hep_0507.

qxp 4/30/2007 3:01 PM Page i

Industry Surveys
Healthcare: Pharmaceuticals

May 10, 2007

CURRENT ENVIRONMENT..................................................................1
Herman Saftlas US drug industry improves
Pharmaceuticals Pharmaceutical companies respond to turbulent times
Analyst The changing political landscape
FDA steps up postmarket surveillance of drugs
Wendy Diller The generics outlook for 2007
Financial Writer Highlights of 2006 and first-quarter 2007
Forging deals in biotechnology
S&P Credit Market Services View:
Outlook for Big Pharma improves
INDUSTRY PROFILE.............................................................................13
Global sales growth likely to keep moderate pace
INDUSTRY TRENDS ...............................................................................16
Demographic trends remain positive
Biotechnology is flourishing
Vaccines come into the spotlight
Pipeline problems apply pressure
Cost cutting and reorganizing
Contacts:
R&D gets an overhaul
Cost containment leads to slower spending growth
Inquiries & Recent performance in key product sectors
Client Support HOW THE INDUSTRY OPERATES .............................................................26
800.523.4534 High risk, high rewards
clientsupport@ Drugs predictable life cycles
standardandpoors.com Regulation: FDA oversees US market
Regulation outside the United States
Sales Prohibitive barriers to entry
800.221.5277 Pricing reflects product strengths, market characteristics
roger_walsh@ The generic stage
Liability issues
standardandpoors.com
KEY INDUSTRY RATIOS AND STATISTICS ...................................................35
HOW TO ANALYZE A PHARMACEUTICAL COMPANY ..................................37
Media Researching the business
Michael Privitera Analyzing financial statements
212.438.6679 S&P Credit Market Services View:
michael_privitera@ Evaluating a pharmaceutical companys creditworthiness
standardandpoors.com GLOSSARY .............................................................................................44
INDUSTRY REFERENCES.....................................................................47
Replacement copies COMPARATIVE COMPANY ANALYSIS ..............................................50
800.852.1641
THIS ISSUE REPLACES THE ONE DATED NOVEMBER 2, 2006.
THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR NOVEMBER 2007.
hep_0507.qxp 4/30/2007 3:01 PM Page ii

Standard & Poors Industry Surveys

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VOLUME 175, NO. 19, SECTION 2

THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 3 SECTIONS.
hep_0507.qxp 4/30/2007 3:01 PM Page 1
C URRENT E NVIRONMENT
US drug industry improves
An improved flow of new products and at-
tention to cost streamlining are beginning to
pay off for the beleaguered pharmaceutical
industry. In 2006, the big pharmaceutical
companies reported better-than-expected ag-
gregate results. Although results for individ-
ual companies were mixed, the underlying
fundamentals were strong. We believe com-
panies appear to be more favorably posi-
tioned to weather the encroaching onslaught
of generic competition than they were in
2003 and 2004. Aggregate revenues in 2006
for the 11 Big Pharma companies under our
coverage grew 6.5% to $271.8 billion, while
average earnings per share advanced 18.6%
in 2006.
Despite near-term concerns over political
uncertainties, reimbursement issues, and
price competition following patent expira-
tions, Standard & Poors believes that the
positive momentum should continue in 2007.
The number of new molecular entities
(NMEs) likely to be launched in the United
States in 2007 will be comparable to the 22
of 2006, but the sales potential is higher. In
addition, Medicare Part D, the new US
government prescription drug benefit for the
elderly, contributed roughly 1% to sales
growth in 2006 and is likely to have a posi-
tive impact again in 2007.
Longer-term prospects are enhanced by
demographic growth in the senior population
(people aged 65 and older account for about
a third of industry sales) and by the promise
of new therapeutic products derived from
discoveries in genomics and biotechnology.
Importantly, new drug pipelines are improv-
ing after a weak period of several years.
Cost-cutting initiatives and synergies from
mergers should also bolster profits at some
of the big companies.
Prospects for the generics pharmaceutical
segment also remain favorable. A large number
of blockbuster ($1 billion or more in annual
sales) drugs are losing patent protection in the
next few years, providing significant opportu-
nities for this subsector. The new Medicare pre-
scription drug benefit particularly helped gener-
ic drug makers because their products have
filled a majority of prescriptions (more than
60% in 2006). Companies with rich generic
pipelines and competence in litigating complex
patent issues should prosper. However, there
may be fewer opportunities in 2007 than there
were in 2006 for companies to get 180-day
market exclusivity (granted to the generic com-
pany thats first to file for approval and chal-
lenge an existing patent, as defined in the
Glossary of this Survey and discussed in
more detail later in this section). This situa-
tion will lead to greater competition and
pressure on margins.
Despite near-term uncertainties over pricing
issues and patent expirations, we think phar-
maceuticals remains one of the healthiest and
widest-margined US industries. As of late April
2007, our fundamental outlook for the S&P
Pharmaceuticals Index was positive. Year-to-
date through April 20, 2007, the S&P Phar-
maceutical Stock Index was up by 8.4%,
versus a 5.1% increase in the S&P 1500 and
an 8.2% rise in the S&P Healthcare Index. We
attribute the strong results to new Medicare
business, price increases, cost-streamlining ef-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
forts, and better foreign exchange.
Pharmaceutical companies respond
to turbulent times
Although the outlook for big pharmaceu-
tical companies is more favorable than it has
been in the past three years, the industry is
still in the middle of a multiyear transforma-
tion. Underperforming R&D and increasing-
ly fierce price competition from generics have
forced it to change. Big Pharma has strug-
gled, even as small biotechnology companies
have made stellar progress.
Companies have responded by merging,
forming alliances, buying biotech companies,
litigating against generics competitors, and
cutting costs. In late 2006 and early 2007,
1
hep_0507.qxp 4/30/2007 3:01 PM Page 2
LEADING THERAPY CLASSES IN US SALES 2006
SALES YR-TO-YR
(BIL. $)
1. Lipid regulators 35.2
2. Oncologics 34.6
3. Respiratory agents 24.6
4. Acid pump inhibitors 24.1
5. Antidiabetics 21.2
6. Antidepressants 20.6
7. Antipsychotics 18.2
8. Angiotensin-II antagonists 16.5
9. Erythropoietin products 13.9
10. Antiepileptics 13.1
Source: IMS Health Inc.
these activities continued, with some major
companies moving aggressively to cut sales
forces and reorganize R&D. These actions
were especially notable because of the size and
leadership position of the companies involved.
In addition, recent acquisition activity appears
to be focused on smaller biotech firms with
promising R&D profiles. Standard & Poors
believes that these responses will help counter-
act the effects of generic competition and im-
prove new product pipelines.
Schering-Plough agrees to buy Organon
In March 2007, US drugmaker Schering-
Plough Co. agreed to pay $14.4 billion in
cash to the Dutch chemicals conglomerate
Akzo Nobel NV for its pharmaceutical and
animal health business, Organon Biosciences
NV. The transaction is the latest in a string
of acquisitions of mid-sized European brand-
name pharmaceutical companies, mostly by
other European companies. (See the Global
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
Industry Survey on the European Pharma-
ceuticals Industry published in May 2007
for more on European merger activity.)
Schering-Ploughs goals in making the
purchase are to improve its late-stage new
drug pipeline and increase its scale. In the
pharmaceutical industry, leadership requires
ever-expanding geographical reach, global
marketing clout, and the ability to mitigate
R&D risk. We believe Schering-Ploughs ac-
tion will help it achieve these goals. After the
acquisition, scheduled for completion by
year-end 2007, Schering-Plough will be the
14th largest pharmaceutical company as
ranked by global sales, up from its current
position as 17th. Schering-Plough has agreed
to pay 3.1 times sales for Organon well
above the valuation Organon would likely
2
have received if Akzo Nobel had taken it
public, as the Dutch company originally
% CHG.
planned to do. We believe the premium was
7.5
appropriate, given the strategic benefits and
20.5
potential returns on the combination.
10.4
The deal shows how far Schering-Plough
3.9
13.1 has come since Chairman and CEO Fred
3.3 Hassan took over in April 2003. At that
10.9 time, the company was reeling from generic
15.2 competition against key products that made
11.8 up the majority of its sales, and federal ac-
10.8 tions against it for manufacturing and com-
pliance irregularities. A deal of this size
would have been out of the question. As of
2007, Schering-Plough has the management
skills and the cash reserves to make it hap-
pen. Among other signs of health, Schering-
Ploughs top seven products had double-digit
sales growth in 2006. The company says its
Phase II drug pipeline is 50% stronger than
it was two years ago. In addition, patents for
its key products do not expire soon.
Even with these improvements, however,
Schering badly needs to fill a gap in its late-
stage product pipeline. Organon has several
products pending regulatory approval or in
Phase III clinical trials, including drugs for
insomnia and depression, several hormones,
and sugammadex, which would be used in
anesthesiology. It has a strong presence in the
contraceptive and fertility markets and in
central nervous systems, areas where Scher-
ing has little expertise. A setback with ase-
napine, an antidepressant, occurred in
November 2006, when partner Pfizer Inc.
backed out of a co-marketing deal, citing
commercial reasons. Organon said it would
pursue development on its own. The drug, if
it succeeds, may help Schering-Plough break
into a huge therapeutic area where it previ-
ously has not participated.
The Schering-Plough/Organon deal may or
may not portend a new round of industry
mergers. However, Bristol-Myers Squibb Co.,
currently the 14th largest pharmaceutical
company, is rumored to be a potential acqui-
sition target. The company is suffering from
tough generic competition. In September
2006, its CEO and chairman Peter Dolan was
forced to resign abruptly, largely as a conse-
quence of a failed deal-making strategy aimed
at countering generics. (See the November
2006 issue of Healthcare: Pharmaceuticals
for details about the events leading up to Mr.
Dolans departure.)
hep_0507.qxp 4/30/2007 3:01 PM Page 3
In general, however, industry leaders are
split over the strategic merits of large-scale
mergers. The big pharmaceutical companies,
having gone through a round of mergers in the
late 1990s, appear to be spending more re-
sources on small acquisitions and alliances,
notably in the biotechnology field. Abbott
Laboratories acquisition in December 2006 of
the specialty pharmaceutical company Kos
Pharmaceuticals Inc. for $3.7 billion is an ex-
ample of this kind of smaller deal. Kos broad-
ens Abbotts product line, although it wont
contribute much to marketing and scale. (See
the end of this section for a more detailed dis-
cussion of recent deal-making activities be-
tween Big Pharma and biotech companies.)
Pfizer cuts sales force and revamps R&D
Pfizer Inc., the worlds largest drug compa-
ny, is grappling with patent expirations for key
products. In addition, the company has seen
several R&D setbacks, including its decision in
late 2006 to drop work on a high-profile new
cholesterol drug, torcetrapib, which was in
late-stage development. Five of Pfizers drugs,
constituting 21% of revenues in 2006, went
off or are going off patent in 2006 and 2007.
The companys most important drug, the anti-
cholesterol medication Lipitor, faces competi-
tion in the United States from the generic
versions of competitors brand-name drugs
that went off patent in 2006.
Despite the first-time entrance of generics
into the statin class of anticholesterol thera-
peutics and unusually heavy pressure from
payers to switch all drugs in that class to
generics, sales of Lipitor rose by 6% globally
(3% in the United States) to $12.9 billion in
2006. Lipitor, which is a statin, benefited from
its potency advantages and its strong market
recognition. The drug was also partially
spared the fierce price wars that often accom-
pany generics competitions because of the lim-
ited number of generics suppliers initially
allowed onto the market.
Bristol-Myers Squibbs statin Pravachol
($2.3 billion in 2005 global sales) lost its
patent in April 2006. The battle only began to
heat up, however, after Merck & Co. Inc.s
Zocor, the worlds second best-selling medicine
in 2005 (with $4.4 billion in global sales),
went off patent in June 2006. Zocor competi-
tors got 180-day exclusivity. (The Food and
Drug Administration awards six months of
marketing exclusivity to the first generics man-
ufacturer to file for a new drug approval that
challenges an existing patent for a brand-name
drug.) In this case, two companies, Ranbaxy
Laboratories Ltd. and Teva Pharmaceutical In-
dustries Ltd., got 180-day exclusivity, for dif-
ferent doses. As permitted by law, Merck also
authorized a third company, Dr. Reddys
Laboratories Ltd., to sell a generic.
The market dynamics in the statin class
got tougher in December 2006, when the
180-day exclusivity expired. More competi-
tors came onto the market, driving prices
down further. The full impact on Lipitor isnt
yet clear, but US sales fell 4% from February
2006 to February 2007, according to IMS
Health. The rest of 2007 and beyond looks
tough for Pfizer, however, which faces patent
losses for other major products, including
Norvasc, an antihypertensive ($4.9 billion in
global 2006 sales; $2.7 billion, US) and
Zyrtec, an allergy medication ($1.6 billion
global; $1.5 billion, US). In 2008, Camptosar,
an oncology drug ($903 million in global
sales in 2006), is expected to go off patent,
and in 2011, the patent protection for Lipitor
will expire.
Pfizers response has been to step up devel-
opment of new drugs and to cut costs. Its long-
term strategy to introduce a next-generation
cholesterol drug fell apart in November 2006,
however, when the drug candidate it was
counting on demonstrated unacceptable safe-
ty concerns in late-stage clinical trials. Pfizer
and many on Wall Street had expected the
drug, torcetrapib, would be a best seller.
Pfizer had hoped it would form the back-
bone of its cardiovascular business, replacing
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
much of the sales that the company will lose
to generics in the next few years.
Torcetrapib would have been prescribed
in combination with Lipitor as a one-two
punch to fight coronary artery disease. The
drug raised levels of high-density lipopro-
tein (HDL), the so-called good choles-
terol, while Lipitor lowers low-density
lipoprotein (LDL), the bad cholesterol.
High levels of LDL and low levels of HDL
have been linked to heart attacks and strokes.
In November 2006, however, after analyzing
data from a Phase III study, Pfizer execu-
tives determined that torcetrapib could ac-
tually worsen coronary artery disease. The
company immediately halted work on the
drug, after spending an estimated $800 mil-
lion on its development.
3
hep_0507.qxp 4/30/2007 3:01 PM Page 4
Partly in response to this R&D disap-
pointment, Pfizers new chairman and CEO
Jeffrey Kindler moved quickly to initiate a
new cost-cutting campaign. The big pharma-
ceutical companies, including Pfizer, have
been cutting costs for several years. Never-
theless, Pfizers aggressive strategy, announced
in January 2007, is of particular interest.
First, because Pfizer is a bellwether for the
industry, its move could set the pace for the
rest of the industry. In addition, the initiative
represents a firm reversal of Pfizers past
strategy, in which it built the industrys
largest sales force and used it successfully to
outstrip competitors market clout.
Mr. Kindler replaced Hank McKinnell, who
resigned under pressure in July 2006, bur-
dened by Pfizers lackluster results. Under Mr.
McKinnell, a cost-cutting program begun in
2005 reduced Pfizers workforce from 106,000
to roughly 98,000 and aimed to pare expenses
by $4 billion by 2008. Mr. Kindlers new plan
goes further, cutting 20% of the companys
10,000 US sales representatives and a similar
proportion of overseas reps.
The plan also revamps Pfizers R&D op-
erations. Pfizer has reorganized its R&D
several times over the years as the company
has grown and expanded its pipeline by
40% since 1998. The reorganization an-
nounced in January 2007, however, is
among the most extensive and includes
closing five research sites and reducing the
R&D budget for support staff and facilities
by 20%. The goal is to shift R&D resources
to the highest-potential areas. To do this,
the company is consolidating all of the
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
work in each therapeutic area at one R&D
site; currently, the activities are not central-
ized. (For further discussion of industry
moves to revamp R&D operations see the
Industry Trends section of this Survey.)
The changing political landscape
In 2007, pharmaceutical companies also
face an unpredictable political landscape.
The new Democratic majority in Congress
has moved quickly to introduce healthcare
reform proposals, many of which include ef-
forts to keep a lid on healthcare costs, im-
prove the safety of treatments, or modify
competitive practices.
The proposals range from reform of the
one-year-old Medicare Part D prescription
4
drug benefit, to expansion of the FDAs re-
sponsibilities for monitoring safety of
treatments already on the market, to new
restrictions on patent fights between gener-
ics and brand-name companies. While the
prospects for passage of these initiatives
are hard to assess, the nature and sheer
volume of the proposals creates uncertainty
for pharmaceutical companies, particularly
in devising their pricing and marketing
strategies. Even if these proposals show lit-
tle likelihood of being successful on their
own, some of them could be attached to
broader bills. Notably, the renewal of the
Prescription Drug User Fee Act (PDUFA)
could attract riders.
Since 1992, the pharmaceutical industry
has provided part of the funding in exchange
for speedier FDA reviews of new drug appli-
cations. (The PDUFA currently finances more
than half of the FDA review process for new
drug applications.) The current law is almost
certain to be renewed when it expires in Sep-
tember 2007, and Congress could attach
several proposed reforms to it. The laws es-
tablishing separate clinical trials for chil-
drens medications are also up for renewal
and could be another vehicle for attempts to
push through additional legislation.
While many proposals are pending in
Congress, Standard & Poors believes that
those directed at the issues discussed below
are of most interest to the industry.
Medicare Part D enters its second year
Since January 1, 2006, Medicare Part D
(PDP) has enabled those eligible for
Medicare approximately 43 million el-
derly and disabled Americans to have
the federal government pay for their pre-
scription drugs. According to the Centers
for Medicare and Medicaid Services (CMS),
which oversees Medicare, more than 38 mil-
lion Medicare beneficiaries had some form
of prescription drug benefit in 2006.
The PDP has created a new business driver
for drug manufacturers. According to IMS
Health Inc., a market research firm specializ-
ing in the pharmaceutical industry, the federal
program contributed 1% to 2% to retail pre-
scriptions volume growth in 2006 and slightly
less than 1% to sales growth. IMS Health fig-
ures released in March 2007 indicate that PDP
covered 16% of all retail prescriptions in 2006
and more than 50% of prescriptions filled by
hep_0507.qxp 4/30/2007 3:01 PM Page 5
senior citizens. The market research firms ex-
ecutives estimate that the government now
pays for 40% of all US prescriptions filled. In
short, PDP has made the government into the
biggest purchaser of drugs in the United States.
The companies most exposed to Medicare
Part D that is, those with a high propor-
tion of drugs used by seniors are Merck
(with 20% of its sales from drugs for se-
niors), Pfizer (18%), and Eli Lilly and Co.
(which doesnt disclose this figure); others,
such as Wyeth (9%), have little exposure.
While the cost of the PDP is less than origi-
nally projected, it is still enormous. Politi-
cians are concerned that it and Medicare
in general will be unsustainable in the
long term.
The government, however, doesnt directly
negotiate drug prices with suppliers. The
Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA), which
created Medicare Part D, explicitly forbids the
federal government from doing this. Congress
was concerned that such powers would give
the government, as the nations largest purchas-
er of drugs under PDP, too much influence
over drug prices. Instead, private managed care
organizations selected by the CMS are respon-
sible for administering benefits and negotiating
prices with suppliers. The managed care com-
panies are thus at the heart of efforts to control
spending on the program.
The expectation was that the huge vol-
ume of prescriptions stemming from Medicare
Part D, accompanied by intense efforts to
surpass competitors, would help MCOs to
negotiate steep discounts from manufactur-
ers. According to the CMS, the average
drug price under Medicare Part D showed
a 27% discount from the average whole-
sale price of the drug. Still, the cost to the
government of the new benefit is very high;
Congress would like it to decrease or to
grow at a slower rate.
Republicans and Democrats have different
approaches to controlling Medicare drug
costs. Some in both parties favor leaving the
program alone, but others advocate a more
proactive stance against what they perceive
will be future problems. In general, Republi-
cans favor pushing the MCOs to get better
terms from drug companies. Some Democ-
rats favor getting the federal government
more involved in negotiating PDP drug prices
under certain circumstances.
To that end, Democrats have introduced a
bill that would eliminate the provision of the
MMA that expressly forbids the government
from interfering in the negotiation process.
President Bush had said that he would veto
this bill, and in mid-April 2007, Senate Re-
publicans successfully blocked consideration
of the bill.
Regardless of the outcome of this de-
bate, MCOs and suppliers are in the middle
of their third year of negotiating drug
prices, and their relationships are changing.
MCOs had until April 16, 2007, to submit
their formularies for 2008 to the CMS and
have until June 4 to file their formal bids
for 2008. The RPM Report, a trade publi-
cation, indicates that MCOs now appear to
have more leverage in their negotiations be-
cause they are consolidating their offering
plans, with the top eight plans now en-
rolling more than two-thirds of PDP benefi-
ciaries. In addition, the plans now have, for
the first time, a full year of utilization and
cost data available to them. The plans also
expect to implement formularies that cover
more drugs, as the government requires,
but are asking patients to pay more of the
bill for their medications. About three-
quarters of PDP plans have four-tier formu-
laries in 2007, compared to 35% in 2006,
according to The RPM Report.
Medicare PDP also has had an impact
on distribution channels because it favors
bigger pharmacy chains and mail-order
pharmacies, according to IMS Health. Inde-
pendent pharmacies and food stores, which
did not benefit as much from PDP, barely
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
increased sales in 2006. In contrast, retail
mail order was up 14.2% and chain store
drug sales rose 8.1%.
Safety reform at the FDA gains traction
In 2007, a number of initiatives are un-
derway to improve the ability of the US Food
and Drug Administration (FDA) to monitor
the safety of drugs on the market. The FDAs
activities are closely aligned to the pharma-
ceutical industrys growth prospects, because
the agency has control over approval of new
drugs and the ways drugs are used. The
agencys role in monitoring the safety and ef-
ficacy of drugs on the market became the fo-
cus of ongoing fierce debate in political and
legal circles following the Vioxx safety scan-
dal in September 2004.
5
hep_0507.qxp 4/30/2007 3:01 PM Page 6
Critics charged that the FDA was too lax
when it approved Mercks painkiller Vioxx
in 2001, despite preliminary data that indi-
cated the drug might put users at higher risk
of heart attacks. Merck withdrew the drug
from the market in September 2004, follow-
ing publication of a definitive study showing
that Vioxx increased risk of heart attacks.
Reverberations began almost immediately.
Congress and consumer groups called for re-
form, leading the agency to revamp its safety
review procedures. Under pressure from
Congress, the agency in 2005 established an
independent Drug Safety Oversight Board
(DSOB) to oversee management of important
drug safety issues and reviewed industry ties
of experts who sit on its advisory panels.
Subsequently, the agency has continued to
undergo intense scrutiny, both internally and
externally. In September 2006, the Institute
of Medicine (IOM), a nonprofit independent
advisory agency, issued a report criticizing
the FDA for the way that it monitors drug
safety and calling the agencys organization
dysfunctional. The report had a significant
impact because of the Institutes nonpartisan
status and the possibility that safety overhaul
measures could be attached to upcoming leg-
islation. One heated question concerns who
will pay for the increased scrutiny if Con-
gress orders the agency to be more vigilant.
Among current legislative proposals, the
most prominent is the Kennedy-Enzi bill
(Senators Edward Kennedy, D-MA, and
Mike Enzi, R-WY), entitled The Enhancing
Drug Safety and Innovation Act of 2007.
The bill calls for every drug application to
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
include a post-market risk management pro-
gram and establishes clinical trials registry
and clinical results database. While it has run
into criticism because of its potential expense
and vulnerability to too much bureaucracy, it
also has a wide support base in Congress.
Contributing to the FDAs woes has been
its lack of a permanent leader; for all but 18
months since early 2001, the agency operat-
ed without an officially appointed commis-
sioner. In December 2006, the Senate finally
confirmed Dr. Andrew von Eschenbach, the
interim commissioner, as the permanent com-
missioner, after a considerable delay due to
partisan maneuverings by both Democrats
and Republicans. Since then, the FDA has
undertaken steps to improve its own safety
surveillance programs.
6
FDA steps up postmarket
surveillance of drugs
In January 2007, in a formal response
to the IOM report and to other critics, the
FDA announced a new series of programs
to strengthen drug safety surveillance and
communications with the public about
their medications. These initiatives include
a pilot program to produce safety profiles
of drugs that have been on the market for
18 months and upgrading the process for
collecting information on adverse reactions
to medications.
As part of its program, the FDA is tight-
ening requirements for labeling and plans to
expand the duties of advisory committees.
These panels of experts will now be asked to
undertake periodic postmarket reviews. In
March 2007, the agency, under pressure
from Congress, proposed new rules limiting
the experts who sit on these advisory panels
to accepting a maximum of $50,000 from
pharmaceutical companies in the year pre-
ceding their service to the agency. If finalized,
the new rules will affect many of the pan-
elists, according to Global Insight, an eco-
nomics and market forecasting firm.
Heightened safety concerns are having a
commercial impact, as warning labels and
publicity about risks may already have
crimped demand for certain drugs. In late
2006 and early 2007, the FDA required
manufacturers to add stronger safety warn-
ings to the labels of several kinds of drugs
that are already on the market and it is re-
viewing other labels. Insomnia drugs are
coming under scrutiny because of their side-
effect profile (including reports of midnight
binge eating, sleep driving, and short-term
memory loss). As of March 2007, this popu-
lar group of drugs has to have stronger risk
warnings on its labels. Beginning in February
2007, manufacturers of certain drugs for
attention-deficit hyperactivity disorder
(ADHD) also have to alert patients about
potential cardiovascular risks and associated
psychological reactions. Childrens cough
syrups and best-selling anemia drugs (Amgen
Inc. and Johnson & Johnson are top manu-
facturers) are also coming under intense
safety scrutiny in 2007.
In 2006 and early 2007, the FDAs height-
ened concern about drug safety also led to
some delays in the approval process, though
hep_0507.qxp 4/30/2007 3:01 PM Page 7
the chief culprit behind the dearth of new
product approvals in 2006 was the low num-
ber of new drug applications in prior years.
Several companies suffered setbacks when
the agency either rejected their high-profile,
potentially important drugs, or asked for
more data before approving them.
European companies Sanofi-Aventis SA
and Novartis AG were hit especially hard be-
cause of agency concerns about their prod-
ucts, Sanofis antiobesity drug Acomplia and
Novartiss diabetes drug, Galvus. These
drugs may generate huge sales for their man-
ufacturers if they get on the market, but the
FDA delay makes their near-term commercial
prospects uncertain. The delay in launch of
Galvus was a positive driver for Merck,
which launched Januvia, a new diabetes
drug, in the fall of 2006. Both Januvia and
Galvus belong to a new class of diabetes
drugs, but Januvias mechanism of action is
sufficiently different from Galvuss that it
does not appear to trigger the same safety
risk issues as Galvus.
Congress is also pondering legislation that
would restrict direct-to-consumer (DTC) ad-
vertising for several years following the
launch of a new product. DTC advertising
has come under attack from politicians, con-
sumer groups, and FDA officials for being
too aggressive and for encouraging use of
drugs for unapproved indications. While it
isnt likely to be banned, some efforts are un-
derway to limit its use in the first year or
two after a product launches, in order to give
physicians time to understand the drug.
Spending on DTC was nearly $4 billion in
2005 and minimally higher for the first 11
months of 2006, according to IMS Health.
The generics outlook for 2007
Several pro-generics initiatives are pend-
ing in Congress. Among these are bills
prohibiting brand-name pharmaceutical
companies from launching authorized
generics until after the 180-day marketing
exclusivity period.
Another pending bill prohibits brand-
name companies from settling patent chal-
lenges by paying generics companies to delay
the launch of generics. A bill regarding this
topic has been introduced in the Senate. Also
actively underway are talks to establish a US
regulatory approval pathway for generic ver-
sions of biologics. This issue has gained trac-
tion because biotechnology products are so
expensive, but it is highly controversial and
unlikely to get far in the near term. These
proposals are of great importance to the US
pharmaceutical industry as generics competi-
tion increases.
Generics accounted for a huge portion of in-
dustry volume growth in 2006 and will likely
be an important factor in the industrys perfor-
mance in 2007. While prescription volume
growth was high in 2006, new generics for sev-
eral best-selling drugs held back the revenue
growth of innovator companies. In 2006, the
prescription volume of generics grew 13%,
while their revenues grew 22.4%. Chief drivers
were the introduction of generic versions of
Zocor (simvastatin), Plavix (clopidogrel, an an-
ticoagulant), and Zoloft (sertraline, antidepres-
sant). Other brands, namely Pravachol, Mobic
(painkiller), and Toprol XL (antihypertensive),
also went off patent in 2006.
In 2006, unusually intense battles char-
acterized the ongoing war between branded
and generic drugs. Litigation is routine in
generic competition, but the fight over
Plavix was unusually fierce and largely re-
sponsible for the ouster of Plavixs US mar-
keter Bristol-Myers Squibbs chief executive
Peter Dolan. (See the November 2006
Healthcare: Pharmaceuticals Industry Survey
for a detailed discussion.) Within two
weeks of the introduction of the generic
version of Plavix, 80% of all prescriptions
for the drug were filled with the generic,
according to IMS Health.
This year is also important for brand-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
name drugs going off patent, although not
quite as big as 2006. Drugs with sales valued
at more than $15 billion will face generic
competition in 2007 for the first time, accord-
ing to IMS Health. The most significant drugs
losing patent protection in 2007 are Pfizers
Norvasc and Zyrtec, and Sanofi-Aventis
insomnia drug Ambien.
In contrast to their high-profile approach to
the Zocor patent expiration in 2006, when
MCOs aggressively pushed members to switch
to generics, MCOs have not widely publicized
their approach to Norvasc and Ambien, which
were expected to face generic competition be-
ginning in March and April 2007, respectively.
Medco Health Solutions Inc., a pharmacy ben-
efits management company, says that the loss
of patent protection for Ambien could reshape
7
hep_0507.qxp 4/30/2007 3:01 PM Page 8

MAJOR PATENT EXPIRATIONS FOR SELECTED BRAND-NAME PHARMACEUTICALS*

(Due to lose patent protection by 2010, ranked by 2006 sales)

2006 US
SALES EXPIRATION
BRAND NAME GENERIC COMPANY INDICATION (MIL. $) DATE*
Norvasc Amlodipine Pfizer Inc. Antihypertensive 2,703 Sep. '07
Effexor XR Venlafaxine Wyeth Depression 2,640 Jul. '08
Risperdal Risperidone Johnson & Johnson Schizophrenia 2,544 Dec. '07
Protonix Pantoprazole sodium Wyeth Proton pump inhibitor for GERD 2,382 Jul. '10
Fosamax Aledronate Merck Osteoporosis 1,983 Jan. '08
Wellbutrin XL Bupropion GlaxoSmithKline Depression 1,915 Oct. '07
Ambien IR Zolpidem Sanofi-Aventis SA Insomnia 1,789 Apr. '07
Toprol XL Metoprolol XL AstraZeneca Antihypertensive 1,695 Sep. '07
Zyrtec Cetirizine Pfizer Inc. Allergies 1,569 Dec. '07
Coreg Carvedilol GlaxoSmithKline Antihypertensive 1,536 Mar. '07
Lotrel Amlodipine/benazepril Novartis AG Antihypertensive 1,496 Mar. '07
Levaquin Levofloxacin Johnson & Johnson Antibiotic 1,481 Dec. '10
Aricept Donepezil Pfizer/ Eisai Alzheimers disease 1,385 Nov. '10
Depakote Divalproex Abbott Laboratories Epilepsy 769 Jan. '08
*Expiration dates are estimates and subject to change, based on the outcome of patent litigations. A generic Norvasc launched in March 2007,
following an appellate court decision in favor of a generics manufacturer. Wellbutrin XL, already has generic competition for some doses but
not others. A generic Toprol XL at the lowest dose (25mg) launched in late 2006, but FDA approvals of generic versions of other dosages (50, 100
and 200 mgs) are pending and are much bigger markets.
Sources: Company reports; S.G. Cowen & Co.; Standard & Poors

spending on insomnia treatments in 2007, giv-
en the drugs US sales of $2.2 billion in 2006.
Medications to treat sleep disorders are one of
the fastest growing categories of drug spend-
ing, rising 31.5% in 2005, according to
Medco. The number of adults aged 20 to 44
using sleep medication increased by 128%
from 2000 to 2005. Ambien will likely face im-
mediate and fierce price competition because
no generics maker has 180-day exclusivity.
Hypertension drugs also face generic com-
petition in 2007. In addition to Norvasc,
Toprol XL, another widely used antihyperten-
sive made by UK-based AstraZeneca PLC, lost
its patent protection in late 2006. Coreg, also
sold by a UK company, GlaxoSmithKline PLC,
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
from multiple new entrants into the industry.
Of the drugs that will be targeted by generics
companies through 2010, many currently gen-
erate huge revenues, but because few of the
drugs have tough barriers to entry, price wars
are inevitable.
The cutthroat competition has fueled a
steady wave of consolidation in the once-
fragmented generics industry. As a result, the
sector is highly concentrated, with the top 10
firms accounting for more than 70% of sales
in 2006. Much more than in the branded in-
dustry, where a strong patent on a popular
drug can ensure a monopoly for years,
generics companies have to keep costs low
to survive because their products lack any

is likely to go generic in 2007 as well. Hyper-
tension affects about 60 million adults in the
US and half of all Americans 60 or older.
While the hypertension medications have been
pounded by generic competition in recent
years, Norvasc and Toprol XL are particularly
important because they are the third and
fourth most frequently prescribed drugs in the
United States, according to IMS Health. The
manufacturer of a generic version of Norvasc
has semi-exclusivity; that is, it will share ex-
clusivity with one other company.
differentiation that protects pricing. By consol-
idating, generics companies hope to gain
greater economies of scale, which lowers costs
and improves pricing flexibility. Pricing flexi-
bly is a key competitive advantage as low-cost
manufacturers from emerging markets, no-
tably India, establish a presence in the Euro-
pean and US markets. Consolidation also
enables generics companies to expand their
product portfolios, thus gaining leverage with
distributors and buyers that generally prefer
to work with just a few large suppliers.

No windfall anticipated for generics companies Highlights of 2006 and first-quarter

Generics companies are not likely to reap a 2007
windfall from most of the near-term patent ex-
piration opportunities. One reason is intensify- For brand-name drug companies, the
ing competition from existing companies and most effective strategy in fighting generics

8
hep_0507.qxp 4/30/2007 3:01 PM Page 9

RECENT NEW MOLECULAR ENTITIES APPROVED

THERAPEUTIC APPROVAL
TRADE NAME GENERIC NAME INDICATION APPLICANT POTENTIALS DATE
Invega Paliperidone Schizophrenia Johnson & Johnson S 12/19/06
Polyphenon E ointment Kunecatechins Genital/perianal warts MediGene S 10/31/06
Tyzeka Telbivudine Hepatitis B Idenix S 10/25/06
Omnaris Ciclesonide Allergies Altana* S 10/20/06
Januvia Sitagliptin phosphate Type 2 diabetes Merck S 10/16/06
Zolinza Vorinostat Advanced cutaneous T-cell lymphoma Merck PO 10/6/06
Pylera Biskalcitrate;
metronidazole;
tetracycline
hydrochloride Ulcers Axcan Pharma S 9/28/06
Noxafil Posaconazole Antifungal Schering P 9/15/06
Sprycel Dasatinib Oncology (chronic myeloid leukemia) Bristol-Myers Squibb PO 6/28/06
Prezista Darunavir HIV Tibotec (J&J subsidiary) P 6/23/06
Azilect Rasagiline mesylate Parkinson's disease Teva S 5/16/06
Chantix Varenicline Smoking cessation Pfizer P 5/10/06
Dacogen Decitabine Myelodysplastic syndromes MGI Pharma SO 5/2/06
Eraxis Anidulafungin Antifungal Vicuron S 2/17/06
Amitiza Lubiprostone Chronic idiopathic constipation Sucampo S 1/31/06
Ranexa Ranolazine Chronic angina CV Therapeutics S 1/27/06
Sutent Sunitinib malate Oncology Pfizer P 1/26/06

P-Priority review: significant improvement compared with marketed products, in the treatment, diagnosis, or prevention of a disease. S-Standard review: drug ap-
pears to have therapeutic qualities similar to those of one or more already marketed drugs. O-Orphan drug. *Nycomed bought Altana Pharma AG in December 2006.
Source: US Food and Drug Administration.

is to replace lost sales of older, unprotected
drugs with new, patented drugs. In 2006,
there were a greater number of promising
approvals from the FDA than in 2005. The
drugs approved, however, are not likely to
generate the revenues needed to make up
the shortfall from patent expirations. Fur-
thermore, new drugs take time to build
market share.
Perhaps the most innovative nonbiologic
therapy launched in 2006 was Gardasil, a
vaccine that prevents infection from human
papillomavirus, which is the cause of almost
2007. It is a combination of two drugs al-
ready on the market: Mercks Januvia,
which was approved in October 2006, and
the generic drug metformin. The two drugs
were already being used together to tackle
three key defects in Type 2 diabetics: poor
glucose control, insulin reduction, and in-
sulin resistance. Januvia is aimed at the first
two, while metformin, which is the major
medication for Type 2 diabetics, reverses the
latter. Metformin is more potent, but Janu-
via represents the latest scientific break-
through. It is a hormone that stimulates the

MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

all cervical cancers. Gardasil is the first vac-
cine aimed at preventing cancer. Despite
the high price tag that Merck has set for
Gardasil, MCOs appear to be willing to re-
imburse for it. CDC has recommended its
use in females age 11 to 26, although actual
rate of use will depend on states vaccination
guidelines. Several states have made the vac-
cine mandatory, although accumulating con-
troversy led Merck to stop lobbying states to
take this action. If payers are generous with
reimbursements, Gardasil could boost com-
panies interest in working in the vaccine
field; until now, they have been concerned
about the fields profitability, which has tra-
ditionally been poor.
Mercks newest drug for Type 2 diabetes,
Janumet, received US approval in March
pancreas to produce more insulin and ap-
pears to have few side effects, and is the
first in a new class of therapeutics.
In January 2007, Johnson & Johnson
(J&J) launched Invega, a next-generation
treatment for schizophrenia. Invega, which
J&J licensed from the Japanese pharmaceu-
tical company Eisai Ltd. Co., is aimed at
gradually replacing J&Js best-selling antipsy-
chotic, Risperdal, which goes off patent in
June 2008. The 18-month advance gives J&J
time to convert the Risperdal market to Inve-
ga, which the company claims is safer and
easier to use than Risperdal. J&J has two ad-
ditional drugs for central nervous system dis-
orders in late-stage development: paliperidone
palmitate (a long-acting injectable for schizo-
phrenia) and carisbamate (epilepsy).

9
hep_0507.qxp 4/30/2007 3:01 PM Page 10
J&J also received US approval in mid-
2006 for Prezista, an HIV treatment. In June
2006, J&J subsidiary Janssen Pharmaceutica
NV formed an alliance with Vertex Pharma-
ceutical Inc. in which Janssen will market
Vertexs investigational hepatitis C drug,
VX-950, in parts of Europe and Asia, while
Vertex retains rights in North America. The
drug has shown highly promising results in
clinical trials. J&J expected to file eight
new drug applications in 2007 and to
launch 10 to 13 new drugs between 2005
and the end of 2007.
Other potentially promising drugs could be
launched in 2007, including Wyeths Pristiq, an
antidepressant (Wyeth received an FDA ap-
provable letter requesting additional data for
this drug in January 2007). Wyeth and its part-
ner, the Belgium-based Solvay Pharmaceuticals
Inc., also filed a new drug application in
October 2006 for bifeprunox, an antipsychot-
ic, which they claim has a better metabolic pro-
file than existing treatments. In January 2007,
the partners extended their collaboration to in-
clude work on additional antipsychotics.
Pfizer launched Sutent in 2006 for metastatic
renal cell cancer and for gastrointestinal stom-
ach cancer patients who are resistant to stan-
dard therapy. Sales were $200 million in 2006,
and Pfizer is seeking to expand indications for
the drug. The company plans to launch three
medicines in 2007: a treatment for HIV, an an-
tibiotic for complicated skin infections, and a
drug for overactive bladder disease.
Not all of the biggest growth prospects
come from new products. Obtaining expand-
ed indications for existing best-selling thera-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
pies often helps to extend product lifecycles.
Abbotts Humira, which treats rheumatoid
arthritis and psoriatic arthritis, was launched
in 2002 and has been one of the worlds
fastest-growing drugs, with more than $2 bil-
lion in global sales in 2006. In February
2007, the FDA approved the drug for
Crohns disease, a type of chronic inflamma-
tory bowel disease, making it the first and
only self-administered biologic treatment for
Crohns. Abbott is also studying use of the
drug in other indications, which it believes
have multibillion-dollar potential.
Forging deals in biotechnology
The business model that spurred unprece-
dented growth in the pharmaceutical indus-
10
try since the early 1990s is changing. The
shift has been occurring slowly for several
years, but its impact became powerfully evi-
dent in 2006 and early 2007. Throughout
the 1990s, pharmaceutical companies con-
centrated their R&D and sales efforts on
selling small-molecule drugs to mass mar-
kets; today, however, they are increasingly re-
liant on more customized biological products
that help smaller patient populations with
harder-to-treat medical conditions.
Much of the shift comes from deal mak-
ing with biotech firms. While big pharma-
ceutical companies have not been at the
forefront of the biotechnology revolution,
they are increasingly participating in it and
devoting their considerable resources to it.
Armed with tens of billions of dollars in
cash reserves and pressured to find new
products, the large pharmaceutical compa-
nies are making biotechnology a core part of
their growth strategy. Many are stepping up
the pace of their deal making in an effort to
get ahead in the field. In 2006 and early
2007, activity in this arena reached an al-
most frenzied pitch.
During this time, Merck & Co., for exam-
ple, entered into 50 licensing agreements with
small companies and acquired three biotech
companies. The largest, Sirna Therapeutics
Inc., which Merck acquired in December
2006, is developing a new class of drugs
based on RNA interference (RNAi), a gene-
silencing technology. The price tag was $1.1
billion. In May 2006, Merck paid $400 mil-
lion in cash for GlycoFi Inc., a maker of
technologies that enhance the effectiveness of
protein-based drugs and vaccines. That
month Merck also bought the privately held
California biotechnology firm Abmaxis Inc.
for $80 million. This level of activity is a ma-
jor transformation for a company that once
prided itself on being able to rely nearly en-
tirely on internal R&D for new products.
Also in 2006, Switzerland-based Novartis
AG inked an exclusive worldwide licensing
agreement with the US biotechnology firm
Human Genome Sciences Inc. for rights to
develop and commercialize Albuferon, a
treatment for hepatitis C. This deal, which
could be worth as much as $500 million to
Human Genome Sciences, came in June, only
two months after Novartis closed a deal to
buy California-based biotechnology firm
Chiron Corp. for $5.5 billion in cash. Pfizer,
hep_0507.qxp 4/30/2007 3:01 PM Page 11

Wyeth, Lilly, and Johnson & Johnson also

entered into numerous biotechnology deals.
Basic facts are forcing these once-insular
companies to turn to external sources for
biotech innovation. In order to maintain sales
growth in the 5% to 8% range through 2012,
large pharmaceutical companies need to de-
velop and introduce 12 to 50 new products
each between 2007 and 2012, or about two
to nine a year, according to a study published
by the Tufts Center for the Study of Drug
Development (TCSDD) in March 2007. They
cant meet that target through internal R&D
alone: in the last five years, the top 10 drug
companies on average introduced 0.6 new
drugs each per year. The study also noted
that the number of new molecular entities
approved in the US rose 29% from 2001 to
2004, but Big Pharmas share declined from
67% of total approvals to 29%.
The deal-making activities aim to improve
these statistics, which already exhibit signs of
turning around. In 2006, the number of
drugs in Phases I and II of clinical R&D rose
16%, according to IMS Health. At year-end
2006, some 2,075 molecules were in devel-
opment, up 7% from 2005 and 35% from
2003. Of the total pipeline at year-end 2006,
27% were biotech products. The drugs in
Phase III include 90 oncology therapies, 40
for viral infections and HIV, and 27 for
arthritis and pain, many of which are derived
from biological technologies. To some extent,
the lines between the pharmaceutical and
biotechnology industries are blurring.
Cowen & Co., an investment bank, counts
nearly 113 products in Phase II among the top

MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

US-based big pharmaceutical companies (the
number jumps to 246 if the top European
companies are included). These drugs should
begin contributing to revenues in 2010 to
2012, Cowen notes. Based on these numbers,
the new product pipeline appears to be in the
early stages of recovery.

11
hep_0507.qxp 4/30/2007 3:01 PM Page 12
S&P Credit Market Services View:
Outlook for Big Pharma improves
After major ratings downgrades from 2002 through
2004, the Big Pharma companies we rate stabilized in 2005
and 2006. None received downgrades, and our outlooks for
two, Schering-Plough Corp. and Wyeth, were revised from
Negative to Stable. Even some of those whose outlook re-
mains Negative have shown improvement. Except for a
lawsuit late in 2006, Bristol-Myers Squibb Co., for example,
might also have been upgraded from Negative to Stable.
For Merck & Co. Inc., Vioxx litigation has thus far not been
as significant as originally feared, and the companys
pipeline is beginning to improve.
As of April 2007, Standard & Poors expects the out-
look for the industry as a whole to remain stable to
slightly positive for the 200710 period and, with the
possible exception of Bristol-Myers (A+/Negative/A-1),
we do not anticipate any downgrades for 2007. Bristols
situation will hinge on the outcome of the patent trial on
its largest selling product, Plavix. Meanwhile, we recent-
ly placed Wyeth (A/CreditWatch-Positive/A-1) on Credit-
Watch, with positive implications, for a possible ratings
upgrade. Although Merck (AA-/Negative/A-1+) and Pfizer
Inc. (AAA/Negative/A-1+) both have Negative outlooks,
the threats are not likely to be immediate.
The improving credit environment for the major pharma-
ceutical companies is the result of several factors. First,
fewer patent expirations are occurring than in recent years,
and many of the major players, including Bristol-Myers and
Schering-Plough, face no significant expirations for the bal-
ance of the decade. Second, several companies (including
Pfizer, Merck, Schering-Plough, and Eli Lilly & Co.) have
launched a number of potential blockbuster products, and
one (Wyeth) has improved its late-stage pipeline. Wyeth
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
has also resolved its legal problems related to product lia-
bility. Finally, in recent years new management teams at
Pfizer, Bristol-Myers, Merck, and Schering-Plough have
largely refocused their respective companies.
Acquisitions will continue to be a theme for 2007, as the
pipeline-hungry Big Pharma companies hunt for drug
prospects to supplement their internal development pro-
grams. Nevertheless, Standard & Poors has no particular
concerns from a credit standpoint. Even in this period of
slower growth, these companies have continued to main-
tain nearly pristine financial profiles that have a significant
amount of capacity at current rating levels to conduct debt-
financed acquisitions.
What are the threats?
Despite Big Pharmas current improved credit outlook,
Standard & Poors believes that the 201012 period will be
12
difficult for the industry as another record wave of major
patent expirations occurs. Nearly every large US pharma
company will see its top two products exposed to patent ex-
piration during that time. Standard & Poors is concerned:
although pipelines have improved, especially in Phases I
and II, and a number of future blockbuster products have
been launched, the pipelines still appear inadequate to re-
place sales generated by products whose patents are
scheduled to expire.
In the meantime, other developments pose threats to
some companies we rate. Pfizers flagship product, Lipitor,
is beginning to see significant competitive pressure, and
the company was recently forced to cancel development on
potential blockbuster torcetrapib after unfavorable results
from clinical tests, prompting us to revise the outlook on the
AAA rating to Negative. Wyeth and Lilly are seeing in-
creased legal rumblings over product liability relating to
Premarin/Prempro and Zyprexa, respectively, while Merck
is still in the early stages of its Vioxx litigation.
In addition, generic drug companies are now much larg-
er and more aggressively challenging Big Pharmas patents.
Though Standard & Poors believes the chance of having
patents overturned remains small, the outcomes of these
challenges can be unpredictable, as Bristol-Myers found in
August 2006 when Apotex Inc. launched a generic version
of Bristols Plavix while the companies were in the midst of
settlement negotiations.
Finally, while the impact of Medicare Part D has been
muted thus far, the industry may begin to see greater pric-
ing pressure, especially if the now Democrat-controlled
Congress decides that government needs to play a larger
role in negotiations.
These issues notwithstanding, the underpinnings that
make the pharmaceutical industry one of the highest-rated
industries in Standard & Poors corporate ratings universe
very high margins and long patent protection for its prod-
ucts remain intact. Moreover, the major companies have
built and maintained very strong financial profiles includ-
ing large stockpiles of cash and largely net-cash positions
that allow them to weather long downturns without having to
resort to cutting the all-important investment in R&D.
Arthur Wong
Credit Analyst, Corporate Healthcare Team
hep_0507.qxp 4/30/2007 3:01 PM Page 13

I NDUSTRY P ROFILE

Global sales growth likely to keep

moderate pace
Although global pharmaceutical sales continue
to expand faster than most segments of the
world economy, the industrys growth has
decelerated since it peaked in 1999. In 2006,
global pharmaceutical sales grew 7.0% at
constant exchange rates (wholesale pur-
chase price; audited markets only) to $643
billion, according to data from IMS Health
Inc., a market research and consulting firm.
This was slightly above the 6.8% growth
rate of 2005, when sales totaled $601 bil-
lion, but down from 8% growth (to $559
billion) in 2004. IMS Health projects that
annual sales growth will continue at rough-
ly 5% to 8% through 2010. Factors driving
demand include the populations increased
longevity and rising wealth, along with the
launch of innovative new products and reg-
ulatory approval of expanded indications
LEADING PHARMACEUTICAL COMPANIES* 2006
US SALES
(MIL. $)
1. Pfizer 25,822
2. GlaxoSmithKline 21,716
3. Merck 16,528
for existing products.
The US market, which saw sales rise
8.3% in 2006, compared to a 5.4% rise in
2005, was surprisingly robust. Some 31 new
compounds with novel modes of action
(known as new molecular entities, or NMEs)
were launched globally in 2006, including 22
in the US. Among the most notable were
Gardasil, Merck & Co. Inc.s vaccine for pre-
vention of human papillomavirus (HPV) in-
fection, which is the major cause of cervical
cancer, and Roche Holding Ltd./Genentech
Inc.s Lucentis for wet age-related macular
degeneration. In July 2006, a joint venture
formed by Gilead Sciences Inc. and Bristol-
Myers Squibb Co. launched Atripla, the
first single-dose pill combining three im-
portant drugs for HIV infection. Based on
sales performance, Gardasil, Lucentis, and
Atripla were the top innovative drug
launches in 2006.
YR-TO-YR
In 2006, the industrys biggest growth dri-
% CHG. vers shifted, continuing a trend that has been
(2) evolving for several years. Through much of
8
the 1990s and early 2000s, developed coun-
8
tries and blockbuster drugs prescribed for

MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

4. Johnson & Johnson 16,059 0
5. AstraZeneca 14,598 16
broad patient populations by primary-care
6. Amgen 14,494 21 physicians contributed the most to the indus-
7. Novartis/Sandoz 13,805 7 trys expansion, but these are no longer as
8. Sanofi-Aventis 10,944 (2) important. In 2006, emerging markets gener-
9. Roche 10,368 26 ated 27% of the total global growth, up
10. Lilly 9,209 6 from 13% in 2001. The product portfolio
11. Wyeth 8,385 1 outlook also changed, as many of the most
12. Abbott 7,760 8 promising new products were biotech and/or
13. Teva 7,229 33 specialist-driven (that is, prescribed by spe-
14. Bristol-Myers Squibb 6,425 (23)
cialist physicians), notably geared to oncolo-
15. Boehringer Ingelheim 5,549 9
gy. These product categories contributed
16. TAP Pharmaceuticals 4,708 (2)
17. Schering-Plough 3,740 13
62% of the markets total growth, compared
18. Forest 3,550 13 with 35% in 2000, IMS Health estimates.
19. Watson 3,220 8 Many primary-care drug therapies are grow-
20. Eisai 2,941 4 ing more slowly than the market overall be-
*Pharmaceutical sales only. Includes Genentech.
cause of generic competition and, to a lesser
Source: IMS Health Inc. extent, the advent of over-the-counter (OTC)
medicines. Proton pump inhibitors, antihista-
13
hep_0507.qxp 4/30/2007 3:01 PM Page 14

TOP US PHARMACEUTICAL COMPANIES NEW PRODUCT PIPELINES 2007-2008

(As of April 2007)

COMPANY PHASE III FILED US COMMENTS

Bristol-Myers Squibb Co.
Abbott Laboratories Inc.
Johnson & Johnson
Eli Lilly & Co.
Merck & Co.
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
Plans to file three new drug (biologic) applications Filings expected for Ixabepilone
in oncology in 2007: (1H 07) and Vinflunine (2H 07)
Ixabepilone (breast cancer) Between Q4 06 and Q4 07, BMS is
closing, analyzing and reporting 20
pivotal clinical trials involving 10,000
subjects.
Ipilimumab (melanoma)
Vinflunine (bladder cancer)
Also in Phase III:
Apixaban (coagulation)
Saxagliptin (Type 2 diabetes)
Simcor (cholesterol reducer, combines Zocor and Expects Simcor and Vicodin CR filing
Niaspan) in 2007. Vicodin CR is a long-acting
version of the painkiller Vicodin.
Vicodin CR (pain control)
ABT 335 (cholesterol and high triglycerides)
Paliperidone palmitate (CNS) Doripenem Potential filings for 2007 include
(antibacterial) CNTO 1275, paliperidone palmitate,
ceftobiprole, tapentadol, dapoxetine,
zarnestra, and TMC 125
Carisbamate(epilepsy)
Tapentadol (pain)
CNTO 1275 (psoriasis)
CNTO 148 (autoimmune diseases)
Ceftobiprole (antibiotic)
Zarnestra (Acute myeloid leukemia)
Dacogen (Acute myeloid leukemia and myelo-
dysplastic syndromes)
TMC 125 (HIV/AIDS)
Telaprevir (Hepatitis C)
ICA 17043 (hematology)
Dapoxetine (urology)
Yondelis (ovarian cancer)
Prasugrel (acute coronary syndrome) Arxxant* 10 drugs in Phase II development
(diabetes retinopathy)
Enzastaurin (glioblastoma multiforme) Filing for Prasugrel expected
in H2 07, others are further out.
Arzoxifene (osteoporosis and prevention of breast
cancer)
AIR inhaled insulin (diabetes)
MK 0524B(atherosclerosis)
MK 0524A (atherosclerosis)
MK 0518 (HIV)
MK 0364 (obesity)

Pfizer Inc. CP-945598 (obesity) Fesoterodine (overactive 32 products in Phase II

bladder)
Zithromax-Chloroquine combination (malaria) Maraviroc (HIV)
Axitinib (thyroid) Dalbavancin (anti-infective)
CP-675206 (melanoma)
PF- 3512676 (lung cancer)
Schering-Plough Sarasar (myelodysplastic syndrome) Garenoxacin (antibiotic)
Claritin-Singulair combination (asthma)
Mometasone-Formoterol combination (asthma and COPD)
Golimumab (CNTO 148, inflammatory diseases)
Wyeth Torisel (renal cell carcinoma) Lybrel (contraceptive)
Vivant (post-menopausal
osteoporosis)
Pristiq (relief of menopause
and major depressive
disorder)
Bifeprunox (schizophrenia
and biopolar disorder)
Tygacil (anti-infective)

* As of March 2007, Lilly had withdrawn its regulatory applications for Arxxant in the US and EU after regulatory agencies asked for additional information.
Sources: Company reports; Standard & Poors.

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hep_0507.qxp 4/30/2007 3:01 PM Page 15

TOP PRESCRIPTION DRUGS 2006

(Ranked by US sales)
SALES YR-TO-YR
DRUG COMPANY USE (MIL.$) % CHG.
Lipitor Pfizer Cholesterol reducer 8,662 3
Nexium AstraZeneca Antiulcer 5,148 18
Advair Diskus GSK Asthma 3,954 10
Aranesp Amgen Anitanemia 3,941 42
Prevacid TAP Antiulcer 3,590 (6)
Epogen Amgen Anitanemia 3,241 9
Zocor Merck Cholesterol reducer 3,185 (29)
Enbrel Amgen Antiarthritic 3,086 12
Seroquel AstraZeneca Antipsychotic 3,026 16
Singulair Merck Respiratory 3,004 19
Source: Company reports; IMS Health Inc.

mines, platelet aggregation inhibitors (antico-
agulants that keep blood from clotting), and
antidepressants are popular therapeutic cate-
gories that have not been able to dodge in-
tensifying competition.
Regional results
In the 10 major markets (including the
United States, Japan, and the major EU
countries) that accounted for 80.5% ($489.5
billion) of total audited global sales in 2006,
growth in 2006 was 5.9%, compared with
5.7% for 2005 and 7.2% in 2004. North
American sales rose 8.3% (to $289.9 bil-
lion), greater than the pace in 2005 (5.4%)
and about in line with growth in 2004
(8.0%). In the United States, the new
Medicare prescription drug benefit helped to
boost sales; Canada also turned in a strong
7.6% growth rate.
Europe, the second largest regional phar-
lion). That years performance the best for
Japan since 1991 was the result of the
respite from government-imposed price cuts
and the launch of several new products in the
oncology, antihistamine, and antihypertension
areas. IMS Health forecasts annual growth of
just 3% to 6% in Japan through 2010.
Emerging markets in Asia and Latin
America were the biggest drivers of global
growth in 2006, as they were in 2005, and
the importance of these areas is increasing.
Although the United States remains a critical
market for success, North Americas contri-
bution to worldwide industry growth de-
clined from 60% in 2002 to 34% in 2005
(latest available).
Sales in the Asia-Pacific region (excluding
Japan) and Africa advanced 9.8% to $46.4
billion (audited) in 2006. China, once again
among the worlds fastest growing markets,
experienced a 12.3% rise in pharmaceutical

MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

maceutical market, continued to see slower
growth. Sales totaled $181.8 billion in
2006, up 4.8% from 2005. This was below
North Americas growth rate and markedly
slower than the 7.1% growth Europe experi-
enced in 2005, as well as the 9.7% average
annual compound growth that the region en-
joyed from 2000 to 2004.
Japan once again posted a below-average
performance. Sales in this market declined
0.7% in 2006 to $60.3 billion (audited and
unaudited; $56.7 billion, audited only). After
a short hiatus, the government resumed its
relentless price cutting in April 2006. A lack
of new products also kept this markets size
in check. Japan historically has been a lack-
luster market, but in 2005, it registered
strong 6.8% growth (total sales of $60.3 bil-
sales to $10.7 billion (audited hospital sales
only, which are the majority of Chinas
sales), despite a government crackdown on
corruption in the healthcare industries,
which had an adverse effect on business.
Sales in Latin America were even stronger,
rising 12.9%, year over year, to $24 billion
in 2006.
Because they are experiencing double-digit
growth, parts of Asia and the larger countries
of Central and Eastern Europe countries
such as China, Korea, Russia, and Turkey
are gaining share in the global market. As
these nations become richer, they will be
better able to afford higher-quality health-
care. IMS Health expects this momentum
to continue, which will force important
shifts in the industrys focus and investment

15
hep_0507.qxp 4/30/2007 3:01 PM Page 16
priorities. It forecasts that pharmaceutical
markets in the Asia-Pacific-Africa-Australia
region will grow 5% to 8% a year between
2005 and 2010, reaching $90 billion to
$105 billion. The Latin American market,
though smaller in absolute terms, will fol-
low a similar trajectory, reaching $45 bil-
lion to $55 billion in five years.
As North Americas growth slows, IMS
Health projects a downward trend in the re-
gions market share from 47% of global
sales in 2006 (the same as in 2005) to 43%
by 2010. Europe and Japan also may see de-
clines in market share during these years,
from 30% to 28%, and from 10.7% to
9.0%, respectively.
While overall global sales growth is slow-
ing, annual global pharmaceutical consump-
tion on a volume basis is expanding at rates
in the low double digits a trend that is
likely to continue, according to IMS Health.
The increasing disparity between sales and
volume growth reflects continuing wide-
spread pricing pressures and greater pene-
tration of generics.
US still dominates
Even though its sales growth is slowing,
the United States still dominates the world
market. With total sales of $274.9 billion in
2006, the country represented 45.2% of the
global market (audited).
In 2006, the Medicare prescription drug
benefit boosted US prescription volume, but
helped generics more than branded drugs.
IMS Health estimates that Medicare had a
positive 1% impact on industry revenues in
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
2006 (not including rebates and discounts,
which typically are not made public) and
bolstered retail prescription volume by 1%
to 2%. The increased utilization of generics
in new therapeutic categories, as well as new
product launches, specifically in cancer and
diabetes, also contributed to unexpectedly
robust sales growth in 2006. IMS Health
does not expect US sales growth in 2007 to
match the 8.3% gain of 2006. Projections
for compound annual growth rates between
2005 and 2010 are in the range of 6% to
9%, as more generics enter the market and
the Medicare Part D becomes better estab-
lished, stabilizing year-on-year comparisons.
Among negative influences on market
growth are patent expirations, faster and
more widespread generics penetration, an in-
16
crease in mail-order prescriptions, and
changes in the structure of sales forces. IMS
Health finds that, overall, Big Pharma com-
panies have been struggling to grow, while
generics firms are doing better, though they
face a period of intense competition, and
biotechnology companies are soaring, albeit
off a much smaller base.
INDUSTRY TRENDS
Like most industries, big brand-name
pharmaceutical companies face ongoing chal-
lenges and uncertainties. In the past few
years, the industry has been subjected to
heightened competition from generic drug-
makers, unprecedented pricing pressure from
payers, and hard-to-control inflation in re-
search and development (R&D) budgets.
Perhaps most importantly, the industry has
been contending with a slackening new prod-
uct flow an area that might have offset
some of these other difficulties.
The same challenges continue to plague
the industry in 2007, but ongoing improve-
ments in product pipelines, particularly in
the fields of cancer and diabetes, offer
promise for the future. In addition, the new
Medicare prescription drug benefit in the
United States is helping to bolster sales.
Longer term, new products and an aging
population are likely to drive growth in this
industry.
Nevertheless, Big Pharma remains in transi-
tion. Rarely have the pressures on these com-
panies been so intense. As the industry sorts
through its problems, it is responding with
major cost-cutting initiatives, including sales
and marketing overhauls and reorganization
FDA APPROVALS
(Number of drugs)
150
New Drug Applications (NDAs)
125
100
75
New Molecular Entities (NMEs)
50
25
0
1994 95 96 97 98 99 00 01 02 03 04 05 2006
Source: US Food and Drug Administration.
hep_0507.qxp 4/30/2007 3:01 PM Page 17
of R&D operations. The industry is pursuing
new product development in selected areas,
and is forming alliances and making acquisi-
tions with pipeline considerations in mind.
Demographic trends remain positive
Three worldwide demographic trends bode
well for future pharmaceutical consumption:
the aging of the population in the largest mar-
kets, the lengthening of average life expectan-
cy, and a rising incidence of chronic diseases.
In many Western countries, the number of el-
derly a group with a disproportionately
high use of prescription drugs is growing
faster than the general population.
In the United States, for example, people
aged 60 or older represented 17% of the total
population in 2006, according to the United
Nations Population Division, but accounted
for more than one-third of the nations total
consumption of prescription medicines. This
groups share of the population is projected to
rise to 26% by 2050, largely reflecting aging
baby boomers (the approximately 77 million
Americans born between 1946 and 1964),
while the percentage of those aged 80 years or
older is projected to grow from 21% to 28%
during this period.
Similarly encouraging global demographics
should prove to be an important source of ad-
ditional growth for the pharmaceutical indus-
try. The world population, currently 6.5
billion, is projected to rise 40% to 9.8 billion
by 2050, according to the United Nations. The
elderly will comprise an increasing proportion
of that population, with the percentage of peo-
ple aged 60 or older rising from 11% in 2006
to 22% in 2050. The trend is even more pro-
nounced in Europe, the worlds second largest
pharmaceutical market. There, 21% of the
population were aged 60 or older in 2006, a
figure expected to rise to 34% by 2050. In the
less developed countries, the portion of the
population aged 60 or older is expected to rise
from 8% in 2006 to close to 20% by 2050.
Biotechnology is flourishing
Biotechnology is the fastest growing sub-
sector of the pharmaceutical industry. (See
the Glossary section of this Survey for def-
initions of biotechnology and other terms.)
According to market research and consulting
firm IMS Health Inc., biotechnology ac-
counted for $58.1 billion (or 10%) of total
global pharmaceutical sales in 2006. World-
wide biotech sales grew 16.9% in 2006 ver-
sus 2005, and ballooned over the decade
from just $8.8 billion in 1996. In the United
States alone, sales of biotechnology products
grew 20%, year to year, to $40.3 billion in
2006. Oncology revenues, an area that includes
many biotech drugs, grew 20% in 2006, fol-
lowing 18% growth in 2005.
Biotech therapies continue to have
strong prospects, fueled by the introduction
of new products, expanded indications of
successful existing biotech drugs, and the
lack of generic competition, according to
IMS Health. The US Food and Drug Admin-
istration (FDA) approved seven therapies un-
der the biologic license application (BLA)
process in 2006, including three new vac-
cines. (As of June 2003, the kind of therapies
eligible for BLAs was changed, and certain
biologics such as proteins, monoclonal
antibodies, immunomodulators are ap-
proved as new drug applications, or NDAs.
Blood plasma products, vaccines, some diag-
nostic tests, and tissue and cellular therapies
are eligible for BLAs.) In addition, projects
that depend on biotechnology account for
27% of the industrys active pipeline; of
those in late-stage (Phase III) development,
87 are biotech-related. (For more on the in-
volvement of pharmaceutical companies in
biotechnology, see the Current Environ-
ment section of this Survey.)
Biotech spurring many changes
The growing importance of biotechnology
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
is driving changes in medical care. In con-
trast to traditional medicines, biotech drugs
act on specific molecules, leading to better
efficacy and fewer side effects. As scientists
understanding of the genome improves,
biotechnology expertise should assume even
greater importance, since it is required for
the development and manufacture of geneti-
cally derived drugs.
Changes are also occurring in the mar-
ketplace. Biotechnology products typically
command higher prices than traditional
medicines in part because they are per-
ceived to be more efficacious, in part because
they face limited competition, and in part be-
cause many of them address life-threatening
or seriously disabling diseases that currently
are not well treated. Manufacturers ability
17
hep_0507.qxp 4/30/2007 3:01 PM Page 18
to command high prices for patent-protected
biotechnology products guarantees high mar-
gins, even if the customer base is smaller than
it is for traditional medicines. Payers are voic-
ing concerns about the high prices of some
biotechnology drugs, but they have yet to
demonstrate strong resistance. As prices esca-
late, however, tensions are growing.
In 2006, for example, two high-priced bio-
logics to treat rheumatoid arthritis came on the
market: Orencia from Bristol-Myers Squibb
Co., and Rituxan from Genentech Inc. (56%-
owned by Roche Holding Ltd.). These drugs
cost significantly more than current therapies
for this disease. The degree to which they are
able to penetrate the market will depend heavi-
ly on the support they receive from payers. In
2006, however, in a sign that companies are
concerned about a backlash, Genentech, ar-
guably the most successful biotech company,
announced it is capping the annual price of
its oncology drug Avastin at $55,000.
Specialist markets
Unlike traditional medicines, biotechnology
drugs usually are prescribed and sometimes
administered by specialist physicians. This is
because they are often more complex to ad-
minister and use appropriately, and they are
aimed at harder-to-treat conditions. Tradi-
tional medicines, in contrast, often are wide-
ly prescribed by general practitioners. Thus,
sales forces geared to sell biologics tend to be
much smaller and more focused on specific
subsets of physicians than those selling tradi-
tional medicines.
This approach to selling complements an
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
evolving trend in the pharmaceutical indus-
try. According to IMS Health, an increasing
number of the best-selling drugs belong to
the specialist market. In 2006, specialists
prescribed 49% of the blockbuster drugs
on the market. Of the 94 blockbuster drugs
in 2005, 44% were specialist products, up
from 28% in 2000.
In the United States, all of the drugs
launched in 2005 that had blockbuster po-
tential were aimed at specialists. Although
the proportion was lower in 2006, an in-
creasing number of drugs in the pipeline are
specialist-driven or biologics, according to
IMS Health. According to Express Scripts
Inc., a pharmacy benefits manager, spending
on specialty drugs, many of which are bio-
logics, will grow from an estimated $40 bil-
18
lion in 2005 to $90 billion in 2009. In 2005,
rheumatoid arthritis therapies accounted for
the biggest portion of the specialty pharma-
ceutical spending (19%), according to Ex-
press Scripts.
This shift is leading companies to reorga-
nize their sales forces and marketing depart-
ments. Merck & Co. Inc., for example,
successfully launched three new vaccines
(five new products in total) in 2006 without
increasing its sales force: instead, it rede-
ployed sales reps from its human health or-
ganization to its vaccine business.
Vaccines come into the spotlight
Once a backwater of pharmaceutical de-
velopment, vaccines are attracting greater in-
terest amid increased global concern about
the spread of infectious diseases. The early
success of Gardasil, Mercks breakthrough
vaccine for preventing human papillomavirus
infection (HPV) in girls and women, high-
lights the mainstream pharmaceutical indus-
trys renewed interest in vaccines. Gardasil
received approval in the United States in
June 2006 and market clearance in the Euro-
pean Union in September 2006. Its global
sales reached $234.8 million by year-end
2006, and Merck reports that reimbursement
rates are high.
The world leaders in vaccine development
are US companies Merck and Wyeth, and
European companies GlaxoSmithKline PLC
and Sanofi-Aventis SA. The European com-
pany Novartis AG became a new player in
April 2006, when it acquired US biotechnol-
ogy and vaccine company Chiron Corp.
These companies are seeing significant
growth in vaccine sales. Mercks vaccine sales
were up 73% in 2006, while GlaxoSmithKlines
sales rose 23%, year to year. Wyeths perfor-
mance was also strong, due to exceptional
sales of Prevnar, a preventive vaccine that
targets pneumococcal bacteria, which can
cause various infections, including pneumo-
nia, ear infections, and meningitis. Prevnar
experienced a global sales surge of 30% to
$1.96 billion in 2006, following its adoption
by the UK National Immunization Program
and by similar programs of several other
countries.
Merck benefited from the launch of three
major vaccines in 2006. In addition to
Gardasil, its RotaTeq (for protection against
hep_0507.qxp 4/30/2007 3:01 PM Page 19
rotavirus) had global sales of $163.4 million
in 2006, while Zostavax (shingles) generated
$38.6 million. Merck has cited vaccines as
one of its nine core therapeutic areas. The
company purchased GlycoFi Inc. in June
2006 because the latter had a technology
that might enhance vaccine efficacy.
Wyeth also is banking on vaccines for
growth, particularly on Prevnar, which it ex-
pects can reach $3 billion in sales by 2010.
Over the longer term, the company projects
annual sales could reach $4.5 billion if it gets
approval for an adult version of the vaccine,
which is used now on infants. Prevnar is al-
ready the worlds best-selling vaccine, gener-
ating 20% of the industrys total global
vaccine revenues, according to The RPM
Report, a trade publication.
A report on vaccines published in July
2006 by the Tufts Center for Study of Drug
Development (CSDD) found that advances in
technology are greatly enhancing interest in
vaccines, but the vaccines now in the R&D
pipeline will likely take a decade to reach the
market. A modest expansion in vaccine de-
velopment has occurred since 2001: the av-
erage number of anti-infective vaccines
entering clinical trials was 14 per year be-
tween 2000 and 2005. The pace of new
vaccine approvals (preventive vaccines
only; not including therapeutic vaccines)
picked up in 2005 and 2006: four in 2005
and three in 2006, compared with no ap-
provals in 2004 and 2003, two in 2002, and
one in 2001. Flu vaccines were not included
in the study because they do not follow the
standard development and review process.
Governments invest in research on avian flu
One of the key drivers behind recent inter-
est in vaccines is the effort to find a method
of preventing the spread of avian flu. The
disease, which primarily infects birds, is not
a widespread problem for humans right now.
Concern is rising, however, because in recent
years the disease has spread to more than
100 people who had close contact with poul-
try. Of those people, about half died. Re-
searchers and politicians are worried that the
virus might mutate into a form that spreads
more easily among people, with the potential
to cause a global pandemic.
Governments in the United States and in
other countries have been actively preparing
for the possibility of a widespread outbreak
of avian flu in people. They have been setting
aside money to stockpile the only vaccines
thought to be effective against avian flu in hu-
mans: Roches Tamiflu and GlaxoSmithKlines
Relenza, both originally developed for the
common flu. In 2006, Roche reported sales
of Tamiflu were $2.15 billion, up 68% year
over year. GlaxoSmithKline said sales of
Relenza totaled roughly $178 million, up
from nearly $10 million in 2005, largely due
to government orders. Governments, includ-
ing the US government, are also funding re-
search into new vaccines against the virus
that causes avian flu, and have given related
grants to a number of biotechnology and
pharmaceutical companies.
Pipeline problems apply pressure
The industrys ongoing lack of R&D pro-
ductivity and the limitations of its previously
successful blockbuster drug-marketing model
have been disturbing to near-term sector fun-
damentals and stock performance. Large
companies are struggling to revive their drug
development pipelines while keeping their
huge sales forces busy. Although the number
of new drugs coming to market improved in
2006 and continues to be stronger in 2007,
compared with 2005 and 2004, Standard &
Poors believes these may not be sufficient to
make up for the sales lost to generics. The
industry needs to revamp its R&D and its
sales and marketing strategies. It seems to be
in the process of doing this, but current pro-
grams will take time to demonstrate success,
given the long timeframe needed for new
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
drug development.
Big Pharmas long-term growth depends
ultimately on its ability to innovate. A suc-
cessful new product can make up for a lot of
mistakes and inefficiencies; in contrast, effi-
cient operations cant make up for a lack of
productive R&D. R&D spending by large
pharmaceutical companies has been rising
steadily, but the investment has not led to pro-
portionally greater productivity. New prod-
ucts are emerging from pipelines more slowly;
at the same time, the growing complexity of
drug development is increasing the time need-
ed to bring new drugs to market. These delays
add to the cost of doing business.
While pharmaceutical companies report
that the number of drugs in development is
rising after several lackluster years, propo-
19
hep_0507.qxp 4/30/2007 3:01 PM Page 20
nents of reform observe that the output re-
mains suboptimal compared with the in-
crease in investment. In addition, many of
the recent additions to clinical pipelines did
not originate internally, but were obtained
through newly vigorous deal-making activi-
ties, notably between pharmaceutical and
biotechnology companies.
A study published by the Tufts CSDD in
September 2006 indicated how high the
stakes are. It noted that companies that
move drug candidates through the develop-
ment and regulatory processes fastest gain
$1.1 billion in incremental prescription rev-
enue per drug, on average, and save about
$30 million in out-of-pocket development
costs, compared with the slowest companies.
The fastest third of companies reduced the
average time to develop new drugs from 66.5
months to 53 months between 2000 and
2005, the study found.
Cost cutting and reorganizing
Pharmaceutical companies are searching
for ways to reinvigorate growth and grapple
with assorted threats. In addition to deal mak-
ing with biotechnology firms, they are em-
ploying new tools to improve their R&D
efficiency. In the absence of new products,
many have cut costs internally in recent years,
a practice that is ongoing. In 2005 and 2006,
Merck, Pfizer Inc., and Abbott Laboratories
announced multiyear cost-cutting regimens.
Pfizers program, outlined in January
2007, is extensive. It is the subject of much
attention, in part because it follows the ap-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
pointment of a new chairman and CEO,
Jeffrey Kindler, in August 2006. In addition,
Pfizer, as the worlds largest pharmaceutical
company, and one of the pioneers in building
the primary-care blockbuster business model,
is a bellwether for change in the industry.
Immediately following its announcement,
Pfizer cut its sales force size by 20% and be-
gan splitting its large US pharmaceutical op-
erations (with $26 billion in 2006 revenues)
into four smaller operating units, each with
its own profit and loss responsibility.
Pfizers sales force is not the only one
affected by the industrys drive to reorga-
nize, although it is the largest. In 2005, for
the first time in a decade, the number of
sales people employed at major US phar-
maceutical companies fell, according to
20
IMS Health. The decrease was driven by
withdrawal of COX-2 inhibitors from the
market and the increasing generic competi-
tion. The number of visits by sales reps to
doctors offices in the United States fell
13% in 2005, as a result of blockbusters
going off patent and the lack of new prod-
uct approvals. IMS Health comments that,
as of mid-2006, companies had not yet ar-
rived at an optimal ratio of sales activity
per customer or prescriber. Nevertheless,
they have been implementing different sales
and marketing plans, geared less toward
primary care office visits and giving more
attention to specialists.
R&D gets an overhaul
Several companies are in the midst of re-
aligning their R&D operations. Eli Lilly
and Co., which like much of the industry
suffered from a lack of new products be-
tween 2002 and 2006, has introduced in-
cremental improvements throughout its
drug development process. These changes
could reduce the companys R&D costs per
drug by 33% by 2010, according to The
Pink Sheet, a trade publication. The com-
pany hopes to improve the success rate of
drugs in Phase III clinical trials to 90%
from 70%, which would decrease the cost
per new drug to roughly $900 million.
Pfizer has also revamped its R&D orga-
nization several times in recent years, but
the plan announced in January 2007 is the
most extensive to date, including closure of
five research sites and a 20% reduction in
the budget for support staff and facilities.
The company is consolidating all of the
work in each therapeutic area at a desig-
nated R&D site. Pfizer says its goal is to
triple the size of its Phase III pipeline by
2009, up from five drugs in 2007. The ulti-
mate target is to introduce four new inter-
nally generated products a year beginning
in 2011. It is also increasing outsourcing in
noncore R&D and manufacturing activi-
ties. (For further discussion of Pfizers
plan, see the Current Environment sec-
tion of this Survey.)
Given that R&D is the source of future
growth for pharmaceutical companies, indus-
try observers will be watching carefully to
weigh the success of these programs. As long
as streamlining efforts contribute to R&D
hep_0507.qxp 4/30/2007 3:01 PM Page 21
productivity, goals should be met. Drastic
cuts to R&D budgets, however, always entail
some risk of jeopardizing the flow of new
products, and any pay-offs are long, not
short, term. Pfizer states, for example, that it
is just now reaping rewards of R&D done in
1994, and that work done in 2002 will pay
off in 2012.
Cost containment leads to slower
spending growth
The AARP, an advocacy group for Ameri-
cans aged 50 and older, found that manufac-
turer prices for the most common brand-name
prescription drugs climbed 6.2% in 2006,
year on year nearly double the general in-
flation rate for the period of 3.2%. Prices of
153 drugs on the market since 2000 rose
54% through 2006, more than two-and-a-
half times the inflation rate.
Managed care organizations (MCOs),
concerned about rising health expenses, are
looking to contain costs of drug spending.
This is not new, but they are pursuing this goal
with greater commitment as prescription drug
costs particularly the prices of innovative
new biologics continue to climb.
In addition to encouraging the use of
generics, the MCOs have other powerful
tools to help them, including collective pur-
chasing clout to secure discounts on bulk
purchases of pharmaceuticals and medical
products. They also use restrictive drug for-
mularies to control pharmaceutical utiliza-
tion and negotiate prices with manufacturers.
(For more information about the use of
generics, see the Current Environment
section of this Survey.)
To some extent, payers have succeeded in
their efforts. The largest MCOs report that,
in 2006, their pharmacy expenditure growth
trended down, even as utilization climbed,
reflecting greater reliance on generic drugs
and a decline in the number of innovative
new drugs (these tend to be more expensive
than older drugs).
Recent performance in key product
sectors
In this section, Standard & Poors reviews
key therapeutic categories principal products
and recent performance in the US market,
along with developments affecting each sector.
Central nervous system drugs
Benefiting from the advent of a wide vari-
ety of new drugs to treat depression, psy-
chosis, and other neurologic conditions and
also from heavy marketing sales of central
nervous system (CNS) drugs expanded rapidly
in recent years. In 2006, they represented
23.1% of North American industrywide retail
sales, up from 19% in 1996. From December
2005 to December 2006, US retail sales of
CNS drugs rose 9%, to $45.7 billion, accord-
ing to data from IMS Health.
CNS drugs include various narcotic and
non-narcotic analgesics, sedatives, antianxi-
ety agents, antidepressants, antiepileptics,
and nonsteroidal anti-inflammatory drugs
(NSAIDs, prescribed mainly for arthritis). This
sector also includes drugs for Alzheimers dis-
ease, Parkinsons disease, and related neuro-
logical disorders. Eli Lilly is currently the
biggest supplier of CNS drugs. AstraZeneca
PLC is the fastest growing, due to its Seroquel
(antipsychosis) franchise.
Selective serotonin reuptake inhibitors
(SSRIs). With total sales of $20.6 billion in
2006, these drugs comprise the majority of
antidepressant sales. Use and sales grew
rapidly in recent years as companies intro-
duced new drugs, as consumers and their
physicians increasingly viewed depression as
an illness treatable with drugs, and as insur-
ance reimbursement expanded. In 2006,
however, annual sales growth slowed to 3%,
according to IMS Health, as generic competi-
tion took a toll on key branded products.
Several heavily promoted branded prod-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
ucts comprise more than half of all US sales
in this category. These products include
Zoloft (from Pfizer), Effexor XR (Wyeth),
Lexapro (Forest Laboratories Inc.), and
Wellbutrin XL (GlaxoSmithKline). For for-
mer category heavyweights, such as Prozac
(Eli Lilly), Paxil (GlaxoSmithKline), and
Celexa (Forest Laboratories), generic com-
petitors have restrained total market sales
for several years. One of the categorys best-
selling drugs, Zoloft, went off patent on June
30, 2006, further depressing growth. The
most popular dose of Wellbutrin XL, 300
mg, which had US sales of $972 million in
the 12 months ended September 2006, went
generic in December 2006.
Newer products also are heating up com-
petition. For example, Eli Lillys Cymbalta,
21
hep_0507.qxp 4/30/2007 3:01 PM Page 22
an enhanced antidepressant launched in
August 2004, achieved sales of $1.3 billion
in 2006, up 94% from 2005. Unlike con-
ventional SSRIs, which work on only one
neurotransmitter involved in depression,
Cymbalta works on two. In January 2007,
Wyeths dual-action drug Pristiq received
an FDA approvable letter for major depres-
sive disorder. Wyeth says the FDA is not
asking for additional studies, so the drug
could be on the market by the third quar-
ter of 2007.
Antipsychotics. This has been one of
the stronger CNS segments, although growth
is slowing. IMS Health estimates that the
categorys sales grew 8% in 2006, and pro-
jects growth will stay in the range of 7% to
8% a year through 2009. Thats relatively
strong, particularly in light of upcoming
generic competition, but it is short of the
double-digit growth recorded in the early
years of this century. Driving growth are ex-
pansion of the overall schizophrenia patient
market and new indications for existing ther-
apies into such areas as bipolar disorder and
mental illness associated with Alzheimers
and Parkinsons diseases.
According to IMS Health, the most fre-
quently prescribed drugs in this class, as of
December 2006, were AstraZeneca PLCs
Seroquel (30% of total US prescriptions),
Johnson & Johnsons Risperdal (20%), and
Lillys Zyprexa (13.9%). In November 2006,
Risperdal received US approval for use in
children with autism, the first drug of its
kind to do so.
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
In December 2006, Zyprexa, the No. 5
drug in the category (global sales of $4.4 bil-
lion; $2.4 billion in the US) beat back a
patent challenge from a generic competitor,
when a US Court of Appeals upheld a lower
court decision validating the drugs key
patent through 2011. Lillys legal victory
should provide some relief from additional
generic competition in the category.
Longer term, however, the sector will be
affected by the anticipated entrance in June
2008 of generic competition to the No. 3
drug in the category in the United States,
Risperdal ($2.5 billion in US sales in 2006;
$4.2 billion globally). In 2006, Seroquel
was the leading drug in the US market in
this category for the second year in a row,
generating sales of $3.0 billion ($3.4 billion
22
globally), up 16% in the United States and
24% worldwide.
Cardiovasculars
Cardiovasculars, or heart drugs, comprise
the second-largest therapeutic segment, with
about 19% of the US retail market in 2006.
This broad-based group includes treatments
for heart attacks, hypertension, angina, coag-
ulation, arrhythmia, and elevated cholesterol
levels. Driven by demographic growth, US
retail sales for drugs in this category rose 9%
in 2006, according to IMS Health.
Heart drugs are a high priority for many
leading drug companies, given the large num-
ber of patients who take them and the thera-
pies life-saving potential. In addition, patients
must remain on these medications for life,
which creates a stable level of demand.
Cardiovascular disease causes about 30%
of all deaths in most developed nations of
the world. One in five Americans suffer from
some type of cardiovascular problem. New
therapeutics for cholesterol reduction, hyper-
tension, and other chronic cardiac conditions
have proven to be among the industrys most
lucrative drugs.
Cholesterol drugs. This category has
traditionally exhibited strong growth (in the
low to mid-teens), reflecting continued and
consistent evidence that lipid modulation
prevents cardiovascular disease. However, re-
cent trends point to a slowdown in that rate,
and double-digit growth may not return in
the near term.
The statin drugs highly effective in
lowering low-density lipoprotein (LDL) cho-
lesterol and associated with minimal negative
side effects dominate this therapeutic area
and have benefited from a stream of positive
studies. These drugs work by blocking for-
mation of cholesterol in the blood. In 2006,
US sales of lipid regulators (mostly statins)
grew 8%, reaching a total $35.2 billion.
Sales for this class of drugs are expected
to be flat to slightly down for the next few
years, even as total prescription growth re-
mains strong (up 12.5% in the US in 2006,
according to IMS Health). The reasons for
this include threats to statins by generic com-
petition, as well as efforts by managed care
in the US and governments abroad to con-
strain pricing notably the new jumbo
reference price for statins in Germany. (For
hep_0507.qxp 4/30/2007 3:01 PM Page 23
more information about the impact of gener-
ic competition on Pfizers Lipitor, see the
Current Environment section of this Survey.)
On the upside for the group, the American
Heart Association, a nonprofit organization
that focuses on cardiovascular disease, has es-
timated that more than 50% of American
adults have elevated blood cholesterol counts.
However, only one-fifth of those who could
benefit from these drugs currently take them.
Antihypertensives. Hypertension, or
high blood pressure, affects more than 60
million Americans. It is generally an asymp-
tomatic condition, but if left untreated, it can
lead to stroke, aneurysm, heart attack, and
kidney failure. Many drugs, with different
ways of working in the body, are available to
treat hypertension.
The antihypertensive class is likely to be
affected again by generic competition in 2007.
Calcium channel blockers are the largest-
selling category in this sector, accounting for
close to 30% of the US market. The principal
drug in this category, Pfizers Norvasc (global
sales of $4.9 billion in 2006; US sales of $2.7
billion), faces earlier-than-expected generic
competition, beginning in March 2007. (The
previously expected date for generic competi-
tion was September 2007; see the Current
Environment section of this Survey for more
details on the status of Norvasc.)
Angiotensin-converting enzyme (ACE)
inhibitors are the second-largest class of
antihypertensives, with about 28% of the
market. This category now largely comprises
generic versions of Mercks Vasotec, Astra
Zenecas Zestril, and Pfizers Accupril/Accuretic
franchise. (Accuretic is Accupril combined with
a diuretic.) Older antihypertensives include
beta blockers, diuretics, vasodilators, and
other products.
Oncology drugs. Oncology was once
the province of specialty pharmaceutical
companies and biotech startups because of
its size and the limited efficacy of available
products. It is now the fastest growing thera-
peutic category. In 2006, IMS Health notes,
the global market for this therapeutic catego-
ry was $34.6 billion and sales growth topped
20%, a pace that is likely to continue
through 2008. The launch of a significant
number of innovative new compounds is fu-
eling oncology sales, says IMS Health.
Mainstream pharmaceutical manufactur-
ers see oncology as one of the most attractive
growth areas. They are investing heavily in it
for several reasons: scientific breakthroughs
that are helping to identify truly effective
novel therapies, the recent introduction of a
few key drugs that broke the $1 billion sales
barrier, and the limitations of their once stal-
wart traditional primary care markets.
Roche and Genentech (which is majority
owned by Roche) are the leaders in oncology.
Roche/Genentechs bestselling drug Rituxan,
for certain kinds of non-Hodgkins lymphoma,
achieved US sales of $2.1 billion in 2006 and
global sales of almost $4 billion, making it the
best-selling oncology treatment.
Other major pharmaceutical companies are
increasing their commitment to oncology. Key
growth catalysts include Novartiss targeted
therapy Gleevec, an SRC-ABL kinase inhibitor,
which had global sales of $2.6 billion in 2006,
largely from its initial indication for chronic
myelogenous leukemia. Sales grew 17% in
2006, and future sales potential is excellent as
Gleevecs use expands to other cancers.
Genentechs Avastin approved for first-
line therapy for colorectal cancer in the
United States in February 2004 and in Eu-
rope in early 2005 generated global sales
of $2.4 billion in 2006 and US sales of $1.75
billion. In October 2006, Genentech/Roche
received FDA approval to market Avastin for
first-line treatment of advanced nonsmall-cell
lung cancer, in combination with chemother-
apy; this indication will probably be the
companies principal driver of growth in the
US going forward. (Roche was waiting for
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
EU market clearance for this indication as
this Survey went to press in late April 2007.)
The drug already had approval for treatment
of advanced colorectal cancer. In addition,
Genentech is planning to resubmit an appli-
cation in 2007 for FDA approval of Avastin
for metastatic breast cancer. In September
2006, the FDA asked the company for more
information about the treatment. Herceptin,
an older Genentech drug, also continued to
show impressive sales growth in the US mar-
ket: up 54% in 2006, following a similar tra-
jectory in 2005. US sales reached $1.23
billion in 2006 ($3.2 billion globally).
Two new drugs are addressing advanced
renal cancer, for which few options previous-
ly existed. In the first quarter of 2006, Pfizer
received FDA approval for Sutent, Pfizers
23
hep_0507.qxp 4/30/2007 3:01 PM Page 24
third cancer product. Sutent had sales of
$219 million in 2006, a respectable perfor-
mance. (The companys two other oncology
drugs are modest sellers.) Study results pub-
lished in February 2007 in the New England
Journal of Medicine showed Sutent has supe-
rior results to standard interferon therapy.
Germany-based Bayer and its US partner
Onyx Pharmaceuticals Inc. launched Nexavar
almost simultaneously (US approval occurred
in December 2005); it had global sales of
$161 million in 2006.
While the oncology field is promising, it re-
mains comparatively high risk, even within the
uncertain world of pharmaceutical drug devel-
opment. In addition, payers are increasingly
concerned about the high cost of the new on-
cology treatments, as these treatments grow in
number and extend the lives of patients.
Gastrointestinal/metabolism agents
With US retail sales of more than $27.6
billion in 2006 (14% of the countrys total
retail drug sales), gastrointestinal/metabolism
agents represented the industrys third largest
therapeutic sector in that year, according to
data from IMS Health. The group comprises
a diverse range of drugs, including antiulcer
drugs, diabetes compounds, antiobesity
agents, oral contraceptives, and related
drugs.
Volume growth for most drugs in this class
has been in the single digits in recent years, re-
flecting the markets relative maturity and a
rising proportion of inexpensive generics and
OTC products in the total mix. However, cer-
tain segments, such as diabetes treatments, are
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
showing above-average growth.
Antiulcer drugs. US retail sales of an-
tiulcer drugs the largest segment of the
gastrointestinal/metabolism sector grew
only modestly in 2006, according to IMS
Health. This marks a significant decline
from previous years, due largely to the intro-
duction of generics and an OTC version of
AstraZenecas Prilosec in the United States.
This category comprises older H2 antago-
nists such as GlaxoSmithKlines Zantac
and Tagamet, both of which have been off-
patent for years as well as newer prescrip-
tion proton pump inhibitors (PPIs), which
block the production of stomach acid.
All of the PPIs are blockbusters, reflecting
their patent protection, efficacy, and low
24
side-effect profiles, as well as a lack of alter-
natives. Leading products in this category
include Prevacid (from TAP Pharmaceutical
Products Inc., a joint venture between
Abbott Laboratories and Takeda Pharmaceu-
tical Co. Ltd.), Nexium (AstraZeneca),
Protonix (Wyeth), and Aciphex (Johnson &
Johnson). Prevacid had sales of $5.0 billion
globally ($3.6 billion in the US) in 2006, but
has seen its market share decline since 2001
due to competition from cheaper branded
products and generics.
IMS Health expects PPI sales growth to
accelerate to 7% to 8% globally through
2009, despite widening OTC and generic
use. In 2009, Prevacid is expected to go off
patent and face generic competition, which
will affect sales growth for the entire group.
Revived use of older NSAIDs, due to the
COX-2 fallout, has modestly benefited PPIs,
because the latter helps to alleviate the for-
mers gastrointestinal side effects. Nexium
was the second-bestselling medication in the
United States in 2006, up from third place in
2005, according to IMS Health. It generated
US sales of $5.1 billion and global sales of
$6.7 billion for AstraZeneca.
Diabetes drugs. New products that were
launched in 2005 and 2006 are making this
field particularly interesting. In October 2006,
Merck launched Januvia, a new class of treat-
ment for diabetes Type 2. Januvia got off to a
strong start by garnering sales of $42 million
in the United States in 2006; the European
Union gave Januvia marketing clearance in
March 2007, but its prospects there wont be
clear until payers start to reimburse it.
In September 2006, Pfizer began a slow
rollout of Exubera, the first inhaled insulin.
Because the product is so different from tradi-
tional injectable insulins, Pfizer delayed launch
for months after the drug received FDA ap-
proval in January 2006 and is backing the
drug with a substantial education effort.
The novel treatments and an expanding
patient population are fueling this therapeu-
tic categorys rapid growth. According to the
International Diabetes Federation, diabetes is
a highly prevalent disease, with 20 million
patients in the United States and 194 million
worldwide figures that could grow 57%
and 66%, respectively, by 2025. About 5%
to 15% of patients are Type 1 diabetics, who
do not produce insulin at all; the remaining
hep_0507.qxp 4/30/2007 3:01 PM Page 25
patients are Type 2 diabetics, who do not
make enough insulin or do not properly use
the insulin they do make. Patients with Type
1 receive insulin only, while Type 2 patients
take insulin and/or oral medications.
The number of people affected by Type 2
diabetes is particularly on the upswing, dri-
ven by widespread obesity and sedentary
lifestyles, as well as an aging population.
The standard therapy for Type 1 diabetics
is and will remain insulin. New pre-
scriptions written for insulin, of which sev-
eral kinds exist, grew at a compound
annual growth rate (CAGR) of 6% globally
between 1987 and 2004, according to data
from IMS Health.
IMS Health estimates that US retail sales
for diabetes therapies (including insulins and
oral agents) expanded 16% in 2006, to
$11.3 billion. IMS health projects global
growth at a CAGR in the mid-teens through
2009. Eli Lilly and Danish manufacturer
Novo Nordisk A/S dominate the field. Lillys
market share came under pressure in 2006,
and the company has responded by reorga-
nizing its sales force. Both companies face in-
creasing competition, as most of the major
US pharmaceutical companies have become
more active in this area. Pfizer and Merck
are emerging players. Sanofi-Aventis is also a
major player because of the global popularity
of its long-acting insulin Lantus, which was
launched in 2004. GlaxoSmithKline and
Takeda Pharmaceutical manufacture best-
selling insulin sensitizers Avandia and Actos,
respectively. The latter had been sold by
Takeda in partnership with Eli Lilly, but in
April 2006, Takeda announced that it was
ending the relationship and starting to mar-
ket Actos directly.
In addition to Januvia, Type 2 diabetics
have a number of other new treatment op-
tions, with the 2005 introduction of Amylin
Pharmaceuticals Inc.s Byetta and the
promise of others in late-stage clinical trials
or pending FDA approval. Lilly is marketing
Byetta in the United States, where it had
sales of $400 million in 2006, making it the
fourth most prescribed brand-name drug for
Type 2 diabetes, measured by new prescrip-
tions. These therapies are better at helping
diabetics utilize insulin more effectively. IMS
anticipates average annual growth rates of
8% to 9% through 2009, as these new thera-
peutic approaches may become a significant
factor in treatment and because of efforts to
diagnose Type 2 diabetics earlier (to prevent
progression to Type 1 disease).
In addition to these medications, diabetics
often are primary targets of obesity drug
manufacturers, because obesity is a leading
cause of diabetes and because many of the
drugs taken by diabetics cause weight gain.
Sanofi-Aventiss Acomplia has the potential to
be used as a treatment for Type 2 diabetics.
Autoimmune diseases
Autoimmune illnesses are caused by an
immune response against the bodys own tis-
sues. These diseases include, among others,
rheumatoid arthritis, systemic lupus erythe-
matosus and Graves disease. This is one of
the fastest-growing categories among treat-
ment areas. We focus on antiarthritics, be-
cause they represent the largest market in
this group of diseases.
Antiarthritics. Arthritis is a group of in-
flammatory diseases affecting the joints and
characterized by pain, swelling, and stiffness.
Most drugs in this category are used to treat
osteoarthritis, which is by far the most com-
mon form of the disease, affecting 21 million
Americans. A severe form of arthritis, called
rheumatoid arthritis, is treated mainly by
powerful injectable drugs.
Amgen, Johnson & Johnson, and Abbott
Laboratories dominate the category, along
with their respective partners Wyeth,
Schering-Plough Corp., and Bristol-Myers
Squibb as emerging players. Participation by
both Pfizer and Merck has been reduced sig-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
nificantly because of safety concerns related
to their older drugs. Boehringer Ingelheim
GmbH is also a major player, though its
best-selling painkiller, Mobic, went off patent
in July 2006. Cowen & Co., an investment
bank, estimates that global sales of an-
tiarthritic drugs totaled $16 billion in 2006,
and will grow to $28 billion by 2011.
For many years, osteoarthritis was treated
primarily with prescription and over-the-
counter (OTC) NSAIDs. The commercial
outlook for NSAIDs changed considerably
beginning in 2004, however, following the
withdrawal of several popular painkillers
from the market because of safety concerns.
The withdrawals affected the COX-2
inhibitor class of NSAIDs, which studies
found put long-term users at risk of
25
hep_0507.qxp 4/30/2007 3:01 PM Page 26
cardiovascular disease. As a result, Merck
voluntarily withdrew Vioxx in September
2004. In April 2005, at the FDAs request,
Pfizer withdrew Bextra, also a COX-2, from
the market. The only COX-2 that remains
on the market is Pfizers Celebrex, but it has
a black-box warning (the most serious kind)
on its label. Despite this limitation, Celebrex
benefited modestly from its monopoly status:
US sales rose 4% in 2006 to $1.7 billion,
while global sales rose 18% to $2 billion.
A newer class of drugs, tumor necrosis
factor (TNF) alpha inhibitors, now domi-
nates the treatment of patients with severe
rheumatoid arthritis. Leading drugs of this
type are Abbott Laboratories Humira,
Johnson & Johnsons Remicade, and
Wyeth/Amgens Enbrel. These three drugs
generated nearly $7.8 billion in combined US
sales in 2006. Humira was also one of the
worlds fastest growing drugs in 2006: its
sales growth ranked No. 4 among all drugs,
and US sales were up 41% to $1.2 billion,
according to IMS Health. Enbrel was the
eighth best-selling drug in the United States
in 2006.
In early 2006, the FDA approved two new
treatments for rheumatoid arthritis: Orencia
from Bristol-Myers Squibb, and Rituxan from
Biogen Idec and Roche/Genentech. They are
embroiled in a head-to-head battle for pa-
tients with refractory arthritis (those who
dont respond to the anti-TNFs), a group that
accounts for about 20% to 40% of moderate
to severe cases.
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
HOW THE INDUSTRY OPERATES
The modern pharmaceutical industry
emerged during the 1920s and 1930s, with
key discoveries and synthesis of sulfa an-
tibacterials, penicillin and other antibiotics,
and various other compounds, as well as
the emergence of large-scale production ca-
pabilities. Industry output expanded
markedly during World War II, responding
to growing demand for penicillins and re-
lated anti-infectives.
In the postwar years, greater industry in-
vestment in research and development
(R&D) led to important scientific break-
throughs in new therapeutics and vaccines.
During this period, corporations capitalized
on the discovery of tranquilizers, ampheta-
26
mines, advanced antibiotics, and the Salk
polio vaccine.
Today, the pharmaceutical industry de-
rives most of its profits from a broad base of
compounds used to treat infections, cardio-
vascular conditions, depression, inflammato-
ry disease, and other chronic conditions. In
recent years, most leading drugmakers also
have collaborated with biotechnology firms
to develop novel therapies based on recom-
binant deoxyribonucleic acid (DNA) technol-
ogy, monoclonal antibodies, and genomics
research. Such joint efforts are expected to
yield important new therapies for a variety
of diseases and medical conditions over the
coming years. Oncology, for example, has
benefited from these scientific advances and
is now the fastest-growth segment of the
drug industry in terms of sales.
About 97% of US workers with health in-
surance were covered under MCO plans in
2006, with conventional fee-for-services rep-
resenting 3%, based on data from the Henry
J. Kaiser Family Foundation (KFF), a private
nonprofit foundation focused on US health-
care issues. Of those in managed care plans,
61% were in preferred provider organization
(PPO) programs, while 21% were enrolled in
more rigid but less costly health maintenance
organizations (HMOs). In PPOs, patients
can select providers from the insurers
broad network, or pay more to go outside
of the network; in HMOs, they must use
providers in the network, who are paid a set
monthly fee per patient.
As the cost of medical care continues to
rise, employer-sponsored health plans are
forcing patients to shoulder a larger portion
of their expenses. Drug spending is a key tar-
get of these programs efforts to rein in costs.
Although prescription drug spending is a rel-
atively small component of total national
healthcare expenditures, accounting for
about 10% of the total tab, it was, until re-
cently, the fastest-growing category. Since
2004, the pace of growth has slowed slightly.
After peaking in 1999 at 18.1%, the growth
rate fell to 5.8% in 2005 and an estimated
6.5% in 2006. While utilization continues to
climb, the slowdown in spending growth is
due to greater reliance on cheaper generic
drugs, a decline in the number of innovative
new drugs (which tend to be more expensive
than older drugs) coming to market, and in-
creased utilization management by payers.
hep_0507.qxp 4/30/2007 3:01 PM Page 27
MCOs are implementing tiered cost-
sharing formulas and increasing drug copay-
ments. In 2006, about three-quarters of
workers covered by employer-sponsored plans
had cost-sharing arrangements with three or
four tiers in their policies, up from 27% in
2000, according to the KFF. The added out-
of-pocket expense has prompted consumers to
choose less costly generic drugs and, among
the elderly and the poor, either to purchase
cheaper versions of their drugs from outside
the US or forgo the use of high-priced medica-
tions. Increasingly, the plans also require
pharmacists to dispense generics when avail-
able or in therapeutic categories for which
a choice of branded drugs exists a pre-
ferred brand for which the plan has negotiat-
ed an attractive discount.
US generic sales reached $54.1 billion in
2006. According to IMS Health Inc., a mar-
ket research firm specializing in pharmaceuti-
cals, generics accounted for 61% of the total
number of prescriptions dispensed in 2006,
up from 51% in 2002. Both volume and
sales are bound to rise, as 27 of the worlds
bestselling drugs (known as blockbusters,
i.e., those with $1 billion or more in annual
sales) will lose patent protection by 2010.
Examples include Pfizer Inc.s Norvasc (anti-
hypertensive; global sales of $4.9 billion in
2006, US sales of $2.7 billion), Johnson &
Johnsons Risperdal (antipsychotic; global
sales of $4.2 billion in 2006, US sales of $2.5
billion), and Mercks Fosamax (osteoporosis;
global sales of $3.1 billion in 2006; US sales
of $2.0 billion). Norvasc lost patent protec-
tion in March 2007, while Risperdals
patent officially expires December 29,
2007; Fosamax appears likely to face
generic competition in 2008.
Although it faces challenges, the phar-
maceutical industry is still among the
worlds most profitable. In the United
States, the worlds largest pharmaceutical
market, the sector was the most lucrative
industry between 1995 and 2002. Since
then, its ranking has slipped, due to lack of
new products, generic competition, and
pricing constraints. As of 2005, it had de-
clined to fifth place in terms of net profit
margins, with profits equal to 16% of sales,
compared with 6% for all Fortune 500
companies, according to Fortune magazine
(April 2006). Historically, the industry has
rejuvenated itself by developing premium-
priced breakthrough therapies that have
opened up entirely new markets.
High risk, high rewards
Financially, drug manufacturing is a high-
risk business: for every 5,000 compounds
discovered, only one ever reaches the phar-
macists shelf. The odds against making a
profit are steep as well: fewer than a third of
marketed drugs achieve enough commercial
success to recoup their R&D investment.
However, when a drugmaker launches a new
compound that is widely accepted in the
marketplace, the economic rewards can be
immense. This is the primary reason for the
industrys hefty profit margins.
To optimize R&D efforts and achieve
maximum returns, pharmaceutical compa-
nies spent much of the 1990s and early
2000s focusing on developing blockbuster
products. The drug companies aggressively
marketed these to primary-care physicians,
who prescribed them to broad patient popu-
lations. If, in contrast, the companies devel-
oped compounds with benefits similar to
those of drugs already on the market (known
as me-too drugs), they were not likely to
be rewarded by the current cost-conscious
managed care market. The model is slowly
changing, as R&D efforts turn to drugs that
are prescribed by specialist physicians and
target narrower patient populations. Still,
IMS Health estimates that 105 blockbusters
were on the market in 2006 11 more than
in 2005 and 40 more than in 2003.
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
Drugs predictable life cycles
Drugs have widely different development
processes, but their product life cycle nearly
always follows a stable, long-term pattern. In
the United States, after the average 10-year
period of discovery, development, testing, and
approval by the US Food and Drug Adminis-
tration (FDA), a branded ethical (prescription)
drug will have a commercial life of about a
decade. The life cycle is similar in Western
Europe and Japan, the two other major areas
of the world where the majority of new drug
discovery and development take place.
Drugs usually require several years of sales
build-up to reach their full commercial poten-
tial. Physicians have to get comfortable with
the product and its approved application,
27
hep_0507.qxp 4/30/2007 3:01 PM Page 28
while companies often continue conducting
clinical trials that will enable them to get FDA
approval for additional indications. IMS
Health found that 19 drugs, with individual
sales of $2 billion or more in 2004, took an
average of 10 years to reach the $2 billion
sales mark, whereas 14 other drugs reached
that sales level, on average, in four years.
In some cases, companies also benefit as
doctors start to use their drugs for off-label
or unapproved indications; these sometimes
represent a hefty proportion of a drugs total
revenues. Eventually, rival drugs similar in
action may enter the market, or major cus-
tomers may opt to replace the drug with
less expensive compounds in the same ther-
apeutic class. The latter tactic, referred to
as therapeutic substitution, is especially
popular with HMOs and other managed
care buyers.
Regulation: FDA oversees US market
The FDA is responsible for regulatory
oversight of the pharmaceuticals and medical
technologies industries in the United States.
The agency, which began operations in the
mid-1800s, did not acquire even modest reg-
ulatory powers until 1906. Over time, in re-
sponse to events, Congress has strengthened
the FDAs oversight.
A defining moment for pharmaceutical
regulation, and for the medical field in gener-
al, came when Congress passed the Food,
Drug, and Cosmetic Act of 1938. This land-
mark legislation outlined the framework for
the pharmaceutical approval process in the
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
United States. The law required, for the first
time, that drugmakers submit evidence of a
products safety based on clinical trials. It
also required that a drugs label state its con-
tents, how it should be administered, and its
possible side effects.
Following an outbreak in Europe of severe
birth defects caused by thalidomide, Congress
passed the Kefauver-Harris Drug Amend-
ments of 1962 to require that manufacturers
demonstrate both the safety and the efficacy
of new drugs before receiving approval for
commercial sale in the United States. In addi-
tion, this legislation required that drugs be
produced according to specified guidelines for
good manufacturing practices and that
manufacturing plants be subject to FDA ap-
proval and periodic inspection.
28
The most significant drug legislation since
then was the FDA Modernization Act of
1997, which sped the approval of new drugs
for life-threatening illnesses and improved
the overall efficiency of the FDA. The legisla-
tion also extended the popular Prescription
Drug User Fee Act (PDUFA), a program initi-
ated in 1992 that charges drugmakers a fee
for filing new drug applications (NDAs).
Between 1998 and 2002, drugmakers paid
more than $665 million in PDUFA fees.
Those funds were used to hire new FDA per-
sonnel, and the program has been credited
with significantly reducing new drug ap-
proval times.
The 1997 law allowed seriously ill pa-
tients easier access to experimental com-
pounds and provided new incentives for the
development of pediatric medicines. It also
expanded the drug companies ability to
disseminate information on off-label (unap-
proved) uses of new and existing drugs.
In 2005, following a series of high-profile
studies showing that some popular drugs for
arthritis (Vioxx) and depression (Effexor and
the class of therapeutics known as selective
serotonin reuptake inhibitors) have potential-
ly unacceptable side effects, the FDA began a
series of initiatives to improve its drug safety
evaluation processes. It established an Office
of Drug Safety responsible for postmarketing
surveillance and other drug safety issues and
named a director of the program in the fall
of 2005. Critics of the FDA, including some
congressional leaders and FDA insiders, wor-
ry that the office will not be independent of
the agency and, therefore, will not have the
authority to bring problematic side effects to
the agencys attention once products are on
the market.
In January 2007, in response to a highly
critical report published in September 2006
by the well-regarded Institute of Medicine
(IOM), the agency announced more reforms.
These include plans to produce safety pro-
files of drugs after they have been on the
market for 18 months and organizational
changes to improve communication within
the agency.
FDA: the US gateway for new drugs
As the principal federal agency responsible
for enforcing US food and drug laws, the
FDA regulates the introduction of new drugs.
The agency also monitors the manufacture,
hep_0507.qxp 4/30/2007 3:01 PM Page 29
transport, storage, and sale of all food, bio-
logic, cosmetic, and medical device products
in the United States.
The FDA requires that pharmaceutical
manufacturers perform extensive testing to
prove that their products are safe and effec-
tive before it will sanction commercial sale.
Contrary to popular belief, the FDA does not
perform clinical trials. All animal and human
tests, which often last for years and cost
many millions of dollars, are conducted by
manufacturers, often in conjunction with col-
leges or universities, the National Institutes
of Health (the medical research agency with-
in the US Department of Health and Human
Services), or similar research institutions.
Identifying and testing candidate drugs
R&D is the lifeblood of the pharmaceuti-
cal industry. Drugmakers become industry
leaders by spending large sums on R&D in
order to produce a steady stream of success-
ful products. Because ethical pharmaceuticals
are patent-protected only for a finite number
of years, the pharmaceutical industry needs
to continually find new drugs to ensure fu-
ture growth. Firms whose R&D programs
falter end up struggling, particularly if they
face generic competition for their key drugs.
Some weakened companies have merged
with larger, more successful companies to
stay afloat. Those that come up with hit
products prosper.
Searching for innovative products is diffi-
cult in almost any industry. It is especially
challenging in pharmaceuticals, because
products come from highly complex fields,
such as molecular biology and biochemistry,
and involve the intricate workings of the hu-
man body. The quest for new pharmaceuti-
cals must combine an understanding of
complex human chemistry and physiology
with knowledge of all life sciences. Intuitive
acumen is also needed to form theories about
new therapeutic modalities.
Working from a set of hypotheses on how
certain compounds might interact in the
body, researchers synthesize new compounds
to combat particular diseases. Often, pro-
teins, segments of proteins, or genes (isolated
by molecular biologists) or new chemicals
(discovered by analytical chemists) form the
basis for new drugs.
Once candidate molecules are identified,
they are studied in test tubes and in animals
to determine their side effects, efficacy, and
properties (such as how long the body takes
to absorb them). Animal tests (usually on
mice and rats) are conducted to determine
possible side effects and efficacy. Most candi-
date drugs are eliminated at this stage, in re-
sponse to unacceptable side effects or
because they do not function as expected.
Often, hundreds of compounds are tested
before researchers find one promising
enough to advance to human clinical trials.
When such trials are indicated, a company
must first submit an investigational new drug
(IND) application to the FDA, informing the
agency that human studies will start in 30
days unless it objects.
Since the mid-1980s, the industrys R&D
expenditures have risen sharply, both in dollar
terms and as a percentage of total sales. The
Pharmaceutical Research and Manufacturers
of America (PhRMA), an industry trade
group, estimated that industry investment in
drug development including investments
made by non-PhRMA members and invest-
ments in biotech products totaled $55.2
billion in 2006. Company-financed domestic
R&D outlays was an estimated 19.4% of US
pharmaceutical sales in 2006, up from 19.2%
in 2005 and 16.3% in 1985. In contrast, the
average US manufacturing firm spends less
than 5% of sales on R&D.
FDA approval tough to come by
The FDA requires drugs to undergo three
phases of clinical testing on humans. During
Phase I, a small number of healthy people get
moderate doses of the drug in order to test the
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
drugs safety, safe dosing range, and mecha-
nism of action. If this initial test is successful,
the subjects dosage is slowly increased to de-
termine its safety at higher levels.
During Phase II, a larger group of sub-
jects, who have the disease or condition that
the drug is intended to treat, is tested in
placebo-controlled clinical trials. Phase II re-
searchers look for efficacy and continue to
study safety and optimal dosing.
Drugs that pass the first two hurdles then
undergo Phase III trials. At this level, the
most complex and rigorous tests are per-
formed on still larger groups of ill patients
to ascertain the drugs safety, effectiveness,
and optimum dosage regimens.
Usually, Phase III procedures employ ran-
domized, double-blind studies with placebo
29
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control. This means that one group of pa-
tients is given the drug while another group
receives an inert substance. Neither the pa-
tients nor their doctors are aware of which
patients are actually receiving the drug be-
ing tested.
The FDA has estimated that, of 20 drugs
entering clinical testing, an average of 13 to
14 will successfully complete Phase I. Of
those, about nine will finish Phase II, but
only one or two are likely to survive the
Phase III trials. Even after a drug successfully
completes Phase III, there is the possibility
that the FDA will deem the data insufficient
for approval. Ultimately, only one of the
original 20 may be approved for marketing.
When the clinical research on a drug is
complete, the manufacturer submits an NDA
to the FDA. The application compiles the re-
search completed during the three trial phas-
es and includes full details of the products
formula, production, labeling, and intended
use. NDAs are typically voluminous docu-
ments, sometimes exceeding 50,000 pages.
Recently, many firms have taken advantage
of the FDAs new policy of accepting elec-
tronic filings via e-mail.
After a drug is approved, manufacturers
often submit supplemental NDAs containing
additional clinical trial results, in order to
obtain approval for additional indications.
The FDA determines label content, which
must include a detailed description of the
drug and its chemical composition, indica-
tions, contraindications, and side effects.
Postmarket surveillance
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
The FDA requires companies to conduct
postmarket surveillance, although few do so,
despite recent interest in expanding such pro-
grams. Preclinical studies usually identify
common toxicities. But postmarket surveil-
lance can be important for picking up rare
side effects or other unexpected develop-
ments, which are apparent only after the
drug is widely used.
If the safety or efficacy of a drug already
on the market is in question, the FDA has al-
ternatives: it can be more stringent about
postmarket surveillance, it can order a com-
pany to recall selected lots of a product or, in
a worst-case scenario, it can ask a manufac-
turer to withdraw a product from the mar-
ket. These actions can result from adverse
events, defective packaging, misleading label-
30
ing, failure to meet content uniformity tests,
loss of sterility, subpotency, or lack of evi-
dence of effectiveness.
In the past, the FDA rarely undertook mea-
sures against a drug for safety reasons once the
drug was on the market. In light of safety is-
sues concerning COX-2 inhibitors, antidepres-
sants, and several other drugs, however, the
FDA has been placing a greater emphasis on
postmarket drug safety. The new Office of
Drug Safety (ODS), established in 2005, has set
up an independent Drug Safety Oversight
Board (DSOB), consisting of scientific experts,
although both the ODS and the DSOB have
maintained low profiles to date. The agency
also requires companies that undertake post-
market surveillance of certain drugs (either
voluntarily or because the FDA requires it) to
report on the progress of their commitments.
In February 2006, the agency proposed details
of how companies should undertake these re-
ports. A report on The Future of Drug
Safety Promoting and Protecting the Health
of the Public, released in January 2007 in re-
sponse to the IOMs scathing critique, outlined
further proposals for improving drug safety
evaluation and risk management at the agency.
Exceptions for life-and-death situations
Experimental drugs still in clinical trials
are sometimes made available to seriously ill
patients through the FDAs IND treatment
policy. This provision lets manufacturers pro-
vide unapproved drugs to individual patients
with life-threatening diseases, provided Phase
I trials have been completed, even if those
patients are not part of the clinical trial.
Nearly 40 drugs have been granted IND
treatment status since this policy was enacted
in 1987, including new drugs for acquired
immune deficiency syndrome (AIDS), cancer,
heart disease, Lou Gehrigs disease, Parkin-
sons disease, and various other debilitating
or life-threatening conditions. A guideline
proposed in December 2006 by the FDA
would expand access to unapproved drugs to
groups of patients, not just individuals.
Drugs targeting serious or life-threatening
diseases that lack adequate treatments also
can receive expedited review by the FDA un-
der its Subpart E regulation. In this situation,
the FDA can approve the drug based on re-
sults of a Phase II trial, although the manu-
facturer still must conduct a post-approval
outcomes study. In recent years, several new
hep_0507.qxp 4/30/2007 3:01 PM Page 31
breakthrough protease inhibitors for the
treatment of human immunodeficiency virus
(HIV) and AIDS were approved only a few
months after their applications were filed.
Novartis AGs important drug Gleevec, for
treating chronic myeloid leukemia, also was
approved on an accelerated basis, based on
results of three large Phase II studies.
Another piece of legislation designed to
help both patients with rare diseases and the
drug industry is the Orphan Drug Act. En-
acted in 1983 to foster the development of
drugs to treat diseases afflicting small pop-
ulations (fewer than 200,000 patients), this
law provides research grants, tax breaks, and
exclusive marketing rights to manufacturers
of drugs aimed at patient markets that would
otherwise be too small to justify commercial
development.
More than 225 drugs developed with help
from the Orphan Drug Act are currently on
the market, treating some 11 million Ameri-
cans. Ironically, several orphan drugs subse-
quently became blockbuster products,
including Gleevec, GlaxoSmithKline PLCs
Retrovir AZT AIDS drug, Amgen Inc.s
Epogen antianemia drug, and Genentech
Inc.s Protropin human growth hormone.
Regulation outside the United States
The pharmaceutical industry is global;
thus, a company seeking to maximize a
drugs potential files for its approval in many
countries. Big pharmaceutical companies
usually seek to get their products on the mar-
ket in Europe, which is the worlds second
largest pharmaceutical market.
Companies filing for regulatory approval
in the European Union (EU) can either apply
through a centralized EU procedure that en-
ables them to sell their approved products in
all EU countries, or file on an individual
country basis. The London-based European
Medicines Agency (EMEA) reviews all appli-
cations submitted under the centralized
process and recommends them to the Euro-
pean Commission, which grants final mar-
keting authorization. Under new EU rules,
implemented in November 2005, the central-
ized process must be used for biologically
derived therapies (those made from living
cells) and for all medicines addressing certain
therapeutic areas, such as cancer, AIDS, dia-
betes, and neurodegenerative diseases.
The alternative, known as the mutual
recognition procedure, allows drugmakers
with a medicinal product already approved
in one EU country to petition other countries
to accept the product. Should an EU country
refuse to recognize the original countrys au-
thorization, the matter is submitted to an
EMEA scientific committee for arbitration.
In Japan, the Ministry of Health, Labor,
and Welfare supervises new drug approvals.
The approval process moves much more
slowly in Japan than in the United States
and Europe. Many drugs do not reach the
Japanese people until they have been on the
market in Western countries for several
years. Nevertheless, Japan, as the worlds
third largest pharmaceutical market, re-
mains important to US companies. The
Japanese health ministry has publicly com-
mitted itself to reducing approval times,
which is expected to strengthen Japans
pharmaceutical companies.
Prohibitive barriers to entry
The branded prescription pharmaceutical
industry has barriers to entry that are among
the highest of any US industry. Economic,
regulatory, and legal obstacles block poten-
tial new competitors. As noted earlier, the
arduous processes of new drug discovery, de-
velopment, and regulatory filing require
heavy R&D expenditures. All told, develop-
ment of a new drug can take 10 to 15 years,
at a total cost of more than $800 million (in-
cluding costs of unsuccessful compounds).
To enable manufacturers to recoup these
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
investments and earn a satisfactory rate of
return, most developed nations entitle new
drugs to patent protection. A patent can be
issued either on a drugs chemical structure
(a composition patent, which is generally
stronger) or on its method of manufacture
or synthesis (process patent). Sometimes
the patent offices grant a use patent,
which lets the holder manufacture and
market the compound for a specific thera-
peutic purpose and prevents competitors
from using the drug in the same way; this
type of patent tends to be more vulnerable
to competitors challenges in court.
Some countries are better than others at
issuing and enforcing patents. The World
Trade Organization (WTO), an international
group set up in 1995 to establish rules for
31
hep_0507.qxp 4/30/2007 3:01 PM Page 32
conducting international trade, requires
members to recognize patents.
Under WTO rules, new pharmaceutical
patents extend for 20 years from the applica-
tion date. The previous system granted pro-
tection for 17 years from the date of patent
issuance. Given the length of time it takes to
bring a product from the application stage to
market, however, patent protection for most
products is effectively reduced to only eight
to 10 years.
China, India, and other developing coun-
tries in Asia have been particularly notorious
for ignoring foreign companies patents.
Their attitude has harmed business relation-
ships and angered countries (and companies)
that do adhere to international patent laws.
Because they wanted to belong to the WTO,
however, China and India have begun to offi-
cially recognize international patents: China
has done so since 2001, and India has done
so since the beginning of 2005. Their com-
mitment to reform is important because US
companies, under ever-greater pressure in the
West, see these countries as potentially huge
markets, with attractive demographics and
rapidly expanding economies.
Pricing reflects product strengths,
market characteristics
Many factors affect the pricing of new
pharmaceuticals. These include the relative ef-
ficacy and safety profile of a drug versus its ri-
vals, the size of its market, the competition it
faces, and its development costs. In the United
States, breakthrough therapies treating life-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
threatening conditions can command premi-
um prices, well above those for existing
products. New drugs that are not significant
improvements to existing alternatives are usu-
ally priced within parameters set by similar
drugs already on the market. This paradigm
differs from other parts of the world, where
government price controls limit how much
drugmakers can charge for their products.
Drug pricing also varies widely among
different classes of trade that is, different
kinds of payers. Large-scale buyers (such as
hospital chains and other institutional cus-
tomers) usually pay well below list price, be-
cause their huge volume purchases enable
them to negotiate heavy discounts. Govern-
ment organizations, such as the Department
of Defense, the Department of Veterans Af-
32
fairs, and Medicaid, for example, typically ne-
gotiate some of the steepest discounts for
drugs. Meanwhile, wholesale distributors and
pharmacy chains for the retail (or individual
physician/patient) market pay prices for drugs
that are at the higher end of the scale.
Historically, drugmakers have raised
prices to private customers to compensate for
the discounts they give to managed care cus-
tomers. This practice is known as cost shift-
ing. In recent years, several pharmacy chains
and pharmacy trade associations have sued
leading drug manufacturers, charging illegal
price fixing and restraint of trade.
Medicaid, a US federal/state program that
pays for medical services (including prescrip-
tion drugs) for 55 million low-income patients,
accounted for an estimated 19% of US drug
sales in 2005, according to the Henry J. Kaiser
Family Foundation (KFF). A Medicaid rebate
program that went into effect in 1991 required
drugmakers to reimburse state Medicaid pro-
grams for the higher of either 15.1% of sales,
or the difference between prices charged Med-
icaid and the best price the drugmaker offered
a nongovernment customer. Total industry re-
bates to Medicaid were estimated at more
than $4.0 billion in 2003, up from $1.5 billion
in 1993. A Senate proposal attached to a bill
on Iraqi war spending that was expected to go
to a Senate vote at the end of March 2007
would increase that rebate rate by about one-
third, raising money the government would
use to expand other healthcare programs.
(For in-depth discussion of Medicaid and oth-
er insurance programs, see the Healthcare:
Managed Care issue of Industry Surveys.)
These numbers have been changing since
Medicare Part D went into effect in January
2006; at that time, Medicaid-eligible seniors,
who accounted for 14% of Medicaid benefi-
ciaries and 48% of Medicaid prescription drug
spending, automatically became Medicare
drug beneficiaries. Medicaid will continue to
fill in the gaps, but, because of the new legis-
lation, the amount spent and mix of drugs
purchased through the program is declining
significantly.
The generic stage
In the United States, a prescription drugs
patent protects it for 20 years; but during more
than half of that time, the drug is likely to be
in development. Typically, patents expire eight
hep_0507.qxp 4/30/2007 3:01 PM Page 33
to 10 years after a drug comes on the market.
At that time, generic drugs the chemical
equivalents of a branded drug usually ap-
pear immediately, and prices fall rapidly. Once
this happens, the profitability of the branded
drug generally erodes, particularly in the
United States. (In contrast, in Japan and some
European countries, generic drugs are only
slightly less expensive than branded ones.)
Generic drug companies do not have the
same high costs of R&D, tough regulatory
approval, and sales and marketing as the
proprietary companies, so they can afford to
discount their products. Generics manufac-
turers set prices depending on the type of
molecule they are making, how easy it is to
manufacture, and, most importantly, how
many generic competitors they expect to
face. When some easy-to-manufacture block-
buster drugs go off patent, half a dozen or
more generic competitors may enter the mar-
ket simultaneously at prices that are 50% to
80% or more below brand. In less competi-
tive situations, involving drugs that maintain
some barrier to entry (such as special manu-
facturing skills) or those that have exclusivity
for a limited time post-launch (see the The
Hatch-Waxman Act in the following sec-
tion), fewer competitors come into the mar-
ket at the same time, and pricing, at least
initially, is more stable.
As more competitors enter the field,
prices drop even further. For example, a
few months after GlaxoSmithKlines popu-
lar Paxil antidepressant and AstraZeneca
PLCs Prilosec lost patent protection,
generic versions in the United States were
priced more than 80% lower than the
branded products.
The Hatch-Waxman Act
The modern generics drug industry origi-
nated largely as a result of the enactment of
the Drug Price Competition and Patent Term
Restoration Act of 1984, commonly known
as the Hatch-Waxman Act. This watershed
legislation simplified the generic drug ap-
proval process by allowing new generics to
be filed under an expedited format called the
abbreviated new drug application (ANDA).
This filing format requires only that new
generics demonstrate their bioequivalence to
the branded drugs they replace, rather than
undergo the rigorous clinical trials required
for original products.
An amendment to the Hatch-Waxman Act
provided for 180 days of marketing exclusiv-
ity for the first generic to file for FDA ap-
proval and challenge in court the patent of a
branded drug. This provision is the source of
much tension between brand-name and
generics manufacturers. A generics company
can launch its product without interference
from other generics companies as soon as it
receives FDA approval. If a company launch-
es a drug before the innovators patent ex-
pires or is invalidated, however, it runs the
risk of paying treble damages (three times
sales) in the event that a court upholds the
patent. Until 2005, the threat of paying large
amounts of damages deterred nearly all
generics companies from launching copies of
an innovative drug until either a high court
declared a patent invalid or the patent ex-
pired on schedule.
Starting in late 2004, some generics firms
chose to launch at risk, that is, before a fi-
nal court ruling invalidating a patent. It is
not clear why companies became more will-
ing to do this at that time, except that they
may have been dealing with patents that they
considered to be very weak and less likely to
hold up in court; in other words, companies
felt confident of their ability to win in court.
In most cases, companies are taking an
at-risk route only after lower courts have
ruled against the brand-name company.
This was the case in June 2005, when Teva
Pharmaceutical Industries Ltd. launched a
generic version of Sanofi-Aventiss seasonal
allergy drug Allegra (global sales of $1.8 bil-
lion in 2004, the last full year of exclusive
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
sales). Teva Pharmaceutical took an at-risk
approach, but only after several lower courts
had ruled in favor of the generic. (As of
March 2007, litigation at a higher court level
was still pending and a trial date had not yet
been set.) Thus, both Teva and US generics
manufacturer Barr Pharmaceuticals Inc.
which had licensed to Teva its market ex-
clusivity rights to Allegra, in exchange for
royalties on sales could be liable for hefty
triple damages.
In August 2006, the subtleties of the
launch-at-risk strategy were highlighted
in an unusual situation in which Apotex, a
Canadian generics company, commercial-
ized a generic copy of Plavix, a bestselling
anticoagulant developed by French drug
maker Sanofi-Aventis, before the drugs
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patent expired. Apotex was not worried
about the consequences of such a maneuver
because Bristol-Myers Squibb Co., which
markets the drug in the US, and Sanofi-
Aventis had previously agreed that they
would not seek a hefty penalty if Apotex
were to undertake such a maneuver. (The
motivation for this strange agreement was
complicated and is described in detail in
the November 2006 Healthcare: Pharma-
ceuticals issue of Industry Surveys.) Bristol-
Myers Squibb and Sanofi-Aventis were able
to stop Apotex after several weeks, but not
before Apotex flooded retailers shelves
with its generic, causing Sanofi-Aventis and
Brisol-Myers Squibb to lose hundreds of
millions of dollars in sales.
For a generics manufacturer, the advan-
tages of having six months of exclusivity
are enormous. Because competition is limit-
ed, the generics supplier has to offer only a
slight discount to the branded drug; in
many cases, this enables the generics com-
pany to rack up hefty profits. Without the
180-day exclusivity, the company would
likely face a price-sensitive, highly competi-
tive market for that product.
Barr Pharmaceuticals has enjoyed great
spoils from some of its patent challenges. In
its fiscal year ended June 30, 2002, after it
successfully challenged the patents to Eli
Lilly and Co.s best-selling antidepressant
Prozac (fluoxetine), Barr launched a generic
version with six-months exclusivity and saw
its revenues rise dramatically. Fluoxetine
alone generated $367 million for Barr in its
fiscal year 2002. In Barrs fiscal 2003 (ended
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
June 30, 2003), however, its fluoxetine sales
fell to $7.2 million, after the companys six-
months exclusivity ended and competitors
jumped into the market.
Teva Pharmaceutical posted record profits
and sales in 2006, partly from several launches
(with six-months exclusivity or semi-
exclusivity) of drugs that went off patent in
the second quarter of 2006. These included
generic copies of the best-selling branded
drugs Zocor, Proscar (prostate cancer; global
sales in 2005 of $406 million), Zoloft (depres-
sion; $3.1 billion), and Pravachol (cholesterol-
lowering; $1.5 billion). In some cases, Teva had
exclusivity only for certain doses, and it faced
competition from an authorized generic put
out by the innovator company. Still, its profits
from these activities were significant.
34
To compensate the branded drug industry
for greater competition from generics, the
Hatch-Waxman Act granted patent exten-
sions for branded products. An additional
five years of protection was granted to new
chemical entities, and three more years were
given to new approved formulations or new
uses for existing drugs. New formulations of-
ten encompass controlled-release or pediatric
versions of the branded drugs. Sustained-
or controlled-release dosing typically pro-
vides greater efficacy, fewer side effects, and
patient compliance benefits.
The Medicare Prescription Drug, Improve-
ment, and Modernization Act of 2003, best
known for expanding Medicare coverage to
prescription drugs for the first time, also sig-
nificantly modified the Hatch-Waxman Act.
The new rules affect the expenditure of mon-
ey from tens of millions to hundreds of
millions of dollars as they clarify confu-
sion over which generics companies are en-
titled to exclusivity if several companies
appear to be eligible at the same time, and
if the start dates of the exclusivity period
appear to be uncertain.
Going over-the-counter
In the United States, innovator companies
sometimes apply to the FDA for permission
to switch a prescription product to over-the-
counter (OTC), or nonprescription, status, if
they expect that product will shortly face
generic competition. Marketing an OTC
version of a drug broadens the drugs com-
mercial appeal and extends its economic life.
The strategy works best for popular products
used for common, minor maladies. Only the
original manufacturer or a licensee can
market the product under that franchise.
Other companies may sell the product on a
private-label basis once the products patents
expire. About 60% of all drugs sold in the
United States are OTC, according to Global
Insight, a consulting firm.
OTC products face more straightforward,
free-market forces of supply and demand
than do prescription pharmaceuticals, which
have pricing that is affected by heavy dis-
counting to third-party providers and gov-
ernment agencies. Consumers sensitivity to
prices is greater with OTC products than
with prescriptions, because they usually
pay for OTC drugs out-of-pocket, and
most insurance plans do not reimburse for
hep_0507.qxp 4/30/2007 3:01 PM Page 35
OTC drugs. These drugs are free from the
time-consuming, safety-related recordkeep-
ing that the FDA requires for prescription
products.
Compared with the prescription prod-
ucts they replace, products switched to
OTC status have lower margins. However,
producers often sell larger volumes of
mass-marketed OTC products. In addition,
popular consumer medications can have
long shelf lives, which bolsters margins by
minimizing waste.
Some of the more successful prescription-
to-OTC switches in recent years include
Schering-Plough Corp.s Claritin (a nonse-
dating antihistamine); Mercks Pepcid and
GlaxoSmithKlines Zantac 75 (heartburn reme-
dies); Schering-Ploughs Gyne-Lotrimin and
Johnson & Johnsons Monistat 7 (vaginal yeast
infection treatments); Johnson & Johnsons
Imodium A-D (antidiarrhea medicine); and
Procter & Gamble Co.s Aleve, Wyeths Advil,
and Bristol-Myers Squibb Co.s Nuprin (anal-
gesics). AstraZenecas bestselling heartburn
drug Prilosec also went OTC in 2001.
In February 2007, after considerable de-
bate, the FDA approved the first OTC diet
pill, which is a low-dose version of the pre-
scription diet drug Xenical. GlaxoSmithKline
PLCs (GSK) Consumer Health business ex-
pects to begin selling the drug, which it has
branded Alli, in the summer of 2007.
Roche Holding Ltd. sells Xenical globally,
and has given US OTC rights to it to GSK.
An FDA advisory panel recommended to
agency staffers that Xenical was safe to
switch to OTC in March 2006. Xenical,
which reduces the amount of fat the body
absorbs from food, is effective in weight
loss only if it is used with diet and exer-
cise. It had US sales of roughly $100 mil-
lion in 2006, according to IMS Health.
Liability issues
Inevitably, pharmaceutical companies are
subject to lawsuits alleging adverse side ef-
fects from their medications. Some product
liability cases are consolidated into class ac-
tion suits. A.H. Robins, a once-large phar-
maceutical and medical products company,
was driven into bankruptcy in 1985 by huge
liabilities stemming from its sale of intrauter-
ine contraceptive devices that were later
deemed unsafe.
Wyeth was the target of thousands of law-
suits following the recalls in 1997 of its diet
drugs Redux and Pondimin. Pondimin
(generically known as fenfluramine) is the
fen part of the now-banned fen-phen
weight-loss cocktail. As of July 2006, more
than 95% of plaintiffs had agreed to enter
into settlement discussions with the compa-
ny, which had taken charges of $21.1 billion
(as of year-end 2005) in order to pay for a
trust fund, litigation, and other costs associ-
ated with the diet drug litigation.
As of March 20, 2007, Merck was the
target of roughly 22,000 lawsuits in state
and federal courts across the country, alleg-
ing adverse cardiac events resulting from the
use of Mercks painkiller Vioxx. (Vioxx was
no longer on the market as of September
2004.) Analysts estimate that Mercks liabili-
ties could be in the range of $4 billion to
more than $25 billion.
Merck has not sought to settle any of
the lawsuits; instead, it is aggressively de-
fending each suit separately on its merits.
Of the 17 cases tried as of March 28, 2007,
Mercks track record using this strategy has
been modestly favorable: the company won
10 cases and lost five; in addition, two Cal-
ifornia trials ended in mistrials in January
2007. These results included four wins and
one loss in federal courts for Merck, and
six wins and four losses in state courts.
Merck has filed or is filing appeals in the
cases that it lost.
Product liability and insurance coverage
for potential damages are increasingly impor-
tant issues in the industry. Liability risk often
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
is mentioned as a growing cost within the
healthcare system. There have been many calls
for legislative reform to address this, including
proposals to limit a manufacturers liability if
the FDA has approved a drug or device.
KEY INDUSTRY
RATIOS AND STATISTICS

National healthcare expenditures. An-
nual estimates of all healthcare spending in
the United States are released by the Centers
for Medicare & Medicaid Services (CMS).
The data are structured according to type of
expenditure, including such categories as hos-
pital care, physician care, and drugs and oth-
er medical nondurables. The annual report,
35
hep_0507.qxp 4/30/2007 3:01 PM Page 36

entitled Health, United States, includes de-
tailed information on the sources of funds
for each segment.
Total domestic expenditures for prescrip-
tion drugs were roughly $200.5 billion in
2005, according to the CMS; expenditures
for 2006 are estimated at $213.7 billion.
Changes in funding from government and
private sources are important to observe. For
example, federal, state, and local government
funding represented 27.2% of US spending
on pharmaceuticals in 2005 (latest available),
compared with some 17% in 1990, with
two-thirds of this spending coming from
Medicaid. The implementation in January
2006 of Medicare Part D, which extended
Medicare coverage to outpatient retail phar-
macy prescription drugs, was expected to
cause pharmaceutical spending to rise dra-
matically. As of March, the governments es-
timate of the programs cost which keeps
rising was $939.4 billion for the period
from 2007 to 2017. Medicare Part D paid
for an estimated 22% of all US prescription
drug costs in 2006, up from 2% in 2005.
The government estimates that it paid 40%
of the money spent on all prescription
drugs in 2006, including programs under
Medicare, Medicaid, and the Department
of Veterans Affairs.
Health, United States publishes statistics
showing rates of change in total healthcare
spending and by segment. Proportional
changes in pharmaceutical spending can be
measured against other healthcare sectors to
determine the industrys relative growth.
Between 1990 and 2003, spending on pre-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
data show that prescription drug spending in
2005 continued to rise but at a much slower
rate of 5.8%, compared with 8.6% in 2004
and 10.2% in 2003. This slowdown reversed
slightly in 2006, when the pace of growth
reached an estimated 6.5%, and it is project-
ed to hit 7.4% in 2007, according to Health
Affairs magazine. In contrast, total spending
on physicians and clinical services rose 7.0%
in 2004, due largely to an increase in the use
of outpatient services, such as imaging.
A dearth of new drugs combined with
generic competition for several popular
brands, a slowdown in price increases, and
more stringent measures by managed care
organizations to migrate members to cheap-
er generic drugs helped to keep a brake
on rising drug costs, according to the Cen-
ter for Studying Health System Change, a
research group.

Medicare and Medicaid spending.
Changes in government spending and reim-
bursement rates can have significant ramifi-
cations for drugmakers that derive sizable
sales from Medicare or Medicaid patients.
The CMS provides information on spending
and reimbursement rates for Medicaid and
Medicare. According to CMS data, aggregate
spending for Medicare was $342 billion in
2005, or 17.2% of federal spending, with
Medicaid expenditures for the same period
estimated at $179 billion. Implementation of
the Medicare drug benefit that began in Jan-
uary 2006 is causing a decline in Medicaid
spending on drugs and a parallel rise in total
Medicare spending. Indigent elderly who

scription drugs grew at an average annual
rate of 12.4%, outpacing the 7.0% rate of
growth for overall healthcare spending. CMS
PRODUCER PRICE INDEXES FOR
SELECTED PRESCRIPTION DRUG PRODUCTS
(1982=100)
were previously eligible for Medicaid reim-
bursement for prescription drugs about
6.5 million people are now part of the
Medicare Part D program. In general, this is
an advantage for the pharmaceutical indus-
try, because Medicare pays higher prices for
drugs than does Medicaid.

PRODUCT 2002 2003 2004 R2005 2006

Consumer price index (CPI). The CPI,
Cancer therapy 710.5 748.4 754.4 780.7 809.7
Analgesics 553.0 577.0 601.3 612.6 628.3
compiled by the US Department of Labor,
Cardiovasculars 389.7 405.0 424.5 447.9 461.4 tracks price inflation in key segments of the
Bronchial therapy 594.7 618.6 640.5 657.1 669.4 economy, including medical care. The med-
Digestive antispasmodic/ ical care component is further subdivided
antisecretories 102.6 106.0 109.9 119.3 127.8 into products and services, with prescription
Broad & medium spectrum
antibiotics 254.8 262.9 276.9 290.8 307.6
and nonprescription drug statistics broken
down separately.
R-Revised.
Source: US Department of Labor. During the 1980s, prescription drug prices
surged at an average annual rate of 9.6%,

36
hep_0507.qxp 4/30/2007 3:01 PM Page 37
CONSUMER PRICE INDEXES DRUGS
(198284=100)
400
350
Prescription drugs
300
250
All items
200
150
OTC preparations
100
1993 94 95 96 97 98 99 00 01 02 03
OTC-Over-the-counter.
Source: Bureau of Labor Statistics.
compared with a 4.1% rate for the CPI. By
the early 1990s, excessive drug cost inflation
began to receive heightened political atten-
tion, causing leading drugmakers to fear reg-
ulatory price controls. Although prices have
continued to outpace the CPI, the pace of in-
flation slowed in the 1990s.
Between 1990 and 2003, prescription drug
prices increased at an average annual rate of
3.9%, compared with a 2.4% rise in the CPI.
In 2006, they increased at an annual rate of
1.9% much less than the overall medical
inflation rate of 3.6% for the same period, ac-
cording to Bureau of Labor Statistics, and be-
low the overall inflation rate of 3.2%. These
rates included generics, which are a growing
part of consumption but weigh down the aver-
age because they cost a fraction of the price of
innovative drugs. The AARP, an advocacy
group for Americans aged 50 and older, cited a
higher increase (6.2%) in wholesale prices for
the 193 most common brand-name prescrip-
tion drugs for the 12 months ended December
2006, nearly two times the general rate of in-
flation. The AARP attributes the difference to
implementation of Medicare Part D, which
prohibits the federal government from negoti-
ating drug prices directly with drugmakers.

Research and development (R&D) as a
percentage of sales. As new drugs represent the
lifeblood of the pharmaceutical industry, the
percentage of a companys sales that it devotes
to R&D can have an important impact on fu-
ture trends in sales and earnings. For the drug
industry overall, this percentage in the aggre-
gate is higher than for any other industry.
The Pharmaceutical Research and Manu-
facturers of America, an industry trade
group, reported that R&D spending by
members, both in the United States and
abroad, totaled $43 billion in 2006 up
7.8% from 2005 and 6.8% from 2004.

Foreign currency exchange. US drug-
makers derive close to two-fifths of their
total sales from non-US customers. They
carefully monitor fluctuations in the value of
the dollar relative to foreign currencies, as
such changes can have a substantial impact
04 05 06 2007 on their sales and earnings. Assuming all
other variables remain constant, a rise in the
dollars value (compared with other major
world currencies) lowers sales and earnings, be-
cause foreign sales translate into fewer dollars.
A stronger dollar also makes US goods more
expensive abroad, while foreign-manufactured
products become more competitive in the
United States. When the dollar is weak,
however, the opposite situation occurs: drug-
makers sales and earnings are enhanced by
exchange rates, and price competitiveness
improves. While the dollar saw a steady de-
cline against the euro and other currencies,
beginning in 2002 and continuing through
early 2005, it edged up slightly in the latter
half of 2005. Since the spring of 2006, how-
ever, the dollar has steadily weakened.
HOW TO ANALYZE A
PHARMACEUTICAL COMPANY
In evaluating a pharmaceutical company,
the most important factors to consider are its
products, markets, and financial health.
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
Researching the business
A thorough examination of the companys
products and markets is the first step in the
analysis. A pharmaceutical firms drug port-
folio is the main ingredient of its success.
Does the company sell primarily pre-
scription or nonprescription products?
Prices and profit margins of prescription
drugs are significantly higher than those of
nonprescription drugs, which are essential-
ly mass-marketed consumer products. Patent
protection is an important consideration for
prescription drugs, whereas the success of
nonprescription or over-the-counter (OTC)
drugs is more closely linked to brand-name
recognition and promotional spending levels.
37
hep_0507.qxp 4/30/2007 3:01 PM Page 38
For both prescription and nonprescription
drugmakers, company size and market share
are important considerations. Pharmaceutical
firms must have the critical mass to support
heavy spending on research and development
(R&D), as new product development is crucial
to future success. In addition, these companies
have to maintain a large sales force to market
drugs in key domestic and foreign markets.
Smaller drug companies, and even larger ones
that depend heavily on one or two products,
are more vulnerable to eventual patent expira-
tions and competition from rival drugs.
With respect to market share, does the
company dominate any key markets? Key
markets are those with a large population
whose chronic condition requires a daily
regimen of maintenance therapy, thus offer-
ing the greatest sales opportunities. Medica-
tions for high blood pressure, elevated
cholesterol levels, depression, ulcers, dia-
betes, and arthritis are examples. Recently,
oncology, once a niche therapeutic seg-
ment, has become exceedingly attractive
because of its technological advances,
growth rate, and profitability.
Prescription and nonprescription drug
companies vary widely by the type of phar-
maceuticals they offer and the markets that
they serve. Does the company have a nar-
row or a broad product line? A broad
product line is more desirable because
greater diversification makes the company
less dependent on a single product. It also
makes the company more resilient to eco-
nomic cycles and competition.
Prescription drugmakers, however, focus
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
their product development and marketing ef-
forts on select therapeutic areas. For many
decades, Wyeth (formerly American Home
Products) has dominated the female hormone
replacement market with its Premarin family
of products, while Pfizer Inc. has captured the
lead position in the growing cholesterol-
lowering market with its popular drug Lipitor.
Sometimes drugmakers create new markets
with their discoveries, such as Pfizers Viagra
treatment for erectile dysfunction and
Merck & Co. Inc.s Proscar treatment for en-
larged prostate glands. Launched in 2006,
Mercks Gardasil vaccine for preventing infec-
tion with human papillomavirus has the poten-
tial to build a new market. (See the Industry
Trends section of this Survey for more details
on Gardasil and vaccines in general.)
38
Nonprescription drugmakers do not have
to fund major R&D projects, but they must
maintain large advertising budgets to pro-
mote their products, which tend to face more
competition than branded prescription drugs.
As a result, most of the major firms have just
a handful of truly successful product lines.
Sales growth is slow for these businesses,
with success highly dependent on the manu-
facturers clout in the marketplace and over-
all market share.
If a prescription drugmaker has a diver-
sification or acquisition program, has this
been a plus or a minus? The program
should be carefully analyzed to determine
whether its initial objectives are being met
or whether the program is hurting the com-
panys performance. In general, large phar-
maceutical companies regularly turn to
smaller, more entrepreneurial companies as
sources of innovation. Business develop-
ment the process of scouting for attrac-
tive deals and negotiating terms is an
integral part of a companys operating ex-
pertise and core strategy.
Prescription drugmakers
As noted earlier, most major prescription
drugmakers tend to focus on a few specific
therapeutic markets. Pfizer and Merck, for
example, have carved out major stakes in the
huge global antihypertensive and cholesterol-
lowering drug markets by releasing a steady
stream of new products in recent years. Eli
Lilly and Co. achieved phenomenal success
in antidepressants with Prozac, which domi-
nated the market for more than a decade un-
til 2000, when it was overtaken by Pfizers
Zoloft. Eli Lillys sales of Prozac eroded
sharply following the loss of patent protec-
tion in August 2001. GlaxoSmithKline PLC
has maintained dominance in respiratory
drugs with its Advair and Flovent drugs.
In a healthcare market dominated by
managed care, a companys relative size
and the breadth of its product offerings
have become increasingly important.
Health maintenance organizations, pre-
ferred provider organizations, hospital
chains, and other large-scale pharmaceuti-
cal purchasers prefer to deal with a limited
number of large drug manufacturers that
can offer them one-stop shopping.
Other questions to ask when analyzing a
prescription drugmaker include the following:
hep_0507.qxp 4/30/2007 3:01 PM Page 39
When do the patents on the companys
most important drugs expire? If the expira-
tion dates are within the next few years, is
the company adequately preparing to make
up for the revenues lost to generics competi-
tion? If a company loses its marketing exclu-
sivity on key drugs without earning adequate
profits from new products, it can find itself
in difficult economic straits. Many of the
leading US drugmakers, such as Bristol-
Myers Squibb Co., Merck, and Pfizer, are
contending with fierce generics competition,
which is accelerating as a wave of major
drugs go off patent beginning in 2006 and
continuing through 2011.
Have R&D efforts been productive? In
terms of R&D, the larger, well-funded firms
typically have the advantage of being able to
hire top scientists and to conduct more clini-
cal trials, which are necessary to develop
new drugs.
Most leading drugmakers spend between
14% and 18% of their revenues on R&D.
However, their success rates in terms of
lucrative new drugs differ markedly. In
addition, R&D productivity can be cyclical,
with firms that generated a series of signifi-
cant new products experiencing troughs be-
fore rebounding. In the 1990s, Merck and
Pfizer had highly productive R&D programs,
each spawning a number of blockbuster
drugs. In the early years of the twenty-first
century, both companies struggled with thin
late-stage pipelines, despite heavy investment
in R&D. Their problems were particularly
worrisome, because some of their most im-
portant drugs faced generic competition.
In 2006, Merck seemed to be on the
threshold of a rebound with the launch of in-
teresting new drugs, although the revenues
generated from the new product portfolio
may not entirely make up those lost to gener-
ic competition. Pfizer also launched some
promising drugs in 2006, but its sales growth
is likely to be stymied in 2007 by patent ex-
pirations involving several key products.
Pfizer faces additional competition through
2011 as several more important drugs go off
patent, including Lipitor. The company says
that a plethora of new drugs that are now in
early- to mid-stages of clinical trials should
help results beginning in 2009.
In the present managed care environment,
companies with new drugs that are both
therapeutic breakthroughs and cost effective
hold the keys to success. New products that
provide essentially identical results to exist-
ing therapies are less likely to reap big com-
mercial rewards.
Has the company formed any promis-
ing alliances? Large firms often benefit
from alliances with smaller biotechnology
and biopharmaceutical firms working on
potentially lucrative new drugs. Converse-
ly, a smaller company may find it necessary
to team up with a larger partner to fund
the clinical trials and commercialization of
its discoveries.
Business ventures with foreign companies
can be a source of new products. For exam-
ple, many drugs popular in the United States
today were discovered by European and
Japanese firms, but they are marketed by US
drugmakers under royalty arrangements.
Pfizers Lipitor drug is sold under license
from Sankyo Co. Ltd. of Japan.
Many companies also maintain relation-
ships with scientists at leading medical colleges
or other organizations, such as the federal
governments National Institutes of Health
(NIH), which can funnel experimental prod-
ucts to drugmakers. Bristol-Myers Squibb and
GlaxoSmithKline, for example, have obtained
major new drugs from these sources.
What is the companys international
business profile? The United States remains
the most important market for US drug-
makers, as well as for many foreign drug
companies, because of its size and lack of
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
government-imposed price constraints.
Nonetheless, pharmaceutical markets else-
where represent an attractive source of
growth. Indeed, pharmaceutical sales in de-
veloping nations are expanding much faster
than are those in the domestic market.
Although the level of foreign business
varies from company to company, the US
pharmaceuticals industry currently derives
about two-fifths of its revenues from sales
outside the United States. Because many
countries exercise strict price controls, for-
eign markets contribute a lower portion of
profits than of sales.
Which foreign markets has the company
entered or does it plan to enter? Drugmakers
should evaluate foreign markets carefully
with respect to their individual risks and
39
hep_0507.qxp 4/30/2007 3:01 PM Page 40
profit potential. In addition, it is important
to assess the possible impact of changes in
currency exchange rates.
How diversified is the firms foreign busi-
ness? Foreign markets differ widely by level
of pharmaceutical utilization, degree of
government control over pricing, and the
acceptance of clinical research from outside
sources. Japan, for example, with the highest
per capita consumption of prescription drugs
in the world, is the largest single market out-
side the United States. However, the Japanese
government generally requires across-the-
board drug price cuts every few years.
How effective is the company in work-
ing with the FDA? Because all drugs sold in
the United States must first be cleared by the
US Food and Drug Administration (FDA), a
firm must be able to work with the agency
and understand its criteria.
Here again, size and experience can help.
Most large, well-established drug companies
are adept at working with the agency, while
many smaller or newer firms are less profi-
cient and often encounter major snags in ob-
taining approval for their products.
Besides new drug applications, the FDA
also inspects and monitors pharmaceutical
plants for product integrity and quality con-
trol. Several generic drugmakers ran into
problems in this area a number of years ago.
The agency is also expanding its role in post-
market surveillance of drug safety.
How effective is the company at work-
ing with third-payer government and private
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
payers? Reimbursement is crucial for commer-
cial success of a product. Private and public
payers alike are taking an increasingly hard
line in evaluating the cost effectiveness of re-
cently approved drugs. In Europe, several gov-
ernments have established semi-independent
organizations to make recommendations on
whether a new drug should be reimbursed
and in some controversial cases, they have
argued against coverage. The United States
has not taken this approach, although it is
considering establishment of a reimburse-
ment evaluation organization. US payers are
increasingly differentiating drugs within the
same class and placing them in separate tiers,
with varying contributions from patients,
aimed at incentivizing patients to use certain
drugs. The ability to negotiate fair deals with
40
Medicare over reimbursement for prescrip-
tion drugs is also likely to be increasingly im-
portant to drug companies in the future.
Nonprescription drugmakers
While the prescription drug (OTC) market
depends on research-intensive innovation to
differentiate among products and bolster
sales, the nonprescription segment depends
much more on consumer-directed marketing.
The main factors that must be considered in
evaluating a nonprescription drug company
include the relative strength of its product of-
ferings, its ability to develop new products,
competitive pressures in each market seg-
ment, and the manufacturers ability to
support product sales through effective ad-
vertising and promotional campaigns.
Companies with a strong presence in both
prescription and nonprescription sectors
typically generate the most successful OTC
products, because most of the leading OTC
medications on the market today started
their lives as ethical, or prescription, drugs.
Nonprescription drugmakers strive to culti-
vate broad consumer loyalty. For example,
Johnson & Johnsons Tylenol, launched as an
OTC product in 1955, remains the best-
selling nonprescription product in the United
States. This highly regarded analgesic has
successfully fought off rival painkillers and
cheaper private-label acetaminophen prod-
ucts, thanks to effective advertising that has
built unmatched brand loyalty. The product
has even survived recalls due to tampered
packaging and reports of possible liver dam-
age from overdosing or from adverse reac-
tions when combined with alcohol.
Strong recognition for an original brand
also gives the manufacturer an ability to
expand sales through line extensions. Lead-
ing OTC products, such as Tylenol, Advil,
Bayer, and Motrin, have successfully
broadened their consumer appeal through
the addition of specialized formulations for
children, combinations with other prod-
ucts, and extra-strength versions.
Analyzing financial statements
Once the analyst has reviewed a compa-
nys products and markets, a look at its fi-
nancial statements is in order. The income
statement contains some key figures and ra-
tios (described following). Balance sheet and
hep_0507.qxp 4/30/2007 3:01 PM Page 41
cash flow data provide further insight into a
companys financial position and perfor-
mance. Individual company statistics should
be compared with those of rival companies
and industry averages.
The income statement
When looking at a pharmaceutical compa-
nys income statement, it is important to ex-
amine trends in sales growth; profit margins;
R&D and selling, general, and administrative
(SG&A) expenses; and return on equity.
What are the companys sales trends? Ex-
amine the companys recent and historical sales
performance. Has sales growth been con-
sistent or volatile? How has growth been
achieved: through volume, pricing, acquisi-
tions, or through a combination of these?
How wide are operating margins? Drug
companies characteristically have high oper-
ating profit margins (operating earnings as a
percentage of sales). Margins have contract-
ed from their highs of about 40% in the ear-
ly 1990s, due to reduced pricing flexibility,
but the industry average still exceeds 25%
far better than the average margin for corpo-
rations in the S&P 500 Composite Stock in-
dex, which was 8.75% in 2005 (latest
available).
The high margins reflect drugmakers
very low raw material costs and lower-
than-average SG&A expenses per dollar of
sales. Although substantial costs are in-
curred during a drugs R&D phase, once
those costs have been covered, the lions
share of revenues flows to the bottom line.
Companies that can consistently develop
value-added, widely used drugs with long
lives can command margins well above the
industry average.
It is important to note that companies
can temporarily pump up margins by
crimping R&D spending. While this tactic
can provide short-term earnings improve-
ment, it also undermines a drugmakers
ability to develop the new products needed
to support future growth.
Changes in a companys margins over a
period of years can reveal managements ef-
fectiveness in improving the companys prof-
itability. Restructuring and cost-streamlining
efforts often can play a major role in boost-
ing a companys profit margins.
What are the companys pretax and net
returns? Drug industry pretax and net in-
come returns are typically well above aver-
ages in other industries. Drugmakers net
earnings as a percentage of sales averaged
about 16% between 1999 and 2004, com-
pared with about 4.7% for the S&P Industri-
als index. In 2005, the average was slightly
higher about 17% (latest available).
The drug business is less capital inten-
sive than most other industries, and it
tends to have lower interest expense and
depreciation as a percentage of sales. Drug-
makers profit margins also have been aug-
mented by lower tax rates, R&D credits,
and tax credits from manufacturing opera-
tions in Ireland and other areas. Lower-
than-average drug industry tax rates also
reflect the large portion of sales derived
from countries with tax rates below those
of the United States. Past tax credits from
manufacturing operations in Puerto Rico
now have been largely eliminated.
A companys geographic business mix
should be examined to determine how its
blended tax rate compares with others in
the industry. But before comparing differ-
ent companies net returns, make sure that
the reported results are truly comparable.
Although current accounting standards re-
quire that discontinued operations be seg-
mented out, nonrecurring items (such as
restructuring charges, asset sales gains, for-
eign exchange gains and losses, and similar
nonoperating items) often are buried in the
category of other income/expenses and
must be factored out when making com-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
parisons. Accounting practices also vary
for inventory and depreciation.
What is the return on stockholders equi-
ty? Return on equity (ROE), or net earnings as
a percentage of average stockholders equity, is
viewed as a key measure of managements ef-
fectiveness in the pharmaceutical industry. The
drug industrys average ROE of 26% between
1999 and 2004 ranked among the highest of
all industries. In 2005, it was slightly lower
(24%), but still among the highest of indus-
tries. The high ratio is essentially a function of
the industrys relatively high profit margins.
Cash flow
Another way of looking at profits is cash
flow essentially, net earnings plus depreci-
41
hep_0507.qxp 4/30/2007 3:01 PM Page 42
S&P Credit Market Services View:
Evaluating a pharmaceutical
companys creditworthiness
In evaluating the credit ratings for the pharma-
ceutical industry, Standard & Poors assesses both
the companys business risk and its financial risk.
Generally, we weight the business risk profile
more heavily, especially at the higher end of the
credit ratings spectrum. Financial risk becomes
more of a concern at the lower end of the spec-
trum. Standard & Poors evaluates the credit of a
pharmaceutical company with the same criteria
used for biotech companies, but with some slight
differences in emphasis.
Business risk
The business risk profile breaks down into sever-
al components: competitive position, portfolio diver-
sification, new product development, profitability,
and management.
Competitive position. Standard & Poors
evaluates a companys competitive position by its
ation and other noncash charges. It provides
a useful gauge of a companys capacity to fi-
nance capital projects. Cash flow as a per-
centage of sales for drugmakers is higher
than 20%, more than double the average
percentage for US industrial companies.
The source and application of funds state-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
ment shows how a company allocates its
cash flow, which is often a leading indicator
of future growth. Firms investing heavily in
acquisitions and capital projects are prepar-
ing to expand the business. Those paying out
more in dividends are rewarding investors
but retaining less cash for future growth.
Balance sheet
The balance sheet is a snapshot of a
companys financial condition at a specific
moment in time, so it should be examined
to determine a companys financial health.
For pharmaceutical companies, most bal-
ance sheet analysis focuses on liquidity. To
assess a companys short-term liquidity, an-
alysts look at its level of cash and mar-
ketable securities. Companies with large
42
ability to drive sales growth. Generally, a compa-
ny with a larger sales base carries a higher rating,
as this is a sign that it has been able to produce
blockbuster products and/or a number of signifi-
cant products.
The remaining life on a companys patents and
the level of direct competition are particularly impor-
tant, though more so for traditional pharmaceutical
companies than biotechs, because the former face
more direct competition, greater pricing pressure
(given that alternative products may exist), and ag-
gressive generic penetration once patents expire.
Biotechs generally enjoy more monopolistic positions
with their products and so far have faced no compe-
tition from biogenerics.
Portfolio diversification. A portfolio of di-
verse products is critical for pharmaceutical com-
panies, given the possibility of intense
competition, shifts in prescribing patterns, and sur-
prise challenges from generics. Diversification also
provides some protection against the possibility,
though still rare, of having to withdraw a product
liquid assets also are better situated to
make timely acquisitions.
A reliable check for liquidity is the current
ratio, which measures the ratio of current
assets to current liabilities. A healthy work-
ing capital ratio is essential to ensure that the
company can adequately meet its current lia-
bilities. This ratio always should be greater
than 1.0. Any meaningful degradation in
these items from previous reporting periods
may signal a liquidity problem.
Debt leverage varies significantly among
drugmakers. An appropriate debt load de-
pends largely on a drug companys product
line and the strength of its projected new
product stream. The ratio of long-term debt
to total capital is in the conservative range
of 10% to 15% for most leading drugmak-
ers, although some companies have much
higher ratios.
hep_0507.qxp 4/30/2007 3:01 PM Page 43
because of safety problems. Indeed, the diversity
of Mercks product portfolio helped mitigate the fi-
nancial impact of withdrawing Vioxx, a product
that generated sales of $2.5 billion a year.
Although biopharmaceutical companies have less
product diversity than Big Pharma does, this is less
critical given the general lack of competition, both
from patented products and generics. In addition,
biopharmaceutical companies have a better track
record on product withdrawals, so that is less of a
threat to their financial health. To date, the only bio-
pharmaceutical withdrawn from the market was
Elan/Biogen Idecs Tysabri, which ultimately returned
to market.
On the other hand, product diversity is espe-
cially critical for generic drug companies, given the
relative short product life cycles. A generic drug
company with a high concentration of sales or
earnings in a single product is alarming, given the
industrys relative low barriers to entry and high
level of competition.
New product development. Arguably the
most critical factor for any pharmaceutical compa-
ny is its ability to continually generate significant
new products. Standard & Poors evaluates this by
looking at the products in the companys pipeline.
How many products are in each stage, and what is
the sales potential of each? How have recent
product launches performed, and how well is the
company funding its R&D, both on an absolute lev-
el and as a percentage of sales?
We weigh these factors against the number of
patent expirations expected in the intermediate
term, and how much of the companys sales these
represent. This factor is especially critical for
generic drug companies, given the much shorter
life cycles of their products versus those of patent-
ed products. While the hurdle to develop a generic
drug is nowhere near the hurdle for a patented
product, generic drug makers need to have a more
constant flow of new products.
Profitability. Because R&D is so expensive,
time consuming, and ultimately uncertain, the com-
panys ability to produce profits and cash flows is
critical. Profitability should be in line with its peers.
For generic drug companies, R&D is not nearly as ex-
pensive, but profitability is a proxy for cost efficien-
cy, which is critical given the commodity-like nature
of the business and the need to compete on price for
supply contracts.
Management. Standard & Poors credit rat-
ings reflect an assessment of managements track
record and, more importantly, its strategy going for-
ward. Though difficult to quantify, these factors are
important in determining managements commitment
to credit quality.
Financial risk
The financial risk component of a credit rating is
comprised of financial policy, financial leverage, and
liquidity/cash flow protection.
Financial policy. The most important of
the financial risk factors is financial policy. A compa-
nys financial statistics can change drastically de-
pending on how it finances acquisitions, share
buybacks, and dividends. Financial policy is closely
linked to our assessment of company management.
Our assessment of management focuses on their
ability to produce earnings and cash flows, while our
assessment of financial policy focuses more on what
they will do with those cash flows.
Financial leverage. Standard & Poors cal-
culates financial leverage ratios on a net basis for
highly rated, investment-grade pharmaceutical and
biotech companies. In other words, we reduce the
debt, taking into account the cash and investments
they have on their balance sheets. Then we use
this new debt figure in our calculation of key ra-
tios, such as funds from operations to debt and
debt to EBITDA. This adjustment is not done for
generic drug makers and lower-rated companies,
given their penchant for acquisitions and their low-
er rate of cash flow generation.
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
Liquidity/cash flow protection. Standard &
Poors focuses on not only a companys ability to
meet debt and interest payments, but also on how
well it is able to fund R&D and capital expenditures,
which are critical to long-term success. In addition,
pharmaceutical manufacturing is highly regulated
and requires large amounts of capital spending just
to meet regulatory standards.
Arthur Wong
Credit Analyst, Corporate Healthcare Team
43
hep_0507.qxp 4/30/2007 3:01 PM Page 44
G LOSSARY
180-day exclusivity A generic company that is the
first to file a completed abbreviated new drug appli-
cation (ANDA) that contains a challenge to the
patent of the brand-name drug gets a 180 days of ex-
clusivity; that is, only the generics company is al-
lowed to market the generic for six months following
the expiration of the branded drugs patent. In
some cases, two generics companies share exclu-
sivity if they filed patent challenges for different
doses. The maker of the brand-name drug also
has the right to market an authorized generic
following patent expiration.
Abbreviated new drug application (ANDA) The appli-
cation filed for approval of generic drugs by the US
Food and Drug Administration (FDA). ANDAs require
substantially less information than do new drug ap-
plications (NDAs) for prescription drugs, because
applicants have to prove only that their products are
identical (bioequivalent) to the brand products. (See
Bioequivalence.)
Active pharmaceutical ingredient (API) A component
of a drug that provides pharmacological activity and
is important to the products efficacy. The ability to
get access to cheap, reliable APIs is an important
competitive advantage for generics companies that
do not make their own APIs.
Agonist A drug that promotes certain kinds of cellu-
lar activity by binding to a cells receptor.
Amino acids The building blocks of proteins. Amino
acids include alanine, aspartic acid, glutamic acid,
and additional compounds.
Anesthetic A drug used to induce unconsciousness
or to numb a local area of the body.
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
Antagonist A drug that prevents certain types of cel-
lular reactions by blocking substances from binding
to a cells receptor.
Antibody A protein produced by certain types of
white blood cells to deactivate foreign proteins.
Antigen Any substance that induces a bodys im-
mune response.
Authorized generic A generic version of a brand-
ed drug, made by the manufacturer or by a com-
pany that has been approved by the manufacturer.
In essence, it is identical to the branded drug but
has a different label. Innovator manufacturers use
authorized generics to take some of the profits
that are gained by generics companies from 180-
day exclusivities.
44
Autoimmune disease A condition, such as multiple
sclerosis, in which the body produces antibodies
against its own tissues.
Bioavailability The percentage of a drugs active in-
gredient that reaches a patients bloodstream and
body tissues.
Bioequivalence Drugs that have the same rate
and extent of absorption into the body when ad-
ministered at the same dose and under similar
conditions are described as bioequivalent. Such
products can be substituted for each other without
a dosage adjustment to obtain the same therapeu-
tic effect.
Biogeneric Also known as follow-on proteins or
biosimilars, these are copies of therapeutic proteins
launched after patent expiration of the main active
ingredient. Like traditional generics, they have the
same qualitative and quantitative composition, active
substances, and pharmaceutical forms as the innov-
ative product. Unlike traditional generics, however,
they are not identical and are likely to require inde-
pendent proof of efficacy and safety.
Bioinformatics A system whereby biological infor-
mation, especially genetic data, is collected, stored,
and accessed via computers and electronic media.
Biological A medicine (e.g., vaccine, antigen,
serum, or plasma) made of large protein mole-
cules that are derived from living organisms or
their byproducts, not from chemicals; also called a
biologic.
Biotechnology Generally, biotechnology refers to
any technological application that uses biological
systems, living organisms, or derivatives to make or
modify products and processes. The approach dif-
fers from traditional drug development, which relies
on synthetic chemistry and results in small-molecule,
easy-to-administer treatments that come in pills and
tablets. Biotech products consist of larger molecules
that are harder for the body to absorb and thus often
have special administration requirements, such as
injections.
Breakthrough drug A compound that represents a
major therapeutic advance because its chemical
composition or mode of action is significantly differ-
ent than that of existing drugs.
Bronchodilator A drug used to widen the bronchi-
oles (tubular extensions within the lungs) to aid in
respiration.
hep_0507.qxp 4/30/2007 3:01 PM Page 45
Chemotherapy drugs Drugs that work systemically to
treat cancers by killing cells. Usually, these drugs
are indiscriminate and kill both healthy and cancer-
ous cells throughout the body.
Chromosomes Microscopic threadlike components
in the nucleus of a cell that carry hereditary informa-
tion in the form of genes.
Clinical trials A series of carefully defined tests
through which experimental drugs are administered
to humans to determine their safety and efficacy.
Clotting factors Proteins involved in the normal clot-
ting of blood.
Combination therapy The use of two or more
drugs that together have greater therapeutic pow-
er in treating illness and diseases than either drug
used alone.
Corticosteroids Natural steroid hormones secret-
ed by the adrenal glands, or synthetic copies of
those hormones, used to treat inflammation and
other conditions.
Data exclusivity In the United States, a five-year pe-
riod during which generic companies and the FDA
cannot use data submitted by a brand name compa-
ny to evaluate a generic version of a patented drug.
Other countries use different time frames.
Deoxyribonucleic acid (DNA) The basic molecule
that contains genetic information for most living sys-
tems. The DNA molecule consists of four nucleotide
bases (adenine, cytosine, guanine, and thymine) and
a sugar-phosphate frame arranged in two connected
strands, forming a double helix.
Enzyme A protein that controls chemical reactions in
the human body.
Ethical drugs Medicines requiring a doctors
prescription.
Fast track An expedited review status granted by the
FDA for experimental drugs that target serious or
life-threatening diseases and have the potential to
address unmet medical needs.
Formulary A select list of drugs that a healthcare
insurer has approved for reimbursement. Formula-
ries often categorize drugs into levels, or tiers, de-
pending on the extent to which the insurer wants
to encourage members to use that drug (in other
words, the extent to which the insurer will reim-
burse for the drug).
Gene The basic determinant of heredity, genes are
chromosomal segments that direct the syntheses of
proteins and conduct other molecular regulatory
functions.
Generic drug A compound that contains the same
active ingredients as a branded drug. A company
cannot market a generic version of a rivals branded
product until its patent expires.
Genomics The study of genes and their functions, in-
cluding mapping genes within the genome, identify-
ing their nucleic acid structures, and investigating
their functions.
Growth factors Proteins responsible for regulating
cell proliferation, function, and differentiation.
Hatch-Waxman Act A series of amendments to the
Federal Food, Drug, and Cosmetic Act (passed in
1984) that shortened the new generic drug approval
process and provided for patent extensions on
branded drugs; formally known as the Drug Price
Competition and Patent Term Restoration Act.
Hormone A chemical produced by a gland and re-
leased in the bloodstream.
Immunomodulator A drug that attempts to modify the
immune system.
Influenza Contagious disease caused by any of sev-
eral viruses (Types A, B, and C) and characterized by
inflammation of the respiratory tract, fever, and mus-
cle pain. Humans and animals can catch different
versions of the virus and sometimes spread them be-
tween species. Type A, in particular, mutates rapidly
and causes severe disease.
Investigational new drug (IND) An experimental new
compound that has successfully completed animal
studies and has been approved by the FDA to pro-
ceed to human trials.
Managed care A supervised system of financing and
providing healthcare services for a defined popula-
tion group. Health maintenance organizations
(HMOs) are currently the most popular form of man-
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
aged care.
Monoclonal antibodies Large protein molecules pro-
duced by white blood cells, which seek out and de-
stroy harmful foreign substances.
Neurotransmitter A compound designed to act
upon the transfer of electrical impulses in the ner-
vous system.
New active substance (NAS) A chemical, biological,
or radiopharmaceutical substance that is intended
for use in a prescription medicine but which has not
yet received government approval for use in humans.
New chemical entity (NCE) A new molecular com-
pound that has not yet received government ap-
proval for use by humans; excludes biologic
compounds and vaccines.
45
hep_0507.qxp 4/30/2007 3:01 PM Page 46

New drug application (NDA) The formal filing that
drug makers submit to the FDA for approval to mar-
ket new drugs. The document must contain clinical
evidence of the compounds safety and efficacy.
New molecular entity (NME) An NCE or biological
product, intended for use in a prescription medicine,
that has not received government approval for use
in humans.
Orphan drug A drug designed to treat rare diseases
afflicting a relatively small patient population. The US
government gives drugmakers special incentives to
encourage the development of such drugs.
Virus Simple pathogens made only of a protein coat-
ing and genetic material (DNA and ribonucleic acid).
Much smaller than bacteria, viruses straddle the line
between living and nonliving. They are inert and dor-
mant until they are absorbed into a living host, where
they reproduce inside cells by combining their ge-
netic material with that of the host cells. The flu
virus, which has eight genes that rapidly mutate,
comes in many strains, which vary in their infec-
tiousness and potency.

Outcomes management The practice of evaluating

the relative success and cost-efficiency of various
medical products and services. It is typically em-
ployed by HMOs and other managed care providers
to justify the choice or coverage of a particular type
of therapy. Pharmaceutical companies utilize data
obtained from outcomes management for marketing
purposes and to determine future directions for re-
search and development.

Over-the-counter (OTC) drugs Compounds sold in

pharmacies and other outlets without need of a pre-
scription; also known as proprietary medications.

Pandemic A disease appearing worldwide. An epi-

demic disease spreads rapidly through a community;
an endemic disease is native to a particular country or
region and is generally under control in that region.

Pharmacogenomics The study of how an individuals

genetic composition affects the response to drugs. It
combines traditional pharmaceutical sciences, such
as biochemistry, with the knowledge of genes, pro-
teins, and single nucleotide polymorphisms.

Pharmacokinetics Analysis of a drugs absorption

and distribution in the body, its chemical changes in
the body, and how it is stored and eliminated.
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

Recombinant DNA technology The process of creat-

ing new DNA by combining components of DNA from
different organisms. Usually, the new DNA is incor-
porated into therapeutic substances.

Therapeutic substitution A policy that some man-

aged care organizations employ to substitute less
expensive drugs for more expensive ones in the
same therapeutic class, even though the drugs use
different modes of action.

Treatment IND An FDA program that allows experi-

mental drugs (INDs) that treat life-threatening diseases
to be made commercially available to very sick pa-
tients before the drugs obtain formal FDA approval.

46
hep_0507.qxp 4/30/2007 3:01 PM Page 47
I NDUSTRY R EFERENCES
PERIODICALS
BioCentury
BioCentury Publications Inc.
PO Box 1246, San Carlos, CA 94070
(650) 595-5333
Web site: http://www.biocentury.com
Weekly; covers the pharmaceutical and biotechnology
industries, with an emphasis on timely analysis of
industry-related news events.
Drug Topics
Medical Economics
123 Tice Blvd., Woodcliff Lake, NJ 07677
(201) 690-5327
Web site: http://www.drugtopics.com
Semimonthly; covers drugs and retail pharmacies.
FDA Consumer
Food and Drug Administration (FDA)
5600 Fishers Ln., Rockville, MD 20857
(888) 463-6332
Web site: http://www.fda.gov/fdac/default.htm
Monthly; aimed at consumers, with articles on the FDA
and medical topics.
F-D-C Reports: The Pink Sheet
F-D-C Reports Inc.
5635 Fishers Ln., Ste. 6000, Rockville, MD 20852
(800) 332-2181
Web site: http://www.fdcreports.com
Weekly newsletter; covers trade in and regulation of
pharmaceuticals and biotechnology.
IN VIVO: The Business and Medicine Report
Windhover Information Inc.
10 Hoyt St., Norwalk, CT 06851
(203) 838-4401
Web site: http://www.windhover.com
Monthly newsletter; covers the pharmaceutical,
biotech, and devices industries, with an emphasis on
deal-making trends and corporate strategy.
Marketletter
Marketletter (Publications) Ltd.
Appleton House, 139 King St., London W6 9JG UK
44 20 8735 6625
Web site: http://www.marketletter.com
Weekly; reviews worldwide pharmaceutical markets.
MedAdNews
R&D Directions
Engel Publishing Partners
828A Newtown-Yardley Rd., Newtown, PA 18940
(215) 867-0044
Web site: http://www.pharmalive.com
The first is a monthly publication covering pharmaceuti-
cal advertising; the second publishes 10 times a year and
reports on new drugs under development, as well as
overall trends in pharmaceutical R&D activity.
Medical Marketing & Media
Haymarket Media
114 W. 26th St., New York, NY 10001
(646) 638-6000
Web site: http://www.mmm-online.com
Monthly; covers trends in drug marketing and advertis-
ing, regulation, and related topics.
New England Journal of Medicine
Massachusetts Medical Society
10 Shattuck St., Boston, MA 02115
(617) 734-9800
Web site: http://www.nejm.org
Weekly; publishes detailed scientific articles on med-
ical treatments and health issues.
Pharmaceutical Executive
Advanstar Communications Inc.
7500 Old Oak Blvd., Cleveland, OH 44130
(440) 891-2794
Web site: http://www.pharmexec.com/pharmexec
Monthly; covers trends and developments in the phar-
maceutical industry.
Scrip World Pharmaceutical News
Informa Healthcare
Telephone House, 5th Fl., 69-77 Paul St.
London, EC2A 4LQ UK
44 20 7017 5000
Web site: http://www.pjbpubs.com/scrip/index.htm
Twice-weekly newsletter; covers prescription and over-
the-counter (OTC) medicines, and biotechnology news.
BOOKS
Health, United States
National Center for Health Statistics
Web site: http://www.cdc.gov/nchs
Annual survey of national trends in public health statistics.
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
The Merck Manual of Diagnosis and Therapy, 18th Ed.
Mark H. Beers, Robert S. Porter, Thomas V. Jones, Eds.
Whitehouse Station, NJ: Merck & Co., 2006
Web site: http://www.merck.com/pubs
Detailed information for physicians on various dis-
eases and medical conditions, and on therapeutics
for treating them.
Parexels Pharmaceutical R&D Statistical Sourcebook
Parexel International Corp.
Web site: http://www.parexel.com
Annual recap of drug industry research and develop-
ment (R&D) spending, drugs in development, and regu-
latory statistics.
Physicians Desk Reference
Montvale, NJ: Medical Economics Co.
Web site: http://www.medec.com
Annual compendium listing commercial prescription
drugs and their FDA-approved prescribing information.
47
hep_0507.qxp 4/30/2007 3:01 PM Page 48
TRADE ASSOCIATIONS
BIO
1201 Maryland Ave. SW, Ste. 900, Washington DC 20024
(202) 962-9200
Web site: http://www.bio.org
Trade association representing the countrys leading
biotechnology companies in business, legislative, and
regulatory affairs.
Consumer Healthcare Products Association (CHPA)
900 19th St. NW, Ste. 700, Washington, DC 20006
(202) 429-9260
Web site: http://www.chpa-info.org
Represents manufacturers and distributors of OTC medi-
cines and dietary supplements; promotes industry inter-
ests in legislative and regulatory arenas; and publishes
information on the OTC drug industry. Formerly called the
Nonprescription Drug Manufacturers Association.
Generic Pharmaceutical Association
2300 Clarendon Blvd., Ste. 400, Arlington, VA 22201
(703) 647-2480
Web site: http://www.gphaonline.org
Trade association representing manufacturers and dis-
tributors of generic drugs in legislative, regulatory, and
related matters.
Pharmaceutical Research and Manufacturers of
America (PhRMA)
950 F St. NW, Washington, DC 20004
(202) 835-3400
Web site: http://www.phrma.org
Trade association representing the countrys leading
research-based pharmaceutical and biotechnology
companies in legislative and regulatory affairs. Publish-
es pertinent industry statistics.
RESEARCH FIRMS
Decision Resources Inc.
260 Charles St., Waltham, MA 02453
(781) 296-2500
Web site: http://www.decisionresources.com
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
A market research and publishing firm focusing on the
pharmaceutical and biotechnology industries.
Henry J. Kaiser Family Foundation
2400 Sand Hill Rd., Menlo Park, CA 94025
(650) 854-9400
Web site: http://www.kff.org
A private nonprofit foundation focused on US health-
care issues; publishes studies on a variety of
healthcare topics.
IMS Health Inc.
901 Main Ave., Ste. 612, Norwalk, CT 06851
(203) 845-5200
Web site: http://www.imshealth.com
Market research firm specializing in pharmaceuticals.
48
The National Institute for Health Care Management
Research and Educational Foundation
1225 19th St. NW, Ste. 710, Washington, DC 20036
(202) 296-4426
Web site: http://www.nihcm.org
Nonprofit, nonpartisan group that conducts research on
healthcare issues.
NDCHealth
Per-Se Technologies
1145 Sanctuary Pkwy., Ste. 200, Alpharetta, GA 30004
(770) 237-4300
Web site: http://www.ndchealth.com
Provides market research on pharmaceuticals and oth-
er healthcare sectors.
GOVERNMENT AGENCIES
Centers for Medicare & Medicaid Services (CMS)
7500 Security Blvd., Baltimore, MD 21244
(410) 786-3000
Web site: http://cms.hhs.gov
A division of the US Department of Health and Human
Services, the CMS administers the Medicare and Med-
icaid programs and sets rates at which program
providers are compensated.
National Center for Health Statistics (NCHS)
US Department of Health and Human Services
3311 Toledo Rd., Hyattsville, MD 20782
(800) 311-3435
Web site: http://www.cdc.gov/nchs
A division of the Centers for Disease Control and Pre-
vention, the NCHS provides US data on diseases, preg-
nancies, births, mortality, and other categories.
National Institutes of Health (NIH)
9000 Rockville Pike, Bethesda, MD 20892
(301) 496-4000
Web site: http://www.nih.gov
Government agency consisting of 27 institutes and cen-
ters; provides major R&D funding in the life sciences in
the US, and maintains databases of clinical trial results
and research publications.
US Food and Drug Administration (FDA)
5600 Fishers Ln., Rockville, MD 20857
(888) 463-6332
Web site: http://www.fda.gov
US government agency charged with overseeing the
food and pharmaceutical industries; controls and su-
pervises the approval of new drugs and the manufac-
ture and sale of marketed drugs.
hep_0507.qxp 4/30/2007 3:01 PM Page 49
D EFINITIONS FOR C OMPARATIVE C OMPANY A NALYSIS TABLES
Operating revenues
Net sales and other operating revenues. Excludes
interest income if such income is nonoperating.
Includes franchised/leased department income for
retailers and royalties for publishers and oil and mining
companies. Excludes excise taxes for tobacco, liquor,
and oil companies.
Net income
Profits derived from all sources, after deductions of
expenses, taxes, and fixed charges, but before any
discontinued operations, extraordinary items, and
dividend payments (preferred and common).
Return on revenues
Net income divided by operating revenues.
Return on assets
Net income divided by average total assets. Used in
industry analysis and as a measure of asset-use
efficiency.
Return on equity
Net income, less preferred dividend requirements,
divided by average common shareholders equity.
Generally used to measure performance and to make
industry comparisons.
Current ratio
Current assets divided by current liabilities. It is a
measure of liquidity. Current assets are those assets
expected to be realized in cash or used up in the
production of revenue within one year. Current liabilities
generally include all debts/obligations falling due within
one year.
Debt/capital ratio
Long-term debt (excluding current portion) divided by
total invested capital. It indicates how highly leveraged
a company might be. Long-term debt includes those
debts/obligations due after one year, including bonds,
notes payable, mortgages, lease obligations, and
industrial revenue bonds. Other long-term debt, when
reported as a separate account, is excluded; this account
generally includes pension and retirement benefits. Total
invested capital is the sum of stockholders equity, long-
term debt, capital lease obligations, deferred income
taxes, investment credits, and minority interest.
Debt as a percent of net working capital
Long-term debt (excluding current portion) divided by the
difference between current assets and current liabilities.
It is an indicator of a companys liquidity.
Price/earnings ratio
The ratio of market price to earnings, obtained by
dividing the stocks high and low market price for the
year by earnings per share (before extraordinary items).
It essentially indicates the value investors place on a
companys earnings.
Dividend payout ratio
This is the percentage of earnings paid out in dividends.
It is calculated by dividing the annual dividend by the
earnings. Dividends are generally total cash payments
per share over a 12-month period. Although payments are
usually calculated from the ex-dividend dates, they may
also be reported on a declared basis where this has been
established to be a companys payout policy.
Dividend yield
The total cash dividend payments divided by the years
high and low market prices for the stock.
Earnings per share
The amount a company reports as having been earned
for the year (based on generally accepted accounting
standards), divided by the number of shares outstanding.
Amounts reported in Industry Surveys exclude
extraordinary items.
Tangible book value per share
This measure indicates the theoretical dollar amount
per common share one might expect to receive should
liquidation take place. Generally, book value is
determined by adding the stated (or par) value of the
common stock, paid-in capital, and retained earnings,
then subtracting intangible assets, preferred stock at
liquidating value, and unamortized debt discount. This
amount is divided by the number of outstanding shares
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY
to get book value per common share.
Share price
This shows the calendar-year high and low of a stocks
market price.
In addition to the footnotes that appear at the bottom of
each page, you will notice some or all of the following:
NANot available.
NMNot meaningful.
NRNot reported.
AFAnnual figure. Data are presented on an annual
basis.
CFCombined figure. In this case, data are not available
because one or more components are combined with
other items.
49
 hep_0507.qxp
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MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

C OMPARATIVE C OMPANY A NALYSIS H EALTHCARE : P HARMACEUTICALS

4/30/2007
Operating Revenues
Million $ Compound Growth Rate (%) Index Basis (1995 = 100)

3:01 PM
Ticker Company Yr. End 2005 2004 2003 2002 2001 2000 1995 10-Yr. 5-Yr. 1-Yr. 2005 2004 2003 2002 2001
PHARMACEUTICALS
ABT * ABBOTT LABORATORIES DEC 22,287.8 C 19,680.0 D 19,680.6 17,684.7 16,285.2 A 13,745.9 10,012.2 8.3 10.1 13.3 223 197 197 177 163
AGN * ALLERGAN INC DEC 2,319.2 2,045.6 1,771.4 A 1,425.3 D 1,745.5 A 1,625.5 1,067.2 A 8.1 7.4 13.4 217 192 166 134 164
ALO ALPHARMA INC -CL A DEC 553.6 D 1,339.5 C 1,297.3 D 1,230.8 D 975.0 A,F 900.8 A,F 520.9 A,F 0.6 (9.3) (58.7) 106 257 249 236 187

Page 50
BRL * BARR PHARMACEUTICALS INC JUN 1,047.4 1,309.1 902.9 1,189.0 A 509.7 482.3 199.7 18.0 16.8 (20.0) 524 655 452 595 255
BDY BRADLEY PHARMACEUTICL -CL A DEC 133.4 96.7 A 74.7 39.7 25.7 18.6 10.6 28.8 48.4 37.9 1,256 910 703 373 242

BMY * BRISTOL-MYERS SQUIBB CO DEC 19,207.0 D 19,380.0 A,C 20,894.0 18,119.0 18,213.0 A,C 18,216.0 D 13,767.0 A 3.4 1.1 (0.9) 140 141 152 132 132
FRX * FOREST LABORATORIES -CL A # MAR 2,912.1 3,113.8 2,656.2 2,213.3 1,572.5 1,181.4 446.9 F 20.6 19.8 (6.5) 652 697 594 495 352
JNJ * JOHNSON & JOHNSON DEC 50,434.0 47,348.0 A 41,862.0 A 36,298.0 A 33,004.0 A 29,139.0 18,842.0 10.3 11.6 6.5 268 251 222 193 175
KG * KING PHARMACEUTICALS INC DEC 1,772.9 1,304.4 D 1,521.4 1,128.3 872.3 620.2 A NA NA 23.4 35.9 ** ** ** ** NA
LLY * LILLY (ELI) & CO DEC 14,645.3 13,857.9 A 12,582.5 11,077.5 11,542.5 10,862.2 6,763.8 A 8.0 6.2 5.7 217 205 186 164 171

MRX MEDICIS PHARMACEUT CP -CL A DEC 376.9 303.7 247.5 212.8 A 167.8 139.1 19.1 34.7 22.1 24.1 1,970 1,588 1,294 1,112 877
MRK * MERCK & CO DEC 22,011.9 23,430.2 22,485.9 D 51,790.3 47,715.7 40,363.2 16,681.1 2.8 (11.4) (6.1) 132 140 135 310 286
MOGN MGI PHARMA INC DEC 279.4 A 195.7 A 49.4 28.2 33.0 25.2 12.3 36.6 61.8 42.8 2,267 1,588 401 229 267
MYL * MYLAN LABORATORIES INC # MAR 1,257.2 1,253.4 1,374.6 1,269.2 1,104.1 846.7 392.9 A 12.3 8.2 0.3 320 319 350 323 281
NOVN NOVEN PHARMACEUTICALS INC DEC 46.9 45.9 43.2 55.4 45.9 42.9 10.5 16.2 1.8 2.2 449 439 413 530 440

PRX PAR PHARMACEUTICAL COS INC DEC 433.2 D 690.0 A 661.7 381.6 271.0 85.0 66.5 20.6 38.5 (37.2) 651 1,038 995 574 408
PRGO PERRIGO CO JUN 1,024.1 A 898.2 826.0 F 826.3 F 753.5 F 738.6 F 717.1 3.6 6.8 14.0 143 125 115 115 105
PFE * PFIZER INC DEC 51,298.0 A 52,516.0 A,C 45,188.0 A 32,373.0 D 32,084.0 29,574.0 A 10,021.4 D 17.7 11.6 (2.3) 512 524 451 323 320
SGP * SCHERING-PLOUGH DEC 9,508.0 8,272.0 8,334.0 10,180.0 9,802.0 9,815.0 5,104.4 D 6.4 (0.6) 14.9 186 162 163 199 192
SCRX SCIELE PHARMA INC DEC 216.4 152.0 96.8 116.3 69.3 A 36.7 NA NA 42.6 42.4 ** ** ** ** NA

SEPR SEPRACOR INC DEC 820.9 380.9 344.0 239.0 152.1 85.2 16.2 48.1 57.3 115.5 5,065 2,350 2,123 1,474 938
VRX VALEANT PHARMACEUTICALS INTL DEC 823.9 A,C 682.5 D 686.0 D 737.1 C,D 858.1 800.3 507.9 5.0 0.6 20.7 162 134 135 145 169
VPHM VIROPHARMA INC DEC 132.4 22.4 1.6 5.5 D 3.4 2.0 0.1 NM 131.3 491.4 145,513 24,603 1,771 6,085 3,720
WPI * WATSON PHARMACEUTICALS INC DEC 1,646.2 1,640.6 1,457.7 A 1,223.2 1,160.7 811.5 A,C 152.9 A 26.8 15.2 0.3 1,076 1,073 953 800 759
HEALTH CARE DISTRIBUTORS
ABC * AMERISOURCEBERGEN CORP SEP 54,577.3 D 53,179.0 49,657.3 45,234.8 16,191.4 A 11,645.0 4,668.9 27.9 36.2 2.6 1,169 1,139 1,064 969 347
CAH * CARDINAL HEALTH INC JUN 74,910.7 65,053.5 56,737.0 A,C 51,135.7 47,947.6 A 29,870.6 A 7,806.1 25.4 20.2 15.2 960 833 727 655 614
MCK * MCKESSON CORP # MAR 88,050.0 D 80,514.6 69,506.1 57,120.8 D 50,006.0 42,010.0 A 9,915.9 A,C 24.4 16.0 9.4 888 812 701 576 504
OMI OWENS & MINOR INC DEC 4,822.4 4,525.1 4,244.1 3,959.8 3,815.0 3,503.6 C 2,976.5 4.9 6.6 6.6 162 152 143 133 128
PDCO * PATTERSON COMPANIES INC # APR 2,615.1 2,421.5 1,969.3 A 1,657.0 C 1,415.5 A 1,156.5 C 581.9 16.2 17.7 8.0 449 416 338 285 243

PSSI PSS WORLD MEDICAL INC # MAR 1,619.4 1,473.8 1,349.9 1,177.9 D 1,815.8 1,814.8 A 483.3 A 12.9 (2.3) 9.9 335 305 279 244 376
HSIC SCHEIN HENRY INC DEC 4,635.9 A,C 4,060.3 A 3,353.8 A,C 2,825.0 2,558.2 2,381.7 616.2 A 22.4 14.2 14.2 752 659 544 458 415
OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS
ADRX ANDRX CORP DEC 1,042.6 1,148.1 1,046.3 771.0 740.1 515.0 A 53.2 34.7 15.2 (9.2) 1,961 2,160 1,968 1,450 1,392
AZN ASTRAZENECA PLC -ADR DEC 24,143.0 F 21,741.0 F 19,049.0 F 18,084.0 F 16,848.0 F 15,804.0 D 7,722.4 12.1 8.8 11.0 313 282 247 234 218
AVE AVENTIS SA -ADR DEC NA NA 23,827.2 22,810.1 21,228.0 21,430.9 17,314.7 A NA NA NA NA NA 138 132 123
BVF BIOVAIL CORP DEC 935.5 D 886.5 823.7 788.0 A 583.3 291.8 A,F 20.6 46.5 26.2 5.5 4,548 4,310 4,005 3,831 2,836
ELN ELAN CORP PLC -ADR DEC 426.7 D 464.0 762.1 1,160.5 A 1,512.9 A 1,302.0 A 222.7 6.7 (20.0) (8.0) 192 208 342 521 679

GSK GLAXOSMITHKLINE PLC -ADR DEC 37,854.9 A 39,191.8 A 38,388.8 A 34,261.4 A 29,846.6 A 27,266.0 A 10,349.9 A 13.8 6.8 (3.4) 366 379 371 331 288
NVS NOVARTIS AG -ADR DEC 32,212.0 A 28,247.0 A 24,864.0 A 23,430.9 A 19,302.3 A 22,099.1 A NA NA 7.8 14.0 ** ** ** ** NA
TEVA TEVA PHARM INDS -ADR DEC 5,250.4 4,798.9 A 3,276.4 2,518.6 A 2,077.4 1,749.9 A 667.7 A 22.9 24.6 9.4 786 719 491 377 311

Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available.
A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes
other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.
 hep_0507.qxp
Net Income

4/30/2007
Million $ Compound Growth Rate (%) Index Basis (1995 = 100)
Ticker Company Yr. End 2005 2004 2003 2002 2001 2000 1995 10-Yr. 5-Yr. 1-Yr. 2005 2004 2003 2002 2001
PHARMACEUTICALS
ABT * ABBOTT LABORATORIES DEC 3,372.1 3,175.8 2,753.2 2,793.7 1,550.4 2,786.0 1,688.7 7.2 3.9 6.2 200 188 163 165 92

3:01 PM
AGN * ALLERGAN INC DEC 403.9 377.1 (52.5) 64.0 226.7 215.1 72.5 18.7 13.4 7.1 557 520 (72) 88 313
ALO ALPHARMA INC -CL A DEC 62.2 (314.7) 19.4 (93.6) (35.7) 55.5 18.8 12.7 2.3 NM 330 (1,673) 103 (497) (190)
BRL * BARR PHARMACEUTICALS INC JUN 215.0 123.1 167.6 212.4 62.5 42.3 6.4 42.2 38.4 74.6 3,375 1,933 2,631 3,334 981
BDY BRADLEY PHARMACEUTICL -CL A DEC 8.0 8.0 16.8 7.6 3.6 (2.1) (6.9) NM NM 0.1 NM NM NM NM NM

BMY * BRISTOL-MYERS SQUIBB CO DEC 2,992.0 2,378.0 3,106.0 2,034.0 2,043.0 4,096.0 1,812.0 5.1 (6.1) 25.8 165 131 171 112 113

Page 51
FRX * FOREST LABORATORIES -CL A # MAR 708.5 838.8 735.9 622.0 338.0 215.1 104.2 21.1 26.9 (15.5) 680 805 706 597 324
JNJ * JOHNSON & JOHNSON DEC 10,411.0 8,509.0 7,197.0 6,597.0 5,668.0 4,800.0 2,403.0 15.8 16.7 22.4 433 354 300 275 236
KG * KING PHARMACEUTICALS INC DEC 116.6 (50.6) 105.9 182.5 232.9 104.6 NA NA 2.2 NM ** ** ** ** NA
LLY * LILLY (ELI) & CO DEC 2,001.6 1,810.1 2,560.8 2,707.9 2,809.4 3,057.8 1,306.6 4.4 (8.1) 10.6 153 139 196 207 215

MRX MEDICIS PHARMACEUT CP -CL A DEC 65.0 30.8 51.3 50.0 40.4 43.0 1.6 44.7 8.6 110.7 4,029 1,912 3,178 3,101 2,506
MRK * MERCK & CO DEC 4,631.3 5,813.4 6,589.6 7,149.5 7,281.8 6,821.7 3,335.2 3.3 (7.5) (20.3) 139 174 198 214 218
MOGN MGI PHARMA INC DEC (132.4) (85.7) (61.9) (36.1) (34.8) (10.1) (2.6) NM NM NM NM NM NM NM NM
MYL * MYLAN LABORATORIES INC # MAR 184.5 203.6 334.6 272.4 260.3 37.1 102.3 6.1 37.8 (9.4) 180 199 327 266 254
NOVN NOVEN PHARMACEUTICALS INC DEC 10.0 11.2 11.2 13.9 12.1 19.6 (6.6) NM (12.7) (11.2) NM NM NM NM NM

PRX PAR PHARMACEUTICAL COS INC DEC 18.9 29.2 122.5 79.5 53.9 (0.9) 0.6 40.9 NM (35.4) 3,085 4,779 NM NM NM
PRGO PERRIGO CO JUN (353.0) 80.6 54.0 50.2 27.7 19.3 44.4 NM NM NM (794) 181 122 113 62
PFE * PFIZER INC DEC 8,094.0 11,332.0 1,639.0 9,181.0 7,752.0 3,718.0 1,554.2 17.9 16.8 (28.6) 521 729 105 591 499
SGP * SCHERING-PLOUGH DEC 269.0 (947.0) (92.0) 1,974.0 1,943.0 2,423.0 1,053.0 (12.8) (35.6) NM 26 (90) (9) 187 185
SCRX SCIELE PHARMA INC DEC 39.2 26.6 (1.7) 7.0 10.7 2.5 NA NA 73.3 47.7 ** ** ** ** NA

SEPR SEPRACOR INC DEC 3.9 (295.7) (135.9) (276.5) (224.0) (204.0) (33.4) NM NM NM NM NM NM NM NM
VRX VALEANT PHARMACEUTICALS INTL DEC (185.8) (136.3) (65.0) 84.2 85.2 93.4 67.3 NM NM NM (276) (202) (97) 125 127
VPHM VIROPHARMA INC DEC 113.7 (19.5) (36.9) (26.6) (83.0) (41.8) (3.9) NM NM NM NM NM NM NM NM
WPI * WATSON PHARMACEUTICALS INC DEC 138.2 151.3 202.9 175.8 116.4 170.7 47.9 11.2 (4.1) (8.7) 289 316 424 367 243
HEALTH CARE DISTRIBUTORS
ABC * AMERISOURCEBERGEN CORP SEP 291.9 468.4 441.2 344.9 123.8 99.0 28.2 26.3 24.1 (37.7) 1,035 1,660 1,564 1,222 439
CAH * CARDINAL HEALTH INC JUN 1,046.7 1,524.7 1,411.9 1,126.3 857.4 679.7 85.0 28.5 9.0 (31.4) 1,232 1,794 1,662 1,325 1,009
MCK * MCKESSON CORP # MAR 737.0 (156.7) 646.5 562.1 418.6 (42.7) 120.7 19.8 NM NM 611 (130) 536 466 347
OMI OWENS & MINOR INC DEC 64.4 60.5 53.6 47.2 30.1 33.1 (11.3) NM 14.3 6.5 NM NM NM NM NM
PDCO * PATTERSON COMPANIES INC # APR 198.4 183.7 149.5 116.3 95.3 76.5 28.7 21.3 21.0 8.0 690 639 520 405 331

PSSI PSS WORLD MEDICAL INC # MAR 44.3 39.4 28.7 13.6 8.8 (36.1) 0.2 NM NM 12.4 NM NM NM NM 4,757
HSIC SCHEIN HENRY INC DEC 162.4 128.2 139.5 118.0 87.4 56.7 (10.2) NM 23.4 26.7 NM NM NM NM NM
OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS
ADRX ANDRX CORP DEC 62.5 65.7 48.2 (91.8) 72.9 77.7 (5.2) NM (4.3) (4.9) NM NM NM NM NM
AZN ASTRAZENECA PLC -ADR DEC 4,706.0 3,813.0 3,036.0 2,836.0 2,967.0 2,328.0 522.0 24.6 15.1 23.4 902 730 582 543 568
AVE AVENTIS SA -ADR DEC NA NA 2,460.2 2,281.5 1,453.5 (27.2) 677.5 NA NA NA ** ** 363 337 215
BVF BIOVAIL CORP DEC 246.8 161.0 (27.3) 87.8 87.4 (84.4) 5.9 45.3 NM 53.3 4,204 2,743 (464) 1,496 1,490
ELN ELAN CORP PLC -ADR DEC 508.2 (368.3) (815.4) (3,615.1) (887.2) 342.1 88.7 19.1 8.2 NM 573 (415) (919) (4,074) (1,000)

GSK GLAXOSMITHKLINE PLC -ADR DEC 8,059.5 8,246.5 8,021.8 6,333.4 4,498.1 6,296.1 1,655.1 17.2 5.1 (2.3) 487 498 485 383 272
NVS NOVARTIS AG -ADR DEC 6,130.0 5,767.0 5,016.0 5,286.6 4,231.8 4,450.1 NA NA 6.6 6.3 ** ** ** ** NA
TEVA TEVA PHARM INDS -ADR DEC 1,072.3 331.8 691.0 410.3 278.2 148.4 79.8 29.7 48.5 223.2 1,344 416 866 514 349

Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available.
51

MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

 hep_0507.qxp
52
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

4/30/2007
Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001
PHARMACEUTICALS
ABT * ABBOTT LABORATORIES DEC 15.1 16.1 14.0 15.8 9.5 11.6 11.4 10.8 11.7 8.0 23.5 23.2 23.2 28.3 17.6

3:01 PM
AGN * ALLERGAN INC DEC 17.4 18.4 NM 4.5 13.0 15.8 18.8 NM 3.3 11.3 30.1 41.1 NM 7.2 24.5
ALO ALPHARMA INC -CL A DEC 11.2 NM 1.5 NM NM 3.4 NM 0.8 NM NM 6.9 NM 1.8 NM NM
BRL * BARR PHARMACEUTICALS INC JUN 20.5 9.4 18.6 17.9 12.3 15.3 9.8 16.2 29.4 12.9 18.9 12.9 21.8 40.8 19.3
BDY BRADLEY PHARMACEUTICL -CL A DEC 6.0 8.2 22.5 19.2 14.1 2.6 3.1 13.6 19.3 13.8 4.7 5.0 17.6 22.3 17.2

BMY * BRISTOL-MYERS SQUIBB CO DEC 15.6 12.3 14.9 11.2 11.2 10.2 8.2 11.9 7.7 9.0 27.9 23.8 33.1 22.5 22.4

Page 52
FRX * FOREST LABORATORIES -CL A # MAR 24.3 26.9 27.7 28.1 21.5 20.8 22.2 21.7 25.5 19.9 24.3 26.3 26.2 31.3 23.7
JNJ * JOHNSON & JOHNSON DEC 20.6 18.0 17.2 18.2 17.2 18.7 16.8 16.2 16.7 16.2 29.9 29.0 29.0 28.1 26.3
KG * KING PHARMACEUTICALS INC DEC 6.6 NM 7.0 16.2 26.7 4.0 NM 3.6 6.9 12.3 6.1 NM 5.3 9.5 16.1
LLY * LILLY (ELI) & CO DEC 13.7 13.1 20.4 24.4 24.3 8.1 7.8 12.6 15.3 18.1 18.4 17.5 28.4 35.2 42.7

MRX MEDICIS PHARMACEUT CP -CL A DEC 17.2 10.2 20.7 23.5 24.1 6.1 3.1 5.7 7.0 7.7 12.5 6.1 11.5 10.7 8.6
MRK * MERCK & CO DEC 21.0 24.8 29.3 13.8 15.3 10.6 14.0 15.0 15.6 17.4 26.3 35.4 39.0 41.7 47.2
MOGN MGI PHARMA INC DEC NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM
MYL * MYLAN LABORATORIES INC # MAR 14.7 16.2 24.3 21.5 23.6 9.2 10.2 18.5 16.2 16.9 14.0 11.6 21.5 19.1 20.5
NOVN NOVEN PHARMACEUTICALS INC DEC 21.3 24.5 25.9 25.1 26.3 5.1 6.0 7.3 10.1 10.1 7.4 9.4 10.9 15.5 16.4

PRX PAR PHARMACEUTICAL COS INC DEC 4.4 4.2 18.5 20.8 19.9 2.4 3.8 23.0 30.7 35.2 4.5 7.2 39.8 44.2 54.3
PRGO PERRIGO CO JUN NM 9.0 6.5 6.1 3.7 NM 11.5 8.7 8.6 5.2 NM 16.4 12.5 12.5 7.5
PFE * PFIZER INC DEC 15.8 21.6 3.6 28.4 24.2 6.7 9.4 2.0 21.5 21.3 12.1 17.0 3.8 48.0 45.1
SGP * SCHERING-PLOUGH DEC 2.8 NM NM 19.4 19.8 1.2 NM NM 15.0 16.9 3.0 NM NM 25.9 29.3
SCRX SCIELE PHARMA INC DEC 18.1 17.5 NM 6.0 15.5 7.6 6.4 NM 2.7 9.7 12.1 8.6 NM 3.1 11.8

SEPR SEPRACOR INC DEC 0.5 NM NM NM NM 0.3 NM NM NM NM NA NA NA NA NA

VRX VALEANT PHARMACEUTICALS INTL DEC NM NM NM 11.4 9.9 NM NM NM 5.2 5.3 NM NM NM 11.1 10.9
VPHM VIROPHARMA INC DEC 85.9 NM NM NM NM 37.1 NM NM NM NM 75.6 NA NM NM NM
WPI * WATSON PHARMACEUTICALS INC DEC 8.4 9.2 13.9 14.4 10.0 4.4 4.6 6.8 6.8 4.6 6.4 7.0 10.5 10.1 7.2
HEALTH CARE DISTRIBUTORS
ABC * AMERISOURCEBERGEN CORP SEP 0.5 0.9 0.9 0.8 0.8 2.5 4.0 3.8 3.2 1.9 6.8 11.2 12.1 11.2 7.9
CAH * CARDINAL HEALTH INC JUN 1.4 2.3 2.5 2.2 1.8 4.8 7.6 8.1 7.2 6.9 12.6 19.4 20.0 19.0 18.2
MCK * MCKESSON CORP # MAR 0.8 NM 0.9 1.0 0.8 3.7 NM 4.2 4.1 3.4 13.2 NM 13.3 13.3 11.3
OMI OWENS & MINOR INC DEC 1.3 1.3 1.3 1.2 0.8 5.4 5.6 5.2 4.8 3.3 13.3 13.9 15.7 18.6 13.4
PDCO * PATTERSON COMPANIES INC # APR 7.6 7.6 7.6 7.0 6.7 11.0 11.2 12.4 15.1 15.0 17.6 20.2 20.8 20.3 20.7

PSSI PSS WORLD MEDICAL INC # MAR 2.7 2.7 2.1 1.2 0.5 6.4 6.4 5.4 2.4 1.2 14.1 15.3 11.9 4.8 2.4
HSIC SCHEIN HENRY INC DEC 3.5 3.2 4.2 4.2 3.4 6.5 6.0 8.3 8.0 6.7 13.9 12.1 15.0 15.3 13.9
OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS
ADRX ANDRX CORP DEC 6.0 5.7 4.6 NM 9.8 5.8 6.7 5.5 NM 10.4 8.5 9.9 8.1 NM 12.5
AZN ASTRAZENECA PLC -ADR DEC 19.5 17.5 15.9 15.7 17.6 18.7 15.5 13.4 14.3 16.3 33.6 27.6 24.9 27.1 30.7
AVE AVENTIS SA -ADR DEC NA NA 10.3 10.0 6.8 NA NA 7.0 6.5 3.6 NA NA 20.6 21.0 14.1
BVF BIOVAIL CORP DEC 26.4 18.2 NM 11.1 15.0 13.2 8.9 NM 5.5 7.2 21.7 16.6 NM 8.9 12.8
ELN ELAN CORP PLC -ADR DEC 119.1 NM NM NM NM 18.0 NM NM NM NM 122.1 NM NM NM NM

GSK GLAXOSMITHKLINE PLC -ADR DEC 21.3 21.0 20.9 18.5 15.1 17.9 19.2 20.3 18.6 13.9 66.2 65.6 65.7 58.6 39.6
NVS NOVARTIS AG -ADR DEC 19.0 20.4 20.2 22.6 21.9 10.9 11.1 10.6 12.3 11.1 18.4 18.0 17.0 19.5 17.6
TEVA TEVA PHARM INDS -ADR DEC 20.4 6.9 21.1 16.3 13.4 10.7 4.3 13.1 10.1 8.8 18.8 7.6 27.0 25.6 22.0

Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year.
 hep_0507.qxp
4/30/2007
Current Ratio Debt / Capital Ratio (%) Debt as a % of Net Working Capital

Ticker Company Yr. End 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001
PHARMACEUTICALS
ABT * ABBOTT LABORATORIES DEC 1.5 1.6 1.3 1.3 1.1 23.4 25.0 20.9 28.6 32.4 115.1 122.5 130.2 201.6 880.5
AGN * ALLERGAN INC DEC 1.7 3.0 2.4 3.0 2.7 3.5 33.8 44.3 39.4 34.7 7.4 62.2 105.2 66.1 62.3

3:01 PM
ALO ALPHARMA INC -CL A DEC 1.6 0.6 1.9 1.8 1.9 0.0 1.1 40.3 44.9 51.0 0.0 NM 233.7 289.3 322.6
BRL * BARR PHARMACEUTICALS INC JUN 4.7 4.2 3.1 3.6 2.9 1.2 3.0 3.8 6.0 6.4 2.0 4.8 5.9 9.3 8.7
BDY BRADLEY PHARMACEUTICL -CL A DEC 1.2 1.0 14.2 6.1 5.2 28.5 16.8 19.5 0.4 1.0 616.5 NM 20.8 0.6 1.6

BMY * BRISTOL-MYERS SQUIBB CO DEC 1.8 1.5 1.6 1.2 1.2 42.3 45.3 46.5 41.1 40.7 155.1 170.7 194.2 356.8 291.4
FRX * FOREST LABORATORIES -CL A # MAR 5.2 4.8 4.8 4.0 3.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Page 53
JNJ * JOHNSON & JOHNSON DEC 2.5 2.0 1.7 1.7 2.3 5.0 7.4 9.7 8.0 8.2 10.8 19.2 31.0 25.9 21.3
KG * KING PHARMACEUTICALS INC DEC 1.3 1.6 1.4 3.4 8.2 0.0 15.7 14.5 14.9 15.1 0.0 78.7 124.3 38.7 31.9
LLY * LILLY (ELI) & CO DEC 1.9 1.7 1.6 1.5 1.3 33.4 28.0 32.4 34.5 30.6 113.5 85.7 146.1 159.0 180.4

MRX MEDICIS PHARMACEUT CP -CL A DEC 7.1 10.9 9.4 13.9 9.9 48.0 44.8 46.1 48.2 0.0 75.5 68.0 69.4 65.4 0.0
MRK * MERCK & CO DEC 1.6 1.1 1.2 1.2 1.1 19.2 18.4 19.8 16.3 17.6 66.2 271.0 260.3 198.4 338.5
MOGN MGI PHARMA INC DEC 3.7 5.8 6.0 4.2 5.2 67.9 69.4 11.1 34.5 0.0 125.1 91.7 15.3 38.6 0.0
MYL * MYLAN LABORATORIES INC # MAR 4.5 6.2 7.6 4.6 6.1 45.9 0.0 0.0 0.0 0.0 73.9 0.0 0.0 NM NM
NOVN NOVEN PHARMACEUTICALS INC DEC 4.2 3.1 3.4 4.9 2.6 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0

PRX PAR PHARMACEUTICAL COS INC DEC 3.3 3.2 3.8 2.8 2.4 31.8 32.6 33.6 1.1 0.7 54.6 59.0 43.5 1.8 1.0
PRGO PERRIGO CO JUN 1.8 2.5 2.3 2.2 1.8 49.7 0.0 0.0 0.0 0.0 244.6 0.0 0.0 0.0 0.0
PFE * PFIZER INC DEC 1.5 1.5 1.3 1.3 1.4 7.7 8.3 6.8 13.4 12.2 47.2 55.0 94.6 50.4 54.2
SGP * SCHERING-PLOUGH DEC 2.1 1.9 2.0 1.7 1.7 24.2 23.8 24.1 0.2 1.5 47.3 49.9 53.1 0.6 4.3
SCRX SCIELE PHARMA INC DEC 6.7 7.2 4.3 2.0 2.8 30.1 32.4 0.0 0.0 0.0 86.3 68.7 0.0 0.0 0.0

SEPR SEPRACOR INC DEC 3.8 4.1 1.4 4.0 6.0 116.6 139.8 246.9 166.4 133.1 151.2 183.0 406.8 237.7 173.5
VRX VALEANT PHARMACEUTICALS INTL DEC 2.5 4.0 6.8 3.2 4.8 64.1 62.5 64.8 39.8 47.3 221.8 137.1 114.8 121.3 120.2
VPHM VIROPHARMA INC DEC 2.5 4.3 11.7 17.9 8.1 0.0 115.9 106.2 82.9 82.0 0.0 448.0 113.1 88.3 81.6
WPI * WATSON PHARMACEUTICALS INC DEC 5.5 5.4 3.9 2.5 3.6 20.9 19.8 24.7 14.5 18.3 52.7 52.7 73.4 60.9 64.5
HEALTH CARE DISTRIBUTORS
ABC * AMERISOURCEBERGEN CORP SEP 1.3 1.4 1.4 1.4 1.4 18.2 21.1 30.1 34.6 39.7 49.2 52.8 66.2 78.1 94.5
CAH * CARDINAL HEALTH INC JUN 1.3 1.4 1.8 1.7 1.6 19.9 24.3 22.3 23.7 23.6 69.5 76.9 41.6 43.3 45.2
MCK * MCKESSON CORP # MAR 1.3 1.3 1.4 1.4 1.4 14.0 18.6 19.0 24.7 27.4 28.3 33.9 34.1 45.3 47.7
OMI OWENS & MINOR INC DEC 1.8 2.0 2.0 2.1 1.8 28.5 31.1 33.7 57.4 58.6 50.4 47.8 54.3 94.9 107.6
PDCO * PATTERSON COMPANIES INC # APR 2.1 2.5 3.0 3.3 2.7 14.0 22.1 36.2 0.0 0.0 48.0 63.1 93.2 0.0 0.0

PSSI PSS WORLD MEDICAL INC # MAR 2.4 2.2 2.2 1.4 2.4 30.0 35.1 38.5 0.0 27.8 56.9 65.6 68.1 0.0 45.5
HSIC SCHEIN HENRY INC DEC 2.2 2.1 2.2 2.4 2.1 27.1 30.7 19.6 21.8 26.1 56.9 71.3 38.8 40.1 49.4
OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS
ADRX ANDRX CORP DEC 2.9 2.3 2.2 2.4 4.5 0.0 0.0 0.2 0.2 0.0 0.0 0.0 0.4 0.5 0.0
AZN ASTRAZENECA PLC -ADR DEC 2.0 1.9 1.7 1.5 1.5 7.0 6.0 2.0 2.6 6.1 16.0 15.5 5.8 8.4 18.8
AVE AVENTIS SA -ADR DEC NA NA 1.1 0.9 0.9 NA NA 21.0 12.8 25.3 NA NA 510.2 NM NM
BVF BIOVAIL CORP DEC 2.5 1.7 1.6 0.9 3.9 25.3 29.7 46.4 42.5 2.3 100.3 358.1 509.8 NM 6.1
ELN ELAN CORP PLC -ADR DEC 6.7 4.3 1.4 0.9 1.9 85.7 80.9 64.2 50.4 32.2 176.8 171.1 490.0 NM 196.7

GSK GLAXOSMITHKLINE PLC -ADR DEC 1.4 1.6 1.5 1.2 1.1 39.3 38.8 28.7 27.6 20.1 143.8 89.2 90.6 159.3 371.8
NVS NOVARTIS AG -ADR DEC 1.4 2.2 2.4 2.5 2.4 3.5 6.8 8.7 8.1 5.1 21.6 20.2 24.6 21.8 12.5
TEVA TEVA PHARM INDS -ADR DEC 2.4 1.9 2.2 1.9 3.0 22.0 23.5 19.7 38.2 46.7 54.6 86.5 40.3 84.3 86.6
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year.
53

MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

 hep_0507.qxp
54
MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

4/30/2007
Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001

PHARMACEUTICALS

3:01 PM
ABT * ABBOTT LABORATORIES DEC 23-17 23-19 27-19 32-17 57-42 50 50 55 51 82 2.9-2.2 2.7-2.2 2.9-2.1 3.1-1.6 2.0-1.4
AGN * ALLERGAN INC DEC 36-22 32-23 NM-NM NM-NM 58-34 13 13 NM 73 21 0.6-0.4 0.5-0.4 0.6-0.4 0.7-0.5 0.6-0.4
ALO ALPHARMA INC -CL A DEC 26-8 NM-NM 63-31 NM-NM NM-NM 15 NM 47 NM NM 1.9-0.6 1.5-0.8 1.5-0.8 2.8-0.6 1.0-0.4
BRL * BARR PHARMACEUTICALS INC JUN 31-21 45-26 34-17 16-10 51-25 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
BDY BRADLEY PHARMACEUTICL -CL A DEC 37-15 59-28 21-6 33-9 55-3 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

Page 54
BMY * BRISTOL-MYERS SQUIBB CO DEC 17-14 25-18 18-13 49-19 70-46 73 68 70 133 105 5.4-4.2 3.8-2.7 5.3-3.8 7.2-2.7 2.3-1.5
FRX * FOREST LABORATORIES -CL A # MAR 21-15 34-16 31-21 32-19 44-24 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
JNJ * JOHNSON & JOHNSON DEC 20-17 22-17 24-20 30-19 33-22 36 38 38 36 37 2.1-1.8 2.2-1.7 1.9-1.6 1.9-1.2 1.7-1.1
KG * KING PHARMACEUTICALS INC DEC 37-16 NM-NM 41-22 56-20 46-25 0 NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
LLY * LILLY (ELI) & CO DEC 33-27 46-30 31-22 32-17 36-27 83 85 56 49 43 3.1-2.5 2.8-1.8 2.5-1.8 2.8-1.5 1.6-1.2

MRX MEDICIS PHARMACEUT CP -CL A DEC 32-22 82-60 38-24 39-21 48-23 10 18 3 0 0 0.5-0.3 0.3-0.2 0.1-0.1 0.0-0.0 0.0-0.0
MRK * MERCK & CO DEC 17-12 19-10 22-14 20-12 30-18 72 57 49 45 43 6.0-4.3 5.9-3.0 3.6-2.3 3.7-2.2 2.4-1.4
MOGN MGI PHARMA INC DEC NM-NM NM-NM NM-NM NM-NM NM-NM NM NM NM NM NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
MYL * MYLAN LABORATORIES INC # MAR 27-19 35-19 23-13 17-11 18-10 30 16 8 8 8 1.6-1.1 0.8-0.5 0.7-0.4 0.7-0.5 0.8-0.4
NOVN NOVEN PHARMACEUTICALS INC DEC 46-25 54-30 32-15 44-14 77-24 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

PRX PAR PHARMACEUTICAL COS INC DEC 80-39 78-37 21-8 14-6 24-4 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
PRGO PERRIGO CO JUN NM-NM 22-14 22-14 21-13 48-19 NM 11 6 0 0 1.2-0.8 0.8-0.5 0.5-0.3 0.0-0.0 0.0-0.0
PFE * PFIZER INC DEC 27-18 26-15 NM-NM 28-17 37-27 69 45 273 35 35 3.7-2.6 3.1-1.7 2.2-1.6 2.1-1.2 1.3-0.9
SGP * SCHERING-PLOUGH DEC NM-NM NM-NM NM-NM 27-12 43-24 183 NM NM 50 47 1.2-1.0 1.4-1.0 4.0-2.4 4.2-1.8 1.9-1.1
SCRX SCIELE PHARMA INC DEC 20-13 36-14 NM-NM NM-12 73-25 0 0 NM 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

SEPR SEPRACOR INC DEC NM-NM NM-NM NM-NM NM-NM NM-NM 0 NM NM NM NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
VRX VALEANT PHARMACEUTICALS INTL DEC NM-NM NM-NM NM-NM 34-6 33-20 NM NM NM 30 28 1.9-1.2 1.9-1.1 4.0-1.2 4.7-0.9 1.4-0.9
VPHM VIROPHARMA INC DEC 10-1 NM-NM NM-NM NM-NM NM-NM 0 NM NM NM NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
WPI * WATSON PHARMACEUTICALS INC DEC 28-21 35-18 27-14 20-11 60-24 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
HEALTH CARE DISTRIBUTORS
ABC * AMERISOURCEBERGEN CORP SEP 31-19 15-12 18-11 25-15 33-19 4 2 2 3 0 0.2-0.1 0.2-0.2 0.2-0.1 0.2-0.1 0.0-0.0
CAH * CARDINAL HEALTH INC JUN 29-22 22-10 21-16 29-19 40-29 6 3 3 4 4 0.3-0.2 0.3-0.2 0.2-0.2 0.2-0.1 0.1-0.1
MCK * MCKESSON CORP # MAR 22-12 NM-NM 17-10 22-13 28-16 10 NM 11 12 16 0.8-0.5 1.1-0.7 1.1-0.6 1.0-0.6 1.0-0.6
OMI OWENS & MINOR INC DEC 21-16 19-14 18-10 15-9 24-15 32 28 23 22 30 2.0-1.5 2.0-1.5 2.2-1.3 2.4-1.5 2.0-1.3
PDCO * PATTERSON COMPANIES INC # APR 37-23 33-22 32-16 32-22 30-20 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

PSSI PSS WORLD MEDICAL INC # MAR 25-16 22-14 30-12 55-24 86-27 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
HSIC SCHEIN HENRY INC DEC 25-17 27-19 22-11 21-13 20-13 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS
ADRX ANDRX CORP DEC 29-15 34-16 39-11 NM-NM 74-37 0 0 0 NM 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
AZN ASTRAZENECA PLC -ADR DEC 17-12 22-16 28-17 32-17 31-24 35 37 44 47 46 3.0-2.0 2.3-1.6 2.6-1.6 2.8-1.5 1.9-1.5
AVE AVENTIS SA -ADR DEC NA-NA NA-NA 22-14 27-17 51-38 NA NA 27 20 25 NA-NA 1.6-1.1 1.9-1.2 1.1-0.7 0.7-0.5
BVF BIOVAIL CORP DEC 18-9 26-14 NM-NM 97-34 89-45 32 0 NM 0 0 3.6-1.8 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
ELN ELAN CORP PLC -ADR DEC 24-2 NM-NM NM-NM NM-NM NM-NM 0 NM NM NM NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

GSK GLAXOSMITHKLINE PLC -ADR DEC 19-16 17-14 17-12 24-15 39-32 54 56 49 61 58 3.5-2.8 4.1-3.4 4.2-2.8 4.1-2.5 1.8-1.5
NVS NOVARTIS AG -ADR DEC 21-17 22-18 23-17 21-16 29-20 34 33 35 26 30 1.9-1.6 1.9-1.5 2.1-1.5 1.6-1.2 1.5-1.1
TEVA TEVA PHARM INDS -ADR DEC 27-15 64-42 24-13 26-17 35-23 15 37 11 12 12 1.0-0.6 0.9-0.6 0.8-0.5 0.7-0.4 0.5-0.3
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year.
 hep_0507.qxp
Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)

Ticker Company Yr. End 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001

4/30/2007
PHARMACEUTICALS
ABT * ABBOTT LABORATORIES DEC 2.17 2.03 1.76 1.79 1.00 2.89 2.22 2.90 1.93 1.14 50.00-37.50 47.63-38.26 47.15-33.75 58.00-29.80 57.17-42.00
AGN * ALLERGAN INC DEC 3.08 2.87 (0.40) 0.49 1.72 10.68 7.99 4.95 5.93 6.48 110.50-69.01 92.61-66.78 81.80-56.60 75.10-49.05 99.38-59.00
ALO ALPHARMA INC -CL A DEC 1.18 (6.05) 0.38 (1.88) (0.87) 11.56 1.79 1.41 (0.87) (5.54) 30.99-9.39 24.00-12.34 23.97-11.91 28.00-6.50 44.25-18.00
BRL * BARR PHARMACEUTICALS INC JUN 2.08 1.21 1.69 2.17 0.79 10.81 9.18 8.06 6.39 4.59 63.60-43.71 53.99-32.01 56.91-28.93 35.56-21.96 40.27-19.78
BDY BRADLEY PHARMACEUTICL -CL A DEC 0.50 0.51 1.55 0.73 0.42 (0.39) (1.50) 9.60 3.04 2.21 18.50-7.47 30.00-14.15 32.50-10.07 24.00-6.80 23.25-1.31

3:01 PM
BMY * BRISTOL-MYERS SQUIBB CO DEC 1.53 1.23 1.60 1.05 1.05 2.28 1.76 1.66 1.14 0.97 26.60-20.70 31.30-22.22 29.21-21.00 51.95-19.49 73.50-48.50
FRX * FOREST LABORATORIES -CL A # MAR 2.11 2.30 2.01 1.72 0.95 7.69 8.21 8.03 5.66 3.75 45.21-32.46 78.81-36.10 63.23-41.85 54.99-32.13 41.60-23.25
JNJ * JOHNSON & JOHNSON DEC 3.50 2.87 2.42 2.20 1.87 8.64 6.72 5.17 4.53 4.97 69.99-59.76 64.25-49.25 59.08-48.05 65.89-41.40 60.97-40.25
KG * KING PHARMACEUTICALS INC DEC 0.48 (0.21) 0.44 0.75 1.00 3.66 1.83 0.68 2.90 3.51 17.99-7.50 20.62-10.01 18.13-9.46 42.13-15.00 46.05-24.79
LLY * LILLY (ELI) & CO DEC 1.84 1.67 2.38 2.51 2.61 9.77 9.90 8.93 7.56 6.47 60.98-49.47 76.95-50.34 73.89-52.77 81.09-43.75 95.00-70.01

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MRX MEDICIS PHARMACEUT CP -CL A DEC 1.18 0.55 0.95 0.83 0.67 2.98 3.90 3.35 4.40 5.89 37.67-26.30 45.26-32.85 36.01-22.61 32.30-16.93 32.30-15.50
MRK * MERCK & CO DEC 2.11 2.62 2.95 3.17 3.18 7.48 7.03 6.13 4.88 3.77 35.36-25.50 49.33-25.60 63.50-40.57 64.50-38.50 95.25-56.80
MOGN MGI PHARMA INC DEC (1.81) (1.23) (1.12) (0.72) (0.87) (0.45) 1.50 2.38 0.63 1.26 28.17-15.73 34.49-19.90 21.56-3.42 8.52-2.34 10.69-3.75
MYL * MYLAN LABORATORIES INC # MAR 0.80 0.76 1.24 0.98 0.92 2.76 6.03 5.30 4.39 3.97 21.69-15.21 26.35-14.24 28.75-15.56 16.56-11.16 16.94-8.96
NOVN NOVEN PHARMACEUTICALS INC DEC 0.42 0.48 0.50 0.62 0.54 5.95 J 5.50 J 4.79 J 4.28 J 3.55 19.20-10.44 25.96-14.62 15.80-7.30 27.51-8.91 41.50-13.12

PRX PAR PHARMACEUTICAL COS INC DEC 0.55 0.86 3.66 2.46 1.76 9.75 8.38 9.76 4.89 3.98 43.81-21.64 66.90-32.10 75.44-28.80 33.80-15.60 42.20-6.56
PRGO PERRIGO CO JUN (4.57) 1.15 0.77 0.69 0.38 3.12 7.06 5.89 5.24 4.57 19.89-12.76 24.96-15.61 16.74-10.53 14.82-9.25 18.30-7.38
PFE * PFIZER INC DEC 1.10 1.51 0.22 1.49 1.25 1.89 1.48 0.85 2.89 2.64 29.21-20.27 38.89-21.99 36.92-26.95 42.46-25.13 46.75-34.00
SGP * SCHERING-PLOUGH DEC 0.12 (0.67) (0.06) 1.35 1.33 3.64 3.75 4.57 5.10 4.41 22.53-17.67 21.37-15.45 23.75-14.16 36.25-16.10 57.25-32.35
SCRX SCIELE PHARMA INC DEC 1.12 0.74 (0.05) 0.21 0.44 0.70 2.24 1.84 1.28 1.83 22.89-14.01 26.41-10.48 12.05-1.93 33.00-2.42 32.20-11.00

SEPR SEPRACOR INC DEC 0.04 (3.21) (1.61) (3.34) (2.89) (1.60) (3.24) (7.34) (4.97) (4.40) 66.55-48.58 59.96-23.84 32.79-9.72 57.25-3.90 81.88-23.45
VRX VALEANT PHARMACEUTICALS INTL DEC (2.03) (1.62) (0.78) 1.01 1.05 (1.96) 0.28 2.05 3.80 4.46 26.70-16.25 27.37-16.25 25.85-7.72 33.88-6.51 34.73-20.69
VPHM VIROPHARMA INC DEC 2.56 (0.73) (1.43) (1.11) (4.59) 2.99 (5.33) (0.28) 1.07 1.73 24.36-1.67 3.74-1.40 4.75-1.42 23.03-0.86 41.00-12.75
WPI * WATSON PHARMACEUTICALS INC DEC 1.32 1.39 1.89 1.65 1.10 8.81 7.97 5.54 4.33 3.79 36.93-27.99 49.19-24.50 50.12-26.90 33.25-17.95 66.39-26.50
HEALTH CARE DISTRIBUTORS
ABC * AMERISOURCEBERGEN CORP SEP 1.38 2.10 2.02 1.64 1.08 7.38 7.16 5.78 4.03 13.71 J 42.17-26.48 32.01-24.87 36.72-22.83 41.42-25.10 36.00-20.06
CAH * CARDINAL HEALTH INC JUN 2.43 3.51 3.17 2.50 1.93 8.20 7.05 12.10 10.80 9.50 69.64-52.85 76.54-36.08 67.96-50.00 73.70-46.60 77.32-56.67
MCK * MCKESSON CORP # MAR 2.42 (0.53) 2.23 1.94 1.47 13.36 12.47 12.66 10.57 9.81 52.89-30.13 35.90-22.61 37.14-22.61 42.09-24.99 41.50-23.40
OMI OWENS & MINOR INC DEC 1.63 1.55 1.52 1.40 0.90 6.29 6.53 5.38 2.07 1.12 33.59-26.20 29.34-22.08 27.04-15.75 20.90-13.00 21.69-13.92
PDCO * PATTERSON COMPANIES INC # APR 1.44 1.34 1.10 0.86 0.70 3.45 1.95 0.76 3.66 2.85 53.85-33.21 44.20-29.70 35.75-17.70 27.56-19.00 21.02-13.75

PSSI PSS WORLD MEDICAL INC # MAR 0.67 0.61 0.43 0.19 0.12 3.10 2.61 2.44 2.63 3.49 16.65-10.76 13.55-8.60 12.86-5.16 10.48-4.55 10.33-3.25
HSIC SCHEIN HENRY INC DEC 1.87 1.47 1.60 1.36 1.03 5.51 4.03 6.49 6.26 7.97 J 45.93-32.70 39.72-28.08 35.00-17.08 28.86-17.61 20.75-13.59
OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS
ADRX ANDRX CORP DEC 0.85 0.90 0.67 (1.30) 1.04 10.39 9.38 7.95 7.16 8.39 24.47-12.74 30.87-14.75 25.90-7.68 71.27-10.75 77.39-38.50
AZN ASTRAZENECA PLC -ADR DEC 2.91 2.28 1.78 1.64 1.69 7.04 7.05 6.08 4.87 4.06 50.13-34.72 51.20-35.61 49.48-29.41 52.04-28.00 51.75-40.90
AVE AVENTIS SA -ADR DEC NA NA 3.05 2.77 1.70 NA NA 0.73 (0.53) (3.16) NA-NA 94.98-63.92 66.60-41.85 74.21-48.00 86.44-64.05
BVF BIOVAIL CORP DEC 1.55 1.01 (0.17) 0.58 0.64 1.31 (0.15) (1.69) (2.13) 3.00 27.28-13.74 26.01-14.30 51.30-16.51 56.40-19.90 57.18-29.03
ELN ELAN CORP PLC -ADR DEC 1.23 (0.94) (2.29) (10.34) (2.64) (1.18) (1.25) (1.11) (1.79) 1.51 29.93-3.00 30.45-6.88 9.02-2.25 45.18-1.03 65.00-39.35

GSK GLAXOSMITHKLINE PLC -ADR DEC 2.84 2.87 2.75 2.12 1.47 2.28 2.55 3.53 2.55 2.67 53.80-44.17 47.53-38.80 47.64-31.85 51.07-31.35 58.00-47.15
NVS NOVARTIS AG -ADR DEC 2.63 2.36 2.03 2.10 1.64 8.43 11.61 10.43 9.79 8.45 54.71-45.63 50.77-41.30 46.00-33.85 44.10-33.96 46.88-32.70
TEVA TEVA PHARM INDS -ADR DEC 1.73 0.54 1.28 0.77 0.52 4.76 3.44 4.34 2.45 2.74 J 45.91-26.78 34.67-22.82 31.17-17.25 20.09-12.92 18.59-12.13

Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year. J-This amount includes intangibles that cannot be identified.

The analysis and opinion set forth in this publication are provided by Standard & Poors Equity Research Services and are prepared separately from any other analytic activity of Standard & Poors. In this regard, Standard & Poors Equity Research Services
has no access to nonpublic information received by other units of Standard & Poors. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.
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MAY 10, 2007 / HEALTHCARE: PHARMACEUTICALS INDUSTRY SURVEY

hep_0507.qxp 4/30/2007 3:01 PM Page 58

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