Caremark)

Sources: 1) Sean P. Keehan et al.,“National Health Spending Projections Through 2020, Health Affairs, August 2011; 2) CVS Caremark Analysis, CVS Caremark Specialty Analytics,

2013; CVS Caremark non-specialty drug trend, 2012, Caremark BOB trend cohort, Enterprise Analytics, 2013.

Growth in Pharma spend is expected to stabilize at ~7% annually driven primarily by specialty products

As the specialty market continues to grow, there will be a higher level of price scrutiny

Manufacturers will need to develop value stories from a payer perspective, incorporating real world evidence

(RWE), in order to gain favorable coverage for higher priced therapeutics

Clinical and economic value considerations need to be integrated earlier in product development lifecycle

0%

5%

10%

15%

20%

1966 1976 1986 1996 2006

Average Annual Growth Rates in U.S. Prescription Drug Spending, 1966-‐2020E (%)

Actual Estimated

1999: 18.4%

2010: 1.2%

2016

18.3%

24.0% 25.0%

-3.8% -3.5% -2.5%

-10%

0%

10%

20%

30%

2012 2013 2014E

Specialty PMPY Trend Non-specialty PMPY Trend

Ultimately, LS Companies will need to proactively

manage increased scrutiny on pharmaceutical spend

Positioning for Success

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Key Areas for Growth / Innovation for LS companies

Non-

Traditional

External

Relationships

Value-

Based

Contracts

Alternative

Distribution

Channels

Data is Life Blood

The shift towards value-based,

personalized health care will require

new data capabilities and technologies

Master the Art of Ecosystems

The pursuit of information, evidence

and outcomes is resulting in

collaboration across the ecosystem

Growth of Personalized/Translational

Medicine

Improved clinical and analytics

capabilities will accelerate the rise of

personalized medicine

Key Takeaways

- 15 -

“Hard Questions” in Healthcare – what works, for whom,

why and at what cost - are largely information challenges

The shift towards value

based, personalized

healthcare require new data

driven collaborations and

business models

Real world evidence and

data are driving this trend

LS companies are

well-positioned to drive

meaningful analysis of both

internal and external data

Core LS Data

Components

Clinical Outcomes

Cost of Care

Process / Benchmark

Data

Translational Research

Operational Excellence

Comparative Effectiveness

Safety Surveillance

Clinical Effectiveness

Population Health

External Data Sources Internal Data Sources

- 16 -

The pursuit of information, evidence and outcomes is

resulting in collaboration across the ecosystem

Providers

Predictive & preemptive care

Genetically targeted diagnosis

Personalized medicine / safer, higher

quality service

Business development channels &

alliance opportunities

Enhanced community research

Improved clinical trial management, better

patient targeting

Payors

Disease prevention methods

Improved plan design and management

Evidence based insights to promote

healthy lifestyles

Improved forecasting capabilities for

macro health trends

Higher influence due to evidence based

clinical insights and value demonstration

Retail & Specialty Pharmacies

Innovative customer facing technologies

Improved consultative capabilities

Higher degree of influence on patients &

physician community

Insights into behavioral economics

Value add services for e-pharmacy

Pharmaceuticals, Biotech,

Academia

Improved early stage discovery, improved

pipeline by better molecular targeting

Reductions in R&D costs & durations

Identification of new bio-markers

Surface global opportunities (e.g.,

neglected diseases, biosimilars)

Improved safety surveillance

- 17 -

Bench to Bedside: Translational Medicine converts

scientific discoveries into tangible therapeutics

Clinical Research

Basic Research

Health Outcomes

and Surveillance

Clinical Care

Translational Medicine turns promising biological discoveries into therapeutic treatments to improve patient care and

outcomes. However, though organizations and individuals that engage in this process understand the science, they often

struggle with the business of science and what it takes to operationalize and commercialize their products and services.

Basic science

research leading to

promising biologically

relevant discoveries

Outputs include

discoveries reported

via publications in

peer-reviewed

journals

Discoveries are

synthesized into a

therapeutic agent

Clinical trials and

studies using human

subjects are

performed

Approved treatment

or therapeutic agents

are provided to

patients

Personal health

information is

collected

Tra

nsla

tio

nal

Med

icin

e

End results of

treatment or

therapeutic agent

delivery is analyzed

Focus is on patient

and population health

Rare or long-term

effects can be

uncovered

Basic Research Clinical Research Clinical Care Health Outcomes and Surveillance