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GlobalHealth Care

12 March 2002

Pharmaceuticals forBeginners

A guide to the pharmaceuticalindustry

Lucas Herrmann+44 20 7547 [email protected]

Heidi Sprang+44 20 7547 [email protected]

Barbara A. Ryan+1 212 469 [email protected]

Mark Clark+44 20 7545 [email protected]

Deutsche Bank AG

IMPORTANT: PLEASE READ DISCLOSURES AND DISCLAIMERS AT THE END OF THIS REPORT

Industry Focus

Deutsche Bank’s overview of the globalpharmaceutical industry. Structured inthree parts, this layperson’s guideincludes details on the workings of theindustry, key therapeutic markets and asummary of the leading drug companiesin the US, Europe and Japan

Second Edition March 2003

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GlobalHealth Care Pharmaceuticals

12 March 2003

A guide to the pharmaceuticalindustryLucas Herrmann+44 20 7547 [email protected]


Barbara A. Ryan(+1) 212 469 [email protected]


Deutsche Bank AG

IMPORTANT: PLEASE READ DISCLOSURES AND DISCLAIMERS AT THE END OF THIS REPORT

Pharmaceuticals for Beginners Primer

‘So, as you can see, Lipitor and the statin class act to inhibit the ratelimiting enzyme in cholesterol synthesis’

‘Thanks Dad. That’s really interesting. But whats Lipitor?’

‘Errr ….’

So, you’ve inherited the pharmaceutical sector. Big companies, loads ofmarket cap and interesting diseases with some very silly names. Fantastic- finally you’ve got to follow a stock market industry that might actually beof some interest to that person sitting next to you at a dinner party.

But wait. Why do these drugs all have at least two names and how dothey work? What is a COX 2 inhibitor and why can’t analysts just say heartattack or acid stomach instead of using lengthy terms like myocardialinfarction or gastro-esophageal reflux disorder? And what on earth is aplacebo controlled, double blind, intention to treat, Phase III clinical trialanyway? Oh no, what have I done?!

In our view, the pharmaceutical industry is fascinating, exciting and ofobvious relevance beyond the stock market. But it is also hugely technicaland comprises a minefield of products, names and pathways. Keepingtrack of it all can, at times, prove bewildering, and not just for theuninitiated.

With this in mind, in January 2001 the Global Pharmaceutical Team atDeutsche Bank first published a document that we hoped would prove ofgood use for beginners and industry old hands alike – Pharmaceuticals forBeginners. Two years on and some four reprints later, we have musteredthe strength to update and expand our orginal text. As before it isstructured in three parts providing insight into industry basics, therapeuticmarkets and the world’s leading pharmaceutical companies. However, inline with the emergence of significant new therapeutic markets includingthose for erectile dysfunction, rheumatoid arthritis and pain management,the therapeutic section has grown significantly and now covers some 25-disease areas, which in aggregate account for over half of the world’spharmaceutical sales. Similarly, the initial industry section has beenexpanded to include further information on patents, while a new sectionon the workings of the American legislative system has also beenincorporated. And as the team has globalised so too has the companysection. Thus for the first time in this edition we also now include anoverview of the leading Japanese drug companies.

Pharmaceuticals for Beginners is not intended to be read cover to cover,but is meant as an easy-to-use reference guide. Although our concept wasto provide beginners with an easy-to-comprehend insight into anundoubtedly complex industry, we hope that it will also continue to findfavour among more learned readers. Overall, we trust that our readers willfind it a valuable and useful document and entrust it with a permanent sloton an already overcrowded desk.

Now back to that question on Lipitor ….

12 March 2003 Health Care Pharmaceuticals for Beginners

Page 4 Deutsche Bank AG

Table of Contents

Industry Overview ..........................................................................................6

Innovation: The key to growth .............................................................................7

Overview................................................................................................................8

Growth, but Not Without its Pressures..............................................................10

The Companies ....................................................................................................18

The Leading Drugs...............................................................................................27

The R&D Process .................................................................................................31

Clinical Terms ......................................................................................................38

Genomics & Biotechnology.................................................................................39

The Regulatory Process.......................................................................................45

Pharmaceutical Marketing ..................................................................................53

Patents and Market Exclusivity...........................................................................62

Generic Drugs ......................................................................................................68

Funding and Pricing of Pharmaceuticals ............................................................74

The US Legislative Process .................................................................................88

Legislative Dictionary..........................................................................................92

Therapeutic Review ......................................................................................95

Diabetes Mellitus.................................................................................................97

Atherosclerosis ..................................................................................................103

Hypertension .....................................................................................................105

Hypolipidaemics (Statins) .................................................................................111

Thrombosis and the Antithrombotics ..............................................................115

Erectile Dysfunction ..........................................................................................119

Gastrointestinal Disorders ................................................................................123

Asthma...............................................................................................................127

Chronic Obstructive Pulmonary Disorder.........................................................133

Allergic Rhinitis..................................................................................................137

Pharmaceuticals Team

Global PharmaceuticalsLucas Herrmann+44 20 7547 [email protected]


European PharmaceuticalsMark Clark+44 20 7545 [email protected]

Mike Ward+44 20 7547 [email protected]

Holger Blum+49 69 910 [email protected]

Yi-Dan Wang+44 207 545 [email protected]

Alex Evans+44 207 547 [email protected]

Jonas Morner+44 207 545 [email protected]

US PharmaceuticalsBarbara Ryan+1 212 469 [email protected]

Edward P. White+1 212 469 [email protected]

Daniel Beale+1 212 469 [email protected]

George Drivas+1 212 469 [email protected]

Japanese PharmaceuticalsFumiyoshi Sakai+81 3 5156 [email protected]

Masayo Yamazaki+81 3 5156 [email protected]

Research AssistantsEmma Gibbs+44 207 545 [email protected]

Patricia Eager+1 212 469 [email protected]


Deutsche Bank AG Page 5

Antibiotics..........................................................................................................141

Osteoporosis......................................................................................................147

Pain ....................................................................................................................151

Rheumatoid Arthritis.........................................................................................157

Transplantation and Immunosuppression .......................................................163

Multiple Sclerosis ..............................................................................................169

Human Immunodeficiency Virus (HIV) .............................................................173

Viral Hepatitis ....................................................................................................179

Influenza.............................................................................................................183

Central Nervous System Disorders...................................................................185

Schizophrenia ....................................................................................................187

Parkinson’s Disease...........................................................................................191

Alzheimer’s Disease ..........................................................................................193

Affective Disorders (Depression) ......................................................................197

Attention Deficit Hyperactivity Disorder ..........................................................201

Migraine.............................................................................................................205

Oncology (Cancer) .............................................................................................209

Pan-European Company Profiles............................................................217

AstraZeneca .......................................................................................................219

Aventis ...............................................................................................................223

GlaxoSmithKline................................................................................................227

Novartis..............................................................................................................231

Novo-Nordisk.....................................................................................................235

Roche .................................................................................................................239

Sanofi-Synthélabo .............................................................................................243

Schering.............................................................................................................247

US Company Profiles .................................................................................251

Bristol-Myers Squibb.........................................................................................253

Eli Lilly................................................................................................................257



Merck .................................................................................................................261

Pfizer ..................................................................................................................265

Schering-Plough ................................................................................................269

Wyeth.................................................................................................................273

Japanese Company Profiles.....................................................................277

Daiichi ................................................................................................................279

Eisai ....................................................................................................................283

Fujisawa.............................................................................................................287

Sankyo ...............................................................................................................291

Takeda................................................................................................................295

Yamanouchi .......................................................................................................299

Appendix.........................................................................................................303



Innovation: The key to growthMankind’s drive to defeat illness and disease and improve quality of life has madethe pharmaceutical industry one of the largest and most significant globalbusinesses. Driven by its own ability to innovate, the industry has grown stronglyover the decades, as successful new medicines have extended average lifeexpectancy and as governments across the globe have sought to improve the healthand quality of life of their citizens. Following many years of consistent and steadygrowth, today’s global pharmaceutical market is estimated to be worth close to$400bn. With science continuing to innovate, new and exciting developments overthe coming years, not least from unravelling of the human genome (our own book oflife), can be expected to drive further strong growth in the years ahead.

Our pharmacopoeia surrounds only 500 drug targetsToday, people are living longer, healthier and more productive lives as a result, inconsiderable part, of the efforts of the research-based pharmaceutical and biotechnologyindustries in discovering new medicines to prevent, cure and treat disease. Starting withthe discovery of vaccines and the later development of the antibiotic industry, illnessesthat at the start of the twentieth century were often fatal - such as polio, smallpox, syphilisand consumption (tuberculosis) - have today either been eradicated or have effectivetreatments. Advances in molecular biology and our understanding of the body’s chemistryhave enabled us to develop drugs that help our hearts pump longer, our lungs breathmore freely and our minds act more clearly. And yet, amazingly, we are only at thebeginning. Today, our entire universe of drug receptor targets and, with it, the basis ofmuch of today’s industry, only extends as far as 500 or so distinct sites for drugintervention. As the mysteries of the human genome are deciphered, this figure isexpected to advance between six- and 20-fold to nearer 3,000-10,000 within our lifetimes.Of itself, this suggests the potential for explosive industry growth.

Genomics and rational drug design hold great promiseAs we enter the twenty-first century and our understanding of the human bodyfurther improves, drug discovery is moving away from its earlier serendipity andbecoming ever more rational and industrial. Advances in chemistry mean that wecan now design molecules that will react with a particular body protein and testthem rapidly and repeatedly with the use of complicated laboratory machinery. Goneare the days of little men in white lab coats, pipette in hand, test tube in rack andbunsen burner on the laboratory table. Equally, advances in information technologyand computer software, together with the Internet, have allowed us to predict andvisualise the interactions of a drug with the chemistry of the body. Tests can nowbe conducted with accuracy in silico, while information and new discoveries can betransferred to a global audience in a matter of minutes. As a consequence, thestructure of the industry is changing and will continue to do so. For the corporationsinvolved, critical mass is increasing as the business of research increases in costand the need to recover that cost drives an ever-growing need to penetrate end-markets and disseminate product information. Despite a decade of mergers, theresearch-driven industry remains highly fragmented, the largest player controlling nomore than 11% of total industry sales. Research productivity shows few signs ofimprovement, while critical mass continues to increase. Growth there may be, but,as the costs of discovering, developing and launching drugs continues to escalateand governments strive to contain the health care burden associated with an ageingpopulation, industry structure will, in our opinion, continue to alter.



OverviewA $400bn industryWe estimate that in 2002, pharmaceutical industry revenues from prescription drugswill total around $380bn, a 9% increase on the value recorded in 2001. From a valueof nearer $70bn in 1981, the industry has recorded compound annual revenuegrowth of just under 10% and, despite today’s much greater size, it is of note thatunderlying volume growth rates have seen little sign of abatement over the 20-yearperiod. Geographically, the US has grown in importance and today accounts forroughly 52% of total industry sales. US revenues have gained not only from a morefavourable pricing environment but also from the growth of biotech-derived productsand the market stimulus provided by direct-to-consumer advertising. Freedom ofchoice in US healthcare markets, combined with market-based pricing, argue thatUS growth will continue to outpace that of the other major world markets and thatthe US will continue to increase in importance overall.

By contrast, government-influenced buying and formulary control have meant thatthe importance of European revenues as a percentage of the total industry havedeclined over the past 20 years. Twenty years ago, European markets accounted foraround 30% of global pharmaceutical sales. Today, Europe accounts for just over25% of global revenues. Equally, the Japanese government’s influence in domesticpharmaceutical markets has restricted the rate of absolute sales growth, withJapanese end-markets today accounting for a little over 15% of total industry sales.

Figure 1: Value of the pharmaceutical industry 1981-2002E ($ bn)

0

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100

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200

250

300

350

400

450

1981 1986 1990 1995 2000 2002(e)

Value of the Global Pharmaceut ical Market

Source: Wood MacKenzie, Deutsche Bank estimates

Cardiovascular and CNS drugs dominateBy therapeutic category, today’s industry is dominated by demand for cardiovasculardrugs (including the cholesterol-lowering agents), which, in 2002, were estimated toaccount for almost 20% of industry sales, or around $78bn by value.Pharmaceuticals for disorders of the central nervous system – an area that remainspoorly understood in medical terms – represent the second-largest category,accounting for roughly 17% of global revenues and driven in recent years by theemergence of important drugs for treating mental illnesses such as depression andschizophrenia. Anti-infectives, predominantly antibiotics, retain their importance as amajor therapeutic class, despite the age of many of the key products. In 2002, weestimate that anti-infectives represented a little under 10% of global pharmaceuticalsales. Elsewhere, strong growth in gastrointestinal treatments, most significantlythose for ulcers and acid reflux, has enabled them to retain a near 7% share ofglobal markets, while the growing prevalence of respiratory diseases such asasthma in the industrialised world, has seen this category retain its near 10% share.



Figure 2: 2002E drug sales by region Figure 3: 2002E drug sales by therapy

North America52%

Europe25%

Japan15%

Latin America4%

RoW4%

Metabolic7%

Anti-infectives9%

Respiratory10%CNS

17%

Cardiovascular20%

Other 16%

GI7%

Blood agents3%

Oncology5% Musculo-

skeletal6%

Source: IMS Health Source: IMS Health, Deutsche Bank estimates

Consolidating, but still fragmentedFrom a company perspective, innovation and consolidation have meant that anincreasing proportion of global sales are concentrated in the hands of the top tenplayers. This process has accelerated in recent years, following the mega-mergersof companies like Glaxo Wellcome and SmithKline Beecham (both of which werecreated by mergers within the past ten years), Pfizer with Warner-Lambert and,shortly afterwards, Pfizer with Pharmacia. The ongoing process of focus by theworld’s chemical industries has also seen companies such as DuPont and BASFreconsider their ambitions in what were historically core markets, BASF selling itsKnoll business to Abbott and DuPont its pharmaceutical assets to Bristol-Myers. Weestimate that the top ten ethical pharmaceutical companies, in 2002, accounted forjust over 50% of industry revenues, against 25% two decades earlier. However,despite this consolidation, it is of significance that upon the completion of its mergerwith Pharmacia, the world’s largest company, Pfizer, will still account for only 11%of industry revenues. In part, this pays testament to the sustained innovationevident in the industry and the fact that, despite its absolute scale, markets are notmature and growth comfortably in excess of world GDP is still, in our view,achievable.

Individual drugs, too, have become larger, with the top ten today accounting foralmost 12% of total industry revenues, against just 5% two decades ago. In 2002,over 60 chemical entities achieved $1bn blockbuster status, with the world’s largestdrug, the cholesterol-lowering Lipitor, realising sales of almost $8bn.

Figure 4: The market shares of the top ten companies 1981-2002E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1981

1982

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1984

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1987

1988

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2002F

Top Ten Companies Market Share

Source: Company data, Deutsche Bank estimates



Growth, but not without itspressuresDemographics and innovation strong driversIn large part, the significant growth of the pharmaceutical industry reflects the newdiscoveries and medicines that the industry has developed and the impact thatthese have had on life expectancy. Given that the elderly tend to account for thegreatest proportion of drug usage (see Figure 6), the older the population, thegreater the demand for drugs. However, beyond research innovation and thegreying of the population, industrialisation of the developing economies and agreater emphasis on market penetration, including the use of direct-to-consumertechniques, have all helped fuel growth. Equally, improvements in drug regulatoryapproval times over the past ten years have facilitated growth by affording patenteddrugs a greater period of market exclusivity (albeit the increased length of theclinical trial process has to date eaten into much of this benefit).

n Demographics: Populations are not getting any younger, particularly in theworld’s developed economies. Indeed, it is estimated that every five years since1965, roughly one additional year has been added to life expectancy at birth. Inthe US, life expectancy at birth in 1920 was a modest 54 years. By 1965 it stoodat 70 years, while today, the average life expectancy at birth stands at 76 years.The importance of these statistics is that as we get older, we consume moremedicines. Indeed, industry bodies estimate that healthcare expenditures forpeople 65 and older are nearly four times those of people under 65. Lookingahead, we expect the population of the developed world to continue to livelonger. The absolute number of elderly people will also increase as the baby-boomers turn 65 from 2010 onwards. Overall, the next 50 years are expected tosee a doubling of the number of Americans aged 65 or older.

Figure 5: Estimated % of regional populations over 60 from 1990-2035E

Figure 6: US prescription use by age and population by age

0%

5%

10%

15%

20%

25%

30%

35%

40%

Japan Europe USA

% o

f Po

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on

60

and

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1990 1995 2000 2005 2010 2015 2020 2025 2030 20350

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18

Under 5 5 to 14 15 to 24 25 to 34 35 to 44 45 to 54 55 to 64 65 to 74 75 plus0

2

4

6

8

10

12

14

16

18% of population (LHS)

% of Rx Drug Use (RHS)

Source: World Bank Source: National Ambulatory Medical Care Survey

n Innovation: As the industry has grown, it has invested more and more moneyin research and development, in search of new medicines to better treatdisease. In the US alone, the industry trade body, PhRMA (PharmaceuticalResearch and Manufacturers of America) estimates that pharmaceutical R&Dspending in the US has increased more than tenfold over the past twenty years.As a consequence, more molecules than ever before are entering research



pipelines (although failure rates are also rising, as we shall discuss later). In part,this increase has been fuelled by a strong increase in the absolute number ofnew targets for drug interaction, from around 100 at the start of the 1990s tonearer 500 today. However, as we enter the era of genomics and ourunderstanding of our genes and the proteins they encode improves, thatnumber is expected to increase between six- and 20-fold. Such an increase intargets, and with it, understanding of the body’s chemistry, must be expectedto drive a substantial increase in our ability to develop new medicines to treatand prevent disease.

Figure 7: The number of drug receptor targets is increasing rapidly

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Significant new drug launches Research target areas (RHS)


n Market penetration: Outside new drug development, the pharmaceuticalindustry has become better at marketing its own products and seekingadditional opportunities for a drug’s use. Companies have learnt that tomaximise the value of medicines that are increasingly costly to develop, theyneed to penetrate markets more rapidly and more broadly. The result has beena surge in the number of representatives used to sell new and existingpharmaceuticals. In addition, companies are seeking as many medicalindications for their drugs as possible. Thus, if a drug that was initially developedfor depression has a beneficial impact on sufferers of pre-menstrual tension, thedrug company itself will undertake clinical studies to demonstrate the product’sefficacy against this previously untapped market opportunity. In part, it is thisdrive to maximise the range of disorders for which a single drug may showclinical benefit that has spurred the development of an increasing number ofdrugs that generate revenues in excess of $1bn. Thus, where in 1990, onlyseven pharmaceuticals realised sales in excess of $1bn, by 2002 this numberstood at around 65.

Beyond seeking an increase in the number of indications for which any onepharmaceutical may be prescribed, the advent of direct-to-consumer advertisingin the US has also helped spur growth, by allowing the industry to increasepatient awareness of available treatments for disease. Markets are increasinglyconsumer driven, aided not least by the Internet and, with greater awareness ofchoice, lifestyle drugs have come of age. Thus, while addressing a seriousmedical ailment, products such as Pfizer’s Viagra for impotence, Merck’sPropecia for hair loss and Allergan’s Botox for brow furrow all hold the potential



to attain far greater sales and market penetration than might have been the casebut five years ago.

n Industrialisation: As the GDP per capita of the developing nations improves, sothe ability of those governments and their population to afford new medicinesincreases. The populace’s expectations for health care also increase. Today,emerging markets such as those in the Far East and Latin America representimportant sources of revenue for the global industry as a whole.

n Healthcare budgets: Finally, it is also worth stating that relative tohospitalisation, surgery and lost productivity, pharmaceuticals represent a verycost-effective means for governments or insurance companies to contain thehealthcare costs of an ageing population. Of course, the profitability of theindustry makes it an easy target for government to attack as it seeks to holdback the steadily rising costs of providing a healthcare system. However, thereality is that the use of pharmaceuticals saves society huge costs every year inthe management of disease. As such, simple economics dictate that healthcareauthorities around the world must ultimately drive an increase in their use ifaggregate cost containment is to be achieved.

Figure 8: $ millions saved with clot-busters Figure 9: $ cost vs. savings for migraine drug

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Treatment cost of clot-bustingdrug

Savings in reduced patientrehabilitation and nursing home

costs

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pat

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Cost of drug treatment forMigraine

Reduction in labour costs anddecrease in lost productivity

Co

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on

th

$44

$435

Source: Fagan FC et al (1998) Source: Legg RF et al (1997)

Industry pressures increaseWe have already argued that the pharmaceutical industry holds the potential forcontinued robust growth into the medium term and beyond. Yet it also needs berecognised that there are major cost and revenue pressures facing the industry andthat these are likely to impact on revenue and profit growth over the next few years.Not least among these are the increasing costs of clinical and pre-clinical research,pressure on pharmaceutical prices, the increased costs of marketing and sales,greater intensity of competition in therapeutic classes and, very notably over thenext five years, the threat of patent expiries. It also must be stated that thesepressures are arising at a time when drug pipelines look relatively thin and R&Dproductivity would appear to be faltering.

n Patents. The past 18 months have highlighted the pressures exerted uponpharmaceutical company profits following the patent expiry on a best-sellingproduct. Through the course of 2002, several companies including Bristol-Myers, Eli Lilly, GSK, Merck and Schering-Plough were all forced to announce areduction in earnings expectations as they grappled with the negative profitimpact of patent expiries on one or more best-selling products. Although the



next two years look likely to see a moderation in the value of revenues lost togenerics, the deleterious effect of patent expiries looks set to remain animportant theme into the medium term, as a fistful of significant products losepatent protection over the next few years. At a time when few companies areable to boast a late-stage pipeline that holds anything of much interest, revenuegrowth for several of the leading drug companies is likely to come underconsiderable pressure.

Figure 10: Revenues lost to US patent expiry 1990-2008E ($ bn)

Figure 11: US exposure by company 2002-2006E (% 2002E sales)

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Zantac

From Prior Year

Expiring in year

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Pharmacia

Eli Lilly

Takeda

Roche

AstraZeneca

Novartis

Wyeth

Schering Plough

Aventis

GS

K

Pfizer

Merck

Bristol M

yers

Sanofi

Sankyo

Hard Soft

Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates

n Research costs: We have stated that the genomics revolution holds importantpotential for industry growth and the development of new pharmaceuticals laterin the decade. In the interim, however, establishing the technology platforms tomaximise the potential of these new technologies represents a major andunavoidable up-front investment. In addition, while technology breakthroughsare industrialising the research process, the time taken to get products tomarket, together with the cost of developing new chemical entities continues torise. As illustrated by the charts below, it is estimated that the average timetaken to get a product to market has increased over the past 20 years to almost15 years – a near 20% increase. On average, almost 70 clinical trials are nowundertaken for each new drug application, compared to nearer 30 at the start ofthe 1980s, with each new drug application today requiring over 4,200 patientscompared to just over 1,300 20 years ago.

Figure 12: Time to get a new molecule to market 1960s to 1990s

3.25.1 5.9 6.1

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1960s 1970s 1980s 1990s

Preclinical Phase Clinical Phase Approval Phase

Dev

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ent

Tim

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ears

)

Source: PhRMA



Not surprisingly, this has led to a stark increase in the average costs incurred todevelop a new drug. Industry consultants estimate that the average successful drugnow costs $800m pre-tax to bring to market, a sum that includes an estimated$150-200m for the cost of drugs that fail to navigate the research processsuccessfully. Put simply, the number of new chemical entities approved each year isin no way keeping pace with increases in the level of R&D spending.

Figure 13: R&D expenditures, ethical pharmaceuticals, 1980-2002

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gs

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Sp

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(US

$m)

Source: PhRMA Annual Survey, 2001; Deutsche Bank estimates

n Market exclusivity in new classes shortening: Another feature of today’smarket is that competition among drugs is increasing. Competitor drugsaddressing the same medical condition are entering the market at ever-fasterrates. Thus, where six years separated the launch of the ulcer drug Tagametand its follower drug Zantac, only six months separated the launch of the firstCOX2 inhibitor, Celebrex, and the second to market, Vioxx. Today, innovatorcompanies have much less time to maximise the potential of their innovationbefore competition emerges.

Figure 14: Years separating first in class from first imitator

Celebrex* 1999

Diflucan * 1990

Mevacor* 1987

Tagamet * 1977

Seldane* 1985

0 2 4 6 8 10 12

Invirase * 1995Recombinate* 1992

Prozac* 1988

AZT* 1987

Capoten* 1980

Inderal * 1965

Years of Exclusivity

1996 Norvir *1999 Vioxx *

1992 Kogenate*1992 Sporanox *

1992 Zoloft*1991 Pravachol*

1991 Videx*1989 Hismanal*

1985 Vasotec*1983 Zantac *

1978 Lopressor *

Innovative Drug/Year of Introduction

106

54444

21

0.250.25

Follower Drug

Source: PhRMA, The Wilkerson Group



n Government and pricing: With the exception of the US, pharmaceutical pricesare predominantly determined by government-controlled authorities. Thesignificance of healthcare costs as a percentage of GDP in most matureeconomies means that governments will want to control medical costs tightly.Thus, prices are under regular review, with price cuts enforced in manyimportant territories, perhaps most notably Japan (see below). In addition, inseveral markets, high-priced pharmaceuticals will not be incorporated intonational lists, which detail those drugs that may be prescribed by doctors andhealth authorities (ie, national formularies). Thus, while an ageing society willresult in growth in demand for drugs, the cost pressures on society willinevitably mean that governments have to bear down on price. The alternativeis, quite simply, that the costs of healthcare will grow to an unaffordable level ofGDP.

Figure 15: Japan – ongoing price cuts (%)1988 1990 1992 1994 1996 1997 1998 2000 2002

Price cut -10.2 -9.2 -8.1 -7.2 -8.5 -4.4 -9.7 -11 -6.3Source: Ministry of Health & Welfare

Even in the US, the high relative cost of US drugs and the increasing costs ofmedical insurance are exerting strong pressure on the industry to contain pricing.Political pressure for some containment of drug prices and industry profitability hasalso intensified in recent years, not least as the proportion of the healthcare budgetspent on drugs has risen at a significantly faster rate than healthcare expendituresoverall. Of particular sensitivity has been the absence of a national plan to fundsome significant part of the cost of outpatient drugs for the elderly under Medicare.This has led to considerable political comment on the high price of medicines,together with many initiatives to curb growth in pharmaceutical prices. Initiativeswithin the private sector that look to push an increasing percentage of the overalldrug cost onto the consumer (the so-called co-pay) are also having their effect onmarket growth.

Figure 16: % of US healthcare spendingattributable to prescription drugs

Figure 17: US market growth analysed betweenprice, volume and new drugs

9.0%

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4.9% 4.9%

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1965 1970 1975 1980 1985 1990 1996 1997 1998 1999 2000 2001E 2002E

% U

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rugs

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2001

2002E

Volume & Mix Price New elements

US

Mar

ket

Gro

wth

at

Ave

rag

e W

ho

lesa

le P

rice

s

Source: PhRMA Source: IMS Health

n Marketing costs: As companies have recognised the importance of penetratingmarkets more quickly and achieving peak sales rapidly, so their investment insales forces and marketing has risen dramatically. Over the past five years, weestimate that the top ten companies have between them invested in anadditional 35,000 US sales representatives, taking the total number of reps from



around 30,000 in 1997 to nearer 65,000 today. This clearly signifies a hugeinvestment. In addition, companies have spent very heavily on promoting theirproducts using DTC advertising. Indeed, since advertising on television in theUS was deregulated five years ago, DTC spending had risen six-fold to over$1.7bn by 1999.

Figure 18: US sales force numbers 1997 and 2001

0

2000

4000

6000

8000

10000

12000

14000

Pfizer-Pharmacia*

Glaxo

Merck

AZN

Novartis

Eli Lilly

BM

S

Wyeth

Aventis

J&J

S Plough

Abbott

Roche

Bayer

San-S

yn

1997

2001

Source: Company data, *Pfizer includes Pharmacia

Growth, but not without its pressuresThus, we can see that while innovation should continue to lead to an improvementin life expectancy and, with it, increasing demand for medication, the industry facesconsiderable challenges. Growth should, we believe, remain well above that ofglobal GDP, driven significantly by developments in the US market. However, theaforementioned pressures suggest that over the next five years, we must anticipatea slowdown in the pace of growth. As such, it is our opinion that global growth willslow from the 10% or so experienced through 1999 and 2000 to nearer 7-8% by2002, averaging high single/low double-digit rates thereafter.

Figure 19: World drug growth rates (%) Figure 20: US drug growth rates (%)

0%

2%

4%

6%

8%

10%1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003E

2004E

2005E

0%2%4%6%8%

10%12%14%16%18%20%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002E

2003E

2004E

2005E

Source: IMS Health, Deutsche Bank estimates Source: IMS Health, Deutsche Bank estimates



Figure 21: European drug growth rates (%) Figure 22: Japanese drug growth rates (%)

-5%

0%

5%

10%

15%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002E

2003E

2004E

2005E

-5%

0%

5%

10%

15%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002E

2003E

2004E

2005E

Source: IMS Health, Deutsche Bank estimates Source: IMS Health, Deutsche Bank estimates

More consolidation inevitableFor the industry majors, the consequence of these opposing dynamics is that thecritical mass necessary to stay in the game, be it R&D or marketing, is rising.Because this is a science- and discovery-based industry, serendipity will no doubtcontinue to play its role. However, strength in marketing and putting in place theright research platform with strong alliances across the necessary disciplines isbecoming ever more important. With so many best-selling drugs also expected toface generic competition over the next five or so years, the pressures for severalcompanies to remove costs from their business as they seek to retain competitivestrength in light of faltering revenue growth is also likely to intensify. All told, theconsolidation of the past decade looks unlikely to abate.



The companies

The US and European names dominateFrom a corporate perspective, one glance at the leading 20 companies by revenuesdemonstrates that, despite the significance of the Japanese market to world drugsales, it is the US and European companies that dominate today’s industry. Of thetop 20 companies by 2001 revenues, eight were European and ten US based. Onlytwo were Japanese, with the largest of these, Takeda, only registering as thesixteenth largest company overall.

Comparison of the league positions in 1981 and those in 2001 does, however, helpillustrate the extent to which mergers and acquisitions have shaped the industryover the past 20 years. We estimate that of today’s top ten companies, only two –Merck and Eli Lilly – have retained their industry position as a consequence oforganic development rather than through acquisition or merger. All other companieshave been involved in some major form of M&A activity, a feature that is mostapparent among the Europeans, which, with the exception of Bayer and BoehringerIngelheim, have all merged or acquired over the past five years. It is of note,however, that in essence, today’s ten leading companies are the same as those thatled the tables in 1981. Only AstraZeneca, Bristol-Myers Squibb and Johnson &Johnson are top-ten newcomers.

Figure 23: The 20 leading drug companies with sales and shares in 1981 and 2002------ 1981 ------- ------- 2002 -------

Name Sales ($ m) Market Share (%) Name Sales ($ m) Market Share (%)

1 Hoechst 2,559 3.7 Pfizer (pro forma)* 40,326 11.0

2 Ciba-Geigy 2,103 3.0 GSK 27,015 7.2

3 Merck & Co. 2,060 2.9 Merck 21,628 5.6

4 Roche 1,480 2.1 AstraZeneca 17,344 4.5

5 Pfizer 1,454 2.1 Johnson & Johnson 17,151 4.5

6 Wyeth 1,424 2.1 Aventis 16,595 4.3

7 Sandoz 1,418 2.1 Bristol-Myers Squibb (e) 14,700 3.8

8 Eli Lilly 1,356 1.9 Novartis 13,550 3.5

9 Bayer 1,225 1.8 Roche 12,413 3.2

10 SmithKline Beckman 1,220 1.7 Wyeth 11,733 3.1

11 Boehringer Ingelheim 1,100 1.6 Eli Lilly 10,318 2.6

12 Takeda 1,082 1.6 Schering-Plough 8,877 2.3

13 Upjohn 1,042 1.5 Abbott 7,250 1.9

14 Johnson & Johnson 1,008 1.4 Sanofi-Synthelabo 6,996 1.8

15 Bristol-Myers 1,000 1.4 Takeda (e) 5,866 1.5

16 Schering-Plough 871 1.2 Boehringer Ingelheim 5,264 1.3

17 Sankyo 868 1.2 Amgen 4,991 1.2

18 Rhone-Poulenc 825 1.2 Bayer (e) 4,300 1.1

19 Shionogi 800 1.1 Sankyo (e) 4,223 1.1

20 Glaxo 784 1.1 Schering 3,269 0.8Source: Wood Mackenzie, Note: *Pfizer assumes completion of acquisition of Pharmacia

Some strong underlying performancesThat said, the M&A activity of recent years also belies some very strong underlyingperformances and, indeed, some that have been less inspiring. Thus, while themerger of Glaxo Wellcome with SmithKline Beecham afforded those companies a



leg up, the enlarged group’s underlying market share has also benefited from thestrong organic growth of their drug portfolios, broadly doubling over the 20-yearperiod. Similarly, the combination of ICI’s former pharmaceutical business, Zeneca,with the Swedish company, Astra, has created a business that in 1981 would havehad little more than 1% of the global market. By contrast, in 1981, the combinedmarket share of Ciba and Sandoz (which today comprise Novartis) was over 5%,some way ahead of market share today. The same is also true of Hoechst andRhône-Poulenc, which combined to create today’s Aventis and, sadly, of Bayer. Inlarge part, the failure of the large Continental European companies to retain globalmarket share reflects the lower growth achieved in European markets and, with it,those companies’ dependence upon Europe as a source of growth. Greateremphasis on the US market means, however, that this bias is now changing.

Factors driving consolidationSo what has driven this M&A activity? In essence, the reasons are not dissimilar tothose in many other industries, with the exception, perhaps, of the threat that theimpending patent expiry of a large product can have on a company’s future growthpotential. Overall, we would indicate the following as the main drivers ofconsolidation in recent years.

n Patent expiry: As stated, the threat of losing patent protection on a drug thatrepresents a significant proportion of sales can have a dramatic impact onprofitability and, with it, a company’s future. As such, mergers afford theopportunity to cut costs and so compensate for income lost following patentexpiry, but also to spread the revenue shortfall over a wider revenue base.Mergers that have been undertaken with patent expiry in mind include Glaxo’s1995 acquisition of Wellcome (Zantac expiry), Astra’s 1998 merger with Zeneca(Losec and Zestril expiries) and Pharmacia’s 1995 merger with Upjohn (Halcionand Xanax expiries).

n R&D costs: As the costs of discovering and bringing new drugs to market haveincreased, so too have the risks of failure and the need to have sufficient masswithin R&D to fund growth. In addition, more recently, the breadth ofcompetencies needed to stay abreast of the latest developments in researchhas led to a burgeoning of expenditure. Critical mass in R&D is now moving wellbeyond the level of $1bn per annum. Mergers afford a sensible approach toattaining that mass.

n Marketing mass: As with R&D, the costs of bringing a product to market arealso rising. Sales force sizes, most significantly in the US, are rising, whileexpensive DTC advertising is a growing necessity. Companies that find they areunder-represented in the US market are likely to find that their rate of salesgrowth is unable to keep up with that of the industry as a whole. US marketingresources and presence were certainly an important feature of the mergersbetween Ciba and Sandoz in 1996 and Rhone-Poulenc and Hoechst in 1999.

n Buyer concentration: Government is never an attractive buyer. It tends to setits own rules. Increased government involvement in the purchase of a drug,most notably in the US, combined with the concentration of buyer poweramong fewer private health maintenance organisations, have placed downwardpressure on achieved drug prices.

n Geographic expansion: As the cost of developing drugs has increased, so hasthe need to realise greater sales of those drugs. In effect, companies need tohave the infrastructure in place to distribute and market globally. Wherebusinesses offer a complementary fit, considerable benefits can be derived.



n Pipeline weakness: Failure of the R&D effort to consistently develop newdrugs with significant potential over a sustained period will almost certainlydiminish revenue growth. For example, Bayer’s status as a top-ten player hasbeen undermined over the past two decades as little of significance hasemerged from the pipeline. Weak pipelines and with them prospects for growthcan be overcome through merger activity.

Figure 24: Sales by region for the leading drug companies 2001 (%)

3325

32 33 32

58

19 17 1712 11

2514

53

53 43 39 40

23

6864 63

6256

61

64

5

45 7

64

5 77

6

4

3

918 17

23 2113 9

14 1319

27

1019

8

0%

20%

40%

60%

80%

100%

AstraZ

enec

a

GlaxoS

mithKli

ne

Novart

isRo

che

Aventi

s

Sano

fi-Syn

thelab

o

Brist

ol-M

yers

Squib

b Lilly

Merc

kPfi

zer

Pharm

acia

Sche

ring-P

lough

Wye

th

Sal

es b

reak

dow

n by

reg

ion

Europe US Japan RoW

Source: Company data

Europeans less profitable than their US counterpartsThe propensity of the European companies to merge can also be explained by asimple analysis of the returns and growth rates that these businesses haveachieved relative to their US cousins over the past ten years. Indeed, if we look atcorporate activity over this period, we find that while each of the leading Europeancompanies has been involved in a merger, only two of the US majors have takenpart in an M&A deal of major significance, namely, Pfizer and Wyeth. The Europeanportfolio approach to business has not paid dividends, nor has the companies’tendency to rely on lower-growth European markets for revenues. Thus, it shouldcome as little surprise that the Europeans have over the past few years beenshedding their non-pharmaceutical baggage and emphasising the importance of thefaster-growing and more profitable US market for future revenue growth.

Figure 25: European return on capital 1989-2005E Figure 26: US return on capital 1989-2005E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1989 1991 1993 1995 1997 1999 2001 2003E 2005E

CROCI (ex-Super Goodwil l ) COC

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1989 1991 1993 1995 1997 1999 2001 2003E 2005E

CROCI (ex-Super Goodwil l ) C O C




The face of M&A is changingThese, then, are some of the key drivers of merger activity. However, in addition themega-mergers of late, most significantly those of Pfizer and Pharmacia andGlaxo/SmithKline, have upped the ante, reflecting a greater desire to gaincompetitive advantage from absolute scale.

Figure 27: Summary of major industry transactions 1991-2002Year Purchaser Target Cost of target ($ m)

2003* Pfizer Pharmacia 60.0

2002 Amgen Immunex 17.6

2001 Bristol-Myers DuPont Pharma 7.8

2000 Johnson & Johnson Alza 10.8

2000 Shire Biochem Pharma 4.0

2000 Abbott Knoll (BASF Pharma) 6.9

2000 Glaxo Wellcome SmithKline Beecham 76.0

2000 Pfizer Warner-Lambert 89.2

1999 Pharmacia Upjohn Monsanto 26.9

1998 Rhone-Poulenc Rorer Hoechst AG 21.2

1998 Sanofi Synthelabo 11.1

1998 Zeneca Astra 34.6

1997 Hoffmann-La Roche Boehringer Mannheim 11.0

1996 Sandoz Ciba-Geigy 60.0**

1995 Glaxo Burroughs Wellcome 20.0

1995 Hoechst-Roussel Marion Merrell Dow 7.1

1995 Pharmacia Upjohn 13.0**

1995 Rhone-Polenc Rorer Fisons 2.7

1995 American Home American Cyanamid 9.2

1994 Hoffmann-La Roche Syntex 5.3

1994 Sanofi Sterling 1.9

1990 Beecham SmithKline Beckman 6.5*Source: PhRMA/Reuters * Assumes Q1 completion of announced acquisition**Value of merged entity

Looking at these deals, there can be little doubt that the factors discussed overleafplayed an important role. However, these mega-combinations have also been drivenby a desire to gain a greater share of the global market and to begin to dominate themarket place. They have recognised that in an age when research productivity isfaltering, patent expiries looming and the market shifting towards one that is moreconsumer driven, absolute market strength has its attractions. Not least amongthese are strong leverage with the key buyers of drug, the ability to afford greatermarketing muscle behind key growth drivers and the ability to get more from all theassets in the portfolio. In effect, they have further raised the competitive bar.Indeed, one glance at the following charts, depicting the enlarged Pfizer’s standingvis-à-vis its competitors, should help to emphasise just how formidable competingagainst this company is likely to be. All told, our opinion is that the costs ofcompeting are rising and the experience of the past has demonstrated only too wellthat standing still is not an option.

Therapeutic strengths indicate greater concentrationYet despite all of this merger activity, the industry in aggregate can still be describedas fragmented. As mentioned earlier, market shares have concentrated and today’stop ten companies account for almost 40% of global market revenues compared toaround 25% two decades earlier.

These simple statistics do, however, belie a far greater market concentration ifdifferent therapeutic markets are considered. For example, in the near $80bn



cardiovascular market, Merck, Pfizer and Bristol-Myers have almost a 50% marketshare between them. Similarly, in the $9bn asthma market, Glaxo alone has amarket share of over 35%. Consequently, while the industry may still befragmented from a total market perspective, by therapeutic area, concentration isoften much greater. Companies have most definitely established strong franchisesin different therapeutic markets.

Importantly, these franchises have real value over and above potential economies ofscale. Strong association with a particular disease and the medical fraternity willmost likely spawn greater confidence in new drugs introduced by the franchisecompany. Equally, the franchise company will most likely be seen as an attractivecandidate for in-licensing or co-marketing opportunities, providing it with theopportunity to strengthen its hold further. However, if new products selling into thefranchise market are not developed, franchises can also prove transient. Asillustrated only too clearly by Glaxo’s failure to build on the huge success of Zantac,loss of patent protection and years of marketing investment in building a franchisecan disappear rapidly. For reference purposes, we summarise the therapeuticstrengths of the leading industry players on the following page.

Figure 28: Major pharmaceuticals – market capitalisation ($ bn)

Figure 29: R&D expenditure by company 2002($ m)

-20

30

80

130

180

230

280

Pfizer/Pharmacia

J&J

Merck

GS

K

Novartis

Ro

che

AstraZeneca

Eli Lilly

BM

S

Abbott

Aventis

Wyeth

Sanofi S

ynthélabo

Taked

a

S.Plough

Bayer

Novo N

ordisk

Schering

Yam

ano

uch

i

Sero

no

Fujisawa

Altana

Eisai

San

kyo

Merck K

GaA

0

1000

2000

3000

4000

5000

6000

7000

8000

Pfizer/Pharmacia

GS

K

AstraZ

eneca

Aventis

J&J

Novartis

Merck

Ro

che

BM

S

Eli Lilly

Wyeth

Ab

bo

tt

Schering-Plough

Bayer (e)

Sanofi

Am

gen

Takeda (e)

Schering

Sankyo (e)

Merck K

GaA

Yam

anouchi (e)

Novo N

ordisk

Source: Deutsche Bank Source: Deutsche Bank

Figure 30: US salesforce size 1997 vs. 2001 Figure 31: Prescription drug sales 2002 ($ m)

0

2000

4000

6000

8000

10000

12000

14000

Pfizer-Pharmacia*

Glaxo

Merck

AZ

N

No

vartis

Eli Lilly

BM

S

Wyeth

Aven

tis

J&J

S P

lou

gh

Ab

bo

tt

Ro

che

Bayer

San-S

yn

1997

2001

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Pfizer/Pharmacia

GS

K

Merck

AstraZeneca

J&J

Aventis

Novartis

BM

S

Roche

Wyeth

Eli Lilly

Schering-Plough

Abbott

Sanofi

Takeda (e)

Am

gen

B. Ingelheim

Bayer (e)

Akzo/O

rganon

Sankyo (e)

Yam

anouchi (e)

Schering

Novo N

ordisk

Merck K

GaA

Source: Deutsche Bank Source: Deutsche Bank

Deutsche B

ank AG

Page 23

12 March 2003

Health C

are P

harmaceuticals for B

eginners

Figure 32: Therapeutic strengths and key products of the leading global pharmaceutical companiesCardio CNS Anti-infectives Respiratory Metabolism GI Oncology Hormones Muscular Other Comment

AstraZeneca 33 3 33 333 333Crestor Seroquel Pulmicort Nexium Zoladex

Aventis 3 3 33 33 3

Lovenox Several Allegra Taxotere Lantus

Bristol-Myers Squibb 33 33 33Pravachol Zerit Various

Eli Lilly 333 3 3 333Zyprexa Evista Gemzar Insulin

GlaxoSmithKline 33 333 333 3 3 333Paxil Trizivir Advair Avandia Zantac Vaccines

Merck 333 3 33 33 333 333Zocor Crixivan Singulair Fosamax Vioxx Vaccines

Novartis 3 3 33 3 333Diovan Clozaril Zometa Voltaren Neoral Transplant

Roche 333 3 333 3Rocephin Xenical Rituxan Cellcept Transplant

Pfizer-Pharmacia 333 333 333 3 3 33 333 3 ErectileLipitor Zoloft Zithromax Zyrtec Camptosar Genotropin Celebrex Viagra Dysfunction

Schering-Plough 33 33PEG-Intron Clarinex

Sanofi-Synthélabo 33 3Plavix Ambien

Takeda 3 3 33 3Blopress Actos Prevacid Lupron

Wyeth 3 3 333 3 33

Effexor Protonix Premarin Enbrel Vaccines Vaccines333 15%+ market share 33 5-15% market

share3 Good presence

Source: Deutsche Bank



Who’s got and who’s not?Looking through company pipelines at the present time, it is evident that theindustry is suffering from a true dearth of exciting new drugs. Indeed, the pipelinesof the major pharmaceutical companies are today looking thinner than they havedone for several years. At the same time, over the next five years, many of themajor companies look set to lose patent protection on several large and importantdrugs. All told, this does not bode well for the growth prospects of many of today’sindustry leaders.

So who’s got and who’s not? The following tables summarise in brief the pipelinepotential and expiry risks of each of the global majors. What is most striking is thatof the US and European majors, GlaxoSmithKline, Merck, Pfizer, Roche and Bristol-Myers all look as though they have little of real interest in the cupboard. Elsewhere,the apparently strong profiles of Bayer, Sanofi and Schering-Plough are either due tolifecycle type introductions or products that we suspect will not make it to market.Overall, only Lilly, Novartis and AstraZeneca really look as though they haveproducts that are new and which have real blockbuster potential.

Figure 33: Who’s got and who’s not?Company 2002E $m value

of sales exposed toUS expiry to 2006E

Major expiryyear

% 2002Etotal sales

2006E $m valueof launches

in 2002E-2006E

Key launchyear

% of 2002Esales

EuropeansAstraZeneca 980 2003 6 3,300 2002 20

Aventis 2,100 (i) 2005 13 1,495 2002 8

Bayer 980 2003 20 650 2002 13

GSK 6,700 (ii) 2004 21 2,250 2001 8

Novartis 750 2006 4 2,840 2004 20

Roche 750 2005 12 2,100 2003 16

Sanofi 700 2006 9 820 2002 12

United StatesBristol-Myers 2,575 2005 19 1,150 2002 8

Eli Lilly 390 2006 3 3,600 2003 36

Merck 5,210 2006 26 2,310 2002 11

Pfizer 5,800 (iii) 2006 20 3,735 2004 13

Schering-Plough 780 (iv) 2003 8 2,660 2002 30

Wyeth 890 2006 7 750 2003 6Source: Deutsche Bank estimates (i) Assumes expiry of Allegra in 2005; (ii) Assumes expiry of Paxil in 2004; (iii) Assumes expiry of Neurontin in 2003; (iv) Assumes expiry of Rebetol in 2003



European companies – Summary pipelines & expiries 2001-2005E

Figure 34: AstraZeneca Figure 35: AventisPatent Expiries 2002 US Sales % Pharma Expiry DatePrilosec $2,847m 16% 2002Plendil $209m 1% 2003Nolvadex $337m 2% 2003Zoladex $212m 1% 2005Pulmicort $361m 2% 2006

Launches Peak Sales Indication Launch DateFaslodex $300m Oncology 2002Crestor $2,500m Cholesterol 2003Iressa $1,200m Oncology 2002Exanta $1,000m Thrombosis 2003Symbicort (US) $500m Asthma 2005

Patent Expiries 2002 US Sales % Pharma Expiry DateAllegra Euro 1,730m 10% 2001Arava Euro 185m 1% 2003Amaryl Euro 200m 1% 2005

Launches Peak Sales Indication Launch DateLantus Euro 1,000m Diabetes 2001Ketek Euro 750m Antibiotic 2001Alvesco Euro 500m Asthma 2004Insulin glulisine Euro 250m Diabetes 2004Menactra Euro 500m Meningitis 2005


Figure 36: GSK Figure 37: NovartisPatent Expiries 2002 US Sales % Pharma Expiry DateAugmentin £975m 5% 2002Wellbutrin £862m 5% 2002Flonase/Flovent £800m 4% 2004Zofran £525m 3% 2005Imitrex £616m 3% 2006Paxil £1,413m 8% 2003/7

Launches Peak Sales Indication Launch DateAvodart £450m BPH/alopecia 2003Levitra £500m ED 2003Fosamprenavir £200m HIV 2003Alvimopan £250m IBD 2004

Patent Expiries 2002 US Sales % Pharma Expiry DateAredia $80m 1% 2001Lotensin $340m 3% 2004Lamisil $420m 3% 2004/6

Launches Peak Sales Indication Launch DateGleevec $2,000m Leukaemia 2001Zometa $2,000m Bone metastasis 2001Elidel $1,500m Excema 2002Zelnorm $2,450m IBS-C 2002Prexige $1,000m Pain 2003Xolair $300m Asthma 2004Myfortic $300m Transplantation 2004Certican $300m Transplantation 2005


Figure 38: Roche Figure 39: Sanofi

Patent Expiries 2002 US Sales % Pharma Expiry DateRoaccutane CHF 593m 3% 2002Rocephin CHF 889m 5% 2005

Launches Peak Sales Indication Launch DatePegasys CHF 1,500m Hepatitis C 2002Fuzeon CHF 700m HIV 2003Bondronat CHF 200m Bon metastases 2003Bonviva CHF 300m Osteoporosis 2003Xolair* CHF 700m Asthma 2003Tarceva* CHF 850m Oncology 2004Avastin* CHF 500m Oncology 2004Raptiva* CHF 500m Psoriasis 2004*Genentech products

Patent Expiries 2002 US Sales % Pharma Expiry DateCorotrope Euro 45m 1% 2001Plavix Euro 1,565m 21% 2003/11Ambien Euro 1,208m 16% 2006

Launches Peak Sales Indication Launch DateArixtra Euro 120m Thrombosis 2002Eloxatine (US) Euro 1,250m Cancer 2002Tirapazamine Euro 300m Cancer 2004Dronedarone Euro 300m Arrhythmia 2006Rimonabant Euro 500m Obesity/smoking 2005eplivanserin Euro 500m Schizophrenia 2006osanetant Euro 500m Schizophrenia 2006




US companies – Summary pipelines & expiries 2001-2005E

Figure 40: Bristol-Myers Squibb Figure 41: Eli LillyPatent Expiries 2002 WW Sales % Pharma Expiry DateMonopril n/a n/a 2002Serzone $0.2 bn 1% 2003Glucophage XR $0.3 bn 2% 2003Glucovance $0.2 bn 1% 2003Paraplatin n/a n/a 2004Pravachol $2.3 bn 16% 2005Cefzil n/a n/a 2005

Launches Peak Sales Indication Launch DateAbilify $0.6 bn Schizophrenia 2002atazanavir $0.3 bn HIV (PI) 2004garenoxicin $0.3 bn antibiotic 2004DPC083 $0.5 bn HIV (NNRTI) 2005CTLA4IG $0.5 bn RA 2005

Patent Expiries 2002 US Sales % Pharma Expiry DateProzac $0.4 bn 4% 2001Axid <$0.1 bn <1% 2002

Launches Peak Sales Indication Launch DateXigris $0.4 bn Sepsis 2001Forteo $0.4 bn Osteoporosis 2002Strattera $1.0 bn ADHD 2002Cymbalta $1.5 bn Depression 2003Cialis $0.8 bn ED 2003duloxetine $0.5 bn SUI 2003Alimta $0.5 bn Oncology 2004Ruboxistaurin $1.0 bn Diab. Retinopathy 2005


Figure 42: Merck Figure 43: Pfizer (inc. Pharmacia)Patent Expiries 2002 US Sales % Pharma Expiry DateMevacor <$0.1 bn <1% 2001Prinivil $0.4 bn 2% 2002Zocor $3.3 bn 15% 2006

Launches Peak Sales Indication Launch DateCancidas $0.5 bn Antifungal 2001Invanz $0.5 bn Antibiotic 2002Zetia $1.0 bn Cholesterol 2002Emend $0.5 bn Anti-emesis 2003Arcoxia $0.8 bn Osteoarthritis 2004KRP-297 $0.8 bn Diabetes 2005

Patent Expiries 2002 US Sales % Pharma Expiry DateAccupril $0.4 bn 1% 2003Neurontin $1.9 bn 6% 2004Diflucan $0.6 bn 2% 2004Zithromax $1.1 bn 4% 2005

Launches Peak Sales Indication Launch DateGeodon $0.6 bn schizophrenia 2001Vfend $0.5 bn antifungal 2002Bextra $1.5 bn RA 2002Inspra $0.5 bn hypertension 2003Spiriva $1.0 bn COPD 2004Indiplon $0.8 bn Insomnia 2004Pregabalin $1.5 bn neuropathic pain 2004


Figure 44: Schering Plough Figure 45: WyethPatent Expiries 2002 US Sales % Pharma Expiry DateClaritin $1.1 bn 13% 2002

Launches Peak Sales Indication Launch DatePEG-Intron $1.0 bn Hepatitis C 2001Clarinex $0.7 bn Allergic rhinitis 2002Zetia, Zetia/Zocor* $5.0 bn Cholesterol 2002/2004Asmanex $0.5 bn Asthma 2003Noxafil $0.5 bn Antifungal 2004Tenovil (IL-10) $0.5 bn RA 2004Melacine $0.2 bn Melanoma 2004* Joint venture with Merck

Patent Expiries 2002 US Sales % Pharma Expiry DateCordarone $0.3 bn 2% 2002

Launches Peak Sales Indication Launch DaterhBMP-2 (Indux) $1.0 bn Orthopaedics 2003FluMist $0.7 bn Influenza 2003




The leading drugs

Top ten drugs account for 10% of industry revenuesRecent years have seen a dramatic increase in the number of blockbuster drugs,that is, those achieving sales of over $1bn. In addition, the proportion of globalindustry revenues represented by the ten leading drug companies has increasedfrom around 5% in 1985 to around 12% today. Indeed, the world’s largest drug in2002, Pfizer’s Lipitor, looks set to account for over 2% of industry revenues in itsown right. This is more than the global market share of all but the top 12 drugcompanies alone!

Given the economies of scale associated with a single product realising in excess of$1bn in sales, the increase in the number of blockbuster products has done muchfor industry profitability. However, despite consolidation, the overall increase in theabsolute size of key drugs suggests that pharmaceutical portfolios remain asexposed to patent expiries on large products today as was the case a decade or soago.

Figure 46: The world’s leading drugs by revenues in 2002 ($ m)Rank Product Product Category Company Sales

1 Lipitor Hyperlipidemic Pfizer 7,942

2 Zocor Hyperlipidemic Merck & Co 5,580

3 Losec/Prilosec Proton pump inhibitor AstraZeneca 4,623

4 Procrit/Eprex Erythropoietin Johnson & Johnson 4,269

5 Norvasc Hypertension Pfizer 3,846

6 Zyprexa Atypical anti-psychotic Eli Lilly 3,689

7 Seroxat/Paxil Anti-depressant GlaxoSmithKline 3,085

8 Prevacid Proton pump inhibitor TAP Holdings 3,157

9 Celebrex COX-2 inhibitor Pharmacia 3,050

10 Zoloft Anti-depressant Pfizer 2,742

11 Epogen/Aranesp Erythropoietin Amgen 2,676

12 Advair Asthma GlaxoSmithKline 2,449

13 VIOXX COX-2 inhibitor Merck & Co 2,530

14 Plavix Clot-buster Sanofi/Bristol Myers 2,440

15 Neurontin Epilepsy/pain Pfizer 2,269

16 Pravachol Hyperlipidemic Bristol-Myers Squibb 2,266

17 Fosamax Osteoporosis Merck & Co 2,250

18 Cozaar/Hyzaar Hypertension Merck & Co 2,190

19 Risperdal Anti-psychotic Johnson & Johnson 2,146

20 Effexor XR Anti-depressant Wyeth 2,072

21 Insulin Insulin Novo Nordisk 2,035

22 Nexium Proton pump inhibitor AstraZeneca 1,978

23 Claritin Anti-histamine Schering-Plough 1,933

24 Allegra Anti-histamine Aventis 1,914

25 Premarin Hormone replacement therapy Wyeth 1,880Source: Company information

Concentration owes much to marketingThe reason for this dramatic concentration and the significant increase inblockbuster products goes beyond the discovery of new drugs selling to potentiallylarge patient populations. The shortening of time between the introduction of first-



in-class and me-too products has meant that the industry majors have recognisedthe importance of rapidly establishing new products in the market place and buildinga dominant share ahead of the introduction of competitors. Consequently, hugeresources are now put behind drug launches as companies seek to maximisephysician and patient awareness. For example, AstraZeneca is budgeting to spendover $300m on the launch of Crestor, its new cholesterol-lowering drug. In addition,key pharmaceutical products are now launched almost simultaneously worldwide,instead of on a gradual country-by-country basis. This dynamic approach to productlaunches serves to maximise the net present value of a new drug over its lifetime,with peak sales levels attained earlier in a drug’s lifecycle. Company management ofthe lifecycle of new drugs through the use of different formulations (for example,once-a-day, extended release, injectables), together with attempts to attain approvalfor a broader range of indications have also played an important role in bolsteringtotal sales.

Hyperlipidemics lead the blockbuster chartsThe first product to achieve annual sales of over $1bn was SmithKline’s anti-ulcerdrug, Tagamet, in 1986. By 1990, seven drugs had attained blockbuster status.Today, around 65 drugs achieve sales of over $1bn, with the leading 20 achievingsales of at least twice this level.

Indeed, until 2001, a drug for ulcers/acid reflux had for 15 years consistently toppedthe list of industry best sellers (Tagamet, followed by GSK’s Zantac and thenAstraZeneca’s Losec). However, the rapid growth of the cholesterol lowering drugs,such as Pfizer’s Lipitor and Merck’s Zocor, combined with Losec’s recent patentexpiry have seen a new class emerge as the industry leader. With several years ofpatent life still to run and considerable further scope for market expansion, thesedrugs look set to continue to dominate the tables over the next few years. Quitewhat will follow them is, however, at this stage unclear.

The dominant therapeutic categoriesBy examining industry revenues by therapeutic class, it is evident that the mostsignificant categories are those for cardiovascular products (including the cholesterolreducers), diseases of the central nervous system, antibiotics, gastro-intestinalproducts and respiratory disorders. Each of these categories incorporate drugs thattypically target a large and growing patient population.

In particular, cardiovascular markets stand out as representing a major class. Of theworld’s 25 best-selling drugs, six are cardiovascular, of which four are cholesterol-lowering agents. Worth over $18bn in its own right, this cardiovascular sub-sectorcontinues to record growth of over 10% per annum. Similarly, six of the world’s top25 are CNS agents, of which the $7bn anti-psychotics (schizophrenia) market isregistering growth of around 20% per annum. Indeed, of the major classes, it is onlyantibiotics that, in aggregate, today attain little revenue growth, although within theclass, the quinolones are expanding at a rate of over 10% per annum.

However, outside these more traditional categories, new product introductionshave, in recent years, flattered to deceive. After a phenomenal market introductionin 1999, growth in the COX-2 inhibitor class of products, most significantly Vioxx andCelebrex, has slowed dramatically, albeit that four years into their launch, this classof products has still established a market worth over $6bn. Equally, growth of theglitazone class of insulin sensitisers for treatment of diabetes (GSK’s Avandia andLilly’s Actos) has slowed significantly only two years after their initial launch. Peaksales estimates that had a one point stood at around $3bn for each of these nowappear decidedly aggressive.



Figure 47: The major therapeutic categories and leading drugs

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AdvairFlovent

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CiproLevaquin

BiaxinRocephin

TrizivirSustiva

CombivirViracept

PEG-IntronPegasysCrixivan

LovenoxPlavix

FragminArixtraReopro

Source: IMS Health, AstraZeneca Annual R&A 2001; Deutsche Bank

Super drugs of tomorrowSo what will be the super drugs of tomorrow? Looking at current pipelines, the listof candidates appears rather limited. Leaving aside the multitude of secondgeneration and me-too products in development, some of the more interesting andinnovative products include:

n New cancer treatments, not least EGFR inhibitors. These molecules targetspecific receptors in the cell which, when activated, encourage the cell to divideand multiply. Epidermal growth factor receptor inhibitors block these receptorsand so control division. Clinical results to date have been mixed. The drugs havebiological activity, but, as with many cancer treatments before them, do notrepresent a magic bullet. Nonetheless, low side effects and ease ofadministration, with some benefit in late-stage cancers imply significantpotential in a group of patients who have exhausted other treatment options.Key names to watch include AZN’s Iressa, Bristol-Myers/Imclone’s Erbitux andRoche/OSI’s Tarceva.

n Zetia. Zetia is an additive treatment for high cholesterol. The drug preventscholesterol uptake in the gut and when taken in combination with a statin (seelater), significantly enhances cholesterol reduction. Merck and Schering-Ploughare to market the product jointly. We believe Zetia has significant potential,particularly if the treatment paradigm moves to encourage co-prescribing with astatin. Equally, Merck and Schering Plough are working on a one-pillcombination of Zocor with Zetia, which, if successful, would offer greatercontrol of cholesterol then any other existing treatment.

n Oral clot-busters. Several drugs are in development for the prevention of bloodclots (deep vein thrombosis or DVT) in patients that are undergoing orthopaedicsurgery or who are at high risk of a heart attack. While there are existing



treatments in both areas, they are either injectible or difficult to control, withconsiderable risk of side effects. Perhaps most interesting in the near term isAstraZeneca’s Exanta, which, as an oral drug is easy to dose, with potentiallymodest side effects, might replace Warfarin (also used as a rat poison) as thestandard of care for blood thinning in at-risk patients. Daiichi also has a productin development (DX9065), as do Lilly/Sankyo (CS747).

n Drugs for irritable bowel syndrome. A potentially huge market, yet a diseasefor which few people currently seek treatment. Novartis has developedZelnorm, which works for those who suffer from constipation-predominant IBS.As a new drug for a new market, we believe that Novartis will have its work cutout if the drug is to realise its suggested potential.

Large areas of unmet medical needOutside these new drugs, several large diseases still do not have effectivetreatments. Amongst these, and excluding the largest market of them all, cancer,the diseases with the greatest commercial potential include the following:

n Rheumatoid arthritis. A huge market, most significantly in the elderly. Whilethere are several treatments on the market, none is truly effective at controllingthe disease or attacking its root cause. In our view, one of the most interestingproducts in development is the Abbott/CAT drug, Humira, which is expected tobe launched in 2003.

n Stroke. Stroke remains a major killer for which there is no effective treatment.To date, the disorder has represented a graveyard of pharmaceutical ambitions.The first to find an effective treatment will undoubtedly sell well.

n Alzheimers. Over 10% of the over 65 population suffers from Alzheimer’sDisease - a degenerative brain disorder in which memory and function aregradually impaired. The disease poses a huge cost to society. Several newtreatments have been developed, not least Eisai/Pfizer’s Aricept, Novartis’Exelon and J&J/Shire’s Reminyl. Yet these drugs have only been shown to slowthe rate of degeneration by around 12-24 months. More effective treatmentswould offer huge sales potential.

n Obesity. As we become ever more sedentary, so we are becoming moreobese. Roughly 25% of the US population is now suggested to be obese, withEurope not far behind. Drugs that aid weight loss hold huge potential, both fortheir health and lifestyle benefits. Xenical, a treatment from Roche, looked tooffer hope, but side effects are unpleasant and efficacy limited. Compliance hasalso proven an issue.

n Emphysema (COPD). The ravages of smoking are also becoming more evidentin society and not just through cancer. One of the risks of long-term smokers isdamage to the airways and pockets in the lungs, resulting in chronic bronchitisor emphysema. There is a significant market for drugs that can ease thesymptoms of this disorder. Key here are drugs such as Pfizer/BI’s Spiriva and aclass of development projects called the PDE4 inhibitors.

n Neuropathic pain and diabetes. Diabetes is an awful disease whose effectsare wide ranging. Among other things, these include destruction of the bloodvessels feeding, for example, the limbs and eyes. Drugs for treatment ofdiabetes and its side effects, such as neuropathic pain (tingling and painassociated with nerve wasting), offer huge potential.



The R&D processResearch and development (R&D) is the lifeblood of the industry. It is only throughinnovation and the launch of new and effective forms of medicine that thepharmaceutical industry can continue to grow. Consequently, the majorpharmaceutical companies have, without exception, substantially increased theirtotal investment in research and development over the past decade. We estimatethat the top ten industry participants will spend over $30bn on research in the 2002year. This corresponds to almost four times the level of spending in 1990.

Figure 48: Research & development spending by company in 2002 ($ m)

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The drug discovery process is clearly time-consuming, complex and highly risky.From start to finish, industry estimates suggest that of the 5,000-10,000 moleculesscreened in the discovery process, only one will make it to market as an approveddrug. As molecules become more complex and safety regulations ever morestringent, the costs of developing a pharmaceutical have increased dramatically.Today, it is estimated that, if the$300-350m cost of failures is included, the averagesuccessful new drug costs over $800m before tax to bring to market. Thiscompares to an estimated $230m at the end of the 1980s. Equally, the time takenfrom discovery to market has increased dramatically over the past 20 years, risingfrom around 11 years in 1980 to nearer 15 years today.

As illustrated by the above industry estimates of the cost now required to developand successfully launch a new drug, industry productivity has clearly not kept pacewith research costs. While almost every major drug company targets bringing twoto three new products to the market each year, few appear anywhere nearachieving their goal. To date, the costs of improving industry productivity andindustrialising the research process appear to be little more than just that - furthercosts. In our opinion, the paucity of interesting products in the late-stage pipelinesof the major companies also suggests a lack of innovation. All things considered, theindustry remains hugely dependent on basic scientific discovery and the industrycan only develop solutions as the complexities and mechanisms of humanbiochemistry are unravelled.



As illustrated in Figure 45, the research and development programme for drugdevelopment comprises several distinct phases that can broadly be divided intodiscovery, pre-clinical, clinical and post-marketing. On average, we estimate thatcompany spending on R&D is allocated broadly one-third discovery/pre-clinical andtwo-thirds clinical, with roughly 35% of discovery/pre-clinical spending allocated tofinancing research within external organisations. The key features of each of these,together with a definition of certain terms, are described below.

Figure 49: The process of research – stages and timing

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5000-10000screened

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1 approved by the FDASource: PhRMA 2002

DiscoveryIn the discovery phase, several hundred thousand chemical entities will typically bescreened for a pharmacological effect. The length of time this process can take isanything from two to ten years, although new technologies are helping tosignificantly reduce the discovery process, not least high-throughput screening,combinatorial chemistry and an increasing knowledge of genomics (as detailed lateron in this report).

The process of drug discovery begins with knowledge about disease. Thisknowledge is generally developed through basic research - conducted in thelaboratories of the pharmaceutical companies, but also in government, universityand biotechnology company laboratories and mainly funded by the majorpharmaceutical houses. Basic research reveals disease mechanisms or processesthat become the targets of pharmaceutical intervention. It can be likened to theexploratory phase of scientific and drug research, where understanding of diseaseor functional pathways is sought and potential drug targets identified. Clearly, basicresearch in any scientific area is an ongoing event. However, exploratory work ondetermining specific drug targets generally averages 12 months.

Once the potential drug target is identified, the drug companies will attempt todevelop a molecule that interacts with that target and which might form the basis ofa drug. Techniques such as combinatorial chemistry come into play, as companiesuse rational drug design in an attempt to design a molecule that may interact withthe identified target. Companies may also screen their chemical libraries as theyseek potential drug candidates. On average, companies may spend a yeardeveloping lead candidates. These early drug candidates will then be assessedusing techniques such as high throughput screening (HTS) to determine the qualityof the drug-target interaction. Molecular imaging is also used to try to assess druginteraction and the first in vitro tests will be undertaken on animal tissue to see



whether the drug has any physical effect on animal cells, that is, does theconcentration of various chemicals, such as calcium, which are known to play a rolein cell activity, alter? Overall, tens of thousands of molecules may be screened tosee if they have a potential pharmacological effect and over a period of two to threeyears, a handful may move forwards for pre-clinical evaluation.

Combinatorial chemistry: Combinatorial chemistry is the synthesis of a substantialnumber of distinct compounds using similar reaction conditions. The processincorporates systematic molecular design, either by linking separate building blocksor by adding substituents to a core structure. As the process is fully automated orcomputerised, the 1,000-2,000 compounds required to identify three to fourpossible candidates can be screened in a matter of months. Many of the largeinternational drug companies, as well as the smaller molecular design companies,have established extensive molecular libraries detailing the synthesis techniques,physicochemical properties and any experimental data, such as toxicology orpharmacokinetic studies. Overall, it is estimated that combinatorial chemistry hasresulted in a reduction in the time taken to identify drug candidates of between 18-24 months.

High-throughput screening: HTS utilises computer-controlled robotic systems fortesting compounds systematically through a wide range of assays. The compoundsidentified from combinatorial chemistry are bar coded, weighed and dissolved in arange of standard solutions and then screened using a wide range of assays. Thesewill include both the traditional assays and a wide range of new bacterial or humancell assays, which provide a closer proxy for the conditions in the body. AutomatedHTS has replaced what was previously a time consuming and costly manual processand has contributed extensively to chemical information libraries.

The pre-clinical phaseUltimately, using these techniques and others, a handful of drug candidates will betaken forward for pre-clinical testing in animals (in vivo or in the body) and furtherlaboratory analysis (in vitro or outside the body) and the key pharmacologicalcharacteristics of a compound determined. These characteristics are summarised bythe acronym ADMET, which stands for absorption, distribution, metabolism,excretion and toxicology. These determine the suitability of a new chemical tobecome a drug. If a compound appears to have important biological activity and maybe useful as a drug, tests evaluating the ADMET criteria are conducted on the majororgan systems (such as CNS, cardiovascular and respiratory systems). Other organsystems are evaluated when potential problems appear. These pharmacologystudies are conducted in animals to ensure that a drug is safe to be tested inhumans.

An important goal of these pre-clinical animal studies is to characterise anyrelationship between increased drug doses and toxic effects. Drug development willbe halted if tests suggest that a significant risk may be posed in humans – especiallyorgan damage, genetic defects, birth defects and cancer. On average, drugcandidates can spend around four years in the pre-clinical stage.

Clinical studies in humansA drug sponsor may begin clinical studies in humans once the FDA is satisfied thatthe pre-clinical animal data does not show an unacceptable safety risk to humans.The pharmaceutical company will file an application for an investigational new drug(or IND) with the regulatory authorities. Once approved, human trials can begin,although at all stages, sponsors and investigators must follow regulations designedto ensure safety. Indeed, for US applications, an Institutional Review Board must



review and approve a research plan before the trial begins and exercise continuingoversight of the clinical process.

There are four main phases of clinical trials in drug development and a new drugapplication, or NDA, will typically involve almost 70 clinical trials involving more than4,000 patients. The definitions are functional and drug development candidatesneed not necessarily pass through one phase before the next is undertaken, that is,clinical trials may overlap. Equally, it is important to appreciate that a drug may be indifferent phases of the trial process for different indications. In other words, a drugmay be approved for use in, say, hypertension, but still going through the clinicalprocess for, say, congestive heart failure.

n Phase I trials represent initial safety trials on a new medicine. They are usuallyconducted in a small number of healthy male volunteers and are undertaken toestablish the dose range tolerated by volunteers, as well as to gain furtherknowledge on the pharmacokinetics of the drug in humans. In the case of drugsfor the treatment of life-threatening diseases, such as cancer, phase I trials areusually conducted in ill patients, rather than healthy volunteers. Trials typicallyinvolve 20-80 patients and, we estimate, account for around 10% of total R&Dspending. Around 80-90% of phase I drug candidates typically fall by thewayside.

Figure 50: Trials and patient numbers per new drug application

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n Phase II trials are conducted to evaluate efficacy and safety in selectedpopulations of patients with the disease or condition to be treated or prevented.Objectives typically focus on dose response and dosing frequency, togetherwith safety, efficacy and side-effect characteristics. Trials typically involve 100-200 patients and fewer than 40% of phase II drug candidates will progress tophase III. In total, we estimate phase II trials account for around 20-25% of R&Dbudgets. Note that a phase IIb trial is typically a larger and more rigorousdemonstration of a medicine’s efficacy, while a phase IIa study can be thoughtof as a proof of concept study (ie, one in which the trial is seeking todemonstrate that the concept works).

n Phase III trials are typically conducted once the efficacy of a medicine has beendemonstrated and the optimal dose range determined. Again, they are



conducted with patients for whom the medicine is intended and are designed todemonstrate safety and efficacy in larger patient populations. Several trials maybe conducted as the sponsor of the trials seeks to demonstrate the benefit ofthe drug against placebo (see later), in combination with other treatments orefficacy and side-effect profile relative to an existing treatment. The number ofpatients involved will depend on the disease for which the drug is intended. Acancer drug may only be investigated in a few hundred patients, while a drug forhypertension would be studied in several thousand. Key to determining thenumber of patients is the need to identify potentially rare side effects, as well asto perform statistical analysis on the results. No drug will gain approval unless ithas shown statistically significant superiority to placebo in clinical trials, with theexception of cancer drugs, where the focus is on an increase in survival times.Phase III trials are often described as pivotal trials and will typically form themajor part of the submission to the regulatory authorities. Phase III trials areestimated to account for around 30-35% of a company’s R&D spending.

n Phase IV or post-marketing surveillance. Assuming the successfulcompletion of at least two pivotal trials, the drug sponsor submits a new drugapplication (NDA) to the relevant regulatory authority, such as the FDA in theUS, the EMEA in Europe or the MHW in Japan, for approval to manufacture,distribute and market the drug. However, even if the drug is approved, theclinical process does not come to an end. Sponsors are required to undertakepost-marketing surveillance to monitor a drug’s safety, a process that continuesfor the life of the drug. The objective of such surveillance is simple. Adversereactions that occur in fewer than one in 3,000-5,000 patients are unlikely tohave been detected through the clinical process and may be unknown at thetime the drug is launched. Thus, rare adverse events are more likely to bedetected once the drug has exposure to a substantial patient population. Shouldserious adverse events occur anywhere in the world, the pharmaceuticalcompanies must inform the regulatory agencies within 15 days. Dependingupon the frequency and severity of the adverse event, changes to a drug’slabelling, as was the case with Glaxo’s Lotronex, or indeed its completewithdrawal, as happened with Bayer’s Baycol, may be deemed necessary.

… But the clinical trial process continuesIt is important to appreciate that almost all companies will continue to undertakeclinical trials on launched drugs and to use the data gathered to strengthen the druglabel (see the section on regulatory). This may be as they seek to develop furtherlong-term data on the efficacy of the treatment or seek approval for additionalindications, ie, anti-depressant treatments are used not only for depression, but alsofor a number of other anxiety-related CNS indications (social phobia, obsessivecompulsive disorder, etc). Equally, companies may undertake trials to demonstratethe greater efficacy or side-effect profile of the drug relative to a class competitorand so strengthen the drug’s marketing message and appeal to physicians.

R&D productivityOne of the key issues for the industry today is R&D productivity. At a time when theindustry is facing increased pressure on top-line growth in light of patent expiriesand the determination of payers globally to control the growth of expenditure onmedicines, innovation is more important than ever for growth. After a wave of newdrug launches through the mid- to late 1990s, industry pipelines today very evidentlyshow a dearth of innovative new products. And where companies do have a late-stage offering, many of these are ‘me too’ in nature. As such, they are unlikely toopen new markets.



What is somewhat alarming is that while the amounts spent on R&D continue to rise,the industry’s late-stage pipeline is showing precious few signs of expanding. Asillustrated by the charts below, although applications for investigational new drugs fromcommercial organisations are on the increase, the rate of increase is modest. Equally,failure rates have, if anything, been on the rise. As a result, while the number ofmolecules reported to be in Phases I and II has grown, the number of molecules inPhase III has not.

Whether this reversal in industry fortunes is permanent or transient remains to beseen. Certainly, a significant element of the decline in product successes can beattributed to several factors. Among other things, these likely include a more safety-conscious FDA, crowded therapeutic classes requiring products to be betterdifferentiated, a greater risk of drug-drug interactions and the greater complexity oftoday’s molecules. The industry’s early 1990s shift towards more innovative (butunproven) mechanisms, as it feared the impact of a change in US market structure onthe price of ‘me-too’ products, has also no doubt played its part.

Yet, quite aside from any potential future benefit from the genomics revolution, theindustry is undertaking research into a growing number of new receptor classes,many of which could result in significant new developments. In almost all areas ofdisease, new mechanisms are being actively sought. However, with today’spharmacopoeia already encompassing many very successful treatments, be theypalliative or curative, the bar for success is far higher than ever before. Thus, withfew clear signs of an imminent breakthrough in any significant new receptor class, theclear message for the time being must be that, despite all the industry’s best efforts,the risks associated with successful pharmaceutical development continue toincrease, while improvements in productivity do not. Serendipity has yet to show herhand.

Figure 51: IND filings fail to keep pace with R&D Figure 52: The late stage pipeline is static

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How do analysts assess R&D pipelines?Given that a significant proportion of a pharmaceutical company’s marketcapitalisation is tied up in the value of its R&D pipeline, it is not surprising that amajor part of pharmaceutical analysis centres on assessing the potential of drugs indevelopment. This is not an exact science and is probably the area ofpharmaceutical analysis most prone to error.

Until recently, pipeline analysis could be summed up as “spot the blockbuster” andfocused on identifying high potential drugs in development. Most excitingly, these



are drugs with a totally novel mechanism of action, targeted at a disease with largepatient numbers, where there is a high level of unmet medical need. However,many blockbuster drugs have also come from established drug categories, wheresubstantial sales have been won by offering modest improvements over existingproducts.

As pharmaceutical companies get bigger, however, the scope for one blockbusterdrug to exert significant earnings leverage clearly diminishes. As a result, factorssuch as R&D productivity and risk-reward balance are becoming increasinglyimportant.

n R&D productivity – The historical average for pharmaceutical industry R&Dproductivity has been just over one NCE (new chemical entity) launch per year.However, the majority of the large cap companies now target at least two tothree NCE launches per annum. Very few companies are so far achieving this. Acrude measure of R&D productivity can be gauged by looking at the number ofdrugs in development in the light of their projected launch dates. Bear in mindthat the risk of failure increases significantly the further the drug is from themarket.

n Risk-reward – Ideally, an R&D pipeline should have a good balance betweeninnovative products with high market potential, but which have a higher-than-average chance of failure, and products that act by established mechanisms ofaction (often called me-too drugs), where the chance of failure is reduced, butwhere market potential may be more limited due to existing competition. Acompany whose entire pipeline is built on innovative mechanisms is atsignificant risk of bringing nothing to market.

n Balance – To ensure a steady flow of new drugs to the market a pipeline, acompany should ideally have drugs in all stages of clinical trials. The optimalstructure is pyramidal, with more drugs in Phase I than in Phase II and moredrugs in Phase II than Phase III. This reflects the risk of new drug failure, whichis currently estimated by consultants at nine out of ten in Phase I, six out of tenin Phase II and five to six out of ten in Phase III. As discussed above, the moreinnovative the product, the higher the risk of failure. Not surprisingly, a companywith a “pipeline gap“, with no products in Phase III trials, is a cause for concern,as it may suggest a higher-than-average rate of new drug failure.

n Pipeline potential – Analysts generally estimate “peak sales” for each productin a company’s pipeline. This usually represents forecast annual sales five yearsfrom launch. For a drug intended for use in a disease where there is already awell-established market, estimated potential is most likely to be based on atarget market share. This would obviously reflect potential advantages of thenew drug over the competition, but should also take account of the marketingstrength of the originating company. For a drug targeted at a disease for whichthere is little or no existing competition, market potential would be estimated bygoing back to first principals in terms of patient numbers, likely penetration rateand estimated price. In general, the smaller patient numbers and the moreserious the disease, the higher the price of the drug. Also worth bearing in mindis that drugs predominantly prescribed by hospital doctors would tend to requirelower marketing spending than those targeted at a primary care audience.When adding estimates for pipeline products to a company earnings model, wewould recommend risk-adjusting sales potential to reflect the risk of R&Dfailure.



Clinical termsSo, you’ve made the mistake of trying to read a clinical trial. What do all thoseridiculous expressions mean? Here’s a brief summary:

Placebo: A sugar pill (or something to that effect) given to the trial candidate in theplace of the active drug.

Double Blinded: Neither patient nor physician was aware which of the patientgroups were receiving placebo and which were receiving the active drug.

Single Blinded: The patient is unaware but the physician is aware of which patientsare receiving placebo and which were receiving the active drug.

Open (Unblinded) Trial: Both patient and physician know whether they are takingdrug or placebo.

Control: The trial was undertaken comparing the new drug with another drug,rather than a sugar coated pill (placebo).

Cross-over: The patient groups alternate treatment through the course of the trialthat is, one half take the active and the other placebo/control and at a set time theyall swap or cross over.

Randomised: The patient population contains a random but representative mix ofpatients that is, men, women, black, white, even spread of ages, and so on.

Intention to Treat: Every patient initially involved in the trial is registered in the finalanalysis, including those who withdrew for whatever reason. More robust than ‘astreated’.

As Treated: Only the patients who completed treatment are included in the finalanalysis of clinical data.

Primary End Points: The primary and most important objective of the study onwhich the success of the study will usually be determined.

Secondary End Points: Other objectives of the study but not those that are the keymeasurement.

p-Values: A statistician’s term, measuring whether an outcome is statisticallysignificant. The lower the p-value the greater the significance. A p-value of p>0.05suggests limited statistical significance, while one of p<0.01 is highly significant.

Non-statistical: Exactly what it says….

Patient Arms: Trials often split patients into a series of arms, each receivingdifferent doses, for example. Thus a trial of 1000 people may have four arms, with250 patients in each.

Markers: Typically, components in blood that are measured to give an indication ofthe impact of treatment, for example, number of copies of a virus found in the blood(or viral load).



Genomics & BiotechnologyThe sequencing of the human genome heralds the start of an era of greatopportunity and offers the drugs industry huge potential to better understand thebody’s workings and the basis of disease, together with the potential for anunprecedented increase in drug targets. As our understanding of our own geneticcode improves and the roles of the molecules encoded by it become betterunderstood, so our ability to rationally design new drugs specific to differentindividuals and new receptor targets should grow exponentially.

The Genome. What is it?Genomics is the study of the genome and the human genome is, in effect, our bookof life. It contains the instructions for the production of all the thousands ofmolecules that govern cell chemical activity. Our genetic code is comprised of aspecific sequence of molecules called deoxyribonucleic acid or DNA, which take theform of a double helix comprised of two intertwining and complementary strands ofgenetic instructions.

Deoxyribonucleic Acid or DNAEach DNA strand consists of a linear arrangement of linked and repeating sub-unitscalled nucleotides. These nucleotides are based on only four different molecules(known as nitrogenous bases). The four are called adenine (A), thymine (T), cytosine(C) and guanine (G). Each base on one strand of DNA is linked to a specific base onits complimentary strand, so forming base pairs. Importantly, strict rules are adheredto, such that A always bonds with T, and C with G. The limited number of bases andfixed nature of pairing hugely reduces the scope for error, yet maximises diversity.In total, the human genome comprises roughly 3.1 billion base pairs.

DNA is Paired in 23 ChromosomesWithin the human cell nucleus, DNA strands are distributed across 23 pairs ofchromosomes (46 in total). Arranged linearly along these are an estimated 100,000genes. A gene is a specific sequence of nucleotides that direct protein synthesis.They may vary widely in length and, interspersed within and around them on theDNA strand, are ‘junk regions’ that have no known coding function. Interestingly, ofthe 3.1 billion base pairs only 10% are thought to contain genes.

SNIPS and PolymorphismsEach of us has 23 pairs of chromosomes. However, within each of us the exactmake up of our individual DNA is not identical. Minor variations in our genes existand it is these differences that are responsible for our individuality. If all of our DNAwere identical, then we too would all be identical – one huge family of clones,indistinguishable from one another. These minor variations are known aspolymorphisms (many forms). They are often benign but some variations areassociated with a higher risk of disease. For example, as a result of polymorphisms,some people may be more likely to develop diabetes or Alzheimer’s. Equally,differences in our genetic make-up may determine whether or not we react poorlyto a particular drug. Because most polymorphisms involve only a change in onenucleotide of the DNA strand, they are often referred to as single nucleotidepolymorphisms (SNP’s or snips). Those subsets of individuals who have a similarSNP are said to be of the same genotype.



Figure 53: The Creation of Proteins from DNA

Source: DOE Human Genome ProgramSource: Human Genome Project, DoE

Gene ExpressionGenes do not act independently. Rather, so-called control regions - specificsequences located within ‘junk’ DNA, regulate them. In effect, it is the activity ofthese regions that will turn a gene on or off and determine the nature of the cell’sactivity. This allows for functional differentiation between cells, despite the fact thateach cell, no matter where in the body it is, contains the same total instructionbook. Thus, a liver cell produces liver enzymes, while a pancreatic cell producesmolecules specific to the pancreas, and so on. The term ‘gene expression’ refers towhether a gene is turned on (expressed) or not.

The process by which a gene synthesises a single protein (gene expression) isbased on interpretation of the sequence of its base pairs. A gene’s coding sequenceis comprised of triplets of the nucleotides A,T,C and G called ‘codons’. Each of thecodons encrypts for one of twenty particular amino acids and the number and orderof codons along a gene sequence determines the specific amino acid sequence thatmakes up a protein chain. Thus codons are akin to instructions for words, which areordered together along a gene and are read to make up a sentence (the protein).However, to continue the analogy, inserting the punctuation marks is oftendependent upon instructions from other genes. This all adds to the complications ofunravelling the meaning of it all.

How is the gene read?In order for codons to be read and proteins formed, the gene’s twisted DNA strandsunwind and serve as a template. Within the cell nucleus a complementary strand ofwhat is called messenger ribonucleic acid or mRNA is produced, using the DNAtemplate. The transcribed mRNA molecule is nearly the same as the original DNA,except that a nucleotide called uracil (U) takes the place of thymine (T). The mRNAstrand then moves out of the cell’s nucleus and into the surrounding fluid orcytoplasm. Here it attaches to a cell constituent called a ribosome and is translated,the ribosome reading the mRNA and adding the encoded amino acids to one



another to create a protein. This chain of amino acids, or protein, is then eitherimmediately functional or will undergo further change through the influence of othergene-encoded proteins to gain its functionality.

Where Are We in the Genomics Revolution?Today, we are still at the very start of the genomic era. The sequencing of thehuman genome is the first step along a very long road to understanding the basicmake-up of our chemistry. To date, we know the sequence of the 3.1 billion basepairs, but little about what they encode for and where the different codingsequences, or genes, are located. Equally, we have only limited knowledge of howdifferent genes interact. Even more bewilderingly, genes encode for proteins and itthese proteins that are the main perpetrators of functionality in both diseased andhealthy pathways. Thus, if we are truly to benefit from our understanding of genes,we must understand the actions of the million plus proteins which they encode –how they are synthesised and how they interact. Indeed, for the pharmaceuticalindustry, it is proteins that represent the most likely drug targets. Consequently, it isthe study and understanding of proteins (termed proteomics) that, more likely thannot, will be the real key to delivering value and drugs from our knowledge of thehuman genome and its workings.

PharmacogenomicsHowever, our increasing knowledge of the genome is already bearing fruit throughpharmacogenomics. Pharmacogenomics is the study of genotype and itsrelationship to drug action. It is about using the right drug on the right person. It isabout why some patients react favourably to drug treatment and others adversely -the answer to which is increasingly believed to be genetic. Thus, a drug such asRoche/Genentech’s cancer treatment, Herceptin, is only directed at those patientswho express the HER2 gene and receptor.

As said, there is a long way to travel. However, the potential of our developingunderstanding of genomics and proteomics is huge.

n By studying the disease genotypes we should be able to predict whichindividuals have a predisposition to disease.

n Equally, we may be better placed to determine which groups of individuals orgenotypes have a predisposition to react adversely to particular drugs.

n Disease genotypes may also reveal on which chromosome the gene associatedwith a particular illness is encoded.

n If we know where bad genes are located, we may be able to repair them usingso called ‘antisense’ technology

n If we know where healthy and unhealthy genes are located, we may be able todetermine the difference in the proteins that each produces and so developappropriate drugs.

n If we understand how genes are expressed, we may be able to turn good geneson and bad genes off

n If …

…… the list is endless.



BiotechnologyBiotechnology is, in essence, man’s use of the cell’s chemistry to producetherapeutically useful proteins. In large part, biotechnology seeks to industrialise andmanipulate chemical reactions that occur at the cellular level and produce significantquantities of structurally complex molecules.

The use of biotechnology is not new. For thousands of years, man has takenadvantage of the chemistry of micro-organisms to produce desirable products. Forexample, at its simplest level, the process of yeast fermentation represents a goodexample of using biotechnology to undertake an industrial-scale biotechnology-based reaction. Here, a type of fungus called yeast is fed sugar and otheringredients, which it metabolises to produce alcohol and carbon dioxide, etc.

Monoclonal antibodies (Mabs)From a pharmacological perspective, the biotech industry really exploded in the late1970s and early 1980s as scientists developed techniques that could isolate genesthat encoded for specific proteins and recombine them in the genetic material (DNA)of cells that divided rapidly. By doing so, a desired protein could, in theory, bereproduced in commercial quantities – with the recombinant gene encoding for thedesired protein and the cancer cell ensuring its rapid and ongoing replication.

Most significant was the discovery by Kohler and Milstein in 1975 – by fusing anantibody-producing white blood cell (or B lymphocyte) with a mouse-derived cancercell, a hybrid cell capable of mass production of a single specific antibody (amonoclonal antibody or Mab) was possible. (An antibody is a protein that is createdby the host’s immune system in response to a foreign particle called an antigen).This was seen to have particular relevance in the treatment of cancer, but also inother ailments where a specific protein was targeted. The theory was simple. Forexample, if antibodies specific to types of cancer cell could be produced incommercial quantities, then target-specific drugs could be developed. The antibodyproduced through genetic recombination could subsequently be manipulated toincorporate a cell toxin, eg, a radioisotope. This could then be administered to thecancer patient and would kill the cancer cells to which the antibodies attached, butleave healthy cells intact.

Figure 54: Simplified structure of an antibody molecule

Variable region facilitates binding with antigen. Variationmeans that over a million variations of antibody molecule arepossible

Different parts of molecule are held together by bonds whicheffectively act like a hinge permitting further binding flexibility.

Constant region of the molecule binds with larger white bloodcells which destroy the foreign antigen bound to the variableregion. Constant region determines type of immunomolecule. Limited variations exist.




Mammals can produce millions of different antibodiesMan’s (or mammals’) ability to produce a huge diversity of antibodies lies at theheart of his immune system and, in order to better understand antibody technologyitself and some of the products in development, it is useful to have a betterunderstanding of their structure and diversity. Antibodies take the form of a pincer-type molecule comprising four main regions (see diagram). Three of these arebroadly constant in their structure and amino acid sequence, while the fourthsequence exhibits intense diversity. As a consequence, mammals can produce over100 million different antibody variations. The constant regions determine thefunction of the antibody (eg, whether it is raised in response to a parasite or anallergen) and facilitate binding with the white blood cells of the immune system thatultimately destroy the foreign antigen. The variable region is the part that effectivelyadheres to the antigen. Because so many variations are possible, given time, thebody’s immune system invariably develops an antibody to almost any disease and,once that antibody is created, it is mass-produced by the body until all the antigensare destroyed.

Figure 55: Monoclonal antibodies - Commercial and in developmentMurine Chimaeric Humanised Fully human

Panorex (GSK) Remicade (Centocor) Herceptin (Genentech/Roche) Humira (CAT/Abbott)

Bexxar (GSK) ReoPro (Lilly) Synagis (Abbott) ABX-IL8 (Abgenix)

Theragyn (Antisoma) Rituxan (Roche/Genentech) Campath (Millennium) MDX-CD4 (Medarex)

OrthoClone (J&J) Simulect (Novartis) Zenapax (Genentech/Roche)Source: Company data, Deutsche Bank

Great in theory, but not so easy in practiceFrom a commercial viewpoint, production of effective monoclonal antibodies has todate proven very challenging. This is because all the antibodies produced industriallyhave, to date, incorporated some amount of mouse (or murine) protein. Wheninjected into humans, this foreign protein elicits an immune response and isdestroyed. Over the years, scientists have gradually been able to reduce the amountof mouse antibody in any monoclonal. However, as yet, there are no 100% humanMabs available commercially, although new technologies, such as phage display andtransgenic mice, mean that several are in development (the most advanced beingCAT/Abbott’s Humira, formerly D2E7). Figure 7 lists some of the main monoclonalsin commercial production/development analysed by antibody type.

Figure 56: Evolution of antibodies from 100% mouse to 100% humanised

Mouse Protein Human Protein

Murine Antibody(100% mouse protein)

Chimaeric Antibody(35% mouse protein)

Fully Human Antibody(100% human protein)

Humanised Antibody(10% mouse protein)

Reduced Immunogenicity and Enhanced Efficacy

Source: Wood Mackenzie, Deutsche Bank



Recombinant technologiesBeyond the use of biotechnology to produce molecule-specific drugs, biotechnologyalso finds important application in the production of essential human proteins, forexample, insulin and the blood-clotting activators, Factors VII and VIII. Put verybasically, the concept here is simply to discover the gene responsible for theproduction of the particular protein and to insert that gene (recombine it) in rapidlydividing cells, typically a bacterium of some kind. The cells would then produce therelevant protein (say, insulin) which could be extracted, purified and usedtherapeutically.

Figure 57: Simple diagram depicting recombinant theory

Bacterium geneticmaterial encoding forbacterial proteins

Segment of human DNA with blackbar being gene encoding for desiredprotein. This is cut out of DNA andinserted in the bacterium’s geneticmaterial

Human generemoved and placedin the bacterium’sgenetic material

Simplified diagram illustrating basics of recombinant technology whereby a desired gene which codes for a specific proteinis cut from the genetic material of one organism (say man) and inserted in the genetic material of a rapidly dividing cell. Bycombining the desired protein encoding gene in the genetic material of a rapidly replicating simple organism the relevantprotein can be mass produced.

Bacterium Human Genetic Material Bacterium with human geneincorporated (recombinant DNA)




The regulatory processTo date, regulators globally have not created a single harmonised protocol for drugapproval. As such, separate regulatory bodies and approval processes exist in eachof the major markets of the US, Europe and Japan. While future harmonisation is anobjective (and a process, with this as an aim, entitled the International Conferencefor Harmonisation, or ICH, is ongoing), as things stand today, a new drug will needto go through at least three separate approval processes if it is to be launched in theworld’s three largest markets. This is clearly both costly and time consuming. Therequirements of the different regulators also mean that companies often have toundertake further clinical trials in order to meet the regulatory needs of theauthorities in the different territories, a feature that further increases the alreadysubstantial costs of the regulatory process. Having said this, the actual filingrequirements across the three regulatory regimes discussed here are graduallyconverging. However, one major difference between attaining marketing approval inthe US and elsewhere is the need to agree pricing with the authorities in both Japanand Europe. Of itself, this often leads to significant delays between actual approvaland product launch.

Regulation in the USAs with drug development, the process of regulatory approval in the US falls underthe supervision of the Food & Drug Administration (FDA). A new drug sponsor(invariably the drug manufacturer) will submit a file, called a New Drug Application(NDA), for a new chemical entity (NCE) to the FDA for approval to manufacture,distribute and market the drug in the US, based on the data collated through theclinical trial process. This file comprises a multitude of information, including writtenreports of each individual study, manufacturing data and a summary of all availableinformation received from any source concerning the safety and efficacy of thedrug. Included in this must be at least two pivotal trials, one of which must havebeen undertaken in the US (pivotal trials represent the key clinical trials confirmingefficacy and so on for any NCE submission). In addition, 120 days prior to a drug’santicipated approval, the sponsor must provide the FDA with a summary of allsafety information surrounding the new drug, including any additional safety dataobtained from trials undertaken during the review process.

Advisory committeesFollowing NDA submission, the FDA has 60 days to inform the sponsor that theapplication is complete and worthy of review. At this stage, the FDA designates thereview track for the product. A standard review process is 12 months. In the case ofa therapeutic breakthrough, a drug may be granted an ‘expedited’ six-month review.Assuming FDA acceptance, the submitted NDA will be forwarded to a specialisttherapeutic department, the bias of which depends on the drug. For example, acancer treatment will be forwarded to the Division of Oncology and so on. The FDAalso frequently seeks advice from its 17 standing advisory committees on drugs,particularly on NCEs. These comprise independent scientific experts, physicianresearchers and statisticians who will make a recommendation to the FDA as towhether an NDA should be approved or not. The FDA is not, however, obliged toheed their advice.



Approvable, approved and complete reviewAssuming that the NDA meets the efficacy and safety requirements of the FDA, ifthere are no outstanding issues, a drug may be granted an immediate approval atthe end of the formal review process. However, often, if there are outstandinglabelling issues, or if the FDA has requested additional clinical trial data, a drug willbe deemed ‘approvable’, with formal approval following some months later, oncethe outstanding issues are resolved. Formal approval by the FDA typically followsabout one to three months later, following discussions on the prescribing label (seebelow) and, once received, the drug may be launched.

Importantly, the FDA has recently indicated that it intends to replace both‘approvable’ and ‘not-approvable’ letters with ‘complete review’ letters. As such,visibility on the nature of the FDA’s response to a drug NDA looks set to becomemore dependent upon the disclosure made by the drug sponsor. Letters issued will,as before, detail deficiencies in the drug application and actions necessary forapproval. These details will, however, only be available to the drug sponsor.

The drug label and black boxesThe period between receipt of an approvable or complete review letter and FDAapproval itself can, however, take considerably longer. This may be because theFDA believes that further information is required, confirming safety or efficacybefore launch. Alternatively, the delay may surround debate between the drugsponsor and the FDA on what should or should not be incorporated into the drug’slabel. A drug label represents the information that must be made available toconsumers whenever that drug is dispensed (that is, that sheet of paper insideevery drug packet that we throw away as soon as we’ve torn open the packaging).Importantly, the label details all the safety data, together with any specific marketingor superiority claims permitted by the FDA (in other words, claims made followingclinical trials that demonstrate the drug’s superior efficacy relative to otherproducts). In certain instances, the FDA may require that the label emphasisepotential drug side effects, that is, a health warning. This might be by way of boldtext or, in extreme cases (and typically if the drug can result in fatalities), theaddition of a warning in a clearly visible black box. This is excitingly entitled a BlackBox Warning and clearly is not conducive to sales.

The label is important to the drug company, as it determines which claims for theproduct can be made in marketing. Promotional claims cannot be made unless theyare included in the drug’s label.

ANDAs and sNDAsOutside new drug applications (and the INDs discussed in the Research &Development section of this report), the FDA also frequently deals with two othertypes of drug application - supplemental new drug applications (or sNDAs) andabbreviated new drug applications (or ANDAs).

n ANDAs: An ANDA is the submission required for launch of a generic version ofan existing approved drug. They are called abbreviated, because they are notrequired to include data on animal and human clinical studies. Rather, they mustdemonstrate that the generic drug is bioequivalent to the innovator drug. Thismeans that the generic drug is chemically identical to the branded product andis absorbed by the patient in the same way, such that the blood concentrationsof the two are identical.

n sNDAs: Supplemental NDAs are those filed for drugs that are already approved,but for which a new/additional indication is being sought (for example, the use



of the anti-depressant Prozac for treatment of pre-menstrual tension).Depending on the indication, the drug company may or may not be required tosubmit clinical data demonstrating efficacy in this additional indication, togetherwith additional safety data. The time frame for approval is six months if clinicaldata are not required, or 12 if a review of clinical data is necessary.

User fees see complete review periods shorteningReform of the FDA over the past decade has seen a vast improvement in the timetaken for regulatory approval. On average, the FDA now commits to review astandard NDA in 10-12 months. This represents a dramatic improvement on the twoto three years that was typical earlier in the 1990s. In addition, the total number ofdrugs approved in any one year also increased, from around 20 in the early 1990s toaround 30 in the late 1990s (although as illustrated below, approvals have fallensomewhat further of late). Among other things, two pieces of legislation have driventhis change.

n The 1992 Prescription Drug User Act (PDUFA), under which thepharmaceutical industry agreed to pay $327m in 1993-1997 to enable the FDAto hire additional reviewers, and

n The 1997 FDA Modernisation Act (FDAMA), which requires the FDA topromote public health by timely review of NDAs and to protect health byensuring products are safe, effective and properly labelled. The act also saw thepharmaceutical industry agree to pay circa $600m in user fees to facilitate areduction in approval times and the FDA agree to review standard NDAs in anaverage of ten months by the end of 2002, from the prior average of 12 months.

User fee deadline and priority reviewThese two acts have led to the establishment of the user fee deadline. The FDA’sgoal from October 2002 is to respond to the regulatory filing within 12 months(indeed from October 2002, the regulatory goal is to provide a complete reviewletter to 90% of all standard reviews within ten months). Failure to do so and theFDA is obliged to return the user fee - typically several hundred thousand dollars - tothe drug sponsor. However, the FDA is only obliged to deem a drug approvable ornot approvable within this time period. The time to full approval may, as previouslyindicated, take longer if the labelling discussions are protracted, or if the FDArequests additional data. A key feature of the FDA of late has been the increase inthe number of products undergoing protracted ‘approvable’ processes.

Figure 58: Review times 1986-2002 Figure 59: NME approvals 1987-2002

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As previously mentioned, where a new drug application is for a product thatrepresents a significant medical advance on existing therapies, it may be ‘fast



tracked’ by the FDA and receive a priority review. For these priority NDAs, the FDAis committed to review and act on the application within a six-month time frame.This is clearly a major advantage for the innovator and an important incentive forundertaking innovative research in new therapeutic areas.

More recently, the FDA has introduced a further concession to speed certain priorityreviews. For drugs that it deems to be of particular therapeutic benefit, data can besubmitted in parts (ie, on a rolling basis), the FDA committing to review each‘reviewable unit’ within six months. Thus, the review process and feedback maystart earlier, albeit the six-month clock from a PDUFA perspective will not start untilthe final section of the rolling filing has been submitted. Recent examples of suchan approach include AstraZeneca’s Iressa and Eli Lilly’s Alimta, both of whichrepresent alternative cancer therapies. It should be noted, however, that under arolling review, a product can only be declared approved or not approved. There is nohalfway house.

As a final comment, it is worth recognising that the PDUFA legislation sunsets everyfive years. In this way, Congress actually introduced greater flexibility to the act byenabling issues arising in the existing legislation to be tackled and fundingrequirements assessed within a reasonable time frame. Thus, for example, as weenter 2003, under PDUFA III, the FDA has seen a near 60% increase in its fundingfrom the pharmaceutical industry. In return for this, however, it has committed toimproving the level of dialogue with NDA sponsors through the review process andto attempt to complete the first review cycle on any NDA in sufficient time to allowfor second and third reviews before the PDUFA action date. It is hoped that, givengreater funding, initiatives along these lines will see a reversal of the recent declinein approval times. The recently appointed FDA commissioner, Mark McClellan, hasalso indicated his desire to ‘shave’ approval times.

Regulation in JapanRecent years have seen the Japanese regulatory system move towards that of theUS, driven in part by internal scandals, which led to strong calls for change. Theprevious system accentuated development and promotion of ‘me-too’ drugs andincorporated effective barriers to approval of drugs promoted by foreign firms.Indeed, until 1985, foreign firms were not allowed to apply without a Japanesepartner for the first step of drug approval and foreign test data was not accepted.Thus, a non-Japanese company that wished to introduce a product to the Japanesemarket was required to undertake duplicative clinical testing in Japan, with clinicaltrials conducted on native citizens. Clearly, this required significant additionalinvestment, not to mention considerable delays in the time to launch.

Historically, approval times in Japan have been significantly longer than in Europeand the US. This appears, on occasion, to have been particularly so when a Westerncompany has been the principal drug sponsor. Recognising this weakness, theMinistry of Health and Welfare set up the Pharmaceuticals and Medical DevicesEvaluation Centre on 1 July 1997 to “strengthen the Japanese government’sevaluation capacity for securing safety and preventing harmful side effects ofpharmaceuticals.” The centre evaluates the quality, efficacy and safety ofprescription drugs and medical devices. It also assesses proprietary drugs, quasi-drugs and cosmetics that are purchased directly by the general public.

It is also of note that until August 2002, the licence granted in Japan (ie, theapproval) was one for manufacturing of the drug rather than its marketing. As such,companies seeking approval have had to manufacture their own product, a



requirement that, by restricting companies’ ability to out-source production, has alsoled to significant inefficiencies among the Japanese manufacturers, in particular.However, following a revision in the Pharmaceutical Affairs Law (PAL) in 2002, thisrestriction has now been removed, the approval of a product now being approval tomarket.

The evaluation process for a new drug can be summarised as follows. On receipt ofthe New Drug Application (NDA) the Ministry of Health and Welfare forwards it tothe Pharmaceuticals and Medical Devices Evaluation Centre, where it is assessedby a panel of experts with backgrounds in pharmaceutical science, medicine,dentistry, veterinary, bio-statistics and so on. This panel produces a scientificassessment, which is then submitted to the Central Pharmaceutical Affairs Council,a consultative body to the minister. Further committees can be convened to assessthe application, if deemed necessary, and can request further information from thedrug sponsor. Finally, the Executive Committee, which meets four times per year inJanuary, April, July and October, issues the final approval.

MHLW has boosted assessment infrastructure to reduce approval timesUntil recently, it was not unusual for three years to pass from the time of filing anNDA to final approval by the Ministry of Health and Welfare. As part of efforts toradically strengthen the system of drug assessment in 1997 the ministry beganimplementation of a three-year plan to double the number of NDA examiners(despite which, in late 2002, it still stands at a meagre 250 compared to the 2,800reviewers now employed by the FDA). This was part of an attempt to reduceapproval times, initially to two years, but for products submitted from April 2000onwards, to a target of 12 months. It is worth noting that the ministry deems anapproval assessment “live” (with the regulatory clock running) only when underactive consideration. The clock is not running if extra data requested of the NDAsponsor are awaited or while questions are answered.

An official price is required for national health insurance reimbursementOnce approved, a drug containing a New Chemical Entity (NCE) must be granted anofficial price before it can be reimbursed on insurance. New Chemical Entities areadded to the National Health Insurance Drug Price List four times per year (inMarch, May, August, and November), at prices calculated by comparison withapproved drugs. Historically, comparative drugs were selected based on havingsimilar chemical structures, indications, therapeutic effects and so on. The price ofthe new drug was then based on the daily price of the comparable drug, withpremiums added for innovation and based on market size. If no similar drug could beidentified, a price was set according to the cost calculation method. Pricescalculated using this method are adjusted if they are more than double or less than50% of comparable drug prices in the US and Europe.

New drug pricing organisation implemented in 2000Sadly, this system did little to reward or incentivise innovation. Thus, the MHLWimplemented new administrative procedures for the pricing of pharmaceuticals inOctober 2000. The main change attributable to the new system is thatmanufacturers’ pricing proposals are now considered by committees within a newDrug Pricing Organisation (DPO) after passing through the economic affairs divisionof the ministry’s Health Policy Bureau. The DPO has 11 members, supplemented byaround 30 external academic and medical experts, pharmacologists, economists,and dental sector specialists.

Under the new system, companies are able to suggest and provide relevant data oncomparative products, but have to justify any price premium request. Premiums are



granted taking into account the degree of innovation, limited marketability andmedical usefulness. After considering the application, the Drug Pricing Organisationmust reach a majority decision before passing on its proposal to the Central SocialInsurance Medical Council, which provides the final ratification. An appeal processexists, whereby further written and verbal argument can be heard if no agreementcan be reached.

Once agreed, price listing should occur within 60 days of approval (90 daysmaximum) by the ministry's advisory Central Pharmaceutical Affairs Council. Thecurrent requirement to market listed drugs within three months remains. The DrugPricing Organisation is expected to meet at least four times a year, although listingof essential life-saving drugs will be considered on an ad-hoc basis. The DPO willalso consider re-pricing those products for which the market has significantlyexpanded.

Figure 60: Japanese new drug approvals 1991-2001

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Bilateral trade agreements have proved a catalyst for changeThese changes have been prompted, at least in part, by Japan's commitment tospeeding up the approval and listing of drugs under various bilateral trade andderegulatory agreements with the US. For example, the third report of the US-JapanEnhanced Initiative on Competition and Deregulation was endorsed by PresidentClinton and Japanese Prime Minister Mori at the July 2000 Group of Eight summit inOkinawa. Under the initiative, Japan has undertaken to implement specificmeasures to improve transparency, although certain local and foreign industrygroups remain dissatisfied with some aspects of the price calculation methodology,and to expedite approval procedures for drugs and medical devices. This includesthe use of foreign clinical trial data and recognition of the value of innovation. As wehave already seen, the adoption of ICH guidelines has helped in this regard and,since April 2000, MHLW has sought to approve new products within one year.

Generic drugs, those containing previously approved active ingredients, are price-listed annually in July. Prices for the initial listing of a generic are set at 80% of theprice of the original drug, but if other generics are already listed, the price set is thesame as that of the cheapest existing generic. However, if the number of newlyapproved products and existing generics is greater than 20, the new price will be setby multiplying the lowest price by 0.9.



Regulation in EuropeUntil the mid-1990s, the medical committees of the different national Europeanstates determined regulatory approvals in European markets. Limited harmonisationexisted and approval of a single medicine across Europe was often time consumingand costly. However, in 1995, a new European system for the authorisation ofmedicinal products came into operation with the foundation of the European Agencyfor the Evaluation of Medicinal Products (EMEA). The EMEA’s main role is tocoordinate and manage the drug approval system within Europe. The systemevaluates any new product marketing application through either a centralised or adecentralised (ie, mutual recognition) procedure. Biotechnology products have to beevaluated through the centralised procedure, whereas new chemical entities (NCEs)can be evaluated either through the centralised system or via mutual recognition.Approvals for generics and line extensions (additional indications) must go throughthe national regulatory bodies.

The EMEA comprises four bodies, one of which, the Committee for ProprietaryMedicinal Products (CPMP), is responsible for formulating the EMEA’s scientificopinion on marketing applications for human medicines. This regulatory committeecomprises scientific experts in medicinal product evaluation, who are invariablyemployees of national regulatory authorities and are given responsibility for issuingan opinion on whether a new drug may be marketed to the board of the EMEA. Theboard then reports to the European Commission which issues marketingauthorisation.

The centralised procedureUnder the centralised procedure, a new drug sponsor submits its application directlyto the EMEA. The application is presented at the next monthly meeting of theCPMP and two committee members (called Rapporteurs) are appointed to co-ordinate the evaluation of the application. The national regulatory authorities of theappointed committee members then normally undertake evaluation. Onceevaluation has been completed and reported to the CPMP, the CPMP will issue ascientific opinion on the product. This opinion is then conveyed to the EuropeanCommission which is authorised to convert the opinion into marketing authorisation,valid throughout the entire European Union.

EMEA guidelines are that the entire process should take no longer than 300 days.The CPMP is obliged to issue an opinion within 210 days of receipt of an acceptabledossier. However, if questions are raised during evaluation that require additionalinformation, the clock stops until the questions are resolved. After the CPMP hasissued its opinion, the EC has an additional 90 days to convert the opinion into a finaldecision.

Overall, the CPMP has proved very efficient in evaluating new products. Between1995 and 1998, the average time taken before issuing an opinion on all thebiotechnology products reviewed was 174 days. However, the total timeframe canprove disappointingly long. As much as anything, this is because the EMEA takes anaverage of 40 days to transmit the CPMP opinion to the European Commission, atwhich time EU member states are allowed to raise further questions. Thus, for the1995-98 period, while the time taken for the CPMP to issue an opinion was only 174days, time to approval was actually 305 days. This timeframe also excludes ‘stop-clock’ periods, which can be considerable.

Mutual recognition procedure (MRP) or decentralised procedureUnder the MRP system, an NDA is initially forwarded to one member state. Ifnational authorisation is granted in that state, it allows for extension to one or more



other member states. Under the MRP, the holder of the national authorisation forwhich mutual recognition is sought may then submit an application to other memberstates, certifying that the dossier is identical to the one for which first approval wasgranted (or explaining any differences). Within 90 days of receiving the applicationand assessment report, each member state must then decide whether to recogniseapproval. When such mutual recognition between member states is not possible,the EMEA will arbitrate and the European Commission issues a binding decision.

Pricing, efficacy and formulariesSubsequent to approval, the sponsor must then enter negotiations with the relevantnational bodies over price and formulary inclusion. Time taken for this process canagain be considerable. In addition, if the member state believes that the medicinedoes not offer value for money or a significant medicinal advance, it need notapprove its inclusion on formularies and may even recommend that physicians donot prescribe it. Thus, for example, the UK’s National Institute for Clinical Excellence(or NICE) recommended that Glaxo’s flu treatment Relenza was neither included onformularies nor prescribed by physicians.



Pharmaceutical marketingThe importance of marketing a new or existing drug cannot be underestimated. Asthe costs of drug development have increased and the time between innovatorproducts and ‘me-too’ versions has shortened, so the importance of maximisingrevenue from any drug that passes through the clinical process has increased.Consequently, the major drug companies have recognised that a strong marketingmessage and rapid penetration of the potential market are vital if a drug is to attainpeak sales as rapidly as possible and so maximise the total revenue achievable overits patented life.

This recognition has, in recent years, seen several important developments. Salesforces in key markets, most importantly the US, have been increased, whilecompanies have spent more on clinical trials post-launch in order to differentiatetheir product and strengthen the marketing message. In addition, greater emphasishas been placed on influencing key opinion leaders, such as hospital specialists,most significantly ahead of a product’s launch. Above and beyond this investment,the advent of direct-to-consumer advertising in the US has seen the major drugcompanies invest heavily in consumer-orientated television and press advertising, asthey have sought to use the ultimate consumer of drug to direct physicianprescribing. Increasingly, the industry is also moving towards global launches. Inother words, today, launches across the different geographic territories occur withina much narrower time frame than was the case historically. This has been helped bythe gradual harmonisation of the regulatory process in the markets of Europe, theUS and Japan.

Figure 61: Ranking of companies by US sales force size in 2002

0

2000

4000

6000

8000

10000

12000

14000

Pfizer-P

harmacia*

Glaxo

Merck

AZ

N

Novartis

Eli Lilly

BM

S

Wyeth

Aventis

J&J

S P

lough

Abbott

Roche

Bayer

San-S

yn

Takeda

Sankyo

Eisai

Fujisaw

a

Source: Company data, *Includes Pharmacia

Targeting decision makers, not buyersImportantly, it needs to be appreciated that pharmaceutical markets are different tomany other markets, in that the selling effort is, in the main, not targeted at the



actual buyers of drug. Rather, it is targeted at the decision-makers in the processwith a view to influencing their prescribing patterns. Thus, the bulk of any drugcompany’s sales and marketing effort is directed at the general practitioners,consultants and hospital specialists who determine which medicine a patient shouldtake, rather than the government, managed care organisations or private healthcaregroups that actually pay for the drugs. Of course, the companies have relationshipswith these buyers. The focus here is, however, invariably to ensure that the drug isincluded on the buyer’s reimbursement formulary. Often, this will come down toconvincing the relevant authority that the economics make sense, ie, it is cheaper toprescribe the new drug than to face later hospitalisation costs or time lost at work.

Retail or hospital?The pharmaceutical company’s approach to marketing will also differ dependingupon whether the drug is to be used in the hospital setting or prescribed through aphysician’s practice (sold through retail pharmacies). Because the hospital market issmaller and more concentrated, the absolute size of the selling effort required is, asa rule, considerably less. Hospital sales forces are typically smaller than thosemarketing to general practitioners. Equally, because the hospital market tends to bemore specialised, drugs used in the hospital environment generally achieve moremodest sales than those aimed at the mass retail market. This is illustrated by thefact that of the 25 best-selling drugs in 2001, only two – J&J’s Procrit and Amgen’sEpogen – were non-retail products.

Figure 62: US drug routes to market and manufacturer sales efforts

Manufacturer Marketing Flow Manufacturer Product Flow

Wholesalers Mail Order

12%Formulary Effort HMO's, MD's Drugstores Foodstores Non-federal Hospitals

Clinics. Government, 56% 8%13% 11%

Advertising effort Patients

Sales EffortDoctors

Source: Company data, Deutsche Bank

Drug lifecyclesCrudely, the lifecycle of a drug can be broken down into five phases: pre-launch,launch/growth, extension, maturity and patent expiry.

Pre-launch: The pre-launch phase encompasses the work that is undertaken toprepare the market for the new drug while it is still going through the clinical trialand registration process. Simplistically, it can be broken down into events that occurinternally or externally.

n Internally, it involves liaison between marketing and research to create a clinicaldata package that will position the drug as favourably as possible in the market.In other words, it seeks to design trials that will maximise the drug’s attributesand position the drug as favourably as possible in the eyes of the medicalfraternity and patients. Using this data and with the requirements of the market



in mind, the marketing department will seek to create a clear and simplemessage of what the drug is and why it should be used.

n Externally, pre-launch initiatives involve attempting to ensure that key opinionleaders in the relevant field will promote the drug through the medicalcommunity. While the actual marketing of an unapproved entity is prohibited bythe regulators, much can be done to increase market awareness and ensurethat those with influence are exposed to the new drug ahead of launch. Effortshere include getting experts in the field to oversee clinical trials, presentingclinical data at conferences to increase awareness, publishing clinical findings inleading journals and, in general, creating as much awareness within the medicalfraternity as possible of the potential benefits of the treatment in development.

Launch/Growth: The growth phase involves the all-important launch of the drug forits lead indication. Having seeded the market for the launch, during launch itself, thecompany will focus on maximising patient and physician awareness. Here, the scaleand effectiveness of the salesforce is absolutely key and contract salesrepresentatives may be used to further leverage the efforts of the company’s ownsales representatives. Out in the field, the salesforce will seek to inform as manyphysicians of the drug’s release as possible, providing them with free samples forpatient use and extolling the new drug’s virtues. Managed care organisations willalso be heavily targeted as the pharma company seeks to ensure that the new drugis included on formularies. The company will finance conferences and seminars atwhich key opinion leaders will speak, as it seeks to disseminate informationthroughout the market. Key opinion leaders will also be encouraged to host smallseminars for other physicians, at which the disease and its treatment with the newmedication will be discussed, while many pharmacists will be contacted and madeaware of the drug’s release. Some months into the launch, direct-to-consumeradvertising may also be employed to drive consumer awareness.

Figure 63: Schematic of the lifecycle of a drug

0

10

20

30

40

50

60

70

80

90

100

0 2 4 6 8 10 12 14

••

••

Present data at conferences

Pre-launchInvolve opinion leaders in trials

Publish in journalsDetermine how to maximise clinical profile

•••

•

Launch

Salesforce in field

Sponsor conferences

DTC advertise

Use opinion leaders to drive perception

••

Extension

Seek extra indications

Clinical work to demonstrate long-term benefits

• Clinical trials to enhance competitive profile

Maturity

• Further long-term data

• Grow with market

Patent Expiry

• Move to OTC

• Cut marketing spend




Extensions: The extension phase in the lifecycle of a new drug broadly involvesobtaining new treatment indications and enhancing the competitive profile of thedrug.

n Line extensions/additional indications. Most drugs can be used for morethan one disease. For example, anti-ulcer drugs also find use in reflux disorderand dyspepsia, while cancer drugs may be used for more than one type ofcancer. Thus, the extension phase in the lifecycle of a drug involves seekingadditional applications for the medicine and gaining approval for its use in thesenew indications. The effect is to broaden the drug’s total market opportunity.

n Competitive profile: Throughout the life of the drug, most companies will alsolook to sharpen the drug’s clinical data package and competitive profile. Furtherclinical trials will be undertaken with a view to showing the long-term benefits oftreatment or to demonstrate that it is more efficacious than other classcompetitors. With the approval of the regulatory bodies, data collected fromthese trials can then be included on the drug’s label and used as additionalpromotional messages.

Maturity: Efforts to extend a drug’s range of indications and its competitive profilemay continue for much of the drug’s life. However, through its later years of patentprotection, growth will largely reflect that of the underlying market. Investment andmarketing spending will start to tail off and the drug innovator will most likely viewthe mature drug as a cash cow.

Patent expiry: Following patent expiry, revenues may fall sharply depending onwhether generics enter the market or not, and clinical and marketing investment willbe pretty much totally withdrawn. Depending on the nature of the product, the drugcompany may seek to gain approval to sell the drug over the counter (OTC), ie, as abranded non-prescription medicine.

Sales force sizeRecent years have shown that one of the keys to a successful launch and overallpresence in the market place is the strength of the company’s sales force. The pastten years have seen a major shift in companies’ attitudes towards the role of salesrepresentatives in the all-important US market. In the early to mid-1990s, the growthin importance of the managed care organisations as providers of health coverage ledto the view that these organisations would increasingly dictate which drugs wouldbe prescribed by physicians. As such, the industry believed that less time neededbe spent on detailing physicians and more on the less labour-intensive and largermanaged care groups. The result was a reduction in salesforce sizes. However, inthe event, although the managed care organisations established drug formularies(albeit not very restrictive), the physician remained the predominant decision-maker.Consequently, penetration of the physician base has proven absolutely vital if a drugis to achieve its potential.

Indeed, recent years have demonstrated that US salesforces play a key role indetermining whether or not a product will prove successful. Time and time again,under-representation in the US market has resulted in drugs failing to achieve theirpotential, despite encouraging clinical profiles (witness Bayer’s Avelox,AstraZeneca’s Accolate or Akzo’s Remeron). And, as the absolute size of the majorcompanies’ salesforces increases, so the bar is being raised.



Concentration of the selling resources on key products is also of great importance.In itself, absolute size means little. What is important is the weight of effort thatgoes behind a particular drug. In other words, a sales force of 5,000 promoting 30products is of less value than one promoting ten. The consequence of this has beenthe decision by many of the majors to allocate a substantial proportion of their totalsales effort to a handful of those drugs that have blockbuster sales potential.

Figure 64: Total US physician calls 1993-2000

39,641

35,526

31,824 31,39932,354

35,95436,963

39130

25,000

27,000

29,000

31,000

33,000

35,000

37,000

39,000

41,000

1993 1994 1995 1996 1997 1998 1999 2000

Source: IMS Health

There is, of course, another benefit to salesforce size. The stronger a company’ssales representation, the greater its attractions as a co-marketer of choice forproducts emerging from smaller companies’ pipelines. This point has been welldemonstrated by the phenomenal success of Pfizer’s co-marketing arrangementswith Pharmacia for Celebrex, Eisai for Aricept and, prior to its eventual outrightpurchase, Warner-Lambert for Lipitor.

Drug profilesAs therapeutic markets have become more competitive and marketing moreimportant, so drug manufacturers have invested more in trying to differentiate theirproducts and provide their salesforce with a clear marketing message. For any drug,high efficacy, a favourable side-effect profile and a convenient dosing schedule thatfavours compliance (ie, oral, once a day) will always prove points in a drug’s favour.However, to the extent that the drug company can build on these claims byundertaking further clinical work to broaden a drug’s range of indications ordemonstrate superiority vis-à-vis other class competitors, the marketing messagecan be enhanced. New claims can also serve to re-invigorate the drug salesforce,providing them with a new message to market to physicians.

The importance of a drug’s profile and the impact it can have on performance arewell illustrated by the phenomenal success of Pfizer’s cholesterol-lowering drug,Lipitor. Despite being the fifth drug of its type to market, Lipitor’s superior profilecombined with Pfizer’s marketing muscle resulted in one of the most spectacularlaunches in the industry’s history. By contrast, the result of getting the profilewrong, by misreading the market and not putting sufficient sales resources behind adrug was illustrated by Bayer’s early experience in the same market with itscholesterol lowerer Baycol (which was subsequently withdrawn following deathsassociated with a later introduction of a higher dose). Despite being priced at only80% of Lipitor’s level, prescriptions for Baycol were disappointing, as the companymistakenly considered that price rather than efficacy would drive market share.



Figure 65: Cholesterol-lowering US market shares 1996 to date

Total Prescriptions (Market Share)

0%

10%

20%

30%

40%

50%

60%

Mar

-96

Jul-9

6

Nov

-96

Mar

-97

Jul-9

7

Nov

-97

Mar

-98

Jul-9

8

Nov

-98

Mar

-99

Jul-9

9

Nov

-99

Mar

-00

Jul-0

0

Nov

-00

Mar

-01

Jul-0

1

Nov

-01

Mar

-02

Jul-0

2

Mar

ket

shar

e

Lipitor Zocor Pravachol Lescol Baycol

Source: IMS Health

Similarly, the performance of AstraZeneca’s Accolate against that of Merck’sSingulair demonstrates how marketing savvy can lead to excellent results. Whileboth products have similar profiles, Merck has completely outgunned its smaller UKcompetitor, despite being second to market, with a clearer and more distinctmarketing message. The profiles also demonstrate physicians’ clear preference for aonce-a-day formulation - Singulair is taken once a day against twice a day forAccolate.

Figure 66: Asthma market shares of the leukotriene antagonists

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Jul-96

Nov-96

Mar-97

Jul-97

Nov-97

Mar-98

Jul-98

Nov-98

Mar-99

Jul-99

Nov-99

Mar-00

Jul-00

Nov-00

Mar-01

Jul-01

Nov-01

Mar-02

Jul-02

Accolate (ZEN) Singulair (MERCK)

Source: IMS Health

Direct-to-consumer advertisingBeyond the use of salesforces to increase physician awareness, liberalisation of therestrictions on television advertising of drugs in the US has seen the majorcompanies target consumers directly in order to increase brand and, indeed, diseaseawareness. This has proven particularly true for those drugs used to treat so-called



life-style disorders (eg, impotence or hair loss), but also drugs for diseases wherethe consumer may influence the physician’s decision, such as allergy, as illustratedin the Figure below. This details the top ten DTC products advertised in 2001.

DTC advertising places advertisements of prescription drugs in magazines,television, radio and, more recently, on the Internet. It has been legalised in the US,but not in Europe or Japan. However, it is worth noting that DTC advertising canreach consumers in these regions through the ‘back door’ via the Internet, as drugmanufacturers’ sites do not block access to those requesting information fromoutside the US.

Figure 67: DTC spending 2001 ($ m)Drug Indication Company Spending ($ m)

Celebrex Pain Pfizer/Pharmacia 146.8

Vioxx Pain Merck 125.4

Nexium GERD AstraZeneca 111.5

Imitrex Migraine GSK 96.4

Zocor Cholesterol Merck 94.8

Allegra Allergies Aventis 94.5

Actonel Osteoporosis P&G 88.7

Glucophage XR Diabetes Bristol-Myers 87.9

Claritin Allergies Schering-Plough 82.9

Viagra Erectile dysfunction Pfizer 78.3Source: Scott-Levin

Huge extra cashSince TV advertising in the US was permitted in 1996, industry spending on DTCadvertising has witnessed tremendous growth. Over $1.7bn was spent on TVadvertising in 2001, with the balance arising mainly from spending in magazines. In2001, three drug companies spent over $300m on DTC advertising, namely, Merck,Pfizer and GSK (with GSK actually spending a massive $470m). This growth hasbeen driven, in part, by the change in legislation mentioned above, but also becausedrug companies have found it to be an effective medium for promoting theirproducts, as consumers are placing a greater focus on their health.

Figure 68: DTC spending 1989-2001 ($ m)

0 25 30170 180 220 280

570810

1300

1700

24502700

0

500

1000

1500

2000

2500

3000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: Scott-Levin



The benefits of DTC advertising can be well illustrated by looking at the salesperformance of drugs that have been advertised using this medium. Two featuresare evident:

n Market expansion: DTC campaigns have been able to expand markets for anumber of drugs by successfully increasing the number of consumers who areaware of their illnesses and persuading them to go to their doctors and seektreatment with the product advertised. This is well illustrated in the performanceof AstraZeneca’s Nexium, an ulcer/GERD therapy for which sales improvedsignificantly following DTC advertising.

Figure 69: Impact of DTC on US Nexium sales expansion (Rx ‘000s)

0

50

100

150

200

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300

350

400

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500

Feb-01

Mar-01

Apr-01

May-01

Jun-01

Jul-01

Aug-01

Sep-01

Oct-01

Nov-01

Dec-01

Jan-02

Feb-02

Mar-02

Apr-02

May-02

Jun-02

Jul-02

Aug-02

Sep-02

TV driven DTC Campaigns

Source: IMS Health

n Market-share maintenance: This is most apparent in therapeutic areas, wheremost of the products are DTC advertised, with manufacturers using advertisingto defend or increase market share. As illustrated by the below chart depictingmovements in market share between Schering-Plough’s Nasonex and Glaxo’sFlonase, the use of DTC campaigns has become key in influencing prescriptiontrends.

Figure 70: DTC can influence US market shares

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

Jul-

97

Sep

-97

Nov

-97

Jan

-98

Mar

-98

May

-98

Jul-

98

Sep

-98

Nov

-98

Jan

-99

Mar

-99

May

-99

Jul-

99

Sep

-99

Nov

-99

Jan

-00

Mar

-00

May

-00

DTC

DTC

NoDTC

DTCDTC

Market Share Gained

Market ShareLost

Market share Re-gained

Flonase

Nasonex

Source: IMS Health



Analyst considerations when assessing new drug launchesExpanded sales forces and the advent of direct-to-consumer marketing haverecently led to the take-off of new drugs following launch. As a result, the successof a new drug is being judged by analysts earlier and earlier following launch.However, the launch profile of a drug is likely to vary considerably depending on thedisease at which it is targeted.

In a disease for which physician visits are common and where patients are generallygiven short courses of treatment, we would expect a successful drug to enjoy arapid take-off. Products in this category would include anti-ulcer drugs andantibiotics.

In contrast, a drug targeted at a disease for which the majority of patients receivelong-term therapy would generally experience a slower launch than a drug for acutetreatment. This is because a significant proportion of patients receives repeatprescriptions, which a doctor would only normally change in the event of poorcontrol of symptoms or side-effect problems. However, within this category, thelevel of conservatism varies from disease to disease.

n In conditions where physicians perceive no great risk in changing a patient’stherapy, such as high cholesterol, a strong take-off could still be achieved,particularly if a new product is believed to be more effective than existingtherapy.

n By contrast, diseases for which drug therapy needs to be finely adjusted andwhere disruption can lead to serious events (such as epilepsy) tend to see avery low level of switching. As a result, the take-off of new drugs tends to bevery slow, driven predominantly by the diagnosis of new patients.

n Of course, the speed of take-off for drugs that are used in chronic therapy alsodepends on the size of the potential patient population. As a result, drugs totreat common conditions such as high blood pressure can enjoy stronglaunches, even though the majority of existing patients are on repeatprescriptions.

Drugs that are targeted at diseases that had previously not been routinely treated byprimary care practitioners are also likely to experience a slow launch. In these cases,the pharmaceutical company needs to build the market from scratch by educatingphysicians and by targeting patients through direct-to-consumer advertising. Aclassic example here is irritable bowel syndrome, where the majority of patientsself-medicate. The speed of take-off for a drug in a new disease depends of thefrequency and severity of symptoms experienced by patients and their level ofmotivation in going to the doctor. Certain diseases where there is a high level ofpatient motivation, such as obesity and smoking cessation, have in the past seenvery strong launches. Sadly, poor willpower has also made these strong starts short-lived.

Finally, new drugs with genuine life-saving potential in a disease where existingtherapy is ineffective, such as breakthroughs in cancer treatment, tend to achieve ahigh level of patient penetration relatively quickly. However, the majority of cancerdrugs see their sales build gradually as use expands from second or even third lineuse in a specific tumour type to first line use in a broader range of cancers.



Patents and marketexclusivityAs with any research-based industry, the pharmaceutical industry can only beeconomically viable if the huge investment required to innovate and develop newmedicines results in a benefit to the innovator. For the research-drivenmanufacturer, this benefit and, indeed, the incentive to continue to invest vast sumsof money in research, depend vitally on a company’s ability to patent its discoveries.By protecting intellectual property, patents provide research-based companies witha necessary period of market exclusivity to recoup their investment and provide thecapital for further innovation.

Following the 1995 GATT accord, patent rights were recognised and harmonisedinternationally and an international minimum standard for patent term lengthestablished. This was agreed at 20 years from the date on which the patentapplication is filed with the relevant authority, for example, the European PatentOffice in Europe, the US Patent and Trademark Office or the Japanese PatentOffice. However, for those patents filed before 8 June 1995 the period of patentprotection runs for the greater of the 20-year term or 17 years from the issue date.In the US, patent details can be found in the FDA’s Orange Book.

Most pharmaceutical companies will file a number of patents on any particular drugas they seek to ensure that their invention or discovery is properly protected fromimitation. For a patent to be listed on the Orange Book and therefore fall under theauspices of Hatch Waxman legislation (see later), the innovator company mustnotify the FDA of its issuance by the PTO within 30 days. While certain patentscannot be listed on the Orange Book (among other things, those surrounding ametabolite, tableting or a manufacturing process), several are key:

n Composition of matter: This represents the basic patent on the new chemicalentity and its molecular structure. Composition of matter patents affordcompanies the greatest protection and are least likely to be challenged.Typically, it is following the expiry of this patent that generic manufacturers willseek to launch cheaper imitations.

n Mechanism of action: A mechanism of action patent seeks to patent protectthe process by which the drug acts in the body and prohibit others from usingthat process to develop similar drugs. Recent patent disputes suggest thatmechanism of action (or method of use) patents are increasingly difficult touphold.

n Formulation: Formulation patents cover the formulation developed by theinnovator company to enable the drug to pass into the body, reach the relevantorgans and achieve the desired medicinal effect. Several types of formulationpatent may be issued through the drug’s market life as the drug innovatordevelops new ways to deliver its products. Formulation changes and patentstypically represent a key feature of lifecycle management.



Figure 71: Patent types – Robustness and filing timelinesTypical pharma patent portfolio Value Filing

NCE patents (generics/species) High Earlier

Mechanism of action patents

Method of treatment patents

Formulation

NCE salt/solvate/polymorph

Process patents

Gene patents Low LaterSource: GSK; Deutsche Bank

Market exclusivityWhile initial patent life on a new molecular entity usually runs for 20 years from thedate of filing, the period between filing and market launch is invariably a matter ofseveral years. The pre-clinical, clinical and approval periods will all eat significantlyinto any new molecules’ patent life. As such, we estimate that, on average, by thetime a new pharmaceutical obtains marketing approval, it will have little more than11-12 years of patent protection.

However, in certain instances, the clinical and regulatory processes can take so longthat, by the time it is approved, a new pharmaceutical will have little, if any, patentlife remaining. Such a scenario can hardly be seen to favour the innovator. With thisin mind, legislation has been drafted in both the US and Europe that affords drugsperiods of market exclusivity on the basis of data presented to the regulatoryauthorities. Two pieces of legislation are key.

n The 1984 Drug Price Competition and Patent Term Restoration Act (HatchWaxman). Under this law, a five-year period of data exclusivity for innovatorproducts was instituted. This means that applications for generic copies ofdrugs cannot be submitted until five years after an innovator product has beenapproved. This period of exclusivity may run in parallel with a drug’s patent lifeor beyond it. Whatever, it ensures that the innovator obtains at least five yearsof market exclusivity. In fact, this is actually probably nearer six given thatabbreviated new drug applications typically take a year to approve and cannot besubmitted until the five-year exclusivity period has expired (unless a non-infringement certification has been made, in which case the ANDA may besubmitted after four years). In addition, new indications for existing products areentitled to a further three years of exclusivity (albeit doctors would probablyprescribe off-label for the additional indication). Note that generic filings can besubmitted against three-year exclusivity at any time.

n The EU Directive relating to medicinal products: This piece of Europeanlegislation creates non-patent related marketing exclusivity for medicinalproducts in Europe comparable to that of Hatch Waxman, but allows for amaximum period of ten years rather than five. However, data exclusivity beyondthe ten-year period will not be granted for either new indications or newformulations.

Patent term extensionsIn addition, in the US, under Hatch Waxman legislation in certain instances, patentterm extensions may be available for the active ingredient in a drug if the date offirst marketing of the drug was delayed as a result of the regulatory review. For newhuman drugs, the regulatory period is defined as one half of the term starting on thedate on which the IND is granted (so permitting the start of clinical trials) and endingon the date on which a request for marketing approval is filed, plus the entire periodfor which the marketing approval is pending. However, any extension given is



limited to no more than five years and must not extend the patent life of themarketed product to over 14 years. A petition for the extension must be madewithin 60 days of marketing approval.

Hatch Waxman and ANDAs (US only)As a quid pro quo for patent life extension in the US, the 1984 Hatch Waxmanlegislation also established the procedure that simplified the approval process forgeneric drugs. In particular, the 1984 law established the procedure for theAbbreviated New Drug Application (ANDA – see Regulatory section) under which ageneric drug could use the safety and efficacy data of the innovator. Provided thatthe innovator’s patent and market exclusivity had expired, the generic manufacturersolely needed to demonstrate that its product was ‘bioequivalent’ to the innovatordrug and certify to the FDA that the original innovator patent had expired, wouldexpire on a particular date, was invalid or would not be infringed. Under Section505(b)(II) Paragraph (IV) of the Act, it was also obliged to notify the patent holder ofits intent to launch, if at the time of launch an Orange Book-listed patent were inforce.

In practice, the workings of the Act are somewhat more complicated than might atfirst appear. This is due to two main features: litigation and market exclusivity.

LitigationBecause most innovator companies will seek to extend the patent life of theirproducts and prevent the introduction of generics, they will invariably allege that oneof their other many patents is being infringed. Typically, this will be a formulationpatent, a polymorph or salt patent, or mechanism of action patent. Having receivedParagraph (IV) notification, the innovator company has 45 days to file a suit allegingpatent infringement. Should it fail to do so, no subsequent claim can be made andthe FDA will approve the application in the ordinary course of business.

However, assuming the innovator company files for patent infringement, HatchWaxman prohibits the FDA from granting an ANDA until either the cessation of legalproceedings which confirm patent invalidity, or 30 months, whichever is the earlier.If the generic drug review is completed before either of these points in time isreached, its approval will be deemed tentative, full approval coming once 30 monthshave passed or a court decision has been reached. Once full approval has beenreceived, the generic company is free to market its generic version once the initialpatent (typically substance of matter) has expired. However, it should be noted thatit does so in the knowledge that should the court proceedings go against it, it wouldpotentially be liable for damages that are calculated as a multiple of revenue lossessuffered by the innovator firm (punitive or triple damages). This process is illustratedby the schematic shown below.



Figure 72: Timelines associated with Paragraph IV filings

Paragraph IV Filing

Court Decision InvalidatesContested Patent

ANDA Filed Court Proceedings (35 months)Issues 505(b)(2) Para IV Free to Launch

at RiskDay 45 Innovator States Infringement

TIMELINE

Month -5 Month 0 Month 10 Month 20 Month 30 Month 40 Uncontested

ANDA Accepted Patent Expiry (say 35 months)30 Month Period ExpiresANDA Granted


Market exclusivityIn order to encourage the growth of the generics industry and incentivise genericcompanies to enter the market at the earliest possible opportunity, the originalHatch Waxman amendments also included provisions permitting 180 days ofmarketing exclusivity for the generic with first launch entitlement. Given the intenseprice competition that invariably follows patent expiration of a large branded drug,this provision was of considerable value to the generic manufacturer, allowing it togarner significant market share at a more favourable price than would be the casewere all generics to launch on the market simultaneously. Up until late 2002, theFDA had granted this exclusivity to the first generic to file a complete andacceptable ANDA. However, following the 2002 Prilosec case, the FDA modified theoriginal rules such that market exclusivity is now granted to the first manufacturer tosuccessfully challenge the innovator patent, rather than just to the first company tofile a complete ANDA.

As to when this exclusivity commences, following several court rulings, the FDAannounced in early 2000 that it would interpret the phrase ‘ruling of the court’ usedin the 1984 legislation as being the ‘ruling of the first court’, be it from the bench (ie,a summary judgement) or trial in a district (first) court. Thus, for Paragraph (IV) filingsmade after March 2000, exclusivity now commences from the earlier of firstmarketing or a ruling of the first court (this assumes, of course, that the ANDA hasbeen approved). This contrasts with the agencies’ earlier interpretation thatexclusivity would not commence until the earlier of first marketing or the decision ofthe final or appeal court. Note, however, that the FDA’s earlier appeal courtinterpretation still applies in those cases in which the ANDA application was madeprior to March 2002 (ie, the change is not retrospective). Again, the schematicshown below seeks to reflect both the historic and most recent interpretation.



Figure 73: Paragraph IV filings and 180-day exclusivity

FIRST COURT APPEAL COURTFirst Court Decision Innovator Appeals Court Proceedings Continue Innovator Loses AppealInvalid Patent

TIMELINE

180 Day Market Exclusivity BeginsFor ANDA filings post March 2002

180 Day Market Exclusivity BeginsFor ANDA filings pre-March 2002

Patent Expires


Orange Book abuseOne final point. On several occasions in recent years, innovator companies havereceived and then listed on the Orange Book patents that were issued by the USPTO after an initial Paragraph IV notification had been filed. Having done so, theinnovator company would then typically claim that this new patent was also beinginfringed. Applying its then interpretation of the 1984 Act, the FDA wouldsubsequently enforce a further 30-month period before granting a marketing licenseto the ANDA filer (assuming no court ruling). Following several high profile cases,not least Bristol-Myers antics surrounding BuSpar, GSK’s actions on Paxil andPfizer’s on Neurontin, an FTC investigation into the matter led to an FDApronouncement that from here on, only one 30-month stay would be permissibleper ANDA filing.

Paediatric extensions (US only and ex pre-1997 antibiotics)In order to encourage pharmaceutical companies to undertake studies on drugs thatcould have meaningful health benefits in children, the Food and Drug AdministrationModernisation Act of 1997 included legislation that afforded companies a six-monthexclusivity/patent extension if they submitted data relating to the use of an activedrug in a paediatric population. The original legislation expired in 2001, but wasimmediately renewed. Paediatric studies are defined as at least one clinicalinvestigation in paediatric groups in which a drug is anticipated to be used. Theextension is only available in the US and is also only available on those products forwhich the FDA makes a ‘Written Request’. The request may be issued at thebehest of an interested party or on the FDA’s own initiative. Trials must beconducted in accordance with the FDA’s guidelines, but, assuming that the datasubmitted meet with the FDA’s request, an additional six months of productexclusivity will be granted. Each ‘Written Request’ may result in only one period ofpaediatric exclusivity. Note that antibiotics that were the subject of a marketingapplication received before 21 November 1997 are not eligible for paediatricexclusivity unless they meet orphan drug requirements and paediatric studies areconducted.

At present, there is no additional period of exclusivity available for paediatric studiesin Europe. This is, however, a current area of debate, with the EU consideringwhether such an incentive should be introduced and if so, what period of exclusivityshould be offered (at the time of print the consideration is for one full extra year).



Orphan drugsIn order to encourage research into rare diseases with limited incidence in thepopulation as a whole, legislation in the US, Europe and Japan has been passed fordrugs that can be used to treat these diseases. By offering market exclusivity andvarious tax breaks, health authorities have sought to incentivise the industry toundertake research into disease areas that, because of their limited incidence andrevenue prospects, generally hold limited commercial appeal.

The first territory to adopt orphan dug legislation was the US, which in 1983 enactedthe Orphan Drug Act. This legislation has subsequently served as a prototype for aprogramme adopted in Japan in 1993 and, most recently, the European Commission(in 2000).

In the US, an orphan disease is defined as either one which affects under 200,000patients or one which would not recoup development costs on the basis of USsales. Overall, 10-20 million Americans suffer from around 5,000 or so orphandiseases for which there are no available cures, including multiple sclerosis, Crohn’sdisease and narcolepsy, to name but a few. To help these patients, the law providestwo principal incentives to try to make it commercially feasible to develop orphandrugs - a seven-year period of market exclusivity post approval (compared to thenormal five years) and a 50% tax credit for certain clinical research expensesincurred in development. In addition, orphan drugs will often attain fast-trackapproval. Overall, in the US, the approach seems to have worked well, with over190 orphan drugs approved since its enactment compared to only ten in the decadebefore.

In Europe, an orphan disease is defined as one that has an incidence of less thanfive in 10,000. Companies developing such drugs are exempt from some or all ofthe licensing fees and will be granted exclusivity for up to ten years.



Generic drugsOnce the patent or period of exclusivity expires on a branded product, it is likely tofind itself subject to competition from generic versions of the active molecule, mostparticularly if the branded product was achieving significant sales (in excess of$100m per annum). A generic drug is one that has demonstrated itself to be the‘bioequivalent’ of the patented product, ie, it has the same pharmacokinetics andavailability in the body. Because a generic’s attributes are the same as the brandedor innovator drug (in effect, it is exactly the same molecule), its only true form ofdifferentiation from the innovator brand is price.

Hatch Waxman established today’s generic industryThe modern generics industry was firmly established following the 1984 Drug PriceCompetition and Patent Term Restoration Act (Hatch Waxman). In return forallowing innovator products greater market exclusivity, the act allowed the genericmanufacturer to use the product innovator’s drug safety, efficacy and toxicologydata when filing for FDA approval. This greatly reduced the cost of genericapplications and the time taken to gain approval. In essence, all the genericmanufacturer needed to demonstrate was that its version of the already approvedinnovator product was bioequivalent.

Figure 74: Generic drug share of US prescription markets 1984-2001

19%22% 23%

27%30%

32% 33%35% 35%

40%42%

43% 43% 44%47% 47% 49% 49%

0%

10%

20%

30%

40%

50%

60%

1984

1985

1986

1987

1988

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1991

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1993

1994

1995

1996

1997

1998

1999

2000

2001

Gen

eric

Sha

re o

f Pre

scri

ptio

n U

nits

(%)

Source: IMS Health

Generics to account for 50% of US drug market by 2005EThe consequence of the act has been strong growth of the US generic market. Asdemonstrated by the chart above, in 2001, generics accounted for over 49% of theprescription drugs market by volume, compared to 19% in the year the law was firstenacted (1984). With several large products facing patent expiry over the next fewyears, we expect generic prescriptions to account for comfortably over 50% of USprescriptions by 2005.

In general, once the patent/exclusivity period for a large selling branded productexpires, generic competition will commence almost immediately. As more and moregenerics enter the market, price erosion will intensify. Depending upon the number



of entrants, it is not unusual to see generic prices in the US market at only 20-25%of that of the patented product. Today, as illustrated by the generic erosion chart forEli Lilly’s Prozac, below, the influence of managed care and modern technology onbuying patterns has shown that most large products facing patent expiry can expectto lose between 70% and 80% of their monthly US revenues within two months ofexpiry. This contrasts with a more typical 70-80% over 12 months seen in the late1990s and bears testament to the efficiency of the US system.

Figure 75: Days to first generic entrant Figure 76: Percentage with generic competition

0

50

100

150

200

250

Over $100m $25m - $100m $10m - $25m Under $10m0

10

20

30

40

50

60

70

80

90

Over $100m $25m - $100m $10m - $25m Under $10m

Source: Health Services Research Source: Health Services Research

Figure 77: Prozac patent expiry profile (% sales loss)

Figure 78: Zantac patent expiry profile(% sales losses)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jul-01

Aug-01

Sep-01

Oct-01

Nov-01

Dec-01

Jan-02

Feb-02

Mar-02

Apr-02

May-02

Jun-02

Jul-02

20% Market Share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jul-97

Au

g-97

Sep

-97

Oct-97

No

v-97

Dec-97

Jan-98

Feb-98

Mar-98

Ap

r-98

May-98

Jun

-98

Jul-98

20% Market Share

Source: IMS data, Deutsche Bank Source: IMS data, Deutsche Bank

Generic erosion is fastest in the United StatesThe extent of generic erosion varies in different geographic markets depending onboth legislation and physicians’ attitudes towards costs. Erosion of branded drugstends to be the most rapid in the US, driven by the profit opportunity (US prices areabout 30-40% higher than elsewhere in the world) and the desire of private healthmaintenance organisations to keep costs down. One might have expected thatwhere government bodies are the central purchasers, ie, in Europe and in Japan,generics would also hold a large share of end-markets and that conversion from abranded drug to a generic would be rapid. This, however, is generally not the caseand of the larger markets, it is only really in the UK and Germany that genericerosion occurs at a significant pace. The key difference between the US and Europein this regard is the practice of generic substitution by the pharmacist. This meansthat in the US, it is legal for the pharmacist to dispense a generic equivalent of a



drug that the doctor has prescribed by brand. This is illegal in most Europeancountries. Generic penetration is high in Germany and the UK, because doctors inboth of these counties have incentives to be cost conscious and as a result, tend toprescribe drugs using their generic names.

Having said this, the pressure on government health budgets across Europe hasmeant that governments are now actively seeking to promote generic markets as ameans of containing the growth in prescription drug spending. Thus, in France, 2002has seen the government reach agreement with physicians, encouraging them towrite prescriptions using the international non-proprietary (INN or generic) namerather than the brand. Likewise, in several Scandinavian countries, consideration isnow being given to permitting generic substitution where it was not previouslyallowed.

Figure 79: Impact of generics in different geographic areas 2001Large generic markets Limited generic markets

Country % Generics by volume Country % Generics by volume

US 49 Spain 4

Germany 38 Japan 8

UK 50 Italy 2

France 4Source: Deutsche Bank estimates

Therapeutic substitutionThe next five years are likely to see a significant number of innovator productsfacing generic competition as their patents expire. Shown overleaf, our estimatessuggest that in the five years to end-2007, products with US revenues alone of over$40bn will face generic competition for the first time. In several cases, entireclasses of drugs look likely to see a substantial loss of sales as key products loseprotection, not least the anti-depressants, anti-histamines and, to a lesser extent,the cholesterol-lowering statins.

As discussed earlier, historically, the advent of generic competition following theloss of patent protection on any one brand has resulted in significant genericsubstitution. This loss has not, however, resulted in a meaningful deterioration inthe growth of other therapies in the class, as US payers have proved reluctant toactively encourage the substitution of a patented, branded drug in the sametherapeutic class with a cheaper generic, ie, enforce therapeutic substitution.

Figure 80: Post-Vasotec market growth stalls(branded TRx per month ex Vasotec)

Figure 81: Post-Prozac market growth continues(branded TRx per month ex Prozac)

0

1000

2000

3000

4000

5000

6000Generic Vasotec Launched 8/00

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000Generic Prozac launched 8/01

Source: IMS Health; (ex Altace) Source: IMS Health



Figure 82: Key US patent expiries and estimated sales 2003E-2007E (sales are 2001A)2003E 2006E

Brand Generic Company US Sales Expiry Brand Generic Company US Sales Expiry

Prilosec omeprazole AZN $3655m 14 Oct 07(*) Foradil formoterol Novartis $50m 16-Feb-06

Lotensin benazapril Novartis $315m 11-Aug-03 Proscar finasteride Merck $280m 19-Jun-06

Nolvadex tamoxifen AstraZeneca $475m 20-Feb-03 Prandin repaglinide Novo $135m 10-Oct-06

Serzone nefazodone Bristol-Myers $340m 16-Mar-03 Ambien zolpidem Sanofi $895m 21-Oct-06

Celexa citalopram Forest/Lundbeck $425m 17-Jul-03 Lamisil terbinafine Novartis $450m 30-Dec-06

Flovent fluticasone GSK $680m 14-Nov-03 Zoloft sertraline Pfizer $1910m 30-Jun-06

Flonase fluticasone GSK $545m 14-Nov-03 Zocor simvastatin Merck $4700m 23-Jun-06

Cipro ciprofloxacin Bayer $900m 09-Dec-03 Imigran sumatriptan GSK $835m 28-Dec-06

Ultram tramadol JNJ $595m 30 Jun-03 Retrovir zidovudine GSK $50m 17-Sep-06

Glucophage XR metformin Bristol-Myers $305m 03-Oct-03 Protonix pantoprazole Wyeth $640m 29-Jan-06

(*) Substance patent expired 10/01 but formulation valid to 10/07

2004E 2007E

Brand Generic Company US Sales Expiry Brand Generic Company US Sales Expiry

Allegra fexofenadine Aventis $1300m Feb-04 Est. Tequin gatifloxacin BMY $310m 28-Dec-06

Diflucan fluconazole Pfizer $560m 29-Jan-04 Zosyn piperacillin Wyeth $410m 01-Feb-07

Glucovance met/glyburide Bristol-Myers $350m 31-Jul-04 Effexor venlaxafine Wyeth $1452m 30-Dec-07

Paraplatin carboplatin Bristol-Myers $610m 14-Apr-04 Risperdal risperidone J&J $1682m 01-Dec-07

Duragesic fentanyl J&J $515m 23-Jul-04 Fosamax alendronate Merck $1700m 01-Aug-07

Ortho-Tricyclen oestrogen J&J $600 30-Mar-04 Norvasc amlodipine Pfizer $3700m 25-Sep-07

Neurontin gabapentin Pfizer $1495m 12-Apr-04 Zyrtec cetirizine Pfizer $965m 01-Jun-07

Glucophage XR metformin Bristol-Myers $305m 03-Oct-0 Camptosar irinotecan Pharmacia $658m 01-Aug-07

Coreg carvedilol GSK $350m 05-Mar-07

Kytril granisetron Roche $125m 29-Dec-07

Exelon rivastigmine Novartis $132m 14-Aug-07

Paxil paroxetine GSK $1815m 29-Jun-07

2005E

Brand Generic Company US Sales Expiry

Zofran ondansetron GSK $625m 25-Jan-05Altace ramipril Wyeth/King $400m 27-Jan-05

Amaryl glimepiride Aventis $150m 06-Apr-05

Biaxin clarithromycin Abbott $1175m 01-May-05

Cytovene ganciclovir Roche $50m 24-Jun-05

Rocephin ceftriaxone Roche $600m 01-Jul-05

Zoladex goserelin AstraZeneca $210m 30-Aug-05

Retrovir zidovudine GSK $50m 17-Sep-05

Pravachol pravastatin Bristol-Myers $1370m 20-Oct-05

Zithromax azithromycin Pfizer $1140m 01-Nov-05

Cefzil cefprozil Bristol-Myers $370m 01-Dec-05Source: FDA Orange Book; Deutsche bank estimates. Note we do not assume paediatric extensions or supplementary protection unless granted.

Whether this remains the case has yet to be seen. However, as the benefits of onedrug over another in the same therapeutic class become more marginal and costbecomes a more significant issue, the case for driving therapeutic substitution in theUS market will become stronger. Indeed, looking at recent expiries, it does nowseem that in classes where products are poorly differentiated, the advent of genericcompetition against the category leader does result in a moderation in the growthprofile of the entire class. This is illustrated by the impact of the heart drugVasotec’s expiration (the class leader) on growth in the branded ACE inhibitor class.By contrast, as the accompanying analysis of the anti-depressant class after



Prozac’s expiry shows, in a branded class, where the drugs are well differentiatedlittle if any difference in the growth profile is discernible.

Patent life-extension strategiesThe threat of a large impending patent expiry for any leading research-basedcompany should not be underestimated. After all, looming patent expiries have beenlargely responsible for much of the merger and acquisition activity witnessed overthe past decade. Indeed, for any $1bn product, every day that generic entry isdeferred is worth at least $2.7m to revenues and probably well over $2m to grossprofits. This is quite an incentive to defer the inevitable day of reckoning.

Thus, not surprisingly, the leading ethical pharmaceutical companies have developedseveral strategies to extend the life of their products and with some degree ofsuccess. Discussed below, these vary from the now almost inevitable litigation toaltered formulations and isomers of existing drugs.

n Litigation: Almost all pharmaceutical companies will have in place a host ofpatents surrounding any one drug. Beyond composition of matter patents, theseinvariably include patents surrounding the active molecule’s formulation, itsmechanism of action and its manufacture. The slightest whiff of a generic threatand litigation is almost bound to follow, some form of patent infringement beingcited. And if the first court ruling goes against the innovator, there is always thechance to appeal. Of itself, litigation typically buys the innovator several monthsof extra time, not least because such litigation almost invariably runs well pastthe patent expiry date. Increasingly, we are, however, seeing the courts rule inthe generics’ favour.

Figure 83: Forecast Adalat world sales by formulation (Euro m)

0

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2003

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Capsule Retard Oros - Non US CC - US


n Formulations: A more innovative approach to life extension is to develop analternative formulation of an existing drug late in its life cycle that offers patientsand physicians a definite benefit, yet poses a further challenge to the genericmanufacturer. For example, moving from a three times a day formulation toonce a day offers compliance benefits for patients, which will be recognised byphysicians and yet probably presents an additional challenge to the generic (ie,developing its own formulation for slow release). Of course, if the generichouse is able to develop its own formulation, then the life extension strategy



will falter. However, strong formulation competence falls outside the capabilityof many generic houses. Thus, the more sophisticated the formulation, thegreater the protection. As an example, AstraZeneca’s largely successfuldefence of its Prilosec formulation patents emphasises the value of this form ofintellectual property, the company’s formulation patents at least limiting thenumber of generics that were able to come to market. Elsewhere, Bayer’s drugAdalat represents a good example of the use of new formulations to keepgenerics from capturing market share. First introduced in 1974, generic housesare only now developing ways of getting around Bayer’s formulation patents inorder to develop generics that are as compliance-friendly and demonstratebioequivalence.

n Isomers: Many molecules have two distinct forms – one right handed and oneleft handed. Although the molecule is identical in its formula and composition,much like a pair of human hands, each isomer (or hand) is a mirror image of theother. Indeed, the pharmacological effect of the molecule often rests with justone of the two chiral forms.

Several companies have thus seized upon this difference as an opportunity todevelop and patent the more pharmacologically active chiral form and market itas a new drug. For example, AstraZeneca’s Nexium is a chirally pure form of itsanti-ulcer drug Prilosec, as is Schering-Plough’s Clarinex follow-up to its leadinganti-histamine, Claritin, and Forest Lundbeck’s Lexapro follow-up to itsantidepressant Celexa. As ‘new’ molecules, these pure chiral forms are patentprotected and often more efficacious than the original drug.

Figure 84: Isomers as a means of protecting franchises – NRx Nexium and Prilosec

Figure 85: Isomers as a means of protecting franchises – NRx Claritin and Clarinex

0

500

1000

1500

2000

2500

3000

Jan-00

Mar-00

May-00

Jul-00

Sep-00

Nov-00

Jan-01

Mar-01

May-01

Jul-01

Sep-01

Nov-01

Jan-02

Mar-02

May-02

Jul-02

Sep-02

Prilosec Nexium

0

500

1000

1500

2000

2500

3000

Jan-00

Mar-00

May-00

Jul-00

Sep

-00

Nov-00

Jan-01

Mar-01

May-01

Jul-01

Sep

-01

Nov-01

Jan-02

Mar-02

May-02

Jul-02

Sep

-02

Claritin Clarinex

Source: IMS Source: IMS

n Combinations: Another effective means of extending the life of a successfuldrug is to develop a combination product and so create a product that offerscompliance, if not efficacy, benefits, ie, the patient need only take one drugonce a day instead of two once a day, etc. A good example of a combinationproduct is GlaxoSmithKline’s HIV drug Trizivir. By incorporating three activeproducts into one pill, Trizivir offers major compliance benefits (one tablet twicea day instead of three tablets twice a day). It should also do much to cannibaliseRetrovir sales, a constituent of the combination drug, the use patent on whichexpires in 2005.



Funding and pricing ofpharmaceuticalsThe provision of an adequate system of healthcare is seen as a basic right of thecitizen in almost every economy – developed or not. Indeed, access to affordablehealthcare for all citizens is one of the primary objectives of any developedeconomy. As such, healthcare is a major political issue for governments across theworld, as is its cost. For any nation, funding the provision of basic health servicesrepresents a significant percentage of gross domestic product (GDP), as illustratedin the chart below. What’s more, as we live longer and the costs of providingmedical treatment such as hospitalisation, medicines, surgery and nursing continueto rise, so the provision of an acceptable level of healthcare for the population isbecoming an ever larger burden on the government purse.

Given the choice, we suspect that most governments would more actively promoteprivate funding of healthcare and so reduce the funding burden that the provision ofa national system of healthcare represents. However, this is of course politicallyunacceptable in most, if not all, democratic nations. As such, within the majorindustrialised nations, it is only in the United States that government still plays aminority role in the purchase and provision of healthcare for its citizens. Equally, it isonly in the US where a free market for the pricing of drugs exists. Of course, privatemedicine is available in most other countries. However, outside the US, governmentauthorities typically determine price and provision with every effort being made tohold cost down. Thus pharmaceutical prices are determined by the State with goodeffort made to contain pricing and usage wherever possible. This probably does littleto help contain overall costs. Prescription drug therapy is highly cost effective andoften circumvents the need for other more expensive interventions - such assurgery, hospitalisation, physician visits and nursing care. Nonetheless, ofthemselves, prescription drugs represent an important component of healthcarecosts and, being provided by highly profitable and private organisations, are an easypolitical target for government attempts to contain immediate cost.

The variety in national models for the provision of healthcare means that almostevery system has its differences. Starting with the world’s most significanteconomy and the pharmaceutical industry’s most important, over the next fewpages, we review in summary the provision of healthcare in the major economies ofthe developed world.

Figure 86: Healthcare as a % GDP 1990 and 2000 Figure 87: Pharmaceutical costs as % GDP (1997)

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Australia

Canada

France

Germ

any

Italy

Japan

Spain

Sw

itzerland

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ingdom

United S

tates

-

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14.01990 (%) 2000 (%) % Government financed (RHS)

0.9%

1.1%

1.3% 1.3%1.4%

1.5% 1.5%

1.7%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

Net

herl

ands

U.K

.

Can

ada

Ger

man

y

U.S

.

Ital

y

Japa

n*

Fran

ce

Source: OECD HealthData Source: OECD HealthData



United StatesThe US currently devotes a higher percentage of its GDP to health expenditure thanany other industrialised nation, a gap that has widened over the past 20 years. In2000, total national health expenditures in the US amounted to roughly $1.2trn, or13.2% of GDP. Importantly, the share of GDP allocated to health has nearly doubledsince 1970, when it was just 6.9%. With the elderly population forecast to rise to20% of US citizens by 2020 from 12.5% today, healthcare expenditures can only beexpected to rise further as a proportion of GDP, placing considerable pressure onhealthcare financing and society in general.

The significance of healthcare costs has also led to increasing calls for greaterregulation of pharmaceutical pricing. As things stand, the US remains the onlysignificant market in which manufacturers can set the price of drugs without anygovernment-imposed limitation. In addition, the import of drugs has been illegal,preventing wholesalers and users from taking advantage of drug prices that can besubstantially cheaper outside the US. As European and Japanese authoritiescontinue to target the cost of medicines as a means of controlling healthcareexpenditures, the difference in prices between the various regions in the near termcan but continue to expand.

Figure 88: Prices by territory as a percentage of US prices (1999 data)

0%

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S

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Canada

Italy

France

Source: MIMS, Deutsche Bank estimates

Given the discrepancy in prices between the US and elsewhere in the world, it isperhaps surprising that while healthcare expenditure as a proportion of GDP runswell ahead of other industrialised nations, expenditure on pharmaceuticals is in linewith that of other nations. We suspect that in part, this apparent anomaly reflectsthe absence of a state-funded prescription drug benefit for the majority of thoseover the age of 65 and the consequent under-utilisation of prescription drugs as aform of preventative medicine for much of the elderly population.

Managed care has seen explosive growthThe way that healthcare is delivered and paid for in the US has been undergoingrapid, market-driven change in recent years. Most significantly, the provision ofhealthcare insurance has become an expected component of most employees’remuneration packages. At the same time, in an effort to contain associated costs,employers have increasingly outsourced the management of that benefit tospecialised managed care organisations.



Figure 89: Coverage by type (% 2000) Figure 90: US healthcare funding, % of $ spending

Government

GovernmentStates

GovernmentOther

Private

Uninsured

Medicare

Medicaid

Otherprograms

Privateinsurance

No benefits

•Population over 65•Disabled

•Indigent population•Other

•Native Americans•Vet., other

•Employed population•Self-employed

17%

13%

13%

7%

50%

U.S. Pop.260 m

Private Insurance

36%

Medicare20%

Medicaid15%

Out of Pocket17%

Other Public12%

Source: IMS Health Source: HCFA 1999

Figure 91: US drugs as % of healthcare Figure 92: US healthcare cost analysis 2000

9.0%

7.5%

6.2%

10.4%

4.9% 4.9%

5.4%

6.0%

7.2%7.9%

8.2%

8.8%

9.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1965 1970 1975 1980 1985 1990 1996 1997 1998 1999 2000 2001E 2002E

% U

S H

ealt

hcar

e at

trib

utab

le t

o R

x D

rugs

Other23%

Rx Drugs9%

Nursing homes7%

Admin & net6%

Hospital care33%

Physician services22%

Source: IMS Health Source: IMS Health

Almost 80% of employed Americans are now covered by some form of managedcare organisation, compared to less than 10% 20 years ago. These managed careorganisations use their enhanced buyer power to demand cost reductions from theproviders of drug and healthcare services and are today responsible foradministering the healthcare needs for over half the US population. In stark contrastto almost every other industrialised nation, the government is a minority provider.Overall, the US government funds the healthcare costs of under a third of the USpopulation and the prescription drug costs of an even smaller proportion.

Managed care programmesAs stated, almost 80% of employed Americans are now covered for their healthcareneeds through managed care. These managed care programmes have aggressivelyleveraged their greater buying power to negotiate sizeable discounts from the drugmanufacturers – typically of the order of 20% or so. Over the past several years, amultitude of different plans providing varying levels of flexibility and benefit havebeen established. These include health maintenance organisations (HMO), preferredprovider organisations (PPO), fee for service programmes and point of service plans(POS). The essential features of each are highlighted below.



Healthcare maintenance organisations (HMO)There are three types of HMO in existence. In order of increasing flexibility, theseare:

n Staff model HMOs: In this model, individuals see a doctor employed by theHMO, who may prescribe drugs from an approved list (ie, a formulary) set bytheir HMO.

n Group model HMOs: Here, the doctor is self-employed and is contracted towork for one HMO. Again, less choice is available to the patient, as their doctormust work from a formulary. Prescribing patterns are closely monitored andshould the physician fail to adhere to formulary requirements, he risks losing hisHMO contract.

n Network HMOs and independent physician associations (IPAs): Within thistype of organisation, doctors are under contract to a number of different HMOs,each of which typically runs its own formulary. It is invariably difficult for thephysician to remember which drug may be prescribed under a specific plan. Assuch, they often prescribe the treatment that they consider most appropriate.

Figure 93: Drug reimbursement by managed care Figure 94: Private care analysis 2001 (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Managed Care Medicaid

Conventional (29m)22%

HMO (62m)48%

PPO (30m)23%

POS (9m)7%

Source: IMS Health 2000 Source: Kaiser Health;

Point of service (PoS): Under point of service plans, individuals can visit a selectionof doctors specified by their insurer/plan manager. The elected doctor is thenresponsible for providing patients with their basic healthcare, referring them tospecialists should the need arise. Patients wishing to take up the services of aspecialist will often pay an additional out-of-pocket fee.

Preferred provider organisations (PPO): Alternatively, patients can also chose toconsult a number of doctors recommended by their plan manager. The doctors willthen discount the cost of their services to be reimbursed by the managed careorganisations in return for volume of patients referred to them. Patients can alsoconsult a doctor who is not on the list, but will be subject to a higher out-of-pocketcost.

Fee for service indemnity: This is by far the most flexible of all managed careplans. Under the ‘fee for service’ programme, individuals simply choose whichdoctor they wish to see and receive the treatment considered most relevant fortheir condition by the doctor. Rising premiums associated with the flexibility offeredhave, however, seen patients switching to the aforementioned PPO and PoSprogrammes, which, while less flexible, are far more affordable.



Pharmacy benefit managersAlthough managed care now looks after the healthcare needs of around half of theUS population, the industry itself remains very fragmented, with over 1,600managed care organisations of one type or another operating in the US markettoday. However, by outsourcing the management of the pharmaceutical needs oftheir members to organisations called pharmacy benefit managers (PBMs),managed care has achieved greater mass and buyer leverage in prescription drugmarkets. In effect, the PBMs are organisations that administer the prescription drugbenefits on behalf of insurers, HMOs and other drug sponsors. By aggregatingpurchasing and administration for plan members, they are able to save significantcosts for their customers, the HMOs, not least through negotiating discounts ondrugs with the pharmaceutical manufacturers themselves.

Over the past five years, the PBM industry has seen considerable consolidation. Assuch, the top five companies in the industry now account for around 60% of totalUS drug spending. Given that they design a significant proportion of HMO drugbenefit plans, this provides them with substantial negotiating clout. More often thannot, if large cap pharma is to have a new drug listed on a HMO formulary, it willneed to reach agreement on price, etc, with the PBM that manages that formulary’sneeds. In an age when many me-too and generic products are coming to themarket, this is placing increasing pressure on drug prices.

Figure 95: The big five PBMs manage circa 60% of US drug spending (2001)AdvancedPCS

Merck-Medco

Expressscripts

CaremarkRx

WellpointPharmacy

Total NationalTotal

PBM%

Enrolled lives1 75m 65m 47m 23m 30m 240m 285m 84

Annual drug spend2 $21bn $29bn $20bn $6bn $6bn $82bn $140bn 59

Adjusted annual claimsprocessed3

481m 686m 355m 119m 125m 1,764m 3000m 59

1. Market share number distorted due to double counting of members2. Market share based upon $140bn US Rx drug market3. Each mail prescription counts as three network prescriptionsSource: Company data

Co-payments and cost-reduction initiativesFor several years, managed care companies have been trying to contain drug costsby initiating tiered co-payment schemes. These are basically schemes whereby theconsumer of the drug has to pay a differential co-payment on medicines obtained,depending on the status of the drug within the HMO formulary. From an HMOperspective, such an approach provides it with some leverage over consumerpreference, so saving it money. However, as the HMO’s ability to influence theconsumer decision grows, so too does its negotiating position with thepharmaceutical manufacturer. Initially, the managed care organisations (MCOs)launched two-tier programmes. Three-tier programmes have, however, quicklyfollowed these. In some instances, an even greater number of tiers are now beingbuilt into plans.

The concept of co-payments is a simple one. Put simply, the patient can have themedicine he or she wants. But, depending on the tier, they will be required to pay agreater or lesser contribution to the cost of the drug. In most multi-tier prescriptiondrug programmes, generic drugs usually comprise the lowest tier. The second tier isfor preferred drugs, where the co-payment is slightly higher. The third tier is usuallyreserved for non-formulary drugs and features the highest co-payment, in the rangeof $25–$50. Beyond keeping costs down, the key feature is to try and inject someprice awareness and, subsequently, price elasticity into the pharmaceutical market.



Figure 96: Co-payment tiers are rising Figure 97: Three-tier is becoming more common

5.007.006.93

14.00

8.77

29.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

1996 2000

Generic (formulary) Brand (formulary) Brand (non-formulary)

Generic and NF Brand $3.77 Difference

Generic and NF Brand $22 Difference

23% 22%16% 14% 12%

33% 32%

26%23%

20%

18%32%

48% 56% 62%

10% 7% 6%

26%

14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999 2000 2001 2002 2003E

Open system Two Tiers (generic/brand) Three Tiers (generic, non-preffered and preferred brand) Closed

2000 20011999 2002 2003E

Source: IMS Data Source: Health Strategies Group

Publicly funded health insurance programmesA number of these federally funded programmes exist nationwide. Most significantamong these are the government-funded plans of Medicaid for those on lowincomes and Medicare for the elderly and disabled.

MedicaidMedicaid is funded jointly by the state and federal governments and pays for cost ofhospitalisation, visits to doctors and prescription drugs for those with low incomes.It covers an estimated 32 million Americans and in 2001, Medicaid expensed anestimated $18.7bn for prescription drugs. For the pharmaceutical companies, thereis, however, an incremental cost of Medicaid business. In 1990, Congress requiredthat, in order to have a drug reimbursed by the Medicaid programme, the drugmanufacturer would have to pay a rebate on the product supplied.

For all innovator products, reimbursement requires a rebate that is the greater of15.1% of the average manufacturer’s listed retail price (AWP) or the differencebetween the listed price and the manufacturer’s ‘best price’ (typically the discountoffered to private managed care bodies). In addition, a further rebate is demandedfor any price increase that exceeds the rate of consumer price inflation.Reimbursement for generic drugs requires a rebate of 11% of each manufacturer’sAWP. In 1999, manufacturers returned an estimated $3.3bn to the federal and statebodies.

In addition to requiring rebates, as state budgets have become tighter, so manystate Medicaid programmes now run restrictive drug formularies, as well as limitingthe number of prescriptions for any one patient that may be reimbursed. Followingthe success of the states of Florida and Michigan in implementing formularies,which, for non-approved products, require prior authorisation for reimbursement,several other US states are also looking at the use of restricted lists to containexpenditure on expensive new medicines. The provision of Medicaid benefits hasalso been increasingly outsourced to the managed care groups as a means ofcontrolling costs. Almost 50% of Medicaid recipients are now enrolled in some typeof managed care, of which there are three basic types. For reference, these are:

n Full-risk capitation, in which states contract with the managed care provider andpay a fixed fee per enrollee per month to outsource full-risk health insurancecoverage.



n Partial capitation, in which some services are outsourced at full risk, whileothers will be reimbursed by the state.

n Primary care case management, under which beneficiaries are assigned to casemanagers who provide basic medical care and act as gatekeepers, referringpatients to specialists when appropriate.

MedicareMedicare is a nationwide federal programme of healthcare for the elderly anddisabled. In 2000, the programme cost the federal government about $237bn andcovered an estimated 39 million people, approximately 90% of whom were over theage of 65. Significantly, Medicare does not cover out of hospital prescription drugcosts, barring a limited number of exceptions.

Medicare is run in two parts. Part A is automatically available to almost all individualsaged 65 and over and provides in-patient hospital services, home-health services,limited skilled nursing, as well as hospice care. It is funded by the Medicare HospitalInsurance Trust Fund, a government-managed trust towards which employees andemployers pay through equal payroll tax deductions. Similarly, Part B is available tothe majority of those eligible for Medicare and provides for physician services,laboratory services, outpatient hospital services and some medical equipment. It isfinanced through beneficiary premiums and general tax revenues, which are paidinto the Supplementary Medical Insurance Trust Fund.

Figure 98: Lives and prescriptions by coverage under Medicare

Figure 99: Expenditure of Medicare patients on Rx medicines by source

Type of Coverage Number of Percentage Average

Beneficiaries (m) of Total (%) Rx's filled

Medicaid 6.4 15.9 39Employment based 11.9 29.6 31Individually purchased 4.5 11.2 32

Other public 1.7 4.1 37Other HMO 5.7 14.2 28Subtotal 30.2 75 32

No Drug Coverage 10.1 25 25Total 40.4 100 30

Out-of-pocket40%

Individual policies

3%

Employment based plans

26%

Private HMO's5%

Medigap6%

Medicaid12%

State and Federal based

8%

Source: Congressional Budget Office Source: Congressional Budget Office

On the inception of the Medicare Act in 1964, outpatient prescription drugsaccounted for only a relatively minor component of healthcare and, as such, it wasnot felt necessary to include their reimbursement within the provisions of theMedicare Act. Since that time, the picture has, of course, changed considerably.Innovation means that medicines now play a much more significant role inhealthcare, particularly for the elderly, who are most often those suffering withailments for which there is a pharmaceutical treatment (eg, hypertension, diabetes,arthritis, osteoporosis, etc). Medicare legislation has not, however, been altered toaccommodate changes in medical practice and, as such, a significant proportion ofthe elderly have no help funding their pharmaceutical needs. Excluding thosecovered by Medicaid, employer-provided retiree plans or some other form ofinsurance, it is estimated that over 40% of today’s elderly, some 16 million people,have no prescription drug coverage.



Not surprisingly, this apparent inequity has been the subject of much politicaldebate, with change frequently being promised by both political parties. Given aRepublican House, Senate and President, this looks most likely to take the form of aprivate ‘drug only’ insurance policy, with the uninsured paying a modest, means-weighted insurance premium, together with some form of co-payment andgovernment providing significant funding subsidies and managed care overseeingthe provision of the prescription drug needs of the elderly and negotiating discountswith the drug industry.

Other publicly funded programmes exist. Beyond Medicare and Medicaid, thefederal government is also a major purchaser of pharmaceuticals for government-run institutions. Not least among these are the Department of Veterans Affairs, theDefence Department and the Coast Guard. As with Medicaid, discounts aredemanded, though at 24% below the average manufacturer’s price (AMP), thediscounts demanded are more onerous. An estimated 20 million people are coveredthrough such schemes.

Figure 100: Map of the US pharmaceutical industry

Drug rebates

Managed CareOrganisation

PharmaceuticalManufacturer

Adm

inistrative fee% o

f m

fr r

ebat

es

Pricing incentives/

discounts

Basic drug margins;High repeat customerswith chronic conditions

Ther

apeu

tic a

nd/o

rge

neric

sub

stitu

tion

RetailPharmacy

Formulary positioningMail OrderPharmacy

(typically owned by PBM)

PBM

ED

IE

DI

Data m

ining ($)

EDI

Co-pay

Co-pay

Data mining ($)

PremiumRx

Pla

nbe

nefic

iarie

s




EuropeThe major difference between European and US healthcare is that the majority ofEuropean citizens can obtain healthcare benefits from state organised programmes.In addition, government in all European nations exerts significant control over thecost of care by implementing practices such as price controls on prescription drugs.

GermanyIn Germany, statutory health insurance funds (the Krankenkassen) cover thehealthcare needs of around 90% of the country’s 87 million population. Throughthese funds, those covered have equal access to healthcare benefits from supplierswho are under contract to the national system and who are reimbursed by the fundsdirectly.

For the employed, membership of the insurance system is mandatory unless theirincome rises above an annually determined threshold, which, as of January 2003,will be Euro 45,900. Equal contributions approximating 14% of gross salary aremade by both the employer and employee and deducted directly from the payroll.For the unemployed or the retired, the government funds this contribution. Thosewith income exceeding the wealth threshold may choose to have private healthinsurance coverage instead and account for 8% of the population.

Spiralling welfare costs saw significant reform of the healthcare system in the1990s as the government endeavoured to contain costs. For the pharmaceuticalindustry, three measures were of particular significance: reimbursementcaps/reference pricing on prescription drugs, generic substitution and theimplementation of prescribing budgets.

n Reimbursement caps/reference pricing: In 1995, the Federal Ministry ofHealth introduced a list of recommended pharmaceuticals and prices uponwhich reimbursements are now based. Prices are determined by a drug’stherapeutic value, with all drugs in the same therapeutic category reimbursed atthe same price.

The insured pays a fixed contribution for prescribed drugs on the recommendedlist. The pharmacy is then reimbursed for the remainder by the statutory healthinsurance system. If the drug is not on the recommended list, the patient willneed to pay the entire cost. Consequently, this list is subjected to heateddebate and negotiation between the ministry, the doctor’s association and thedrug manufacturers.

n Prescribing budgets: The national prescribing budget for doctors, initiated in1993, limited the volume and cost of drugs that doctors were allowed prescribe.Any doctor exceeding his/her budget was subject to financial penalties.Although the use of physician budgets was abolished in 2002, the impact of thedirective was to help establish a strong generic market, with doctors tending toprescribe generics as soon as they are available. Generics now account foraround 50% of prescriptions in the German market.

n Generic substitution, or Aut Idem: In late 2001, the German governmentintroduced rules obliging pharmacists to substitute products that were offpatent with a generic where available. Doctors are expected to prescribe usingthe generic name and pharmacists to chose a generic that is among thecheapest available. Doctors can, however, write “not substitutable” on theprescription.



Outside these initiatives, the German government has on regular occasions soughtto contain the cost of medicines to the state by introducing obligatory price rebatesto the Krankenkassen. The latest of these was proposed in late 2002, with theauthorities seeking a 6% price rebate on all innovative medicines sold to theKrankenkassen, together with initiatives to reduce pharmacy and wholesalermargins (both of which will ultimately place further pressure on drug prices).

FranceIn France, roughly 80% of healthcare costs are covered by Social Security SicknessInsurance (SSSI). This is predominantly financed through compulsory contributionsmade by employees and employers. The remaining 20% of costs are covered bysupplementary private medical insurance and out-of-pocket payments. Out-of-pocket payments are set to increase following the recent implementation ofadditional cost containment policies in the SSSI schemes.

In an effort to contain overall healthcare costs, the government closely controls thesupply of prescription drugs in its capacity as both regulator of the industry and theindustry’s largest customer. Several schemes are implemented:

n The state SNIP framework agreement. Introduced in 1994, this provides theframework under which pharmaceutical companies negotiate with the Frenchgovernment on the price, quantity and form of drugs supplied.

n Pharmaceutical budgets. The government also agrees an annual budget withthe pharmaceutical companies as to which drugs will be reimbursed and thetotal level of sales permissible. The drug companies will repay spending inexcess of this amount.

In addition, prescription guidelines have been introduced that state which drug iseligible for reimbursement and the reimbursement price. Just over 80% of currentlyavailable prescription drugs are reimbursed by the SSSI schemes. These are subjectto several reimbursement rates, depending on the seriousness of the diseasetreated. Three rates apply:

n 100% for those drugs considered expensive and irreplaceable,

n 35% for drugs that treat less serious illness, and

n 65% for the remainder.

Most of the working population also purchase supplementary healthcare insurance,which provides cover for that element of cost not reimbursed by the state.Consequently, there is little cost consciousness among a large portion of thepopulation, such that, per capita, France is the second-largest consumer of drugs inthe world, after Japan.

Recently, the French government has made significant efforts to stimulate the useof generics. Among other things, its initiatives have included agreeing to payphysicians a consultation fee of Euro 20 in exchange for which physicians haveconsented to write at least 25% of their prescriptions using the generic name. Theextent of penetration may, however, be limited by a further decree that limitsreimbursement on off-patent branded drugs to the value of the lowest availablegeneric.

United KingdomThe UK’s National Health Service (NHS) was established in 1948 to provide universalhealthcare to all residents (58 million). Typically, nationals register with a general



practitioner (GP) in their locality. This GP provides general healthcare services, butwill refer patients to hospital specialists when necessary.

The NHS is financed partly from contributions made by government and partly fromnational-insurance premiums, paid at source by employees and their employers.Employees contribute a fixed percentage of their salary, subject to an annuallydetermined cap. Employers contribute 10% of the employee’s gross salary.

Lack of funding in the 1980s led to the reduction of medical budgets and closure ofhospitals, with a consequent increase in hospital waiting lists. In part, this has drivena significant increase in the demand for private health insurance. Around 10% of thepopulation currently have some form of private medical insurance in place.

Dispensing of prescription medicines in the UK is either undertaken directly by theGP, or, more commonly, through presentation of a GP-written prescription at apharmacist. For several significant segments of the population, prescriptions arefree (eg, the elderly, students, people on low incomes), with the NHS reimbursingthe pharmacist or doctor for the full cost of the drug and paying a fee fordispensation. However, for the majority, a prescription charge of roughly £6.20 ispayable per prescription, irrespective of the actual cost of the drug prescribed. Thisco-payment is used to offset the amount owed by the NHS.

There are a number of drugs that cannot be obtained through the NHS. These aredetermined by the Advisory Committee on NHS Drugs, which bases its decisions onclinical need, whether an effective existing treatment is already available and therelative cost of the drug. NHS-excluded drugs are detailed on the Selected List,which is updated following each review by the committee. Selected List drugs willnot be reimbursed by the NHS.

At the present time, the pharmaceutical bill in the UK corresponds to around 17% ofthe healthcare budget and continues to increase. The government has sought tocontain drug costs in a number of ways:

n Pricing: The price that the NHS will pay for any pharmaceutical is determined bynegotiation between the Association of the British Pharmaceutical Industry andthe Department of Health under the Pharmaceutical Price Regulation Schemeonce every five or six years. Under this scheme, each company is allowed toearn a return on capital of 21% for total products supplied. The last PPRS reviewtook place in October 1999, at which time, a 4.5% price cut was agreed acrossthe industry. The next review is scheduled for late 2004.

n Usage: Doctors in the UK are given a voluntary prescription budget under whichthey are encouraged to consider the cost of medicine prescribed. Unlike thesystem in Germany, they are not penalised financially for exceeding theirbudgets. Additionally, a new body called the National Institute for ClinicalExcellence (NICE) was established in April 1999 to review the costeffectiveness of medicines and discourage their use if their cost outweighedtheir perceived benefits. Given the cost-conscious nature of the UK medicalestablishment, doctors are unlikely to prescribe medicines highlighted by NICEas cost ineffective. Physicians and pharmacists are also encouraged tosubstitute generics for branded products where generics are available. Indeed,in 2000, over 71% of prescriptions were written using generic names, while52% of prescriptions dispensed were for a generic. Note that this rate ofpenetration is achieved despite the fact that pharmacists in the UK are notpermitted to substitute.



JapanJapan has a compulsory health insurance system in which everyone living in thecountry (125 million) must participate. The insured pays insurance premiums to thegovernment and is covered for up to 90% of the cost of medical services andprescription drugs. Costs are determined by the Ministry of Health & Welfare andset out on the Medical Fee Table (services) and the National Health Insurance DrugPrice List (drugs). Some co-payment is invariably required, but the bulk of the cost ispaid by one of two government-controlled health insurance programmes.

Individuals either take part in the Employees’ Health Insurance plan, or alternatively,the National Public Health Insurance plan if they are not eligible for the employee’splan.

n Employee’s Health Insurance Plan: This plan is designed for individuals whoare in full-time employment. It also covers their dependants. The premium paidequates to 8.4% of salary, paid equally by employee and employer anddeducted at source. For the employee, cover runs at 90% of their healthcarecosts. For dependants, 70% of outpatient care costs are covered and 80% ofany hospital costs.

n National Public Health Insurance Plan: Under this scheme, a premium is paidbased on the previous year’s annual salary and the number of family membersinsured. Premiums are capped at approximately $4,000 per family. The systemcovers 70% of the cost of healthcare services or prescription drugs used by theinsured and their family.

Japan’s healthcare system differs from the US and Europe in that any doctor canboth prescribe and dispense prescription drugs. Manufacturers control their marketshare by supplying prescription drugs to doctors at a discount to the reimbursementprice. Because doctors can make a profit from prescribing drugs sold to them at lessthan reimbursement levels, they have tended to over-prescribe. As a result, Japan isthe largest consumer of drugs per capita, with pharmaceuticals representing over20% of total healthcare costs.

In response to this apparent abuse of the system, the Japanese Health Ministry hasbeen reducing the reimbursement price for pharmaceuticals since the 1980s, soreducing doctors’ margin and discouraging over-prescription and manufacturerdiscounts. This has seen some success. Recommendations to further improve thesystem are ongoing.

Government measures to curb rapid expansionThe Japanese government, increasingly concerned at the prospect of drug andhealthcare costs spiralling out of control, some time ago initiated a series ofmeasures designed to eliminate the financial incentive to over prescribe.

Bungyo – The separation of prescribing and dispensing pharmaceuticalsOne measure was “Bungyo,” the separation of prescribing and dispensing ofprescriptions by promoting the filling of prescriptions by independent healthinsurance or “family” pharmacies rather than allowing the prescribing physician alsoto dispense the drug. Bungyo was first introduced in 1974, but was not aggressivelypursued by the Ministry of Health and Welfare (MHW) until 1992, with theimplementation of the Bungyo Promotion Programme.

Bungyo reduces the financial drivers in prescribing, as independent pharmacies onlyfill prescriptions and obtain very little discount from drug companies. They do,however, enjoy higher dispensing fees than a dispensary within a clinic. Asjustification, and perhaps so as not to completely alienate dispensing physicians, the



ministry cited patient-related benefits attributable to Bungyo and the dispensing ofprescriptions by independent family pharmacies. These included better patientknowledge of which drug has actually been prescribed and more continuity ofinformation about those drugs, a reduced potential for overlapping treatmentregimes and drug interactions, which can be seen if a patient consults more thanone doctor at different clinics, and increased patient compliance.

Figure 101: Bungyo – The separation of prescribing and dispensing

DoctorsMargin

Patient

HospitalClinic

Dispensing Doctor

Wholesaler

Insurance

IndependentFamily

Pharmacy

Manufacturer

¥80

¥90

¥92

¥90

¥10

¥100

Consultation& prescription

Prescription

PharmacyMargin

¥2

Source: MHLW, Japanese Pharmaceutical Association, Deutsche Bank research

As can be seen in the diagram above, a patient attending a hospital, clinic or aprescribing physician will incur an eventual cost for the insurance company of ¥100,including a doctor’s margin of ¥10. However, when a patient has a prescriptiondispensed at an independent pharmacy, the margin is significantly reduced.Interestingly, when drug prices are also reduced, as they have been in Japan on aregular basis, as we discuss shortly, the official list price often falls more than thewholesaler price, which also squeezes the doctor’s margin.

The government has met with some success in its Bungyo endeavours. In 1970,the number of prescriptions received by independent health insurance pharmacieswas only 4.7 million. However, this spiralled to around 400 million in 1998, as theBungyo promotion programme became increasingly effective. Moreover, theBungyo rate, the proportion of out-patient prescriptions actually dispensed byindependent pharmacies, has increased from only 9.7% in 1986 to 30.5% in 1999,although large regional variations do occur. A Bungyo rate of 100%, though mostunlikely to occur, as hospitals and clinics will always continue to dispense drugs,would indicate complete separation of prescribing and dispensing. Today, theBungyo rate is estimated to stand at over 50%.

The R-Zone and regular price decreasesThe government also stepped up pressure on excessive market growth and on drugdiscounts by introducing the R-Zone, a level of discount on prices it believed to be‘reasonable.’ If discounts in excess of this level were being obtained, then pricedecreases would be implemented in an attempt to contain rising costs and also torestrict the doctor’s margin on prescriptions. Price cuts continued bienniallythroughout the early 1990s and are expected to continue every other year for thetime being.



Figure 102: Japan – A decade of price cuts (%)1988 1990 1992 1994 1996 1997 1998 2000 2002

Price Cut -10.2 -9.2 -8.1 -7.2 -8.5 -4.4 -9.7 -11 -6.3Source: Ministry of Health & Welfare

Aside from price reductions, the MHLW has also used an increase in co-paymentsas a means of containing the cost of medicines. Thus, having introduced co-payments for salaried workers of 20% in 1997, in October 2002, a 10% basic co-payment was introduced for the elderly (20% for those above a certain incomethreshold). This will be followed in April 2003 by a further 10% increase in the co-payment made by salaried employees. As illustrated below, co-payments combinedwith price cuts have significantly held back the value growth of the Japanesemarket since their introduction in the 1980s.

Figure 103: Growth rates in Japan adjusted for price cuts

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

YoY

cha

nge

Reported growth Adjusted for price cut

Source: IMS, MHW, Deutsche Bank research



The US legislative processGiven the importance to the pharmaceutical industry of the changing US legislativelandscape, we thought it useful to include a brief description of the US legislativeprocess in this document. This may, for example, help readers follow the progressof any medical reform legislation in this and future sessions of Congress.

Law-making in the United StatesThe process for a bill to become law in the US is often a long and complicatedprocess, replete with procedural rules and loopholes. According to the USConstitution, legislative responsibility falls to Congress. The US Congress is dividedinto two separate but equal bodies, the House of Representatives and the Senate.The House comprises 435 members, elected every two years. The Representativesare apportioned to the populations of each of the 50 states. The Senate comprises100 members – two from each state. Senators are elected to terms of six years,with one-third of the total membership of the Senate elected every other year. Each“Congress” lasts two years and is divided into a First and Second session. The 107th

Congress completed its term in October 2002.

Figure 104: Composition of 108th US Congress (2003-2004)House of Representatives Senate

228 Republicans 51 Republicans

205 Democrats 48 Democrats

1 Independent 1 IndependentSource: US House of Representatives, US Senate

Types of legislationIdeas for new legislation may arise from a variety of sources – from the members ofCongress, from individuals or citizen groups, from a member of the President’sCabinet or from the President himself. Once an idea is conceived, a member ofCongress must introduce the draft legislation into his or her respective house.

There exist four principle forms of legislation: the bill, the joint resolution, theconcurrent resolution and the simple resolution. The most common of these is thebill, of which there were 8,889 introduced in the 107th Congress. Bills may beintroduced in either the House or the Senate, with the exception of bills for raisingrevenue. These must originate in the House. By tradition, general appropriation billsalso originate in the House. Bills may be “public”, affecting the general population,or “private”, affecting a specific individual or private entity. The term “companionbill” is also used to describe a bill introduced by one chamber of Congress that issimilar or identical to a bill under consideration by the other chamber.

There is little practical difference between a joint resolution and a bill. Like a bill, ajoint resolution may be introduced in the House or the Senate, but not jointly in bothhouses, as often assumed. They are subject to the same approval procedure asbills, with the exception of a resolution proposing a constitutional amendment. Insuch cases, the resolution must be approved by two-thirds of the House and Senateand ratified by three-quarters of the states. It is not reviewed by the President.

Concurrent and simple resolutions are used for regulating the operations of one orboth houses. Concurrent resolutions affect the operations of both houses, whereassimple resolutions affect only the House or the Senate. To be effective, eachresolution must be approved only by the relevant house(s).



Introduction and referral to committeeFor the purpose of simplicity, we will focus on the legislative pathway for a billintroduced in the House, as most of the process is the same for one originating inthe Senate. Any member or group of members may introduce a new bill or jointresolution. Upon introduction, the bill is referred to the appropriate committee withjurisdiction over its subject matter. This is perhaps the most important phase of thelegislative process, as the committees hold primary responsibility for scrutinising thebill. In fact, only a small percentage of bills ever make it past committee.

Currently, there are 19 standing committees in the House and 16 in the Senate, inaddition to several select or special committees. Each of these committees isfurther broken down into subcommittees. Healthcare matters fall under thejurisdiction of the Committee on Energy and Commerce in the House and theCommittee on Health, Education, Labour and Pensions in the Senate.

Membership of committees is divided between the two major political parties. Bycustom, the division approximately reflects the split in the house as a whole. Eachof the two parties initially assigns its members to committees, with the final slatebeing approved by the full chamber. Each committee also elects as chairman amember of the majority party.

During the review process, the subcommittee solicits opinions from the relevantgovernment agencies and non-government experts. The bill is then amended duringa so-called “mark-up” session, after which the subcommittee may decide to reporta favourable, an unfavourable or no recommendation to the parent committee. Thesubcommittee may also recommend tabling the bill indefinitely. A similar processfollows in the full committee. However, the parent committee also may vote on themeasure and forward it to the whole House.

Motion to discharge committeeOccasionally, the committee process may be circumvented by what is known as a“discharge petition”. If a bill has been held up by a committee for at least 30 days,or if the Committee on Rules refuses to clear it for floor action within seven days,any member may offer a motion to discharge the committee from the bill. A simplemajority is required to pass the motion. While discharge petitions are seldomsuccessful – members are reluctant to disregard the committee judgement andreview process – the threat of such a move may spur a committee to act.

Committee recommendation to the HouseIf the committee votes to report the bill to the House, it drafts a report describingthe purpose and scope of the bill and the reasons for approval. The report willhighlight any areas of existing law the bill proposes to change. It will also state allamendments to the original draft. (These reports often serve as the most valuableresource in understanding the history of a law and are frequently referenced bycourts and executives.)

When a public bill is favourably reported to the House, it is assigned a calendarnumber on the Union or House Calendar. The Union Calendar includes all public billsregarding the raising of revenue or the appropriation of money or property. All otherpublic matters are scheduled on the House Calendar. There is also a CorrectionsCalendar, which permits expedited review of bills, but it requires a three-fifthsmajority for passage.

All measures on the Union Calendar must first be considered by the Committee ofthe Whole House (known as the “Committee of the Whole”), an abbreviated



version of the full House that requires only 100 members for a quorum. Thiscommittee debates and amends legislation, but cannot pass a bill. Rather, all billsconsidered by the Committee of the Whole or listed on the House Calendar mustundergo debate and passage by the full House. A simple majority is required forpassage.

Passage of the bill to the SenateUpon approval by one house of Congress, the bill moves on to the other house forconsideration. Thus, a House resolution is passed to the Senate. In the Senate, thebill undergoes roughly the same process as it did in the House, including the samedetailed review in committee and subcommittee. However, if the bill is of a non-controversial nature, the Majority Leader may ask for unanimous consent forimmediate consideration and order a vote with little or no debate.

One of the key differences in the Senate proceedings is that there is nofundamental “germaneness rule”. Whereas in the House, any proposedamendment must be germane to the underlying bill, Senators may try to introducelegislation by tagging their amendment onto unrelated bills being debated on theFloor.

Resolution of disagreementsFollowing Senate approval, the bill, engrossed with new amendments, returns tothe House. If there are no objections to Senate amendments, the bill is immediatelypresented to the President. In the event of disagreements, the originating housemay request a conference. Conferees, which include members from each house(generally members of the relevant committees), are strictly limited in theirconsideration to matters in disagreement. If the conferees reach a compromise, thebill must again be voted on and approved by both houses. Only after a bill has beenpassed in identical form by the House and Senate may it be presented to thePresident.

Presidential approval or vetoOnce approved by the legislature, the bill is given to the President. The Presidenthas three options: 1) he may sign it into law, 2) he may do nothing, whereby afterten days (excluding Sundays), the bill automatically becomes law, or 3) he may vetoit. If the bill is passed via either of the first two options, it becomes law immediately,unless the bill expressly specifies a different date. In the event of a veto, Congressmay override the decision if both houses achieve a two-thirds majority in favour ofthe bill. However, if the vote is unsuccessful, the bill is rejected.



Figure 105: US legislative process (example of House-sponsored Healthcare Bill)

PresidentialReview

Debate byCommittee on

Energy andCommerce

Debate and Votein Full House

(majority = 218)

Bill introducedby member

of House

If recommended,report to full House

If approved, forward to Senate

Debate and Votein Full Senate

(majority = 51)

Debate byCommittee on

Health, Education,Labour &Pensions

If recommended,report to

full Senate

House Voteon Senate

Amendments

If ap

prov

ed,

retu

rnto

Hou

se

If ap

prov

ed, r

epor

t to

Pres

iden

t

If objections, request Conference

If approved, report to President

Senate VoteHouse Vote

If compromisereached, reportback to House

If conference draftapproved, report

to SenateConference

Debate of Issuesof House/Senate

Disagreement

If vetoed, sendback to House

House Debateand Vote

(majority = 290)

Senate Debateand Vote

(majority = 67)

If vote successful,send to Senate

Bill

Law

If signed or no actiontaken for 10 days, bill becomes law

If vote su

ccessful,

bill becomes law

Bill rejected

If vote unsuccessful,bill rejected

If vote unsuccessful, bill rejectedIf vote unsuccessful, bill rejected




Legislative dictionaryAct - Legislation that has passed both chambers of Congress in identical form andsigned into law. Also refers to a bill that has been passed by one house.

Amendment in the nature of a substitute - An amendment that strikes out theentire text of a bill and inserts a different full text.

Bill - Draft legislation introduced by either the House or the Senate, not yet enactedinto law. Designated H.R. and S.R. followed by a number, for House and the Senatebills, respectively. Similar in function to a joint resolution.

Calendar of Business - One of the two calendars of the Senate, covering all publicand private bills and resolutions.

“Clean Bill” - A new bill (with a new number) that encompasses in a clean draft thetext of a previous bill, including all amendments. Designed to expedite legislativeaction by avoiding separate floor consideration of each amendment.

Cloture - A Senate motion to limit the length of debate on a particular bill, in order toprevent filibustering. Requires three-fifths vote for passage.

Committee of the Whole – Essentially, the full House operating under a differentset of rules that requires only 100 members (instead of 218) for a quorum.Permitted to debate and amend, but not pass legislation.

Committee on Rules - Reports special rules that set the terms for debate andamendments on specific measures.

“Companion Bill” - A bill or resolution introduced by one house that is similar oridentical to legislation introduced by the other. Intended to promote simultaneousconsideration of a measure.

Concurrent resolution - A measure used to deal with matters affecting bothhouses of Congress. Designated H. Con. Res. or S. Con. Res. for House and Senateresolutions, respectively. Does not require presidential approval.

Conference - A temporary panel of House and Senate representatives convened toresolve disagreements on a bill that has passed through both chambers.

Corrections Calendar - One of the calendars of the House, containing resolutionseligible for expedited passage. Matters are generally specific, non-controversialissues or narrowly targeted bills. Passage from this calendar requires a three-fifthsmajority.

Discharge Calendar - The calendar of motions to discharge committees fromconsideration of certain public bills or resolutions.

Engrossed Bill - The official copy of a bill or resolution passed by the House orSenate.



Enrolled Bill - The final copy of a bill or resolution passed by both chambers inidentical form. Printed on parchment paper, signed by House and Senate officials,and submitted to the President for signature.

Executive Calendar - One of the two calendars of the Senate, covering treaties andnominations.

Filibustering - Excessive Senate debate and/or procedural motions intended toblock or delay action on a particular bill.

Germaneness rule - A rule in the House preventing the proposal of irrelevantamendments. No such requirement exists in the Senate, allowing for the addition ofunrelated amendments, often called “riders”.

House Calendar - The second of the two primary legislative slates of the House.Includes all public bills that do not raise revenue or appropriate money or property.

Joint resolution - Draft legislation introduced by either the House or the Senate,not yet enacted into law. Designated H.J. Res. and S.J. Res. followed by a number,for House and the Senate resolutions, respectively.

Majority/Minority Whips - Act as Senate floor leaders in the absence ofMajority/Minority Leaders. Often responsible for rallying party votes on majorissues.

Motion to discharge committee - A motion to discharge a committee from theconsideration of a public bill or resolution that was referred to the committee 30days prior thereto. Requires a majority vote for passage.

Motion to recommit/reconsider - A motion to reconsider a question alreadydecided by vote. Rules generally permit one motion to reconsider any issue. Usuallyoffered by a supporter of the outcome immediately after the vote, followed byanother motion by the same Senator (or other supporter) to table the motion, thussecuring the outcome of the vote.

Motion to suspend the rules - A motion to bypass usual procedure and bring amatter before the House for immediate consideration and passage. Generallyproposed for routine legislation perceived to have a broad degree of support.

“Pocket Veto” - A veto that occurs indirectly, because Congress has adjournedbefore the end of the President’s ten-day window to take action on a bill.

Point of order - A claim that a rule of the House or Senate has been violated.

President of the Senate - Presiding officer of the Senate, officially, the VicePresident. They may (but are not required) to vote in the case of a tie. Dutiesperformed by the President Pro Tempore (and others designated by him) during theVice President's frequent absences.

President Pro Tempore - Constitutionally appointed officer who presides over theSenate in the absence of the Vice President. By custom, the Senator of the majorityparty with the longest record of continuous service.

Private Calendar - A legislative slate of the House that includes all bills andresolutions relating to a private matter.



Quorum - The number of members required to do business – generally, a simplemajority (218 in the House, 51 in the Senate).

Senate Majority/Minority Leaders - Elected by their respective parties to serve aschief Senate spokespeople and to manage and schedule the legislative andexecutive business of the Senate.

Simple resolution - A measure used deal with matters affecting only one house ofCongress. Designated or H. Res. or S. Res. for House and Senate resolutions,respectively. Does not require presidential approval.

Speaker of the House - Member of the majority party who serves as presidingofficer of the House. Traditionally refrains from debating or voting and does not siton any standing committees. Second in line to succeed the President.

Time agreements - A motion in the Senate to limit the time for debate, specifyspeakers and/or control the addition of amendments. Requires unanimous consentfor approval.

Union Calendar -The first of the two primary legislative slates of the House.Includes all public bills appropriating money or property or authorising anundertaking by a governmental agency that will incur an expense to thegovernment.

Veto - Rejection of a bill or resolution by the President. Usually returned to theoriginating house, stating objections. May be overridden by a two-thirds majorityvote of both the House and Senate.



Therapeutic Review

Diabetes Mellitus

Atherosclerosis

Hypertension

Hypolipidaemics (Statins)

Thrombosis and the Anti-thrombotics

Erectile Dysfunction

Gastrointestinal Disorders

Asthma

Chronic Obstructive Pulmonary Disorder

Allergic Rhinitis

Antibiotics

Osteoporosis

Pain

Rheumatoid Arthritis

Transplantation and Immunosuppression

Multiple Sclerosis

Human Immunodeficiency Virus (HIV)

Viral Hepatitis

Influenza

Central Nervous System Disorders

Schizophrenia

Parkinson’s Disease

Alzheimer’s Disease

Affective Disorders (Depression)

Attention Deficit Hyperactivity Disorder

Migraine

Oncology (Cancer)



Diabetes Mellitusn Worldwide market including insulin in 2002 worth around $10bn

n Prevalence of diabetes estimated at 150 million people worldwide

n New products including the glitazones driving strong growth

n Leading producers include Novo Nordisk, Lilly and Aventis

Diabetes mellitus is estimated to affect over 5% of the population in the developedworld. In North America alone, over 21 million people suffer from the disease,although only an estimated 65% are diagnosed. In today’s society, where obesityand a sedentary lifestyle are growing in prevalence, the incidence of diabetes is saidto be increasing at a rate of about 5% per annum. In addition to those who actuallysuffer from the disease, a further 50 million worldwide suffer from impaired glucosetolerance (IGT), many of whom will ultimately need treatment.

PhysiologyDiabetes is a chronic metabolic disorder characterised by poor blood glucose controldue to insulin deficiency and/or insulin resistance. Glucose is the primary fuel ofcells. In healthy individuals, two principal glucose-regulating hormones - insulin andglucagon - maintain a constant glucose concentration in both the fasting and post-meal (post-prandial) state. When blood glucose levels are abundant, such as aftereating a meal, insulin is released. Produced by cells in the pancreas, called beta cells(see diagram), it acts to encourage the uptake, utilisation and storage of glucose inmuscle and fat tissues, but mainly in the liver. During fasting, insulin output fallsand, among others, a counter regulatory enzyme, glucagon, is released. Alsoproduced in the pancreas, but by alpha cells, glucagon stimulates the release ofglucose into the blood from the liver by breaking down glucose stores calledglycogen and converting other fuel sources such as fats and proteins.

In a healthy body, blood glucose levels rise and fall within a fairly tight range of circa70-110mg/dl. However, with diabetic insulin deficiency and/or resistance, bloodglucose can rise to substantially higher concentrations, resulting in hyperglycaemiaand, in the long term, causing blindness and damage to the kidney and heart, amongother organs. There are two types of diabetes mellitus:

n In Type 1 diabetes, or insulin-dependent diabetes, there is an absolute shortageof insulin resulting from destruction of the insulin-producing beta cells by thepatient’s own immune system. Accounting for roughly 10% of cases, Type 1diabetes sufferers are typically young. Given Type 1 patients’ inability toproduce insulin, treatment inevitably includes supply of exogenous insulin.

n Type 2 accounts for roughly 90% of cases and occurs predominantly in peopleover 40. In over 60% of reported cases, patients are overweight. The disease ismost often characterised by a resistance of the peripheral tissues to insulin andimpaired regulation of insulin secretion. Consequently, Type 2 diabetes is alsoknown as non-insulin dependent diabetes mellitus (NIDDM), that is, insulin isproduced, but the body’s insulin receptors are insufficiently sensitive to itspresence. As a result, the insulin producing beta cells over-compensate for thispoor sensitivity, with the frequent result that, over time, they ‘burn out’. Hence,insulin production gradually deteriorates, with around 30% of patients eventuallybecoming insulin dependent.



Figure 106: Blood glucose is controlled by insulin and glucagon

Glucagon causesblood glucose to rise

LIVERStimulates glycogen formation from glucose

Glycogen Glucose

Stimulates glycogen breakdown and conversion of fats and proteins to glucose

PANCREAS

Betacell

alphacell

High blood glucose- after a meal

Low blood glucose- between meals

Insulin

Glucagon

Enhanced bysulphonylureasplus Starlix and

Prandin

Inhibited bybiguanide

class

Negative feedback mechanism keeps tight regulatory control over blood glucose concentration

Negative feedback mechanism keeps tight regulatory control over blood glucose concentration

Insulin causes bloodglucose to fall

Source: Rang, Dale & Ritter

Pharmacological treatmentDiabetes is not yet curable, but it can be well treated. The goals of diabetesmanagement are to attain and maintain a near-normal blood sugar level and reducethe risk of complications. In Type 1 diabetes, treatment will depend on theindividual’s needs, but typically consists of an insulin regimen, which at presentrequires the regular injection of differing formulations of insulin. This will oftencomprise daily injections of long-lasting insulin to provide a basal level similar to thatof the normal body, together with separate injections of rapid/intermediate actingproduct to provide a ‘top-up’ at meal times.

For Type 2 diabetics who have become insensitive to their own insulin, treatmentinitially focuses on diet and exercise so that lower amounts of effective insulin cancontrol blood sugar adequately. Failing this, a range of oral drug regimens areimplemented. Medication is designed to address the three basic abnormalities thatcontribute to the development of hyperglycaemia, namely, peripheral insulinresistance, excessive liver glucose production and impaired insulin secretion.



Oral medicationsAt present, there are five main classes of oral medication available, the mainfeatures of which are highlighted in the Figure below.

Figure 107: The main classes of drugs for control of blood glucoseDrug class Sulphonylureas Biguanides Glitazones Rapid-acting

secretagoguesAlpha-glucosidaseinhibitors

Sales 2002 $0.9bn $0.6bn $2.4bn $0.3bn $0.8bn

Dose per day One/three Two/three One/two Per meal Three

Insulin levels Increase Decrease Decrease Increase n/a

Risk of hypoglycaemia High Low Low Low Low

Increased body weight Yes No No No No

Reduction in lipids No Yes Yes No NoSource: Company data, Deutsche Bank estimates

n Sulphonylureas: First developed in the 1950s, the sulphonylureas account forover 50% of the oral diabetes market by volume, but because they are largelygeneric, under 15% of the market by value. They work by stimulating the betacells to increase insulin production rather than by re-sensitising the body toinsulin. They may, however, cause hypoglycaemia (low blood sugar), which canresult in coma or death if insufficient carbohydrates are ingested. In addition, bycausing constant stimulation of the beta cells, they may lead to the eventual‘burn-out’ of these cells. The leading sulphonylureas by value include Glucotrol,Amaryl, Daonil and Glynase.

n Biguanides: These are oral hypoglycaemic agents that do not requirefunctioning beta cells. They act by suppressing the breakdown of glycogen inthe liver and enhancing glucose uptake in skeletal muscle (re-sensitising). Theirpredominant advantage over the sulphonylureas is that they do not causehypoglycaemia. Side effects can include stomach upset and, in rare cases, lacticacidosis. The lead product in this class has been Bristol-Myers Squibb’sGlucophage (metformin). However, the drug saw a dramatic 90% drop in salesupon loss of its patent protection in 2001.

n Rapid-acting insulin secretagogues: These are a relatively new class ofcompound to be taken at mealtimes. As with the sulphonylureas, they act bystimulating beta cells to produce insulin. However, both onset and offset ofinsulin production is more rapid, thereby more accurately replicating the body’sown insulin profile, an advantage over the sulphonylureas. At present, are onlytwo secretagogues on the market, Novo Nordisk’s Prandin/NovoNorm andNovartis’s Starlix.

n Glitazones: Also known as peroxisome proliferator-activated gamma receptoragonists (PPARs), these represent a new class of compound that act as trueinsulin sensitisers. They act by stimulating the transport of glucose into the cell(via GLUT-4 glucose transport proteins) and by increasing the lipid metabolismactivity of peroxisomes. The result is an increase in the internalisation ofglucose following to the release of insulin. There are two key products in thisclass, Actos (Eli Lilly/Takeda) and Avandia (GlaxoSmithKline), whose sales aregrowing very rapidly. Some incidence of heart murmur has been evident as aside effect.

n Alpha glucosidase inhibitors: A small class of drug that works by reducing theabsorption of carbohydrates in the small intestine and therefore the level ofglucose in the blood. Side effects include flatulence, diarrhoea and abdominalpain. The lead product in this class is Bayer’s Glucobay/Precose.



Figure 108: Pathways for insulin release and activation

in thepancreas

inmuscle/fat cells Binds to

InsulinReceptor

Bound Receptor

Internalised

Increased GLUT-4 glucose

transportersproduced

Increased Glucose

uptake/use of glucose

Reduced Glucosein blood

Fall inInsulin

Transportedinto B-cellvia GLUT 2

Convertedto

ATP

Increased ATPblocks

K+ channel

B-Cellmembranedepolarises

Ca2+ channelopens

Increaseconcentration

Ca2+

Glucosevia

GLUT 2

Insulin

Insulin released

Insulin rises

Via GLUT 4

1 2

3

4

1 Sulphonyl ureas block K+ channel, stimulate insulin release

2 Insulin Secretagogues transiently block K+ channel, stimulate insulin release

3 Biguanides aid glucose uptake in GLUT 4

4 Glitazones act on peroxisome, proliferation activated receptor to stimulate GLUT 4 production and glucose transport


Figure 109: Leading drugs for use in type II diabeticsBrand name Generic name Producer Class Sales 2002

Glucotrol glipizide Pfizer Sulphonylurea $0.3bn

Amaryl glimepride Aventis Sulphonylurea $0.5bn

Glucophage metformin Bristol-Myers Squibb Biguanide $0.3bn

Prandin/NovoNorm repaglinide Novo Nordisk Secretagogue $0.2bn

Starlix nateglinide Novartis Secretagogue $0.1bn

Avandia rosiglitazone GlaxoSmithKline Glitazone $1.2bn

Actos pioglitazone Eli Lilly/Takeda Glitazone $1.1bn

Glucobay acarbose Bayer Alpha glucosidase inhibitor $0.2bn

Basen voglibose Takeda Alpha glucosidase inhibitor $0.4bnSource: Company data, Deutsche Bank estimates

InsulinAs mentioned, in the case of Type 1 patients and in around a third of Type 2patients, insulin becomes the mainstay of therapy. Overall, in 2002, the worldmarket for insulin was worth approximately $4.5bn, shared among threeparticipants, Novo Nordisk (47%), Eli Lilly (43%) and Aventis (10%). This market isprimarily broken down into three key types of insulin:

n Short-acting insulin: Conventional short-acting insulins, including Lilly’sHumalin R and Novo’s Novalin R, are, as the name suggests, short-actingformulations, which must be taken before mealtimes to provide a short-termspike in insulin levels. More recently, Lilly and Novo have introduced short-acting analogues, namely, Humalog and Novolog, which provide an even moreimmediate onset of action.

n Long-acting (NPH or basal) insulin: Humulin N and Novalin N are long-actinginsulin formulations with a duration of action of approximately 16-18 hours, thusrequiring twice daily dosing in many patients. Because they provide a steady



level of background insulin, but no mealtime peaks, they are usually taken incombination with a short-acting insulin or short-acting analogue. Aventis’Lantus, launched in 2000, is the first long-acting insulin analogue. Lasting a full24 hours, it is the only product requiring true once daily dosing. Late 2002 alsosaw Novo file its own basal insulin analogue, detemir, which it expects to launchin the EU and US in 2004.

n Premixes: Premixes, such as Humalin 70/30 and Novolin 70/30, arecombinations of short- and long-acting insulins. (Humalog 75/25 is a premixincorporating Lilly’s short-acing analogue.) They are administered several timesdaily and provide the benefits of both short-acting and basal insulin. While not aseffective as separate administration of a short-acting and a long-actingformulation, they have gained popularity due to more convenient dosing.

Figure 110: US insulin market by category Figure 111: US insulin market by product

0

1000

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Short acting insulins Short acting analogues Long-acting insulins

Long-acting analogues Premixes

0

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02

Humalog 75/25 Humalog Humulin N Humulin R

Humulin 70/30 Novolin 70/30 Novolin R Novolin N

Novolog Lantus

Source: IMS Health Source: IMS Health

Clinical end-pointsThe main objective of treatment of Type II diabetes is the controlled reduction ofblood glucose levels. This is measured by monitoring the extent to which bloodcontains glucose, that is, the level of glycosylated haemoglobin (HbA1c). In non-diabetics, HbA1c levels are typically below 6%, whereas in diabetics, they aretypically over 8%. The objective of therapy is thus to reduce HbA1c levels to below7%.

Pipeline productsThe majority of late-stage projects include rapid-acting insulin sensitisers and novelinsulin formulations. In addition, a new class of diabetes drugs focused on theactions of glucagon-like peptide 1 (GLP-1) has attracted considerable excitement andinterest in recent years. These drugs aim to mimic the insulin stimulating effects ofGLP-1, or inhibit the molecule dipeptidyl peptidase (DPP-IV), responsible for breakingdown naturally occurring GLP-1.



Figure 112: Selected diabetes drugs in the pipelineName Sponsor Phase (estimated launch) Class

Inhaled insulin Pfizer/Aventis/Inhale Phase III (2004) Inhaled insulin

AC2993 Amylin/Lilly Phase III (2004) GLP-1 agonist

NN1998 (AERx) Novo Nordisk/Aradigm Phase II (2005) Inhaled insulin

NN2344 Novo Nordisk Phase II (2005) Insulin sensitiser

LAF 237 Novartis Phase II (2005) DPP-IV inhibitor

KRP-297 Merck Phase II (2005) Insulin sensitiser

Galida (AZ 242) AstraZeneca Phase II (>2004) Insulin sensitiser

NN2211 Novo Nordisk Phase II (2007) GLP-1 agonistSource: Company Data

Figure 113: Sales revenues for type II diabetes medications ($ m)

0

500

1000

1500

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2500

3000

3500

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2000 2001 2002 2003E 2004E 2005E

Sulphonylureas Biguanides Secretagogues

Glitazones Alpha glucosidase


Figure 114: Sales revenues for type II diabetes medications ($ m)Class 2000 2001 2002 2003E 2004E 2005E

Sulphonylureas 700 779 905 1005 1063 1067

Biguanides 2182 2922 588 483 237 205

Secretagogues 153 244 332 396 456 519

Glitazones 1491 1792 2376 2865 3280 3565

Alpha glucosidase 775 836 790 796 791 788Source: Company data, Deutsche Bank estimates



AtherosclerosisAtherosclerosis is a disease of the large and medium-sized arteries. It evolves overmany decades, during most of which time it is clinically silent. It arises as aconsequence of damage to the arterial wall, although quite how this initial damageis caused is still unclear. Among other theories, it has been postulated that thedamage may arise from some form of bacterial infection or as a consequence ofturbulence in the blood stream as a result of hypertension.

Also known as hardening of the arteries, atherosclerosis involves the creation of aplaque consisting of cholesterol, white blood cells, platelets and fibrin on thedamaged area of the artery. Although the plaque in itself is not dangerous, if itruptures, it exposes subendothelial (beneath the inner lining of the arteries) materialthat acts as a focus for thrombosis (blood clotting). Consequently, it is the majorcause of ischaemic heart disease (that is, lack of blood to the muscles of the heart)and as such, is the leading cause of death in the industrialised world. Numerous riskfactors exist, not least cigarette smoking, hypertension, obesity, lack of physicalactivity and increased plasma concentrations of certain cholesterols (namely LDL-cholesterol). Some families may also have a genetic predisposition towards it.

Although the exact cause of damage to the arterial wall is not yet fully understood,the pathogenesis of plaque creation is becoming clearer. Explained crudely, theinjury to the lining of the arteries (endothelium) encourages white blood cells andlow density lipoproteins (LDL-cholesterol) to attach to the damaged area. Ratherthan being released, as is the case in healthy endothelium, the LDL-cholesterol isoxidised and hardens, after which it is absorbed by specialised white blood cellscalled macrophages. These necrotic macrophages then migrate under theendothelium, after which the damaged area is covered by a fibrous cap of platelets,fibrin and regenerated smooth muscle. It is this fibrous mesh overlying a core oflipid and necrotic (dead tissue) debris that is called a plaque and that forms thesubstrate on which thrombosis can develop, should the plaque rupture.

Clearly, several steps in the atherogenic process are potential targets forpharmacological attack, not least the synthesis and catabolism (breakdown) of LDL-cholesterol. Equally, the perceived importance of hypertension as a potential causeof initial endothelial damage makes it an important area for pharmacologicalinvestigation. Both of these strategies are discussed over the following pages.

Figure 115: Stages in atherosclerosis

Initial damage to vascular wall sees arterial plaque

established

Later, plaque ruptures and

clotting cascade sees

thrombosis established




NOTES



Hypertensionn Worldwide market for anti-hypertensives in 2002 worth about $21bn

n Key classes include beta blockers, ACE inhibitors, calcium antagonists and theangiotensin II inhibitors (ARBS)

n Forecast five-year growth at 4% per annum, largely driven by the ARBS

n Lead products: Cozaar (Merck ARB), Norvasc (Pfizer calcium antagonist)

Hypertension, or high blood pressure, is a common disorder that, if not effectivelytreated, greatly increases the likelihood of heart attack, stroke and renal failure. Untilthe 1950s, there was no effective treatment. However, today there are severalclasses of drug that can be used to treat the disease effectively. Hypertensionaffects roughly one in four North American adults. In 90-95% of cases, the cause ofthe increase in blood pressure is not known, although 60% of those suffering areoverweight.

PhysiologyBlood pressure in the arteries is generated by the interplay between blood flow andresistance to blood flow. It reaches a peak during the pumping of the heart (cardiacsystole) and a trough at the end of the heart’s period of relaxation (diastole). Ineffect, it can be defined as the product of cardiac output (CO) and the totalperipheral resistance (TPR) offered by the blood or vascular system. Cardiac output,which is a function of heart rate, stroke volume and the capacity of blood in theveins, is the major determinant of systolic pressure, while peripheral resistancelargely determines diastolic pressure. As such, treatment is typically directed ataltering these variables.

Arterial blood pressure is conventionally measured in millimetres of mercury andrecorded as systolic pressure over diastolic. Hypertension is defined as a level ofsystolic blood pressure or SBP (blood pressure during the contraction phase of theheartbeat) of 140mm Hg or above, or a level of diastolic blood pressure or DBP(pressure during the resting stage of the heart) of 90mmHg or above. This compareswith a normal level of blood pressure of 120mmHg SBP or below and 80mm Hg orbelow for DBP.

Major functions in the body act to control blood pressure and a sophisticatedfeedback system exists. Key regulatory mechanisms, each of which is mentionedbelow, include the actions of the nervous system, hormones, control of body fluidand regulators produced by the blood vessels themselves.

n Nervous system: One of the key mechanisms for maintaining blood pressure isthrough the actions of the nervous system. Noradrenalin, a chemicalmessenger, is released by nerve endings located on blood vessels (includingthose of the heart) and acts on alpha and beta receptors. Stimulation of alphareceptors on veins and arteries serves to narrow the vessels, so-calledvasoconstriction, thereby increasing peripheral resistance and, consequently,blood pressure. Equally, stimulation of beta receptors in the heart (actually beta1 receptors) results in an increase in contractility and heart rate, thereby alsoincreasing blood pressure (note that it is on this beta 1 receptor that most betablockers act). Countering this, a system of pressure sensors or baroreceptors



located at the nerve endings that attach to large arteries (including those of theheart) provide feedback to the brain and hence the central nervous system, soimpacting the rate of noradrenalin release.

n Hormones: Through both its actions on the vascular system and its role incontrolling the excretion of sodium, a hormonal system called the renin-angiotensin system is one of the most important mechanisms for control ofblood pressure. It is also the key pathway at which two major classes of drugsare directed, namely the angiotensin converting enzyme or ACE inhibitors andangiotensin II receptor blockers or ARBS. Produced by the kidneys, renin actson a blood protein called angiotensinogen, converting it to angiotensin I. This isthen converted by the angiotensin converting enzyme (ACE) to angiotensin II,which has three key properties that increase blood pressure. These actionsinclude:

i. Powerful vasoconstriction, so increasing peripheral resistance

ii. Increased release of noradrenaline from nerve terminals, so reinforcingvasoconstriction and the rate and force of heart contraction

iii. Secretion of aldosterone, a hormone that facilitates sodium retention by thekidneys and, consequently, water retention

n Vascular regulators. The lining of blood vessels also has an important part toplay in hypertension. Among other actions, endothelial cells produce nitric oxide,which acts as a vasodilator. The presence of calcium channels also regulatesthe concentration of calcium within blood vessel muscle and henceconstriction/dilation (calcium ions stimulate muscle activity). It is on thesecalcium channels in both the heart and the peripheral blood system that thecalcium antagonists have their effect.

n Control of body fluid: Blood pressure can also be controlled by reducing thetotal amount of fluid in the blood vessels. Regulated by the kidneys, waterretention is influenced by the concentration of sodium in the blood. Diuretics actto increase the excretion of water and reduce blood pressure.

Pharmacological treatmentA large number of drugs are used to treat hypertension. The market, however, isdominated by four main classes. These are the beta-blockers, calcium antagonists,ACE inhibitors and ARBS. Each of these classes may be used as monotherapy, butwill often be taken with a diuretic. Summarised briefly below, a diagrammaticoverview of where each of these main drug classes acts is shown the Figure below.

Figure 116: Summarised features of the leading classes of hypertensive agentsClass Beta blockers Ca2+ antagonists ACE inhibitors ARBS

Sales 2002 $2.6bn $6.5bn $5.2bn $7.1bn

Lead product Seloken ($0.9bn) Norvasc ($3.8bn) Zestril ($0.9bn) Cozaar ($2.2bn)

Main action on Heart Heart/vascular Vascular Vascular

Side effects Bronchospasm, CHF, dec. HDL Swelling Cough, swelling Swelling

Status Well established Well established Well established EmergingSource: Deutsche Bank

Deutsche B

ank AG

Page 107

12 March 2003

Health C

are P

harmaceuticals for B

eginners

Figure 117:

Drug action point

Kidney

ACE Inhibitors

Diuretics act on kidney to increase water and

sodium excretion

Beta antagonists act on heart to reduce rate and force of contraction

Calcium antagonists work on heart to reduce force of contraction

Nitrates act to dilate blood vessels

Blocked by AIIAntagonists

From veins From lungs

To lungs To arteries

R. Atrium L. Atrium

R. Ventricle L. Ventricle

Calcium antagonistsblock channels

Nitrates produce nitric oxidecausing vasodilation

Angiotensinogen (from liver)

Angiotensin I

Angiotensin II Angiotensin convertingenzyme (ACE)

Renin

Na+ excretion/water retention

Aldosterone

To heart

Ca2+

Vascular wall

Muscle

Calcium passes throughchannels and binds to sitecausing vasoconstriction and raising blood pressure

HEART

Angiotensin IIacts on vascular

receptors causing contraction

BLOOD VESSEL

Source: Deutsche Bank Securities Inc. estimates and company information



Beta blockers: The discovery of beta blockers in the 1960s represented a majorbreakthrough in cardiac therapy. The oldest of the four lead classes of anti-hypertensives, beta blockers act predominantly on the heart. They work by inhibitingthe stimulation of the beta adrenergic receptor in the heart and thereby slowing therate and strength of contraction. This reduces cardiac output and, with it, bloodpressure.

Figure 118: Leading beta blockersName Generic name Producer 2002 sales

Seloken metoprolol AstraZeneca $901m

Tenormin atenolol AstraZeneca $370m

Coreg carvedilol GlaxoSmithKline $459mSource: Company data

Calcium antagonists: Calcium is vital for muscle contraction. An increase in theconcentration of calcium within muscle cells precipitates their contraction. Inessence, calcium antagonists work by preventing the inflow of calcium throughcalcium channels on heart and vascular tissue. This reduces both the strength of theheart’s contraction and reduces vascular constriction. As such, the product can alsobe used for angina. Patent expiry on several key products, not least Adalat,Cardizem and Procardia, has led to a decline in class sales.

Figure 119: Leading calcium antagonistsName Generic name Producer 2002 sales

Norvasc amlodipine Pfizer $3,846m

Adalat nifedipine Bayer $721m

Plendil felodipine AstraZeneca $491mSource: Company data

Angiotensin converting enzyme (ACE) inhibitors: ACE inhibitors are one of thetwo classes of drugs that work on the renin-angiotensin system. They work bypreventing the creation of angiotensin II, a powerful vasoconstrictor. With genericcompetition for several of the leading compounds (Vasotec, Prinivil and Zestril)arriving in the last couple years, class sales have come under significant pressure.

Figure 120: Leading ACE inhibitorsName Generic name Producer 2002 sales

Vasotec enalapril Merck $790m

Zestril lisinopril AstraZeneca $877m

Delix/Tritace/Altace ramipril Aventis/King $1350m

Prinivil lisinopril Merck $480m

Accupril quinapril Pfizer $668m

Lotensin captopril Novartis $1,113mSource: Company data



Angiotensin II receptor antagonists (ARBS): The newest class of hypertensivetreatments, the angiotensin II inhibitors, also act on the renin-angiotensin system,but do not cause the dry cough that has proved an irritating side effect of the ACEinhibitor class. To date, their sales penetration has been relatively modest, but salesare growing rapidly.

Figure 121: Leading angiotensin II inhibitorsName Generic name Producer 2002 sales

Cozaar/Hyzaar losartan Merck $2,190m

Diovan valsartan Novartis $1,665m

Avapro irbesartan Sanofi/BMS $994m

Atacand/Blopress candesartan AstraZeneca/Takeda $1,117mSource: Company data

Clinical end-pointsThe key clinical end-points for hypertension drugs are their impact on both systolic(upper) and diastolic (lower) blood pressure. Since the objective of therapy is tolower blood pressure, the greater the reduction, the more effective and interestingthe product. Side effects must, of course, also be considered.

Pipeline productsThere are several new products for the treatment of hypertension in the pipeline.Perhaps the most interesting of these is a new class of drug known as neuro-endopeptidase (NEP) inhibitors. The so-called ACE/NEPs act on the renin-angiotensin system, but also prevent the degradation of a cardio-protectivehormone, so helping the heart muscle to relax. The most advanced compound inthis class is Bristol-Myers Squibb’s Vanlev (omapatrilat). Although Vanlev wasshown to be more effective at reducing both diastolic and systolic pressure thanexisting hypertension drugs, concerns arose following incidences of swelling aroundthe throat (angioedema), leading to filing delays and a subsequent negative opinionby the FDA advisory committee. However, a number of similar drugs lie further backin the pipeline that hope to realise the potential of this class.

Figure 122: Selected hypertension drugs in the pipelineName Sponsor Phase Class

Inspra (eplerenone) Pfizer* Launched Aldosterone blocker

Fasidotril Lilly Phase II ACE/NEP inhibitor

CI-1034 Pfizer Phase II Endothelin antagonist

SPP 100 Novartis Phase II Renin inhibitor*Assumes Pfizer merger with PharmaciaSource: Company data



Figure 123: Market value of classes of hypertension drugs ($ m)

0

2000

4000

6000

8000

10000

12000

2000 2001 2002 2003E 2004E 2005E

ACE Inhibitors ARBS Beta Blockers Calcium antagonists


Figure 124: Market value of classes of hypertension drugs ($ m)Class 2000 2001 2002 2003E 2004E 2005E

ACE Inhibitors 6748 5613 5200 3887 3432 3002

ARBS 4206 5432 7072 8679 9862 10820

Beta Blockers 2359 2333 2618 2908 3174 3441

Calcium antagonists 7017 6526 6541 6608 6508 6441Source: Company data, Deutsche Bank estimates



Hypolipidaemics (Statins)n Worldwide ‘statin’ market in 2002 was worth roughly $17.5bn

n Forecast five-year growth of 8% per annum

n Class leaders are Pfizer’s Lipitor and Merck’s Zocor, with 2002 sales of $8.0bnand $5.6bn, respectively

Cholesterol is a waxy substance that occurs naturally in the body. However, theamount required by the body is relatively small and excess arising from diet may bedeposited on the arteries. As described earlier, this can result in the coronaryarteries becoming clogged and may lead to chest pain (angina) or, should an arteryin the heart become completely blocked, tissue in the heart ‘dies’ producing a heartattack (myocardial infarction). Clinical studies have shown that a 1% increase incertain cholesterol levels (LDL-C – see later) is associated with a 2% increase in therisk of coronary heart disease. In patients without coronary heart disease, desirablelevels of total cholesterol are stated as being under 200mg/dL, of which LDL-cholesterol should be under 130mg/dL.

PhysiologyCholesterol is vital for normal body function. It is a core component of cellmembranes and is the key building block for many internally produced hormones. Italso forms an important part of the bile acids that are secreted by the liver into thegastrointestinal tract to aid digestion. While much of the cholesterol that we need isabsorbed through the gut wall from our food, cholesterol is also produced internallyby the liver. The rate-limiting step in its production in the liver relies on an enzymecalled HMG-CoA reductase (3-hydroxy 3-methylglutaryl-CoA).

Because cholesterol itself is unable to pass through cell walls, it is transported aboutthe body in a complex called a lipoprotein. As well as cholesterol, lipoproteinsconsist of triglycerides, phospholipids and proteins called apolipoproteins. There areseveral different classes of lipoproteins, each of which plays a different role andwhich are differentiated from each other by size, density and the relative proportionsof core lipids that they carry. Key among these are very low density lipoproteins(VLDL), low density lipoproteins or (LDL) and high density lipoproteins (HDL). Thefunction of each is as follows:

n VLDL - These lipoprotein complexes carry triglycerides (fats) and cholesterolfrom the liver to the tissue, wherein triglycerides are removed and pass intotissue cells with the help of an enzyme called lipoprotein lipase. Triglyceridesprovide a source of energy.

n LDL - Put crudely, after VLDL loses its triglyceride, it becomes cholesterol richand is called LDL. Some of the LDL cholesterol is also taken up by the tissues.Much, however, returns to the liver, where it is ingested via specific LDLreceptors.

n HDL - This type of lipoprotein adsorbs cholesterol derived from cell breakdownin tissues and carries it back into the blood stream, wherein it is transferred toLDL.



It is cholesterol rich LDL cholesterol that is the key protagonist of atherosclerosis.Hence, its title of ‘bad cholesterol’. By contrast, as a carrier of cholesterol awayfrom tissue, HDL cholesterol is often referred to as ‘good cholesterol’.

Figure 125: The statins inhibit HMG-CoA reductase

Acetyl CoA via HMG CoA Reductase

LDL

HDL

VLDL

VLDL carries cholesterol andtriglycerides to cell tissue which istransferred via lipoprotein lipase

HDL or good cholesterolcarries cholesterol

from tissue to blood

LDL receptors takeup LDL to liver cell

for digestion

Lipoprotein Lipase

Cholesterol fromcell turnover

Fatty acids andcholesterol

enters tissue

Bile acids and cholesterolsecreted

Glitazones enhancelipoprotein lipase activity

and absorbtion of fatsfrom blood

Statins inhibit HMG CoAreductase and cholesterol

formation

Statins increase LDLreceptors in liver and it’s

uptake

Lipoprotein lipase helpstissue cells absorb fats

LDL

Cholesterol

LIVER CELL

ARTERIALWALL

INTESTINE

Zetia inhibits cholesterolabsorption in intestine

Cholesterolabsorbed in

intestine


Pharmacological treatmentSeveral drugs are used to treat raised levels of cholesterol. Of these, by far thelargest and most important are the statins. Introduced in 1987, the statin class todayrealises annual sales of nearly $18bn globally and continues to grow at healthy highsingle-digit rates. Clinical trials have shown that by reducing the level of LDL-cholesterol in the blood by up to 60%, as well as modestly increasing levels of HDL,mortality by heart attack or stroke can be reduced by around a third. The class isgenerally well tolerated, with mild and infrequent side effects, such as stomachupset, insomnia and rash.

The statins have a two-fold effect on cholesterol, each of which is illustrated above.Not only are they potent inhibitors of HMG-CoA reductase, so limiting theproduction of cholesterol in the liver, but also, by reducing internal production ofcholesterol, they stimulate the synthesis of LDL-receptors and so increase itsclearance from blood plasma.

Today, there are several statins available on the market. The class leader is Pfizer’sLipitor (atorvastatin), which, at its maximum dose of 80mg, has been shown toreduce the level of LDL cholesterol in the plasma by around 60%. Since its launch in1997, Lipitor has rapidly gained market share, with $8.0bn in sales in 2002.



The statin market took a hit in August 2001 with the recall of Baycol, which prior tothe withdrawal was expected to earn approximately $900m, or 15% of Bayer’s 2001pharmaceutical sales. The recall followed a number of cases of rhabdomyolysis(muscle wasting), primarily in patients taking the highest 80 mg dose and who wereconcurrently taking the fibrate gemfibrozil. Amid concerns over a possible classeffect, the FDA has begun to tighten its review of new entrants, such asAstraZeneca’s Crestor. However, the heightened risk of rhabdomyolisis seems toprimarily be linked to Baycol – a drug long plagued with side effects – and the classcontinues to generate billions of dollars in sales.

Figure 126: Comparison of cholesterol-lowering properties of leading statinsProduct (max dose) Total cholesterol LDL HDL Triglycerides

Lipitor (80mg) -45% -60% +5% -37%

Zocor (80 mg) -31% -36% +16% -33%

Pravachol (80 mg) -27% -37% +3% -19%

Lescol (80 mg) -27% -36% +6% -18%

Crestor (40 mg) -46% -63% +10% -28%Source: Company data

Figure 127: Leading statinsBrand Generic Producer 2002 sales

Lipitor atorvastatin Pfizer $8.0bn

Zocor simvastatin Merck $5.6bn

Pravachol pravastatin BMS $2.2bn

Lescol fluvastatin Novartis $0.6bn

Mevalotin pravastatin Sankyo $0.9bnSource: Company data

Clinical end-pointsThe key clinical end-point for the statins is their efficacy in reducing total bloodcholesterol over a defined period (typically eight weeks). Within this, data shouldmeasure the reduction in LDL-C, increases in HDL-C and reduction in triglycerides.Following the Baycol incident, increased emphasis is also being placed on a cleansafety profile.

Pipeline productsThere are several drugs in the development pipeline. Most interesting among theseis AstraZeneca’s Crestor (rosuvastatin), which in Phase III trials at a 10 mg dose hasbeen shown to reduce LDL cholesterol by around 43% and raise HDL by 12%.These results were superior those yielded by Lipitor (10 mg, 35% decrease in LDLand 8% increase in HDL) in the head-to-head study. The drug was granted anapprovable letter in June 2002, but is still pending final approval. However, the drugreceived its first European approval in November 2002.

Aside from the statin class, Merck and Schering-Plough recently launched Zetia(ezetimibe), the first in a new family of cholesterol-lowering drugs that inhibit theabsorption of cholesterol in the intestine. This distinct mechanism of action makesZetia complementary to the statins, which work in the liver. In clinical trials, Zetiademonstrated approximately a 25% further reduction in LDL, along withimprovements in both HDL and triglyceride levels when added to ongoing statintherapy. Merck and Schering-Plough are also exploring a Zetia/Zocor combinationproduct.



Figure 128: Growth forecasts for the leading statins ($ m)

0

2000

4000

6000

8000

10000

12000

2000 2001 2002 2003E 2004E 2005E

Lipitor Zocor Pravachol Lescol Mevalotin Crestor


Figure 129: Growth forecasts for the leading statins ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Lipitor Pfizer 5029 6449 7972 9525 10600 11425

Zocor Merck na 5260 5580 5625 4700 4200

Pravachol BMS 1766 2101 2266 2385 2420 2465

Lescol Novartis 429 482 578 679 733 783

Mevalotin Sankyo 1130 1096 858 834 675 643

Crestor AstraZeneca 0 0 0 200 750 1325Source: Company data, Deutsche Bank estimates



Thrombosis and theAntithromboticsn World anti-thrombotic market valued at around $6.5bn in 2002

n Forecast five-year growth of 14%, driven by heparins and anti-aggregates

n Lead products include Aventis’ Lovenox, a low molecular weight heparin, andPlavix, a platelet anti-aggregant from Sanofi/BMS

Thrombosis is the formation of a blood clot in the blood system (or vasculature) inthe absence of bleeding. In the arteries, it tends to arise following the rupture of anatherosclerotic plaque, while in the veins, it is generally associated with static bloodflow. Once a thrombus is established, it can block key arteries and veins, includingthose in the heart, or it can break away forming an embolus, which later may lodgein the lungs (pulmonary embolism) or the brain (cerebral embolism), causing astroke.

PhysiologyDespite the absence of bleeding, the creation of a thrombus involves the initiation ofthe blood-clotting cascade. In healthy vascular tissue, the arterial lining (called theendothelium) produces proteins that keep the clotting cascade in check. However,in tissue covered by a plaque, these proteins are not produced and the plaquerepresents a substrate for the thrombus to develop on. Key to this is the activationof platelets and a host of other blood proteins, such as fibrinogen, thrombin andother blood enzymes, or ‘factors’, which travel about the body in the blood systemin an inactive state. Once activated, the various factors form part of a huge chain-reaction that serves to amplify the clotting cascade.

The creation of a thrombus can simplistically be broken down into three differentchains, each of which inter-reacts with the other. A general overview of the differentcascades is shown in the figure overleaf

n Platelet aggregation – This involves the activation of platelets and a bloodprotein, which bind together via fibrin bridges. Drugs that act to block theactivation of platelets are called anti-aggregation agents. Such drugs includeaspirin and Sanofi’s Plavix.

n Blood coagulation – A series of reactions that involve the activation of anumber of inert proteins in plasma called blood factors (for example, Factor VIIIand so on) culminate in the activation of fibrin, which creates a bridge betweenplatelets. The heparins inhibit the activation of certain of these blood factors, soblocking the coagulation cascade. By acting on vitamin K, another moleculeessential for coagulation, warfarin also inhibits blood factor activation.

n Fibrinolysis – Circulating blood contains factors that act to degrade the fibrinlinks between the platelets. In the clotting cascade, these are deactivated,enabling the clot to form. Drugs that act to enhance the degradation of fibrininclude the tissue-type plasminogen activators (tPAs) and include Genentech’sActivase.



Figure 130: Three pathways are involved in the creation of a thrombus

Rupture of Atherosolerotic Plaque

Blood Coagulation

Thrombus

Platelet Aggregation

Platelet Activation

Synthesis ofThromboxane (TXA2)

Expression on platelets ofFibrin binding sites

(GPIIA IIIB receptors)

Platelet aggregation viaFibrin binding toGPIIB/IIIA site

Release ofADP

Plavixinhibits

Aspirininhibits

Reopro,Exantainhibit

Clotting cascade initiated via factors XII to IX

Activation of Factor X

Conversion of Factor II(Prothrombin) to

Factor IIA (thrombin)

Fibrinogen converted to Fibrin

Stimulatesplatelet

activation

Inhibited by LDL-proteins

Plasminogen Plasmin

Activase Enhances

Fibrinolysis

Digests FibrinHeparins, warfarinLovenox (LMWH)Arixtra


Figure 131: Summary of the main anti-thrombotic agentsBroad class Heparins Anti-aggregation agents Fibrinolytics

Sales in 2002 $2.3bn $3.7bn $0.5bn

Pathway Inhibit activation of blood factors Inhibit activation of platelets Encourage creation of plasmin

Key Products Lovenox, Fragmin, Fraxiparine Aspirin, Plavix, ReoPro Activase, Retavase

Administration Injection Oral/injectable Injection

Adverse effects Haemorrhage, cytopaenia Rash, diarrhoea, haemorrhage HaemorrhageSource: Deutsche Bank

Pharmacological treatmentGiven the different pathways, several classes of drug have been developed in aneffort to inhibit thrombosis:

Warfarin: The most commonly used anti-coagulation agent. Discovered in the1920s, the product has been generic for many years (although BMS still realises$300m from its brand Coumadin). Warfarin acts by inhibiting the reduction of a keyenzyme in the clotting process, vitamin K (K for Koagulation in German). In doing so,



warfarin prevents the activation of several clotting factors, namely II, VII, IX and X.However, the therapeutic use of warfarin requires a careful balance between givingtoo much (risk of bleeding) and too little (coagulation remains unchecked). Use isfurther complicated by the time taken for the drug to become active (two days) andbecause of numerous drug-drug interactions that alter its activity. The effect ofwarfarin is monitored by measuring the time taken to create Factor II (prothrombin)and is expressed as an International Normalised Ratio (INR). Dosage is usuallyadjusted to give an INR of 2-4 depending on the clinical situation.

Heparins: One of the oldest classes of drug, heparins are long-chain sugarmolecules (polysaccharides) that bind to the many different blood clotting factors,for example: Factor XII, Factor X and so on. In doing so, they inhibit the clottingcascade. Today, heparin fragments, referred to as low molecular weight heparins(LMWH), are increasingly used. This is because they have a longer eliminationperiod and, as such, their clotting effect is more predictable.

Figure 132: The heparinsBrand name Generic name Producer Sales 2002

Lovenox enoxaparin Aventis $1474m

Fraxiparine nadroparin Sanofi-Synthelabo $306m

Fragmin dalteparin Pfizer* $270m

Arixtra fondaparinux Sanofi-Synthelabo $9m*Assumes Pfizer merger with PharmaciaSource: Company data

Anti-aggregation agents: Anti-aggregation agents work at different stages of thepathway that leads to the combination of platelets with fibrin as illustrated in thefigure on the preceding page. Several are taken orally and can be used asprophylactics (preventatives), reducing the risk of thrombosis and coronary events(aspirin is probably the best known example). A key area of recent interest has beenthe glycoprotein IIb/IIIa receptor on activated platelets, which binds fibrin.

Figure 133: Anti-aggregation agentsBrand name Generic name Producer Sales 2002

Plavix clopidogrel Sanofi/BMS $2407m

Reopro abciximab Lilly $384m

Ticlid ticlopidine Sanofi-Synthelabo $129m

Integrilin eptifibatide Schering-Plough/Millennium $303mSource: Company data

Fibrinolytics: The smallest class of anti-thrombotic drugs, fibrinolytics, typicallyneed to be injected quickly after the onset of symptoms, that is, they are taken inresponse to trauma. However, by deactivating the clotting, their main drawback isthat they can cause severe bleeding and gastric haemorrhage. The largest drugs inthe class are Genentech’s Activase and TNKase, with combined sales of just under$0.2bn.

Clinical end-pointsThe key end points used to assess the performance of anti-thrombotic agents arethe incidence of clotting or thrombo-embolic events compared to placebo, asignificant reduction being sought. Additionally, bleeding as a side effect is also avery important consideration, that is, they should not significantly increase the riskof (potentially) uncontrollable bleeding.



Pipeline productsGiven the importance of the anti-thrombotic market and its potential for growth,anti-thrombotics have been a keen area of interest for many pharmaceuticalcompanies. Unfortunately, the most recent entrant in this category, Sanofi’s Arixtra,has been a disappointment. Its dismal sales may be in part a result of slightly morefrequent bleeding events associated with the drug, as well as surgeons’ andhospitals’ reluctance to switch products.

Nonetheless, AstraZeneca has high hopes for its oral and injectable thrombininhibitor, Exanta, which it expects to file in 2003. The first oral anti-coagulant sincethe introduction of warfarin 50 years ago, AZN expects Exanta to gain usage inbroader indications such as stroke, which represents the third-leading cause ofdeath in the US.

Figure 134: Five-year anti-thrombotic sales growth ($ m)

0

1000

2000

3000

4000

5000

6000

2000 2001 2002 2003E 2004E 2005E

Heparins Anti-aggregation Agents Fibrinolytics


Figure 135: Five-year anti-thrombotic sales growth ($ m)Class 2000 2001 2002 2003E 2004E 2005E

Heparins 1406 1793 2349 2514 2839 3131

Anti-aggregation agents 2544 3208 3692 4102 4757 5294

Fibrinolytics 468 473 478 600 655 705Source: Company data, Deutsche Bank estimates



Erectile Dysfunctionn 150 million men affected by ED worldwide, with prevalence expected to double

by 2025

n Viagra sales exceeded $1.7bn in 2002

n Two new PDE-V inhibitors, Lilly/ICOS’ Cialis and Bayer/GSK’s Levitra, tointroduce competition in ED market

An estimated 30 million men in the US and as many as 150 million men worldwideexperience erectile dysfunction (ED), defined as the inability to achieve and maintainan erection adequate for satisfactory sexual intercourse. Causes of ED may beeither physiological, psychological or (in the majority of cases) a combination ofboth. While an overwhelming 70% of cases are associated with vascular disease,ED may also be caused by drug-related, operative, neurological and other factors. Inaddition, ED often occurs as a consequence of normal aging, affecting as many as50% of men between the ages of 40 and 70.

PhysiologyIn general terms, when a man is sexually aroused, the arteries in the penis muscles,the corpora cavernosa, relax and widen, allowing more blood to flow into the penis.At the same time, the veins in the muscles compress, restricting the blood outflow.With increased blood flow in and reduced blood flow out, the penis enlarges,resulting in an erection.

On a cellular level, this process is more complex. Upon stimulation, the corporacavernosa muscles release the neurotransmitter nitric oxide (NO). NO in turnstimulates the enzyme guanylate cyclase, thereby facilitating the synthesis of cyclicguanine monophosphate (cGMP). Cyclic GMP triggers a cascade of reactions thateventually instruct the penile muscles to relax, allowing the blood accumulationrequired for erection.

The natural regulator of this process is the enzyme phosphodiesterase type V (PDE-V). PDE-V inhibits erection by breaking down cGMP into a non-biologically activeform, 5’-GMP. In the absence of cGMP, the body’s signal to the corporatecavernosa is interrupted and the patient fails to achieve an erection.

Pharmacological TreatmentHistorically, ED was a relatively small market that lived under the domain ofurological specialists. Drug therapies, using compounds such as phentolamine,papaverine and alprostadil, were either injected into the penis or delivered asurethral suppositories. Not until Viagra (sildenafil) was launched in 1998 did thetherapeutic market for ED explode.

Viagra acts as a PDE-V inhibitor, blocking the enzyme’s ability to inactivate cGMP.However, it has no effect on the initial release of NO. The implication of this is thatViagra can potentiate an erection once sexual stimulation has induced NO-release,but the drug cannot produce an erection independently.



Figure 136: Mechanism of erection and action of PDE-V inhibitorscorpora

cavernosa

corporasponglosum

dorsal/bulbourethal

arteries

deep dorsalvein

NORelease

cGMPSexualStimulation

MuscleRelaxation

GuanylateCyclase

GTP

PDE-V5’-GMP

VIAGRA(inhibits PDE-V)

Source: National Institute of Diabetes & Digestive & Kidney Diseases

Viagra’s adverse effects are in part associated with its interaction with othermembers of the phosphodiesterase family. There are 11 PDE isoforms in the body,each of which has an important role in other signalling pathways. Viagra appears tobe many thousand-fold more selective for PDE-V than for most other PDE isoforms,including PDE-III, an isoform involved in the control of cardiac contractility. However,Viagra’s selectivity for PDE-V versus PDE-VI (an isoform found in the retina) is onlyten-fold greater, most likely forming the basis for colour vision disturbances seen insome patients.

More importantly, Viagra has been shown to enhance the hypotensive (blood-pressure lowering) effects of nitrate drugs often taken for heart conditions. Thus, itis contraindicated in this group of patients and is additionally discouraged in menwith a recent history of coronary heart disease.

Clinical end-pointsThe severity of ED is typically evaluated using the International Index of ErectileFunction (IIEF), a standardised questionnaire comprising 15 questions concerningsexual function. Two of the IIEF questions usually serve as primary end-points,namely, those regarding 1) the ability to achieve erections sufficient for sexualintercourse and 2) the maintenance of erections after penetration. Patients arerequired to answer both questions on a six-point scale and improvements aremeasured against baseline values.

Figure 137: Efficacy and pharmacokinetic data for PDE-V inhibitorsViagra (50 mg) Cialis (20 mg) Levitra (20 mg)

Producer Pfizer Lilly Bayer/GSK

Generic sildenafil tadalafil vardenafil

% patients with improved erections (placebo) 74% (24%) 85% (54%) 85% (28%)

% successful intercourse attempts (placebo) 66% (20%) 78% (43%) 81% (52%)

Tmax (hours) 1.0 2.0 0.7

T½ (hours) 4.0 17.5 3.9

Selectivity for PDE-V vs. PDE-III 4,000x 44,000x 3,600x

Side effects headache, flushing, dyspepsia,rhinitis, abnormal vision

dyspepsia, back pain, dizziness,myalgia

headache, flushing, rhinitis,dyspepsia

Note: All PDE-V inhibitors are contraindicated in patients with heart conditions who are taking or expect to take nitrates.Source: Company data



Pipeline productsTwo key competitors to Viagra, namely Lilly’s Cialis (tadalafil) and Bayer/GSK’sLevitra (vardenafil), are currently under FDA review, but neither is likely to be clearlydistinguishable in terms of efficacy (with 70% to 80% of patients achievingintercourse) or safety (both are contraindicated with nitrates). Cialis, which hasalready received European authorisation, may have a slight edge, being the mostselective and having the longest duration of action of the three PDE-V inhibitors.However, the lack of any head-to-head studies demonstrating clear, definitiveadvantages of any one agent, suggests that marketing will be the key determinantof near-term success.

Figure 138: Key ED pipeline productsProduct Mechanism Company Status

Cialis (tadalafil) PDE-V inhibitor Lilly/ICOS Filed US/Approved EU

Levitra (vardenafil) PDE-V inhibitor Bayer/GSK Filed US/Approved EU

Uprima (sublingual apomorphine) dopamine receptor agonist TAP Pharma Filed

Intranasal apomorphine dopamine receptor agonist Nastech Phase II

Alprox-TD (topical alprostadil) PGE-I agonist NexMed Phase II

UK 369,000 PDE-V inhibitor Pfizer Phase IISource: Company data

Figure 139: Sales growth of key ED drugs ($ m)

0

500

1000

1500

2000

2500

2000 2001 2002 2003E 2004E 2005E

Viagra Cialis Levitra


Figure 140: Sales growth of key ED drugs ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Viagra Pfizer 1344 1518 1735 1925 2085 2220

Cialis Lilly 0 0 30 200 400 600

Levitra Bayer/GSK 0 0 0 40 180 300Source: Company data, Deutsche Bank estimates



NOTES



Gastrointestinal Disordersn World market in 2002 for ulcers and GERD worth $15bn

n Underlying prescription growth over 10%. Value growth, however, slowed bypatent expiries

n Between 25-35% of US population affected by GERD

n Market dominated by proton pump inhibitors, particularly AstraZeneca’sLosec/Prilosec

Both ulcers and gastro-oesophageal reflux disease (GERD) are disorders that ariseas a consequence of stomach acid, causing tissue destruction or irritation. An ulceris a focal area of the stomach or duodenum that has been destroyed by digestivejuices and stomach acid, usually facilitated by the bacteria Helicobacter pylori(H.pylori), but often by the use of non-steroidal anti-inflammatory drugs (NSAIDs),such as aspirin, or from stress. Approximately 10% of Americans will develop achronic peptic ulcer during their lifetime. GERD or heartburn refers to the backwardflow of acid from the stomach up into the oesophagus, which, unlike the stomach,has no protective lining. Approximately 10% of Americans suffer from heartburndaily, with more than one-third of the population having intermittent symptoms.

PhysiologyThe stomach secretes about 2.5 litres of gastric juice daily. The principle secretionsare pepsinogens, used to break down proteins and hydrochloric acid, which servesto digest food and which is secreted by cells located in the stomach lining, calledthe parietal cells. In addition, mucus is secreted by mucosal cells and forms animportant buffer protecting the gastric lining or mucosa from the acid attrition of thegastric juices. Locally produced prostaglandins stimulate the production of mucus (itis worth noting that by inhibiting one of the enzymes in prostaglandin production,namely cyclooxygenase 1, aspirin among other NSAIDS (non-steroidal anti-inflammatory drugs) has a detrimental effect on the stomach).

In both ulcers and GERD, the regulation of acid secretion by the parietal cells isespecially important and it is here that the main drugs act. Stimulation of the parietalcells by one of three main messengers encourages them to pass hydrogen ions viaa ‘proton pump’ into the stomach. The three main biochemical messengers thatpromote the activity of the proton pump by acting on receptors located on itssurface are illustrated in the diagram overleaf. They include:

n Gastrin, a peptide hormone, which is synthesised in the mucosa and whoseproduction is stimulated when food is digested in the stomach,

n Acetylcholine, which is released by nerve endings in the stomach upon the sightand smell of food, and

n Histamine. Both acetylcholine and gastrin act to cause histamine release fromcells called mast cells, located close to the parietal cell. The histamine releasedthen binds to histamine receptors (called H2 receptors) on the parietal cell andstimulates the proton pump to promote acid generation.



Figure 141: The parietal cell and action points for gastrointestinal action

Mucous cellsParietal cells

Gastric Mucosa

Mast Cell

AcetylChlorine Gastrin

CholineReceptor

HistamineReceptor

H + ionspumped into

lumen

Histamine

Gastrin receptor

Prostaglandinsinhibit but are blocked by aspirin

Proton Pump

Blocked byH2 antagonists

e.g. Zantac

Proton pumpinhibitors block

e.g. Losec


Pharmacological treatmentIn both GERD and peptic ulcers, one of the key aims of pharmaceutical therapy is toreduce or inhibit the production of acid so preventing the stomach from digestingitself and allowing the damaged area of the mucosal wall to heal. The market isdominated by two main classes of drug, the H2 antagonists (for example, GSK’sZantac), which were first introduced in the 1970s, and the more recently introducedproton pump inhibitors or PPIs (for example, AstraZeneca’s Losec). In the case ofulcers, an antibiotic may also be taken, typically in combination with a proton pumpinhibitor, to eradicate the Helicobacter pylori bacterium. Because proton pumpinhibitors directly inhibit acid production, they have proven significantly moreefficacious in reducing acid levels, thereby increasing healing rates. Consequently,they account for a greater share of the market in volume terms. Patent expiry of thetwo leading H2 antagonists (GSK’s Tagamet and Zantac) also means that by value,the PPIs dominate (albeit patent expiry of several products in this class, not leastLosec, will cause a sharp fall in their value share from 2003 onwards).



Figure 142: H2 antagonists and PPIs – some detailsClass H2 antagonists PPIs

Estimated value in 2002 $1.7bn $13.5bn

Leading products Zantac (ranitidine) Losec/Prilosec (omeprazole)

Point of action Histamine receptors The proton pump

Healing rates 4 weeks 56% gastric ulcers healed 78% gastric ulcers healed

Healing rates 8 weeks 78% healing 91% healingSource: Deutsche Bank estimates and company information

H2 antagonists: These completely inhibit histamine- and gastrin-related acidsecretion, but only partially decrease acetylcholine-related secretion (hence they areless efficacious than PPIs). They are taken orally once or twice a day and are welltolerated. Side effects are limited, but include diarrhoea and dizziness. Most formsare also available in over-the-counter formulations.

Figure 143: Leading H2 antagonistsBrand name Generic name Manufacturer 2002 sales

Zantac ranitidine GlaxoSmithKline $0.7bn

Gaster famotidine Yamanouchi $0.6bn

Pepcid famotidine Merck $0.1bnSource: Company data

Proton pump inhibitors (PPIs): The PPIs irreversibly inhibit the proton pump in theparietal calls. First to market was Losec, which for several years was the world’sbest-selling drug, but now faces imminent generic competition. The product is takenorally, but because it rapidly degrades in acid, it is administered with a specialcoating to ensure its absorption into the blood. Again, side effects are rare, but mayinclude diarrhoea, headache and sometimes rash.

The year 2000 saw the launch of two new PPIs, namely Protonix and Losec’ssuccessor, Nexium. Of these, Nexium, which is actually one of the two isomers ofracaemic omeprazole, appears to offer the best overall profile. However, given thelack of an overwhelming difference in benefit, Nexium’s success will be largely dueto AstraZeneca’s ability to convincingly market it as an improved follow-on to Losec.

Figure 144: Leading PPIsBrand name Generic name Manufacturer 2002 sales

Losec/Prilosec omeprazole AstraZeneca $4.6bn

Prevacid lansoprazole TAP Pharmaceuticals $3.2bn

Nexium esomeprazole AstraZeneca $2.0bn

Protonix/Pantozol pantoprazole Wyeth/Altana $2.0bn

Aciphex/Pariet rabeprazole Johnson & Johnson/Eisai $0.7bn

Takepron lansoprazole Takeda $0.9bnSource: Company data

Clinical end-pointsThe key end-points used in clinical trials are typical rates of healing over differenttime periods compared to placebo. For gastric ulcers, the time periods used aretypically four and eight weeks. For GERD and duodenal ulcers, healing over four toeight weeks is also measured. In addition, measures of stomach acidity over a setnumber of days may also be measured, although these are not indicative of healingrates.



Pipeline productsGiven the $15bn in annual sales shared primarily by the PPIs and H2 antagonists,the GERD and ulcer market is obviously very attractive. However, the current PPIsare highly effective, leaving little room for significant improvement. Moreover, themarket continues to be hugely competitive and will soon see generic competitionvia omeprazole that may undermine the pricing structure of this poorly differentiatedproduct class. Thus, it is perhaps no surprise that the pipeline for gastrointestinaldisorders is rather thin and unexciting. Nonetheless, AstraZeneca and Altana areadvancing early-stage clinical projects, namely AR-H04427 and soraprazan,respectively, that hope to introduce novel twists into this market. AR-H044277 is aso-called reversible PPI, which, as the name suggests, does not irreversibly modifythe proton pump as do the regular PPIs. Sorarazan is an acid pump antagonist thatreversibly inhibits both active and non-active pumps and does not require initial acidactivation.

Figure 145: PPI sales growth ($ m)

0

1000

2000

3000

4000

5000

6000

7000

2000 2001 2002 2003E 2004E 2005E

Losec/Prilosec Nexium Prevacid

Protonix Pariet/Aciphex Takepron


Figure 146: PPI sales growth ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Losec/Prilosec AstraZeneca 6260 5578 4623 2327 1636 1357

Nexium AstraZeneca 17 568 1978 3422 4333 5054

Prevacid TAP 2749 2951 3157 3100 3000 3000

Protonix Wyeth/Altana 624 1233 1837 2162 2082 2126

Pariet/Aciphex J&J 205 556 697 719 690 650

Takepron Takeda 821 993 945 993 1088 1136Source: Company data, Deutsche Bank estimates



Asthman Worldwide market worth nearly $9bn in 2002

n Industry estimates that 5-7% of the population affected

n Market growing at over 8% per annum, aided by increasing diagnosis and moreaggressive treatment

n Complicated delivery devices afford some revenue protection beyond drugpatent expiry

n Leading companies include GlaxoSmithKline, Schering-Plough and AstraZeneca

Asthma is defined as a reversible obstruction of the airways, usually triggered inresponse to an allergic reaction. The asthmatic reacts to stimuli that are not ofthemselves noxious and suffers intermittent but recurrent attacks that consist ofdifficulty in breathing out due to severe constriction of the airways (bronchospasm).Patients frequently have a persistent cough and suffer mucus plugging of airways.Asthma is an increasingly common ailment, the incidence of which is believed to begrowing, reflecting increased industrialisation, air pollution and urban living. It is aleading cause of hospitalisation and, perhaps surprisingly, it is estimated that asmuch as a third of the adolescent population suffering from asthma have not yetbeen diagnosed.

PhysiologyThe characteristic features of asthma are inflammatory changes in the respiratoryairways that are associated with abnormal bronchial (lung) sensitivity to allergensthat are normally non-noxious. For example, pollen, or particles of house-mite dustcan provoke an asthma attack. Indeed, even the ‘shock’ of cold air can bring on anattack. Asthma’s development probably involves both genetic and environmentalfactors.

Importantly, current theory suggests that there are two main phases to the attack:

n the initial response, which is the abrupt bronchospasm in response to theallergen. This involves the constriction of the smooth muscle in the bronchi

n the inflammation stage, which occurs after continued exposure to the allergen

The inflammation associated with asthma is different from bronchitis, in that it isassociated with the presence of white blood cells (T cells), which release chemicalmessengers (cytokines), which in turn release products that cause damage to theairways.

In the initial response, the bronchospasm arises as the allergen interacts withimmune response cells called mast cells. These release histamines, which causesmooth muscle constriction. In addition and perhaps more significantly, potentbronchial-constrictors and inflammatory agents called leukotrienes are also released,attracting white blood cells to the area, so setting the scene for the delayedinflammation stage. Factors that activate platelets (PAF) and attract platelets to thearea are also released from, among other things, the mast cells. Note that it isagainst this initial reaction that the beta agonists are used, acting on beta 2receptors that are located in smooth muscle tissues in the lungs to causevasodilation and so allow exhalation.



In the second or delayed phase, specific types of white blood cells, called T-helperlymphocytes (Th) and eosinophils (also a type of white blood cell), are released.Together with the leukotrienes, these cause inflammation. Specific moleculesreleased by the eosinophils, which normally form part of the body’s defencesagainst bacteria, cause damage to the epithelial lining of the bronchi. This is believedto add to the sensitivity of the bronchi by leaving the mast cells more exposed toallergens in the future. Because the synthesis of many of the inflammatory media,including PAF, the leukotrienes and prostaglandins is initiated by precursors, whosesynthesis is inhibited by steroids (the glucocorticoids), drugs based onglucocorticoids form the main pharmaceutical approach to both prevention andtreatment of the inflammatory response.

A broad overview of the pathways and chemical mediators involved is shown in thefigure below.

Figure 147: The physiology of asthma

Initial Response Progressive Inflammation

+ +

+

+ + +

+

Exciting agent:allergen or non-specific stimulus...

Mast cells, mononuclear cells causing release of ...

Spasmogens H, PAF, PGD2,LTB4, LTD4

BrochospasmInflammation:vasodilations, oedema,mucus secretion

Inhibited by glucocorticoids

Prevented by cromoglycate, nedocromil

Reversed byB-adrenoceptoragonists andtheophyline

Chemotaxins:e.g. LTB4, PAF

andT cell-derivedchemokines

which cause ...

Infiltration of cytokine-releasing T-cells, and activation of inflammatory

cells, particularly eosinophilis (activated by PDE4) with release of ...

Mediators eg. LTC4, LTD4 PAF

eosinophils

Axon reflexrelease ofexcitatory

neuropeptides

Epithelialdamage

Bronchospasm

Bronchial hyper-responsiveness

PDE 4inhibitors

Leukotriene antagonist e.g. Singulair, Accolate

Source: Rang, Dale and Ritter



Pharmacological treatmentThe treatment of asthma uses several different classes of drug, some of which areaimed at treating the initial bronchospasm, and others, the inflammatory response.A summary of the different classes and their areas of action are shown below.

Figure 148: Leading asthma product classesClass Short-acting beta agonist Long-acting beta agonist Xanthines Steroids (glucocorticoids) Leukotriene antagonists

Acts on: Bronchospasm Bronchospasm Bronchospasm Anti-inflammatory Specific anti-inflammatory

Administration Inhalation/oral/injected Inhalation/oral Oral/injected Inhaled/oral Oral

Use Acute relief as required In combination as prophylactic Severe asthma Prophylaxis Relief and prophylaxis

Role Initial therapy Adjunct to steroids Limited alternative First line/add on Alternative to steroids

Examples Ventolin Serevent, Oxis Theo-Dur Flovent/Flixotide Singulair

Growth Declining Modest Declining Modest Double digit

Novelty Off-patent Patented Off-patent Mixed NovelSource: Deutsche Bank

With a broad range of products available, treatment guidelines have been developedover the years. Updated in 1997, these give a useful indication of the approach totreatment of asthma. Important within the approach is the desire of physicians todirect treatment at the affected area, particularly given the use of steroids. As such,inhaled products that do not pass into the blood are often preferred to those takenorally. However, some element of any inhaled product will inevitably enter the bloodsystem and, because steroids can reduce growth in children, US physicians havebeen reluctant to freely prescribe them for use in this patient group. However,superior performance has meant that these long-standing US concerns are graduallyeasing. This has further augmented the market share position of glucocorticoids,such as GlaxoSmithKline’s Flovent.

Step 1: Inhaled short-acting beta agonist

Step 2: As in step 1, plus regular low-dose inhaled steroid or leukotrieneantagonist (US only)

Step 3: As in step 1, plus regular high-dose inhaled steroid or regularstandard dose inhaled steroid plus long-acting beta agonist.

Step 4: As in step 1, plus regular high-dose steroid, plus one or more oflong-acting beta agonist, xanthine, sodium chromoglycate (forexample, Intal), anti-muscarinic

Step 5 (severe): As in step 4, plus oral corticosteroid

Because treatment often involves the prescription of both an anti-inflammatorysteroid and a bronchodilator, combination products are available. For example,GlaxoSmithKline has recently released its combination product called Seretide(Advair in the US), which unites both its long-acting beta agonist Serevent with itslead steroid, Flixotide. With the exception of the xanthines and sodiumcromoglycate, both of which are small and declining classes, the main drug classesare shown on the next page.



Product classesn Short- and long-acting beta agonists: These work by stimulating the beta 2

receptors of the smooth muscle in the lungs. In doing so, they relieve the initialsymptoms of asthma, that is, the inability to breathe. Taken by inhalation, theydo little to treat the underlying inflammation. Their main side effect comes fromtheir absorption into the blood and consequent action on beta 1 receptorsoutside the lungs, causing a tremor induced by vasoconstriction.

Figure 149: Leading short- and long-acting beta agonistsBrand name Generic name Producer Sales 2002

Short Acting

Ventolin salbutamol GlaxoSmithKline $0.4bn

Bricanyl terbutaline AstraZeneca $0.1bn

Proventil albuterol Schering-Plough $0.1bn

Long acting

Serevent salmeterol GlaxoSmithKline $0.8bn

Foradil formoterol Novartis/Schering-Plough $0.3bn

Oxis formoterol AstraZeneca $0.1bnSource: Company data

n Glucocorticoids (steroids): These products act to inhibit the release of thefactors that cause inflammation. Because they are not bronchodilators, they donot have any effect on smooth muscle. Their efficacy in management of chronicasthma is, however, unequivocal. They are given by inhalation through ametered dose inhaler. Because they are steroids, regular large doses canproduce adrenal suppression, particularly in children, and it is this potential sideeffect that has historically restricted their popularity among US physicians.Indeed, it is the very low systemic absorption and complete first passmetabolism (breakdown by the liver) of Flixotide that have made it the inhaledsteroid of choice.

Figure 150: Leading glucocorticoids (steroids)Brand name Generic name Producer Sales 2002*

Flovent/Flixotide fluticasone GlaxoSmithKline $0.8bn

Pulmicort budesonide AstraZeneca $0.8bn

Becotide beclomethasone GlaxoSmithKline $0.2bnSource: Company data *Includes sales for use in allergic rhinitis

n Leukotriene antagonists: These products act on the inflammation cascade.Their appeal is that they act more specifically on the molecules that causeinflammation and, importantly, do not have the potentially worrying side effectsof the steroids (although they are not as effective). They are taken orally andbecause of their modest bronchodilator activity, are not used to treatbronchospasm.

Figure 151: Leading leukotriene antagonistsBrand Name Generic name Producer Sales 2002

Singulair montelukast Merck $1.5bn

Accolate zafirlukast AstraZeneca $0.1bnSource: Company data

n Xanthines (theophyllines): This class has long been used for bronchodilation.However, as newer products have been developed, the side effects associatedwith the xanthines have seen their use wane.



n Combination products: Given the popularity of prescribing both an anti-inflammatory steroid and a bronchodilator, several products combine these twocompounds into a single drug.

Figure 152: Leading steroid/bronchodilator combination productsBrand name Generic name Producer Sales 2002

Seretide/Advair salmeterol/fluticasone GlaxoSmithKline $2.4bn

Symbicort formoterol/budesonide AstraZeneca $0.3bnSource: Company data

Clinical end-pointsThe two main clinical end-points used in asthma therapy are:

n FEV1 or the forced expiratory volume from the lungs emitted in one second.This measures the extent to which the bronchospasm has eased.

n PFER or the peak expiratory flow rate measures the maximal flow from thelungs in litres/minute after a full inhalation.

Pipeline productsSeveral new classes of drug are in the pipeline. Many of these are based oninhibition of the inflammation cascade and, as such, are directed againstinflammatory factors, such as leukotrienes, phosphodiesters and so on. Inconjunction with Novartis and Roche, Genentech has developed an injectable anti-IgE compound called Xolair. Requiring administration only a few times monthly, itmay provide parents with a more easily monitored dosing regimen. The FDA,however, has issued a Complete Response letter for Xolair, requesting additionalpharmacokinetic data, which the companies hope to submit by late 2002. Alsopending approval is Schering-Plough’s Asmanex. Initially filed in 1998, Asmanex is acorticosteroid inhaler with once daily dosing. Its delay may be largely tied up withongoing manufacturing issues.

Altana is also evaluating two products currently in Phase III trials. The first of these,roflumilast, is a phosphodiesterase IV (PDE-IV) inhibitor in development for bothasthma and a related condition called chronic obstructive pulmonary disorder(COPD). It is described in greater detail in the following section on COPD. Altana hasalso developed an inhaled steroid, Alvesco (ciclesonide), which provides potent anti-inflammatory effects with low systemic absorption and can be dosed once daily.Altana has licensed US marketing rights to Alvesco to Aventis.



Figure 153: Sales growth for different classes of asthma drug ($ m)

0

1000

2000

3000

4000

5000

6000

2000 2001 2002 2003E 2004E 2005E

Short-acting beta agonists Long-acting beta agonists

Steroids Leukotrienes

Steroid + beta agonist


Figure 154: Sales growth for different classes of asthma drug ($ m)Class 2000 2001 2002 2003E 2004E 2005E

Short-acting beta agonists 842 778 622 547 487 432

Long-acting beta agonists 1672 1819 1790 1685 1627 1625

Steroids 2347 2316 1809 2016 1910 1819

Leukotrienes 1012 1413 1649 2150 2522 2791

Steroid + beta agonist 315 1307 2748 3791 4612 5417Source: Company data, Deutsche Bank estimates



Chronic ObstructivePulmonary Disordern US market for COPD estimated at $2.5bn

n Incidence growing at 12% per annum

n 14 million Americans affected by COPD, primarily long-term smokers

Chronic Obstructive Pulmonary Disorder (COPD) is a broad term covering severalclosely related respiratory diseases, including chronic bronchitis and emphysema. Itis estimated to affect 5% of the population and was the fourth-leading cause ofdeath in the US in 2001. Cigarette smoking is the primary cause of COPD,responsible for 80-90% of all cases. While the prevalence of smoking has decreasedin recent years, COPD is on the rise. This is explained by the fact that COPDdevelops only after many years of smoking, so we are just now seeing the effectsof changes in smoking demographics from decades ago.

PhysiologyAlthough both classified under COPD, chronic bronchitis and emphysema aredistinct conditions with different symptoms and causes. Chronic bronchitis isassociated with chronic coughing that produces excess mucus secretion into thebronchial tree. (“Chronic” is defined as occurring on most days for at least threemonths of the year and recurring over the course of at least two consecutive years).Caused by prolonged exposure to bronchial irritants, chronic bronchitis results ininflammation and narrowing of the airways.

Emphysema, on the other hand, is characterised by enlargement of the air sacs thatlie at the ends of the bronchial branches in the lungs. Also caused by repetitiveirritation, the normally elastic air sacs, called alveoli, become more rigid and thewalls of the airways are destroyed. This tissue damage reduces the surface area inthe sacs available for gas exchange, resulting in diminished breathing capacity.

Figure 155: Lung damage in COPD

Healthy Alveolus Chronic Bronchitis Emphysema




Damage to the alveoli occurs due to destruction of elastin, a protein responsible formaintaining the strength of the alveolar walls. Smoking facilitates this process bystimulating production of elastase, a protein that degrades elastin. There is also arare hereditary condition, known as “familial emphysema,” that is characterised bygenetic deficiency of α1-antitrypsin (AAT). Because AAT normally inhibits thedestructive effects of elastase, deficiency of this protein can lead to emphysema inotherwise low-risk non-smokers.

Pharmacological treatmentDespite the physiological differences between COPD and asthma, drug therapiesfor COPD have similar aims – to relax and open narrowed airways, to reduceinflammation and to loosen built-up mucus. The three primary groups of drugs aredescribed below. (Also see previous section on asthma.)

n Anticholinergics. Anticholinergic drugs, namely Atrovent (ipratropium bromide),are generally used as a first line therapy for COPD. They help facilitatebronchodilation by blocking the action of the neurotransmitter acetylcholine inthe smooth muscle of the bronchial tree. Although fairly potent, anticholinergicsare short acting and thus must be administered up to four times per day.

n Long-acting beta agonists. These drugs, developed primarily for asthma,facilitate bronchodilation by stimulating the beta 2 receptors found in thesmooth muscle of the lungs.

n Corticosteroids. Unlike the anticholinergics and beta agonists, these drugstarget the inflammatory response by inhibiting the release of factors that causeinflammation.

Clinical end-pointsAmong the tools used to measure the severity of COPD is a factor called forcedexpiratory volume (FEV1). (See section on asthma.) FEV1 measures lung function bycalculating how much air a patient can exhale in one second. Although FEV1

decreases with age in healthy adults, this decline is two to three times morepronounced in patients with COPD. Consequently, an improvement in FEV1 versusplacebo generally serves as a key endpoint in clinical studies.

Pipeline productsThe size and growth potential of the COPD market, together with the fact that it is,as yet, poorly served, have encouraged companies to attempt to developappropriate treatments. Several approved asthma drugs, such as the combined β2

agonist/corticosteroid products, Advair (salmeterol/fluticasone, GlaxoSmithKline) andSymbicort (budesonide/formoterol, AstraZeneca), are currently pending FDAapproval for the COPD indication. Additional key late-stage products are describedbelow.

n PDE-IV inhibitors. These drugs are thought to relax airway muscle by inhibitingphosphodiesterase IV (PDE-IV). PDE-IV normally breaks down cyclic adenosinemonophosphate (cAMP), a molecule responsible for activating protein kinase,which in turn relaxes bronchial muscle. By inhibiting this process, PDE-IVinhibitors enable the production of more protein kinase, thereby enhancingbronchodilation.



Despite several development failures – namely at Bayer, Lilly and GlaxoSmithKline –companies have persisted with this class of molecule. Currently, two PDE-IVinhibitors are in late-stage development, GlaxoSmithKline’s Ariflo and Altana’sroflumilast. It is worth noting that GlaxoSmithKline suspended its concurrentdevelopment programme for Ariflo in asthma due to the drug’s side effects andgiven the availability of numerous other effective options in this indication. Indeed,while most developmental PDE-IV inhibitors have shown efficacy, the dose levelrequired has invariably been associated with a level of side effect (principally nauseaand vomiting) that has prevented commercialisation.

n Anticholinergics. Spiriva (tiotropium bromide) is a new anticholinergicdeveloped by Boehringer Ingelheim and to be marketed jointly with Pfizer.Although similar to ipratropium bromide, Spiriva appears to be longer acting(administered once per day), more potent and more specific, thereby positioningit as a promising alternative to Atrovent. Spiriva is still awaiting final FDAapproval following a positive advisory committee recommendation inSeptember 2002.

Figure 156: Key pipeline productsProduct Mechanism Company Status

Advair β2 agonist/corticosteroid GlaxoSmithKline Filed

Symbicort β2 agonist/corticosteroid AstraZeneca Filed

Spiriva anticholinergic Boehringer Ingelheim/Pfizer Filed

Ariflo PDE-IV inhibitor GlaxoSmithKline Phase III

roflumilast PDE-IV inhibitor Altana Phase IIISource: Company data



NOTES



Allergic Rhinitisn Prescription antihistamine market worth over $6bn in 2002

n 40 million Americans affected by allergic rhinitis

n Leading products include Claritin (Schering-Plough), Allegra (Aventis) and Zyrtec(UCB/Pfizer)

Allergic rhinitis results from the body’s hypersensitivity to normally innocuousparticles, which, when inhaled through the nose, elicit an adverse reaction. Allergicrhinitis may either be seasonal or perennial. Seasonal allergies, known as hay fever,arise following exposure to seasonal allergens (primarily pollens) that are present inthe spring and/or fall. Perennial allergic rhinits is present year-round and is caused bynonseasonal allergens such as dust mites, animal hair or skin particles and moulds.Allergic rhinitis is estimated to affect more than 40 million Americans and ranks asthe sixth most common chronic illness in the US.

The allergy market has grown enormously in recent years, with the antihistaminesalone leaping from $2 bn in sales in 1997 to over $6 bn in 2002. The key driver ofthis growth has been the liberalisation of direct-to-consumer advertising in the US in1997. Antihistamines have been the most heavily promoted drug category with anapproximate spend of $250 m in 2001. However, with class leader Claritin recentlyswitched to over the counter (OTC) and Allegra facing looming patent expiry thisgrowth may soon see a reversal.

PhysiologyAllergic rhinitis is triggered by exposure to normally innocuous substances that elicitan adverse immune reaction. There is strong evidence of a genetic component tothe disease, with children of one allergic parent having a 30% risk of developingallergic rhinitis and children of two allergic parents having almost a 50% risk ofbecoming allergic. Allergen exposure is an additional predisposing factor. That is, inorder to develop allergies, one must have an initial exposure to the appropriateallergen. Thus many potential allergy sufferers may never develop symptomsbecause they never come into contact with the offending allergen.

Allergies are caused by an antibody-mediated immune reaction to specific allergens.Following initial exposure, allergen-specific IgE antibodies are produced which bindto certain immune cells, called mast cells, located in the nasal passage. Uponreexposure, the mast cell-bound IgE molecules interact with the airborne antigen,triggering the release of inflammatory mediators such as histamine, leukotrienes,and platelet-activating factor (PAF) as shown in the figure overleaf. It is these agentsthat are responsible for the acute inflammatory response, along with increasedmucus secretion, muscle contraction and other allergic symptoms. A further late-stage reaction may also occur in some patients following an influx of inflammatorycells, such as eosinophils, monocytes and macrophages, that occurs hours after theinitial exposure. These cells trigger similar allergic symptoms despite the absence ofthe original allergen.



Figure 157: Early-phase Allergic Reaction

MastCell

IgE

HistamineLeukotrienes

Platelet-activating factor

MastCell

SneezingNasal congestion/itchingItchy eyes, throat, ears

Allergens(e.g. pollen)

Antihistamines(competitively bind tohistamine receptors)

InflammationMuscle contractionMucus secretion

Neutrophil chemotaxis

Nasal Steroids(block release of inflammatory

mediators, suppress chemotaxis,cause vasoconstriction, etc.)

Decongestants(shrink swollen mucosa,

improve ventilation) IgE

Source: Dipiro, Talbert, Yee, Matzke, Wells and Posey

Pharmacological TreatmentAlthough avoidance of the relevant allergens is the most direct method to preventallergic rhinitis, not surprisingly, it is usually the most difficult given the widespreadprevalence of many seasonal and perennial antigens. Immunotherapy, in which apatient undergoes repeated exposure to the allergen in an attempt to sensitise hisor her immune system, may offer long-term benefit, but its use is also limited giventhe significant expense, time commitment and potential risks involved.

Thus, treatment of allergic rhinitis primarily relies on pharmacological therapies,namely antihistamines, decongestants and steroids. Antihistamines are histaminereceptor antagonists that competitively bind to H1 histamine receptors, therebyinhibiting histamine induced inflammation. Because antihistamines are better atpreventing the actions of histamine rather than reversing the effects once they havetaken place, they are best given prior to anticipated allergen exposure. Many of thefirst-generation drugs such as diphenhydramine HCl (Tavist) and clemastinefumerate (Benadryl) are available over the counter (OTC). While offering therapeuticbenefit, drowsiness is often a chief complaint of patients taking these drugs. Inaddition, several first-generation drugs are associated with drug-drug interactions, akey factor that led to the withdrawal of Hoechst Marion Roussel’s Seldane andJ&J’s Hismanal.

Given these problems with first-generation antihistamines, the second-generationdrugs have largely taken over the prescription market. The market leaders includeClaritin, Allegra and Zyrtec. All market themselves as non-sedating antihistamines,although Zyrtec exhibits a higher sedation rate than the other two compounds. Inlate 2002, Schering-Plough gained FDA approval to switch its class-leading productClaritin to OTC status shortly before prescription generics were set to becomeavailable. However, the company still markets as a prescription product its Claritinfollow-on, Clarinex, which contains the active isomer of the parent drug.



Figure 158: Leading Antihistamines for Allergic RhinitisName Generic Producer Class 2002 Sales

Claritin/D* loratadine Schering-Plough Antihistamine $1.9 bn

Allegra/D* fexofenadine Aventis Antihistamine $1.9 bn

Zyrtec/D* cetirizine UCB/Pfizer Antihistamine $1.6 bn

Clarinex desloratadine Schering-Plough Antihistamine $0.6 bnSource: Company data *D = decongestant formulation (see below)

Given the nasal congestion often associated with allergic rhinits, many patients alsotake a topical or systemic decongestant. Topical decongestants, available as drips orsprays, are highly effective and available OTC, contributing to their widespreadusage. While not as effective in terms of immediate onset of action, oraldecongestants may last longer and cause less local irritation. In addition, Schering-Plough, Aventis and UCB (the makers of Claritin, Allegra, and Zyrtec, respectively)have all developed combined antihistamine/decongestant products, designated witha “D” (e.g. Claritin D), in an effort to provide added convenience to consumers.

Figure 159: Leading Nasal Steroids for Allergic RhinitisName Generic Producer Class 2002 Sales

Flonase fluticasone propionate GlaxoSmithKline Inhaled steroid $0.8 bn

Nasacort/AQ triamcinolone acetonide Aventis Inhaled steroid $0.3 bn

Nasonex mometasone furoate Schering-Plough Inhaled steroid $0.5 bn

Rhinocort/Aqua budesonide AstraZeneca Inhaled steroid $0.3 bnSource: Company data

Particularly for patients who suffer from perennial rhinitis, nasal steroids offer a thirdmode of treatment. These drugs, given as an intranasal spray, are most effectivewhen given in advance of exposure to allergens. However, therapeutic benefits maynot be evident for several days, with peak responses usually appearing after two tothree weeks.

It is also important to note that Merck’s Singulair (montelukast), a drug originallydeveloped for asthma, has recently gained approval for seasonal allergic rhinitis.Singulair acts as a leukotriene antagonist, thereby inhibiting allergy symptoms via adifferent mechanism from the traditional antihistamines.

Pipeline ProductsSepracor is developing a novel antihistamine, Soltara, which is the active isomer ofHismanal, the aforementioned drug that was pulled from the market in 1999 due tocardiovascular side-effects (QTc prolongation). Sepracor describes Soltara’s profileas best in class, with a rapid onset of action of 20-40 minutes. However, Soltarareceived a non-approvable letter from the FDA in March 2002 with requests foradditional safety data relating to issues that appeared in animal studies but not inhumans, along with additional assurance of the absence of any potential for QTcprolongation.

Yet even if Soltara is eventually approved, it is questionable how much of a marketwill remain for it to capture. With Claritin OTC and Allegra’s patent exclusivity likelyto end by 2004, the prescription antihistamine market may quickly dwindle withconsumers treating their allergy symptoms through OTC and/or generic products.



Figure 160: Sales Forecast for Leading Antihistamines ($ m)

0

500

1000

1500

2000

2500

3000

3500

2000 2001 2002 2003E 2004E 2005E

Allegra/D Claritin/D Zyrtec/D Clarinex

Source: Deutsche Bank estimates

Figure 161: Sales Forecast for Leading Antihistamines ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Allegra/D Aventis 1074 1578 1914 1799 1674 552

Claritin/D Schering-Plough 3013 3159 1933 335 135 130

Zyrtec/D UCB/Pfizer 1225 1497 1601 1669 1748 1776

Clarinex Schering-Plough 0 0 598 695 750 805Source: Deutsche Bank estimates

Figure 162: Sales Forecast for Leading Nasal Steroids ($ m)

0

100

200

300

400

500

600

700

800

900

1000

2000 2001 2002 2003E 2004E 2005E

Flonase Nasacort/AQ Nasonex Rhinocort/Aqua

Source: Deutsche Bank estimates

Figure 163: Sales Forecast for Leading Nasal Steroids ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Flonase GlaxoSmithKline 617 726 802 858 472 283

Nasacort/AQ Aventis 188 238 310 357 407 448

Nasonex Schering-Plough 415 524 524 590 685 775

Rhinocort/Aqua AstraZeneca 221 265 299 326 342 352Source: Deutsche Bank estimates



Antibioticsn World market in 2002 worth around $24bn

n Overall growth of approximately 1%, driven by the quinolone class

n Resistance an increasing feature and driving development

n Leading companies include Bayer, GSK, Pfizer, Roche and Daiichi

Antibiotics are used to kill the bacteria responsible for many infections. Firstdeveloped commercially in the late 1940s following Alexander Fleming’s discoveryof penicillin in 1928, they have played a major role in the development of today’spharmaceutical industry. Antibiotics form a major class of drugs; it is estimated thatthe account for sales of roughly $24bn, equivalent to nearly 6% of the sales of theentire pharmaceutical industry.

Bacterial infections are a growing problem. In recent years, rising resistance toexisting treatments has led to renewed interest from research-basedpharmaceutical companies into the development of new and effective products.

PhysiologyAntibiotics work by interfering with specific and essential processes within thebacterial cell. In essence, their development has centred on manipulatingmechanisms and pathways that are vital to the bacteria’s replication, yet which areeither not found in humans or differ significantly. This limits, but does not eliminatethe drugs’ toxicity to humans.

Figure 164: Antibiotics and bacteria - points of action

DNA

mRNA

ribosomes

Folic Acid Metabolism InhibitorsSulphonamidesTrimesthoprim

RNA Polymerase InhibitorsRibamycins

DNA Gyrase InhibitorsQuinolones

Cell Wall Synthesis InhibitorsPenicillins

CephalosporinsMonobactamsCarbapenems

Protein Synthesis InhibitorsTetracylines

AminoglycosidesMacrolides

Chloramphenicol

Target AreaCell Wall SynthesisProtein SynthesisNucleic Acid SynthesisIntermediary metabolism

Drug ClassPenicillinsMacrolidesQuinolonesSulphonamides

Source: British Biotech



Figure 165: Antibiotics – Respiratory tract infections and antibiotic usage

Type of Infection Indication Primary Infectious Agent Key Antibiotic Usage

SinusitisS. pneumoniaeH. influenzaM. catarrhalis

Penicillins 38%Caphalosprins 23%Macrolides 23%Quinolones 4%

Upper Respiratory Tract Infections

Lower RespiratoryTract Infections

Otitis Media S. pneumoniaeH. influenza

Penicillins 59%Caphalosprins 18%Macrolides 13%Quinolones 1%

Throat S. pyogenese

Penicillins 44%Macrolides 20%Cephalosporins 12%Quinolones 1%

Bronchitis(AECB)

H. influenzaS. pneumoniaeM. catarrhalismycoplasma (inepidemics)

Macrolides 43%Penicillins 24%Cephalosporins 18%Quinolones 7%

CommunityAcquiredPneumonia

S. pneumoniaeH. influenzaM. catarrhalisAtypicals

Macrolides 49%Penicillins 16%Cephalosporins 16%Quinolones 13%

Source: IMS Health

There are several different classes of bacteria, of which the four most significant arethe penicillins, cephalosporins, macrolides and quinolones. Several of these targetthe same key metabolic process in a bacterium, albeit in a different way. Asillustrated below, the main areas of interference tend to be cell wall synthesis (forexample, penicillin, cephalosporin), protein synthesis (for example, macrolides andtetracyclines), nucleic acid synthesis (quinolones) and essential intermediatepathways (for example, sulphonamides).

Bacteria are typically classed as either Gram-positive or Gram-negative. The ‘Gram’definition reflects the difference in structure of the bacterial cell wall and,consequently, whether they are stained with dye in a Gram test. Gram-positivebacteria tend to be associated with respiratory tract infections (RTI), while Gram-negative bacteria are associated with infections of the urinary tract (UTI). Note thatalmost 60% of bacterial infections are in the respiratory tract, with only 10% in theurinary tract. Respiratory tract infections (RTIs) may be further broken down intothose affecting the upper and lower regions.

Pharmacological treatmentGiven the variety of options, choice of treatment typically depends on severalfactors, not least the nature of the infection (for example, RTI or UTI), patient history(allergic reaction to penicillin is quite common), potential drug interactions and so on.Increasingly, attention is also being given to resistance, which, as discussed later,has become a major problem. Drug usage may also be limited by the form in whichthe antibiotic is administered, that is, whether it is taken orally or injected. Use ofinjectable antibiotics is typically limited to hospitals (a feature that generally impliesmore modest sales potential).



Figure 166: Antibiotic sales by infection (1999) Figure 167: Antibiotic sales by type (2002)UTI10%

Upper RTI33%

Lower RTI27%

Other30%

Cephalo-sporins

33%

Macrolide17%

Penicillins17%

Carba-penems

4%

Quinolones20%

Others9%

Source: Deutsche Bank Source: Wood Mackenzie

As stated, there are four main classes of antibiotic, each of which is described inthe Figure below. Some summary characteristics of each class are presented asfollows:

Figure 168: Main antibiotic classes – summary characteristicsClass Penicillins Cephalosporins Macrolides Quinolones

Class value 2002 ~$4.1bn ~$7.8bn ~$4.0bn ~$4.9bn

Sales growth rate -6% -1% +1% +6%

RTI/UTI Mainly uRTI Mainly uRTI Mainly lRTI Mainly UTI/new RTI

Key product amoxycillin ceftriaxone azithromycin ciprofloxacin

Lead Brand Augmentin Rocephin Zithromax Ciprobay

Action point Cell wall (B lactam) Cell wall (B lactam) Protein synthesis DNA coiling

Side effects Allergic reaction Allergic reaction GI disturbance GI, headaches

Administration Mainly oral Mainly injected Mainly oral Mainly oralSource: Deutsche Bank, Wood Mackenzie

Penicillins: Penicillin was the first modern antibiotic and is one of the group of beta-lactams, which includes cephalosporins and carbapenems (among others). It acts byinterfering with the synthesis of bacterial cell walls. Despite the age of the class,penicillins remain the most widely used antibiotics, owing to their broad activitybase and good safety profile. They remain the drugs of choice for many clinicaluses, including bacterial meningitis, skin infections, pharyngitis, middle earinfections, bronchitis, gonorrhoea, and syphilis, among other infections. They can betaken orally, although different products are absorbed to different degrees and thus,in some cases, injection may be more efficacious. They are well tolerated and toxicside effects are rare, although allergic reactions such as rashes and fever occur inabout 10% of patients. Given the age of the group, many penicillins are off patent,including the class leader of recent years, GlaxoSmithKline’s Augmentin (amoxycillin+ clavulanic acid), which lost its patent protection in late 2002. There are noproducts of any significance in development.

Figure 169: Leading penicillinsBrand name Generic name Producer 2002 sales

Augmentin amoxycillin + clavulanic acid GlaxoSmithKline $1.8bn

Amoxil amoxycillin GlaxoSmithKline $0.2bn

Unasyn ampicillin Pfizer $0.4bnSource: Company data



Cephalosporins: These are also known as beta-lactams, acting to interfere with thesynthesis of the bacterial cell wall. Some may be given orally, but most are given byinjection. They are typically the second choice antibiotic, their main uses being inpneumonia, septicaemia, meningitis, sinusitis and urinary tract infections. Unwantedside effects are similar to those seen with the penicillins, although they may alsocause diarrhoea. The leading class product is the injectable Rocephin, whose patentexpires in 2005. There are few products of any significance in development. Notethat despite their second line usage, they have a broader spectrum of activity andare more potent than the penicillins.

Figure 170: Leading cephalosporinsBrand name Generic name Producer 2002 sales

Rocephin ceftriaxone Roche $1.0bn

Zinnat/Ceftin cefuroxime axetil GlaxoSmithKline $0.4bn

Cefzil cefprozil Bristol-Myers Squibb $0.3bnSource: Company data

Quinolones: The quinolones, particularly the fluoroquinalones, are the most recentlyintroduced major class of antibiotic. They work by inhibiting a bacterial enzymecalled DNA Gyrase, which prevents bacterial DNA from coiling, so preventingreplication. Bayer’s ciprofloxacin is the most commonly used. The quinolones arebroad spectrum, but are particularly effective against many gram-negative bacteria,including many organisms that are resistant to penicillin. Taken orally or by injection,their main uses are in urinary tract infections. Unwanted effects are infrequent andusually mild, but include gastrointestinal disturbances and skin rashes(photosensitivity). Because of their unique mechanism of action, the bacterialresistance mechanisms that have limited the efficacy of the other main classes havenot been replicated. Thus, although resistant strains have developed, the quinolonesare likely to experience strong growth as a class. Several new products are indevelopment. However, problems associated with the class have been anincreasing feature. Generally, the quinolones are not recommended for use inchildren owing to potential abnormalities in cartilage formation. Pfizer withdrew itsnew product Trovan following liver toxicity, while GlaxoSmithKline withdrew itsproduct Raxar after reports of cardiac abnormalities. Bayer’s recently launchedAvelox (moxifloxacin) also has warnings regarding QT prolongation (heartarrhythmias) on its US label, so damaging its competitive profile and hindering itsgrowth.

Figure 171: Leading quinolonesBrand name Generic name Producer 2002 sales

Ciprobay ciprofloxacin Bayer $2.0bn

Levaquin levofloxacin Johnson & Johnson $1.1bn

Cravit levofloxacin Daiichi $0.4bn

Tequin gatifloxacin Bristol-Myers Squibb $0.3bn

Avelox moxifloxacin Bayer $0.2bn

Tavanic levofloxacin Aventis $0.2bnSource: Company data

Macrolides: Macrolides, such as erythromycin, have been in use for over 40 years.They act by interfering with bacterial protein synthesis by attaching to bacterialribosomes (the cellular constituents that read RNA as a template for proteinsynthesis). Their spectrum of activity is similar to that of the penicillins (althoughthey are mainly effective against gram-positive bacteria) and they have provenuseful alternatives in penicillin-sensitive patients. They are typically administeredorally. The main unwanted side effects include gastrointestinal disturbances.



Figure 172: Leading macrolidesBrand name Generic name Producer 2002 sales

Zithromax azithromycin Pfizer $1.5bn

Biaxin/Klaricid clarithromycin Abbott $1.1bn

Numerous erythromycin Various $0.2bn

Ketek telithromycin Aventis $0.1bnSource: Company data

Resistance conferring opportunityPoor compliance and over-prescribing among various reasons have meant thatbacterial resistance to antibiotics is becoming an increasing problem. After years ofexposure and consequent mutation, many infections are now becoming resistant toa greater number of drugs. Initially more prevalent in hospital settings, resistance isnow an increasing threat in community-acquired infection.

There are several mechanisms of resistance. For example, bacteria have becomecapable of synthesising beta lactamases that cleave the beta lactams before theycan be fully effective. Alternatively, bacterial mutation has meant that initial drugtargets have been modified. Among others, these resistance mechanisms havelimited the use of penicillin, cephalosporins and other beta lactams in the treatmentof certain diseases. Resistance to the quinolones is also a growing problem. Targetalteration has also limited the use of erythromycin and some other macrolides.Thus, where staphylococcus aureus could in the past be treated with methycillin,strains have emerged that are now resistant to this and many other antibiotics (forexample, methycillin resistant staphylococcus aureus or MRSA). Equally,enterococcus, a frequently encountered hospital pathogen, now shows resistanceto vancomycin (VRE), which previously had been the antibiotic of last resort.

Figure 173: Comparative profiles of quinolone antibioticsBrand name Cipro Levaquin Tequin Avelox

Generic name ciprofloxacin levofloxacin gatifloxacin moxifloxacin

Marketer Bayer J&J/Aventis BMS Bayer

Launch 1986 1997 1999 1999

Clinical profile

Gram +ve + ++ +++ +++

Gram -ve ++++ ++ ++ +++

Respiratory tract + ++ ++ ++

Urinary tract +++ + + +

Indications

Urinary tract ü ü ü

Chronic bronchitis ü ü ü

Sinusitis ü ü ü ü

Pneumonia ü ü ü ü

Skin infections ü ü ü ü

Gastrointestinal ü

Bone and joint üSource: Company data

This presents a major threat to the treatment of disease. Tried and trustedantibiotics may no longer work on bacteria against which they had previously provenefficacious. However, this situation also confers opportunity on new classes ofantibiotics that operate through alternative mechanisms. For example, newlylaunched Zyvox and Synercid hope to serve as alternatives to treat bacteria resistantto methycillin and vancomycin. It also explains the expectation that the quinolones



will see growth from increasing use against bacteria that are now showingresistance to beta lactams and macrolides.

Figure 174: Some instances of bacterial resistanceBacteria Disease examples Resistance Minimal resistance

Gram positive

Streptococcus pneumoniae Pneumonia, Beta-lactams, macrolides Quinolones, clavulanic acid

Staphylococcus aureus Sepsis, pneumonia Penicillin, vancomycin Recent quinolones

Enterococci Urinary tract Vancomycin

Gram negative

H. influenzae Meningitis, earache Beta-lactams Quinolones

E. coli Urinary tract Quinolones, penicillin MacrolidesSource: Deutsche Bank

Pipeline productsThere are now several developmental antibiotics in the pipeline, most of whichrepresent variations of existing classes. Many of these are also primarily targeted atresistant strains of bacteria, potentially positioning them as treatments of last resortand limiting their market potential. However, one agent of interest is Bayer’sfaropenem, as it would be the first orally available drug in the carbapenem family.

Figure 175: Selected pipeline antibioticsName Type Producer Status

Invanz Carbapenem Merck Launched 2002

Garenoxacin Quinolone Bristol-Myers Squibb Phase IIICompany data

Figure 176: Sales forecasts for key antibiotic classes ($ m)

0100020003000400050006000700080009000

2000 2001 2002 2003E 2004E 2005E

Cephalosporins Macrolides Penicillins Quinolones Carbapenems

Source: Wood Mackenzie

Figure 177: Sales forecasts for key antibiotic classes ($ m)2000 2001 2002 2003E 2004E 2005E

Cephalosporins 8440 8116 7775 7665 7589 7527Macrolides 4008 4076 3971 4114 4190 4195Penicillins 4332 4537 4136 3715 3650 3597Quinolones 4785 5171 4859 5198 5271 5413Penems 925 954 966 1027 1055 1081Source: Wood Mackenzie



Osteoporosisn World market in 2002 worth approximately $4bn

n Growth estimated at over 15%, driven by new drugs and demographics

n 80% of sufferers are women

n Key products include Merck’s Fosamax, P&G/Aventis’ Actonel and Lilly’s Evista

Osteoporosis (literally porous bone) is a disease in which bones gradually becomemore porous and consequently weaker and more brittle. It is defined as a bonemineral density (BMD) that is at most only 40% that of a ‘young normal adult’ andgenerally progresses with age. Often accompanied by the distortion of bonestructure, it is estimated that 10 million Americans suffer from the disease, while afurther 18 million suffer from a milder reduction in bone density, termed osteopenia.Less than half of sufferers are currently receiving treatment.

Osteoporosis is associated with a high risk of bone fractures, bone pains and bonecancers if left untreated. With lifespans increasing and the elderly representing agreater proportion of the population, the financial burden of treating the disease isincreasing quickly. Consequently, the demand for better medication to prevent orreduce the risks of osteoporosis-derived complications is high.

PhysiologyBone is predominantly comprised of collagen, calcium and phosphate ions, boundtogether by phosphoproteins. Simplistically, bone is created by the establishment ofan organic collagen-based network or osteoid, onto which calcium phosphatecrystals are deposited, so establishing a hard bone matrix. In healthy adults, thebone mass is continuously being remodelled, with some bone being resorbed andsome new bone laid down. This process of remodelling is undertaken by two typesof cells – osteoblasts, which secrete new bone matrix, and osteoclasts, which breakit down – and is closely regulated by the action of hormones (including oestrogen,which dampens the activity of the osteoclasts) and other chemical.

The process of bone remodelling is dynamic, although bone breakdown can be alsoinitiated when bone is damaged or when plasma calcium falls below a particularlevel. Key to the process is the role of the parathyroid gland in maintaining plasmacalcium concentrations. Receptors on the parathyroid cells react to a decline in thecalcium concentration, triggering the secretion of parathyroid hormone (PTH), whichthen acts on a number of pathways. One of these pathways involves the breakdownof older bone, where PTH:

i) Promotes the formation of the hormone calcitriol from vitamin D, whichfacilitates the formation of osteoclasts from precursor cells;

ii) Encourages the action of chemical messengers or cytokines, such as theinterleukins on the osteoclasts, so stimulating their activity. The osteoclaststhen adhere to the bone, move along it and secrete hydrogen ions andproteolytic (protein-cleaving) enzymes that break down bone and release itscomponents, such as calcium, but also insulin-like growth factor (IGF1) from thesite of their action.



Figure 178: Bone remodelling is dynamic

Precursor cell

Cytokines

Differentiation to OBsRecruitmentof OCs

Parathyroid Hormone( PTH)

Calcitriol

Bisphosphonates

OCs

Oestrogens

IGFInterleukin

OBs

New osteoid

Steroids

BMPs

IGF molecule

BONE

Source: Rang, Dale & Ritter Note: OCs are osteoclasts and OBs osteoblasts

It is the release of insulin-like growth factor that initiates the process of bonereplacement and the second phase of the cycle. IGF1 stimulates the activation andformation of osteoblasts. Once activated, the osteoblasts migrate to the site ofbone breakdown and, together with collagen-producing cells (called chondrocytes),produce the osteoid matrix in which the crystals of calcium phosphate are depositedto create new bone. In addition, the osteoblasts release interleukins that activatethe osteoclast cells, so reinitiating the remodelling cycle.

Although the cycle is dynamic, there are several important regulatory mechanisms.These tend to regulate osteoclast activity.

(1) Increased plasma calcium concentration acts on receptors on the surface of theparathyroid cells and inhibits PTH secretion, thereby preventing furtherformation of osteoclasts.

(2) Oestrogen acts to inhibit the action of the interleukins that stimulate osteoclastactivity, inhibits the development of osteoclast precursor cells and encouragesthe osteoclasts to undergo programmed cell death (apoptosis). Thus, theabsence of oestrogen in post-menopausal women leads to an increasedincidence of osteoporosis.

(3) Calcium levels also impact on the activity of the hormone, calcitonin, a rise incalcium concentration leading to an increase in calcitonin release. Calcitonin issecreted by the special “C” cells in the thyroid, which bind to a specificreceptor on osteoclasts and stop further bone breakdown.

Osteoporosis is commonly found in:

n Post-menopausal women, whose oestrogen levels have fallen to the extent thatcontrol of the inhibition of osteoclast activation is reduced, and

n the elderly, whose bodies fail to rebuild bone that has been broken down as aresult of factors such as a reduction in osteoblast activity, calcium uptake and soon.



Importantly, because excessive levels of steroids tend to inhibit the formation ofosteoblasts and their activation, osteoporosis can also arise as a side effect ofexcessive use of steroids (glucocorticoids).

Pharmacological treatmentThere are currently two major classes of compounds on the market for treating andpreventing osteoporosis, namely, the bisphosphonates and the selective oestrogenreceptor modulators (SERMs). Other alternatives include oestrogen or hormonereplacement therapies, which are largely used for prevention, and the calcitonins.

Figure 179: Osteoporosis treatment: SERMS and bisphosphonates comparedBisphosphonates SERMs

Sales 2002 $3.0 bn $0.8 bn

Leading product Fosamax (Merck) Evista (Eli Lilly)

Point of action Inhibits osteoclast activation & promotes osteoclast apoptosis (death) Inhibits osteoclast activation

Healing rates Reduces the risk of one or more spine fractures by 47% and therisk of two or more spine fractures by 90%

Reduces the risk of first spine fracture by 55% and the risk ofsubsequent spine fractures by 30%

Side Effects Musculoskeletal or abdominal pain, nausea, heartburn Hot flushes, deep vein thrombosisSource: Deutsche Bank, Company data

BisphosphonatesWith several products available, the bisphosphonates currently dominate the marketfor the treatment of osteoporosis. They work by inhibiting the activation ofosteoclasts and promoting their programmed death (apoptosis), thereby reducingbone breakdown and reducing the risk of fractures. They are resistant to enzymebreakdown and are effective in reducing the level of bone loss in the elderly. Thetwo leading products indicated for osteoporosis, Fosamax and Actonel, do,however, suffer from the major disadvantage of having to be taken 30 minutesbefore a meal with a full glass of water, after which time, the patient must remain inan upright position. Gastrointestinal complaints, such as ulcers, are the main sideeffect. Note that Aredia and Zometa, although bisphosphonates, are not indicatedfor osteoporosis. Rather, they are approved to treat the breakdown of bone due tometastatic cancer. However, Novartis is currently conducting Phase II studies forZometa in osteoporosis in an effort to gain official approval for this indication.

Figure 180: Leading bisphosphonatesName Generic name Producer 2002 sales

Fosamax alendronate Merck $2.3bn

Aredia pamidronate Novartis $0.3bn

Actonel risedronate Aventis $0.5bn

Zometa zoledronic acid Novartis $0.2bnSource: Company data

Selective oestrogen receptor modulators (SERMs)There is only one SERM currently on the market –Lilly’s Evista. This product mimicsthe action of oestrogen by binding to specific oestrogen receptors on osteoclasts,slowing the rate of bone loss. In addition, Evista is currently in Phase III clinical trialsfor prevention of breast cancer. We believe that, if successful, Evista will takemarket share from the bisphosphonates on account of this broader indication.

Figure 181: SERMs on the marketName Generic name Producer 2002 sales

Evista raloxifene Eli Lilly $0.8bnSource: Company data



Clinical end-pointsThe objective of all therapies for osteoporosis is to increase bone density, decreaseor stop bone loss and reduce the risk of bone fractures. Phase III clinical trials areusually run for three years. Efficacy is measured by the comparison of fractures inhip, vertebrae and limbs for those taking the drugs and those on placebo.

Pipeline productsA number of therapies, including sodium fluoride, vitamin D metabolites, parathyroidhormone, other bisphosphonates and SERMs, are currently in clinical trials for thetreatment and prevention of osteoporosis. The most advanced of these, Lilly’sForteo, was just approved by the FDA in November 2002. Forteo is a recombinantparathyroid hormone (rPTH) that may offer an alternative mechanism of treatment.(It differs from NPS Pharmaceuticals’ Preos by the number of amino acids includedin the protein chain).

Figure 182: Key pipeline productsName Producer Type Status

Forteo Eli Lilly rPTH (1-34) Approved

Lasofoxifene Pfizer SERM Phase III

TSE-424 Wyeth Tissue selective oestrogen Phase III

Preos NPS Pharmaceuticals rPTH (1-84) Phase III

Zometa Novartis Biphosphonate Phase II

SERM 3339 Aventis SERM Phase IISource: Company data

Figure 183: Sales forecasts for key osteoporosis drugs ($ m)

0

500

1000

1500

2000

2500

3000

2000 2001 2002 2003E 2004E 2005E

Aredia Fosamax Actonel Evista Forteo


Figure 184: Sales forecasts for key osteoporosis drugs ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Aredia Novartis 664 752 276 109 87 70

Fosamax Merck na 1630 2250 2660 2800 2800

Actonel Aventis 40 277 508 787 1023 1228

Evista Lilly 522 665 822 1030 1240 1435

Forteo Lilly 0 0 6 95 240 370Source: Company data, Deutsche Bank estimates



Painn World market estimated at $15bn in 2002

n Growth of NSAID category estimated at 8% per annum, driven primarily byCOX-2 inhibitors

n Treatment based on severity and acute vs. chronic nature of condition

n Key companies: Pfizer and Merck

Pain is one of the world’s largest and most rapidly growing markets. Over 25 millionpeople in the US suffer from acute pain related to injury or surgery and another 50million experience chronic pain. The annual cost of pain management to the USeconomy is estimated at $100bn per year.

PhysiologyPain is classified into several categories to help determine appropriate treatment.First, it is broadly characterised as acute or chronic. Acute pain is short lived,whereas chronic pain is usually described as persisting for more than three to sixmonths. Chronic pain is further divided between somatogenic conditions, or thoseexplicable by physiological causes, and psychogenic conditions, or those primarilyassociated with psychological origins. Finally, somatogenic pain may be eithernociceptive, meaning that it is a result of normal activation of pain-sensitive nervefibres, or neuropathic, resulting from nerve tissue damage.

In order to understand the mechanisms of pain, it is helpful to become familiar withthe components of the nervous system. The nervous system is divided into twoparts: the central nervous system (CNS) and the peripheral nervous system (PNS).The CNS, which consists of the brain and spinal cord, communicates chemicalsignals to and from the PNS, which includes the sensory and motor nerve fibresthroughout the body. Signals from the CNS tell the heart to beat faster or instruct amuscle to contract; signals from the PNS inform the brain that a pinprick hurts.

Most painful sensations are a result of the nociceptive pathway. Following injury,damaged cells release several chemical mediators, including bradykinin, 5-hydroxytryptamine (5-HT) and histamine. Histamine primarily initiates aninflammatory response. Bradykinin and 5-HT stimulate nerve receptors, callednociceptors, that pass the signal from the PNS to the CNS, creating the painfulsensation. Also, at the time of cell injury, arachidonic acid is released, which, withthe help of the enzyme cyclooxygenase, produces prostaglandins. While notstimulating pain directly, these molecules enhance the pain-producing effects ofbradykinin and 5-HT. They also contribute to the inflammatory response.

Many injuries also give rise to a hypersensitive state known as hyperalgesia, whichcauses a person to experience increased pain from a mild noxious stimulus. Thisphenomenon is responsible, for example, for a mild touch triggering pain whenapplied to sunburned skin. Hyperalgesia is caused by the release of twoneurotransmitters, substance P and calcitonin gene-related peptide (CGRP), whichsensitise the nerve fibres to future stimulation.



Figure 185: Physiological pathway of pain

Cell Trauma/Noxious Stimulus

Pain

Nerve Growth Factor

Nerve FibreStimulation

Inflammation

Descending Inhibitory

Pathways (CNS)

Prostaglandins

Substance P, CGRPBradykinin, 5HT

OPIOIDS (Inhibit Substance P & 5-HT release, directly stimulate

opioid receptors in CNS)

NSAIDs (inhibit production of

prostaglandins)

Source: Rang, Dale, Ritter

Finally, neuropathic pain caused by damage to the nerve fibres persists without anyspecific sensory nerve stimulation. It is generally linked to CNS disorders, such asstroke or multiple sclerosis, or conditions causing peripheral nerve damage,including diabetic neuropathy, shingles or mechanical injury.

Pharmacological treatmentGiven the complex causes and manifestations of pain, treatments vary widely andare best categorised into several groups based on the relevant conditions they aimto treat.

Mild to moderate pain (eg, headache, arthritis). Low-level pain is generallytreated with aspirin, acetaminophen or other non-steroidal anti-inflammatory drugs(NSAIDs). There are currently over 50 different NSAIDs on the market, most ofwhich differ slightly in pharmacological characteristics or side-effect profile, but all ofwhich (with the exception of acetaminophen) attempt to inhibit the inflammatoryreaction. The NSAIDs’ target is the cyclooxygenase (COX) enzyme, which isassociated with the production of prostaglandins. Cyclooxygenase exists in twoforms. The first of these, COX-1, exhibits protective effects and is constitutivelyexpressed in most tissues, including the kidneys, gastrointestinal tract and bloodplatelets. Only the second form of the enzyme, COX-2, is involved in theinflammatory pathway.

Figure 186: Leading COX-2 inhibitors and late-stage candidatesBrand Generic Company Launch/Status 2002 sales

Celebrex celecoxib Pfizer* 1999 $3.1bn

Vioxx rofecoxib Merck 1999 $2.5bn

Bextra valdecoxib Pfizer* 2001 $0.5bn

Arcoxia etoricoxib Merck Approved UK/Phase III US launch

Dynastat paracoxib (injectable) Pfizer* Approved EU/Phase III US -

Prexige lumiracoxib Novartis Phase III - *Assumes Pharmacia merger with PfizerSource: Company data



Figure 187: Incidence of gastroduodenal ulcers in COX-2 vs. NSAID Drugs

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Celebrex(200 mg)

Naproxen(500 mg)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Vioxx(25 mg)

Ibuprofen(2400 mg)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Bextra(10 mg)

Naproxen(500 mg)


Because most NSAIDs do not discriminate between these two enzymes, theydisrupt the protective efforts of COX-1, leading to side effects such asgastrointestinal and kidney irritation. In an effort to avoid these complications, arelatively new class of drugs has emerged that selectively targets the COX-2enzyme. Although applicable in a number of pain indications, these drugs have beenmost widely used for the treatment of osteoarthritis, a painful condition caused byerosion of cartilage and bone in the joints. Osteoarthritis is estimated to affect morethan 50% of people over 65 and nearly all people over age 75. The COX-2s are alsouseful in the treatment of mild cases of rheumatoid arthritis, a much less commonform of joint deterioration, but which is associated with higher levels of COX-2expression and inflammation. Currently, only four COX-2 inhibitors are approved, butas in the early days of the triptans and statins, this family of drugs is rapidlyexpanding.

Figure 188: COX-2 versus NSAID specificity

Arachidonic Acid

COX-1 constitutivelyexpressed

COX-2 induced atinflammation site

Protectiveprostaglandins

(GI tract, kidney, blood)

Inflammatoryprostaglandins

(Inflammation site)

X XNSAIDs

(inhibit COX-1 & COX-2)

COX-2 inhibitors(inhibit only COX-2)


Concern, however, has arisen recently regarding the cardiovascular safety of theCOX-2s following results of Merck’s VIGOR study, which indicated an increasedincidence of heart attacks among patients taking Vioxx. Merck has argued that thisresult was driven by the absence of a cardioprotective effect of Vioxx, comparedwith naproxen (which inhibits platelet aggregation), rather than any specific toxicityissues. However, as these results have not been replicated by the other COX-2s,



this does not appear to be a class effect. Thus, physicians continue to recommendthe COX-2s based on their preferential GI profile.

Figure 189: Sales growth for leading COX-2 inhibitors ($ m)

0

500

1000

1500

2000

2500

3000

3500

4000

2000 2001 2002 2003E 2004E 2005E

Celebrex Vioxx Bextra Dynastat Arcoxia Prexige


Figure 190: Sales growth for leading COX-2 inhibitors ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Celebrex Pfizer 2614 3114 3050 3150 3280 3425

Vioxx Merck na 2350 2530 2735 2650 2625

Bextra Pfizer 0 0 470 760 1050 1350

Dynastat Pfizer* 0 0 0 90 300 535

Arcoxia Merck 0 0 30 25 75 100

Prexige Novartis 0 0 0 0 181 507*Assumes Pfizer merger with PharmaciaSource: Company data, Deutsche Bank estimates

Severe pain (eg, post-operative, cancer pain). In circumstances where NSAIDsare insufficient to alleviate pain, clinicians may turn to opioid drugs. “Opioid” is ageneric term for agents that stimulate so-called opioid receptors in the brain,triggering an analgesic effect. Opioids include both natural compounds, such asmorphine and codeine, and synthetic derivatives such as meperidine, fentanyl andmethadone. The pharmacological potency of each drug is related to its affinity foropiate receptors. However, morphine continues to serve as the standard fortreatment and the benchmark against which other drugs are compared.

By acting directly on the CNS as well as peripherally via inhibition of 5-HT andsubstance P release, morphine is effective in most kinds of acute and chronic pain,with the exception of neuropathic pain. However, it is associated with significantside effects, including respiratory depression and severe constipation. (Theseeffects may be alleviated by the administration of opioid antagonists, such asnaloxone and naltrexone, which competitively bind to the same receptors asmorphine.) Additional key concerns associated with opioids are their tolerance anddependence effects. Tolerance requires increased doses of the drug over time toproduce an equivalent pharmacological effect. Dependence, on the other hand,induces physical withdrawal symptoms and/or psychological cravings for the drugafter its use is discontinued. Due to these complications, morphine and its peers arenot recommended for long-term use, except in severe cases, such as the treatmentof cancer pain.



Despite the enormous market for opioid drugs and the need for potent therapieswithout the tolerance and dependence characteristics of morphine, there iscurrently little of note in the pipeline. The only late-stage product relevant to thiscategory is GlaxoSmithKline’s alvimopan (licensed from Adolor Corp.), which is aPhase III opioid antagonist designed to treat post-operative ileus (loss of bowelcontrol after surgery).

Neuropathic pain. Approximately three-quarters of a million people currently sufferfrom neuropathic pain, caused by injury to the peripheral or central nervous system.This includes a number of disorders, such as phantom limb pain, diabetic peripheralneuropathy, fibromyalgia and postherpetic neuralgia. Although apparently related tospontaneous activity of damaged sensory nerves, the exact mechanisms behindneuropathic pain are poorly understood.

Until recently, treatment generally relied on off-label use of anticonvulsants andantidepressants, including Pfizer’s Neurontin (gabapentin). Neurontin, which mayhave earned as much as 50% of its past sales from off-label use in painmanagement, recently gained official FDA approval for postherpetic neuralgia and isawaiting approval for complications of herpes zoster (shingles). Pfizer also expectsto file in mid-2003 an NDA for Neurontin’s successor, pregabalin, in neuropathic painand epilepsy. (Interestingly, Johnson & Johnson’s epilepsy drug, Topomax, hadpreviously been in late-stage trails for diabetic neuropathy, but failed to demonstratestatistical significance.)

Figure 191: Key development candidates for neuropathic painName Company Status

Pregabalin Pfizer Filing expected 2003

Lamictal GlaxoSmithKline Phase III

Prialt Elan Phase III

Harkoseride Schwarz Pharma Phase II

LY333531 Lilly Phase IISource: Company data

Clinical end-pointsClinical trial design varies according to the class of drugs. The COX-2s mustdemonstrate pain relief equivalent to or better than that provided by standardNSAIDs such as naproxen or ibuprofen. More importantly, they are judged on theirability to provide an enhanced safety profile with respect to gastrointestinalperforations, ulcers and bleeds. The opioid-type and neuropathic drugs are evaluatedfor pain relief, primarily in comparison to morphine and placebo, respectively.



NOTES



Rheumatoid Arthritisn Rheumatoid arthritis affects an estimated 1-2% of the population

n Worldwide market for disease-modifying drugs worth over $2bn

n Key products include the TNF-α inhibitors, Enbrel and Remicade

Rheumatology refers to arthritis and over 100 other diseases of the joints, musclesand bones. Most significant of these is rheumatoid arthritis (RA), a chronicsyndrome characterised by non-specific, usually symmetric inflammation ofperipheral joints, resulting in progressive destruction of joint tissues. Approximately1-2% of the population is affected by RA and one in three patients is likely tobecome severely disabled within 20 years. Onset of RA most often occurs betweenthe ages of 25 and 50 and appears three times more often in women than in men.

PhysiologyIn healthy people, joints exist in places such as the hip, knee and finger, helping toprotect the bones and facilitate mobility. Joints comprise several essential tissues:the joint capsule, which surrounds and supports the joint; the synovium, which linesthe joint capsule and produces synovial fluid; synovial fluid, which lubricates andnourishes the joint cavity; and cartilage, which covers and cushions the ends of thebones.

RA is a so-called autoimmune disease, a condition in which the body inappropriatelydirects a hostile immune response on its own tissues. In patients with RA, the body,for unknown reasons, attacks its own cells in the joint cavity. White blood cells,called leukocytes, are recruited to the synovium and cause inflammation. The typicalsymptoms of arthritis, including warmth, redness, swelling and pain, are a result ofthis inflammatory reaction. The inflammatory process also causes synovial cells togrow and divide abnormally, making the normally thin synovium unusually thick andpuffy.

Eventually, as the abnormal synovial cells proliferate, they begin to destroy theprotective cartilage and invade the bone itself. At the same time, the surroundingmuscles and ligaments that support the joint system also become weak. In as littleas one or two years after the onset of RA, bones begin to suffer permanentdamage, thus warranting early diagnosis and treatment of the disease.

Pharmacological treatmentThe initial focus of RA therapy is to treat the symptoms of the disease and maintainthe patient’s quality of life. In addition, the long-term goal of treatment is to haltdisease progression and permanent deterioration of the joint tissues. While in early-stage patients physicians have traditionally focused on pain and inflammation relief,the treatment paradigm has begun to shift, with new emphasis being placed on theintroduction of aggressive disease-modifying drugs from disease onset. The keygroups of RA drugs are described below.



Figure 192: RA-induced inflammation of the joint

Joint Capsule

SynovialFluid

Cartilage

Bone

Synovium

Normal Joint

InflamedSynovium

CartilageLoss

SwollenJoint Capsule

BoneLoss

Joint Affected byRheumatoid Arthritis

Source: National Institute of Arthritis and Musculoskeletal and Skin Diseases

n NSAIDs: NSAIDs are generally used as a first-line therapy for patients with mildRA. Relatively safe and inexpensive, they offer both analgesic and anti-inflammatory properties that help to reduce the swelling and pain caused by RA.There are also the COX-2 inhibitors, which provide strong anti-inflammatoryeffects, but without the gastrointestinal irritation associated with many otherNSAIDs (see section on pain).

n Steroids: Corticosteroids, which can be administered orally or via injectiondirectly into the affected joint, offer the most potent short-term anti-inflammatory activity, but also produce significant side effects, includinghypertension, osteoporosis and increased susceptibility to infection. Inparticular, the clinical benefit of corticosteroids appears to diminish over time,which becomes problematic given the long-term nature of RA.

n DMARDS: Disease-modifying anti-rheumatic drugs (DMARDs) represent thesecond major category of RA drugs. Unlike the previously described drugs,which principally focus on short-term reduction of pain and inflammation,DMARDs attempt to halt the long-term progressive bone and joint damage.Methotrexate is the most commonly prescribed DMARD. It is animmunosuppressant, providing a more rapid onset of action and a slightly betterside-effect profile than the other traditional DMARDs. In the event thatmethotrexate is not tolerated or is ineffective as a monotherapy, patients mayalso turn to other DMARDs, such as sulfasalazine, chloroquine andpenicillamine.

n Gold compounds: Gold-containing compounds, such as auranofin (oral),aurothioglucose (injected) and aurothiomalate (injected), comprise a sub-category of DMARDs. Although not fully understood, these drugs appear tominimise the autoimmune response by interfering with lymphocyteproliferation. Additionally, auranofin appears to inhibit the induction ofinflammatory cytokines, interleukin 1 (IL-1) and tumour necrosis factor α (TNF-α), both of which play an important role in normal inflammatory and immuneresponses. Once a primary second-line agent, the gold compounds havebecome less popular over time due to their modest efficacy, high side-effectprofile and the availability of better alternatives.

n Cytokine-targeted therapies: The cytokine-targeted drugs represent the mostrecent innovations in RA therapy. In fact, when Aventis launched Arava(leflunomide) in 1998, it was the first drug specifically approved for RA in over adecade.



Arava is a synthetic orally active drug that primarily exertsimmunosuppressive activity via the interruption of pyrmidine synthesis, akey step required for T-cell proliferation. Similar in mechanism and sideeffects to methotrexate, it is used as second-line agent in patients that havefailed methotrexate therapy.

Enbrel was the first TNF-α inhibitor to reach the market. TNF-α is a cytokineimplicated in RA-induced inflammation, with elevated levels found in thesynovial fluid of RA patients, and is thus a key target for therapy. Enbrel is a“fusion” protein, combining a synthetic version of human TNF-α receptorwith a stabilising immunoglobulin fragment. It may be used as amonotherapy or with methotrexate.

Remicade is a part-human, part-mouse, “chimeric” monoclonal antibodythat also targets TNF-α. In contrast to Enbrel, Remicade must beadministered in combination with methotrexate.

Kineret, launched in 2001, is a recombinant form of the naturally occurringIL-1 receptor antagonist (IL-1Ra). IL-1, like TNF-α, is implicated in theinflammatory process. It also appears to facilitate cartilage degradation. Bybinding to and inactivating IL-1, Kineret helps to reduce both inflammationand disease progression. Still new and not quite as clinically effective as theTNF-α inhibitors, Kineret is generally used as a second line agent afterEnbrel and Remicade.

The launch of Enbrel and Remicade has been a welcome advance in the treatmentof RA. Although providing moderate benefit, methotrexate is disliked by patients,due to its significant and often intolerable side effects. These include nausea,vomiting, liver toxicity, chest pain, fatigue and many more. In comparison, Enbrel,which must be injected subcutaneously twice per week, only elicits injection siteirritation. Remicade provides similar efficacy, with only a slightly inferior side-effectprofile, but must be used in combination with methotrexate. Importantly, however,Remicade is eligible for Medicare reimbursement, whereas Enbrel is not.

Figure 193: Leading drugs for rheumatoid arthritisBrand Generic Company Launch 2002 sales

Enbrel etanercept Amgen/Wyeth 1998 $0.8 bn

Arava leflunomide Aventis 1998 $0.3 bn

Remicade infliximab Johnson & Johnson 1999 $1.3 bn

Kineret anakinra Amgen 2001 $0.1 bnSource: Company data

Clinical end-pointsClinical efficacy is generally evaluated using the American College of Rheumatology(ACR) response criteria, which measure improvements of 20% (ACR20), 50%(ACR50) and 70% (ACR70) from baseline. ACR20, for example, requires a 20%decrease in the number of tender and swollen joints, as well as improvements inthree of the following five parameters: 1) patient’s global assessment, 2) physician’sglobal assessment, 3) patient’s assessment of pain, 4) degree of disability and 5)level of acute-phase reactant.

Additional key considerations in clinical trial design include whether the drug isadministered as a monotherapy or in combination with methotrexate, as this willdefine the label it later receives. In addition, trials for the newer drugs typically



include safety end-points, so as to enable claims of superior side-effect profilescompared to methotrexate.

Figure 194: Comparison of TNF-α inhibitors in rheumatoid arthritisEnbrela Remicadea Humiraa CDP870b

(25 mg, 6 mos) (3 mg/kg + MTX, 30 wks) (40 mg + MTX, 52 wks) (400 mg, 12 wks)

ACR20 (control) 65% (58%) 50% (20%) 58.9% (24.0%) 60% (15%)

ACR50 (control) 40% (32%) 27% (5%) 41.5% (9.5%) 40% (0%)

ACR70 (control) 21% (14%) 8% (0%) 23.2% (4.5%) 29% (0%)

Sharpe scorec (control) 0.57 (1.06) 0.5 (4.0) 0.1 (2.7) n/a

Dosing twice/week initial dose at weeks 2 & 6,then once/8 weeks

once/2 weeks once/4 weeks

Administration subcutaneous intravenous subcutaneous subcutaneous

With MTX? no yes yes no

Side Effects injection site reaction infusion reaction, upperrespiratory infection, rash,sinusitis, headache, cough

injection site reaction, rash, backpain, upper respiratory infection,sinusitis

injection site reaction, upperrespiratory infection

Black Box Warning risk of serious infections andsepsis (May 99)

risk of infection includingtuberculosis and invasivefungal infections (Oct 01)

n/a n/a

Notes: a Control = Methotrexate (MTX) , b Control = Placebo (Phase II data), c Sharpe score measures change in structural joint damage assessed by x-ray, smaller number indicates less damageSource: Company data

Pipeline productsThe most advanced pipeline products are new additions to the TNF-α inhibitorfamily. In December 2002, Abbot received FDA approval of HUMIRA (formerlyD2E7), a molecule nearly identical to Remicade, but formulated as a fully human(versus chimeric) antibody. Potentially more interesting is CDP870, Celltech’spegylated TNF-α antibody fragment. Not only does this molecule have a long half-life, thereby requiring dosing only once every four weeks, but it is also produced inEscherichia coli, which reduces the manufacturing cost to approximately 5-10% ofthat of the other TNF-α drugs.

Figure 195: Key pipeline productsBrand Mechanism Company Status

HUMIRA TNF-α inhibitor Abbott Approved

CDP870 TNF-α inhibitor Pfizer*/Celltech Phase III

pralnacasan ICE-inhibitor Aventis Phase II

Mabthera/Rituxan B-cell modulator Roche Phase II

MRA IL6 inhibitor Roche/Chugai Phase II

CTLA4 Ig Immunosuppressant Bristol-Myers Squibb Phase II

Tenovil Anti-inflammatory Schering-Plough Phase II

efalizumab Anti-CD11a Roche/Genentech/XOMA Phase II*Assumes Pfizer merger with PharmaciaSource: Company data



Figure 196: Sales growth for key RA drugs ($ m)

0

500

1000

1500

2000

2500

3000

3500

2000 2001 2002 2003E 2004E 2005E

Enbrel Remicade Arava Kineret Humira


Figure 197: Sales growth for key RA drugs ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Enbrel Amgen/Wyeth 652 761 802 1590 2250 2900

Remicade J&J 369 721 1297 1561 1966 2173

Arava Aventis 177 231 256 237 119 59

Kineret Amgen 0 12 62 125 200 235

Humira Abbott 0 0 0 200 475 698Source: Company data, Deutsche Bank estimates



NOTES



Transplantation andImmunosuppressionn World market worth approximately $2.6bn in 2002

n Growth primarily constrained by availability of organs for transplant

n Key players are Novartis and Roche

More than 20,000 solid organ transplants and 40,000 bone marrow transplants areperformed annually worldwide. Tens of thousands more patients remain ontransplant waiting lists. With viable donor organs far outnumbered by patients inneed, the success of each transplant procedure is critical. Primarily, this requireseffective immunosuppressive drugs to minimise the risk of rejection.

The likelihood of rejection is automatically reduced when patients receive grafts ofan identical genetic nature via an autograft (use of the patient’s own tissue) or anisograft (a transfer between identical twins). However, most transplants utiliseallogenic (genetically dissimilar) tissues. Because the body is conditioned to attackcells that it recognises as foreign, its innate response is to reject the unfamiliartissue. To address this issue, transplant patients are treated with strong doses ofimmunosuppressive drugs.

PhysiologyThe transplant rejection process is a result of the body’s natural protective immuneresponse. Usually, when a pathogen such as a bacterium or virus enters the body, itexhibits on its cell surface antigens that the immune system recognises as foreign.Upon recognition, these antigens are taken up by certain cells, called antigen-presenting cells (APCs), which process the antigen and display it on their cellsurface to uncommitted T-helper cells (Thp). When the naïve T-helper cells see theantigen, they replicate and become activated T-cells (T0). T0 cells subsequentlyproliferate into Th1 or Th2 cells, depending on the particular cytokines present. Inthe Th1 or “cell-mediated” pathway, T0 cells give rise to an army of cytotoxic CD8T-cells capable of finding and killing infected cells. The Th2 pathway, often called the“humoral” response, gives rise to antibody-producing B-cells. Certain B-cells alsobecome memory cells, which as the name suggests, remember the foreign antigen,thus enabling an immediate and potent response upon its reappearance.

Both of these pathways may lead to the rejection of transplanted allografts. Whentissue from a genetically different donor is transplanted, antigens expressed on thecells of the donor’s tissue trigger an immune reaction. Acute rejection is principallyassociated with the cell-mediated response. Late graft deterioration is thought to becaused by gradual antibody-mediated damage. In addition, some patients mayexperience hyperacute rejection. This reaction occurs when a patient has beenpreviously exposed (for example, via pregnancy, blood transfusion or transplant) tocells expressing antigens identical to those on the graft. Because memory cellsrecall the foreign antigens, they immediately launch an attack on the new tissue.



Figure 198: Mechanism of graft rejection

Th1

CD8T

Thp

B P

MB

Antigen presenting cell

Antigen Antibodies

CytotoxicT-cells

Memory B-cells

Plasma cells

B

Macrophageactivatingcytokines

Graft Destruction

RapamuneSimulect, Zenapax

(inhibit binding of IL-2)

IL-2

IL-2IL-12

IL-4

Th0

Th0

Imuran, Cellcept(inhibit DNA synthesis/

cell proliferation)

Sandimmune, Prograf(inhibit synthesis ofIL-2, IFN- γ , IL-4)

Th2

Th1

IFN-γ

Source: Deutsche Bank, Rang, Dale & Ritter

Pharmacological treatmentTo reduce the likelihood of rejection, donor tissues are tested prior to transplant todetermine which antigens they express. By comparing their genetic makeup, donorand recipient may be matched so as to minimise antigenic differences. Because ofresidual responses not resolved via antigen-typing, a course of immunosuppressivedrugs is also essential to the transplantation process. Given in high doses at thetime of transplant, these drugs generally suppress all immune responses, makinginfection the leading cause of death in transplant recipients. In addition, althoughdrug doses may be lowered over time, immunosuppressive therapy can rarely everbe stopped completely.

Historically, immunosuppression has largely relied on a triple drug cocktailcomprising Sandimmun/Neoral, Imuran and a corticosteroid. Although newer agentshave emerged that may be used as substitutes for Sandimmun and Imuran, relianceon a three-pronged approach persists. This triple cocktail is also the same acrossdifferent types of transplant procedures, with the exception of bone-marrowtransplants, where methotrexate is used in place of Imuran. Although all drugs aimto suppress the immune system in some capacity, they each act by differentpathways as described below:

n DNA synthesis inhibitors. Imuran (azathioprine) and Cellcept (mycophenolate)both suppress the immune response by interfering with the synthesis of DNA, acritical step required for cell division and proliferation. Imuran was first used intransplantation in the 1960s. Unfortunately, Imuran acts as an antimetabolite,thus indiscriminately depleting bone marrow as well. Cellcept was introduced in1995 as a more selective alternative to Imuran. While utilising the sameunderlying mechanism, Cellcept blocks a particular enzyme called IMPDH that isonly required for DNA synthesis in lymphocytes (T-cells and B-cells). Other cellsthat can employ an alternative “salvage” pathway are spared.



Figure 199: Standard post-transplant drug regimensSolid organ transplant Bone marrow transplant

Sandimmun or Prograf

+

Imuran or Cellcept

+

prednisone or methylprednisolone

Sandimmun or Prograf

+

methylprednisolone

+

methotrexateSource: Deutsche Bank

n Calcineurin inhibitors. These drugs inhibit immune cell replication byinterrupting the synthesis of certain cytokines responsible for stimulating cellproliferation. Sandimmun and Neoral (cyclosporin) bind to and inactivatecalcineurin, an intracellular intermediary required in the cytokine synthesisprocess. However, because production is downregulated, but not entirelyeliminated, affected cells preserve some ability to react against infectiousagents. Prograf (tacrolimus) acts by a similar mechanism, but has demonstratedsomewhat more favourable efficacy.

n Corticosteroids. Corticosteroids play a role in the treatment of many diseases,but it is their immunosuppressive capability that makes them useful intransplantation. These drugs – typically prednisone or methylprednisolone –significantly reduce overall lymphocyte and monocyte counts by directing themout of the circulating blood into other non-circulating compartments.

n Cytokine inhibitors. Rather than affecting the initial synthesis of cytokines, tworecently introduced monoclonal antibodies, Simulect (basiliximab) and Zenapax(daclizumab), block their cellular function. By interfering with the binding of thecytokine IL-2, they intercept the message telling activated T-cells to proliferate.A third drug in this category, Rapamune (sirolimus) also interferes with cytokinestimulation, albeit through a different mechanism. Being fairly new, all of thesedrugs are primarily used as additive agents and none are FDA approved forprocedures other than kidney transplants.

n Anti-lymphocyte agents. Orthoclone (OKT3) is a monoclonal antibody thatreacts with the CD3 receptor complex on T-cells, rendering the cells immuno-incompetent. Because of its toxic effects and the risk of oversuppression,Orthoclone is generally not used at the time of transplant, but rather in theevent of acute rejection. Also in this category are the polyclonal antibodies,Thymoglobulin and Atgam (antithymocyte globulin), which are most often usedas adjuncts, enabling the administration of other immunosuppressive drugs atlower, less toxic doses.

Figure 200: Leading immunosuppressive drugsBrand Generic Manufacturer 2002 sales

Imuran azathioprine GlaxoSmithKline na

Cellcept mycophenolate Roche $0.8bn

Sandimmun/Neoral cyclosporin Novartis $1.0bn

Prograf tacrolimus Fujisawa $0.7bn

Simulect basiliximab Novartis $0.1bn

Zenapax daclizumab Roche $0.1bn

Rapamune sirolimus Wyeth $0.1bn

Thymoglobulin rabbit ATG SangStat $0.1bn

Atgam equine ATG Pfizer* na

Orthoclone OKT3 J&J/Ortho Biotech na*Assumes Pfizer merger with PharmaciaSource: Company data



Clinical end-pointsKey clinical end-points in transplantation trials are patient survival, graft survival andincidence of acute rejections. These measures are generally followed for a period ofsix to twelve months. Because of the severe penalty for ineffective drugs (ie, graftrejection), preclinical and early clinical safety and efficacy data for novelimmunosuppressants are subject to heightened scrutiny. Once in later stage trials,the drugs are used as incremental agents, given in addition to a traditional cocktailcomprising Imuran, Sandimmun and/or corticosteroids.

Pipeline productsMost of the drugs currently in development attempt to offer more selectivemethods of immunosuppression. The most developed of these candidates areNovartis’ Certican (everolimus) and myfortic (mycophenolate). Neither, however,offers a significantly new mechanism of treatment. Certican inhibits cytokine actionby acting on the same intracellular receptor as Rapamune, and Myforticencapsulates the same active ingredient as Cellcept in a more gastrointestinal-friendly enteric coating. More interesting is Novartis’ Phase II compound, FTY720,which employs a unique lymphocyte-homing mechanism to direct cells away fromthe graft, while preserving their ability to respond to other immune challenges.

Figure 201: Key pipeline productsName Company Status

Certican (everolimus) Novartis Registration

myfortic (mycophenolate) Novartis Registration

ABX-CBL Abgenix/SangStat Phase II/III

FTY720 Novartis Phase II

R1524 Roche Phase II

LEA 29y Bristol-Myers Squibb Phase IISource: Company data

One of the challenges that faces all of these new products is physicians’ reluctanceto switch patients from one immunosuppressive protocol to another. In fact, thisreluctance extends to switches from branded products to generic equivalents and isresponsible for the ongoing sales of drugs such as Sandimmun that lost their patentprotection years ago. Thus, the hurdle for new drugs to gain acceptance is higher onaverage for transplantation than for other therapeutic areas.

Also limiting the growth of this sector is the shortage of organs available fortransplant. This is a growing area of focus for both medical researchers and drugcompanies. In particular, living donor transplants are becoming increasingly commonfor recipients requiring a kidney, and even in some cases, for those requiring a liveror lung transplant. Pharmaceutical companies are also exploring the viability ofxenotransplantation, or the transplantation of non-human (usually “porcine” or pig)tissues. While clinical use of xenografts is still a long way off, a significant stridewas made recently with PPL Therapeutics’ successful breeding of pigs that lack theenzyme responsible for adding a certain sugar molecule to the surface of pig cells.Because the pig sugar molecule normally causes hyperacute rejection of thetransplanted organ within minutes, the ability to delete the gene responsible forproducing the enzyme represents a critical step toward the creation of porcinetissues that can be transplanted in humans.



Figure 202: Sales growth of key immunosuppressants ($ m)

0

200

400

600

800

1000

1200

1400

2000 2001 2002 2003E 2004E 2005E

Cellcept Sandimmun/Neoral Prograf

Rapamune Certican myfortic


Figure 203: Sales growth of key immunosuppressants ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Cellcept Roche 468 626 754 800 877 948

Sandimmun/Neoral Novartis 1215 1084 1037 991 942 895

Prograf Fujisawa 469 596 687 834 984 1115

Rapamune Wyeth 26 70 130 200 260 335

Certican Novartis 0 0 0 4 33 87

myfortic Novartis 0 0 0 14 87 145Source: Company data, Deutsche Bank estimates



NOTES



Multiple Sclerosisn Worldwide market worth roughly $2.8bn in 2002

n Growth estimated at 16% per annum

n Market dominated by interferon drugs, Avonex (Biogen), Rebif (Serono) andBetaseron (Schering)

Multiple sclerosis (MS) is an inflammatory disease of the central nervous system(CNS) that affects approximately 300,000 people in the US and 350,000 in Europe. Itis most often diagnosed in adults between the ages of 25 and 40 and affects twiceas many women as men. While the exact cause of MS remains a mystery,epidemiology studies imply both a genetic and an environmental component to thedisease.

The progressive symptoms of MS typically include blurred vision, muscle weaknessand lack of coordination. Some patients also experience cognitive impairment suchas difficulty with concentration, memory or judgement. Based on the frequency andresolution of these symptoms, MS patients are classified into four primarycategories listed below.

Figure 204: Multiple sclerosis patient classificationType Incidence Characteristics

Relapsing-remitting (RRMS) 40% Abrupt onset of a few attacks, followed by partial or total remission

Secondary progressive (SPMS) 40% Few attacks per year, with progressive deterioration in condition and physical ability

Primary progressive (PPMS) 10% Rapid deterioration from onset, with only brief periods of improvement or stabilization

Benign 10% Abrupt onset of a few attacks, followed by stabilization and no permanent disabilitySource: Deutsche Bank Securities Inc. estimates and company information

PhysiologyMS is caused when immune system cells attack the myelin sheath that surroundsnerve fibres in the brain and spinal cord. In addition to its protective role, myelinnormally facilitates the smooth, high-speed transmission of chemical messagesbetween the brain, the spinal cord and the rest of the body. Damage to the myelinsheath and the underlying neuron, coupled with an inflammatory response, leads toformation of lesions or “plaques” and impairment of the nerves’ ability to conductmessages. In the case of minor damage, the myelin may be able to repair itself andrestore normal functionality. However, as the disease progresses, the damage oftenbecomes irreparable.

On a cellular level, MS damage results from several malfunctions in the immunesystem as shown in the diagram overleaf. First, certain immune system cells,known as T-cells, become activated and primed to attack the body’s own myelintissues. Second, the blood-brain barrier, which usually prevents large moleculesfrom passing from the bloodstream into the CNS, becomes permeable to theactivated T-cells. This occurs due to overexpression of so-called “adhesionmolecules” that line the blood vessels and can shepherd molecules across theblood-brain barrier. Once inside the CNS, the activated T-cells recruit macrophagesand initiate an inflammatory response. It is these macrophages that are primarilyresponsible for the myelin destruction and nerve damage.



Figure 205: Mechanism of nerve damage in multiple sclerosis

macrophage

SEVEREDNERVE

NERVE FIBREDAMAGE

myelin

postsynapticneuron

nervefibre

blood brainbarrier

adhesionmolecules

activatedT-cell

INFLAMMATION


Pharmacological treatmentAs no known cure for MS exists, treatment focuses on drugs designed to reducethe severity and frequency of attacks. Acute exacerbations are usually treated withshort-term, powerful steroids or muscle relaxants, whereas prevention of relapsesand progressive nerve damage relies on the interferons. The exact mechanism bywhich the interferons slow disease progression is unknown, but there is evidencesuggesting they may downregulate certain inflammatory cytokines, inhibit T-cellproliferation and/or reduce blood-brain barrier permeability and T-cell migration intothe CNS. There are currently three interferons on the market: Betaseron (interferonβ-1b), Avonex (interferon β-1a) and Rebif (interferon β-1a). Avonex and Rebif aregenerally used as primary therapies, while Betaseron is reserved as a second-lineagent. A fourth drug, Copaxone (glatiramir), whose mechanism is also poorlyunderstood, is generally used upon failure with the interferons.

Figure 206: Comparison of leading multiple sclerosis drugsAvonex Rebif Betaseron Copaxone

Generic interferon β-1a interferon β-1a interferon β-1b glatiramir

Company Biogen Serono Schering Teva

Launch (USA/Europe) 1996/1997 2002/1998 1993/1996 1997/1997

Approved indications RRMS RRMS RRMS, PPMS (Europe only) RRMS

Route of delivery intramuscular subcutaneous subcutaneous subcutaneous

Dosage 30 µg 22 or 44 µg 250 µg 20 mg

Frequency of administration once/week every other day every other day dailySource: Company data

The relative efficacy of the interferons – particularly Avonex and Rebif, whichcontain the same active ingredient – has been debated, prompting recent head-to-head studies. In 2002, Serono announced results of its 48-week EVIDENCE study



comparing Rebif (44 µg dose, thrice weekly) and Avonex (30 µg dose, once weekly)in patients with RRMS. The findings of this study (see below) formed the basis ofSerono’s successful motion to overturn Avonex’ orphan drug status in the US(originally due to expire in 2003) and allow for the early launch of Rebif.

Despite the EVIDENCE data, it remains to be seen how well Rebif will competewith Avonex in the all-important US market. Physicians are likely to continue torecommend Avonex due to its more convenient dosing schedule and better side-effect profile, not to mention its established reputation in the US.

Figure 207: EVIDENCE study resultsRebif Avonex

44 µg, 3x/week 30µg, 1x/week

Number of patients 339 338

Proportion relapse-free at 48 weeks 62% 52%

Mean number of MRI T2 active lesions at 48 weeks 0.9 1.4

Proportion with no T2 active lesions 63% 45%

Side effects

– Injection site reaction 83% 28%

– Liver function disorder 18% 9%

– Change in white blood cell counts 11% 5%Source: Serono

Clinical end-pointsThe severity of MS-induced disability is most often evaluated via the expandeddisability status scale (EDSS), a ten-point scale divided into half-point increments.Unfortunately, this scale (as well as many others that have tried to improve upon it)comes in for much criticism, due to its high subjectivity, non-linearity and low test-retest reliability. Given these deficiencies, most investigators employ as primaryend-points more objective measures, including relapse rates and the number of MSlesions visible via magnetic resonance imaging (MRI) scans.

It is also worth noting that with substantial evidence supporting the long-termefficacy of the interferon drugs, clinical evaluation may begin to rely on head-to-headstudies rather than traditional placebo-controlled trials. If this emerges as thestandard going forward, it may represent a greater challenge for new drugs seekingapproval.

Pipeline productsMS has traditionally been a very risky area for product development, with a numberof drug candidates having failed in late-stage trials. For example, once-promisingcompounds such as Linomide, LeukArrest, paclitaxel and others all failed in Phase IIor III due to lack of efficacy and/or due to significant side effects.

Nonetheless, the current pipeline offers a few MS hopefuls. Most interesting ofthese is perhaps Elan/Biogen’s Antegren, a monoclonal antibody that binds to α4β1integrin. Alpha-4-beta-1 integrin is a receptor present on T-cells that facilitatesmigration across the blood-brain barrier. By blocking the receptor, Antegren isdesigned to prevent T-cells from entering the CNS and destroying the myelintissues.



Also worth noting are recent studies assessing the ability of the interferons to delaydisease onset. In particular, a two-year clinical trial in people who have experienceda single, isolated MS attack demonstrated that Avonex produced a 44% reduction inthe likelihood of those patients suffering a second attack. Similar results wereachieved in a separate study using Rebif.

Figure 208: Key pipeline productsProduct Mechanism Company Status

Antegren cell adhesion inhibitor Biogen/Elan Phase III

THC-CBD IL-6 enhancer GW Pharmaceuticals Phase III

Cladribine (oral) immunosuppressant IVAX/Serono Phase II

Fampridine-SR nerve conduction enhancer Acorda Therapeutics Phase II

NBI 5788 altered peptide ligands Neurocrine Biosciences Phase IISource: Company data

Figure 209: Sales growth of leading multiple sclerosis drugs ($ m)

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Figure 210: Sales growth of leading multiple sclerosis drugs ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Avonex Biogen 761 972 1034 1068 1106 1144

Rebif Serono 254 380 532 807 1031 1325

Betaseron Schering 546 610 738 800 840 840

Copaxone Teva 228 343 499 669 837 970Source: Company data, Deutsche Bank estimates



Human ImmunodeficiencyVirus (HIV)n World market in 2002 worth over $5.5bn

n Approximately 40 million people infected worldwide including 1.5–2 million inthe US and Europe

n Growth of approximately 5% per annum; combination therapy key

n GlaxoSmithKline, Roche and Bristol-Myers Squibb dominate

Acquired immunodeficiency syndrome (AIDS) is caused by HIV (humanimmunodeficiency virus). Affecting over 40 million people worldwide, including anestimated 1.5 – 2 million in the US and Europe, the virus acts by replicating in thewhite cells of the immune system and destroying them in the process. Shorn oftheir resistance to disease, HIV-infected individuals become highly susceptible toopportunistic and other infections and it is these secondary infections that are theusual cause of death. Growth of the market for HIV drugs in recent years has beenstrong, driven by a number of factors. These include the development of new drugs,acceptance that drug treatment has a beneficial effect on prognosis, and theissuance of treatment guidelines promoting the initiation of earlier therapy. Theefficacy of current regimens has also aided drug growth and patients are livinglonger on a high drug regimen. Despite this, it is estimated that of the 1 million or soinfected in the US, only 20–25% currently receive treatment, with over 50% ofpatients as yet unaware of their condition.

PhysiologyViruses are small infective agents (virions) essentially consisting of nucleic acidenclosed in a protein coat called a capsid. They are intracellular parasites with nometabolic machinery of their own. Simplistically, viruses operate by attachingthemselves to host cell receptors, which then mediate cell entrance generallythrough endocytosis. The nucleic acid of the virus (which in HIV is a strand of RNA)then uses the host cell’s replication machinery to synthesise additional quantities ofits own genetic code (nucleic acid), as well as the proteins it needs for assembly ofnew viral capsids. Host cell death follows, leading to the release of multiple virions,which go on to infect other cells.

Figure 211: Progression of HIV to AIDS takes a long time

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With HIV, the virus binds to a particular class of white blood cells called helper T-cells or CD4 cells. These normally play a key role in the immune system. Onceinfected, there is a progressive loss of CD4 cells, this being the definingcharacteristic of HIV infection, and the viral count in the host’s blood (the viral load)increases markedly. As antibodies to the infected CD4 cells are produced by thebody’s still-functioning immune system, the infected CD4 cells are killed and withthem the virions. Consequently, the viral load declines sharply. However, becauseviral replication is error prone, constant mutations occur and, while the humandefence system consistently produces antibodies to the new variants, wave afterwave of mutations are postulated to gradually deplete the body’s ability to respond.Over considerable time, the virus eventually gains the upper hand. The viral loadstarts to rise and when the body’s immune system is no longer able to ward offother opportunistic infections, full-blown AIDS develops. In the absence of drugtherapy, death usually follows within two years, caused by a host of opportunisticdiseases.

Figure 212: HIV infection and sites of drug action

DNA

DNARNA

Proviral DNAReverse transcriptase

Integrase

Transcription

Viral RNA transcript

Viral DNAintegrated intohost DNA

Two RNA copies

Processing

Viral mRNA

Translation

Genomicviral RNA

Viral proteins

Protease

Human cell

HIV virus

Fusioninhibitors


Pharmacological TreatmentAs with antibiotics used against bacteria, the development of drugs to treat HIV hascentred around inhibiting metabolic processes that are specific to the virus. To date,treatments have focused on three main mechanisms of action, leading to theemergence of three classes of drug, the nucleoside reverse transcriptase inhibitors,or nRTIs; the non-nucleoside reverse transcriptase inhibitors, or nNRTIs; and theprotease inhibitors, or PIs. The mechanism of each is briefly described below andalso illustrated by the above diagram. However, it should be stressed that while thediscovery of several new drugs to treat the HIV virus has extended the lives and



prospects for HIV positive patients, up to 40% of patients are on their third or fourthcombination regimen because of therapy failure or resistance.

n NRTIs: This class of drug acts by binding to the active site of the reversetranscriptase enzyme. Reverse transcriptase is responsible for transcribing theviral RNA injected into the CD4 cell to DNA. It does so by copying the viral RNAblock by block or nucleotide by nucleotide. However, when an nRTI is used, itbinds to the enzyme and is inserted into the DNA chain instead of a nucleotide.Its dysfunctional properties prevent further growth of the DNA chain, therebystopping the creation of a new virus. The value of the class in 2002 was around$2.7bn. Side effects of several of the drugs include neuropathy (nerve death),intestinal intolerance, pancreatitis, insomnia and anaemia. Importantly, Epivirshows minimal toxicity, which together with a twice-daily dosing regimen and aunique resistance profile, have made it the drug of choice.

Figure 213: Leading nRTIsBrand name Generic Manufacturer 2002 sales

Retrovir zidovudine GlaxoSmithKline $0.1bn

Epivir (3TC) lamivudine GlaxoSmithKline $0.4bn

Combivir zidovudine/lamivudine GlaxoSmithKline $0.9bn

Zerit stavudine Bristol-Myers Squibb $0.4bn

Ziagen abacavir GlaxoSmithKline $0.3bn

Videx didanosine Bristol-Myers Squibb $0.2bn

Trizivir zidovudine/lamivudine/abacavir GlaxoSmithKline $0.5bnSource: Company data

n NNRTIs: This class of drug actually binds to the reverse transcriptase enzyme,but not at its active site. Rather, it binds at another site and in doing so preventsthe enzyme from functioning. Given a more favourable side-effect profile, therole of nNRTIs in therapy in 2002 was around $0.9bn. Side effects includeheadaches and rashes. Sustiva’s once-a-day dosing has positioned it as the drugof choice. However, the recent launch of Viread, a second once daily agent, mayerode some of the drug’s dominant market share.

Figure 214: Leading nNRTIsBrand name Generic Manufacturer 2002 sales

Sustiva efiravenz DuPont $0.5bn

Viramune nevirapine Boehringer Ingelheim $0.3bn

Viread tenofovir Gilead $0.1bnSource: Company data

n Protease inhibitors: This class of drug acts on a different enzyme to the othertwo classes. The human host cell replicates many new viral proteins after theproviral DNA has been inserted into the human DNA. These proteins are used toassemble new virus before release into the body. In order to assemble thevirus, these protein chains need splicing into smaller units. This is the job of theprotease enzyme, which is inhibited from functioning by this class of drug. Thevalue of the class in 2002 was around $1.8bn. There are many side effects, notleast gastrointestinal disturbances, nausea and lipodystrophy (fatty humpsdevelop on patients’ backs). Crixivan’s potency and resistance profile haveplaced it as the drug of choice.



Figure 215: Leading protease inhibitorsBrand name Generic Manufacturer 2002 sales

Invirase/Fortovase saquinavir Roche $0.1bn

Crixivan indinavir Merck $0.3bn

Viracept nelfinavir Roche/Pfizer $0.5bn

Norvir ritonavir Abbott $0.2bn

Agenerase amprenavir GlaxoSmithKline $0.1bn

Kaletra lopinavir Abbott $0.6bnSource: Company data

Treatment protocolAntiretroviral therapy has changed dramatically in recent years. Data suggesting thattreatment with three drug regimens could – in theory – completely suppress viralreplication have driven the acceptance of combination therapy as the standardmethod of treatment for HIV-infected patients. Initially, treatment guidelinesrecommended the use of two nRTIs with one protease inhibitor. However, concernsover metabolic side effects associated with PIs have seen some switching to theuse of a nNRTI instead. Given the number of drugs taken, compliance with suchhighly active anti-retroviral therapy (HAART) is also a major issue. Consequently, thedrug manufacturers have sought to develop combination tablets, GlaxoSmithKline,in particular, with products such as Combivir and Trizivir.

Because of the degree of mutation of the HIV virus, viral resistance remains a majorissue and problem. Despite the development of several classes of drug, asuccessful outcome from treatment cannot be assured. As such and in an effort tolimit resistance to current drugs, there has been considerable debate as to when itis most appropriate to start treatment. Current US guidelines are as follows:

Figure 216: International HIV treatment protocolClinical category CD4 and HIV count Recommendation

Symptomatic (AIDS evident) Any value Treat

Asymptomatic CD4<350 cells/mm3 or HIV RNA >55,000 copies per ml Treatment should be offered if not initiated

Asymptomatic CD4>350 cells/mm3 and HIV RNA <55,000 copies per ml Treatment recommendation unclearSource: Department of Health and Human Services and Kaiser Family Foundation

Clinical end-pointsGiven that the key measurements for any HIV drug will be its impact on viral loadand with it, recovery in the number of T-helper cells, the two primary clinicalmeasures are the CD4 and HIV counts. In addition, the count should be taken afterseveral different periods of treatment in order to establish whether the impact onHIV is sustained or transitory.

Pipeline productsA number of HIV drugs are in development, including two new classes that offernovel mechanisms to combat the disease. The most developed of these are thefusion inhibitors. Unlike existing HIV drugs, the fusion inhibitors seek to stop the HIVvirus from binding to the CD4 helper cell and so prevent infection. The leadingproduct in this class, Fuzeon, is being developed jointly by Trimeris and Roche, whoexpect a 2003 launch. Another class in development is the integrase inhibitors.Integrase is the enzyme that integrates the proviral DNA into human DNA forreplication. By interfering with its action, viral replication may be prevented.



Figure 217: A selection of encouraging pipeline productsName Company Class Phase

Fuzeon (T-20) Roche/Trimeris Fusion Inhibitor Filed US/EU

Atazanavir Bristol-Myers Squibb PI Filed US/EU

Coviracil Triangle Pharmaceuticals nRTI Filed US

GW433908 (fosamprenavir) GlaxoSmithKline PI Phase III

Tipranavir Boehringer Ingelheim PI Phase II

DPC-083 Bristol-Myers Squibb nNRTI Phase II

R724 (T-1249) Roche/Trimeris Fusion inhibitor Phase II

GW 810781 (S-1360) GlaxoSmithKline/Shionogi Integrase inhibitor Phase IISource: Company data

Figure 218: Sales growth of HIV classes ($ m)

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Figure 219: Sales growth of HIV classes ($ m)2000 2001 2002 2003E 2004E 2005E

nRTIs 2467 2673 2725 2936 2984 2974

nNRTIs 673 768 944 1009 1174 1309

Protease Inhibitors 1748 1717 1798 1870 1933 2165

Fusion Inhibitors 0 0 0 45 114 238Source: Company data, Deutsche Bank estimates



NOTES



Viral Hepatitisn World market in 2002 including vaccines valued at roughly $4bn

n Growth of over 15% per annum anticipated

n Two major markets – hepatitis C (HCV) and hepatitis B (HBV)

n Over 350 million people infected with HBV and 170 million with HCV

n Major players include Schering-Plough, Roche and GlaxoSmithKline

Viral hepatitis is a major cause of disease and death worldwide. At least fivedifferent clinically important variants have been discovered, of which the two mostsignificant, hepatitis C (HCV) and hepatitis B (HBV), account for up to 80% of chronicdisease. The vast majority of carriers are not aware that they are infected.

PhysiologyHepatitis B and C are typically contracted through the blood and thus are mostcommonly associated with intravenous drug use or infected blood products.Although both can be transmitted sexually, it is estimated to be 100 times easier topass on than HIV. As its name suggests, the virus congregates and replicates in livercells (or hepatocytes), using the host cells’ apparatus to replicate. There are severaldifferent forms of the virus, including both acute and chronic, which are clinicallydefined by the duration or severity of the infection. In acute hepatitis, the viralinfection may last up to six months, during which time patients develop only a fewmild symptoms, such as fatigue, malaise, anorexia, and in about 25% of cases,jaundice. Most acute sufferers experience minimal liver cell damage.

For HBV, about 65% of patients recover completely. However, approximately 10%of adults and up to 90% of infants do not clear the virus within six months anddevelop chronic or persistent infection. Without treatment, these patients are likelyto carry the disease for the rest of their lives. While many of these may show nosymptoms for long periods of time, if at all, a significant proportion will go on todevelop liver cirrhosis or cancer of the liver, dying prematurely. At the present time,it is thought that up to 350 million people worldwide have chronic HBV. Althoughthe vast majority are in South East Asia and Africa, where as much as 8-10% of thepopulation is infected, there are estimated to be 1.25 million chronic sufferers in theUnited States and over 3 million in western Europe. In the US, roughly 10% ofchronic liver disease and cirrhosis are secondary effects of chronic HBV infection.

By contrast, in HCV, a far higher percentage of people infected fail to clear the viruswithin six months. Up to 80% develop chronic infection, of whom a significantminority will suffer from liver cirrhosis and liver cancer. The number of patients whodevelop chronic HCV means that it is now the leading cause of liver transplants inthe US. It is estimated that there are now over 170 million carriers worldwide,predominantly in Africa, South East Asia and Latin America, with some 12 millionpeople in the major western economies confronting the disease. Importantly, of the2.7 million infected in the US, only 20% have been diagnosed and only 5% haveelected to receive treatment.



Pharmaceutical treatment of chronic viral HBVNo known drug can consistently eradicate HBV. Current therapeutic options includeantiviral agents and immunomodulatory agents, such as interferon, that affect viralreplication and alter the immune response. A huge potential market does, however,make development of an effective prophylactic commercially desirable.

n Interferons: Traditionally, treatment has been based around the use of thealpha-interferons, which were introduced by Roche and Schering-Plough in theUS market in 1992. These drugs act by stimulating the immune system and in33% of patients, lead to a complete loss of HBV DNA and normalisation ofcertain liver enzymes (serum aminotransferases). A small percentage ofresponders relapse following the cessation of therapy (this is in marked contrastwith HCV, where almost 50% relapse). Interferon is, however, very expensive.Side effects also result in the discontinuance of therapy in up to 10% ofpatients.

n NRTIs: Outside interferon, certain nucleoside reverse transcription inhibitors(NRTIs), which are traditionally used for HIV treatment, have been found to havea therapeutic effect. Most significant among these is GlaxoSmithKline’slamivudine, or Zeffix brand. Three-year clinical data have shown that 65% ofpatients taking this drug experience a loss of viral antigen, although resistance(not yet seen to be clinically relevant) is a feature. The drug is taken orally oncedaily (an advantage over injectable interferon) and costs substantially less. Weestimate that Zeffix will realise sales of approximately $0.3 bn by 2005.

Beyond treatment of the disease, there is also a substantial market for hepatitisvaccines, which in 2002 was worth approximately $1bn. Two vaccines are currentlyavailable, both of which are based on recombinant forms of the HBV surfaceantigen. These are GlaxoSmithKline’s Engerix B and Merck’s Recombivax. Dosageis in the form of three injections over six months and results in protection for over90% of healthy persons.

Pharmaceutical treatment of chronic viral HCVAs with HBV treatment, that of HCV relies heavily on the use of interferons.However, in contrast with HBV, where the product is used to boost the immuneresponse, in HCV, interferon acts to inhibit viral replication. As with HBV, theobjective of treatment is to achieve an undetectable viral load and normal liverenzyme levels six months after the cessation of therapy, that is, attain a sustainedresponse. It is also important to recognise that in HCV, there are six different viralgenotypes. Crucial here is that the two most prevalent genotypes, 1a and 1b, whichaccount for 70% of chronic HCV infections, are also the hardest to treat. This isseen from analysis of response profiles, where patients with genotype 2 or 3achieve a 40% response with interferon alone, against a 10% response rate forgenotype 1.

Until recently, the traditional standard of treatment for HCV was alpha interferon andan adjunct called Rebetrol (ribavirin). In the US, Schering-Plough alone had rights tothis combination, bundling the two products together in a package called Rebetron.In effect, this froze its main competitor, Roche, out of the US market.

However, the virus often responded poorly to this conventional therapy, most likelyas a result of the fast rate at which injectable interferon is broken down by the bodyand, consequently, its low bioavailability. In an attempt to overcome this, bothSchering-Plough and Roche have developed new forms of interferon. Called



pegylated interferon, Schering-Plough’s PEG-Intron and Roche’s Pegasys have amolecule of polyethylene glycol attached to them. This has been shown to reducethe rate at which they degrade in the body. In addition, they can be given once aweek compared to traditional regimens, which require injections three times aweek.

Schering-Plough received approval for PEG-Intron in January 2001, followed byapproval for the drug in combination with ribavirin approximately one year later.Roche received approval for Pegasys in October 2002, followed by approval for itsown ribavirin (called Copegus) to be used in combination with Pegasys two monthsthereafter. Despite modest speculation as to Pegasys’ marginally better tolerabilityand efficacy, however, there is little evidence to date indicating any significantdistinction between the two drugs.

Figure 220: Comparison of Pegasys and PEG-Intron efficacyPegasys PEG-Intron Pegasys + Ribavirin PEG-Intron + Ribavirin

Genotype Make-up Sustainedresponse

Make-up Sustainedresponse



Genotype 1 63 28 70 14 n.a. 46 68 42

Non-1 37 58 30 51 n.a. 76 32 82

Total 100 39 100 25 100 56 100 54Source: European Association for the Liver; American Association for Study of Liver Diseases

Clinical end-pointsThe two key markers for hepatitis B and C are viral load, which is measured byexamining serum levels of HCV/HBV RNA and the level of particular liver enzyme,most significantly, hepatic transaminase ALT. The objective of treatment is that asustained response is attained, that is, that there is no sign of viral RNA in theserum six months after treatment is discontinued, and that liver enzyme levels havereturned to normal. Trial data is typically taken at 24 and 48 weeks. And remember,in HCV, the genotype population is crucial to the response.



NOTES



Influenzan Novel world market worth $139m in 2002

n Overall growth gaining following the introduction of the neuraminidase inhibitors

n 25-40 million cases in the US per annum

n Leading products include Tamiflu (Roche) and Relenza (GlaxoSmithKline)

Influenza or “flu” is an infection of the lungs caused by the highly contagiousinfluenza virus. This virus spreads from person to person by tiny droplets producedby coughing and sneezing. Other symptoms experienced include a combination offever, sore throat and aches. The virus is most active between November andMarch when the human immune system in the Northern Hemisphere is at itsweakest. The effect is exacerbated by large gatherings that take place aroundChristmas, which provide easy routes for the virus to reach new targets and spreadquickly. It is estimated that between 25 million and 40 million people are infected inthe US during the flu season each year.

PhysiologyThe influenza virus is an RNA virus and comprises an RNA core surrounded by a lipidenvelope with two glycoproteins (proteins with sugar molecules attached), calledneuraminidase and hemaglutinin, protruding from it. On inhalation of the virus, itshemaglutinin binds to sialic acid on the surface of the epithelial cells that line therespiratory tract. This binding prompts the cell to internalise the virus. The cell’sprotein synthesising machinery is then used by the virus to produce multiple copiesof its core and the two key glycoproteins. These are packaged into the lipidenvelope made from the membrane of the infected epithelial cell. The hemaglutininon the surface of the new virus again binds to the host cell membrane via a sialicacid bond. Finally, the neuraminidase protein cleaves to the host cell wall and theinfection spreads.

The body’s immune system produces antibodies to the two viral glycoproteinswhen it has been infected and protects the individual from future infections by thesame virus. However, these proteins mutate easily, either as a result of antigenicdrift or antigenic shift. Consequently, they can be slightly different from thosepreviously encountered by the body. This prevents the bodies’ existing antibodiesfrom neutralising them and results in a new infection.

Pharmacological treatmentUntil 1999, there was no effective treatment for all strains of influenza. In severecases, flu can deteriorate to pneumonia, a more life threatening disease and around1% of sufferers are hospitalised. However, most patients recover within one to twoweeks, a time frame that can be significantly reduced by the novel flu drugs,Relenza and Tamiflu, if they are taken within 48 hours of infection.



Figure 221: Treatments on the marketTamiflu Relenza

Generic name Oseltamivir Zanamavir

Producer Roche GlaxoSmithKline

Sales 2002 $116m $23m

Dosing Oral tablet Inhaler device

US approvals Treatment and Prophylaxis Treatment

Symptom benefit 1.3 to 1.4 day symptom reduction 1 to 2.5 day symptom reduction

Side effects Nausea in 5% over placebo As per placebo

Resistance No resistance develops 1% develop resistance

Administration Within 48 hours Within 48 hoursSource: Deutsche Bank Securities Inc. estimates and company information

These compounds are neuraminidase inhibitors. They block the active site of theneuraminidase protein by mimicking the host cells’ sialic acid, thereby preventingattachment to the host cell wall and thereby preventing the viruses from spreadingto surrounding cells and exacerbating the infection. They can also be used as aneffective prophylactic (a protective).

Flu vaccines have also been around for many years and are generally givenapproximately six weeks before flu season in an effort to reduce (although noteliminate) the likelihood of becoming ill. Given the frequent mutations of the fluvirus, these vaccines are reformulated each year to combine different strains ofvirus. Following the recent withdrawal of Wyeth’s FluShield, Aventis (Fluzone) andPowderject (Fluvirin) remain the key players in this field.

Clinical end-pointsThe primary end-point in the treatment group is the reduction in length ofsymptoms, that is, how quickly do patients recover from the disease? As aprophylactic, the objective of treatment is disease prevention relative to placebo.

Pipeline productsThe most interesting product in late-stage development is Wyeth andMedImmune’s FluMist, an intranasally delivered live attenuated influenza vaccine(LAIV). Initially filed with the FDA in 2000, FluMist received two complete responseletters, followed by a positive recommendation by the FDA’s Vaccines and RelatedBiological Products Advisory Committee (VRBPAC) in December 2002. The vaccinecomprises living mutant strains of normal influenza virus that have been altered tobe non-infectious. It aims to elicit a stronger immune response than conventionalvaccines and provide greater protection from infection. It has convenienceadvantages over conventional vaccines in that it can be self-administered with asimple sniff. Runny nose and sore throat have been reported as the major sideeffects.



Central Nervous SystemDisordersWhile recent years have seen scientists make good progress in their understandingof the human brain and central nervous system (CNS), diseases of the CNS and,indeed, the mechanisms of the brain remain poorly understood. Pathways arecomplex and because of the intricacy of messenger pathways and complicatedfeedback mechanisms, few CNS disorders are well defined. Yet, CNS disordersrepresent a major source of disease and physician visits and as a result, a majorsource of pharmaceutical industry revenues. Indeed, in 2002, drugs for CNSdisorders generated revenues totalling an estimated $50bn.

Over the following pages, we review the leading disorders, most significantlydepression and schizophrenia. However, prepare to be frustrated. Cause and effectare poorly understood, receptor sub-types are numerous and as a consequence, thebeginner is almost certain to be somewhat bemused. Consequently and in order toprovide some type of overview, we have started this section with an overview ofthe principle roles played by the leading neurotransmitters found in the centralnervous system.

Leading neurotransmitters of the CNSn L-glutamate is the principal and ubiquitous excitatory transmitter in the CNS. It

is widely and fairly uniformly distributed and its concentration in the CNS ismuch higher than in the periphery. It is derived from glucose and glutamine andis stored in synaptic vesicles (nerve-ending storage dumps). Its release istypically controlled by the concentration of calcium, while its actions are mainlyterminated by carrier mediated re-uptake into the nerve terminals. Glutamateacts upon four different categories of receptor, the most significant of which arethe NMDA and AMPA receptors. It is believed to play an important role inlearning/memory, epilepsy and excitotoxicity or brain ischaemia (stroke), giventhat, somewhat surprisingly, it is highly neuro-toxic.

n GABA (gamma amino butyric acid) is the main inhibitory transmitter in the brain.It is formed from glutamate by the action of glutamic acid decarboxylase andbroken down by GABA-transaminase. As with glutamate, its actions aregenerally terminated following its neuronal reuptake. Virtually all neurons aresensitive to its inhibitory effect. It acts on two types of receptors, GABA A andB. As an inhibitory transmitter, it plays a vital role in dampening CNS activity.Drugs such as benzodiazapine sedatives and barbiturates act by enhancing itsreceptor binding, thereby causing sedation and tranquillity. GABA agonists arealso used as anti-convulsants and anti-epileptics.

n Noradrenaline (norepinephrine) has both inhibitory and excitatory effects. Aswith most CNS transmitters, its exact role is unclear. Among other effects, it isbelieved to increase wakefulness and alertness and it has been suggested thata functional deficiency of noradrenaline leads to depression, while an excessresults in mania. Outside mood, noradrenaline plays a key role in the regulationof blood pressure.

n Dopamine is a neurotransmitter, as well as being a precursor of noradrenaline.Among other functions, it plays an important role in motor function and mood.



Monoamine oxidase (MAO) and COMT (catechol-O-methyl transferase) break itdown. Dopamine acts on two main receptor classes, excitingly entitled D1 andD2 type. Given its importance to motor control, it plays a key role in Parkinson’sdisease, in which patients suffer from a deficiency of dopamine. There is alsoincreasing evidence that excess dopamine has a role in schizophrenia.Dopamine is also associated with vomiting (emesis). Thus, nearly all dopaminereceptor agonists (stimulators) cause vomiting and nausea as a side effect,while dopamine antagonists (depressors) act as anti-emetics.

n Serotonin (5-hydroxytryptamine or 5HT) is produced in neurons from dietarytryptophan. Following its release, it is largely recovered by neuronal uptake,which may be inhibited by specific serotonin reuptake inhibitors (SSRIs), animportant class of antidepressant. As with dopamine, serotonin is degraded byMAO. There are several classes of 5HT receptor located in differentconcentrations and regions of the brain. The three most significant are 5HT1-3.5HT1 are predominantly inhibitory in their effect. Thus, antagonism can be usedto treat depression. By contrast, 5HT3 plays a role in nausea (emesis). Overall,5HT is associated with wakefulness, mood, hallucinations, sleep and behaviour.

n Acetylcholine plays an important role in the CNS. It has a largely excitatory role,acting on two classes of receptors described as muscarinic and nicotinic. Themain functions ascribed to cholinergic pathways are related to arousal andlearning. As such, certain neurodegenerative disorders, such as Parkinson’s andAlzheimer’s, are associated with abnormalities in cholinergic pathways.Muscarinic receptors act to block acetylcholine release and to mediate the mainbehavioural effects associated with acetylcholine (learning and memory). Theirantagonism or blockage has been seen to lead to amnesia. Nicotinic receptorsare seen to potentiate the release of other excitatory transmitters, such asdopamine and glutamate.

Figure 222: Summary of the leading CNS neurotransmitters and their propertiesNeurotransmitter Receptors Functional role Disease involvement Drug types Key enzymes

Glutamate NMDA, AMPA Excitatory Stroke, epilepsy None significant GABA aminotransferase

GABA GABA Types A & B Dampens CNS activity Epilepsy, sedation Benzodiazepines,barbiturates

GAD (creation), GABAtransaminase

Serotonin (5-HT) 5HT 1-4 Hallucinations, mood,alertness

Depression, anxiety SSRIs, TCAs, MAOIs MAO (degrades)

Noradrenaline Beta-adreno receptors Alertness, Depression, anxiety SSRIs, TCAs Created by DOPAdecarboxylase

Dopamine D1 and D2 Motor control, mood Parkinson’s, schizophrenia Dopamine agonists,antagonists,

MAO and COMT degrade

Acetylcholine Muscarinic and nicotinic Learning, memory Alzheimer’s Cholinesterase inhibitors Acetylcholinesterase(degrades)




Schizophrenian World market worth approximately $8bn in 2002

n Growth in excess of 20% per annum

n Around 1% of the population globally affected

n Leading products include Zyprexa (Eli Lilly), Risperdal (Johnson & Johnson) andSeroquel (AstraZeneca)

Schizophrenia is a disorder of the mind that is believed to arise from aneurochemical imbalance in the brain. Derived from the Greek and meaning ‘splitmind’, it is a relatively common condition affecting approximately 1% of thepopulation at some point in their lives. Some 15-30 new cases are diagnosed per100,000 people annually. It develops mainly in young people, affecting men andwomen equally, although the symptoms seem to appear earlier in males (generallybetween the ages of 15-24). Sadly, it often drives the patient to attempt to commitsuicide. The recent development of atypical drugs used in its treatment with fewerside effects has driven strong growth of the market in recent years and is expectedto continue to do so.

Schizophrenia is characterised by an array of symptoms that are divided crudely intopositive and negative. Negative symptoms can co-exist with positive from the start,or may develop later, perhaps as a consequence of treatment.

Figure 223: Schizophrenia – Positive and negative symptomsPositive symptoms Negative symptoms

Hallucinations (voices) Withdrawal from society

Delusions (often paranoid) Flattening of emotions

Thought disturbances (irrational) Apathy

Incoherence Low self-esteemSource: Deutsche Bank

While the cause of schizophrenia remains unclear, it is believed to involve acombination of genetic and environmental factors. As such, it is seen as aneurodevelopmental disorder rather than a neurodegenerative one (for example,Alzheimer’s and Parkinson’s). In first degree relatives, the incidence ofschizophrenia is 10%, strongly supporting a hereditary and thus genetic dispositionto the disease. Some theories suggest that it arises as a consequence of a viralinfection of the foetus while in the uterus.

PhysiologyAs with almost all other CNS disorders, an accurate physiology of schizophrenia isnot known. However, pharmacological evidence suggests that it is associated withdopamine overactivity, as dopamine agonists have been seen to induceschizophrenia and antagonists control it. There are two main families of dopaminereceptors in the brain, classed as D1 and D2, but the dopamine receptors relevant tothe actions of the anti-psychotic drugs mainly belong to the D2 family (namely D2,D3 and D4). Receptor function is, however, also dependent on where in the brainthe receptors are located. Consequently, side effects with drug treatment arecommon. Thus, the “typical” anti-psychotics act by inhibiting the action of dopamineon D2 receptors in the mesolimbic area of the brain, with a favourable impact on the



positive symptoms of schizophrenia (but little on the negative). Their impact on D1and D2 receptors elsewhere has, however, meant that most of the ‘typical’ anti-psychotics developed to date have distinct side effects. These fall into three maincategories:

n Extrapyramidal side effects (EPS). These are the most problematic andunwanted effects of treatment and consist of involuntary movements (musclespasms, twitching, shaking), which often resemble the symptoms ofParkinson’s disease.

n The release of prolactin. Because dopamine plays a role in inhibiting thesecretion of this hormone, dopamine antagonists tend to see a rise in plasmaprolactin concentration levels. The result is breast swelling, pain and lactation inboth men and women.

n Autonomic side effects. Effects on receptors in the periphery can causeblurred vision, increased pressure in the eye and urinary retention, as well asother disorders.

Beyond dopamine, the observation that LSD can induce hallucinations by acting on5HT receptors has led to the development of ‘atypical’ anti-psychotic therapy.Serotonin (or 5HT) is known to have some modulatory effects on dopaminergicpathways and, by inhibiting 5HT, the side effects associated with the earlier or‘typical’ pharmacological treatments have been reduced. Indeed, it has also beensuggested that by blocking 5HT, the negative symptoms associated withschizophrenia are reduced.

Pharmacological treatmentAs pharmacological treatment has developed, it has led to the emergence of twodistinct classes of drugs, the ‘typical’ and ‘atypical’ anti-psychotics. The distinctionbetween the two is not well defined, but rests on the incidence of EPS side effects,efficacy against hard-to-treat patients and efficacy against negative symptoms. Thetypical anti-psychotics represent the earlier drugs discovered and used in therapy.They generally act by inhibiting the action of dopamine in the brain and work wellagainst positive symptoms. However, their effect on the negative symptomsassociated with schizophrenia is often more muted and side effects, particularlyEPS, tend to be significant. Early drugs in this class included the phenothiazines (forexample, chlorpromazine). These were subsequently displaced following the 1958discovery of haloperidol, which showed a much-reduced incidence of extrapyramidalside effects. It is of note that haloperidol remains the comparator of choice whenassessing the benefits of new drugs in development.

Figure 224: Classes of schizophrenia treatmentTypical Atypical

chlorpromazine clozapine (Clozaril)

sulpiride (Dogmatil) risperidone (Risperdal)

haloperidol (Haldol) olanzapine (Zyprexa)

quetiapine (Seroquel)

ziprasidone (Geodon)

apriprazole (Abilify)Source: Deutsche Bank

More recently, the development of the atypical anti-psychotics has helped to drivethe dramatic growth of the overall class and it is these drugs that dominate today’smarkets. While side effects remain a key negative, their incidence has been much



reduced, while containment of both positive and negative features of schizophreniahas been improved.

Figure 225: Selected atypical anti-psychoticsBrand name Generic name Manufacturer 2002 sales

Zyprexa olanzapine Eli Lilly $3.7bn

Risperdal risperidone Johnson & Johnson $2.1bn

Clozaril clozapine Novartis $0.3bn

Seroquel quetiapine AstraZeneca $1.1bn

Geodon ziprasidone Pfizer $0.2bnSource: Company data

n Zyprexa: Launched in 1996, Zyprexa is the leading anti-psychotic by value onthe market. Sales have benefited from the strength of Eli Lilly’s position in CNS,which has been built on the back of its now off-patent anti-depressant, Prozac.Zyprexa is an isomer of clozapine, with activity on dopaminergic, 5HT andmuscarinic receptors. It has good activity against both positive and negativesymptoms of schizophrenia, needs to be taken once a day and has fewer EPSside effects than haloperidol. However, it does cause weight gain in somepatients. Class leadership is helped by a lower incidence of EPS than Risperdaland a better clinical response.

n Risperdal: Despite its 1994 US launch, a higher incidence of EPS (particularly athigher dosages) and the need for dose titration (gradual increases in dosage tofind the appropriate level) have caused Risperdal to lose ground to Zyprexa.Taken once a day, the drug acts on both dopaminergic and 5HT receptors, sotreating both the positive and negative effects of schizophrenia.

n Seroquel: With no discernible advantages over alternative therapies, Seroquelhas made a limited impact on US markets since its launch in 1997. AlthoughEPS effects are low, the drug requires titration and patients require regular eyeexaminations following reports of cataract formation and lens changes.

n Clozaril: The first atypical anti-psychotic, Clozaril, is now off patent. The drug isassociated with certain blood disorders (agranulocytosis) and, as such, patientsneed regular blood checks. However, Clozaril is the only drug approved intreatment-resistant cases.

n Geodon: Launched in 2001 after long delays at the FDA, Geodon is a novelserotonin and dopamine antagonist that, unlike the other atypical anti-psychotics, does not induce weight gain. However, its uptake has been slowdue to concerns about its effect on the heart (QT prolongation) that emergedduring clinical trials and unproven efficacy relative to other class products.

Clinical end-pointsKey to clinical trials is the impact of any new molecule on the positive and negativesymptoms of schizophrenia, together with a favourable side-effect profile. Thesewill be assessed subjectively by clinicians and patients and marked according to thePositive and Negative Syndrome Scale (PANSS) and Brief Psychiatric Rating Scale(BPRS). Control trials measuring the performance of the new entity againsthaloperidol (and, perhaps, olanzapine and risperdal) ought also to be undertaken andshow a favourable outcome.



Pipeline productsThere are several new atypical anti-psychotics in development. Approved inNovember 2002, Bristol-Myers Squibb’s Abilify (apriprazole) is a new dopamine andserotonin agonist, which appears to have a good side-effect profile, includingminimal weight change. In the pipeline are also several drugs that act via a novelpathway, serving as tachykinin antagonists. However, development in this field isnot without its risks, as evidenced by the safety issues that caused Novartis tosuspend development of its Phase III candidate, Zomaril.

Figure 226: Key late-stage schizophrenia drugsProduct Mechanism Company Status

Abilify (apriprazole) D2 and 5HT1A agonist Bristol-Myers Squibb launch

SR142801 NK3 antagonist Sanofi-Synthelabo Phase II

Talnetant NK3 antagonist GlaxoSmithKline Phase II

Epilvanserin Selective 5HT2 antagonist Sanofi-Synthelabo Phase IISource: Company data

Figure 227: Growth of Leading Schizophrenia Drugs ($ m)

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Zyprexa Risperdal Seroquel Geodon Abilify


Figure 228: Growth of Leading Schizophrenia Drugs ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Zyprexa Eli Lilly 2366 3087 3689 4015 4300 4590

Risperdal J&J 1603 1845 2146 2340 2589 2695

Seroquel AstraZeneca 427 685 1145 1603 1956 2230

Geodon Pfizer 0 149 222 325 415 500

Abilify BMS 0 0 0 160 300 430Source: Company data, Deutsche Bank estimates



Parkinson’s Diseasen World market in 2002 worth around $1.5 bn

n Limited effective long-term treatment

n Leading products include Comtan (Novartis) and Madopar (Roche)

Parkinson’s disease is the second-most common adult-onset neuro-degenerativedisease. It affects about 4 million people worldwide, or roughly 1–2% of people overthe age of 65. It is a progressive disorder of movement that occurs mainly in theelderly, the classic signs of which are tremor, rigidity and the suppression ofvoluntary movements. The disease shows no hereditary tendency, but is oftenpreceded by stroke or viral infection and appears to be more prevalent in men thanin women. Memory impairment and cognitive dysfunction are rarely encountered inearly stage Parkinson’s disease, although 30% of sufferers eventually develop someform of dementia. Depression is also a common feature.

PhysiologyThe main feature of Parkinson’s disease is the progressive destruction of dopamine-producing cells in a particular part of the brain associated with motor control, calledthe substantia nigra. Dopamine plays a key role in motor control (movement), bothdirectly and by controlling (depressing) the level of acetylcholine released in otherparts of the brain. Post-mortem studies have revealed that the dopamine content ofthis part of the brain is extremely low, at less than 10% of normal levels. It isestimated that the characteristic Parkinson’s disease symptoms develop once 70%of the dopaminergic neurons in the substantia nigra have been destroyed. Hence,the balance of dopamine and acetylcholine in the brain is distorted, with the resultthat messages to the muscles become garbled. While the exact cause of thisphysiological change is unknown, a consensus is now emerging that the disease iscaused by oxidative stress and metal toxicity.

Pharmacological treatmentGiven that the apparent cause of Parkinson’s disease is a lack of dopamine in thebrain, current pharmacological treatment is aimed at increasing the level ofdopamine, either directly or through slowing its metabolism in the brain.

First-line treatment relies heavily on L-dopa, a dopamine precursor that can crossthe blood-brain barrier. Because conversion of L-dopa outside the brain normallysees about 95% of it metabolised before it arrives in the brain, L-dopa is nearlyalways combined with a decarboxylase inhibitor. However, because thisdecarboxylase inhibitor cannot pass into the brain, L-dopa is rapidly broken downonce in the CNS. Unfortunately, while L-dopa can be seen to provide immediatebenefit to patients at the early stage of the disease, as time progresses, itseffectiveness declines. The drug also has significant, albeit slowly developing sideeffects, not least involuntary writhing movements, which tend to develop withintwo years of treatment, and sudden rigidity (which is believed to arise as the brain’sability to store the dopamine it is given deteriorates). Sadly, after five years oftreatment, over 60% of patients will be little better than they were at the inceptionof treatment.



Figure 229: Action of dopamine and drugs to treat Parkinson’s

L-Dopa from Periphery

L-Dopa

Methyl-Dopa

COMT catabolises

Comtan (COMT inhibitor)

Dopamine

Homovanillic Acid

MAO

MAO inhibitors e.g.Selegiline

Dopamine

Dopamine

Dopamine

Dopamine

Dopamine

D1 Receptor

Dopamine Agonist(Parlodel,Requip, Mirapex)

DopamineRe-uptake


Beyond direct treatment with L-dopa, current pharmacological treatment alsoincludes various dopamine agonists and drugs that inhibit the enzymes that degradedopamine. These are typically used in combination with L-dopa and includeinhibitors of both monoamine oxidase (MAO) and catechol-O-methyl transferase(COMT). However, no treatment has as yet shown itself capable of fully orpermanently restoring motor function. Importantly, dopamine agonists can be givenas monotherapy before initiating L-dopa with the hope of extending theeffectiveness of L-dopa therapy. Equally, COMT inhibitors also extend theeffectiveness of L-dopa and may reduce side effects.

As a class, there are few drugs that have attained significant sales. This largelyreflects the maturity of current drugs and the absence of any dramatic advances inmedication. Many of the currently available drugs are off patent.

Figure 230: Key drugs used to treat Parkinson’s diseaseBrand Generic Action Producer 2002 Sales

Parlodel bromocriptine Dopamine agonist Novartis $0.1bn

Requip ropinirole Dopamine agonist GlaxoSmithKline $0.1bn

Mirapex pramipexole Dopamine agonist Pfizer* $0.2bn

Permax pergolide Dopamine agonist Lilly $0.1bn

Comtan entacapone COMT inhibitor Novartis $0.1bn

Sinemet L-dopa/carbidopa Dopamine precursor Bristol-Myers Squibb $0.1bn

Madopar L-dopa/benserazide Dopamine precursor Roche $0.1bn*Assumes Pfizer merger with PharmaciaSource: Company data

Pipeline productsSeveral products are in development for Parkinson’s disease, including both novelcompounds and new delivery technologies. One of the more interesting of these isa dopamine agonist that is being developed as a steady release patch by SchwarzPharmaceuticals in conjunction with Aderis Pharmaceuticals. The patch, calledRitigotine CDS, is used once a day and ensures an almost constant plasmadopamine level. Phase III results are expected in 2004.



Alzheimer’s Diseasen World market in 2002 worth over $1.3bn

n Growth currently over 20%, but slowing over next five years

n Affects 10% of the over-65 population, with 15 million people afflictedworldwide

n Leading products include Aricept (Pfizer/Eisai) and Exelon (Novartis)

Alzheimer’s disease (AD), first characterised by Alois Alzheimer in 1907, is a gradualprogressive dementia affecting both cognition and behaviour. It is characterised by aloss of short-tem memory and deterioration in behaviour and intellectualperformance. The exact physiology is unknown and no cure exists. Although drugsmay reduce symptoms and progression for a time, the disease is usually fatal.Alzheimer’s is generally thought of as a disease of old age, because most casespresent themselves after age 65. The disease affects 10% of people over the age of65 and almost 50% of those of 85 years and over. In 2000, AD was listed as theeighth-leading cause of death in US, killing 50,000 people; however, the real figureis thought to be higher, given that AD is often not reported on death certificates.Perhaps more significantly, the estimated costs of dealing with the disease are putat a staggering $100bn per annum. We would also note that several genes encodingimportant enzymes and proteins associated with Alzheimer’s disease have nowbeen discovered, implying a genetic predisposition to the disease.

PhysiologyAlzheimer’s disease is associated with shrinkage of brain tissue and localised loss ofneurons (nerve fibres) in certain parts of the brain. Two microscopic features arecharacteristic of the disease, namely, the existence of extracellular ‘amyloid’proteins, which are similar in nature to starch and which form plaques around brainneurons, and intra-neuronal meshes of filaments (Tau proteins), called neurofibrillarytangles. Altered processing of amyloid protein from its precursor is now recognisedas key to the pathogenesis of the disease.

In the brains of normal individuals, a long chain glycoprotein called amyloid precursorprotein (APP) is cleaved at a particular point. The protein produced is believed to aidbrain function. However, mutation of the APP gene gives rise to amyloid proteins(called amyloid beta proteins) of different chain lengths. One of these, in particular,leads to the creation of plaques, which ultimately result in the destruction of brainneurons, either directly or as a result of an immune response to the developedplaque.

As neurons are injured or die, neurotransmitter concentrations diminish. Inparticular, the concentration of acetylcholine and the number of cholinergic neuronsare reduced. Consequently, drug therapy to date is largely directed at increasing theconcentration of acetylcholine in the brain by preventing its metabolism by theenzyme acetylcholinesterase and so preserving neuronal communication andfunction. Although such an approach cannot cure the disease, it has been seen toslow the rate of deterioration in Alzheimer’s patients by six to twelvemonths.



Importantly, several genes associated with Alzheimer’s disease have now beenidentified and it is hoped that as knowledge of the illness develops, therapies aimedat prevention will be developed.

Figure 231: Plaque formation in Alzheimer’s disease

Healthy Brain

amyloidprecursorprotein

cell membrane

NORMALBRAIN

FUNCTION

normalcleavage site

Alzheimer’s Disease

amyloidplaque

amyloidbeta protein

mutatedgene

NEURONDESTRUCTION

Source: Dipiro, Talbert, Uee, Matzke, Wells and Posey

Pharmacolgical treatmentAs stated, the focus of current drugs available for treatment of Alzheimer’s hasbeen to improve the concentration of acetylcholine in the brain. Acetylcholine isbelieved to have a role in learning and short-term memory and its concentration inparticular areas of the brain is known to be reduced in Alzheimer’s patients. To date,three drugs have been approved for use in Alzheimer’s, each of which works byinhibiting acetylcholinesterase and, consequently, the breakdown of acetylcholine.Products of this nature are likely to dominate the market for several years. However,there are several other drugs in development that look at different mechanisms ofaction. These include drugs that inhibit the enzymes that cleave APP at the wrongpoint and drugs directed at mitigating the immune response that arises as a result ofplaque formation resulting in neuronal destruction.

Figure 232: Current acetylcholinesterase InhibitorsBrand name Aricept Exelon Reminyl

Generic donepezil rivastigmine tartrate galantamine

Manufacturer Pfizer/Eisai Novartis J&J/Shire

Sales 2002 $0.9bn $0.3bn $0.2bn

Side effects Nausea, vomiting, diarrhoea Nausea, vomiting, diarrhoea, weight loss Nausea, vomiting, diarrhoea

Cognition Delays symptoms of AD by 6 -12 months Most effective in moderate to severe Dual mechanism of action also nicotinic

Dosing Once a day Twice a day Twice a daySource: Company data

Clinical end-pointsAs with many CNS disorders, end-points for trials designed to assess the impact ofnew molecules on Alzheimer’s disease rest heavily on the assessment of clinicians.Various structured interview-based scales measuring efficacy against placebo exist.Most significant among these are the Alzheimer’s Disease Assessment Scale(ADAS) and the Clinicians Interview Based Impression of Change (CIBIC).



Pipeline productsSeveral products are in development for Alzheimer’s disease, including novelcompounds that act as beta amyloid inhibitors. However, most are still in very earlystage studies. The exception is Lundbeck’s Ebixa (memantine), which was launchedin Europe in late 2002 and is in pre-registration in the US. Developed by the Germancompany, Merz, and licensed to Lundbeck in Europe and Forest Laboratories in theUS, memantine is an NMDA receptor antagonist designed to offer neuroprotectiveeffects in patients with severe AD. Because of its unique mechanism of action, itmay be given in combination with the acetylcholinesterase inhibitors.

As noted, most other development candidates are early stage and/or are likely to beof little significance. Among these is Takeda’s zanapezil (TAK-147), currently inPhase III studies in Japan. With little published clinical data on the drug’seffectiveness and no ex-Japanese trials, the drug’s market is likely to be restrictedto Japan. Sanofi also has a compound in Phase IIb trials, but its progress to date hasbeen very slow.

It is important to note, however, that drug development in this area (like muchneurological research) has historically been risky, with many drugs failing to meetsafety or efficacy requirements in clinical trials. The most recent example isElan/Wyeth’s highly touted drug, AN-1792, which had its Phase I trial suspendedfollowing instances of inflammation in the central nervous system.

Figure 233: Sales growth of leading Alzheimer drugs ($ m)

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Figure 234: Sales growth of leading Alzheimer drugs ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Aricept Pfizer/Eisai 661 785 879 976 1041 1090

Exelon Novartis 120 239 274 291 320 352

Reminyl Shire 40 69 165 334 492 374Source: Company data, Deutsche Bank estimates



NOTES



Affective Disorders(Depression)n World market in 2002 worth roughly $12bn

n Anticipated growth of 5% per annum to 2005

n Value growth slowed due to patent expiration of class-leading products.

n Leading products include Zoloft (Pfizer) and Paxil (GSK)

Affective disorders are characterised by changes in mood (depression or mania).Depression is the most common state, ranging from mild to severe, or psychoticdepression, which may be accompanied by hallucinations and delusions. Symptomsof depression include emotional and biological components, emotional includingthings such as misery, apathy, low motivation and low self-esteem, while thebiological response includes a loss of appetite and sleep disturbance, among othersymptoms. There are two types of depressive syndrome, namely, unipolar (75% ofcases), in which mood swings are always in the same direction, and bipolar, inwhich depression alternates with mania (manic depression). There is a stronggenetic tendency in bipolar disorders.

The true prevalence of depressive disorders is unknown, although various bodieshave reported that around 17% of the population have a history of a majordepressive disorder at some point in their lifetime and more than 10% an episodewithin the past year. Depression is two to three times as frequent in females as it isin males and is most evident in adults between the ages of 25 and 44. The mostfrequent complication of depression is suicide and it is estimated that about 15% ofthose with unrecognised or poorly treated depression commit suicide.

PhysiologyAs with most illnesses of the CNS, the physiological cause of affective disorders isunclear. The main theory of depression is, however, that it arises as a consequenceof a functional deficit of monoamine transmitters at certain sites in the brain. Incontrast, mania is due to functional excess. In part, this theory is supported by thepositive impact that drugs with a known ability to facilitate monoaminergictransmission have on depression, although many studies have shown this theory tobe over-simplistic.

The key neurotransmitters with a role in depression and mania appear to be themonoamines, that is, serotonin (5-HT) and noradrenaline. Consequently, thepharmacological approach to alleviation of the symptoms has been to develop drugsthat impact upon the level of these monoamines in particular regions of the brain.Several different classes of drugs have been developed over the years, including thetricyclic antidepressants (TCAs), monoamine oxidase inhibitors (MAOIs) andselective serotonin re-uptake inhibitors (SSRIs). It is this last class that includesproducts such as Prozac, Paxil and Zoloft and which accounts for the lion’s share oftoday’s world market by value.

n Tricyclic antidepressants. These act by inhibiting the uptake of noradrenalineand/or serotonin (5-HT) by monoaminergic nerve terminals, thus facilitatingtransmission. They act by competing with the binding site of the amine carrier



protein. However, most TCAs also have an impact on other types of receptor,leading to troublesome side effects. These include dry mouth, blurred vision,constipation, sedation and urinary retention. They also have significant adverseinteractions with other drugs. Taken in overdose, they can be fatal, somethingof a disadvantage given their use by a class of patient that frequently hassuicidal tendencies.

n Monoamine oxidase has two main functions - to control the concentration ofnoradrenaline and 5-HT within the nerve terminal and to inactivate ingestedamines. Monoamine oxidase inhibitors bind irreversibly to one or both forms ofthe cerebral enzyme, monoamine oxidase (MAO-A or B), so increasing stores ofnoradrenaline, dopamine and 5-HT in nerve terminals. Inhibition of MAO type Acorrelates most strongly with antidepressant activity, because it is this enzymetype that has the strongest affinity for 5-HT. MAOIs were among the first anti-depressant drugs to be developed. However, significant side effects arose, inpart because of the effect of these drugs on the action of MAO outside theCNS. Consequently, they have largely been displaced by the TCAs and SSRIs.As with TCAs, overdose can be fatal.

n Selective serotonin re-uptake inhibitors (SSRIs). These show greaterselectivity for 5-HT than either the TCAs or MAOIs. While their efficacy intreating the symptoms of depression is no greater than that of the TCAs, amuch improved side-effect profile has seen them become the leading class ofanti-depressants. As with other classes of drugs, it is typically two to fourweeks before a therapeutic benefit is seen. Common side effects includenausea, insomnia, weight loss and loss of libido, yet their toxicity is less thanthat of other classes. Importantly, the efficacy and side-effect profile of theSSRIs has seen them used in a variety of other, largely anxiety-related,disorders, such as panic attacks, anxiety disorders and obsessive-compulsivedisorder. Increased usage of these drugs for anxiolytic indications has helpeddrive the overall size of the market for anti-depressants.

n Atypicals. Beyond these three main categories of anti-depressant, a classdefined as the atypicals exists. These represent a heterogeneous group ofcompounds, such as GlaxoSmithKline’s Wellbutrin and Wyeth’s Effexor. Oftenrelated to the TCAs, their exact chemical mode of action is unclear. Whileefficacy has not proven to be better than that of the TCAs, their side-effectprofile is often more favourable. In particular, these products have beenmarketed on the basis of a more rapid onset of action and a lower incidence ofsexual dysfunction.

Figure 235: Leading SSRIs and atypical anti-depressantsBrand name Generic name Manufacturer Sales 2002

Prozac fluoxetine Eli Lilly $0.7bn

Paxil/Seroxat paroxetine GlaxoSmithKline $3.1bn

Zoloft sertraline Pfizer $2.7bn

Effexor venlafaxine Wyeth $2.1bn

Wellbutrin bupropion GlaxoSmithKline $1.3bn

Celexa citalopram Forest Laboratories $1.9bnNote: Each of the above is an SSRI with the exception of GlaxoSmithKline’s Wellbutrin and Wyeth’s Effexor which are classed as atypical.Source: Company data



Other indicationsOutside affective disorders, anti-depressants have also found increasing use inanxiety-related indications. As stated, this broadening of the indication base hashelped drive the growth of the entire class. Additional indications often include thefollowing:

n Panic disorder: Panic disorder begins as a series of unexpected panic attacks,involving an intense terrifying fear similar to that caused by life-threateningdanger. The attacks are followed by at least a month of persistent concernabout having a further attack. Secondary to the panic attack, many patientssubsequently develop agoraphobia.

n Obsessive-compulsive disorder (OCD): OCD requires the presence ofobsessions/compulsions that are severe enough to cause marked distress, tobe time consuming and to cause significant impairment in social or occupationalfunctioning. Individuals suffering often recognise that their obsessions (forexample, cleanliness) or compulsions are excessive or unreasonable andattempt to ignore or suppress them. Over 50% of those suffering OCD typicallyalso suffer from another major psychiatric disorder.

n Anxiety: Historically, anxiety disorders have largely been treated withbenzodiazepines (for example, Valium). These act as GABA (gamma aminobutyric acid) agonists, GABA having an inhibitory effect on the activity of certainCNS pathways and, consequently, a calming/sedating influence. However,several of the SSRIs have been seen to have anxiolytic properties, in particularthose whose strongest effect is on 5-HT. SSRIs are increasingly emerging asfirst-line therapy because of better tolerability and lower risk of dependency.They are, however, significantly more expensive than classical benzodiazepinetherapy.

n Social phobias: The essential feature of social phobia is a marked andpersistent fear of social or performance situations in which embarrassment mayoccur. Unlike other anxiety disorders, the reason for the fear is clearlyidentifiable, although the patient can do little to control it.

Pipeline productsWith a half dozen SSRIs already on the market, the more interesting developmentproducts are those exploring novel mechanisms to treat depression. Mostsignificant of these is Lilly’s Cymbalta (duloxetine), which received an approvableletter from the FDA in September 2002. Like Effexor, Cymbalta selectively inhibitsreuptake of both norepinephrine and serotonin. Also of note is Merck’s Aprepitant, anovel substance P antagonist, currently in Phase III trials.



Figure 236: Sales growth of leading antidepressants ($ m)

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Figure 237: Sales growth of leading antidepressants ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Prozac Eli Lilly 2571 1906 656 310 255 235

Paxil/Seroxat GlaxoSmithKline 2345 2675 3085 3368 2885 1518

Zoloft Pfizer 2139 2364 2742 2985 3100 3155

Effexor Wyeth 1159 1541 2072 2775 3260 3725

Wellbutrin GlaxoSmithKline 684 932 1324 665 295 393

Celexa Forest Laboratories 1140 1868 1850 1519 914 282Source: Company data, Deutsche Bank estimates



Attention DeficitHyperactivity Disordern Worldwide market worth nearly $1bn in 2002

n Approximately 3-5% of school aged children diagnosed with ADHD

n Market dominated by extended-release formulations of older compounds

Attention deficit hyperactivity disorder (ADHD) is the most common behaviouraldisorder among school-age children. It is estimated to affect 3-5% of children, and isseen as much as ten times more often in boys than in girls. The condition ischaracterised by three key behaviours – inattentiveness, hyperactivity andimpulsiveness – which diminish the patient’s ability to function in normal areas oflife. In addition, while traditionally considered a childhood disease, recent evidencesuggests residual symptoms may persist into adulthood.

ADHD is often difficult to diagnose and treat due to the lack of observablephysiological signs, combined with a broad range of characteristic symptoms.Moreover, many ADHD-type behaviours may be linked to other causes ranging frommild seizures to emotional disturbances. It may also coexist with neurologicalconditions such as anxiety disorders or depression.

Given these complexities, the American Psychiatric Association has outlined specificdiagnostic criteria in the Diagnostic and Statistical Manual of Mental Disorders (DSMIV). An ADHD diagnosis requires that children exhibit signs of inattention and/orhyperactivity and impulsivity that adversely affect their ability to function in at leasttwo environments, such as school, home or social settings. The behaviour mustappear before age seven, be excessive in comparison to that expected of childrenthe same age and must persist for at least six months. The full criteria are outlinedin the Figure overleaf.

It is worth noting that, while similar to the DSM-IV guidelines, the diagnostic criteriaused in Europe are slightly narrower. Specifically, the European definition, which isbased on the International Classifications of Diseases (ICD-10), requires that thechild exhibit all three symptoms of inattention, hyperactivity and impulsivity. This, incombination with greater European scepticism regarding the treatment of ADHDwith stimulant drugs, helps to explain the lower incidence (~1.5% versus ~5%) ofthe condition in Europe.

PhysiologyThe cause of ADHD is unknown. The condition appears to run in families, with onein four affected children having a parent previously diagnosed with ADHD. Inaddition, children whose mothers utilised alcohol, cigarettes or other drugs duringpregnancy are at a heightened risk of developing ADHD. However, dietary factors –once thought to cause hyperactivity – have been proven to be uncorrelated.

Recent research has begun to suggest possible neurological abnormalitiesassociated with ADHD. Imaging studies using PET (positron emission tomography)scans have indicated a possible dopamine deficit due to the upregulation of proteinsknown as dopamine transporters. In addition, there appear to be malfunctions in



certain parts of the brain, including areas responsible for concentration and theswitching off of automatic responses.

Figure 238: Diagnostic criteria for ADHDA) Either (1) or (2):

1) Six (or more) of the following symptoms of inattention have persisted for at least 6 months to a degree that is maladaptive andinconsistent with developmental level:– often fails to give close attention to details or makes careless mistakes in schoolwork, work, or other activities– often has difficulty sustaining attention in tasks or play activities– often does not seem to listen when spoken to directly– often does not follow through on instructions and fails to finish schoolwork, chores, or duties in the workplace (not due to

oppositional behavior or failure to understand instructions)– often has difficulty organizing tasks and activities– often avoids, dislikes, or is reluctant to engage in tasks that require sustained mental effort (such as schoolwork or homework)– often loses things necessary for tasks or activities (e.g., toys, school assignments, pencils, books, or tools)– is often easily distracted by extraneous stimuli– is often forgetful in daily activities

2) Six (or more) of the following symptoms of hyperactivity-impulsivity have persisted for at least 6 months to a degree that ismaladaptive and inconsistent with developmental level:Hyperactivity– often fidgets with hands or feet or squirms in seat– often leaves seat in classroom or in other situations in which remaining seated is expected– often runs about or climbs excessively in situations in which it is inappropriate (in adolescents or adults, may be limited to

subjective feelings of restlessness)– often has difficulty playing or engaging in leisure activities quietly– is often "on the go" or often acts as if "driven by a motor"– often talks excessivelyImpulsivity– often blurts out answers before questions have been completed– often has difficulty awaiting turn– often interrupts or intrudes on others (e.g., butts into conversations or games)

B) Some hyperactive-impulsive or inattentive symptoms that caused impairment were present before age 7 years.

C) Some impairment from the symptoms is present in two or more settings (e.g., at school and at home).

D) There must be clear evidence of clinically significant impairment in social, academic, or occupational functioning.

E) The symptoms do not occur exclusively during the course of a pervasive developmental disorder, schizophrenia or other psychoticdisorder and are not better accounted for by another mental disorder.

Source: Diagnostic and Statistical Manual of Mental Disorders (DSM-IV)

Pharmacological treatmentCurrent clinical practice usually combines stimulant drugs with behavioural andcognitive therapies. Methylphenidate, first introduced in 1955 as Ritalin, is typicallythe drug of choice. Amphetamine compounds, such as dextroamphetamine, areused as second-line agents. In addition, Shire has gained success with its product,Adderall, which is a combination of four different amphetamine salts.

Given the long-expired patent protection on these drugs, current branded productsare primarily formulation modifications of the traditional stimulants. This is perhaps amore significant strategy in this class of drugs, because its users are primarilychildren, who must take the mid-day dose while at school. Complicating the dosingregimen is the fact that methylphenidate and amphetamine are class II “scheduled”drugs, meaning they are government-controlled substances, with specificregulations for distribution and dispensing. Thus, companies have achievedsignificant sales for once-daily premium-priced formulations, despite the presence ofcheaper generic alternatives.



In the methylphenidate category, there are three key extended release drugs –Concerta (J&J), Metadate CD (Celltech) and Ritalin LA (Novartis). Concerta leads thisgroup by a wide margin, likely as a result of being first to market and enjoying themarketing strength of Johnson & Johnson. Metadate and Ritalin LA introduced oneand two years later, respectively, offer a different pharmacokinetic profile, as theycombine separate immediate-release and delayed-release components; however,neither has captured a significant share of the market.

Shire’s Adderall is the second major competitor in this therapeutic area. Theamphetamine-based drug’s success is largely due to its favourable pharmacokineticprofile, which enabled Shire to market it as a long-acting agent from its initial launch.However, in anticipation of pending generic competition, Shire developed a so-calledextended release formulation, Adderall XR. Interestingly, the actual prescribinginstructions of these two versions differ only slightly, with many patients onAdderall taking the drug once daily and other patients on Adderall XR taking the drugtwice daily.

Given the current ADHD market, there is little evidence of any overwhelmingwinners with regard to efficacy or ease of use. Consequently, until non-stimulant orother novel agents enter the market, marketing skill will likely determine sales andmarket share. For the time being, this favours Johnson & Johnson and Shire, whohave already demonstrated their expertise in this area.

Figure 239: Leading stimulants for ADHDProduct Generic Company Dosing 2002 sales

Concerta methylphenidate J&J 1x/day* $0.4bn

Metadate CD methylphenidate Celltech 1x/day* $0.1bn

Ritalin methylphenidate Novartis 2-3x/day $0.1bn

Adderall/XR mixed amphetamine salts Shire varies $0.4bn*Despite “once-daily” labelling, often taken 2x/day.


Clinical end-pointsClinical trial requirements are not as well established for ADHD as for otherindications, as many of the existing drugs never underwent rigorous clinical testingbefore approval. This is evidenced by the variety of diagnostic rating scales used inrecent trials. Among these are the Conner’s Inattention/Overactivity withAggression Scale (IOWA), the Conner’s Global Index Scale (TCGIS) and the ADHDRating Scale-IV (ADHD RS). In fact, Lilly developed its own parent-rated diary to helpmeasure the efficacy of its late-stage candidate, atomoxetine.

Pipeline productsGiven the lack of non-scheduled, non-stimulant medications for ADHD, there ismuch interest in several late-stage products. The most advanced of these is Lilly’sStrattera (atomoxetine), which received FDA approval in November 2002. Stratteraappears to control ADHD by blocking the reabsorption of norepinephrine, aneurotransmitter thought to be important in regulating attention and controllingimpulses. Importantly, in addition to being the first non-stimulant (and likely the firstnon-scheduled) agent, Strattera is the first drug to be approved for ADHD in adults.

Also in development is what could become the first objective diagnostic test forADHD. Based on research that has revealed two to four fold greater dopaminetransporter density in clinically diagnosed ADHD patients, Boston Life Sciences



created an imaging agent, Altropane, which enables detection of abnormaldopamine transporter levels via SPECT imaging scans.

Figure 240: Leading pipeline productsProduct Company Comment Status

Strattera (atomoxetine) Lilly norepinephrine reuptake inhibitor Approved

Methypatch Noven methylphenidate patch Filed

SPD503 Shire non-scheduled agent Phase II

Altropane Boston Life Sciences 123I-labeled diagnostic imaging agent Phase IISource: Company data

Figure 241: Sales growth of leading ADHD drugs ($ m)

0

100

200

300

400

500

600

700

800

2000 2001 2002 2003E 2004E 2005E

Concerta Adderall Ritalin Strattera


Figure 242: Sales growth of leading ADHD drugs ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Concerta J&J 68 255 412 513 618 678

Adderall Shire 214 350 428 391 410 446

Ritalin Novartis 143 128 110 101 91 87

Strattera Lilly 0 0 3 130 315 490Source: Company data, Deutsche Bank estimates



Migrainen World triptan market in 2002 worth roughly $2bn

n Overall growth estimated at 5% per annum

n Growth driven by DTC advertising and earlier treatment

n Leading products are the triptans and include Imitrex (Glaxo), Zomig(AstraZeneca) and Maxalt (Merck)

Migraine is a common condition affecting 10-15% of the population. Sufferersexperience blinding headaches and nausea that can last several hours. There areseveral types of migraine.

n 10% of patients suffer from the classical definition of migraine, with visualdisturbances (aura), such as white flashing lights or distorted view of objectsseen prior to the onset of the headaches. These disturbances enable physiciansto easily diagnose the disease and prescribe the necessary medicine.

n The majority of migraine sufferers (approximately 85%), however, do notexperience an initial aura. Consequently, they are harder for physicians todiagnose and do not often receive the required medicine.

n A minority of patients (approximately 5%) suffer from other types of migraine.

PhysiologyMigraine can be set off by a number of stimuli. These include diet, menstruation,stress and medications. The exact mechanism by which migraine occurs is currentlyunknown. However, a number of hypotheses have been put forward, the main onebeing based on the concept of an abnormal neuronal discharge followed byconstriction of the blood vessels in the brain. This is illustrated overleaf.

This mechanism suggests that migraine starts with a neuronal disturbance, possiblycaused by the stimuli outlined above. This leads to hyperactivity of nerve cells in anarea of the brain where it meets the spinal cord and the release of large amounts ofneuropeptides, namely noradrenalin and 5-hydroxytryptamine (5-HT). Theseneuropeptides cause the blood vessels in the brain to narrow (intra-cerebralvasoconstriction), resulting in a number of visual disturbances being experienced bythe patient.

The 5-HT released is also postulated to act on blood vessels outside the brain,including the lining of the brain (the meninges), leading to local inflammation andsubsequent expansion of the blood vessels (vasodilation). It is postulated that it isthe impact on pain receptors in these regions that leads to the subsequent ‘blindingheadache’ that is the main symptom of migraine attack.

Pharmacological treatmentA range of treatments is available to treat migraine, depending upon the seriousnessof the condition.

n Mild to moderate cases are treated using over-the-counter medicines such as:

Simple analgesics, including aspirin, which act to restrict the release ofprostaglandins, thereby reducing, but not completely eradicating the painexperienced, or



Figure 243: Theory of migraine

Vasodilation

Abnormal neuronal discharge AURA

Activation ofNA neurons

Cerebralvasoconstriction

VISUALDISTURBANCE

Activation of5-HT neurons

Perivascularinflammation

Kininrelease

PGrelease

Sensitisationof nociceptive

nerve terminals

Excitiation of nociceptivenerve terminals

PAIN

Release of neuropeptides(SP, CGRP, VIP, etc.)

Sumatriptan

Aspirin, etc.Vasoconstrictors

(ergotamines)

Sumatriptan

5-HT2 antagonists(methysergide, pizotifen)


Non-steroidal anti-inflammatory drugs, (NSAIDs) such as ibuprofen, whichreduce the level of inflammation seen outside the brain and subsequently,vasodilation and pain.

n Moderate to severe cases are treated with prescription medicines that include:

the older ergotamines (vasoconstrictors), which as 5-HT1 antagonists inhibitthe presynaptic activities that lead to pain. This group of drugs account forroughly 30% of retail prescription sales in the US, or

the newer triptans, for example, GlaxoSmithKline’s Imitrex (sumatriptan),which specifically target the 5-HT1D receptors believed to be responsible forvasodilation and pain. The drugs initiate vasoconstriction and thus bring aboutpain relief. This group of drugs accounts for roughly 70% of retail migraineprescriptions in the US.

Imitrex was the first triptan on the market. Launched in 1993, it now commands thelargest share of the triptan market, at circa 65%, due to its high efficacy. Othertriptans were launched between 1997 and 2002 and have marginally increased theoverall size of the triptan market.

Market growth has, however, been disappointing, given that an estimated 10-15%of the developed world’s population suffer from migraine. Surveys conducted in theUS showed that only one in ten patients receives the correct treatment and that50% of those who have migraine do not know it. Consequently, the marketpotential for triptans remains significant. One reason for this is that most of thosepatients that do not suffer the classical aura associated with migraine (that is, thevast majority) appear to be incorrectly diagnosed.



Figure 244: Summary of key triptansBrand name Generic name Producer 2002 Sales

Imitrex/Imigran sumatriptan GlaxoSmithKline $1.2bn

Naramig/Amerge naratriptan GlaxoSmithKline $0.1bn

Zomig zolmitriptan AstraZeneca $0.3bn

Maxalt rizatriptan Merck $0.2bn

Frova frovatriptan Elan Launch

Relpax eletriptan Pfizer LaunchSource: Company data

As such, if the market is to expand more rapidly, education of both the physicianand patient will be key. Direct-to-consumer advertising looks likely to be central inassisting drug companies increase awareness of the disease and the specialistmedications available.

Clinical end-pointsClinical end-points are defined as the relief of moderate or severe pain to no or mildpain without the use of additional medication after a set time period (typically two orfour hours).

Pipeline productsPfizer’s Relpax (eletriptan) represents the last major triptan to reach the market.Although previously launched in many countries around the world, Relpax onlyrecently received US approval in December 2002 after long delays at the FDA. Givenits late arrival to a well-established and crowded category, however, sales for Relpaxare expected to be fairly modest.

Figure 245: Sales forecast for leading triptans ($ m)

0

200

400

600

800

1000

1200

1400

2000 2001 2002 2003E 2004E 2005E

Imitrex/Imigran Naramig/Amerge Zomig Maxalt


Figure 246: Sales forecast for leading triptans ($ m)Product Company 2000 2001 2002 2003E 2004E 2005E

Imitrex/Imigran GlaxoSmithKline 1067 1092 1198 1258 1284 1296

Naramig/Amerge GlaxoSmithKline 117 131 135 134 130 126

Zomig AstraZeneca 237 273 328 377 407 427

Maxalt Merck na 235 295 310 320 330Source: Company data, Deutsche Bank estimates



NOTES



Oncology (Cancer)n World market approaching $17 bn in 2002

n Growth estimated at 13% per annum, driven by ageing population andinnovation

n Several classes of drugs, including cytotoxic chemicals, hormonals andmonoclonals

n Leading players include AstraZeneca, Bristol-Myers Squibb and Roche

Cancer is one of the major causes of death in the developed world. Roughly one infive people will die from some form of cancer, while one in three will suffer from acancer at some point in their lives. Sadly, because the disease is largely prevalent inolder age groups, its incidence is rising. There are many types of cancer. However,as yet, there is no known cure for the disease, although some types are now wellcontrolled.

Cancer (also called a tumour or neoplasm, and so on) is a disease in which thebody’s cells divide and multiply in an uncontrolled manner. In addition, whereasnormal cells do not migrate and develop in other parts of the body, malignant cancercells are invasive and able to migrate via the blood or lymphatic system and multiplyelsewhere, an event called metastasis. Thus, a metastatic or malignant cancer isone that need not be confined to the particular organ or region of the body fromwhich it originated, in other words, a metastatic cancer is one that can spread in anuncontrolled manner. For example, in metastatic breast cancer, breast cells thatwould not normally be able to develop outside the breasts migrate and develop inother organs. This makes the disease all the harder to treat. By contrast, if a tumouris benign, it does not have the potential to migrate or metastasise.

Sadly, the treatment of cancer is still very crude. The first line of clinical treatment istypically surgical removal of the cancerous area. This may be accompanied byirradiation and chemotherapy, the role of each depending upon the type of cancer.Additionally, because the central objective of chemotherapy is to kill human cells,chemotherapy is often blunt and crude. All too frequently it is also ineffectual.

The biology of cancerThe division and multiplication of human cells is controlled by several factors. Thebody releases various growth messengers called cyclins and cyclin-dependentkinases that bind to cell receptors and stimulate a cell to start dividing. Genes calledproto-oncogenes located on human DNA (for example, the ras gene), control theproduction of these messengers and, indeed, the production of their cell receptors.At the same time, these growth-initiating messengers are regulated by severalnegative feedback mechanisms. Proteins are produced that can bind to the growthmessengers and inhibit their action. These proteins are also encoded for by variousgenes, in particular, the tumour suppressor gene p53 and the Rb gene. In effect,these genes act as brakes on the replication system.

Once the new process is initiated, the cell’s DNA is replicated and the proteinsrequired to create a new cell produced. Vitally, the process of cell replicationincludes checks and balances designed to ensure accuracy. Not least among these



is the action of the p53 gene, which, if the DNA is damaged, encourages cell self-destruction (apoptosis).

In cancer cells, an inherited or acquired mutation has occurred in the normal cell’sDNA. Normally, for mutation to occur, more than one event must take place, inother words, it is a multistage process. It may be because of exposure to a DNA-corrupting substance or by viral damage. However, the end result of the process isnormally one of two main changes

the tumour suppressor genes (p53 and so on) are inactivated. Indeed, mutations inp53 are the most common mutations found in human cancer cells.

the proto-oncogenes that produce growth messengers and receptors and so onbecome overactive and become oncogenes. Again, in 20-30% of all cancers, the rasgene has mutated.

Principles of chemotherapyThe basic principle of chemotherapy is similar to that of antibiotics. The objective oftreatment is clearly to kill the cancer cells, but leave the normal cells unchanged.However, the challenge in cancer is that both cells are human and therefore arecommon in almost every respect. Thus, unless differences in mechanism or cellnature can be found, it is impossible to be cancer-cell specific.

One key difference does, however, exist between cancer cells and normal cells.Cancer cells tend to divide more rapidly than most normal cells. Thus, mostcytotoxic agents target the process of replication, as this will have the greatestimpact on rapidly dividing cells. Sadly, however, not every normal cell divides slowly.Some, such as bone marrow, hair, those lining the intestine, reproductive cells, andso on, also divide rapidly. Consequently, it is in these organs that the mostsignificant side effects of chemotherapy are often seen.

Of course, what would be ideal would be to find a specific and differentiating site onthe cancer cell that could be targeted and it is this approach to cancer chemotherapythat has driven the development of many monoclonal antibody-based drugs.Monoclonal antibodies (mabs) are antibodies to a particular protein, which aregenetically replicated using cloning techniques. By attaching a toxin or radio-isotopeto an antibody that is specific to a cancer cell, the cancer cell can be targeted.Another approach has been to disrupt the blood vessels that the cancer creates andneeds to grow, that is, interfere with cell proteins called metalloproteinases thatenable the creation of new blood vessels (angiogenesis). As the products of thebiotechnology revolution of the 1980s make their way through the clinical process,drugs of this nature are expected to play an increasingly large role in cancer therapy.

Drugs used to treat cancerCancer drugs can be broadly spilt into three classes: cytotoxics, hormonals and thenewer targeted therapies. Cytotoxic drugs tend to work by interfering with theprocess of DNA replication or cell division. By contrast, hormonal therapy is aimed atblocking those hormone-sensitive receptors that play a key role in promoting cellgrowth. Targeted therapies include drugs such as the monoclonal antibodiesdescribed above. Cytotoxic drugs represent the major category, with 2002 sales of$8bn. Hormonal drugs achieved sales of $6bn and targeted drugs approximately$3bn.



Figure 247: Points of action of several cytotoxic drugs

Purine Synthesis(adenosine, guanine)

Pyrimidine Synthesis(cytosine, thymine)

Ribonucleotides

Deoxyribonucleotides

DNA

RNA (transfer, messenger,

ribosomal)

Proteins

Enzymes Microtubules

5 FU, Xeloda, Gemzar, Tomudex(inhibit nucleotide

synthesis)

Bleomycin (damages DNA and

prevents repair)

Pharmorubicin,Camptosar, Hycamtin

(inhibit creationof DNA/RNA)

Taxol, Taxotere(inhibit microtubule

function)

Fludura(inhibits adenosine

formation)

Methotrexate(inhibits purine

synthesis)

Eloxatine, Platinol,Paraplatin, Cisplatin

(cause DNA tocross link)


Cytotoxic drugsMost cytotoxic drugs act by seeking to damage the cell’s DNA and so initiate celldeath or apoptosis, the theory being that the cell’s self-destruct mechanism is stillintact. Thus, drugs are designed that cause the DNA to cross-link or that corrupt theconstituents of DNA itself, that is adenosine, guanine, thymidine and cytosine, thatform the base pairs, and so on. Of course, for apoptosis to occur, the p53 genemust be unaffected and as we have stated, mutation of this gene is most commonin cancerous cells. Alternative methods include prevention of cell division (mitosis)and it is along these lines that the market-leading taxanes work (Taxol from Bristol-Myers Squibb and Taxotere from Aventis).

Some of the more important cytotoxic drugs and their points of action are illustratedin the diagram above. This depicts the stages involved in cell division and at whatstage the different drugs act. The diagram emphasises that cytotoxins are eitherdirected at

n Interfering with the synthesis of the four bases used in DNA, for example,Gemzar and 5FU,

n Interfere with the DNA itself, either by causing cross-linking (for example, theplatinol drugs) or by acting on important enzymes (Camptosar), or

n Interfere with the synthesis of proteins and enzymes necessary for cell division,for example, the taxanes (Taxol, Taxotere, and so on).



Overall, cytotoxic drugs can largely be divided into the following main categories:

n Alkylating agents, which act by forming covalent bonds between DNA, soimpeding replication. This category includes drugs such as the platinumcompounds, carbaplatin and cisplatin, eloxatine and so on.

n Antimetabolites, which block or subvert the production of DNA. Drugs thatwork in this manner include methotrexate and the purine and pyrimidineanalogues 5 fluorouracil (5FU), Xeloda and Gemzar.

n Cytotoxic antibiotics, which prevent mammalian cell division. The mostfrequently used of these is an antibiotic called bleomycin.

n Plant derivatives, like the taxanes and vinca alkaloids, which disrupt celldivision. This category includes class-leading products such as Taxotere andTaxol.

Side effects and resistanceOne of the main disadvantages of all cytotoxic drugs is that by their very nature theycause damage to normal cells. Thus the side-effect profile of many is a majordisadvantage in their use. Typically, cytotoxic drugs cause kidney and nervedamage, largely because of the damaging impact of their metabolites, as well asnausea and negative effects on other fast-dividing cells (such as hair follicles). Mostsignificant here is their effect on the immune system, which can be substantiallydepleted as white blood cells (lymphocytes) are damaged, leaving the patientvulnerable to infection.

Beyond side effects, resistance to treatment is also a problem. Resistance can beprimary (that is, present when the drug is first given) or acquired as, like bacteria,cancer cells adapt. Consequently, cytotoxic agents are often used in combination.Intermittent large doses are also often more effective than smaller regular doses towhich resistance can build.

Figure 248: Leading branded cytotoxicsBrand Generic Producer 2002 sales Mechanism

Taxol paclitaxel Bristol-Myers Squibb $0.7bn Prevents cell division

Taxotere docetaxel Aventis $1.2bn Prevents cell division

Gemzar gemcitabine Eli Lilly $0.9bn Prevents DNA synthesis

Paraplatin carboplatin Bristol-Myers Squibb $0.6bn DNA crosslinking

Camptosar irinotecan Pfizer* $0.6bn Enzyme interference

Furtulon doxifluridine Roche $0.2bn Alters building block creation

Pharmorubicin epirubicin Pfizer* $0.3bn Enzyme interference

Platinol cisplatin Bristol-Myers Squibb $0.1bn DNA crosslinking*Assumes Pfizer merger with PharmaciaSource: Company data

Hormonal therapyIn certain cancers, hormones play a major role in promoting cell growth. Mostsignificant here are breast and prostate cancer, where the hormones oestrogen andtestosterone play important roles in cell proliferation. Consequently, drugs havebeen developed that seek to interfere with these pathways, by either reducingoestrogen production in breast cancer or testosterone production in prostate cancer.



There are essentially four different types of hormonal therapy, each of which isdirected at either reducing the production of the relevant hormone or blocking itsaction upon cell receptors. The different types of therapy are described below.

n Anti-oestrogen: Drugs in this class, such as AstraZeneca’s Nolvadex, interferewith oestrogen’s ability to bind to cell receptors or deplete the number ofreceptors.

Figure 249: Leading anti-oestrogensBrand Generic Producer Sales 2002

Nolvadex tamoxifen AstraZeneca $0.5bn

Faslodex fulvestrant AstraZeneca $0.1bnSource: Company data

n Anti-androgens act by either blocking the production of testosterone fromcholesterol in the testes or blocking the action of testosterone metabolites oncell receptors, thereby preventing cell division.

Figure 250: Leading anti-androgensBrand Generic Producer Sales 2002

Casodex bicalutamide AstraZeneca $0.6bn

Eulexin flutamide Schering-Plough $0.1bnSource: Company data

n Aromatase inhibitors. Aromatase is an enzyme that plays an active role in theproduction of oestrogen from cholesterol. The inhibitor class acts by blockingthe production of oestrogen in the body.

Figure 251: Leading aromatase inhibitorsBrand Generic Producer Sales 2002

Arimidex anastrozole AstraZeneca $0.3bn

Femara letrozole Novartis $0.2bn

Aromasin exemestane Pfizer* $0.1bn*Assumes Pfizer merger with PharmaciaSource: Company data

n Luteinising hormone releasing hormone (LHRH) analogues. Oestrogen,progesterone and testosterone production is under the control of thehypothalamus, a major hormone-controlling gland located in the brain. TheLHRH class ultimately inhibits the production of LHRH and with it, thesubsequent production of the main sex hormones.

Figure 252: Leading LHRH analoguesBrand Generic Producer Sales 2002

Zoladex goserelin AstraZeneca $0.8bn

Lupron leuprolide Takeda Abbot Pharmaceuticals $1.0bnSource: Company data

The mechanism of action of each of these forms of hormone therapy is illustratedthe following figures.



Figure 253: Hormonal regulation and breast cancerHypothalmus (controls hormonal production)

Pituitary (releases hormones)

OOPHORECTOMY

Breast Cell

FSH LH

GnRH (confusingly also known as

LHRH - LH releasing hormone)

(1)

ProgesteroneOvary

Cholesterol

aromatase*

(2)

Oestrogens

(3)

CytoplasmicProgesterone

Receptor

CytoplasmicOestrogen Receptor

Cellular Growth andDivision

aromatase*- necessary for the conversion of cholesterol to oestrogenSource: Rang, Dale & Ritter

The breast cancer diagram illustrates that the LHRH analogues interfere with theproduction of sex hormones at position 1 by dampening the action of LH releasinghormone on the pituitary. Further along the pathway, aromatase inhibitors act toprevent the conversion of cholesterol to oestrogen. Finally, anti-oestrogens actwithin the breast cell itself at position 3, either by blocking the receptor or bydepleting the number of receptors available.

Figure 254: Hormonal regulation and prostate cancer

Pituitary (releases hormones)

FSH LH

+

Testis

ORCHIECTOMY

(2)

SerumTestosterone

SerumAndrogens

Adrenal Gland

Androgens(masculinising sex hormones)

Cholesterol

(2)

Testosterone Dihydrotestosterone5 alpha-reductase

(3)

Prostate Cell

CytoplasmicDihydrotestosterone

Receptor

Cellular Growth andDivision

GnRH (confusingly also known as

LHRH - LH releasing hormone)

(1)

Hypothalmus(controls hormonal production)


As with breast cancer, in prostate cancer, LHRH analogues can be used to dampenthe impact of the hypothalamus on the pituitary. Subsequently, two types of anti-androgens are used, which play similar roles in prostate cancer to the aromataseinhibitors (by inhibiting the production of testosterone) and the anti-oestrogens, byblocking receptors promoting cell growth in the prostate gland itself.



Targeted therapyLargely a product of the biotech industry, the newest and fastest- growing class ofcancer therapeutics are is the targeted therapies. Included in this class is Roche’sblockbuster Mabthera/Rituxan, a genetically engineered antibody that binds to aspecific antigen found on over 90% of non-Hodgkin’s lymphoma (NHL) B-cells andfacilitates cell death. Novartis’ Glivec/Gleevec, launched in 2001, is likewise a highlytargeted therapy that has produced dramatic results in patients with chronic myeloidleukaemia (CML).

This class also represents the most significant area of new product development.Companies such as AstraZeneca and Bristol-Myers Squibb/ ImClone are developingdrugs that target the receptor for epidermal growth factor (EGF), one of severalhormones that functions as an essential communication messenger, instructingcells to stay alive, to proliferate, to become mobile, etc. The protein is over-expressed in a number of cancers, enabling unregulated replication and subsequenttissue invasion, metastasis, chemotherapy resistance and poor treatmentoutcomes. By targeting this protein, the EGFR inhibitors are designed to reducetumour growth rather than destroy cancer cells.

Figure 255: Drug action points in EGFR-based cancer treatments

Nucleus

EGFR EGFR

Cancer cell Membrane

Kinase

EGF TGFa

Iressa/Tarceva bind totyrosine kinase

Apoptosis

Metastesis

Angiogenesis

XXX

Erbitux blocks the EGFreceptor

X

pY

Antisense molecules act withinthe nucleus (Affinitac)

XX

Source: AstraZeneca, EGFR-COM; EGF = epidermal growth factor, EGFR = EGF receptor, TGR = tissue growth factor, K = tyrosine kinase, Py = phosphorylation

Figure 256: Selected marketed and late-stage targeted therapiesBrand Generic Producer 2002 sales/status Mechanism (indication)

Mabthera/Rituxan rituximab Roche $1.5 bn Anti-CD20 mab (NHL)

Herceptin trastuzumab Roche $0.6 bn Anti-HER2 mab (breast cancer)

Glivec/Gleevec imitinab Novartis $0.6 bn Signal transduction inhibitor (CML)

Iressa gefitinib AstraZeneca Filed EGFR inhibitor (multiple cancers)

Erbitux cetuximab BMS/ImClone Filed EGFR inhibitor (multiple cancers)

Bexxar n/a GSK Filed I131 radiolabelled anti-B1 mab (NHL)

Tarceva erlotinib Roche Phase III EGFR inhibitor (multiple cancers)

Avastin bevacizumab Roche/Genentech Phase III VEGF inhibitor/anti-angiogenesis (multiple cancers)Source: Company data



Supportive therapiesDue to the serious side effects caused by most cancer chemotherapies, there is alarge demand for drugs to alleviate these symptoms. These agents, which generateapproximately $5 bn in annual sales, generally fall into four categories:erythropoietins, cytokines, anti-emetics, and agents to treat bone metastases. Theerythropoietins (EPOs) are used for the treatment of chemotherapy-inducedanaemia (red blood cell depletion). Until recently, the only US-approved drug in thiscategory was Johnson & Johnson’s Procrit, which earned an estimated one-third ofits $4.3 bn 2002 sales from this indication. Procrit, however, now faces competitionAmgen’s Aranesp, which was just approved in 2001. In the cytokine family, the keydrugs include Amgen’s Neupogen and its follow-on product Neulasta, both indicatedfor the treatment of neutropenia (white blood cell depletion). Other products in thiscategory include Neumega for the treatment of thrombocytopenia (plateletdepletion). The anti-emetics, including GlaxoSmithKline’s Zofran and Roche’s Kytril,help treat chemotherapy-induced nausea. Finally, Novartis’ Aredia and Zometarepresent the key treatments for bone metastases.

Clinicians’ approach to cancerAs a final comment, it is worth noting that because cancer is often fatal, oncologistsare willing to try many different drugs, often in combination with each other. Wherethere is little hope of recovery, the objective of treatment is often purely to defer theday of reckoning without significantly reducing the patient’s quality of life. Drugs willbe recommended for first, second or third line treatment depending upon their rateof success relative to other compounds and the impact that they have on a patient’swellbeing overall (quality of life). It should also be appreciated that because doctorsare dealing with patients who are often likely to die, cancer drugs are frequentlyused off-label, that is, anything will do, provided it offers some hope of recovery ordefers the day of reckoning. Thus, if clinicians are aware that a drug undergoingtrials has shown some degree of efficacy, they will often try it in relevant patientgroups, even if regulatory approval has not yet been granted.

Figure 257: Sales growth of major classes of cancer drug ($ m)

0

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Source: Wood Mackenzie

Figure 258: Sales growth of major classes of cancer drug ($ m)2000 2001 2002 2003E 2004E 2005E

Cytotoxics 6823 7384 7984 8847 9426 10164

Hormonals 4668 5117 5618 5942 6326 6639

Targeted Drugs 1594 2411 3323 4424 5890 7743Source: Wood Mackenzie



Pan-European Company Profiles

AstraZeneca

Aventis

GlaxoSmithKline

Novartis

Novo Nordisk

Roche

Sanofi-Synthélabo

Schering



Europe

10 March 2003

AstraZenecaReuters: AZN.N Bloomberg: AZN US Exchange: N Ticker: AZN.N

Delivering the pipeline

In April 1999, Astra AB and Zeneca PLC merged to createAstraZeneca. Established as a world-leading lifesciencecompany, the subsequent agrochemical demerger has left thegroup wholly focused on healthcare. The company has, in ouropinion, a pipeline and portfolio that should drive steadygrowth from 2004 onwards. However, this needs be deliveredon time and to expectations. In the interim, genericcompetition to Prilosec suggests a challenging 2003.

Generic competition makes for challenging yearThe introduction of generic competition to Prilosec and Nolvadex inthe US will make 2003 a challenging year. Key to the near termEPS outlook will be the time taken for Schwarz to increase genericsupply to beyond 50% of current Prilosec market volume. Wecurrently assume full capacity by early 2004 although an earlierincrease is a real possibility.

New products to drive medium term growthIn the medium term, we believe AZN’s earnings performance willdepend crucially on its ability to successfully launch its threemegabrands, namely Iressa for lung cancer, Crestor for loweringcholesterol and Exanta for thrombosis. In our view, while Iressa’sapproval will be key for near-term estimates, most significant willbe Crestor’s US approval at the full dose range. Any significantdisappointments would likely savage the share price.

Low patent risk supports long term outlookAssuming the successful launch of its new crop of products, AZNlooks unlikely to face a major US patent expiry until late in thedecade. Comments by several generic companies suggest,however, that there is an ongoing risk that Nexium may face anearly patent challenge.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS ($) 1.84 1.60 1.89 2.21

EPS Growth 6% -13% 18% 17%

DPS (net) 0.70 0.70 0.70 .74

P/E x 17.4 20.0 16.9 14.5

EV/EBITDA x 9.7 10.8 9.2 7.6

PBT adj ($ m) 4,387 3,794 4,369 5,110

PBT stated ($ m) 4,037 3,794 4,369 5,110Source: Deutsche Bank estimates and Company data

Price and RecommendationPrice 10 March 2003 1975pRecommendation BuyPrice target 2575p

Price Relative Chart4/3/03

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AZN/FTSE100

HIGH 0.70 1/3/02, LOW 0.33 3/3/00, LAST 0.56 28/2/03 Source: DATASTREAM

Stock DataMarket Cap ($ bn) 57.4Free float 100%Net Cash at 31/12/02 $3.8bnCAGR Sales 2001-2006E 8.2%CAGR EPS 2001-2006E 7.4%Group Margin 2002 24.4%Group Margin 2006E 23.3%Shares Issued 1733m

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Figure 259: Key expiries and launches 2001-2006E Figure 260: Pharma sales mix 2001-2006EPatent Expiries 2002 US Sales % Pharma Expiry DatePrilosec $2,847m 16% 2002Plendil $209m 1% 2003Nolvadex $337m 2% 2003Zoladex $212m 1% 2005Pulmicort $361m 2% 2006

Launches Peak Sales Indication Launch DateFaslodex $300m Oncology 2002Crestor $2,500m Cholesterol 2003Iressa $1,200m Oncology 2002Exanta $1,000m Thrombosis 2003Symbicort (US) $500m Asthma 2005

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AstraZeneca: Key Pharmaceutical Profit & Loss Data

Figure 261: Summary proforma P&L data 2001 – 2006E (US$m)Year End December 2001 2002 2003E 2004E 2005E 2006E % CAGR

Sales 16,222 17,841 17,978 20,064 22,319 24,096 8.2%

COGS (4,198) (4,520) (4,430) (4,729) (5,123) (5,435) 5.3%

SG&A (5,427) (5,998) (6,508) (7,484) (8,307) (8,847) 10.3%

R&D (2,687) (3,069) (3,345) (3,579) (3,883) (4,233) 9.5%

EBIT 4,156 4,356 3,754 4,319 5,040 5,608 6.2%

EBITDA 5,016 5,316 4,753 5,357 6,120 6,731 6.1%

EPS (US$) 1.73 1.84 1.60 1.89 2.21 2.47 7.4%

COGS (%) 25.9% 25.3% 24.6% 23.6% 23.0% 22.6% -2.7%

SG&A (%) 33.5% 33.6% 36.2% 37.3% 37.2% 36.7% 1.9%

R&D (%) 16.6% 17.2% 18.6% 17.8% 17.4% 17.6% 1.2%

EBIT (%) 25.6% 24.4% 20.9% 21.5% 22.6% 23.3% -1.9%Source: Company data, Deutsche Bank estimates

AstraZeneca: Sales by geography and therapeutic category

Figure 262: Sales by therapeutic category 2002 Figure 263: Sales by geography 2002

Gastro-intestinal

38%

Cardio-vascular

21%

Respir-atory10%

Oncology14%

CNS9%

Other8%

UK3%

OtherEurope

28%

N America57%

Japan5%

RoW7%

Source: Company data Source: Company data

As with Lilly, AZN’soutlook over the five-year perioddemonstrates thenegative impact ofsignificant patentexpiries on earnings. Asnew products comethrough, however,growth should pick upand progress should beconsistent. We recognisethat there is fluidity in2003 numbers given thenumber of moving parts.



AstraZeneca: Leading products and sales by therapeutic category

Figure 264: Leading products and sales by therapeutic category (US$m)Brand Generic Lead Indication US Expiry US Exclusivity 2002 2006E

Gastrointestinal

Losec omeprazole Ulcers/GERD Oct-07 Expired 4623 1166

Nexium esomeprazole Ulcers/GERD Feb-15 Feb-04 1978 5539

Cardiovascular

Zestril lisinopril Hypertension Expired Expired 877 254

Tenormin atenolol Hyprtension Expired Expired 370 256

Seloken metoprolol CHF Mar-08 Feb-04 901 1347

Plendil felodipine Hypertension Oct-07 Expired 489 479

Atacand candesartan Hypertension Jun-12 Jun-03 569 978

Crestor rosuvastatin Cholesterol n.a. n.a. 0 1750

Exanta ximelagatran Anti-thrombotic n.a. n.a. 0 630

Respiratory

Pulmicort budesonide Asthma Mar-07 Expired 812 858

Accolate zafirleukast Asthma Sep-10 Sep-02 144 110

Rhinocort budesonide Rhinitis April-06 Expired 299 336

Oxis Formoterol Asthma n.a. n.a. 120 81

Symbicort Formoterol/budesonide Asthma n.a. n.a. 299 850

Oncology

Zoladex goserelin Prostate Cancer Aug-05 Expired 794 754

Nolvadex tamoxifen Breast Cancer Expired Expired 480 97

Casodex bicalutamide Prostate Cancer Oct-08 Expired 644 985

Arimidex anastrozole Breast Cancer Dec-09 Sep-05 331 920

Iressa na Breast Cancer n.a. n.a. 67 1050

Faslodex na Breast Cancer Oct-04 Apr-07 35 250

Specialist/Hospital

Diprivan propofol Anaesthetic Expired Expired 443 307

Xylocaine xylocaine Pain Relief Expired Expired 180 118

Zomig zolmitriptan Migraine Nov-12 Nov-04 328 440

Seroquel quetiapine Schizophrenia Sep-11 Sep 02 1145 2408

Merrem Carbopenem Antibiotic n.a. n.a. 285 436Source: Company data, Deutsche Bank estimates



NOTES



Europe

10 March 2003

Aventis SAReuters: AVEP.PA Bloomberg: AVE FP Exchange: PA Ticker: AVEP.PA

Successfully restructured

Aventis was created in 1999 following the merger of Hoechstand Rhône Poulenc. Subsequent disposals, not least theEuro 7.5bn sale of its agrochemicals interests, have left abusiness that is focused almost entirely on humanpharmaceuticals and vaccines. The company has growingfranchises in diabetes and oncology and a leading position inmarkets for vaccines.

Increased US presence strengthening sales and marginsSince the merger, management has made substantial headway attransforming the pharmaceutical business. Beyond theachievement of some Euro 750m of cost savings, the emphasis onstrategic brands and the company’s exposure to the growthmarkets of the USA has paid handsome dividends. As sales ofstrategic brands have risen from 29% of the portfolio in 1999 to55% in 2002 and US sales have risen from 23% of the portfolio to39% over the same period, operating margins have surged risingfrom 16.9% in 1999 to 24.4% in 2002.

Near term uncertainty about Allegra’s position in US marketShare price performance is likely to be heavily influenced by theoutcome of two near term uncertainties in the US market for thecompany’s best selling drug, the antihistamine Allegra. Followingthe switch of a competitor product, Claritin from prescription drugto OTC status in late 2002, we expect managed care to attempt toencourage patients to move to cheaper alternatives. Moresignificantly, we expect Barr’s challenge against the Allegra patentsto open the door to generic competition from 2005.

Early stage pipeline interesting but unprovenThe company has an interesting early stage pipeline althoughfollowing some recent disappointments the late stage pipelinelooks unlikely to bear significant fruit in the near term.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS (Euro) 3.31 3.69 4.20 4.49

EPS Growth 27% 17% 16% 8%

DPS (net) 0.70 0.84 1.00 1.20

P/E x 12.4 11.1 9.7 9.1

EV/EBITDA x 6.7 6.2 5.5 5.1

PBT adj (Euro m) 3,480 3,907 4,503 4,857

PBT stated (Euro m) 3,480 3,907 4,503 4,857Source: Deutsche Bank estimates and Company data

Price and RecommendationPrice 10 March 2003 Euro 40.30Recommendation BuyPrice target Euro 55


2000 2001 20020.10

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F:RPP/DJEURST


Stock DataMarket Cap (Euro bn) 33.4Free float 100%Net Debt at 31/12/02 Euro 1.3bnCAGR Sales 2001-2006E 5.3%CAGR EPS 2001-2006E 12.3%Group Margin 2002 24.4%Group Margin 2006E 26.9%Shares Issued 794m


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Figure 265: Key expiries and launches 2001-2006E Figure 266: Pharma sales mix 2001–2006EPatent Expiries 2002 US Sales % Pharma Expiry DateAllegra Euro 1,730m 10% 2001Arava Euro 185m 1% 2003Amaryl Euro 200m 1% 2005

Launches Peak Sales Indication Launch DateLantus Euro 1,000m Diabetes 2001Ketek Euro 750m Antibiotic 2001Alvesco Euro 500m Asthma 2004Insulin glulisine Euro 250m Diabetes 2004Menactra Euro 500m Meningitis 2005

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Aventis: Summary Lifescience Profit & Loss Data

Figure 267: Key lifescience profit & loss data (Euro m)Year End 31 December 2001 2002 2003E 2004E 2005E 2006E % CAGR

Sales 16,576 17,590 18,092 19,585 19,948 21,442 5.3%

COGS -4,418 -4,563 -4,523 -4,720 -4,987 -5,253 3.5%

SG&A -5,636 -5,793 -5,880 -6,326 -6,403 -6,947 4.3%

R&D -2,891 -3,141 -3,266 -3,527 -3,491 -3,752 5.4%

EBIT 3,569 4,296 4,474 5,018 5,267 5,759 10.0%

EBITDA 4582 5256 5446 6023 6307 6834 8.3%

EPS (Euro) 2.79 3.31 3.69 4.20 4.49 4.97 12.3%

COGS (%) 26.7% 25.9% 25.0% 24.1% 25.0% 24.5% -1.7%

SG&A (%) 34.0% 32.9% 32.5% 32.3% 32.1% 32.4% -1.0%

R&D (%) 17.4% 17.9% 18.1% 18.0% 17.5% 17.5% 0.1%

EBIT (%) 21.5% 24.4% 24.7% 25.6% 26.4% 26.9% 4.5%Source: Company data, Deutsche Bank estimates

Aventis: Pharmaceutical sales by Geography and Therapeutic Area

Figure 268: Pharma revenues by therapy 2002 Figure 269: Pharma sales by geography 2002

Cardiology24%

Oncology12%

Respir-atory19%

Arthritis6%

CNS11%

Anti-infective

11%

Metabolism

14%

Vaccines3%

N America44%

Germany6%

France13%

OtherEurope

8%

Japan5%

RoW24%


The summary P&Lemphasises that it ismix improvement andan expanding top linethat are driving verystrong (25%-plus)compound annualearnings growth atAventis. This growth isunderwritten by bothnew product launchesand cost cutting. Notethat we expect pharmasales growth to be heldback by bottom slicingthe long tail of drugs.



Aventis: Leading products and sales by therapeutic category

Figure 270: Leading products and sales (Euro m)Brand Generic Lead Indication US patent expiry US exclusivity 2002 2006E

Cardiovascular

Lovenox enoxaparin DVT, angina Feb-12 Nov-03 1563 2437

Delix/Tritace ramipril Hypertension na na 923 947

Oncology

Taxotere docetaxel Cancer May-10 Dec-02 1261 2385

Campto irinotecan Cancer na na 241 346

Respiratory/Allergy

Allegra fexofenadine Allergy May-12 Expired 2030 478

Nasacort triamcinalone Asthma Jan-07 Expired 329 497

Alvesco ciclesonide asthma na na 0 230

Central nervous system

Copaxone glatiramer MS May-14 Dec-03 554 1016

Rilutek riluzole ALS Jun-13 Dec-02 120 150

Anti-infectives

Targocid teicoplanin Anti-infective na na 222 290

Tavanic levofloxacin Anti-infective na na 257 392

Ketek quinupristin Anti-infective na na 52 750

Diabetes

Amaryl glimepiride Diabetes I Apr-05 Expired 578 701

Insuman insulin Diabetes I/II na na 172 190

Lantus insulin Diabetes I/II Sep-14 Oct-05 299 1620

Arthritis/Osteoporosis

Arava leflunomide Arthritis Expired Sep-03 271 55

Actonel risedronate Osteoporosis Dec-13 Apr-03 539* 1450*Source: Company data, Deutsche Bank estimates *Gross non-consolidated sales through agreement with Procter & Gamble.



NOTES



Europe

10 March 2003

GlaxoSmithKlineReuters: GSK.L Bloomberg: GSK LN Exchange: L Ticker: GSK.L

Building a pipeline

Established from the merger of Glaxo Wellcome andSmithKline Beecham, GSK is the world’s second largestresearch-based pharmaceutical company with just over 7% ofthe global market. The company has leading franchises intherapeutic markets for respiratory products, anti-infectives,vaccines and CNS disorders. Recent patent losses have,however, significantly undermined the near-term outlook forgrowth, and now much depends on building the pipeline.

Well-positioned with massive size and scaleGSK has a number of key investment attractions, not least marketleading positions in important therapeutic categories and a well-respected management team. In addition, its massive salesinfrastructure (40,000 reps globally, including 8,000 in the US) andhuge R&D budget have made it a partner of choice for licensors.

Patent expiries putting pressure on earningsDespite the company’s broad product base, the recent loss ofpatent protection on key product Augmentin together with ourexpectation following adverse court rulings that Wellbutrin andPaxil will face generics from 2003 and 2004 suggest that near-termearnings will struggle to make progress. Indeed, with othersignificant products expected to lose patent protection over the2003-7 period, the pressures on GSK’s top and bottom line lookunlikely to subside quickly.

Interesting pipeline but still early stageRecent product disappointments and delays have left a late stagepipeline that contains little of real excitement. Although GSK hassought to rebuild a growing early stage pipeline, in part throughaggressive in-licensing, we believe this contains much risk and littlethat is likely to make it to market before the middle of the decade.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS (p) 78 80 82 83

EPS Growth 8% 3% 3% 0%

DPS (net) 0.40 0.41 0.42 0.43

P/E x 13.5 13.1 12.8 12.8

EV/EBITDA x 8.6 8.5 8.5 8.6

PBT adj (£m) 6,517 6,528 6,540 6,399

PBT stated (£m) 5,506 6,128 6,340 6,399Source: Deutsche Bank estimates and Company data

Price and RecommendationPrice 10 March 2003 1055pRecommendation BuyPrice target 1300p


2001 20020.26

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GSK/FTSE100


Stock DataMarket Cap (GBP bn) 64.2Free float 100%Net Debt at 31/12/02 £2.3bnCAGR Sales 2001-2006E 2.5%CAGR EPS 2001-2006E 4.5%Pharma Margin 2002 34.2%Pharma Margin 2006E 31.1%Shares Issued 5912m


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Figure 271: Key expiries & launches 2001-2006E Figure 272: Pharma sales mix 2001-2006EPatent Expiries 2002 US Sales % Pharma Expiry DateAugmentin £975m 5% 2002Wellbutrin £862m 5% 2002Flonase/Flovent £800m 4% 2004Zofran £525m 3% 2005Imitrex £616m 3% 2006Paxil £1,413m 8% 2003/7

Launches Peak Sales Indication Launch DateAvodart £450m BPH/alopecia 2003Levitra £500m ED 2003Fosamprenavir £200m HIV 2003Alvimopan £250m IBD 2004

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GlaxoSmithKline: Summary profit & loss data

Figure 273: Summary of selected P&L items (£ m)Year End 31 December 2001 2002 2003E 2004E 2005E 2006E % CAGR

Sales 20,489 21,212 21,193 21,666 22,020 23,179 2.5%

Of which Pharma 17,205 17,995 18,023 18,374 18,563 19,566 2.6%

COGS -4,430 -4,243 -4,287 -4,426 -4,550 -4,786 1.6%

SG&A -7,451 -7,543 -7,485 -7,680 -7,916 -8,253 2.1%

R&D -2,555 -2,732 -2,862 -3,004 -3,155 -3,373 5.7%

EBIT 6,090 6,583 6,588 6,585 6,429 6,798 2.2%

EBITDA 6,803 7,492 7,550 7,602 7,503 7,932 3.1%

EPS (p) 72.3 78.3 80.3 82.5 82.7 90.1 4.5%

COGS (%) 21.6% 20.0% 20.2% 20.4% 20.7% 20.6% -0.9%

SG&A (%) 36.4% 35.6% 35.3% 35.4% 36.0% 35.6% -0.4%

R&D (%) 12.5% 12.9% 13.5% 13.9% 14.3% 14.6% 3.1%


GlaxoSmithKline: Sales by geography and therapeutic area

Figure 274: Sales by therapy 2002 Figure 275: Sales by geography 2002

CNS25%

Respira-tory22%

Anti-bacterials

12%

Metabolic8%

Vaccines6%

Oncology5%

Antivirals13%

Cardio-vascular

4%Other

5%

US55%

UK4%

France5%

Germany3%

OtherEurope

14%

Japan4%

L America3%

RoW12%


Near-term cost savingsplay a significant role ingrowth with the marginmoving ahead by200BPs by 2003.However, ourexpectation of genericcompetition then startsto eat heavily intomargins and growth.The result is little EPSor sales growth overthe period.



GlaxoSmithKline: Leading products and sales by therapeutic category

Figure 276: Leading products and sales by therapeutic category (£ m)Brand Generic Lead Indication US patent US exclusivity 2002 2005E

GI/Metabolism

Zantac Ranitidine Ulcers Expired Expired 382 184

Avodart dutasteride BPH Oct-13 Nov-06 0 365

Avandia Rosiglitazone Diabetes Apr-15 May-04 809 1272

Respiratory

Ventolin Salbutamol Asthma Expired Expired 265 174

Serevent Salmeterol Asthma Feb-08 Jun-03 523 254

Becotide Beclomethasone Asthma Expired Expired 130 82

Flixotide/Flovent Fluticasone Asthma Nov-03 Expired 783 585

Flixonase Fluticasone Rhinitis Nov-03 Expired 534 139

Zyban Bupropion Smoking Aug-13 Expired 99 55

Seretide/Advair Salmeterol + fluticasone Asthma Sep-10 Aug-03 1631 3552

Ariflo n.a. COPD n.a. n.a. 0 175

Anti Viral

Zovirax Aciclovir Herpes Expired Expired 228 130

Valtrex Valaciclovir Herpes Jan-16 Jun-04 425 775

Retrovir Zidovudine HIV nRTI Sep-05 Expired 50 5

Epivir Lamivudine HIV nRTI Nov-09 Jun-05 295 235

Combivir Na HIV nRTI May-16 None 588 469

Ziagen Abacavir HIV NNRTI Jun 09 Jun-04 173 165

Trizivir Na HIV nRTI May-14 Jun-04 315 657

Agenerase Amprenavir HIV PI n.a. n.a. 44 5

Zeffix Lamivudine Hepatitis B Nov-09 Jun-05 123 212

Anti-bacterial

Zinnat Cefuroxime Antibiotic Expired Expired 243 142

Fortum Ceftazidime Antibiotic Expired Expired 201 165

Augmentin Co-amoxicillin/clavulanate Antibiotic Expired Expired 1191 630

Amoxil Amoxicillin Antibiotic Expired Expired 136 86

Oncology/Tissue Repair

Zofran Ondansetron Emesis Jan-05 Expired 708 283

Central Nervous System

Imigran Sumatriptan Migraine Dec-06 Expired 798 840

Lamictal Lamotrigine Epilepsy Jul-08 Aug-05 438 833

Wellbutrin Bupropion Depression Aug-13 Expired 882 282

Paxil Paroxetine Depression Jun-07 Expired 2055 926

Cardiovascular

Coreg/Kredex Carvedilol CHF Mar-07 Nov-04 306 660Source: Company data, Deutsche Bank estimates



NOTES



Europe

10 March 2003

NovartisReuters: NOVZn.VX Bloomberg: NOV LN Exchange: Ticker: NOVZN.VX

Robust growth

Novartis was created in 1996 following the merger of Swisscompanies, Ciba and Sandoz. The spin-out of itsagrochemicals activities has left Novartis predominantlyfocused on human health, with ethical pharmaceuticalsdominating (around 63% of sales). Outside pharmaceuticals,Novartis also has leading positions in consumer health (20%of sales), ophthalmics (8%) and generics (8%).

Core brands and new products driving growthSince 2000, Novartis has launched more NMEs than any otherglobal major. Together with a greater emphasis on the marketing inthe US of core brands such as Diovan and Lotrel, these havehelped to drive growth and rejuvenate the portfolio.

Low patent risk and solid pipelineOur estimates suggest that only 6% of the portfolio will facegenerics in the US market over the next five years. At the sametime, the company has a pipeline that contains several projects ofinterest, not least the COX2 inhibitor Prexige for which weanticipate US launch in mid 2004.

Roche merger likely, but only in longer termThrough acquiring a 32% interest in the voting rights of Roche,Novartis’s Swiss neighbour, the company has in our opinion madea fairly clear statement of future intent. We believe that a mergerin time is likely and would represent a sensible combination.

Growing focus on pharma segment likely to continueFollowing the spin-out of Syngenta (agrochemicals) and the sale ofpart of its consumer health activities, additional deals reducing thecompany’s exposure to consumer health, animal health andopthalmics would not come as a surprise.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS ($) 1.88 2.18 2.45 2.76

EPS Growth 16% 16% 12% 13%

DPS (net) 0.61 0.72 0.83 0.94

P/E x 19.2 16.5 14.7 13.1

EV/EBITDA x 14.0 11.4 10.0 8.5

PBT adj ($ m) 5,694 6,534 7,354 8,295

PBT stated ($ m) 5,694 6,534 7,354 8,295Source: Deutsche Bank estimates and Company data

Price and RecommendationPrice 10 March 2003 CHF 47.30Recommendation BuyPrice target CHF 61


1998 1999 2000 2001 20020.10

0.12

0.14

0.16

0.18

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0.22

S:NOVN/SWSPIXD


Stock DataMarket Cap (CHF bn) 123.2Free float 100%Net Cash at 31/12/02 $7.2bnCAGR Sales 2001-2006E 10.6%CAGR EPS 2001-2006E 14.1%Pharma Margin 2002 28.7%Pharma Margin 2006E 30.4%Shares Issued 2475m


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Figure 277: Key expiries & launches 2001-2006E Figure 278: Pharma sales mix 2001-2006EPatent Expiries 2002 US Sales % Pharma Expiry DateAredia $80m 1% 2001Lotensin $340m 3% 2004Lamisil $420m 3% 2004/6

Launches Peak Sales Indication Launch DateGleevec $2,000m Leukaemia 2001Zometa $2,000m Bone metastasis 2001Elidel $1,500m Excema 2002Zelnorm $2,450m IBS-C 2002Prexige $1,000m Pain 2003Xolair $300m Asthma 2004Myfortic $300m Transplantation 2004Certican $300m Transplantation 2005

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Novartis: Key profit & loss data

Figure 279: Summary Five-year Pro Forma Forecasts ($ m)Year End 31 December 2001 2002 2003E 2004E 2005E 2006E % CAGR

Sales 18,980 20,911 24,320 26,441 28,764 31,457 10.6%

Of which Pharma 11,956 13,550 15,749 17,413 19,220 21,359 12.3%

COGS (4,672) (4,915) (5,594) (5,949) (6,357) (6,826) 7.9%

SG&A (7,515) (8,108) (9,411) (10,256) (11,052) (11,883) 9.6%

R&D (2,482) (2,799) (3,448) (3,772) (4,127) (4,517) 12.7%

EBIT 4,311 5,088 5,868 6,464 7,229 8,231 13.8%

EBITDA 5,206 6,038 7,027 7,682 8,510 9,580 13.0%

EPS ($) 1.65 1.91 2.22 2.49 2.80 3.20 14.1%

COGS (%) 24.6% 23.5% 23.0% 22.5% 22.1% 21.7% -2.5%

SG&A (%) 39.6% 38.8% 38.7% 38.8% 38.4% 37.8% -0.9%

R&D (%) 13.1% 13.4% 14.2% 14.3% 14.3% 14.4% 1.9%


Novartis: Sales by geography and therapeutic category

Figure 280: Sales by division 2002 Figure 281: Sales by geography 2002

Pharmaceuticals66%

Animal Health3%

Generics7%

Consumer Health18%

CIBA Vison6%

US42%

Europe32%

RoW26%


The summary forecastsshow sales growthaccelerating post 2000as new products startto come through.Strong top-line growthallows for investment inSG&A with nodetriment to theearnings line. All in all,Novartis appears tohave considerable P&Lflexibility over themedium term.



Novartis: Leading products and sales by therapeutic category

Figure 282: Leading products and sales by therapeutic category ($ m)Brand Generic Lead Indication US patent US Exclusivity 2002 2006E

Cardiovascular

Lotrel Benazepil + amlodipine Hypertension Dec-17 Expired 652 1163

Cibacen/Lotensin/Cibadrex Benazepril Hypertension Aug-03 Expired 461 130

Diovan Valsartan Hypertension Mar-12 Expired 1665 3112

Lescol Fluvastatin Cholesterol Oct-11 Expired 578 832

Metabolism

Zelnorm Tegaserod IBS Apr-13 Jul-07 45 825

Starlix Nateglinide Diabetes II Mar 06 Dec 05 0 297

Miacalcic Calcitonin Homeostasis Mar 15 Expired 395 403

Rheumatism

Voltaren Diclofenac Pain Expired Expired 597 499

Prexige lumiracoxib. Pain na na 0 870

Womens' Health

Estraderm franchise Estradiol HRT na na 282 283

Respiratory

Foradil Formoterol Asthma Expired Feb-06 263 366

Xolair Olizumab Asthma na na 0 181


Clozaril Clozapine Schizophrenia Expired Expired 323 270

Ritalin Methylphenydate ADD Expired Expired 110 82

Tegretol Carbamazepine Epilepsy Jul-07 Expired 365 232

Trileptal Oxcarbazepine Epilepsy na Jan-05 279 681

Exelon Rivastigamine Alzheimer's Aug-07 Apr-05 305 482

Transplantation/Dermatology

Sandimmun/Neoral Cyclosporine Transplant rejection Expired Expired 1037 850

Myfortic micophenolate Transplant rejection na na 0 217

Certican Everolimus. Transplant rejection na na 0 145

Lamisil Terbinafine Fungal Dec-06 Expired 874 693

Elidel na Eczema Dec-16 Jun-07 95 725

Famvir famiciclovir Cold sores/herpes Sep-10 na 221 298

Oncology

Aredia pamidronate Cancer Expired Expired 276 56

Sandostatin octreotide Cancer Oct 15 Expired 608 674

Sandoglobulin immunoglobulin Cancer na na 39 0

Zometa zoledronate Cancer Jul-07 Aug-08 489 1786

Gleevec imatinib Cancer May-13 Feb-09 615 1855Source: Company data, Deutsche Bank estimates



NOTES



Europe

10 March 2003

Novo-NordiskReuters: NVOb.CO Bloomberg: NOVOB DC Exchange: CO Ticker: NVOB.CO

Driven by diabetes

Founded in 1923 to manufacture insulin, Novo Nordisk is nowthe world’s leading producer and, using its expertise inrecombinant technologies and purification, has developedstrong positions in markets for certain other human proteins.The company has set itself several ambitious (in our view)long-term targets including 15% annual operating profitsgrowth.

Improvement of product mix key to driving growthWith 63% of revenues from insulin (where Novo has a globalmarket share of around 46%), growth over and above that in thediabetic population (around 5% p.a.) depends upon improving mixthrough product development and delivery mechanism innovation.

New competitors threaten insulin franchiseIn the near term the company is set to face a key competitivethreat to its diabetes franchise in Europe from the roll-out ofAventis’ long acting insulin, Lantus. At risk are the 25-30% ofEuropean revenues derived from sales of Novo’s basal insulins.

Growth from NovoSeven dependent on new indicationsGrowth in recent years has been augmented by Novo’s highlyprofitable recombinant blood clotting agent, NovoSeven. However,with the market for the product’s initial haemophilia indication nowlargely penetrated, future growth will depend on broadening theproduct’s indications, which looks unlikely to happen before 2005.

Encouraging pipeline, but still focused on diabetesThe company has an interesting early stage pipeline focused ondiabetes, including an insulin sensitiser (NN2344) and a glucogen-like-peptide antagonist (NN2211). However, the recentdisappointing loss of NN622, has raised questions on Novo’s abilityto develop drugs outside its core protein franchise.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS (DKK) 10.9 11.9 12.5 14.0

EPS Growth 4% 9% 5% 12%

DPS (net) 3.54 3.98 4.17 4.61

P/E x 19.0 17.4 16.6 14.8

EV/EBITDA x 10.1 10.0 9.2 8.7

PBT adj (DKK m) 5,810 6,248 6,545 7,334

PBT stated (DKK m) 6,300 6,748 6,845 7,334Source: Deutsche Bank estimates and Company data

Price and RecommendationPrice 10 March 2003 DKK203.5Recommendation HoldPrice target DKK190


1998 1999 2000 2001 20020.60

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DK:NON/DKKFXIN


Stock DataMarket Cap (DKK bn) 69.2Free float 75%Net Cash at 31/12/02 DKK 209m CAGR Sales 2001-2005E 5.8%CAGR EPS 2001-2005E 7.6%Pharma Margin 2002 21.8%Pharma Margin 2005E 24.2%Shares Issued 347m


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Figure 283: Selected products/pipeline 2002 Figure 284: Sales by product area 2000-2005EInsulin Indication Phase LaunchNovoMix Intermediate PIII 2003NN304 (detemir) LA basal analogue PIII 2003NN1998 Inhaled insulin PII 2005NN2344 Glitazone PII 2005NN2211 GLP-1 PII 2007Existing Non-InsulinNovoSeven Liver surgery PII 2005NovoSeven GI Bleeds PII 2005NN703 Growth hormone PII 2004

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Diabetes Prandin HRT NovoSevenSource: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates

Novo Nordisk: Summary P&L forecasts

Figure 285: Novo Nordisk: Summary P&L 2000-2005EDKK m 2000 2001 2002 2003E 2004E 2005E CAGR %

Sales 20,811 23,776 25,187 25,563 27,619 29,795 7.4%

COGS (5,044) (5,979) (6,633) (6,876) (7,208) (7,598) 8.5%

SG&A (8,132) (9,080) (9,430) (9,458) (10,081) (10,786) 5.8%

R&D (3,390) (3,970) (4,139) (4,090) (4,419) (4,767) 7.1%

Underlying EBIT 4,555 5,207 5,489 5,648 6,446 7,206 9.6%

One-time income 261 407 490 500 300 0

Reported EBIT 4,816 5,614 5,979 6,148 6,746 7,206 8.4%

EBITDA 5,854 6,695 7,077 7,278 7,910 8,405 7.5%

EPS (DKK) 8.36 10.43 10.89 11.89 12.45 13.96 10.8%

COGS % 24.2% 25.1% 26.3% 26.9% 26.1% 25.5% 1.0%

SG&A % 39.1% 38.2% 37.4% 37.0% 36.5% 36.2% -1.5%

R&D % 16.3% 16.7% 16.4% 16.0% 16.0% 16.0% -0.4%

Underlying EBIT % 21.9% 21.9% 21.8% 22.1% 23.3% 24.2% 2.0%Source: Deutsche Bank Securities Inc. estimates and company information

Novo Nordisk: Sales by geography and therapeutic category

Figure 286: Healthcare sales by category 2002 Figure 287: Healthcare sales by geography 2002

Insulin65%Oral hypo-

glycaemics6%

Human growthhormone

8%

HRT5%

NovoSeven14%

Other2%

Europe43%

N America24%

Japan & Oceania17%

RoW16%


We expect that Novowill make steadyprogress towards itstargeted 25% operatingmargin target.However, the impact ofLantus and incrementalmarketing costs areexpected to restrict thecompany in its target of15% annual operatingprofit growth.



Novo Nordisk: Leading products and sales by therapeutic category

Figure 288: Leading products and sales by therapeutic category (DKK m)Brand Generic Lead Indication 2002 2005E

Diabetes Care

Insulin Insulin Diabetes 16,034 19,370

Prandin Repaglinide Diabetes 1,631 1,786

Hormones

Norditropin Human growth hormone Dwarfism 2,131 2,377

Women’s Health Oestrogen Menopause 1,342 1,298

Haemophilia

NovoSeven Factor VII Blood clotting agent 3,621 4,550Source: Company data, Deutsche Bank estimates



NOTES



Europe

10 March 2003

RocheReuters: ROCZg.VX Bloomberg: ROG VX Exchange: S Ticker: ROCZG.VX

Crunch year

Roche is one of Europe’s leading pharmaceutical companiesand remains family controlled. Roche has strong franchises inmarkets for anti-infectives and oncology and, through its 58%holding in Genentech, is well exposed to developing marketsfor biotech-based products. The company is also the leadingglobal supplier of diagnostic systems.

New products to drive pharma growthApproval and successful launch of several new products isexpected to account for some 60% of pharma growth to 2006. Keyamongst these is Pegasys for hepatitis C for which consensuspeak sales expectations run at around US$1 billion.

Decreased financial income hurting operating performanceAs recently as 2000, Roche was generating over 20% of pre-taxprofits from financial income. However, the recent collapse inworld stock-markets has highlighted an over-exposure to equitiesand equity-linked debt instruments, significantly undermining animprovement in the group’s operating performance.

Diagnostics well positioned, but fit with pharma questionedIn Diagnostics, Roche looks extremely well placed to capitalise onthe increasing use of gene sequencing to determine the pre-disposition of individuals to disease. Synergies with pharma are,however, debatable.

Strategic disposals and acquisitions strengthening focusNovartis’ unwelcome move to acquire a stake in Roche’s votingbearer shares has helped catalyse change. Beyond improveddisclosure, Roche’s actions have included implementation of aCHF700m cost-cutting programme, acquisition of a 51% interest inJapanese company Chugai, disposal of the vitamins business andthe aggressive target of a 25% pharma operating margin by 2004.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS (CHF) 5.15 4.50 5.32 6.14

EPS Growth -17% -16% 22% 18%

DPS (net) 1.45 1.45 1.50 1.78

P/E x 18.1 21.8 17.9 15.1

EV/EBITDA x 13.7 13.0 11.4 10.2

PBT adj (CHF m) 949 3,411 4,666 5,079

PBT stated (CHF m) 5,701 4,901 6,007 7,108Source: Deutsche Bank estimates and Company data

Price and RecommendationPrice 10 March 2003 CHF78.45Recommendation HoldPrice target CHF 80


1998 1999 2000 2001 20020.26

0.28

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0.36

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S:ROG/SWSPIXD


Stock DataMarket Cap (CHF bn) 94.8Free float 100%Net Debt at 31/12/02 CHF7660CAGR Pharma Sales 2001-2006E 6.8%CAGR EPS 2001-2006E 2.7%Pharma Margin 2002 21.1%Pharma Margin 2006E 24.1%Shares Issued Genusscheine 703m

Bearer (voting) 160m


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Figure 289: Key expiries & launches 2001-2006E Figure 290: Sales portfolio mix 2001-2006EPatent Expiries 2002 US Sales % Pharma Expiry DateRoaccutane CHF 593m 3% 2002Rocephin CHF 889m 5% 2005

Launches Peak Sales Indication Launch DatePegasys CHF 1,500m Hepatitis C 2002Fuzeon CHF 700m HIV 2003Bondronat CHF 200m Bon metastases 2003Bonviva CHF 300m Osteoporosis 2003Xolair* CHF 700m Asthma 2003Tarceva* CHF 850m Oncology 2004Avastin* CHF 500m Oncology 2004Raptiva* CHF 500m Psoriasis 2004*Genentech products

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Roche: Key profit & loss data

Figure 291: Roche (Continuing Structures) Summary P&L (CHF m)Year to 31 December 2001 2002 2003E 2004E 2005E 2006E % CAGR

Sales 25,761 26,545 28,462 30,959 33,454 35,848 6.8%

of which pharma 18,861 19,306 21,016 22,798 24,608 26,273 6.9%

COGS (6,011) (6,108) (6,589) (7,275) (7,862) (8,317) 6.7%

SG&A (9,141) (9,320) (9,944) (10,540) (11,211) (11,826) 5.3%

R&D (3,771) (4,132) (4,385) (4,777) (5,173) (5,546) 8.0%

EBIT 4,266 4,965 5,331 6,207 7,058 7,995 13.4%

Financial Income 1,523 736 (430) (200) 50 130 -38.9%

EBITDA 7,788 8,240 8,710 9,716 10,677 11,730 8.5%

EPS (CHF) 5.38 4.49 3.75 4.57 5.40 6.16 2.7%

COGS (%) 23.3% 23.0% 23.1% 23.5% 23.5% 23.2% -0.1%

SG&A (%) 35.5% 35.1% 34.9% 34.0% 33.5% 33.0% -1.4%

R&D (%) 14.6% 15.6% 15.4% 15.4% 15.5% 15.5% 1.1%


Roche: Sales by Therapy and Geographic Area

Figure 292: Pharma sales by therapy 2002 Figure 293: Pharma sales by region 2002

Oncology26%

Dermatology5%

Infection9%

CNS4%

Other24%

Cardio-vascular

10%

Virology7%

Metabolism8%

Inflammation7%

N America41%

L America8%

Europe33%

Japan9%

RoW9%


The most strikingfeature of the P&L isthat despite the strongimprovement inoperating income, thecollapse in finacialincome ensures thatEPS growth is restrictedto a nominal amount.



Roche: Leading products and sales by therapeutic category

Figure 294: Leading products and sales by therapeutic category (CHF m)Brand Generic Lead Indication US Patent US Exclusivity 2002 2006E


Dormicum/Versed midazolam Anesthesia Expired Expired 142 83

Lexotan bromazepam Anxiety Expired Expired 244 160

Madopar benserazide Parkinson's Disease Expired Expired 239 210

Infectious disease

Rocephin ceftriaxone Antibiotic Jul -05 na 1548 392

Oncology

Rituxan/MabThera rituximab Cancer Biological na 2332 4240

Furtulon doxifluridine Cancer na na 248 168

Xeloda capecitabine Cancer Jan-11 Apr-04 444 1294

Herceptin trastuzumab Breast Cancer Biological na 1007 1831

Kytril granesetron Anti-emetic Dec-07 Aug-05 451 534

Tarceva na Oncology na na 0 405

Avastin na Oncology na na 0 135

Neutrogen (Chugai) lenograstim Oncology Non-US na 67* 266

Virology

Invirase/Fortovase saquinivir HIV PI Nov-10 Expired 185 115

Roferon-A a-interferon HBC Biological na 160 66

Cymevene/Valcyte ganciclovir Anti-Viral Jun-03 Expired 296 326

Viracept nelfinavir HIV PI Oct 13 Expired 320 170

Tamiflu oseltamivir Influenza Dec 16 Oct-04 180 271

Pegasys pegylated interferon HBC Biological na 94 1454

Fuzeon na HIV Fusion Biological na 0 700

Cardiovascular

Recormon erythropoeitin Anaemia Biological na 1192 2913

Epogin (Chugai) erythropoetin Anaemia Non-US na 216* 866

Activase/TNKase alteplase/tenctaplase MI Biological na 322 246

Dilatrend carveldilol CHF Non-US na 329 527

Sigmart (Chugai) nicorandil Angina Non-US na 61* 194

Dermatology

Roaccutane isotretinoin Acne Expired Expired 911 266

Metabolism

Protropin/Nutropin somatropin Growth Expired Dec-03. 477 516

Rocaltrol calcitrol Osteoprosis Expired Expired 218 179

Xenical orlistat Obesity Jun-09 Apr-04 763 663

Bonviva ibandronate Osteoprosis na na 0 200

Alfarol (Chugai) alfacalcilol Osteoporosis Non-US na 67* 206

Inflammation/immunomodulation

Cellcept mycophenolate Organ Transplant na na 1173 1512

Zenapax daclizumab Organ Transplant Biological na 74 109Source: Company data, Deutsche Bank estimates *2002 figures for Chugai products are estimates



NOTES



Europe

10 March 2003

Sanofi-SynthélaboReuters: SASY.PA Bloomberg: SAN FP Exchange: LY Ticker: SASY.PA

Patent challenged

Majority controlled by TOTAL and L’Oréal, Sanofi-Synthélabowas created in 1999 following the decision of its Frenchparents to merge their quoted pharmaceutical interests.Domiciled in France, the company is well placed incardiovascular and CNS markets. Its other areas of focus areoncology and internal medicine. Outside ethicalpharmaceuticals, the group has interests in cardiac devicesand OTC products.

Profit growth to outpace industryDriven by Plavix, Avapro, and Stilnox/Ambien, profit growth overthe forecast period should significantly outpace that of theindustry. In particular 2003 should gain from a full year’sconsolidation of US Ambien profits post the April 2002 cessation ofthe Lorex JV with Pharmacia, and an end to the US destockingissues at Bristol-Myers, Sanofi’s US marketing partner, whichimpacted adversely on 2002 revenue growth for Plavix and Avapro.

Share price pressure from early patent challenge to PlavixSignificant uncertainties on the medium-term outlook have,however, emerged following several generic challenges to the keyPlavix patent. Although the cases are unlikely to come to courtbefore late 2004 and, in our opinion, are of questionable merit, theyhave served to undermine Sanofi’s share price performance.

Robust pipeline, but can Sanofi deliver?With 30 compounds in clinical development (of which 10 are inPhases IIb & III), Sanofi-Synthelabo has an impressive pipeline for acompany of its size. However, near-term growth is not expected tobe pipeline driven and the company needs to demonstrate that ithas sufficient critical mass to ensure pipeline products reach themarket within projected timelines.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS (Euro) 2.42 2.92 3.51 4.06

EPS Growth 28% 21% 20% 16%

DPS (net) 0.60 0.70 0.80 0.90

P/E x 19.5 16.2 13.5 11.6

EV/EBITDA x 11.8 9.9 8.3 7.2

PBT adj (Euro m) 426 593 730 853

PBT stated (Euro m) 426 570 730 853Source: Deutsche Bank estimates and Company data

Price and RecommendationPrice 10 March 2003 Euro 45.01Recommendation HoldPrice target Euro 52.00


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F:SQ@F/DJEURST


Stock DataMarket Cap (Euro bn) 34.9Free float 100%Net Cash at 31/12/01 Euro 4.4bnCAGR Sales 2001-2006E (developed) 10%CAGR EPS 2001-2006E 19%Pharma Margin 2002 38.6%Pharma Margin 2006E 45.2%Shares Issued 714.7m

TOTAL SA 26.1%L’Oreal 19.5%


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Figure 295: Key expiries & launches 2001-2006E Figure 296: Portfolio Shift 2001-2005EPatent Expiries 2002 US Sales % Pharma Expiry DateCorotrope Euro 45m 1% 2001Plavix Euro 1,565m 21% 2003/11Ambien Euro 1,208m 16% 2006

Launches Peak Sales Indication Launch DateArixtra Euro 120m Thrombosis 2002Eloxatine (US) Euro 1,250m Cancer 2002Tirapazamine Euro 300m Cancer 2004Dronedarone Euro 300m Arrhythmia 2006Rimonabant Euro 500m Obesity/smoking 2005eplivanserin Euro 500m Schizophrenia 2006osanetant Euro 500m Schizophrenia 2006

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Sanofi-Synthélabo: Key profit & loss data

Figure 297: Summary of key P&L forecasts (Euro m)Year End 31 December 2001 2002 2003E 2004E 2005E 2006E % CAGR

Sales 6,488 7,448 8,076 8,991 9,784 10,466 10%

COGS (1,253) (1,378) (1,365) (1,403) (1,403) (1,392) 2%

SG&A (2,306) (2,428) (2,495) (2,745) (2,951) (3,157) 6%

R&D (1,031) (1,218) (1,290) (1,406) (1,519) (1,640) 10%

BMS Income 208 190 189 271 368 450 17%

EBIT 2,106 2,614 3,115 3,708 4,279 4,727 18%

EBITDA 2,407 2,955 3,465 4,070 4,652 4,727 14%

EPS (Euro) 1.88 2.42 2.92 3.51 4.06 4.48 19%

COGS (%) 19.3% 18.5% 16.9% 15.6% 14.3% 13.3% -7%

SG&A (%) 35.5% 32.6% 30.9% 30.5% 30.2% 30.2% -3%

R&D (%) 15.9% 16.4% 16.0% 15.6% 15.5% 15.7% 0%

EBIT (%) 32.5% 35.1% 38.6% 41.2% 43.7% 45.2% 7%Source: Company data, Deutsche Bank estimates

Sanofi-Synthélabo: Sales by geography and therapeutic category

Figure 298: Developed sales by therapy 2002 Figure 299: Developed sales by geography 2002

Cardio-vascular

38%

Oncology6%

CNS33%

InternalMedicine

23%

Europe57%US

23%

RoW20%


The P&L profile reflectsthe co-marketingarrangements struck bySanofi with its partners.Strong US sales growthof Plavix and Avaprodoes not show in salesbut comes through as aroyalty. Fullconsolidation of Ambiensales from 2002 also hasa significant impact.



Sanofi-Synthélabo: Leading products and sales by therapeutic category

Figure 300: Leading products and sales by therapeutic category (Euro m)Brand Generic Lead Indication US patent US Exclusivity 2002 2005E

Cardiovascular

Fraxiparine nadroparin DVT Non-US. Non-US 324 386

Ticlid ticlidpidine Anti-thrombin Expired Expired 137 75

Tildiem diltiazem Angina Non-US Non-US 141 115

Avapro/Aprovel irbesartan Hypertension Sep-11 Expired 562 (1068) 946 (1673)

Plavix clopidrogel Anti-thrombin Jul-03/Nov-11 Nov-02 987 (2587) 2106 (5278)

Cordarone amiodarone Arrhythmia Expired Expired 162 164

Corotrope milrinone CHF na na 127 7

Kerlone (B Blocker) betaxolol Hypertension Expired Expired 77 60

Arixtra fondiparinux DVT Aug-03 Dec-06 9 90

na dronedarone Arrhythmia na na 0 25

Central nervous system

Stilnox zolpidem Hypnotic Oct 06 Expired 1424 1864

Depakine valproate Epilepsy Expired Expired 267 328

Dogmatil dulpiride Psychosomatic Expired Expired 78 45

Solian amisulpride Schizophrenia Expired Expired 135 194

Oncology

Eloxatin oxaliplatin Cancer Jan-13 Aug-07 389 1294

Fasturtec rasburicase Hyperuricaemia na na 8 65

Tirazone tirapazamine Cancer na na 0 25

Internal medicine

Xatral (BPH) alfuzosin BPH na na 182 506Source: Company data, Deutsche Bank estimates Note: bracketed numbers represent global sales



NOTES



Europe

10 March 2003

ScheringReuters: SCHG.DE Bloomberg: SCH GR Exchange: F Ticker: SCHG.DE

Questions emerging

Schering is a German pharmaceutical and diagnosticscompany that boasts a collection of strong franchises in nichemarkets. In particular, it holds leading positions inpharmaceutical markets for the treatment of multiplesclerosis, fertility control and hormone replacement therapywhile also being the dominant producer of diagnostic mediafor use in MRI, X-ray and ultrasound.

Significant opportunity lies in US marketPharmaceutical sales growth has benefited from the successfullaunch of several new products. In particular a positive start forYasmin in the US offers promise in a market with significantpotential that, to date, has remained largely untapped by Schering.

Pipeline could provide dramatic lift to long term growthAn emerging pipeline of oncology and cardiovascular (CV) products,not least anti-thrombotics, offer interesting future potential. Whilethe company’s modest US infrastructure suggests penetration inthat market would necessitate out-licensing, significant successwith one of a number of novel compounds could materially alterthe company’s long-term growth trend.

New competitors and negative news put pressure onBetaseron and HRT franchiseThe past year has seen challenges emerge on several importantfronts. Not least amongst these has been the emergence ofSerono’s multiple sclerosis drug Rebif (co-marketed by Pfizer) asan additional competitor in the US multiple sclerosis market, amarket in which Schering has a 25% share. Equally, growth in thecompany’s HRT franchise is expected to come under somepressure following recent adverse findings in a large US studylooking at the risk/benefit profile of long-term HRT treatment.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS (Euro) 2.35 2.56 2.88 3.22

EPS Growth 9% 13% 12% 12%

DPS (net) 0.93 1.01 1.14 1.27

P/E x 14.4 12.5 11.1 9.7

EV/EBITDA x 7.3 6.4 5.8 5.3

PBT adj (Euro m) 718 802 903 1,009

PBT stated (Euro m) 718 802 903 1,009Source: Deutsche Bank estimates and Company data

Price and RecommendationPrice 10 March 2003 Euro 33.80Recommendation BuyPrice target Euro 43.0


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Stock DataMarket Cap (Euro) 6.9Free float 90%Net Cash at 31/12/01 Euro 0.6bnCAGR Sales 2001-2006E 6.6%CAGR EPS 2001-2006E 11.4%Group Margin 2002 14.8%Group Margin 2006E 17.1%Shares Issued 197m


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Holger Blum+49 69 9103 [email protected]



Figure 301: Key expiries & launches 2001-2006E Figure 302: Portfolio shift 2001-2005EPatent Expiries 2002 Sales % Pharma Expiry DateFludara Euro 149m 3% 2003Mirena Euro 137m 3% 2003

Launches Peak Sales Indication Launch DateYasmin Euro 500m Contraception 2001Campath Euro 250m Oncology 2001Zevalin Euro 50m Oncology 2002

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Schering: Key profit & loss data

Figure 303: Summary key P&L data 2001-2006E (Euro m)Year End 31 December 2001 2002 2003E 2004E 2005E 2006E % CAGR

Sales 4,842 5,023 5,224 5,572 6,058 6,666 6.6%

of which pharma 3,228 3,467 3,692 3,965 4,349 4,840 8.4%

COGS 1,215 1,212 1,243 1,293 1,399 1,533 4.8%

SG&A 2,126 2,195 2,231 2,368 2,556 2,800 5.7%

R&D 864 947 972 1,036 1,127 1,240 7.5%

EBIT 668 741 817 916 1,020 1,143 11.3%

EBITDA 868 989 1072 1170 1273 1394 9.9%

EPS - IAS (Euro) 2.11 2.35 2.56 2.88 3.22 3.62 11.4%

COGS (%) 25.1% 24.1% 23.8% 23.2% 23.1% 23.0% -1.7%

SG&A (%) 43.9% 43.7% 42.7% 42.5% 42.2% 42.0% -0.9%

R&D (%) 17.8% 18.9% 18.6% 18.6% 18.6% 18.6% 0.8%


Schering: Sales by geography and therapeutic category

Figure 304: Sales by therapeutic area 2002 Figure 305: Sales by geography 2002

Contraception26%

CNS18%

HRT7%

Oncology8%

Othertherapeutics

7%

Diagnostics30%

Dermatology4%

Europe46%

US26%

Japan12%

L America/Canada

9%

Asia4%

RoW3%


We expect the launchof new products willmean that drug growtheclipses that of thegroup as a whole.Margins should alsobenefit from thegrowing contribution tosales from higher-margin products.



Schering: Leading products and sales by therapeutic category (2001 and 2005E)

Figure 306: Leading products and sales by therapeutic category (Euro m)Brand Generic Indication US patent US Exclusivity Sales 2002 Sales 2005E

Contraception/HRT

Diane Cyproterone Contraception Non-US Non-US 226 241

Triquilar Levonorgesterol Contraception Non-US Non-US 80 61

Femovan Gestodene Contraception Non-US Non-US 100 76

Microgynon Levonorgesterol Contraception Non-US Non-US 130 103

Mirena Levonorgestrol Contraception Non-US Non-US 137 232

Nuvelle Oestrodiol HRT Non-US Non-US 25 27

Climara Oestrodiol patch HRT Jun-10 Expired 89 67

Yasmin Drospirenone Contraception None Jun-04 152 622

Musculo Skeletal

Betaseron Beta interferon MS Biological Biological 783 846

Oncology

Fludara Fludarabine Cancer Feb-03 Expired 149 30

Campath alemtuzumab Cancer Non-US Non-US 60 248

Zevalin ibritumomab Cancer na na 0 48

Androcur Cyproteron Prostate cancer Expired 101 81

Leukine na Leukaemia Biological na 45 101

Bonefos Bisphosphonate Hypercalcaemia Non-US Non-US 43 51

Cardiovascular

Betapace Sotalol Arrhythmia Expired Expired 61 33Source: Company data, Deutsche Bank estimates



NOTES



US Company Profiles

Bristol-Myers Squibb

Eli Lilly

Merck

Pfizer

Schering-Plough

Wyeth



North America

10 March 2003

Bristol-Myers SquibbCompanyReuters: BMY.N Exchange: NYSE Ticker: BMY

Challenging times

Bristol-Myers Squibb derives over three-quarters of itscontinuing sales from pharmaceuticals with strong franchisesin cardiovascular, oncology/chemotherapy and anti-infectivemarkets. Outside pharmaceuticals the company has solidpositions in the markets for imaging agents, wound care andinfant nutritionals.

Still emerging from accounting and stocking issuesGeneric competition to Glucophage, among others, combined withthe unwinding of stuffed wholesaler channels served tosignificantly undermine results in 2002. The revelation that inearlier years aggressive use of incentives had been employed toencourage sales led to an SEC investigation and the company hasrestated its accounts for 1999, 2000 and 2001. Several seniormembers of the previous management team have departed.

Patent expiries and thin pipeline make for challenging nearterm outlookForthcoming patent expiries, not least that of the company’s best-selling product Pravachol in 2005/06 suggest that Bristol-Myers willface quite a headwind over the forecast period. Following thefailure of blockbuster hopeful Vanlev, little of substance isexpected to emerge from the pipeline in the near term over andabove the recent launch of schizophrenia drug Abilify.

Strategic issues, recent missteps raise takeover speculationPipeline and sales mishaps together with a debacle over the $2bncost of in-licensing the cancer drug, Erbitux, have left the shareslargely friendless and vulnerable to takeover. Given the strategicchallenges facing the business, the company’s independent futureis certainly not assured.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS ($) 1.45 1.60 1.72 1.86

EPS Growth -22.5% 10.3% 7.5% 8.1%

DPS (net) 1.12 1.12 1.14 1.16

P/E x 15.7 14.3 13.3 12.3

EV/EBITDA x 8.8 8.6 7.8 7.0

PBT adj ($m) 4,023 4,432 4,800 5,189

PBT stated ($m) 4,023 4,432 4,800 5,189Source: Deutsche Bank Securities Inc. Estimates and Company data

Price and RecommendationPrice 10 March 2003 US$22.80Recommendation HoldPrice target US$25


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Stock DataMarket Cap (US$ bn) 44.4Free float 99%Net Debt at 31/12/01 0.9bnCAGR Sales 2001-2005E 5.2%CAGR EPS 2001-2005E -0.1%Group Margin 2002 5.1%Group Margin 2005E 25.0%Shares Issued 1942m


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Barbara Ryan+1 212 469 [email protected]



Figure 307: Key US expiries & launches 2001-2005E Figure 308: Portfolio shift 2001-2005EPatent Expiries 2002 WW Sales % Pharma Expiry DateMonopril n/a n/a 2002Serzone $0.2 bn 1% 2003Glucophage XR $0.3 bn 2% 2003Glucovance $0.2 bn 1% 2003Paraplatin n/a n/a 2004Pravachol $2.3 bn 16% 2005Cefzil n/a n/a 2005

Launches Peak Sales Indication Launch DateAbilify $0.6 bn Schizophrenia 2002atazanavir $0.3 bn HIV (PI) 2004garenoxicin $0.3 bn antibiotic 2004DPC083 $0.5 bn HIV (NNRTI) 2005CTLA4IG $0.5 bn RA 2005

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Patent expiring New launches Growth Other


Bristol-Myers Squibb: Key profit & loss data

Figure 309: Summary P&L (US$m)Year End 31 December 2000 2001 2002 2003E 2004E 2005E % CAGR

Sales 17,538 17,987 18,769 19,461 20,690 22,053 5.1%

COGS (4,730) (5,423) (6,618) (6,870) (7,283) (7,763) 12.8%

SG&A (5,378) (5,193) (5,218) (5,644) (6,062) (6,506) 4.2%

R&D (1,878) (2,183) (2,218) (2,215) (2,245) (2,275) 4.2%

EBIT 5,552 5,188 4,715 4,732 5,100 5,509 -0.2%

EBITDA 6,458 6,103 5,565 5,672 6,140 6,659 0.6%

EPS (US$) 2.02 1.87 1.45 1.60 1.72 1.86 -1.6%

COGS (%) 27.0% 30.1% 35.3% 35.3% 35.2% 35.2% 6.1%

SG&A (%) 30.7% 28.9% 27.8% 29.0% 29.3% 29.5% -0.8%

R&D (%) 10.7% 12.1% 11.8% 11.4% 10.9% 10.3% -0.7%


Bristol-Myers Squibb: Sales by geography and therapeutic category

Figure 310: Sales by therapeutic category 2001E Figure 311: Sales by geography 2001E

Cardio-vascular

31%

Oncology24%

Anti-infective

16%

CNS6%

Diabetes18%

Other5%

US67%

Europe/Africa19%

AsiaPacific

7%

Other7%


Group sales growth hasbeen undermined bythe loss of patentprotection on keyproducts includingGlucophage, Taxol andBuSpar together withan overstatement ofsales in earlier years.Operating margins arenot expected to retaintheir previous peaksover the forecasthorizon.



Bristol-Myers Squibb: Leading products and sales by therapeutic category

Figure 312: Leading products and sales by therapy sales (US$m)Brand Generic Lead Indication Key US Patents US NCE Exclusivity Sales 2002 Sales 2005E

Cardiovascular

Pravachol Pravastatin Cholesterol Apr-06 expired 2,266 2,465

Plavix Clopidrogel Anti-thrombotic Feb-08 expired 1,890 3,755

Avapro Irbesartan Hypertension Mar-11 expired 586 810

Coumadin Warfarin Angina expired expired na na

Oncology

TAXOL Paclitaxel Chemotherapy expired expired 857 na

Oncology Therapeutics Network Chemotherapy na na na 1,900 3,300

Paraplatin Carbaplatin Chemotherapy April-04 expired na na

Anti-infectives

Zerit Stavudine HIV-nRTI Jun-08 expired 443 485

Sustiva Evafirenz HIV-NNRTI Sep-14 Sep-03 455 580

VIDEX Didanosine HIV-NRTI Aub-06 May-04 262 300

Tequin Gatifloxacin Antibiotic Dec-07 Dec-04 184 130

CNS

BuSpar Buspirone Anxiety expired expired 53 23

Serzone Nefazodone Depression Mar-03 expired 221 10

Abilify Aripiprazole Schizophrenia expired Nov-07 0 430

Other

Glucophage Metformin Diabetes expired expired 220 15

Glucophage XR Metformin Diabetes expired Oct-03 297 30

Glucovance Metformin combo Diabetes expired Jul-03 246 375Source: Company data, Deutsche Bank estimates



NOTES



North America

10 March 2003

Eli Lilly and CompanyReuters: LLY.N Exchange: NYSE Ticker: LLY

Positioned for growth

Eli Lilly is a global pharmaceutical manufacturer with corefranchises in CNS, diabetes/endocrinology, anti-infectives andoncology. The company also operates an Animal HealthDivision (Elanco), but, given the strength of thepharmaceutical business, it represents just over 5% of sales.

Prozac patent expiry offset by strong new product portfolioDespite the negative impact of generic competition to Prozac fromAugust 2001, the strong growth of several core products, not leastZyprexa (schizophrenia), Gemzar (cancer) and Actos (diabetes), hasenabled Lilly to achieve broadly flat earnings through the expiryperiod by compensating for the loss of some $2bn of Prozac sales.The company has the strongest pipeline of the US majors.

Product approvals delayed by manufacturing issuesAlthough ongoing manufacturing issues with the FDA mean thatthe timing of the approval of certain products remains uncertain,we expect Lilly to have gained US approval to market seven toeight new products by the end of 2004.

New products appear promising, but will they deliver?After the disappointing launch of blockbuster hopeful, Xigris, webelieve key to Lilly’s near-term growth will be the execution ofsuccessful launches for Strattera (ADHD), Forteo (osteoporosis),Cialis (erectile dysfunction), Cymbalta (depression) and Alimta(oncology). In our view, early prescription data will be key to shareprice performance.

Low patent risk and robust pipeline enhance growth outlookThe recent launch of BMS’s Abilify could introduce an importantcompetitor to Zyprexa, Lilly’s key growth driver, which also facespatent challenges. However, with a full launch schedule, Lilly lookssignificantly better placed than its peers to deliver high-qualityearnings growth over the forecast period.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS ($) 2.55 2.50 2.96 3.44

EPS Growth -8% -2% 19% 16%

DPS (net) 1.24 1.34 1.45 1.57

P/E x 22.3 22.8 19.2 16.6

EV/EBITDA x 15.1 15.6 13.6 12.0

PBT adj ($ m) 3542 3463 4114 4773

PBT stated ($ m) 3542 3463 4114 4773Source: Deutsche Bank Securities Inc. Estimates and Company data

Price and RecommendationPrice 10 March 2003 US$56.00Recommendation BuyPrice target US$75


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Stock DataMarket Cap (US$ bn) 61.0Free float 88%Net Cash at 31/12/02 $0.1bnCAGR Sales 2001-2005E 7.8%CAGR EPS 2001-2005E 5.7%Group Margin 2002 30.0%Group Margin 2005E 28.4%Shares Issued 1086m


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Figure 313: Key US expiries & launches 2001-2005E Figure 314: Portfolio shift 2001-2005EPatent Expiries 2002 US Sales % Pharma Expiry DateProzac $0.4 bn 4% 2001Axid <$0.1 bn <1% 2002

Launches Peak Sales Indication Launch DateXigris $0.4 bn Sepsis 2001Forteo $0.4 bn Osteoporosis 2002Strattera $1.0 bn ADHD 2002Cymbalta $1.5 bn Depression 2003Cialis $0.8 bn ED 2003duloxetine $0.5 bn SUI 2003Alimta $0.5 bn Oncology 2004Ruboxistaurin $1.0 bn Diab. Retinopathy 2005

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Eli Lilly: Key profit & loss data

Figure 315: Summary key P&L data (US$ m)Year End 31 December 2000 2001 2002 2003E 2004E 2005E % CAGR

Sales 10,953 11,542 11,078 12,161 13,854 15,595 7.3%

COGS (2,068) (2,160) (2,177) (2,699) (3,006) (3,322) 9.9%

SG&A (3,228) (3,417) (3,424) (3,865) (4,433) (4,990) 9.1%

R&D (2,019) (2,235) (2,149) (2,370) (2,600) (2,860) 7.2%

EBIT 3,638 3,729 3,328 3,227 3,814 4,423 4.0%

EBITDA 4,555 4,419 4,092 3,988 4,614 5,273 3.0%

EPS (US$) 2.65 2.76 2.55 2.50 2.96 3.44 5.4%

COGS (%) 18.9% 18.7% 19.6% 22.2% 21.7% 21.3% 2.4%

SG&A (%) 29.5% 29.6% 30.9% 31.8% 32.0% 32.0% 1.7%

R&D (%) 18.4% 19.4% 19.4% 19.5% 18.8% 18.3% -0.1%


Eli Lilly: Sales by geography and therapeutic category

Figure 316: Sales by therapeutic area 2002 Figure 317: Sales by geography 2001

Antiinfective7%

Cardio-vascular

5%Oncology

9%

Other2%

Endocrin-ology25%

Women'sHealth

8%

CNS44%

US62%

Japan3%

Europe17%

RoW18%




Eli Lilly: Leading products and sales by therapeutic category

Figure 318: Leading products and sales by therapeutic category (US$ m)Brand Generic Lead Indication Key US Patents US NCE Exclusivity Sales 2002 Sales 2005E

Anti-Infectives

Ceclor Cefaclor Antibiotic expired expired 198 136

Xigris RhAPC Sepsis biological n.a. 100 260

Vancocin Vancomycin Antibiotic expired expired 145 149

Cardiovascular

ReoPro Abciximab Thrombotic biological biological 384 350

Oncology

Alimta Pemetrexed Cancer n.a. n.a. 0 260

Gemzar Gemcitabine Cancer May-10 Expired 875 1270

Gastrointestinal

Axid Nizatidine Ulcer/GERD expired Expired 113 59

Endocrinology

Humatrope Insulin Diabetes biological Biological 329 335

Humulin Insulin Diabetes biological Biological 1004 935

Humalog Recombinant insulin Diabetes biological Biological 834 1165

Actos Pioglitazone Diabetes Jan-06 Jul-04 330 700

Women’s Health

Forteo Teriparatide Osteoporosis n.a. Nov-05 6 370

Evista Raloxifene Osteoporosis Apr-03/Mar-14 Expired 822 1435


Strattera Atomoxetine ADHD n.a. Nov-07 3 490

Cymbalta Duloxetine Depression Dec-08 n.a. 0 900

Prozac Fluoxetine Depression expired expired 656 235

Zyprexa Olanzapine Schizophrenia Apr-11 expired 3689 4590Source: Company data, Deutsche Bank estimates



NOTES



North America

10 March 2003

Merck & Co. Inc.Reuters: MRK.N Exchange: NYSE Ticker: MRK

Relying on Zetia

Merck is a global, research-driven pharmaceutical companythat develops and markets a broad range of human healthproducts and provides pharmaceutical benefit managementservices through its Merck-Medco subsidiary. The companyhas core franchises in cardiovascular, inflammation andendocrinology markets as well as a leading vaccines business.Sales arise equally between the two divisions.

Impact of generic competition offset by growth of key brandsDespite the advent of generic competition to drugs accounting foralmost US$5 billion of sales over the past two years, thecompany’s success at marketing five key products namely Vioxx(arthritis/pain), Zocor (cholesterol), Fosamax (osteoporosis),Singulair (asthma) and Cozaar (hypertension) has enabled it towithstand a significant dent to earnings.

New competition, product delays increase reliance on ZetiaWith the 2006 US patent expiry of best-seller Zocor looming largeand the late stage pipeline appearing several years off, the successof the recent launch of Zetia and the development of a combinationZocor/Zetia product by the Merck/Schering-Plough joint venture isan imperative for future growth. This is made all the more so by anincrease in competition to each of the five key growth drivers and adelay to the expected launch of important franchise products, notleast the second generation COX2 inhibitor, Arcoxia.

Medco demerger delayed but still to comeAlthough turbulent stock markets resulted in the companypostponing the intended spin out of the Medco managed carebusiness, a demerger is still intended in 2003. Upon completionthis should further highlight the excellent underlying profitability ofthe pharmaceutical business.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS ($) 3.14 3.40 3.69 4.03

EPS Growth 0% 8% 8% 9%

DPS (net) 1.41 1.46 1.55 1.65

P/E x 16.7 15.4 14.2 13.0

EV/EBITDA x 10.9 10.1 9.5 8.8

PBT adj ($ m) 10,213 10,831 11,459 12,208

PBT stated ($ m) 10,213 10,831 11,459 12,208Source: Deutsche Bank Securities Inc. Estimates and Company data

Price and RecommendationPrice 10 March 2003 US$52.80Recommendation HoldPrice target US$60


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Stock DataMarket Cap (US$ bn) 117.5Free float 98%Net Debt at 31/12/02 $7.7 bnCAGR Sales 2001-2005E 6.4%CAGR EPS 2001-2005E 6.4%Group Margin 2002 19.1%Group Margin 2005E 18.4%Shares Issued 2277m


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Figure 319: Key US expiries & launches 2001-2005E Figure 320: Portfolio shift 2001-2005EPatent Expiries 2002 US Sales % Pharma Expiry DateMevacor <$0.1 bn <1% 2001Prinivil $0.4 bn 2% 2002Zocor $3.3 bn 15% 2006

Launches Peak Sales Indication Launch DateCancidas $0.5 bn Antifungal 2001Invanz $0.5 bn Antibiotic 2002Zetia $1.0 bn Cholesterol 2002Emend $0.5 bn Anti-emesis 2003Arcoxia $0.8 bn Osteoarthritis 2004KRP-297 $0.8 bn Diabetes 2005

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Merck: Key profit & loss data

Figure 321: Summary key P&L data (US$ m)Year End 31 December 2000 2001 2002 2003E 2004E 2005E % CAGR

Sales 40,363 47,716 51,790 55,670 58,125 61,130 10.9%

Of which pharma* na 21,385 21,628 22,170 21,625 21,880 na

COGS (22,444) (28,977) (33,054) (35,582) (37,316) (39,368) 15.1%

SG&A (6,168) (6,224) (6,187) (6,512) (6,684) (6,969) 3.1%

R&D (2,344) (2,457) (2,677) (2,940) (3,225) (3,550) 10.9%

EBIT 9,408 10,059 9,872 10,636 10,899 11,243 4.6%

EBITDA 11,115 11,841 11,685 12,631 13,469 14,458 6.8%

EPS (US$) 2.90 3.14 3.14 3.40 3.69 4.03 8.6%

COGS (%) 55.6% 60.7% 63.8% 63.9% 64.2% 64.4% 3.7%

SG&A (%) 15.3% 13.0% 11.9% 11.7% 11.5% 11.4% -7.1%

R&D (%) 5.8% 5.1% 5.2% 5.3% 5.5% 5.8% 0.0%

EBIT (%) 23.3% 21.1% 19.1% 19.1% 18.8% 18.4% -5.8%Source: Company data, Deutsche Bank estimates*Pharma sales figures not available for 2000 due to change in accounting practises and restatement of historical figures.

Merck: Sales by geography and therapeutic category

Figure 322: Pharma sales by therapy 2002 Figure 323: Sales by geography 2001

Cardiovascular38%

Antibiotics3%Other

19%

Vaccines/Biologics

4%

AZN products5%

Bone/ Pain24%

Respiratory7% Other

18%

US56%

Europe18%

Japan8%




Merck: Leading products and sales by therapeutic category

Figure 324: Leading Products by category sales ($ m)Brand Generic Lead Indication Key US Patents US NCE Exclusivity Sales 2002 Sales 2005E

Cardiovascular

Zocor simvastatin Cholesterol Jun-06 expired 5580 4200

Prinivil lisinopril Hypertension expired expired 480 30

Cozaar/Hyzaar losartan Hypertension Aug-09 expired 2190 2850

Antibiotics

Primaxin imipenem Antibiotic Sep-09 na 585 475

Cancidas caspofungin Antifungal Mar-13 Jan-06 105 475

Invanz ertapenem Antibiotic Feb-13 Nov-06 15 375

Other

Trusopt/Cosopt dorzolamide HCl Glaucoma Apr-08 expired 425 330

Proscar finasteride BPH Jun-06 expired 550 480

Fosamax alendronate Osteoporosis Aug-07 expired 2250 2800

Propecia finasteride Alopecia Jun-06 expired 215 165

Maxalt rizatriptan Migraine Jun-12 Jun-03 295 330

Singulair montelukast Asthma Aug-12 Aug-03 1505 2675

Crixivan/Stocrin indinavir HIV-PI May-12 expired 290 170

Vioxx rofecoxib Arthritis Jun-13 May-04 2530 2625

Emend aprepitant Anti-emetic na na 0 500

Arcoxia etoricoxib Arthritis na na 30 100Source: Company data, Deutsche Bank estimates



NOTES



North America

10 March 2003

Pfizer Inc.Reuters: PFE.N Exchange: NYSE Ticker: PFE

Industry leader with hugefinancial flexibilityFollowing the pending merger with Pharmacia, Pfizer willcement its position as the world’s largest pharmaceuticalcompany with just over 11% of the global market. Thecombined entity will have strong positions in cardiovascular,anti-infective, musculo-skeletal and CNS and unparalleledstrength in US marketing. Robust top-line growth combinedwith cost-saving opportunities should enable profit growth tooutpace that of the industry over the forecast period.

Merged entity set to dwarf the competitionThe merger with Pharmacia will create a business with enormouspotential and financial flexibility. R&D spending of around $7-8 bnp.a. will be broadly twice that of the nearest competitor whilestrong growth from the enlarged portfolio should be augmented byan estimated $2.5bn of cost savings by 2005. Managementexpectations for 16% compound growth in earnings over the 2002-4 period look realistically achievable, in our view.

Pharma business insulated by breadth and scale of portfolioIn our opinion, the broad spread of the company’s business leavesit much better placed to deliver consistent growth. The sheer scaleof the business also suggests that anticipated generic competitionto any one significant drug such as Zithromax, Zyrtec and Zoloftover the 2005-7 period will be far more manageable than it hasbeen for competitors.

Impact of new competition offset by launch of new productsAfter several product launch delays, competition looks set toemerge to several of Pfizer’s key growth drivers, not least Lipitorand Viagra through the course of 2003. However, Pfizer’s pipelinecontains several products of interest, such as Spiriva, Indiplon andpregabalin, which should sustain high-single-digit revenue growth,while margins should continue to expand with synergies.

Year End Dec 31 (proforma) 2002E 2003E 2004E 2005E

EPS ($) 1.41 1.80 2.14 2.46

EPS Growth -15% 28% 19% 15%

DPS (net) 0.49 0.57 0.62 0.67

P/E x 19.0 16.7 14.0 12.2

EV/EBITDA x 14.6 12.5 11.2 9.9

PBT adj ($ m) 15,060 18,108 20,749 23,453

PBT stated ($ m) 15,060 18,108 20,749 23,453Source: Deutsche Bank Securities Inc. Estimates and Company data



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HIGH 0.04 19/10/01, LOW 0.02 31/12/99, LAST 0.04 28/2/03Source: DATASTREAM

Stock DataMarket Cap (US$ bn) 231.4Free float 97%Net Debt at 31/12/02 $1.3bnCAGR Sales 2001-2005E (proforma) 7.4%CAGR EPS 2001-2005E (proforma) 10.5%Group Margin 2002 (proforma) 32.7%Group Margin 2005E (proforma) 39.7%Shares Issued (proforma) 8081m


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Figure 325: Key US expiries & launches 2001-2005E Figure 326: Portfolio shift 2001-2005EPatent Expiries 2002 US Sales % Pharma Expiry DateAccupril $0.4 bn 1% 2003Neurontin $1.9 bn 6% 2004Diflucan $0.6 bn 2% 2004Zithromax $1.1 bn 4% 2005

Launches Peak Sales Indication Launch DateGeodon $0.6 bn schizophrenia 2001Vfend $0.5 bn antifungal 2002Bextra $1.5 bn RA 2002Inspra $0.5 bn hypertension 2003Spiriva $1.0 bn COPD 2004Indiplon $0.8 bn Insomnia 2004Pregabalin $1.5 bn neuropathic pain 2004

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Lipitor Patent Expiring Launch OtherSource: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates

Pfizer: Key profit & loss data*

Figure 327: Key summary proforma P&L data ($ m)Year End 31 December 2001 2002 2003E 2004E 2005E % CAGR

Sales 43,858 44,993 49,941 53,911 58,357 7.4%

COGS (7,621) (7,099) (7,845) (8,339) (8,903) 4.0%

SG&A (15,413) (15,632) (16,987) (18,178) (19,340) 5.8%

R&D (7,022) (7,529) (7,949) (8,424) (8,899) 6.1%

Merger synergies 0 0 1,400 2,200 2,600 na

EBIT 13,802 14,733 17,893 20,504 23,148 13.8%

EPS (US$) 1.65 1.41 1.80 2.14 2.46 10.5%

COGS (%) 17.4% 15.8% 15.7% 15.5% 15.3% -3.2%

SG&A (%) 35.1% 34.7% 34.0% 33.7% 33.1% -1.5%

R&D (%) 16.0% 16.7% 15.9% 15.6% 15.2% -1.2%

EBIT (%) 31.5% 32.7% 35.8% 38.0% 39.7% 6.0%Source: Company data, Deutsche Bank estimates; *Assumes 1/1/03 completion of Pharmacia merger

Pfizer: Sales by geography and therapeutic category

Figure 328: Proforma sales by therapy 2002 Figure 329: Proforma sales by geography 2002E

Cardiovascular35%

Antiinfective10%CNS

16%

Allergy3%

Musculoskeletal10%

Other22%

Metabolism4%

US65%

Europe21%

Japan7%

RoW7%

Source: Company data Source: Company data, Deutsche Bank estimates

The summary tableassumes completion ofthe deal from the startof 2003. It highlights theongoing strong top-linegrowth and evenstronger bottom-lineperformance as thebenefit of the $2.5bn ofcost savings worksthrough



Pfizer: Leading products and sales by therapeutic category

Figure 330: Leading products and sales by therapeutic category ($ m)Brand Generic Lead Indication Key US Patents US NCE exclusivity Sales 2002 Sales 2005E

Cardiovascular

Lipitor Atorvastatin Cholesterol Jun-11 expired 7,972 11,425

Norvasc Amlodipine Hypertension Sep-07 expired 3,846 4,175

Accupril Quinapril Hypertension April-03 expired 668 200

Cardura XL Doxasocin Hypertension expired expired 531 171

Inspra Eplerenone Hypertension Apr-04 Sep-07 0 800

Infection

Zithromax Azithromycin Antibiotic Nov-05 expired 1,516 1,690

Diflucan Fluconazole Anti-fungal Jan-04 expired 1,112 475

Viracept Nefinavir HIV-PI Oct-13 Nov-02 336 265

Vfend Voriconazole Anti-fungal expired May-07 42 490

Musculo-skeletal

Celebrex Celecoxib Osteoarthritis Nov-13 Dec-03 3,050 3,425

Bextra Valdecoxib Osteoarthritis Feb-15 Nov-06 470 1,350

Dynastat Parecoxib Osteoarthritis n.a. n.a. 0 535

Oncology

Camptosar Irinotecan Oncology Aug-07 Apr-03 574 710

Pharmorubicin/Ellence Docerubicin Oncology Jun-06 expired 333 447

CNS

Zoloft Sertraline Depression Jun-06 expired 2,742 3,155

Neurontin Gabapentin Epilepsy Jul-00 expired 2,269 825

Pregabalin n.a. Epilepsy n.a. n.a. 0 2,050

Aricept* Donepezil Alzheimer’s Nov-10 expired 203 340

Relpax Eletriptan Migraine n.a. n.a. 6 310

Indiplon n.a. Insomnia n.a. n.a. 0 375

Geodon Ziprasidone Schizophrenia Mar-07 Feb-07 222 500

Metabolism

Glucotrol XL Glipizide Diabetes II Sep-09 expired 297 255

Exubera Insulin Diabetes I n.a. n.a. 0 250

Detrol Tolterodine Incontinence Jan-12 Mar-03 757 1,130

Darifenacin Darifenacin Incontinence n.a. n.a. 0 210

Genotropin Somatropin Dwarfism Apr-13 expired 551 660

Other

Xalatan Timaprost Glaucoma Mar-11 expired 928 1,185

Zyrtec/Reactine Cetirizine Rhinitis Dec-07 expired 1,115 1,350

Viagra Sildenafil Impotence Jun-11 Mar-03 1,735 2,220*Does not include alliance revenues on AriceptSource: Company data, Deutsche Bank estimates



NOTES



North America

10 March 2003

Schering-PloughCorporationReuters: SGP.N Exchange: NYSE Ticker: SGP

Strong EPS acceleration post2003 troughDeriving about 85% of revenues from ethical pharmaceuticals,Schering-Plough has strong franchises in markets for allergy,respiratory diseases and anti-infectives, most significantlyhepatitis C. Outside pharmaceuticals, the company derivesmodest revenues from interests in animal health, foot care (DrScholl), sun care (Coppertone) and OTC medicines.

Better transparency with new managementA new CEO should lead to increased transparency following thesecretive reign of Dick Kogan. We see EPS set to grow 20% in2004 and 2005 based upon leverage from Zetia and Zetia/Zocor.

Challenges ahead for allergy franchiseKey to maintaining its prescription allergy/asthma franchise will bethe sustained sales and payor reimbursement of its Claritin follow-on, Clarinex, in the wake of Claritin’s OTC switch, along withgrowth of existing drugs (e.g. Nasonex) and approval and launch ofpipeline products (e.g. Asmanex).

Zetia, Zetia/ZocorZetia, the first offspring of the SGP/Merck joint venture, along withthe Phase III Zetia/Zocor combination product, provides asignificant opportunity in the huge cholesterol lowering market,which is expected to reach as much as $25 billion by 2005. Itssuccess is key to the company’s future earnings performance.

Hepatitis C franchise in competitionThe company’s Intron A/PEG-Intron/Rebetron franchise forhepatitis C has continued to post strong sales. Competition is,however, set to intensify not least from Roche’s recently approvedPegasys but also from the expected launch of generic ribavirin laterthis year.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS ($) 1.40 0.79 0.95 1.20

EPS Growth -11% -43% 19% 26%

DPS (net) 0.68 0.68 0.72 0.76

P/E x 11.6 20.5 17.2 13.6

EV/EBITDA x 7.1 11.6 10.2 8.5

PBT adj ($ m) 2671 1520 1805 2281




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Stock DataMarket Cap (US$ bn) 25.2Free float 100%Net Cash at 31/12/02 $1.9bnCAGR Sales 2001-2005E -0.4%CAGR EPS 2001-2005E -6.6%Group Margin 2002 25.3%Group Margin 2005E 17.2%Shares Issued 1470m


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Figure 331: Key US expiries & launches 2001-2005E Figure 332: Portfolio shift 2001-2005EPatent Expiries 2002 US Sales % Pharma Expiry DateClaritin $1.1 bn 13% 2002

Launches Peak Sales Indication Launch DatePEG-Intron $1.0 bn Hepatitis C 2001Clarinex $0.7 bn Allergic rhinitis 2002Zetia, Zetia/Zocor* $5.0 bn Cholesterol 2002/2004Asmanex $0.5 bn Asthma 2003Noxafil $0.5 bn Antifungal 2004Tenovil (IL-10) $0.5 bn RA 2004Melacine $0.2 bn Melanoma 2004* Joint venture with Merck 0%

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Schering-Plough: Key profit & loss data

Figure 333: Summary key P&L data (US$ m)Year to 31 December 2000 2001 2002 2003E 2004E 2005E CAGR

Sales 9,816 9,762 10,310 8,896 9,125 9,605 -0.4%

of which pharma 8,346 8,365 8,877 7,231 7,360 7,760 -1.4%

COGS 1,903 2,079 2,597 2,803 2,801 2,939 9.1%

SG&A 3,486 3,444 3,681 3,170 3,239 3,400 -0.5%

R&D 1,333 1,311 1,425 1,443 1,530 1,615 3.9%

EBIT 3,094 2,928 2,607 1,480 1,555 1,651 -11.8%

EBITDA 3,513 3,363 3,061 1,950 2,280 2,806 -4.4%

EPS ($) 1.64 1.58 1.40 0.79 0.95 1.20 -6.1%

COGS % 19.4% 21.3% 25.2% 31.5% 30.7% 30.6% 9.6%

SG&A % 35.5% 35.3% 35.7% 35.6% 35.5% 35.4% -0.1%

R&D % 13.6% 13.4% 13.8% 16.2% 16.8% 16.8% 4.4%

EBIT % 31.5% 30.0% 25.3% 16.6% 17.0% 17.2% -11.4%Source: Company data, Deutsche Bank estimates

Schering-Plough: Sales by geography and therapeutic area

Figure 334: Sales by therapeutic category 2002 Figure 335: Sales by geography 2001

Other9% Dermatology

6%

Cardiovascular5%

Allergy/Respiratory

39%

Antiinfective/Cancer

41%

Other10%

US61%

Japan4%

Europe25%


Impact of Claritin OTCswitch on Claritin/Clarinex franchise toreduce near-term sales,while PEG-Intron forhepatitis and Zetia forcholesterol loweringhace the potential todrive longer-termgrowth, especiallyagainst Schering-Plough’s relatively smallpharma business.



Schering-Plough: Leading products and sales by therapeutic category

Figure 336: Leading Product Sales by therapeutic category ($ m)Brand Generic Lead Indication Key US Patents US NCE exclusivity Sales 2002 Sales 2005E

Allergy/Respiratory

Claritin loratadine Allergy expired expired 1387 50

Claritin D loratadine/pseudoephedrine Colds & Flu Oct-12 expired 546 80

Clarinex desloratidine Allergy Apr-04, Dec-14 Dec-06 598 805

Claritin OTC (US) loratadine Allergy Expired expired 105 260

Nasonex mometasone Allergy Oct-17 expired 524 775

Proventil salbutamol Asthma expired expired 128 50

Asmanex mometasone Asthma na na 0 495

Anti-Infective/Anticancer

Remicade (non-US) infliximab Rheumatoid arthritis biological biological 337 635

Intron A/Rebetron/PEG interferon Hepatitis C varied varied 2736 1650

Temodar temozolomide Brain tumour Nov-10 Aug-04 279 375

Posaconazole posconazole Fungal infections na na 0 95

Tenovil interleukin-10 Rheumatoid arthritis na na 0 75

Melacine na Melanoma na na 0 35

Cardiovascular

K-Dur potassium Potassium deficiency Sep-06 expired 18 10

Nitro-Dur nitroglycerin Angina Feb-10 expired 86 105

Integrilin eptifibatide Thrombosis Nov-14 May-03 303 480

Zetia/Zocor ezetimibe Cholesterol Sep-13 Oct-07 50 1900Source: Deutsche Bank Securities Inc. estimates and company information



NOTES



North America

10 March 2003

WyethReuters: WYE.N Exchange: NYSE Ticker: WYE

Concentrating portfolio

Following the sale in March 2000 of its agrochemical interests,Wyeth is now focused almost entirely on human health, andindeed changed its name accordingly. The company has corefranchises in women’s health, contraception, inflammatorydiseases and vaccines. Wyeth also has US$2.3 billion ofConsumer Product sales.

Double-digit sales and EPS growth driven by new productsNew products continue to drive growth, most notably Effexor,Enbrel, Protonix and Prevnar. Prevnar is set to become a $2bnvaccine, while Enbrel sales should exceed that level. We believethese important new drugs will drive double-digit sales and EPSgrowth over the next few years. Additionally, incremental leveragewill come from royalties on J&J’s CYPHER stent and Flumist.

Premarin family recovering from WHI study falloutThe Premarin family suffered fallout from the July 2002 WHI study,which linked hormone replacement therapy with an increased riskof breast cancer, but is stabilising at levels less drastic than initiallyexpected.

Low generic threat, but not much in the pipelineGeneric competition for key products is completely lacking overthe next four to five years. However, the late-stage pipeline is alsorelatively thin.

Shares undervalued due to lingering Premarin andmanufacturing fearsThe shares continue to trade at a significant discount to the marketand peer group, largely driven by fears over near term execution onthe manufacturing front for Prevnar. Resolution of this, and theresumption of double digit EPS growth in 2H 2003 (easier Premarincomps) should enhance Wyeth’s multiple substantially.

Year End Dec 31 2002A 2003E 2004E 2005E

EPS ($) 2.22 2.45 2.72 2.99

EPS Growth 2% 10% 11% 10%

DPS (net) 0.92 0.92 0.92 0.94

P/E x 15.8 14.3 12.9 11.7

EV/EBITDA x 11.9 10.8 9.6 8.3

PBT adj ($ m) 3756 4173 4644 5103




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Stock DataMarket Cap (US$ bn) 46.4Free float 99%Net Debt at 31/12/02 $3.2bnCAGR Sales 2001-2005E 6.8%CAGR EPS 2001-2005E 8.2%Group Margin 2002 24.5%Group Margin 2005E 26.3%Shares Issued 1334m


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Figure 337: Key US expiries & launches 2001-2005E Figure 338: Portfolio shift 2001-2005EPatent Expiries 2002 US Sales % Pharma Expiry DateCordarone $0.3 bn 2% 2002

Launches Peak Sales Indication Launch DaterhBMP-2 (Indux) $1.0 bn Orthopaedics 2003FluMist $0.7 bn Influenza 2003

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Wyeth: Key profit & loss data

Figure 339: Summary of key P&L data ($ m)Year End 31 December 2000 2001 2002 2003E 2004E 2005E CAGR

Sales 13,214 13,984 14,584 15,910 16,969 18,170 6.6%

of which pharma 9,979 10,940 11,733 12,880 13,899 15,070 8.6%

COGS 3,269 3,389 3,918 4,329 4,497 4,779 7.9%

SG&A 4,983 5,035 5,011 5,383 5,719 6,069 4.0%

R&D 1,688 1,870 2,080 2,180 2,380 2,550 8.6%

EBIT 3,273 3,691 3,575 4,018 4,374 4,773 7.8%

EBITDA 3,969 4,573 4,488 4,858 5,319 5,823 8.0%

EPS ($) 1.90 2.18 2.22 2.45 2.72 2.99 9.5%

COGS % 24.7% 24.2% 26.9% 27.2% 26.5% 26.3% 1.2%

SG&A % 37.7% 36.0% 34.4% 33.8% 33.7% 33.4% -2.4%

R&D % 12.8% 13.4% 14.3% 13.7% 14.0% 14.0% 1.9%

EBIT % 24.8% 26.4% 24.5% 25.3% 25.8% 26.3% 1.2%Source: Company data, Deutsche Bank estimates

Wyeth: Sales by geography and therapeutic category

Figure 340: Sales by geography 2001 Figure 341: Sales by therapeutic category 2002

Other9%

US68%

Japan2%

Europe21%

Women'sHealth

20%

Antiinfective9%

Musculoskeletal4%

Other32%

Cardiovascular6%

Gastro-intestinal

11%

CNS18%


Despite decline inPremarin franchise,sales growth to remainsolid due to low patentexposure and expectedgrowth of currentproduct portfolio.Longer-term risk lies inWyeth’s thin pipeline.



Wyeth: Leading products and sales by therapeutic category

Figure 342: Leading products and sales by therapeutic category ($ m)Brand Name Generic Name Lead Indication Key US Patents US NCE Exclusivity Sales 2002 Sales 2005E

Gastrointestinal

Protonix Pantoprazole Ulcers/GERD Jul-05* Feb-05 1071 1050

Zoton Lansoprazole Ulcers/GERD na na 309 355

Contraception/HRT

Premarin Family Hormone HRT various expired 1880 1465

Oral Contraceptives Hormone Contraception expired expired 597 585

Blood Products

Benefix Factor IX Haemophilia B biological biological 219 360

ReFacto Factor VIII Haemophilia A biological biological 198 270

CNS

Effexor/XR Venlafaxine Depression Dec-07 expired 2072 3725

Ativan Lorazepam Depression expired expired 217 140

CV/Cancer

Cordarone Amiodarone Arrhythmia expired expired 283 15

Anti-infective

Zosyn/Tazocin Piperacillin Antibiotic expired expired 406 540

Minocin Minocycline Antibiotic expired expired 118 75

Prevnar Pneumococcal vaccine Meningitis biological biological 648 1550

FluMist na Flu vaccine na na 0 455

Anti-inflammatory

Enbrel Etanercept Rheumatoid arthritis biological biological 159 600

Rapamune Sirolimus Transplant Sep-13 Sep-04 130 335

Synvisc Hylan G-F 20 Pain biological biological 212 335

Indux rhBMP-2 Osteoporosis na na 0 235Source: Company data, Deutsche Bank estimates *Wyeth has applied for a patent extension, which if granted would extend Protonix’ patent protection through 2007



NOTES



Japanese Company Profiles

Daiichi

Eisai

Fujisawa

Sankyo

Takeda

Yamanouchi



Asia

10 March 2003

Daiichi PharmaceuticalReuters: 4505.T Bloomberg: 4505 JT Exchange: T Ticker: 4505.T

Sensible strategy

Daiichi’s strength in quinolone antibiotics has enabled it todevelop into one of the more international of the Japanesedrug companies while retaining its strong domestic position.Strategically, the group’s approach not only recognises theneed to expand into the US but also that it needs to do so in afinancially responsible manner. Outside ethical drugs, thecompany has leading positions in markets for radio-imaging(in-licensing products from Amersham) and diagnostics.

Core antibiotic franchise driving growthDaiichi’s progress has been heavily dependent upon its strength inantibiotics. In particular, its growth in recent years has been drivenby the success of its new quinolone, levofloxacin, which it marketsin Japan as Cravit, and which is sold in the US by J&J as Levaquinand in Europe by Aventis as Tavanic. The launch of competitorproducts in Japan is, however, now impacting on that growth.

Pipeline offers opportunities for overseas expansionDaiichi’s pipeline, which has been further strengthened followingthe recent JV agreement with Suntory, contains several projects ofinterest, not least projects in cancer, new quinolones and oralanticoagulants. The success of these will be key to the group’soverseas development.

Well-positioned for internationalisationDaiichi’s adopted approach to internationalisation has been bothpragmatic and sensible. The company intends to develop andmarket those products which sell into niche markets by itself butto out-license/co-market those selling into large primary caremarkets. Given its strong competence in anti-infectives, Daiichi isperhaps more fortunate than many of its domestic peers in that ithas several pipeline projects with potential.

Year end March 31 2002A 2003E 2004E 2005E

EPS (¥) 110.2 100.1 99.0 106.6

EPS Growth 8% -9% -1% 3%

DPS (net) 28.00 30.00 30.00 30.00

P/E x 14.7 16.2 16.4 15.2

EV/EBITDA x 5.0 5.8 5.9 5.6

PBT adj (¥m) 58,279 54,700 58,000 59,000

PBT stated (¥m) 58,279 54,700 58,000 59,000Source: Company data, Deutsche Bank estimates

Price and RecommendationPrice 10 March 2003 Yen 1672Recommendation HoldPrice target Yen 1800


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Stock DataMarket Cap (US$ bn) 3.89Net Funds at 31/12/02 US$1.5bnCAGR Sales FY 2001-2006E 2.3%CAGR EPS FY 2001-2006E 0.9%Group Margin 3/2002 19.7%Group Margin 3/2007E 15.8%Shares Issued 361.2m


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Fumiyoshi Sakai+813 5156 [email protected]



Figure 343: Sales by business area 2002 Figure 344: Sales by therapeutic category 2002

Ethical drugs67%

Veterinary 1%

Vitamins 4%

Radio-Imaging

5%

Diagnostics14%

Chemicals/Other 11%

CNS8%

CV/Respiratory35%

Gastro-intestinal

3%

Anti-infectives-Oncology

48%

Dermatological6%


Daiichi: Key profit & loss data

Figure 345: Summary Key P&L Data FY2001-2006E (¥ m)Year to 31 March 2002 2003E 2004E 2005E 2006E 2007E % CAGR

Sales 332,753 323,000 341,000 355,000 364,000 373,000 2.3%

COGS 112,514 108,000 120,000 123,000 126,000 129,000 2.8%

SG&A 108,727 109,900 113,000 113,000 114,000 116,000 1.3%

R&D 46,100 50,600 55,000 62,000 66,000 69,000 8.4%

EBIT 65,409 54,500 53,000 57,000 58,000 59,000 -2.0%

EBITDA 81,809 71,500 70,000 74,000 74,500 75,500 -1.6%

EPS (¥) 110.18 100.12 99.04 106.61 110.21 115.25 0.9%

COGS (%) 33.8% 33.4% 35.2% 34.6% 34.6% 34.6% 0.5%

SG&A (%) 32.7% 34.0% 33.1% 31.8% 31.3% 31.1% -1.0%

R&D (%) 13.9% 15.7% 16.1% 17.5% 18.1% 18.5% 6.0%


Daiichi: Key drugs and pipeline products

Figure 346: Summary of key drugs and pipeline projectsKey Drivers(consolidated)

Generic Disease 2002 (¥ bn) 2006E (¥ bn) Key Pipeline Generic Disease Japan Overseas

Cravit Levofloxacin antiinfective 48 43 DE310 n.a. Cancer PI PI

Panaldine Ticlodipine Thrombosis 44 23 DX8951f Exatecan Cancer PIII PIII

Artist Carvedilol CHF 10 16 DK507 n.a. Antibiotic n.a. PI

Zyrtec Cetirizine Allergies 12 11 DX9065a n.a. Anticoagulant PII PII

Omnipaque n.a. Imaging 38 33 DV7314 clopidogrel Thrombosis PIII n.a.

Gracevit sitafloxacin antibacterial Filed PIISource: Company data, Deutsche Bank estimates



NOTES



Asia

10 March 2003

EisaiReuters: 4523.T Bloomberg: 4523 JT Exchange: T Ticker: 4523.T

What next?

Eisai is one of the most international of the Japanese majors.The huge US success of the company’s two products, Aciphexand Aricept, has seen earnings double over the past five yearsdespite a decline in domestic sales. The ongoing growth ofthese two products should continue to support earnings overthe medium term although, with little coming through thepipeline, growth rates look set to moderate considerably.

Recent growth driven by Aciphex and AriceptThe anti-ulcer drug Aciphex (Pariet in Japan), which is co-marketedwith J&J in the US, and the Alzheimer’s drug Aricept, which is co-marketed with Pfizer outside Japan, have been the twin pillars ofEisai’s successful overseas expansion. Combined, these productshave attained global sales of over ¥180bn since launch in 1997.

New competition and generics threaten future growthHowever, the entry of new competitors in global markets iscausing growth rates to fall from their previously high levels. Inaddition, greater competition has meant that Eisai must investmore in its sales efforts to support its market shares. Genericcompetition in global PPI markets is also a future threat to Aciphex.

Pipeline offers little of excitementEisai’s pipeline looks unlikely to deliver any new products ofsignificance in the near term. Excluding the in-licensed rheumatoidarthritis drug, D2E7, only the very high-risk sepsis project (E5564)and cancer drug (E7070) look to have significant potential.

Weak growth prospects for domestic franchiseThe company’s domestic portfolio is dominated by long listedproducts which look unlikely to achieve notable growth and which,by their nature, are likely to prove vulnerable to significant futureGovernment price cuts.


EPS (¥) 123.5 150.6 171.4 173.1

EPS Growth 57% 22% 14% 1%

DPS (net) 29.00 32.00 35.00 35.00

P/E x 17.9 14.7 12.9 12.8

EV/EBITDA x 6.4 5.8 5.3 5.3

PBT adj (¥m) 62,754 77,000 87,700 88,500




1998 1999 2000 2001 20021.00

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J:ES@N/TOKYOSE


Stock DataMarket Cap (US$ bn) 5.91Net Funds at 31/12/02 US$1.4bnCAGR Sales FY 2001-2006E 4.2%CAGR EPS FY 2001-2006E 8.7%Group Margin 3/2002 16.8%Group Margin 3/2007E 17.9%Shares Issued 296.5m


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Figure 347: Sales by division FY2001 Figure 348: Aricept/Aciphex sales 1999-2005E

Ethical drugs90%

OTC6%

Other4%

0

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160

1999 2000 2001 2002E 2003E 2004E 2005E

0%

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20%

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50%

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70%

80%

90%

100%

Aciphex Aricept % Total Growth

Source: Company data, Source: Company data, Deutsche Bank estimates

Eisai: Key profit & loss data

Figure 349: Summary key P&L data FY2001-2006E (¥ m)Year to 31 March 2002 2003E 2004E 2005E 2006E 2007E % CAGR

Sales 431,673 463,000 485,000 501,000 517,000 530,000 4.2%

COGS 101,493 105,000 104,000 104,500 103,800 105,200 0.7%

SG&A 202,494 220,000 231,500 240,000 248,000 254,000 4.6%

R&D 55,000 58,000 63,000 69,000 72,000 76,000 6.7%

EBIT 72,685 80,000 86,500 87,500 93,200 94,800 5.5%

EBITDA 87,985 97,500 105,100 105,200 110,000 110,600 4.7%

EPS (¥) 123.5 150.6 171.4 173.1 183.5 187.0 8.7%

COGS (%) 23.5% 22.7% 21.4% 20.9% 20.1% 19.8% -3.3%

SG&A (%) 46.9% 47.5% 47.7% 47.9% 48.0% 47.9% 0.4%

R&D (%) 12.7% 12.5% 13.0% 13.8% 13.9% 14.3% 2.4%


Eisai: Key drugs and pipeline products



Aricept Donepezil Alzheimers 95 134 T-614 n.a. R arthritis PIII n.a.

Aciphex Rabeprazole Ulcer/GERD 99 115 D2E7 Adalimumab R arthritis PIII n.a.

Selbex Tebrenone Ulcers/gastritis 30 25 E7070 n.a. Cancer PII PII

Methylcobal methycobalamine Nerve disorder 30 29 E2007 n.a. MS n.a. PI

Galkay Vitamin K2 Osetoporosis E5564 n.a. Sepsis n.a. PIISource: Company data, Deutsche Bank estimates



NOTES



Asia

10 March 2003

FujisawaReuters: 4511.T Bloomberg: 4511 JT Exchange: T Ticker: 4511.T

Pipeline driven

The success of Prograf, the immunosupressant, hastransformed Fujisawa’s fortunes in recent years. Marketed tohospital specialists, Prograf’s growth and profitability hasenabled Fujisawa to build a specialist sales force in both USand European markets. Over 30% of sales and 60% of profitsnow arise outside Japan. The internationalisation of thebusiness should be further aided by the anticipated launch ofthe anti-fungal micafungin.

Ambitious goals for global expansionIn our view, Fujisawa has set itself ambitious targets for globalgrowth and competitiveness. Under its Vision 2005 strategicprogramme the company is concentrating on niche businesses thatrequire only a small salesforce and aims to be able to compete onglobal terms with the leading global drug companies. Financially, itstargets include the achievement of sales of ¥400 billion by 2005,split equally between Japan and overseas.

Well-positioned for growthPartly through acquisition but, importantly, through the hugesuccess of Prograf, Fujisawa has established marketing, researchand clinical development capabilities in Europe and the US. Withinfrastructure now in place, future international launches shouldsignificantly augment profitability. R&D resource is being focusedon four main areas, namely immunology, CNS, metabolic diseasesand anti-infectives. Several projects are progressing through theclinic in the US and Europe.

In-licensing strategy for Japanese marketsIn Japan, Fujisawa is actively seeking to in-license interesting drugcandidates. Growth in a turgid home market should benefit infuture years from the recent launch of Seroquel for schizophreniaand the hypnotic Myslee (Sanofi’s Ambien).


EPS (¥) 80.1 90.9 117.0 152.4

EPS Growth 26% 14% 29% 30%

DPS (net) 16.00 16.00 18.00 20.00

P/E x 30.2 26.6 20.7 15.9

EV/EBITDA x 12.6 10.7 9.2 7.4

PBT adj (¥m) 47,007 48,000 68,000 88,500


Price and RecommendationPrice 10 March 2003 Yen 2430Recommendation BuyPrice target Yen 3000


1998 1999 2000 2001 20020.50

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J:FM@N/TOKYOSE


Stock DataMarket Cap (US$ bn) 6.76Net Funds at 31/12/02 US$278mCAGR Sales FY 2001-2006E 11.3%CAGR EPS FY 2001-2006E 19.7%Group Margin 3/2002 13.7%Group Margin 3/2007E 19.5%Shares Issued 330.2m


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Figure 351: Prograf sales (Yen bn) and % Group Figure 352: Sales by therapeutic category 2002

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1998 1999 2000 2001 20020%

5%

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25%

Prograf % Total

CNS14%

CV/Respiratory16%

Anti-biotics27%

Allergy5%

Other11%

GI2%

Immuno-suppression

25%


Fujisawa: Key profit & loss data


Sales 341,356 383,000 435,000 490,000 545,000 584,000 11.3%

COGS 121,894 140,000 167,000 184,000 205,000 220,000 12.5%

SG&A 115,509 118,000 130,000 146,000 163,000 170,000 8.0%

R&D 57,100 68,000 70,000 72,000 75,000 80,000 7.0%

EBIT 46,852 57,000 68,000 88,000 102,000 114,000 19.5%

EBITDA 62,707 74,100 86,000 106,500 120,000 132,000 16.1%

EPS (¥) 80.07 90.90 116.96 152.41 175.44 196.96 19.7%

COGS (%) 35.7% 36.6% 38.4% 37.6% 37.6% 37.7% 1.1%

SG&A (%) 33.8% 30.8% 29.9% 29.8% 29.9% 29.1% -3.0%

R&D (%) 16.7% 17.8% 16.1% 14.7% 13.8% 13.7% -3.9%


Fujisawa: Key drugs and pipeline products



Prograf tacrolimus Transplant 72 137 FK778 n.a. transplant n.a. PII

Protopic tacrolimus Dermatitis 9 28 FK614 n.a. diabetes PII. PII

Fungard micafungin renal failure NIL 50 JTE522 tilmacoxib Pain PII n.a.

Cefzon cefdinir hypertension 28 26 FK960 n.a. Alzheimer PII PII.

Seroquel quetiapine schizophrenia 5.1 13 FK228 n.a. Cancer n.a. PII

Myslee zolpidem insomnia 5.0 11Source: Company data; Deutsche Bank estimates



NOTES



Asia

10 March 2003

SankyoReuters: 4501.T Bloomberg: 4501 JT Exchange: T Ticker: 4501.T

Wasting asset

With 5% market share, Sankyo holds a leading position in theJapanese pharmaceutical market with strong franchises incardiovascular and anti-infective markets. Outside drugs, thecompany has important operations in OTC, diagnostic andagrochemical markets. Competition from new productscombined with the recent patent expiry of best sellerMevalotin suggest that the next few years will represent asignificant challenge for Sankyo.

Overseas expansion hampered by product disappointmentsHistorically, Sankyo has held a strong position in the domesticmarket. Yet, efforts to expand overseas and build on what weresolid Japanese foundations have been undermined by researchdisappointments, not least the 1999 US and European withdrawalof its insulin sensitiser, Rezulin (troglitazone), and delays in thedevelopment of follow-on statin, NK104.

Mevalotin hurt by competition and patent lossMuch of the company’s growth has been built on the success ofthe cholesterol lowering drug pravastatin. Sold by Sankyo asMevalotin in Japan and by licensor Bristol-Myers as Pravachol inthe US and Europe, the drug accounted for 32% of groupconsolidated revenues in 2002. Patent expiry in Japan combinedwith the advent of fierce competition from Pfizer/Yamanouchi’sLipitor, however, is now eating significantly into Mevalotin’sdomestic sales base and overseas exports.

Near-term growth hinges on anti-hypertensive, BenicarIn the near term the company’s overseas expansion dependsheavily on the success of its hypertensive treatment Benicar(olmesartan). Yet beyond this, while the company has aninnovative and potentially exciting early stage pipeline, few late-stage projects of significance are evident.


EPS (¥) 85.8 84.2 93.3 86.5

EPS Growth -8% -2% 11% -7%

DPS (net) 25.00 25.00 25.00 25.00

P/E x 18.6 18.9 17.0 18.4

EV/EBITDA x 5.9 6.1 6.0 6.3

PBT adj (¥m) 80,724 76,000 82,000 76,000




1998 1999 2000 2001 20021.20

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J:SN@N/TOKYOSE


Stock DataMarket Cap (US$ bn) 6.00Net Funds at 31/12/02 US$2.4bnCAGR Sales FY 2001-2006E 2.8%CAGR EPS FY 2001-2006E -0.1%Group Margin 3/2002 14.7%Group Margin 3/2007E 11.9%Shares Issued 452.4m


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Figure 355: Sales by division FY2001 Figure 356: Outlook for statin sales FY2001-2005E

Other 4%

Pharmaceutical77%

Diagnostics2%

Food8% OTC

5%

Agchem4%

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60

80

100

120

140

160

180

200

2001 2002 2003 2004 2005 2006

Mevalotin - Domestic Mevalotin Bulk NK104

Source: Company data, Wood Mackenzie estimates Source: Company data, Wood Mackenzie estimates

Sankyo: Key profit & loss data


Sales 548,893 573,000 587,000 597,000 605,000 630,000 2.8%

COGS 221,442 230,500 237,000 245,000 253,000 265,000 3.7%

SG&A 165,201 176,000 180,500 186,000 189,000 194,000 3.3%

R&D 81,600 86,500 87,500 90,000 93,000 96,000 3.3%

EBIT 80,649 80,000 82,000 76,000 70,000 75,000 -1.4%

EBITDA 108,849 105,000 107,500 101,000 95,000 99,500 -1.8%

EPS (¥) 85.75 84.21 93.31 86.48 79.65 85.34 -0.1%

COGS (%) 40.3% 40.2% 40.4% 41.0% 41.8% 42.1% 0.8%

SG&A (%) 30.1% 30.7% 30.7% 31.2% 31.2% 30.8% 0.5%

R&D (%) 14.9% 15.1% 14.9% 15.1% 15.4% 15.2% 0.5%


Sankyo: Key drugs and pipeline products



Mevalotin pravastatin cholesterol 175 101 NK104 pitavastatin cholesterol Filed PII

Loxonin loxoprofen pain 30 27 CS747 n.a. antiplatelet n.a. PII

Espor erythropoetin renal failure 18 10 CS505 n.a. atherosclerosis PI PII

Benicar olmesartan hypertension 0 41 CS011 n.a. diabetes n.a. PII

NK104 pitavastatin cholesterol 0 15 Fidarestat Fidarestat neuropathy n.a. PII

CS917 n.a. Diabetes n.a. PISource: Company data, Deutsche Bank estimates



NOTES



Asia

10 March 2003

Takeda ChemicalReuters: 4502.T Bloomberg: 4502 JT Exchange: T Ticker: 4502.T

Leader of the pack

Takeda is the leading Japanese pharmaceutical company witha market capitalisation that dwarfs all others in the sector.Importantly, its status as domestic leader is not just areflection of its leading 6% share of the Japanese market butalso the success of its expansion overseas. Through thesuccess of key products such as Prevacid and Lupron, sold byits TAP joint venture with Abbott, and Actos, the companynow derives over 70% of its profits in overseas markets.

Strong growth driven by recent launchesThe release of several major products through the mid to late1990s have provided a solid platform for growth. The success ofActos (diabetes), Blopress (hypertension) and Takepron/Prevacid(GERD) has seen earnings more than treble since 1997.

Late-stage pipeline lacking significanceIn the near term growth looks set to rely upon these drivers.Although the Phase II pipeline is building, aided in part by active in-licensing, the late stage pipeline contains little of significance.

Going solo in the USTakeda’s 50:50 US joint venture with Abbott, while very successfuland profitable, has become something of a double-edged sword.With Abbott originating few, if any, new molecules of substance tothe JV and Takeda now of a size where it can fund its own USgrowth, Takeda has been reluctant to use TAP as the vehicle forUS expansion. Instead it has created its own 100% ownedsubsidiary Takeda Pharmaceuticals North America (TPNA), thedevelopment of which has been supported by the successful USlaunch of the diabetes treatment Actos which it has and willcontinue to co-market with Eli Lilly through 2006. Substantial cashresources leave Takeda well placed to acquire outside Japanshould the opportunity arise.



1998 1999 2000 2001 20022.50

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J:TA@N/TOKYOSE


Stock DataMarket Cap (US$ bn) 33.90Net Funds at 31/12/02 US$7.8 bnCAGR Sales FY 2001-2006E 44.2%CAGR EPS FY 2001-2006E 8.5%Group Margin 3/2002 28.0%Group Margin 3/2007E 35.3%Shares Issued 882.5m


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EPS (¥) 267.0 315.1 330.4 352.5

EPS Growth 60% 18% 5% 7%

DPS (net) 55.00 64.00 68.00 70.00

P/E x 16.3 13.8 13.1 12.3

EV/EBITDA x 7.5 8.4 7.7 7.3

PBT adj (¥m) 373,427 442,500 463,600 494,000




Figure 359: Sales by division FY2001 (%) Figure 360: Growth drivers FY1998-2002E (%)

Pharmaceuticals76%

Vitamins & Food4%

Chemicals4%

Other8%

OTC8%

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60%

1998 1999 2000 2001 2002E

Actos Prevacid/Takepron Blopress Lupron


Takeda: Key profit & loss data

Figure 361: Summary key P&L data FY2001-2006E (¥m)Year to 31 March 2002 2003E 2004E 2005E 2006E 2007E % CAGR

Sales 1,005,060 1,050,000 1,108,000 1,139,000 1,190,000 1,236,000 4.2%

COGS 337,854 310,000 296,000 297,000 290,000 291,000 -2.9%

SG&A 285,763 305,000 340,000 340,000 340,000 329,000 2.9%

R&D 100,200 115,000 120,000 130,000 150,000 180,000 12.4%

EBIT 281,243 320,000 352,000 372,000 410,000 436,000 9.2%

EBITDA 387,613 346,000 378,000 399,500 437,700 463,700 3.6%

EPS (¥) 267.0 315.1 330.4 352.5 382.0 401.2 8.5%

COGS (%) 33.6% 29.5% 26.7% 26.1% 24.4% 23.5% -6.9%

SG&A (%) 28.4% 29.0% 30.7% 29.9% 28.6% 26.6% -1.3%

R&D (%) 10.0% 11.0% 10.8% 11.4% 12.6% 14.6% 7.9%


Takeda: Key drugs and pipeline products



Actos pioglitazone Diabetes 120.4 236 TAK-147 zanapezil Alzheimer’s PIII n.a.

Leuplin leuprolide Oncology 98.1 92 TAK-677 n.a. Obesity n.a. PII

Blopress candesartan Hypertension 77.4 104 TAK-370 mosapride GERD n.a. PII

Takepron lansoprazole GERD 114.2 125 TAK-428 n.a. Neuropathy n.a. PII

TAK-475 n.a. cholesterol n.a. PII

TAK-559 n.a. Diabetes n.a. PII

TAK-375 n.a. insomnia n.a. PIIISource: Company data; Deutsche Bank estimates



NOTES



Asia

10 March 2003

Yamanouchi PharmaceuticalReuters: 4503.T Bloomberg: 4503 JT Exchange: T Ticker: 4503.T

Risk and reward

Buoyed by the success of its collaboration with Pfizer in Japanon Lipitor, Yamanouchi’s domestic business has made goodprogress of late. Key to its future will, however, be the successor otherwise of its efforts to expand in the North Americanmarket. Outside pharmaceuticals, the company has significantinterests in nutritional foods through Shaklee, and fruit andother gift items through the US business of Bear Creek.

Gaster sales decline offset by strength of Lipitor in Japan andtamsulosin in EuropeDespite the recent entry of generics to the company’s best sellingGaster drug, the success of Lipitor has seen Yamanouchi achievestrong sales growth in the domestic market. This has been furthercomplemented by the ongoing strength in Europe of tamsulosin forbenign prostatic hypertrophy.

Pfizer/Pharmacia merger raises questions about future ofLipitor and CelebrexPfizer’s intended purchase of Pharmacia, a move which wouldsubstantially increase the enlarged organisation’s Japanesemarketing strength, has raised a question mark on the future oftwo potentially significant products over which Yamanouchi hasdomestic marketing rights, namely Lipitor and Celebrex. The lossof either product would be a significant blow.

YM905 to serve as cornerstone for US expansionThe company intends breaking into the all-important US marketthrough the launch of its urge incontinence drug YM905(solifenacin). Filed in early 2003 with a planned 2004 launch date,we now expect the company will seek to sign a western marketingpartner to help it maximise the drug’s potential. Given that Pfizerwill represent its main rival, competition is likely to be intense.


EPS (¥) 154.7 194.9 208.0 225.3

EPS Growth 38% 26% 7% 8%

DPS (net) 25.00 28.00 28.00 28.00

P/E x 20.7 16.4 15.4 14.2

EV/EBITDA x 8.5 7.3 6.7 6.2

PBT adj (¥m) 93,030 112,200 122,000 132,000




1998 1999 2000 2001 20022.00

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J:YP@N/TOKYOSE


Stock DataMarket Cap (US$ bn) 9.91Net Funds at 31/12/02 US$2.8 bnCAGR Sales FY 2001-2006E 6.0%CAGR EPS FY 2001-2006E 12.8%Group Margin 3/2002 19.6%Group Margin 3/2007E 25.4%Shares Issued 361.2m


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Figure 363: Sales by division FY2001 Figure 364: Growth drivers 2001-2005E

Pharmaceuticals79%

Nutritional Products

7%

Food & Roses13%

Other1%

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2001 2002E 2003E 2004E 2005E

Lipitor % Group Celebrex % Group Gaster % Group


Yamanouchi: Key profit & loss data


Sales 481,327 520,000 553,000 580,000 607,000 645,000 6.0%

COGS 167,628 173,500 184,000 196,000 200,000 206,000 4.2%

SG&A 154,307 170,500 180,000 183,000 189,000 200,000 5.3%

R&D 65,100 66,000 68,000 70,000 72,000 75,000 2.9%

EBIT 94,291 110,000 121,000 131,000 146,000 164,000 11.7%

EBITDA 111,691 130,200 142,000 152,000 166,500 184,500 10.6%

EPS (¥) 154.7 194.9 208.0 225.3 251.3 283.1 12.8%

COGS (%) 34.8% 33.4% 33.3% 33.8% 32.9% 31.9% -1.7%

SG&A (%) 32.1% 32.8% 32.5% 31.6% 31.1% 31.0% -0.7%

R&D (%) 13.5% 12.7% 12.3% 12.1% 11.9% 11.6% -3.0%


Yamanouchi: Key drugs and pipeline products



Gaster Famotidine GERD 85 75 YM905 n.a. incontinence PII filed

Harnal (Japan) Tamsulosin BPH 41 50 Z-338 n.a. gastroprokinetic n.a. PII

Lipitor Atorvastatin renal failure 46 85 YM178 n.a. Obesity n.a. PII

Telmisartan Telmisartan hypertension 0 18 YM177 n.a. Pain PIII n.a.

Celebrex Celecoxib cholesterol 0 8 YM598 n.a. Cancer n.a. PIISource: Company data, Deutsche Bank estimates



NOTES



AppendixAbbreviated New Drug Application – The regulatory process whereby a genericmanufacturer wishing to produce a copy of a patented drug can apply to have earlyphysical, chemical and toxicological data and later clinically-derived safety andefficacy data for the original product taken “as read.” Thereby needing only to provethat its product is chemically the same as the original and is bioequivalent (behavesthe same as the original drug in the patient).

Absorption – As part of the ADMET acronym for drug testing is how and to whatdegree animals/animal tissues incorporate a particular chemical compound in pre-clinical testing.

ACE Inhibitors - A class of compounds that block the action of AngiotensinConverting Enzyme thereby inhibiting the production of Angiotensin II, a potentblood vessel constrictor (vasoconstrictor). ACE inhibitors are often used astreatments for hypertension and congestive heart failure.

Acetylcholine – A chemical in the body which acts as a neurotransmitter, therebypropagating nerve impulses and causing cardiac inhibition, gastrointestinalperistalsis and other parasympathetic effects.

Acetylcholinesterase – An enzyme in the central nervous system which actsspecifically to breakdown the neurotransmitter, acetylcholine.

Active Control – In a clinical trial when the drug under investigation is comparedwith an already tested, usually approved product rather than a non-active placebo(sugar tablet).

ADMET – An acronym used in drug testing standing for the absorption, distribution,metabolism, excretion and toxicology analyses that are undertaken in animals/animaltissues in order to characterise a pre-clinical developmental compound.

Advisory Committee – One of 17 different consulting panels of the Food and DrugAdministration in the US which often consider the merits of new products beforemarketing approval. Made up of expert scientists and physicians these committeesmake recommendations on approvals and/or particular courses of action intherapeutic areas. Although not bound by Advisory Committee recommendationsthe FDA usually follows their advice.

Agonist – A substance that has an affinity for a particular receptor and whichinteracts with it to initiate a response.

Aldosterone – A steroid hormone involved in the kidney’s regulation of sodium (forwhich it facilitates re-absorption by the body in preference to potassium) and in theloss of hydrogen.

Allergen – A substance foreign to the body that elicits an immune response, alsoknown as an allergic reaction.

Allergic Rhinitis - Inflammation of the nasal mucous membranes associated withan allergen, often plant pollens in hay fever.

Amino Acid – Organic acids in which one of the CH hydrogen atoms has beenreplaced with NH2. The twenty or so amino acids constitute the building blocks ofproteins.

ANDA – See Abbreviated New Drug Application



Angina Pectoris – An acute severe chest pain, often radiating down the left arm,due to ischaemia (poor blood flow) of the heart muscle usually caused by coronarydisease.

Angioplasty – A procedure to open narrowed arteries, usually via the introductionof a balloon tip catheter, which is then inflated to dilate the vessel.

Angiotensins – A family of compounds with profound blood vessel constricting(vasoconstrictive) activity which are produced by the enzymatic action of renin onangiotensinogen.

Angiotensin I – A compound formed from angiotensinogen in an enzymaticreaction facilitated by renin. Further enzymatic action (via angiotensin convertingenzyme) forms angiotensin II, which produces constriction of the blood vessels.

Angiotensin II – A compound formed from Angiotensin I in a reaction mediated byangiotensin converting enzyme. Angiotensin II significantly increases blood vesselconstriction and therefore blood pressure. It is also the most powerful stimulus forthe production and release of aldosterone.

Angiotensin Converting Enzyme – A compound that mediates the conversion ofAngiotensin I, a relatively inert substance in the body, into Angiotensin II, a potentblood pressure-raising agent.

Angiotensin II Receptor Blockers – A class of compounds that interfere with theaction of Angiotensin II, a potent blood pressure-raising agent, thereby producing afall in blood pressure. Often used as a treatment for hypertension.

Angiotensinogen – A compound produced by the liver that is converted toangiotensin I by renin. It is involved in the renin-angiotensin system that regulatesblood pressure levels.

Antagonist – A substance that has an affinity for a particular receptor and acts at itto inhibit the action of another agent which is also usually specific for that receptor.

Anti-aggregants – Drugs used to prevent the clumping of blood platelets. Suchproducts have proved useful in the treatment of a number of cardiovascularconditions.

Antibody – Proteins produced by the body, which make up an important part of theimmune system. They specifically target and destroy the foreign proteins (antigens)which usually provide the stimulus for their production.

Antigen - A protein that is foreign to the body and which provokes the production ofneutralising antibodies by the immune system. These antibodies specifically targetand destroy the antigen.

Antisense Technology – The use of single nucleotide chains which act as therapiesby matching up and binding to specific mRNA molecules thereby blocking theprotein synthesis they would normally produce.

Apoptosis – The programmed cell death inherent to all normal cell types when thetime is right. An apoptosis malfunction is possibly involved in the undifferentiatedcell division seen in cancer tissue proliferation.

Apolipoprotein – Is the protein component of lipid and protein-containinglipoprotein complexes. These are a normal component of High, Low and Very LowDensity Lipoproteins in Man.

Arterial – Pertaining to vessels carrying blood away from the heart.

As Treated – In a clinical trial this analysis includes only those patients completingtreatment. Those dropping out of the study are not included. This is not as robust an



analysis as an “Intent To Treat” analysis, where all patients registered in the trial areincluded in the analysis.

Atherogenesis – The formation of atheroma or lipid (fatty) deposits, usually in arterywalls. These are important in the pathogenesis (development) of arteriosclerosis.

Atherogenic – Having the ability to initiate, to increase or accelerate the process ofatherogenesis.

Atheroma – Lipid (fatty) deposits in the walls of the arteries, producing a yellowswelling on the inner endothelial surface characteristic of atherosclerosis.

Atherosclerosis – A nodular hardening of the arteries associated with the build upof fatty deposits, the formation of fibrous tissue and calcification.

Baroreceptor - Receptors located in the vascular system and the heart sensitive towall distension due to increased pressure. They form part of the reflex mechanismthat tends to reduce that pressure.

Base Pairs – Couplings formed by the specific bonding of the nitrogenous basesadenine, thymine, cytosine and guanine, between complementary strands of DNA.Adenine binds with thymine and cytosine with guanine.

Bd – Of instructions written on a prescription, twice-daily.

Beta-Adrenergic Receptors – Cell surface proteins that bind to transmitters of theautonomic nervous system such as norepinephrine. Stimulus leads to the classicfight, flight or frolic response with an increase in heart rate, blood pressure and“readiness for action.”

Beta cells – Those cells in the pancreas responsible for the secretion of insulin.

Beta-Blockers – A group of compounds that block the stimulus of beta-adrenergicreceptors. Actions include a slowing of the force and rate of heart contractions.Often used in hypertension and anxiety.

Biotechnology – Is the use of cell chemistry to produce therapeutically usefulproteins. Biotechnology seeks to industrialise and manipulate chemical reactions atthe cellular level to produce significant quantities of often complex molecules.

Black Box Warning – In the USA a product can be launched or eventually issuedwith this severe warning that is included on its prescribing information. Such awarning usually refers to potentially life-threatening adverse effects.

Blockbuster – A product with annual sales in the order of $1bn is said to be ablockbuster.

Blood pressure – The pressure attained in the vessels of the body carrying theblood. Usually measured in millimetres of Mercury (mmHg) and expressed in twofractions, systolic, which relates to the pressure in blood vessels generated duringcontraction of the heart and diastolic, relating to the pressure in the same vesselswhen the heart is relaxed. Optimal readings are 120mmHg for systolic pressure and90mmHg for diastolic pressure.

Body Mass Index – A measure of overweight/obesity also used as an indicator oflikely complications due to excess weight. Calculated as an individual’s weight inkilograms divided by the square of his/her height in metres.

Bronchospasm – The tightening of the smooth muscle of the lungs associated withan asthma attack.

Calcification – The hardening of artery walls associated with the build-up of non-soluble deposits of Calcium salts.



Calcium Channel Blockers – A class of compounds that act by inhibition of thepassage of Calcium ions into muscle cells. They are often used as treatments forhypertension and angina.

Cardiac Output – A measure of the efficiency of the working of the heart usuallyexpressed as the heart rate multiplied by the volume of contraction.

Cascade – Pertaining to a sequence of chemical reactions within the body.

Catabolism – Breaking down in the body of complex chemical compounds intosimpler ones, often with the release of energy.

Catheter – A tubular instrument designed to allow passage of fluid from or into abody cavity. A balloon tip catheter is fitted with an inflatable tip, which can be usedto facilitate passage of the tube through the blood vessel, to take haemodynamic(blood flow-related) measurements or to open a partially blocked blood vessel(angioplasty).

Cells – The smallest unit of living structure capable of independent existence,composed of a membrane-enclosed mass of protoplasm and containing a nucleus.

Central Nervous System – That portion of the nervous system comprising thebrain and spinal column.

Central Pharmaceutical Affairs Council – An advisory body to Japan’s Ministry ofHealth and Welfare, comprising 15 medical and pharmacological experts, whichscreens and evaluates data submitted for a new drug approval.

Cerebral Embolism – An obstruction of the vessels of the main parts of the brain,most often composed of a detached blood clot from a distant site, a mass ofbacteria or other foreign body.

Chemotaxins – Are chemical substances that mediate the movement of cells ororganisms.

Chiral – Denoting a chemical that can exist in a number of forms. A term usuallyused in relation to the different isomers of a particular compound. Isomers haveidentical chemical compositions but have atoms in differing positions within themolecule thus conferring them with variable shapes potentially leading to differingchemical and physical properties.

Cholesterol – The most abundant steroid present in animal tissues, especially inbile and gall stones, and also present in food. It is important in the pathogenesis ofatheroma formation in the arteries.

Chromosome – Packages of genetic information, in the form of DNA, located in thenucleus of cells. In humans 23 pairs of chromosomes contain an estimated 100,000genes which code for specific proteins.

Clone – An individual organism or group of organisms derived from a singleorganism or cell and therefore having identical genetic make-up.

Codon – A triplet of nucleotides made from adenine, thymine, cytosine andguanine, which codes specifically for one of the twenty or so amino acids. Thenumber and sequence of codons along a gene sequence determine the structure ofthe protein made by that gene.

Combinatorial Chemistry – The systematic, usually automated, synthesis of largenumbers of similar, but distinct, chemical compounds in preparation for drug activityscreening.



Committee on Proprietary Medicinal Products – Is an advisory committee to theEuropean Medicines Evaluation Agency (EMEA), which assesses New DrugApplications.

Contractility – The ability of a substance, especially of muscle, of shortening, orbecoming reduced in size, or developing increased tension.

Control Regions – Sequences within the non-protein coding junk DNA, which act toregulate gene expression and therefore protein synthesis.

Corticosteroids – Steroids produced by the tissue of the adrenal gland in the body.

CPMP – See Committee on Proprietary Medicinal Products.

Crossover - Of a clinical trial, when patient groups alternate between the varioustreatments and/or placebo during the course of the study.

Cytokines – Non-antibody proteins within the body, released by certain cells inresponse to specific antigens and which mediate the immune response.

Cytoplasm - The main constituent of a cell comprised of gel-like living matter,which contains various cellular structures and the nucleus.

Deep-Vein Thrombosis – A condition relating to the formation of blood clots, oftenin blood vessels of the lower limbs, following surgery or extended periods ofimmobilisation. These blood clots potentially block blood vessels locally or candetach and cause blockage elsewhere, for example in the lungs (Pulmonaryembolism).

Diabetes – A metabolic disease in which carbohydrate utilisation is reduced and thatof lipid and protein enhanced. It is caused by an absolute or relative deficiency ofinsulin and manifests as raised glucose levels in the blood. Long term complicationsinclude damage to nerves, the kidney and eyes.

Diastole – The resting or relaxation phase of the beating heart. The pressure inblood vessels during relaxation forms part of the measurement of blood pressure(see also systole and hypertension).

Distribution – As part of the ADMET acronym for drug testing is the distribution ofa particular chemical throughout animals/animal tissues in pre-clinical testing.

Diuresis – Usually denotes the excretion of unusually large volumes of urine.

Diuretic – Is an agent that promotes the production of urine.

DNA – Deoxyribonucleic Acid. A strand of molecules containing genetic instructionsmade up of linked and repeating sub-units called nucleotides, based on thenitrogenous bases adenine (A), thymine (T), cytosine (C) or guanine (G). Each ofthese bases pairs with another on a complementary strand of DNA (A with T and Cwith G) to form a double helix.

Double Blind – In a clinical trial when neither the patient nor the investigatingphysician is aware what has been administered be it active treatment or placebo.

Drug Label – The prescribing instructions and other product information agreedwith the Food and Drug Administration, which is routinely included in the packagingof a drug product.

Embolism – An obstruction of vessels, usually blood vessels, most often composedof detached blood clot from a distant site, a mass of bacteria or other foreign body.

EMEA – See European Medicines Evaluation Agency

Enantiomer – One of a pair of molecules, that are mirror images of each other.



Endothelial cells – Flat cells that typically line the walls of blood cells and the heart.The lining of a layer of such cells is known as endothelium.

Enzyme – A protein secreted by cells that acts as a promoter or catalyst of chemicalreactions in the body apparently remaining unchanged by the reaction itself.

Eosinophils – A form of white blood cell also known as a leukocyte.

Essential Hypertension –Blood pressure that is raised above normal but with nodiscernible cause. Also known as idiopathic hypertension.

European Medicines Evaluation Agency. - The European Union’s drug regulatoryagency which oversees all aspects of pharmaceutical regulation, from clinical trialsand registration, through to manufacturing standards and promotional claims.

Excretion - As part of the ADMET acronym for drug testing is the method by whichanimals/animal tissues rids itself of a particular chemical compound and itsbreakdown products in pre-clinical testing.

Exogenous – Something originating or that is produced outside an organism.

FDA – See Food & Drug Administration

Fee-For-Service – The most flexible of Managed Care plans where individualssimply choose the physician they wish to see and receive the treatment consideredmost suitable by that doctor.

FEV1 – Forced Expiratory Volume of air expelled from the lungs in one second. Afrequently used test of lung function.

Fibrin – An elastic filamentous protein derived from fibrinogen via the action ofthrombin. It is a component of blood clots.

Fibrinolysis – The breakdown of fibrin by a chemical reaction known as hydrolysis.In therapeutic terms this is carried out with products known as fibrinolytics.

Food & Drug Administration - The US government’s regulatory agency whichoversees all aspects of pharmaceutical regulation, from clinical trials andregistration, through to manufacturing standards and promotional claims.

Formulary – A group of pharmaceuticals approved for use by a particular institution.

Gastrin – A hormone secreted in the mammalian stomach which stimulates thesecretion of hydrochloric acid by the parietal cells of the gastric glands.

Gene – A specific sequence of nucleotides, or DNA sub-units, that direct proteinsynthesis.

Gene Expression – Refers to whether a gene is ‘turned on’ or activated to directprotein synthesis. Specific control regions within junk DNA regulate geneexpression.

Generic – Is the basic chemical constituent of a pharmaceutical product.

Genome – The blueprint of genetic information of an organism often referred to inhumans as the “book of life.” The Human Genome, which was finally sequenced inJune 2000, comprises some 3.1bn base pairs of information, only 10% of which arethought to code for proteins, arranged on 23 pairs of chromosomes.

Genomics – The study of all aspects of the Genome, the blueprint of geneticinformation, particularly its structure and function, as it relates to humans.

Genotype – The genetic constitution of an individual, sometimes used with respectto the make-up of a group of individuals with similar characteristics as determinedby one gene.



GERD – Gastro-Esophageal Reflux Disease, a condition in which acid is regurgitatedfrom the stomach into the esophagus causing heartburn pain and in more severechronic cases, tissue erosion. Acid secretion suppressants such as H2-blockers andproton pump inhibitors are used to treat the condition.

Glitazones – A class of chemicals also known as the thiazolidinediones, which aresensitisers of body tissue to insulin and are, therefore, used as treatments fordiabetes. Examples include Actos (Takeda/Lilly), Avandia (GlaxoSmithKline) and thenow withdrawn Rezulin (Pfizer).

Glucagon – A hormone involved in glucose metabolism. It promotes the elevationof blood glucose levels by the breakdown of glycogen in the liver. Sometimes usedto treat hypoglycaemic coma induced by exogenously administered insulin.

Glucocorticoids – Any steroid-like compound capable of significantly influencingintermediary metabolism and of exerting a clinically useful anti-inflammatory effect.

Glucogenic – Giving rise to the production of glucose in the body.

Glycosylated haemoglobin – Any one of the four haemaglobin A fractions (AIa1,AIa2, AIb and AIc) to which glucose and related monosaccharides bind.Concentrations are raised in the red blood cells of patients with Diabetes Mellitus,and can be used as a retrospective measure of glucose control over time in suchpatients.

H2 Antagonists – A class of compounds which inhibit the action of histaminereceptors in the stomach, reducing gastric acid secretions. As such they are usefulin the treatment of GERD and ulcer disease.

Haemoglobin – A respiratory protein found in red blood cells responsible for theoxygen carrying capacity of the blood.

Haemodynamic – Pertaining to the movement of blood.

Haemorrhagic stroke – A condition in which bleeding into the tissues of the braincauses damage.

Health Maintenance Organisation - Part of the managed care system, thesegroups administer the drug benefit of individuals, usually on behalf of theiremployer. The pooling of large numbers of people in HMO schemes allows bulkpurchasing and the negotiation of discounts. These organisations range fromrelatively inflexible Staff Model HMOs, which employ physicians and use strictformularies to control drug availability, through to Group or Network HMOs wherethe physician is contracted to one, or an number of HMOs, respectively. Inevitably,less influence can be exerted on physician prescribing decisions in these moreloosely structured entities.

HDL-cholesterol – High-density lipoprotein cholesterol is one of a number of lipid-protein complexes present in the body. Also colloquially known as “good”cholesterol because of the beneficial effect it has on the evolution of cardiovasculardisease.

High Throughput Screening – The systematic, usually automated rapid screeningof compounds through a wide range of assays to determine their biological activity.

Histamine – Is a compound that is a powerful stimulant of gastric secretions, ofsmooth muscle constriction and is a vasodilator of both capillaries and arterioles. Itsinhibition is therefore useful in the treatment of a number of conditions includingGERD, ulcer disease and asthma.

HMG Co-A reductase – 3-hydroxy-3-methylglutaryl coenzyme A reductase is therate-limiting enzyme in the intracellular synthesis of cholesterol. Its action is



inhibited by the statins which are the most frequently used compounds forcholesterol reduction.

HMO – see Health Maintenance Organisation.

Hormone – A chemical substance formed in one organ or part of the body whichthen exerts its effect elsewhere within the body.

Hydrolysis – A chemical process whereby a compound is cleaved into two or moresimpler compounds with the uptake of water. It is effected by the action of acids,alkalis, or enzymes.

Hyperglycaemia – An excess of glucose in the circulating blood, especially withreference to fasting levels.

Hypertension – A condition in which blood pressure is raised above the normalrange as measured in millimetres of Mercury (mmHg). Blood pressure is expressedin two fractions. Systolic, which relates to the pressure in blood vessels generatedduring contraction of the heart and diastolic, which relates to the pressure in thosevessels when the heart is relaxed. Treatment to reduce hypertension is usuallyconsidered appropriate once systolic pressure exceeds 140mmHg and/or diastolicpressure exceeds 90mmHg.

Hypoglycaemia – An abnormal depletion of circulating blood glucose levelssometimes engendered by overdose of diabetes treatments such as insulin.

Hypolipidaemics – Products that reduce lipid levels in the blood.

Hypotension – A blood pressure that is lower than the normal range as measuredin millimetres of Mercury (mmHg). Blood pressure is expressed in two fractions.Systolic, which relates to the pressure in blood vessels generated during contractionof the heart and diastolic, which relates to the pressure in the same vessels whenthe heart is relaxed. Optimal blood pressure is regarded as 120mmHg diastolic and80mmHg systolic.

Incidence – The number of new cases of a disease in a defined population over aspecific period of time.

IND – see Investigational New Drug.

Independent Physician Association – A loosely based collection of physicians inan organisation that is part of the Managed Care system. The range of suggestedformularies they employ allows negotiated discounts for bulk drug purchases to beobtained but in reality IPA’s exert little influence on physicians’ prescribing habits.

Inflammation – Is the term for the collective changes that occur in tissues inresponse to injury and which eventually lead to healing. These changes principally,but not always, involve redness, warmth, swelling and pain.

Inotrope – Is a compound that affects the contractility of muscular tissue. Usuallyrelates to the use of positive inotropes in heart failure.

In silico – Pertaining to experiments or reactions occurring on a silicon chip. Relatesparticularly to recent advances in experimental biology.

Insulin – A peptide hormone secreted by beta cells in the pancreas that promotesglucose utilisation, protein synthesis and neutral lipid storage. It is used in aninjectable formulation for the treatment of diabetes mellitus.

Intent to Treat – In a clinical trial this analysis includes all patients originallyregistered, even if they subsequently withdrew from the study. This is a morerobust analysis than “as treated” where only those patients completing treatmentare included.



Intracellular – Occurring within the cell.

Investigational New Drug (IND) – A drug candidate for which the sponsorcompany has permission from the regulatory authorities, usually the US Food andDrug Administration, to test a particular compound in clinical trials.

In vitro - Pertaining to experiments or reactions occurring in the artificialenvironment that is the laboratory test-tube. Literally meaning “in glass.”

In vivo – Pertaining to experiments or reactions occurring within a living organism.

Ions – An atom or group of atoms carrying an electric charge.

IPA – See Independent Physician Association.

Ischaemia – A reduction in blood flow to tissues usually as a result of blood vesselblockage.

Ischaemic Stroke – A condition in which blood vessel blockage leads to brain tissuedamage.

Isomers – The different forms in which certain compounds can exist. Isomers haveidentical chemical compositions but have atoms in differing positions within themolecule thus conferring them with variable shapes potentially leading to differingchemical and physical properties.

Junk DNA – Regions of DNA strands that have no known coding properties forprotein synthesis. Of the 3.1bn base pairs of genetic information only 10% isthought actively to code for protein synthesis. Within the remainder sequences ofDNA act as control regions to regulate gene expression.

LDL-Cholesterol - Low-density lipoprotein cholesterol is one of a number of lipid-protein complexes present in the body. Also colloquially known as “bad” cholesterolbecause of the detrimental effect it has on the evolution of cardiovascular disease.

Leukotrienes – Products of Arachidonic acid metabolism thought to be involved asmediators of inflammation and with a role in the allergic response.

Lipids – Substances extracted from animal or vegetable cells that are fat-soluble.

Lipoproteins – Are compounds or complexes within the body which contain bothlipids and proteins.

Lumen – Is the space forming the interior of a tubular structure such as a bloodvessel or the intestine.

Lymphocyte – A form of white blood cell formed in the lymphatic tissue (eg. lymphnodes, spleen. Thymus, tonsils etc) throughout the body.

Macrophages – Are usually large, long-lived cells widely distributed throughout thebody, which are actively involved in the body’s defense against disease. Theyactively engulf and destroy invading bacterial and inert substances and are involvedin the production of antibodies and cell-mediated immune response.

Managed Care – Is a concept employed in the US, which involves appointingspecific providers to the task of managing actively the provision of healthcare for agroup of individuals. For example, This involves Health Maintenance Organisations,which administer the drug benefit of individuals, usually on behalf of their employer.The pooling of large numbers of people in HMO schemes allows bulk purchasingand the negotiation of discounts. These organisations range from relatively inflexibleStaff Model HMOs, which employ physicians and use strict formularies to controldrug availability, through to Group or Network HMOs where the physician iscontracted to one, or an number of HMOs, respectively. Inevitably, less influence



can be exerted on physician prescribing decisions in these more loosely structuredentities.

Markers – Surrogate end points, the measurement of which is often used in clinicaltrials to demonstrate a response to treatment. Typically, this could involve blood-borne entities such as copies of a virus (viral load in HIV trials) or proteins indicativeof tumour activity in cancer trials.

Mast Cells – A connective tissue cell that is believed to contain substances, whichare mediators of the allergic response such as histamine. Stabilisation of such cellwith Intal is used as an asthma treatment.

Medicaid – A US scheme funded by State and Federal government designed toprovide the cost of hospitalisation, doctors’ visits and prescription drugs for thoseindividuals with low incomes.

Medicare – The US nationwide federally funded healthcare programme for theelderly and disabled. Generally Medicare does not cover out-of-hospital prescriptiondrug costs.

Membrane – Is a covering or skin for cells, tissues or organs within the body.

Messenger Ribonucleic Acid – A molecule transcribed in the cell nucleus usingunwound DNA as a template. It is almost the same as the original DNA with theexception that another nucleotide, uracil, takes the place of thymine. The mRNAmolecule then moves out of the nucleus into the surrounding cellular fluid, orcytoplasm, where it attaches to a ribosome to be read (translated) producing aprotein.

Metabolism - As part of the ADMET acronym for drug testing is the wayanimals/animal tissues break down a particular compound in pre-clinical testing.

Metastasis – The shifting of a disease, or its local manifestations, from one part ofthe body to another, as in the development of new cancerous growths remote fromthe site of the primary tumour.

MHW – see The Ministry of Health and Welfare.

Ministry of Health and Welfare - The Japanese government’s drug regulatoryagency which oversees all aspects of pharmaceutical regulation, from clinical trialsand registration, through to manufacturing standards and promotional claims.

Molecular Imaging – A technique used in drug development that provideinformation on the shape and configuration of a substance under investigation.

Monoclonal (Antibody) – A specific antibody produced from a clone or geneticallyidentical population of hybrid cells.

Mononuclear – Having only one nucleus. Used especially in reference to bloodcells.

Monosaccharides – Are carbohydrates that cannot form any simpler sugars bysimple hydrolysis.

Monotherapy – Is the treatment of a condition with only one product.

mRNA - see Messenger Ribonucleic Acid.

Mucosa – The mucous lining of various tubular structures within the body,consisting of epithelium, lamina propria (a layer of connective tissue) and, in thedigestive tract, a layer of smooth muscle.

Mucus – A clear viscid secretion of the mucus membranes, consisting of mucin,epithelial cells, leukocytes and various inorganic salts suspended in water.



Myocardial infarction – Heart attack, as in infarction or death of heart tissue(myocardium) brought about by a sudden loss of blood supply.

National Institute for Clinical Excellence – A UK government advisory body whichconsiders the cost effectiveness of new products.

NDA – See New Drug Application.

Neurotransmitter – Any specific substance released by a nerve cell on stimulation,which crosses the Synapse (nerve gap) which divides nerve cells, to stimulate orinhibit the post-synaptic nerve cell.

New Chemical Entity – As the name implies a newly synthesised compound forwhich a sponsor company will likely undertake drug development.

New Drug Application (NDA) – The filing made to the regulatory authorities,usually the Food and Drug Administration, by a drug sponsor for the approval of aproduct once clinical testing has been completed.

NICE – See National Institute for Clinical Excellence.

Nitrogenous Bases – Adenine, thymine, cytosine and guanine are the fourmolecules that bind following specific rules (adenine with thymine, cytosine withguanine) and are the basic building blocks of DNA.

NSAIDS – Non-Steroidal Anti-Inflammatory Drugs. A group of drugs used for thetreatment of pain and inflammation associated with a number of conditions such asarthritis.

Nucleotides – Linked and repeating sub-units of DNA strands which are based onthe four nitrogenous bases adenine, thymine, cytosine and guanine.

Nucleus – The central, typically rounded structure of the plant or animal cellcontaining the genetic information.

Obese – An overweight person with a calculated body mass index (BMI) of 30 orhigher. BMI is an indicator of likely complications due to excess weight. Calculatedas an individual’s weight in kilograms divided by the square of his/her height inmetres.

Od – Of instructions on a prescription meaning once daily.

Oedema – The build up of fluid in body cells, tissues or cavities.

Oesophagus – Is that portion of the digestive canal between the throat region, orpharynx and the stomach.

Open Trial – A clinical trial where both the patient and investigating physician areaware what has been administered, be it active treatment or placebo.

Orange Book – The US Food and Drug Administration’s list of patents recognisedon approved branded products.

Orphan Drug – A drug recognised by the regulatory authorities (different conditionsapply in different geographies) as being useful for a relatively rare condition affectingonly a limited number of patients. Orphan Drug status affords certain assistance tothe drug sponsor (R&D grants, favourable tax treatment etc) and a period of marketexclusivity for the product.

Overweight – A person with a calculated Body Mass Index (BMI) in a range of 25 to29.9. BMI is an indicator of likely complications due to excess weight. Calculated asan individual’s weight in kilograms divided by the square of his/her height in metres.



Oxidise – A reaction in which a compound is combined with oxygen or loseselectrons.

P-value – A statistical term measuring whether a trial outcome is statisticallysignificant. In biological systems a p-value of lower than 0.05 is deemed to besignificant.

Parasite – Is an organism that lives in or on another and derives nourishmenttherefrom.

Patent – Is the legally granted protection, usually 20 years, for scientific innovation,given to a company that has discovered a new molecule or novel scientific process.

Pepsin – Is the principal digestive enzyme of gastric juice, formed from pepsinogen.

Pepsinogen – A proenzyme formed and secreted by the chief cells of the gastricmucosa which is acted upon by gastric juices and pepsin itself to form activepepsin.

Peptide – A compound containing two or more amino acids combined together inthe same molecule.

Peristalsis - A rhythmic wave of contractions and relaxation alternating along thelength of the intestine or other tubular structure which propel internal contentsalong its length.

Peroxisome proliferator-activated receptor (PPAR) agonists – Are groups ofcompounds which stimulate PPA receptors. They are variously under investigationfor the treatment of diabetes.

Pharmacogenetics – Is the genetic basis for variation in drug response.

Pharmacogenomics – A group of related technologies concerned withunderstanding the genetic basis of a drug response.

Pharmacokinetics – The movement of drugs within biological systems as affectedby their uptake and distribution through the body, binding to receptors and tissues,elimination from the body and the effect the body has on the drug.

Pharmacology – The science concerned with drugs, their sources, appearance,chemistry, actions and uses.

Pharmacopoeia – A collection of drug product descriptions, or monographs, whichdepict their characteristics and the properties and standards for the strength andpurity of those compounds.

PhRMA – Pharmaceutical Research & Manufacturers of America is the leading tradeassociation of the Ethical Pharmaceutical industry in the US.

Phospholipids – Are lipids (fatty substances) containing phosphorus.

Placebo – The non-active reference material used in clinical trials designed todetermine the relative efficacy of a drug candidate. Occasionally referred to as asugar pill placebo treatment is sometimes used in clinical practice for those patientsthought not to require active therapy.

Plasma – Is the liquid portion of the blood.

Plasmin – Is an enzyme (aka. Fibrinolysin), that converts fibrin to soluble products. Itoccurs in plasma as plasminogen and is activated to plasmin by organic solvents andcertain therapeutics.



Platelet – An irregularly shaped structure found in the peripheral blood containinggranules and cytoplasm but with no definite nucleus, which is involved in the bloodclotting process.

Point of Service – A healthcare plan under which individuals can consult one of anumber of physicians recommended by the plan manager. This physician will thenbe responsible for the basic healthcare needs of the patient but can refer to aspecialist should the need arise. However, referral can lead to further out-of-pocketexpense for the patient.

Polymorphisms – Literally “many forms” is used in the context of DNA analysis tohighlight the small variations that produce diversity between individuals.

Polysaccharides – A carbohydrate containing a large number of saccharide (sugar)groups.

PPO – See Preferred Provider Organisation.

Preferred Provider Organisation – A healthcare plan under which patients canelect to consult one of a number of physicians recommended by the PPO manager.The physician provides a discount on usual fees in return for regular referrals fromthe PPO. Patients can consult a non-plan physician for an additional out-of-pocketexpense.

Prevalence – Is the number of cases of a disease existing in a given population at aparticular moment in time.

Primary End-Point – In a clinical trial this is the most important pre-determinedobjective of the study.

Priority review – Is an accelerated review period for a New Drug Application withinthe Food and Drug Administration’s user fee system. This 6-month review is shorterthan the standard 12-months.

Prophylactics – Are drugs used to prevent a disease or a process that can lead todisease.

Proteins – Are large molecules consisting of chains of the 20 alpha amino acids.They comprise three-quarters of the dry weight of most cell matter and are involvedin structures, hormones, enzymes, muscle contraction, immunological response andessential life functions.

Proteomics – The study of proteins in terms of their synthesis, structure andfunction.

Proton Pump – The mechanism by which Hydrogen ions are released into thestomach thereby forming an acid environment to facilitate the digestion of food.

Protoplasm – The living matter that comprises the inside of cells, be they animal orvegetable, in which the nucleus is suspended.

Pulmonary Embolism - An obstruction of the pulmonary arteries of the lung, mostoften composed of detached blood clot from a distant site following an operation orconfinement to bed.

QT prolongation – Is a side effect noted with a number of pharmaceuticals andinvolves a distortion of the normal conduction of electrical impulses across theheart, which manifests as an extension of the time between two points (Q and T) onan electrocardiograph.

Radioisotope – Is a radioactive version of an element, which gradually loses itslarger number of neutrons via the emission of radiation. Radioisotopes are oftenused in the localised treatment of tumours.



Randomised – In a clinical trial, patients are randomly allocated to treatment groupsthat should be representative and comparable in terms of sex, age, race etc.

Rational Drug Design – The systematic design of new drug candidates usingmolecular modelling and a detailed knowledge of the properties of various chemicalcompounds.

Racemic – Is the name given to an optically inactive mixture of two or moreseparable isomers.

Receptor – Is a structural protein on the cell surface or within the cytoplasm of acell that binds to a specific factor, such as a hormone, antigen or neurotransmitter.

Recombinant – A microbe, or strain, that has received chromosomal parts fromdifferent parental strains. Often used to denote the insertion of a sequence of DNA,by chemical or biological means, into the DNA of a recipient organism with theobjective of producing therapeutically useful products.

Renin – Is an enzyme that converts angiotensinogen to angiotensin and, part of therenin-angiotensin-aldosterone system is involved in the regulation of blood pressure.

Ribosome – A structure in the cytoplasm of a cell which facilitates the reading(translation) of a strand of mRNA into a protein by the specific selection and addingtogether of a chain of amino acids.

Seasonal Allergic Rhinitis - An inflammation of the nasal mucous membranesassociated with plant pollen as allergens. Also known as in hay fever.

Secondary End-Point – In a clinical trial pre-determined objectives for analysis butdeemed to be less important than the Primary end-point.

Secretagogue – Is an agent that promotes secretion.

Single Blind – In a clinical trial where the physician but not the patient is awarewhat has been administered be it active treatment or placebo.

SNDA – See Supplementary New Drug Application.

SNPs – Single nucleotide polymorphisms are minor changes in the make up of DNAthat account for the variation seen between individuals.

Spasmogens – A substance, usually released by the body in response to stimulus,which causes spasms in smooth muscle. In the lungs this leads to contraction ofthe airways, the so-called asthma attack.

Statins – A colloquial collective name for the HMG Co-enzyme A reductaseinhibitors, which are frequently used to reduce cholesterol levels.

Supplementary New Drug Application – Is the regulatory process whereby a newindication or formulation for use in the USA is filed with the Food and DrugAdministration.

Synapse – The functional membrane to membrane contact of a nerve cell withanother nerve cell, an effector (muscle or gland) cell, or a sensory receptor cell. Thesynapse subserves the transmission of nerve impulses, usually via the release of aneurotransmitter into the synaptic cleft (or gap) which then exerts an effect on cellson the other side of the cleft.

Systemic – Pertains to an action within the body and usually refers to the action ofa pharmaceutical.

Systole – The contracting phase of the beating heart. The pressure in blood vesselsproduced by such contraction forms part of the measurement of blood pressure(see also diastole and hypertension).



T-cells – A long-lived cell of the immune system also known as a T lymphocyte,which is responsible for the cell mediated immunity.

Thrombosis – The formation or presence of a blood clot (thrombus) within bloodvessels, which may cause infarction (death) of the tissues supplied by that vessel.

Total Peripheral Resistance – That resistance to the passage of blood around thebody afforded by small blood vessels of the vascular system.

Toxicology - As part of the ADMET acronym for drug testing is the toxicity profiledemonstrated in animals/animal tissues by a particular compound in pre-clinicaltesting.

Toxin – Is a substance that is poisonous to the organism.

Transcription – The process whereby mRNA is produced by the binding ofnucleotides in the nucleus of a cell using unwound DNA as a template. The mRNAproduced is almost the same as the original DNA with the exception that that a fifthnucleotide, uracil, takes the place of thymine.

Transgenic – An animal that has been produced from a cell cloned after geneticalteration to carry genes, usually human, that will allow the production oftherapeutically useful (human) proteins

Translation – The process whereby the mRNA molecule produced by the binding ofnucleotides during transcription moves out of the nucleus of the cell into thesurrounding cellular fluid, or cytoplasm. There it attaches to a ribosome and is read,or translated. This process selects and adds together specific amino acids therebyproducing a protein.

Unblinded Trial – A clinical trial where both the patient and investigating physicianare aware what has been administered, be it active treatment or placebo.

User Fee (Deadline) – A sum of money (currently circa $300,000) which a companysponsoring a New Drug Application in the US pays to the Food and DrugAdministration for review of the product. In return the FDA agrees to render adecision on the application within 12-months for a standard review and within 6-months (priority review) for a product which represents a significant advance onexisting therapies.

Vasculature – Is the vascular (blood vessel) network of an organ.

Vasoconstriction – Is the narrowing of the blood vessels, usually leading to anincrease in blood pressure.

Vasodilation – Is the relaxation of the blood vessels, usually leading to a decreasein blood pressure.

Vasopressor – An agent producing vasoconstriction (contraction of the bloodvessels) and an increase in blood pressure, usually understood to be systemicarterial pressure, unless otherwise specified.

Ventricles – Are the lower chamber of the heart.

VLDL-cholesterol – Very Low-density lipoprotein cholesterol is one of a number oflipid-protein complexes present in the body. It has a detrimental effect on theevolution of cardiovascular disease although not as pronounced as LDL-cholesterol.



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Rating Key Rating Dispersion and Banking Relationships

Buy: Total return expected to appreciate 10% or more over a12-month period

Hold: Total return expected to be between 10% to –10%over a 12-month period

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