Pharma Industry Report Nov 16

Industry Surveys
Pharmaceuticals
November 2016
Jeffrey Loo, CFA
Equity Analyst
Performance

Sector Overview
ETF Market Flows
Industry Overview
Industry Profile

Industry Trends
How the Industry Operates
Key Industry Ratios and Statistics
How to Analyze a Company in This Industry
Glossary

Industry References
Comparative Company Analysis
Contacts
Sales Inquiries & Client Support
800.523.4534
clientsupport@standardandpoors.com
Media Inquiries
Beth Piskora
212.438.4631
beth.piskora@cfraresearch.com
S&P Global Market Intelligence
55 Water Street
New York, NY 10041
Copyright 2016 CFRA. All rights reserved. S&P Global is used under license. The owner of this trademark is S&P
Global Inc. or its affiliate, which are not affiliated with CFRA Research or the author of this content. CFRA, the CFRA
inverted pyramid logo, and STARS are registered trademarks of CFRA.
Topics covered by
Industry Surveys
Aerospace & Defense
Airlines
Automobiles
Banks
Beverages
Biotechnology
Capital Markets
Chemicals
Commercial Services & Supplies
Communications Equipment
Consumer Finance
Electric Utilities
Electronic Equipment
Energy Equipment & Services
Food & Staples Retailing
Food Products
Gas Utilities
Health Care Equipment & Supplies
Health Care Providers & Services
Hotels, Restaurants & Leisure
Household Durables
Household Products
Insurance
Internet Software & Services
Information Technology Services
Life Sciences Tools & Services
Machinery
Media
Metals & Mining
Multiline Retail
Oil, Gas & Consumable Fuels
Paper & Forest Products
Pharmaceuticals
Real Estate Investment Trusts
Road & Rail
Semiconductors & Equipment
Software
Specialty Retail
Technology Hardware
Telecommunications
Textiles, Apparel & Luxury Goods
Thrifts & Mortgage Finance
Contributors
Todd Rosenbluth
Director, ETF Research
Beth Piskora
Senior Director, Content
Sam Stovall
Chief Investment Strategist
EXECUTIVE SUMMARY
The pharmaceuticals industry has been under significant pressure over the past two years due to
ongoing scrutiny over high drug prices. There have been several high-profile cases where consumers,
the media, and ultimately, Congress expressed significant concern over drug prices. In several cases,
Congress held hearings and the negative perception created an overhang in the industry. However,
CFRA thinks the most adverse impact on the industry was Hillary Clinton making high drug prices
a key topic during her presidential campaign. For example, in September 2015, in response to the
outrage over Turing Pharmaceuticals 5,555% price increase for generic drug Daraprim, Clinton
sent out a tweet saying, Price gouging like this in the specialty drug market is outrageous, and she
promised to push for proposals to end these practices, if elected. Then in August 2016, following
consumer and media outrage over an almost 500% price increase for Mylans anti-anaphylactic
shock injector EpiPen, Clinton once again vowed to rein in the drug industrys high drug prices, and
she promised to create an oversight panel that would fine companies that excessively raised prices
of generic drugs. In each instance, the share prices of pharmaceutical firms fell sharply in response to
Clintons words. Even though Clinton lost the presidential election, we expect this regulatory
pressure on drug prices to continue beyond the presidential election cycle.
Although Clinton was more vocal and focused on addressing high drug prices during her
election campaign, president-elect Donald Trump also expressed similar views. A key component
of Clintons plan to lower drug prices was to allow Medicare to negotiate drug prices directly with
manufacturers, an action currently prohibited by law. Similarly, Trump expressed his desire to
allow Medicare to negotiate drug prices. In addition, Trump has endorsed the idea of allowing the
re-importation of drugs manufactured overseas into the US.
However, CFRA thinks overturning the law to allow Medicare to negotiate drug prices will be
challenging, as many Republicans do not support that initiative. Further, the nonpartisan
Congressional Budget Office (CBO) stated that allowing Medicare to directly negotiate for lower
prices would have a negligible effect on federal spending. The CBO stated that privately run
plans for Medicare Part D (prescription drug plans, or PDPs) are more suited to negotiate since
they compete for PDP enrollees based on cost and coverage and have built-in risks regarding costs
and profitability.
The pharmaceuticals industry has defended its pricing practices, arguing that efforts to remove
some of their discretion over pricing would harm innovation and result in job losses. The industry
maintains that drug development is extremely expensive and that high prices are necessary to
support future research and development (R&D) initiatives to develop new life-saving medicines.
In addition, some pharmaceutical executives claim that the current system of increasingly higher
deductibles has contributed to higher prices for the consumer.
The global pharmaceutical market increased 6% to $1.1 trillion in 2015, up from $1.0 trillion
in 2014, with nearly 40% of the growth coming from specialty drugs, including oncology,
autoimmune, respiratory, and anti-viral drugs, according to IMS Health, a pharmaceutical
information and technology service provider. Pharmaceutical sales will likely reach $1.4 trillion by
2020, according to projections from IMS Health. (Sales cover direct and indirect pharmaceutical
channel wholesalers and manufacturers. The figures above represent manufacturer prices, and
include prescription and certain over-the-counter data.)
Expanding access to health care worldwide, mainly in low income and emerging markets, is
driving global growth in pharmaceutical sales, while the increase in the insured population in the
INDUSTRY SURVEYS
PHARMACEUTICALS / NOVEMBER 2016
US is driving domestic drug sales. Branded and specialty drugs will likely drive spending growth in
the developed markets, while an overall increase in the use of pharmaceuticals will likely spur
growth in emerging markets.
The top-20 global pharmaceutical companies accounted for 81% of total global branded sales
in 2015 and 57% of total global sales, according to IMS Health.

In 2015, total spending on drugs in the US increased 8.5% on a net price basis to $309.5 billion
and 12.2% to $424.8 billion on an invoice basis. Discounts, rebates, and other price concessions
reduced invoice spending by approximately 27.1%. Reasons for this substantial increase, in CFRAs
view, include higher spending on innovative new treatment options, the lower impact of patent
expirations, an increase in list prices for branded drugs, and more insured patients due to the health
care reform law. IMS Health forecasts that US spending on drugs will reach $560$590 billion by
2020, driven by innovative treatments. A record number of 4.4 billion prescriptions were filled last
year, up just 1.0% from 2014. Specialty drugs use in the US rose 21.5% to $150.8 billion. We
expect specialty drugs to continue to increase over the next several years, driving up total drug
spending in the US, and we think that prescriptions filled will rise at a modest pace.
Sales in the US accounted for about 40.2% of the global pharmaceuticals market in 2015, followed
by pharmerging nations, including the BRIC countries (Brazil, Russia, India, and China), at 23.3%,
and the EU5 (Germany, France, Italy, the UK, and Spain), at 13.5%, according to IMS Health.
The compound annual growth rate (CAGR) for global sales from 2016 to 2020 is forecast to
range from 4%7%, with India projected to be the fastest-growing region at 11%14%,
according to IMS Health. The US is forecast to grow 5%8%, while France is expected to be the
slowest-growing region at -3%0%, due to its declining population. Chinas drug spend in 2020
is estimated at $150$180 billion, the highest of any pharmerging country.
In CFRAs view, health care reform will continue to have a net positive impact on the health
care sector, despite provisions that put pressure on pharmaceutical pricing and utilization.
The pharmaceuticals industrys pipeline is strong, in CFRAs view. However, we note that the
scrutiny over high drug prices has depressed stock valuations throughout the industry.
In spite of the scrutiny over high drug prices, CFRA maintains a positive fundamental outlook
on the pharmaceuticals industry due to several factors, including expanding global presence
(together with increasing access to health care in many emerging markets), positive demographics
such as a growing elderly population, and a healthy merger and acquisition (M&A) environment.
INDUSTRY SURVEYS
SECTOR OVERVIEW
Year to date through November 18, 2016, the S&P 500 health care index, which represented
14.1% of the S&P 500 index, was down 3.5% in price, compared with a 6.7% gain for the S&P
500. In 2015, the health care sector index rose 5.2%, versus a price decline of 0.7% for the S&P
500. There are 10 sub-industry indices in this sector. The pharmaceuticals sub-industry is the
largest, representing 37.2% of the sectors market value, while the health care technology subindustry is the smallest, accounting for 0.6%.
The health care sector is projected to record a 6.4% year-over-year increase in operating earnings
per share (EPS) in 2016, compared with the S&P 500s estimated EPS decline of 0.9%, according
to S&P Capital IQ consensus estimates. In 2015, this sector posted a 15.2% gain in EPS, versus a
decrease of 0.6% for the S&P 500.
The sectors price-to-earnings (P/E) ratio of 16.4x, based on consensus operating EPS estimates for
2016, is well below the S&P 500s forward P/E of 18.4x. S&P Capital IQ also reports that the
sectors P/E-to-projected EPS growth rate (PEG) ratio is 1.3x, which is below the broader markets
PEG of 1.5x. Finally, this sector pays a dividend yield of 1.8%, compared with the 2.1% yield for
the S&P 500.
HEALTH CARE SECTOR AND INDEX PRICE PERFORMANCE
(as of Octob er 31, 2016)
INDUSTRIES
INDEX
VALUE
% OF
S&P 1500
-------------------------- PRICE CHANGES (in percent) --------------------------2016

2015
5-YEAR
OCTOBER 3-MONTHS YEAR-TO-DATE
CAGR
Biotechnology
2,454.25
2.55
(9.26)
(11.83)
(18.26)
5.33
23.36
Health Care Distributors

Health Care Equipment
Health Care Facilities
512.26
1,079.34
215.02
0.40
2.57
0.25
(15.74)
(6.54)
(4.51)
(24.18)
(6.88)
(8.97)
(26.92)
9.03
(4.09)
4.94
6.54
(10.72)
10.21
16.03
15.44
Health Care Services

Health Care Supplies
Health Care Technology
591.92
1,651.03
197.76
0.45
0.22
0.13
(6.29)
(3.43)
(6.37)
(12.64)
(5.09)
(6.85)
(13.89)
10.76
(1.89)
6.10
3.23
(4.12)
11.16
16.19
6.89
278.44
869.37
587.84
0.66
1.37
4.84
(10.89)
(2.62)
(5.46)
(9.61)
(3.85)
(11.95)
(2.52)
3.83
(5.98)
14.67
20.04
3.70
16.77
20.88
12.69
809.95
2,126.15
1,509.46
13.45
89.72
7.22
(6.74)
(1.94)
(2.76)
(10.36)
(2.18)
(3.21)
(6.19)
4.02
7.93
5.83
(0.73)
(3.71)
15.31
11.15
11.20
722.59
491.70
3.06
100.00
(4.53)
(2.08)
(2.87)
(2.28)
7.57
4.41
(3.36)
(1.03)
12.09
11.19
Life Sciences Tools & Services

Managed Health Care
Pharmaceuticals
Health Care Sector
S&P 500
S&P MidCap 400
S&P SmallCap 600
S&P Composite 1500
Source: S&P Dow Jones Indices.
ETF Market Flows and Investing Landscape

Investors interested in exploring opportunities aligned with either the health care sector, or
more specifically, the pharmaceuticals industry, may want to consider exchange-traded funds
(ETFs). In recent years, investors have increasingly turned to ETFs when seeking exposure to
specific sectors or industries within the stock market. In addition to market focus, ETFs offer
investors added benefits, such as intraday market liquidity and lower fees relative to other
diversified financial instruments.
INDUSTRY SURVEYS
In 2015, $18.2 billion was added to all sector ETFs, with $7.4 billion for the health care sector
alone; certain sectors, such as utilities and industrials, experienced outflows. In the first nine
months of 2016, the health care sector had outflows of $5.2 billion.
SECTOR ETF INFLOWS
(total inflows for the period ended, in $, millions)
SECTOR
YEAR ENDED
FIRST 10
2015
MONTHS, 2016
Consumer Discretionary
Consumer Staples
3,161
(711)
(5,374)
(980)
Energy
9,823
3,380
Financials
Health Care
659
7,400
(5,488)
(5,401)
Industrials
(4,513)
1,247
Information Technology
Materials
3,601
475
(2,996)
9,201
REITs
1,692
8,990
Telecommunication Services
Utilities
Source: State Street Global Advisors.
13
289
(3,353)
2,451
PowerShares Dynamic Pharmaceuticals (PJP), iShares US Pharmaceuticals (IHE), and SPDR S&P
Pharmaceuticals (XPH) are three direct ways to gain exposure to the pharmaceuticals industry. These
three ETFs all experienced outflows year to date through October 31, led by PJPs $410 million.
While IHE and PJP provide exposure to similar large-cap pharmaceutical companies, IHE is more
concentrated. IHEs top-10 assets comprised 57% of its total assets as of November 21, 2016,
compared with 52% for PJP. The two ETFs also hold some biotechnology companies. Meanwhile,
XPH holds only pharmaceuticals stocks and has more exposure to small-cap companies.
CFRA thinks industry ETFs can incur elevated risk that investors may not want. As such, the
table ETFs with Meaningful Pharmaceuticals Exposure includes diversified health care ETFs such
as Health Care Select Sector SPDR (XLV), iShares US Healthcare (IYH), and Vanguard Health Care
(VHT), which have 34% or more of assets in pharmaceuticals companies. These ETFs also have
stakes in companies in the biotechnology and health care providers and services industries.
ETFS WITH MEANINGFUL PHARMACEUTICALS EXPOSURE
COMPANY
TICKER
ETF
NAME
XLV
Health Care Select Sector SPDR
VHT
IYH
FXH
PJP
IHE
FHLC
Vanguard Health Care

iShares US HealthCare
First Trust Health Care AlphaDEX
PowerShares Dynamic Pharmaceuticals
iShares US Pharmaceuticals
Fidelity MSCI Health Care Index
ASSETS UNDER
MANAGEMENT
(in $, millions)
RATIO
13,295
0.14
5,498
1,727
956
933
641
578
0.10
0.45
0.66
0.58
0.45
0.08
510
483
0.35
0.40
XPH
SPDR S&P Pharmaceuticals
RYH
Guggenheim S&P 500 Equal Weight Health Care
Source: CFRA ETF Report November 4, 2016.
NET
EXPENSE
INDUSTRY SURVEYS
INDUSTRY OVERVIEW
Pharmaceuticals Industry Stocks Modestly Outperforming
Pharmaceuticals industry stocks modestly outperformed the broader market in the past few
years, but they underperformed relative to the health care sector. From 2011 to 2015, the S&P
pharmaceuticals industry index rose 105.6%, higher than the 61.9% growth for the S&P 1500
composite stock index. However, the S&P health care sector index increased a more impressive
130.8% during this period. In 2015, the S&P pharmaceuticals industry index grew 3.7%, once
again outperforming the broader S&P 1500 (which declined 1.0%), but underperforming the S&P
health care sectors 5.8% expansion.
However, the trend has reversed this year. Year to date through November 18, 2016, the S&P
pharmaceuticals industry declined 4.8%, while the S&P health care sector index declined 3.0%;
both lagged behind the 7.7% growth of the S&P 1500. CFRA thinks the current
underperformance is related partly to increased volatility due to uncertainty over the Affordable
Care Act (ACA) and scrutiny over high drug prices.
STOCK MARKET PERFORMANCE
(December 2010=100)
250
200
150
100
50
Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep
2011
2012
2013
2014
2015
2016
S&P 1500 Index
S&P Composite 1500 Health Care Sector Index
S&P Composite 1500 Pharmaceutical Index
Source: S&P Capital IQ.
Donald Trumps presidential election and the Republican partys control of Congress raises the
possibility of a repeal of the ACA. However, an outright repeal and replace of the law is
unlikely, in CFRAs view, as Republicans did not obtain a 60-person supermajority in the Senate
to block a Democratic filibuster. Nevertheless, we think the Republicans effort to eliminate the
ACAs individual mandate and Medicaid expansion clauses has a good chance of succeeding. For
those proposals to push through, the Republicans could use a budgetary process called
reconciliation, which only requires a simple 51-person majority in the Senate.
INDUSTRY SURVEYS
About 20 million individuals are currently insured under the ACA, either through obtaining
insurance from the health care exchanges or by being part of the Medicaid expansion. The loss of
these 20 million insured patients will have an adverse effect on drug sales, in CFRAs view. We
note that there is political risk in taking away insurance from millions of people. In addition, we
think that any legislation or bill to eliminate the individual mandate and/or Medicaid expansion
will take timearound 1824 months, in our estimate.
The pharmaceuticals industrys stock performance has been aided by several factors, in CFRAs
view, including expanding global presence, which has resulted in increased global sales, positive
demographics such as a growing elderly population, benefits from the health care reform law, and
a healthy merger and acquisition (M&A) environment.
In 2015, prescription drug sales in the US rose 12.2% to $424.8 billion on an invoice basis
(before discounts and other price concessions). This growth rate is slightly slower than the 14.2%
growth rate in 2014, which, according to IMS Health, a division of QuintilesIMS, was the fastest
rate since 2001, driven by higher prices and new drug approvals, particularly for the treatment of
hepatitis C. US pharmaceutical drug spending is expected to rise 43.6%50.7% from 2015 levels
to $610$640 billion by 2020, according to IMS Health.
Several drugs such as Humira, the worlds best-selling drug, saw sales growth of 11.4% in
2015 to $14.4 billion, from $12.9 billion in 2014. Sovaldi, to treat hepatitis C, which was
approved in December 2013, was the best-selling drug launch in history, with sales of more than
$9.0 billion within the first 12 months on the market. However, sales growth for Sovaldi and its
follow-on combination drug, Harvoni, are expected to decline in 2016 on increased competition
from Mercks recently approved (January 2016) hepatitis C drug, Zepatier. In addition, market
growth is likely to flatten as public payers such as Medicaid and the Veterans Administration limit
the number of patients due to the overall cost of treatment. Year to date through the third quarter
of 2016, sales of Sovaldi and Harvoni dropped to $3.5 billion and $7.4 billion, respectively,
compared with $3.7 billion and $10.5 billion during the same period last year. Meanwhile,
Zepatier sales were $326 million in the first nine months of this year.
TOP 10 GLOBAL DRUG PRODUCT SALES
(arranged b y 2016 estimated glob al sales in $, millions, unless otherwise noted)
RANK
BRAND
GLOBAL SALES
PRIMARY
PERCENT CHANGE
NO.
1
NAME
Humira
INDICATION
Rheumatoid Arthritis
2014
12,890
2015
14,359
2016
16,385
2
3
4
Harvoni
Enbrel
Remicade
Hepatitis C
2,127
8,915
8,807
13,864
9,066
8,144
10,439
9,178
7,874
551.81
1.69
(7.53)
5
6
Rituxan
Avastin
Rheumatoid Arthritis, NHL

Oncology
7,547
7,018
7,321
6,945
7,595
7,198
(2.99)
(1.04)
3.74
3.64
7
8
9
Herceptin
Revlimid
Lantus
Oncology
Multiple Myeloma, NHL
Diabetes
6,863
4,980
8,428
6,794
5,801
7,089
7,040
6,800
6,196
(1.01)
16.49
(15.89)
3.62
17.22
(12.60)
10
Prevnar 13
Pneumococcal Infecion
4,297
6,245
6,136
45.33
(1.75)
71,872
85,628
84,841
19.14
(0.92)
Total, Top 10
20142015
11.40
20152016
14.11
(24.70)
1.24
(3.32)
Note: Gilead Sciences received approval for Epclusa to treat hepatitis C in 2016, which is adversely impacting some
Harvoni sales.
Source: EvaluatePharma.
INDUSTRY SURVEYS
Driven by the approval of several cancer compounds, the oncology therapeutic area saw a
23.7% increase in sales in 2015 (a 9.3% increase in utilization and a 14.4% increase in cost),
according to Express Scripts 2015 Drug Trend Report. In terms of sales, oncology remained
the top therapeutic area.
TOP 10 THERAPEUTIC AREAS
RANK
THERAPEUTIC
NO.
AREAS
GLOBAL SALES*
GROWTH RATE**
(in $, millions)
2014
2015
(in local currency)

20142015
Oncologics
75,411
78,939
14.0
Antidiabetics
63,766
71,471
19.0
Pain
60,175
56,191
2.5
AutoImmune
37,400
41,928
19.7
Antihypertensives
47,612
41,393
(3.3)
Respiratory Agents
39,544
40,037
8.0
Antibacterials
40,934
38,361
1.0
Mental Health
39,181
34,870
(4.8)
Viral Hepatitis
18,160
32,027
84.0
10
28,504
29,484
13.7
Total, Top 10
Dermatologics
450,687
464,701
3.1
Total, Global Market
943,934
954,116
9.5
*Covers direct and indirect pharmaceutical channel wholesalers and manufacturers.

Sales and rank are based on US dollar with quarterly exchange rates.
**Growth is in constant dollar to normalize for exchange rate fluctuations.
Source: IMS Health.
In late September 2015, drug companies stock prices experienced significant volatility and
subsequent downturns due to several negative events that focused on rapidly increasing drug
prices. CFRA thinks one of the catalysts for the increased stock price volatility was when a small
privately held pharmaceutical company, Turing Pharmaceuticals LLC, raised the price of the drug
Daraprim (for the treatment of parasitic infection toxoplasmosis) from $13.50 to $750 per tablet,
translating into a 5,555% increase. Daraprim is a 62-year-old drug that Turing acquired in
August 2015. Immediately after the proposed price increase, Hillary Clinton, the Democratic
partys presidential candidate, stated, Price gouging like this in the specialty drug market is
outrageous, and she promised proposals to end these practices if elected.
Congressional hearings focused on high drug prices were held in February 2016, with Turings
price hikes being the focus of the investigation. Since then, the scrutiny over high drug prices has
continued, and even increased to some extent in August, following the uproar over the price of
Mylan NVs anti-anaphylactic shock injector EpiPen, which has increased 461% since 2007. In
September 2016, amid the EpiPen pricing controversy, Clinton proposed creating an oversight
panel to monitor drug prices of older drugs that have limited competition. If the oversight panel
determines that a price increase is unjustified, the offending company would be subject to a fine or
charged increased rebates.
However, Clinton lost the election to Donald Trump, the Republican partys presidential
candidate. Following Trumps victory, stocks of pharmaceutical companies rose, partly in

anticipation of a more lenient drug-pricing policy, at least compared with what Clinton had
INDUSTRY SURVEYS
10
planned. While the president-elect was less vocal than Clinton about drug pricing, he previously
favored the importation of cheaper medicines and more scrutiny over drug prices. CFRA expects
scrutiny over the price issue to remain, as the Republicans, who won control of both chambers of
the US Congress after the election, have conducted probes into the topic in the past.
Several other companies, including Valeant Pharmaceuticals International Inc., are being
investigated over their drug-pricing policy. Valeant received subpoenas from several State
Attorney Generals requesting information related to price increases of drugs they recently
acquired, including Nitropress and Isuprel, prices of which increased 525% and 212%,
respectively. Due to the increased scrutiny over rapidly rising drug prices, Valeant stated in its
third-quarter 2015 conference call that it will pursue fewer, if any, transactions that are focused
on mispriced products. This has been one of Valeants growth strategies, but CFRA thinks these
investigations may temper some acquisitions within the pharmaceuticals industry.
Some acquisitive companies, such as Valeant, Endo International plc, Mylan, and Allergan Inc.,
have significant tax advantages over many US-headquartered pharmaceutical companies. These
companies have completed tax inversion transactions in recent years, and reincorporated their
headquarters in countries with much lower tax rates. In 2014, the US Treasury Department
implemented new rules to discourage tax inversion by making these transactions less financially
attractive; this has significantly slowed the number of tax inversion deals.
In April 2016, the Treasury Department put forth new rules in an effort to eliminate tax
inversion deals and, in effect, caused Pfizer and Allergan to terminate their $160 billion merger,
which would have been the largest merger in history within the health care sector. Under the new
rules, for the purpose of computing ownership percentage when determining if an acquisition can
be treated as an inversion, the stock of the foreign company excludes any US assets acquired
within three years prior to the signing date of the latest acquisition.
Patent Cliff and Recent Drug Approvals
The drug industry experienced a patent cliff from 2011 to 2015, when a significant number
of top-selling drugs lost their patent protection. During this period, EvaluatePharma, an
information service provider in the pharmaceuticals industry, estimated that approximately $255
billion worth of pharmaceutical sales had patent expirations.
The accompanying table indicates the effect of these patent losses on US sales for the four
major pharmaceutical firms during this period. After four straight years of declining sales in the
US from 2010 to 2014, and after bottoming out at $53.0 billion in 2014 (a drop of 29.1% from
$74.7 billion in 2010), pharmaceutical sales grew 8.5% in 2015.
LARGE PHARMACEUTICAL COMPANY SALES
(total US sales only, in $, millions, unless otherwise noted)
SALES
COMPANY
PERCENTAGE CHANGE
-- (first half) --
----- (first half) -----
NAME
2013
2014
2015
Pfizer
Merck
20,274
18,246
19,073
17,071
21,704
17,519
9,428
NA
12,960
NA
(5.92)
(6.44)
13.79
2.62
37.46
NA
Eli Lilly
12,890
9,134
10,097
4,739
5,446
(29.14)
10.54
14.91
8,318
7,716
8,188
3,881
5,225
(7.24)
6.12
34.63
59,728
52,994
57,508
18,048
23,631
(11.27)
8.52
30.93
Bristol-Myers Squibb
Total
2015
2016
20132014 20142015
20152016
Source: Company reports.
11
INDUSTRY SURVEYS
Total estimated sales lost from the expiration of patent exclusivity was about $16.0 billion in
2015, following $11.9 billion in 2014, according to IMS Health. In 2013, sales loss was estimated
at $19.9 billion, after a whopping estimated sales loss of $28.9 billion at the peak of the patent
cliff in 2012.
Some prescription drugs that had annual worldwide sales of about $44 billion in 2014 lost
their patent protection in 2015, according to EvaluatePharma. This is the second-highest amount
since the $53 billion worth of drugs that went off patent in 2012. In 2013 and 2014, the amount
was $28 billion and $34 billion, respectively. However, the effect of generic alternatives on sales
of prescription drugs that went off patent in 2015 was only $16 billion, as some of these drugs are
biologics that are a challenge to replicate.
In March 2015, the US Food and Drug Administration (FDA) approved the first biosimilar,
Zarxio, which was manufactured by Sandoz, Novartis International AGs generic division, as a
substitute for Amgen Inc.s Neupogen. In April 2016, the FDA approved its second biosimilar,
Inflectra, manufactured by South Korea-based Celltrion (partnered with Pfizers Hospira unit), as
a substitute for Johnson & Johnsons Remicade. The agency also approved Erelzi, a biosimilar to
Amgens Enbrel, in August 2016, and Amjevita, a biosimilar to AbbVie Inc.s Humira, in
September 2016.
SELECTED TOP PATENT EXPIRATIONS
(arranged b y US sales, in $, millions)
BRAND NAME
2016*
Humira
COMPANY
INDICATION
SALES
AbbVie
Seretide/Advair
Crestor
GlaxoSmithKline
AstraZeneca
Asthma
Hyperlipidaemia
5,625
5,382
Zetia
Merck
Hyperlipidaemia
2,526
1,892
Benicar
Daichi Sankyo
Hypertension
Kaletra
AbbVie
HIV
2015
Abilify
14,012
700
Otsuka Holdings
Schizophrenia, Bipolar disorder
4,638
Neulasta
Amgen
Neutropaenia
4,596
Copaxone
Teva
Multiple sclerosis (MS)
4,237
Tracleer
Actelion
Pulmonary hypertension
1,620
Zyvox
Pfizer
Antibacterials
1,352
Avodart/Jalyn
GlaxoSmithKline
Benign prostatic hyperplasia
1,326
Namenda
Forest Labs/Actavis
Alzheimer's
1,013
Androgel
AbbVie
Testosterone deficiency
Synagis
Astra Zeneca
Infections
*2016 is based on estimated 2015 sales. 2015 is based on actual 2014 sales.
934
499
Although CFRA foresees price competition and erosion, we do not anticipate the same level of
price erosion that chemically based pharmaceuticals face when a generic hits the market.
Biosimilars will likely be discounted 15%30% compared with the 90%95% discount that is
typical for generics. In 2015, global sales for Neupogen reached about $1.1 billion, and we expect
sales of $800 million in 2016. Global sales for Remicade reached $8.1 billion in 2015, and we
expect sales of $7.9 billion in 2016.
INDUSTRY SURVEYS
12
In October 2016, Pfizer announced that it will launch Inflectra (a biosimilar to autoimmune
disease drug Remicade) in the US in November this year, and that it will sell the drug at a 15%
discount to Remicade. Pfizers Inflectra launch is considered at risk, as Remicade manufacturer
Johnson & Johnson vowed to defend the remaining patents it has on Remicade. A court decision
in favor of Johnson & Johnson could entitle the company to triple damages.
The pharmaceuticals and biotechnology industries have benefited from an increased number of
approved drugs, highlighted by the 45 New Molecular Entities (NMEs, or novel, new innovative
drugs) approved in 2015 by FDA Center for Drug Evaluation and Research (CDER). This is the
highest number of NME approvals in almost 20 years (a record 53 NMEs were approved in
1996), after 41 NME approvals in 2014, 27 in 2013, and 39 in 2012.
Year to date through October 21, 2016, there have been 19 NMEs approved by the FDA,
including Roches Tecentriq, an anti-PD-L1 immuno-oncology drug for bladder cancer; AbbVies
and Roches Venclexta to treat patients with chronic lymphocytic leukemia with the 17p deletion;
and Mercks Zepatier and Gilead Sciences Epclusa to treat hepatitis C. CFRA thinks each of these
drugs could achieve more than $2 billion in annual sales by 2020.
From 2006 to 2015, the average number of NMEs approved was 29.3, while the average
number of NMEs filed was 35.1. However, since 2011 to 2015, the average number of NMEs
approved was 36.4, a 24.2% increase over the 10-year average, while the average number of
NMEs filed was 39.4, a 12.3% increase.
NME APPROVALS
(number of drugs)
50
45
40
35
30
25
20
15
2005
2006
2007
2008
2009
NMEs Filed*
2010
2011
2012
2013
2014
2015
NMEs Approved
*New Molecular Entities (NMEs) filed in a certain year does not indicate that they will be reviewed in the
same year as the review process typically takes 812 months.
NMEs are novel, innovative drugs that the FDA has not approved, and include both New Drug Applications (NDAs)
and Biologics License Applications (BLAs).
Source: Food and Drug Administration.
There has been increased funding under the new Prescription Drug User Fee Act (PDUFA) and
new productivity measures to streamline the approval process. With this in mind, CFRA expects
the number of NME approvals to remain high in 2016. There is also evidence that company
research and development (R&D) pipelines appear stronger, particularly in cancer, immune
diseases, and other areas representing unmet medical needs.
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INDUSTRY SURVEYS
CFRA thinks this healthy increase in NME filings and approvals bodes well for the
pharmaceuticals industry, as it indicates a more productive R&D effort and potential for higher
sales growth.
Resurgence of R&D Pipelines

Given the healthy product pipeline expected in the industry over the next decade, CFRA thinks
that positive investor perceptions are a key driver of strength in big pharmaceutical stocks. The
R&D pipeline is strong, with a total net present value of $492.8 billion in 2015, up significantly
from its estimate of $418.5 billion in 2014, according to EvaluatePharmas World Preview 2016,
Outlook to 2022 report.
CFRA thinks a key contributing factor to increasing pipeline value is the rise of orphan drugs,
which treat rare diseases that affect 200,000 or fewer Americans. As of October 2016, the FDA
approved six orphan drugs, or 32% of total NME approvals this year. In 2015, the FDA
approved a record 21 orphan drugs, or 47% of total NME approvals last year. This follows a
healthy approval climate in 2014, when the FDA approved 17 orphan drugs (41% of all drugs
approved that year). In 2013, the FDA approved nine orphan drugs, or 33% of all NME
approvals. We think these are significant numbers, considering that patients with rare diseases
often have few or no drug treatment options. These FDA-approved drugs are used in the
treatment of pulmonary arterial hypertension, chronic lymphocytic leukemia, mantle cell
lymphoma, multiple myeloma, and non-small cell lung cancer. An example is Kalydeco, an oral
medication for the treatment of the genetic disorder cystic fibrosis.
ORPHAN DRUGS MEDIAN COST
(from 2010 to 2014*)
66,057
2014
4,775
63,435
Year
2013
3,909
50,352
2012
3,562
Orphan
Non-Orphan
42,329
2011
3,006
36,767
2010
2,755
0
10,000
*Latest available.
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Median Cost per Patient ($)
INDUSTRY SURVEYS
14
Industry Revenues
The total global pharmaceuticals market increased 6% to $1.1 trillion in 2015, up from $1.0
trillion in 2014, with nearly 40% of the growth coming from specialty drugs, including oncology,
autoimmune, respiratory, and anti-viral drugs, according to IMS Health.
In 2015, total drug spending in the US increased 12.2% to $424.8 billion, on an invoice basis, with
a record number of 4.4 billion prescriptions filled. After adjusting for rebates and other price
concessions, net spending in the US was $310 billion last year, up 8.5% from 2014. Spending
increased 13.1% in 2014, compared with the 3.2% increase in 2013, which was the fastest rate of
growth since 2001. Reasons for this substantial increase, in CFRAs view, include higher spending on
innovative new treatment options, the lower impact of patent expirations, the increase in the list prices
for branded drugs, and more insured patients due to the health care reform law. IMS Health forecasts
that US drug spending will reach $610$640 billion by 2020, up 43.5%50.6% from 2015 levels.
Worldwide orphan drug sales are projected to grow at a compound annual growth rate
(CAGR) of 11.7% from 2015 to 2020, reaching $178 billion in 2020, nearly double the rate of
the overall drug market.
Sales in the US accounted for roughly 40.2% of the global pharmaceutical market in 2015,
followed by pharmerging nations, particularly the BRIC countries (Brazil, Russia, India, and
China), at 23.3%, and the EU5 (Germany, France, Italy, the UK, and Spain), at 13.5%, according
to IMS Health.
The forecast CAGR for global sales from 2016 to 2020 is 4%7%, with India projected to be
the fastest-growing region at 11%14%, according to IMS Health. The US is forecast to grow
5%8%, while France is expected to be the slowest-growing region at -3%0%.
Overall sales growth for the companies in the S&P pharmaceuticals index was 0.9% in 2015,
after rising a modest 1.3% in 2014. However, this is a significant improvement over the 1.5% and
8.3% declines in 2013 and 2012, respectively. The 8.3% decline in 2012 reflect the effects of the
patent cliff, which was then at its peak. The larger pharmaceutical companies experienced
significant declines in 2012 and 2013, mainly on patent expirations.
For 2016, CFRA forecasts overall sales growth of 5.2% for the companies in the S&P 1500
pharmaceuticals index, with those in the S&P 500 growing 5.1%. All four major pharmaceutical
companiesPfizer, Merck, Bristol-Myers Squibb, and Eli Lillywill likely report sales growth in
2016, which would be a first since 2010 when all four companies reported sales growth in the
same year.
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INDUSTRY SURVEYS
PHARMACEUTICAL COMPANIES IN THE S&P 1500

(arranged b y market capitalization, as of Octob er 21, 2016, in $, b illions)
RANK TICKER
NO.
COMPANY
SYMBOL
NAME
INDEX
MARKET
CONSTITUENTS
CAPITALIZATION
JNJ
Johnson & Johnson
S&P 500 Index
310.36
PFE
Pfizer
S&P 500 Index
195.19
MRK
Merck & Co.
S&P 500 Index
169.23
AGN
Allergan (formerly Actavis)
S&P 500 Index
91.26
BMY
Bristol-Myers Squibb
S&P 500 Index
83.58
LLY
Eli Lilly
S&P 500 Index
82.57
ZTS
Zoetis
S&P 500 Index
25.22
MYL
Mylan
S&P 500 Index
19.80
PRGO
Perrigo
S&P 500 Index
12.94
10
MNK
Mallinckrodt
S&P 500 Index
6.69
11
ENDP
Endo International
S&P 500 Index
4.64
12
AKRX
Akorn
S&P MidCap 400 Index
3.37
13
CTLT
Catalent
3.04
14
PBH
Prestige Brands
2.52
15
MDCO
The Medicines Company
S&P SmallCap 600 Index
2.53
16
NKTR
Nektar Therapeutics
2.00
17
IPXL
Impax Laboratories
1.61
18
19
DEPO
SUPN
DepoMed
Supermus Pharmaceuticals

1.46
1.03
20
PAHC
Phibro Animal Health
1.01
21
AMPH
Amphastar Pharmaceuticals
0.84
22
LCI
Lannett Company
0.79
23
ANIP
SciClone Pharmaceuticals
0.76
24
SCLN
ANI Pharmaceuticals
0.48
The successful commercialization of a drug is partly based on the availability of third-party
payer reimbursement, including private health insurers and government payers. In recent years,
these third-party payers have increasingly pressured drug firms to lower drug pricing and, at
times, have challenged the medical necessity of certain drugs for some patients, thereby exerting
some influence over a physicians decision. CFRA foresees continued pricing pressure on the drug
firms as third-party payers attempt to control costs, which will result in lower average selling
prices, and therefore revenues for drug firms.
These third-party payers, including prescription benefit managers and health insurers, are
demanding bigger discounts and rebates from drug manufacturers; this trend will likely continue
as some of these third-party payers are growing in scale through industry consolidation and are
able to negotiate better pricing terms.
INDUSTRY SURVEYS
16
REVENUE PER SHARE

(aggregate value weighted per share, $, quarterly)
38
37
36
35
34
33
32
31
2010
2011
2012
2013
2014
S&P Composite 1500 Pharmaceuticals Index
2015
2016*
Period Average
*Data through second quarter.

Drug prices are also subject to government rebates and chargebacks. For example, under the
ACA, the Medicaid drug rebate on the average manufacturer price rose from 15.1% to 23.1%.
Further, there is a statutory requirement that drug manufacturers charge the Department of
Veteran Affairs no more than the lowest price paid by any private-sector purchaser. However, by
law, the Department of Health and Human Services is not able to negotiate drug prices for
Medicare recipients. Under the Medicare Modernization Act of 2003, which brought prescription
drug benefits, Medicare recipients choose Medicare Part D prescription drug benefits through
private plan sponsors. These private plan sponsors then negotiate with the drug companies and
establish formularies. CFRA thinks that at the time, Congress thought this market-oriented
approach through private plans would lead to better pricing through competition.
High drug prices have received significant media attention recently. In September 2015, stock
prices within the health care sector took a significant hit, following the infamous 5,555% price
hike of Turing Pharmaceuticals generic drug Daraprim. Other companies, including Valeant
Pharmaceuticals, received subpoenas regarding drug price increases. The media backlash was
quick and significant, leading to billions of dollars of market capitalization slashed from
companies valuations. Clinton spoke out against these high drug prices and vowed to rein them
in if elected President. Despite the election of Trump, CFRA expects drug prices and associated
price hikes to remain a contentious issue beyond the presidential election cycle.
Industry Profit Margins

Gross Margin
The pharmaceuticals industry has one of the highest gross margins compared with most other
industries; pharmaceutical firms are able to charge significant premiums for their products since
many drugs help transform, improve, and potentially save the lives of people. The industry is also
able to charge premium prices because the cost of drug development is substantial, while the
potential of a drug failing clinical trials is extremely high due to the lack of efficacy or for safety
17
INDUSTRY SURVEYS
reasons. In 2015, the estimated average pretax cost per new prescription drug approval, inclusive
of failures and capital costs, was $2.6 billion, according to the Tufts Center for the Study of Drug
Development (CSDD). This is a significant increase compared with Tuft CSDDs estimated cost of
$1.5 billion in the early 2000s.
Due to the significant costs in developing and successfully marketing a drug, companies are
able to charge high prices to fund R&D for other drugs in its pipeline. This results in high gross
margins. Only three out of 10 drugs approved are profitable due to high costs of development,
according to the Pharmaceutical Research and Manufacturers of America (PhRMA).
Between 1998 and 2014, there were 96 unsuccessful attempts to develop drugs to treat
melanoma, 167 for lung cancer, and 75 for brain cancer, according to PhRMA. In the same
period, some medicines beat the odds and advanced care; the FDA approved seven medicines to
treat melanoma, 10 for lung cancer, and three for brain cancer.
Gross margins are typically higher for products sold in the US, as pharmaceutical firms can
command higher prices in the US. In many other countries, including developed nations in
Europe, drug pricing and reimbursement are negotiated with their respective governments, which
typically results in lower pricing. Substantial discounts for certain medicines in developing
countries can also hurt gross margins.
The average gross margin for the firms in the S&P 1500 pharmaceuticals index was 70.0% in
2015, up from 68.6% in 2012.

The larger companies within the S&P 500 enjoy higher gross margins than the constituents in the
S&P 400 and S&P 600. The average gross margin for companies within the S&P 500 was 70.1% in
2015 compared with 58.1% and 57.2% for companies in the S&P 600 and S&P 400, respectively.
GROSS MARGIN
(in percent, quarterly)
73
72
71
70
69
68
67
66
65
2010
2011
2012
2013
2014
2015
2016*
Period Average

INDUSTRY SURVEYS
18
Based on CFRAs analysis, gross margins for companies in the S&P 1500 pharmaceuticals
index will likely remain stable in 2016, with a slight increase to 69.6%. Among the companies in
the S&P 500, Pfizer had the highest gross margin in 2015 at 80.7%, despite the acquisition of
generic drug manufacturer Hospira Inc., which had the lowest gross margin at 38.1%.
Operating Income
Earnings before interest and tax (EBIT) is a widely used metric to gauge operating profit after
selling, general, and administrative (SG&A) expense, and other operating expenses. Within the
pharmaceuticals industry, cost of goods, selling and marketing, and R&D costs are typically the
highest expenses for a company. Often, SG&A costs could exceed a drug firms cost of goods sold.
SG&A expenses are comprised primarily of salaries, benefits, and other staff-related costs
associated with sales and marketing, finance, legal, and other administrative personnel. Also included
is the branded prescription drug fee, which was implemented in 2011 to help fund the ACA.
R&D expenses consist primarily of the cost of clinical research and studies, materials and
supplies, licenses and fees, milestone payments under collaboration arrangements, and personnel
costs including salaries, benefits, and often, stock-based compensation.
Sales and marketing play a significant role in the pharmaceuticals industry, and typically spike after
the approval of a new drug. SG&A margins are around 26%32% for companies in the S&P 1500
pharmaceuticals index, while R&D costs average around 14.9% of sales. Over the past several years,
total R&D spending for pharmaceutical firms in the S&P 500 remained flat, with firms cutting back
on costs as sales declined. In 2010, R&D costs for firms in the S&P 500 were $34.5 billion, and
declined marginally to about $33 billion from 2011 to 2014. However, R&D rose significantly in
2015 to $36.2 billion as companies such as Merck, Pfizer, and Johnson & Johnson raised R&D
expenditures. Bristol-Myers Squibb had the highest R&D expense ratio at 24.4% of sales.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES MARGIN
34
32
30
28
26
24
22
2010
2011
2012
2013
2014
2015
2016*
Period Average

19
INDUSTRY SURVEYS
R&D costs for branded drug manufacturers are significantly higher than those for generic drug
manufacturers, where R&D costs are typically in the mid- to high-single digits.
RESEARCH & DEVELOPMENT EXPENSES
7.00
6.25
5.50
4.75
4.00
2010
2011
2012
2013
2014
2015
2016*
Period Average

Adjusted operating income or EBIT for the pharmaceuticals industry is among the highest of any
industry. Adjusted EBIT for the companies in the S&P 1500 pharmaceuticals index was 30.4% in
2015, up from 29.9% in 2014 and 28.9% in 2013. CFRA anticipates improvement in 2016 to 32.0%
on higher sales growth and improved leverage, as spending is expected to remain conservative.
OPERATING MARGIN
31.5
30.0
28.5
27.0
25.5
24.0
2010
2011
2012
2013
2014
2015
2016*
Period Average

INDUSTRY SURVEYS
20
Larger pharmaceutical firms in the S&P 500 generate significantly higher operating margins
than their smaller counterparts in the S&P 600. Operating margins for companies in the S&P 500
averaged 29.8% from 2010 to 2015, while companies in the S&P 400 and S&P 600 generated
average operating margins of 28.9% and 9.5%, respectively, during that period.
Industry Earnings
Net Income
Adjusted net income margin for the pharmaceuticals industry is also among the highest of any
industry. Adjusted net income margin for pharmaceutical companies in the S&P 1500 averaged
22.6% from 2010 to 2015. The lowest adjusted net income margin was 21.1% in 2011, and the
highest was 25.2% in 2015.
Despite sales declines in 2012 and 2013, the pharmaceuticals industry was able to expand net
margins each year, mainly by cost cutting. CFRA expects this trend to continue in 2016 and 2017,
along with improving sales, which we think will drive net margins up to 25.9%.
NET INCOME
12.5
10.0
7.5
5.0
2.5
0.0
2010
2011
2012
2013
2014
2015
2016*
Period Average

Companies in the S&P 500 generated the highest net margins, averaging 22.6% from 2010 to
2015, while companies in the S&P 600 generated net margins of 5.6% during that period.
Industry Balance Sheet

Cash balances for the large firms in the S&P 500 increased significantly over the past several
years, driven by healthy cash flow generation. The cumulative cash balance for the firms in the
S&P 1500 increased to $90.8 billion at year-end 2015 from $84.7 billion at year-end 2010.
Johnson & Johnson and Pfizer had the largest cash and short-term investments balances at
year-end 2015, with $38.4 billion and $23.3 billion, respectively.

Many pharmaceutical companies pay annual dividends, and the average dividend yield for
pharmaceutical companies in the S&P 500 is approximately 3%.

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INDUSTRY SURVEYS
TOTAL CASH AND SHORT-TERM EQUIVALENTS

65
60
55
50
45
40
35
30
2010
2011
2012
2013
2014
2015
2016*
Period Average

Stock buybacks are a significant component of capital deployment, as numerous
pharmaceutical firms have initiated extensive stock buyback programs. Since 2010, Pfizer has
repurchased 1.9 billion shares for $50.7 billion.
Debt-To-Equity Ratio
The pharmaceuticals industrys debt-to-equity ratio increased at a rapid rate over the past several
years. CFRA thinks many firms raised debt over the past several years for general corporate purposes
and to help finance acquisitions since the cost of debt has remained at low levels over the past years.
TOTAL DEBT-TO-EQUITY RATIO
63
58
53
48
43
38
33
2010
2011
2012
2013
2014
2015
2016*
Period Average

INDUSTRY SURVEYS
22
CFRA attributes the rise in the industrys debt-to-equity ratio to companies taking on more
debt for strategic expansions, to finance M&As, and for stock repurchases and other capital
deployment strategies.
Return on Equity
The average return on equity (ROE) for the pharmaceuticals companies in the S&P 500 in
2015 was 25.7%, down from 27.4% in 2014. The average was hurt by two new additions to the
S&P 500, Mallinckrodt plc and Perrigo Co., which had an average ROE of 13.7% and 12.1%,
respectively, in 2014 and 2015.
Industry Valuation
The regulatory approval or non-approval of a drug can have a significant effect on a
companys valuation.
Valuation within the pharmaceuticals industry increased steadily over the past several years,
with significant multiple expansion. In 2011, the S&P pharmaceuticals index valuation ranged
from 10x11x next-12-month earnings, representing a discount to the overall health care sector
(which was trading at 11.9x next-12-month earnings), and a discount to the broader S&P 1500
(which was trading at 12.7x next-12-month earnings).
In 2016, the pharmaceuticals industry is trading in a range of 14.5x15.5x next-12-month
earnings. This range is a significant multiple expansion from the level in 2011, but it is down from
the peak range of 17x18x the industry was trading in mid-2015, prior to the significant
contraction that occurred starting in September 2015 due to the scrutiny over high drug prices.
Comparison based on a P/E-to-growth (PEG) analysis may provide additional insight on an
appropriate valuation. A company with a higher growth ratea three-year earnings per share
(EPS) CAGR is typically usedshould command a higher P/E ratio than a company with a slower
EPS growth rate.
23
INDUSTRY SURVEYS
INDUSTRY TRENDS
Operating Environment
M&As Take Center Stage
Mergers and acquisitions (M&As) took center stage within the pharmaceuticals industry over the
past several years. On November 22, 2015, Pfizer agreed to acquire Allergan in a $160 billion
transaction, the largest announced M&A deal in the pharmaceuticals industry ever. For tax and
legal reasons, the deal was structured as if Allergan was acquiring Pfizer, as the businesses would
be combined under Allergan and would keep Allergans Irish domicile. The intention was that
immediately after the deal closed, the company would adopt the Pfizer plc name.
However, in April 2016, the Treasury Department put forth new rules in an effort to eliminate tax
inversion deals and, in effect, led to Pfizer terminating its proposed merger with Allergan. Under
the new rules, for the purpose of computing ownership percentage when determining if an
acquisition can be treated as an inversion, the stock of the foreign company excludes any US
assets acquired within three years prior to the signing date of the latest acquisition. In other
words, all of Allergans US acquisitions in the prior 36 months, including the acquisitions of
Actavis, Forest Labs, and Warner Chilcott, would be excluded in calculating Allergans size. As a
result, Pfizers ownership would exceed the 80% ownership threshold, and Pfizer would continue
to be treated as a US corporation for tax purposes, in spite of its corporate address.
The recent buying binge among pharmaceutical companies started in February 2014 when Actavis
plc agreed to acquire Forest Laboratories in a deal valued at $25 billion. Then in April 2014,
Valeant Pharmaceuticals International, perhaps the most prolific acquirer in the industry, teamed
up with Bill Ackmans Pershing Square Capital Management, and proposed to acquire Allergan in
a combination of cash and stock valued at about $47 billion or $157 per share. However,
Allergan, rejected the offer and adopted a shareholder rights plan (also known as a poison pill),
which would be triggered if any investor acquires a stake of 10% or more in the company.
Pershing Square reported that it had a 9.7% stake in Allergan. Actavis eventually acquired
Allergan in March 2015 and adopted the Allergan name, which came into effect in June 2015.
M&A deals continued at a healthy pace in 2015 with numerous transactions including Valeants
$10.1 billion acquisition of Salix Pharmaceuticals, Inc. in April 2015 and Pfizers $17 billion
acquisition of Hospira in September 2015.
In February 2015, Mylans acquisition deal for Abbott Laboratories established generic drug
business in developed markets outside the US (worth $5.3 billion) was finally completed. Mylan
reincorporated in the Netherlands in a tax inversion to lower its corporate tax rate.
CFRA thinks that this onslaught of transactions, in addition to strengthening pipelines, expanding
market share, entering new geographies, and tapping new therapeutic indications, has been a way
for acquirers and potential acquirers to lower their tax rates by acquiring sizeable foreign
companies through a tactic known as a tax inversion. US companies have exploited a loophole
in the tax laws by merging or acquiring foreign firms and transferring their official address to a
foreign country.
Under US tax laws, if a company transfers at least 20% of its shares to a foreign firm and
establishes its headquarters in a foreign country, the company can avoid paying US taxes on
INDUSTRY SURVEYS
24
foreign profits when it repatriates those profits back into the US. Those profits are currently taxed
at the US corporate tax rate of around 35%, less a foreign tax credit. Instead, the newly combined
company and its tax requirements would fall under the jurisdiction of the foreign country.
Prior to its new April 2016 rules, the Treasury Department issued rules in September 2014 to
make tax inversions less financially attractive by imposing new taxes on foreign earnings if those
earnings are loaned to another foreign subsidiary. These so-called hopscotch loans will now
be considered taxable dividends.
The AbbVie Inc.-Shire plc deal became one of the first casualties of the 2014 Treasury
Department rule. In 2014, AbbVie decided to terminate its proposed $53.6-billion acquisition of
Shire and elected to pay a hefty $1.6 billion break-up fee to Shire. In February 2015, Mylan
restructured its acquisition of Abbott Labs established generic drugs unit in developed markets
outside of the US. Abbott Labs received a 22% stake in the new company, up from the originally
agreed upon 21%
Companies that completed inversions before the new Treasury Department rules came into effect
have a competitive advantage over US-based companies for future M&A transactions, as they
have already established a lower corporate tax rate in the country where they are domiciled.
Actavis and Valeant are two prime examples, and both companies are currently the industrys
most prolific acquirers.
However, there were also some high-profile unsuccessful hostile deals, including Teva
Pharmaceuticals $40.1 billion bid for Mylan in April 2015 and Mylans $35.9 billion bid for
Perrigo Co. plc in November 2015. Mylan was unable to receive the 50% of Perrigos shares
necessary for its tender offer, which expired on November 13, 2015. Under Irish takeover rules,
Mylan cannot make another bid for Perrigo for the next 12 months. Meanwhile, Teva eventually
withdrew its bid for Mylan and entered into a friendly transaction with Allergan to purchase
Allergans generic unit for $40.5 billion. This acquisition was completed in August 2016, during
which Allergan also agreed to sell its Anda Inc. unit to Teva for $500 million in a deal that was
closed in October 2016.
Orphan Drugs on the Rise
A key contributing factor to increasing pipeline value in the pharmaceuticals industry is the rise of
orphan drugs, which treat rare diseases that affect 200,000 or fewer Americans. There are as
many as 7,000 rare diseases estimated to affect between 2530 million people in the US, according
to the National Institutes of Health. As of October 2016, the US Food and Drug Administration
(FDA) approved six orphan drugs, or 32% of total approvals of New Molecular Entities (NMEs,
or novel, new innovative drugs) this year. In 2015, the FDA approved a record 21 orphan drugs,
or 47% of total NME approvals in 2015. This follows 17 orphan drug approvals in 2014 (41%
of all NME approvals that year), a surge from nine orphan drug approvals in 2013 (33% of all
NME approvals).
Because of the small patient population, orphan drug developers are typically able to command
premium pricing. Of the top 20 most expensive drugs in the US, 17 have orphan drug status,
according to EvaluatePharma. The most expensive drug, Soliris, developed by Alexion
Pharmaceuticals Inc. to treat rare disease paroxysmal nocturnal hemoglobinuria, costs about
$600,000 per patient annually. Sales of Soliris climbed steadily from $1.6 billion in 2013 to $2.2
billion in 2014 and $2.6 billion in 2015. CFRA expects Soliris sales to rise another 10.5% in 2016
to about $2.9 billion.
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In contrast, the much-publicized price tag of Gilead Sciences Inc.s Sovaldi was a mere $84,000
for a 12-week treatment and had a cure rate of more than 90%, and therefore, not a recurring
annual cost. In 2014 (latest available), Sovaldi accounted for more than a quarter of total
spending increase across Medicaid, Medicare, and commercial health plans. Since then, Sovaldi
had $10.3 billion in global sales for 2014, $5.3 billion for 2015, and $3.5 billion for the first nine
months of 2016.
The orphan drugs segment is an area that is exhibiting superior research and development (R&D)
productivity, and it is expected to generate attractive returns in the future, according to
EvaluatePharma. Orphan drugs have a lower cost of development and a better ability to fetch a
premium price compared with other medicines, making the segment an appealing research area
for both large and small pharmaceutical companies.
The increase in orphan drugs development can be partly attributed to the Orphan Drug Act of
1983. Prior to 1983, only 38 orphan drugs were approved; subsequently, 335 orphan drugs have
been approved as of fiscal year 2015 (ended September 30, 2015). The Orphan Drug Act
incentivizes firms to spend significant research funds on rare diseases. Otherwise, many drug firms
would not pursue orphan drug development due to the small patient population. These incentives
include seven years of marketing exclusivity from approval, 50% tax credit on R&D cost, and
R&D grants for clinical trials. Orphan drugs also command premium pricing and typically do not
encounter the same level of reimbursement challenges as non-orphan status drugs, which may
have competing drugs on the market.
Sales of orphan drugs are forecast to grow 11.7% annually through 2020, compared with 4.7%
growth for non-orphan drugs, and sales are expected to reach $178 billion by 2020, accounting
for about 20.2% of all prescription drug sales, according to EvaluatePharma.
Oncology Therapies Emerge as a Hot R&D Space
Global spending on cancer drugs increased 11.5% on a constant-dollar basis in 2015, reaching $107
billion that year. This spending is expected to grow between 7.5%10.5% annually through 2020 to
$150 billion, according to IMS Health. Despite a surge in innovative and targeted therapies for cancer
patients, growth in cancer drug spending moderated on the back of fewer breakthrough therapies for
large patient populations, patent expiries, reduced use of supportive care medicines, and stronger
payer management.
Innovation in cancer therapies is becoming more targeted, according to IMS Health, while
pharmaceutical company investments remain high. Similar to targeted therapies, many of the new
oncology drugs are aimed at small patient populations and are focused on lung and breast cancer,
including tumor types with lower prevalence (e.g., ovarian, stomach and liver cancers, and
leukemia). Cancer therapies make up 30% of preclinical and Phase I clinical development products.
Melanoma, a form of skin cancer, is gaining increasing attention from pharmaceutical companies.
Bristol-Myers Squibb made a significant investment in such research with its acquisition of
Medarex Inc. in 2009 for $2.4 billion, while Merck entered into skin cancer research when it
merged with Schering-Plough Corp. that year, gaining the rights to the antibody pembrolizumab.
Medarex brought ipilimumab, the breakthrough melanoma drug now sold under the Yervoy
name, to Bristol. More recently, Bristol has been studying a combination therapy of Yervoy with
an experimental antibody called nivolumab, which Bristol hopes will be a more powerful
melanoma therapy. Nivolumab is among the first in a new class of antibodies that block the
action of a protein called PD-1, and enhance the bodys immune system T-cell response.
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The FDA approved pembrolizumab (now branded as Keytruda) in September 2014; nivolumab
(now branded as Opdivo) was approved in December 2014, and the combination therapy of
Opdivo and Yervoy was approved in September 2015 as treatments for melanoma. In 2015,
Opdivo sales stood at $1.1 billion, while Keytruda earned $566 million. CFRA forecasts sales of
about $5.4 billion for Opdivo in 2016 (with $4.2 billion for Bristol and $1.2 billion from
Japanese drugmaker Ono Pharmaceutical Co. Ltd.), rising to about $8.8 billion in 2020 to
become Bristols best-selling drug. Meanwhile, we estimate Keytruda sales at $1.4 billion for
2016, rising to $5.8 billion by 2020.
Diabetes Drugs: Second Best-Sellers
The diabetes medications group was the second best-selling therapeutic category in the US in
2014, according to IMS Health, and one of the fastest growing, with worldwide sales of about
$63.6 billion in 2014. The increasing number of Type 2 diabetes patients and the switch to newer
treatments is driving the lucrative US diabetes market. In 2014 (latest available), an estimated
29.1 million adults in the US (9.3% of the population) were suffering from diabetes, of which
90%95% were Type 2 diabetes patients, according to the Centers for Disease Control and
Prevention (CDC), an organization under the Department of Health and Human Services (HHS).
About 415 million people in the world were suffering from diabetes in 2015, and that number is
projected to reach 642 million by 2040, according to the International Diabetes Federation.
Healthy Growth Also Seen for Global Vaccines
The global market for vaccines has grown at a much faster pace than the pharmaceutical market
over the last few years, and CFRA expects this trend to continue. The global vaccine market grew
at a 23% compound annual growth rate (CAGR) from $9 billion in 2005 to $25 billion in 2010,
compared with the pharmaceutical market growth of 6% in the same period, according to IMS
Health. The firm expects the market to grow 10% annually from $40 billion in 2014 to $68
billion by 2018. By 2020, spending on antibiotics and vaccines for developed countries is forecast
to reach $35$37 billion, while spending for pharmerging countries will likely surge to $20$21
billion. IMS Health expects therapeutic vaccines for cancer, human immunodeficiency virus
(HIV), and Alzheimers disease to account for a larger share of global vaccine sales, growing to a
22% share in 2023. The main driver of growth will be more coverage through inclusion in
national immunization programs, innovative partnerships between public and private vaccine
stakeholders, and rising prices in the developed markets.
In April 2014, major pharmaceutical companies announced a series of deals amounting to $28.5
billion, to focus on particular areas: Novartis on cancer, GlaxoSmithKline plc (GSK) on vaccines,
and Eli Lilly on animal health. GSK bought Novartis global vaccines business, except influenza
vaccines, for $5.3 billion in March 2015.
Amid active deals in the global vaccine business, companies around the world are bent on fast
tracking the development of vaccines to fight the Ebola virus. A large-scale outbreak of the virus
started in December 2013 and has spread through various countries in West Africa. The World
Health Organization (WHO) declared a public health emergency on the outbreak in West Africa
between August 2014 and March 2016. The epidemic has claimed 11,310 lives as of June 10,
2016, according to the WHO.
GSK obtained its anti-Ebola vaccine candidate (ChAd3-ZEBOV) when it acquired biotechnology
company Okairos in 2013. In October 2014 GSK said that development of its vaccine candidate
was progressing at an unprecedented rate, with Phase 1 conducted in the US, UK, Mali, and
Switzerland. Since then, the company has been working with the US National Institutes of Health
(NIH) to develop a vaccine candidate to fight Ebola. An international consortium, consisting of
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the Wellcome Trust, the Medical Research Council, and the UK government, is funding the trials.
Another vaccine being researched (VSB-EBOV) was developed by NewLink Genetics and Merck
Vaccines USA in collaboration with the Public Health Agency of Canada. The vaccine has passed
Phase 1 clinical trials. These two leading vaccine candidates started their Phase II/III trials in
March 2015 (GSK) and April 2015 (NewLink). In April 2016, the WHO chose to use VSV-EBOV
for a Phase III trial in Guinea and Sierra Leone, two countries hard hit by the Ebola epidemic. In
June this year, the agency declared an end to Ebola virus transmission in Guinea and Liberia.
In February 2016, the WHO declared a public health emergency on the Zika virus and its
complications. The Zika virus is mosquito-borne, and it includes symptoms such as malaise,
headache, mild fever, skin rash, conjunctivitis, or muscle and joint pain. The virus can cause
unusually small heads and brain damage in infants born to infected mothers. Since the start of the
outbreak in 2015, thousands of cases have been recorded across 73 countries and territories, while
some biotechnology and pharmaceutical companies have been on a race to develop a vaccine
against the virus. Inovio Pharmaceuticals, GSK, and Sanofi, companies that are frontrunners in
that race, registered increases in stock values in relation to their anti-Zika efforts.
Generics Pressure Remains Intense
Big brand-name pharmaceutical companies are facing heightened competition from generic
drugmakers and unprecedented pricing pressure from payers. However, with new products and an
aging population, CFRA foresees a healthy future for this segment. Ongoing improvements in
early-stage product pipelines, particularly in the fields of cancer, hepatitis C, and diabetes, offer
long-term promise.
Big Pharma, the large-capitalization segment of the pharmaceuticals industry, remains in
transition. Rarely have the pressures on large pharmaceutical companies been so intense. As the
industry sorts through its problems, it is responding with major cost-cutting initiatives, including
sales and marketing overhauls and the reorganization of R&D operations. The industry is
pursuing new product development in selected areas, and is forming alliances and making
acquisitions with pipeline considerations in mind.
Emerging Markets to Drive Sector Growth
With markets in the worlds major developed nations either stagnant or showing only modest
growth, pharmaceutical manufacturers are increasing their focus on emerging markets. Emerging
markets accounted for more than 70% of global gross domestic product (GDP) in 2015, and they
are expected to account for 85% of the worlds population in 2016, according to the International
Monetary Fund (IMF). With respect to the worldwide pharmaceuticals industry, industry
observers have forecast that emerging markets will drive up to 90% of the sectors growth
through 2020. Although patent expiration and threats from generic drugs have put pressure on
some pharmaceutical companies, CFRA sees profitability and growth in emerging markets.
Drug sales in the 21 nations that the IMS Health refers to as pharmerging countries are
expected to grow collectively at a CAGR of 7%10% between 2016 and 2020, a slower pace
than the average 13.6% growth between 2010 and 2015, according to IMS Health. These
pharmerging countries include China (Tier I); Brazil, India, and Russia (Tier II); and Algeria,
Argentina, Bangladesh, Chile, Colombia, Egypt, Indonesia, Kazakhstan, Mexico, Nigeria,
Pakistan, Philippines, Poland, South Africa, Saudi Arabia, Turkey, and Vietnam (Tier III). Sales in
the pharmerging countries totaled $249 billion in 2015 and they are expected to reach $345$375
billion by 2020.
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The growth in emerging markets is largely being fueled by spending on generic drugs. Global
spending on generic drugs is expected to reach $420$432 billion by 2017, of which around
55%58% will be coming from developing markets. Emerging markets are expected to increase
their spending on pharmaceuticals by around $146$176 billion in that time. The 21 pharmerging
countries are expected to account for about 26% of global medicine spending in 2020, according
to IMS Health.
Developing nations are generally enjoying rapid rates of growth in demographics and GDP, and
rising levels of disposable income. Thus, an increasing number of people in these countries are
able to buy goods and services they previously could not afford, although the larger population
segments in these regions are still mostly impoverished.
Health care expenditures, including spending on pharmaceuticals, typically increase with a rising
standard of living. Emerging markets comprise some 85% of the worlds population, and they
accounted for all real worldwide economic growth over the past five years, according to the IMF.
Another factor spurring growth in the emerging markets is that as they develop, their populations
become subject to ailments and conditions that typically affect developed nations. These include
poor health behaviors such as drinking alcoholic beverages, smoking, and rising levels of obesity,
which, in turn, lead to cardiovascular disease, cancer, diabetes, respiratory ailments, and other
maladies. CFRA thinks that these situations unlock opportunities for multinational
pharmaceutical manufacturers to tap large new customer bases.
CFRA also sees emerging areas yielding additional benefits in terms of raw materials and production.
Many developing nations provide opportunities for attractive low labor-cost manufacturing bases,
allowing multinational drugmakers to establish new manufacturing plants from which
pharmaceuticals could be sold to other emerging markets, as well as to developed countries.
Demographics Shape Pharmaceutical Consumption
The three worldwide demographic trends that bode well for long-term pharmaceutical
consumption are the aging of the population in the largest markets, the lengthening of the average
life expectancy, and a rising incidence of chronic diseases. In many Western countries, the elderly
populationa group with a disproportionately greater use of prescription drugsis growing
faster than the general population.
Since senior citizens account for a disproportionate amount of prescription drug consumption,
projected above-average growth for the aged has positive implications for pharmaceuticals. People
aged 60 and up are projected to account for 21.1% of the total world population by 2050, up
from 12.0% in 2015, according to the UN Population Division.
In the US, the Census Department projected that the 65-and-older segment of the population will
grow from an indicated 48 million in 2015 to 88 million in 2060. As a percentage of the total
population, people aged 65 and older are expected to account for close to 22% of all Americans
in 2050, up from 15% in 2015. This represents a bullish trend for the pharmaceuticals industry,
since the elderly as a group account for roughly one-third of prescription drug use.
Biotechnology Remains Key to Big Pharma
Large drugmakers have made significant new investments in the biotech space, either through
outright acquisitions or through in-licensing and partnership deals with smaller biotech firms.
Sales of biotechnology products are expected to grow around 55%, from $184 billion in 2015 to
$337 billion by 2022. These products share of the worlds prescription and over-the-counter
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(OTC) drug market is estimated to grow from 24% in 2015 to 29% in 2022, according to data
from EvaluatePharma. Biotechnology products are expected to account for 50% of the top 100
drugs by 2022, up from 47% in 2015 and 30% in 2008. Roche is the biggest player in the
biotechnology space, according to EvaluatePharma.
Rosy Forecast for Generics
Generic medications continue to deliver significant cost savings, according to the 2015 Drug
Trend Report published by Express Scripts Lab. CFRA projects above-average growth for the
generic drug sector over the coming years, with gains largely attributed to the same reasons that
the branded sector is likely to remain in the doldrums. The main growth drivers for generics
include a record number of patent expirations on widely prescribed branded drugs, and mounting
pressure from government and private-industry third-party customers for greater use of less
expensive generic drugs. Inexpensive generic drugs are widely used by virtually all managed care
and governmental health insurance organizations, and accounted for 88% of prescriptions written
in the US, according to the 2016 Generic Drug Savings & Access in the United States Report
from the Generic Pharmaceutical Association. However, given their low costoften 10% or less
compared with branded pricesgenerics represented 27% of the total sales in the US
pharmaceuticals industry in 2015.
Another key driver for generics is the new federal health care reform legislation, which is aimed at
reducing health care costs while extending coverage to some 31 million Americans presently
without medical coverage by 2019. This huge expansion of the health care sectors end-user base
started in 2014, and is especially welcomed by the generics market, which will need new business
by the time patent-cliff-related sales diminish.
The largest company in the global generics space in 2015 was Teva Pharmaceutical Industries. In
August 2016, Teva completed its $40.5 billion acquisition of Allergans generics unit, significantly
increasing its market share. Other key players were Novartis, Mylan, and Valeant Pharmaceutical.
Health Care Reform to Benefit Generics
With its emphasis on cost savings and expanded coverage, health care reform is a win-win
situation for the generic pharmaceutical segment, in CFRAs view, as nearly all health insurance
plans will likely favor its low-cost products. We also expect this segment to benefit materially
from the planned implementation of a new FDA regulatory process to approve generic versions of
biologics. As of November 2016, the FDA has approved four biosimilarsZarxio, a biosimilar to
Amgens Neupogen, in March 2015; Inflectra, a biosimilar to Johnson & Johnsons Remicade, in
April 2016; Erelzi, a biosimilar to Amgens Enbrel, in August 2016; and Amjevita, a biosimilar to
AbbVies Humira, in September 2016.
CFRA also sees increasing M&A activity in the generics area, as large-capitalization branded drug
companies are likely to increase their exposure in the generic space over the coming years. We
note that Novartis already has a major position in global generics through its Sandoz division.
Pfizer and Merck also have representation in generics.
This market continues to grow, helped by patent expirations and greater inducements by managed
care and other third-party payers on patients to select generic options. However, the generics
segment has also had its share of problems, including some quality control manufacturing issues
that have resulted in plant shutdowns and product recalls.
In the long term, CFRA thinks the health care reform will be positive, although we see some initial
drawbacks such as increased Medicaid rebates, and product liability and pricing lawsuits.
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Regulatory/Legislative Environment
Health Care Reform: In Peril After Trump Victory
The Patient Protection and Affordable Care Act (PPACA) or ACA, commonly referred to as
health care reform law, was enacted by Congress in March 2010 with the implementation of its
various provisions effective on various dates. Its individual mandate component and Medicaid
expansion became effective on January 1, 2014.
CFRA noted that the health care reform law has a net positive effect on the health care sector,
despite provisions that put pressure on pharmaceutical pricing and utilization. The program is seen
to result in market expansion as it expands coverage to millions of previously uninsured people.
The Obama Administration reported in October 2016 that 13.8 million Americans are expected
to sign up for health insurance via the health care exchanges by 2017, within the Department of
Health and Human Services (HHS) projection of 11.014.1 million, and surpassing the
Congressional Budget Office (CBO) revised projection of 13 million. As of October 2016, only 31
states and the District of Columbia have expanded Medicaid coverage under the ACA. Further, as
of August 2016, more than 15.7 million additional Americans have enrolled in Medicaid and the
Childrens Health Insurance Program (CHIP) since October 2013.
Medicaid is a significant driver in prescription growth, according to IMS Health; the number of
prescriptions filled through the program rose 17% in 2014, accounting for 70% of the overall
growth in prescriptions. Furthermore, in the states that expanded Medicaid, Medicaid
prescriptions filled increased 25% in 2014 compared with a 3% increase in non-expansion states.
However, CFRA notes that various provisions in the health care reform law have increased fees
and other costs for the pharmaceuticals industry. This includes a minimum 23.1% rebate on
branded drugs sold to Medicaid beneficiaries, discounts on branded drugs to Medicare Part D
participants who are in the Medicare coverage gap or doughnut hole, and a fee payable to
the federal government based on a companys market share of branded drug sales in the US (this
fee will increase annually through 2018).
CFRA expects that the branded segment will feel pressure from renewed efforts by government
and private third-party payers to reduce hyperinflationary pricing, at least while the ACA is in
effect. These measures include greater emphasis on generic usage, with changes in three-tier
insurance plans tailored to encourage generic or formulary use. Increasing pressure on off-label or
unapproved drug usage (which is permitted with physician discretion) and a greater push on
therapeutic substitution are also negatives on the pricing front.
However, CFRA thinks that either the ACA or the major components of the law are in jeopardy
since Donald Trump won the presidential election and the Republican party retained control of
Congress. Republicans have been threatening to repeal and replace the ACA ever since it was
signed into law in 2010. Indeed, House Republicans have voted to repeal the ACA more than 60
times, only to be met with a presidential veto each time. However, with Trumps election and the
Republicans control of both the House of Representatives and the Senate, the party will have the
ability to implement some changes to the law. However, a complete repeal and replacement of the
ACA will likely be both extremely challenging and politically unpopular.
Firstly, Republicans do not have a 60-person supermajority to override a potential filibuster by
Senate Democratics, so they will be unable to repeal the entire ACA. Secondly, repealing the law
would also eliminate several provisions that are popular with both Democrats and Republicans.
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This includes allowing individuals aged 26 and below to remain on their parents insurance
coverage, the elimination of annual and lifetime benefit caps, and the requirement that insurers
sell policies to anyone, regardless of their health status.
CFRA anticipates that Republicans will likely use a budgetary process called reconciliation, which
only requires a simple majority of 51 votes in the Senate, to target several provisions they view
unfavorably, namely the individual mandate and the Medicaid expansion. The individual mandate
provides government subsidies that help about 1314 million Americans pay for and obtain health
insurance, while imposing a tax penalty on those that do not obtain insurance. The Medicaid
expansion has helped about seven million people obtain Medicaid coverage. Despite more than 60
House Republican votes to repeal and replace the ACA, Republicans have yet to put forth any
concrete plans that would allow these 2021 million people to keep their insurance if the
provisions are eliminated.
The Medicaid expansion will likely be eliminated, since reducing the size of the Medicaid program
is generally viewed favorably by most Republicans. One possible scenario CFRA sees Republicans
potentially putting forth is changing the current system of the joint federal and state funding
entitlement program, which guarantees coverage for anyone who is eligible, to one that would
turn Medicaid into a block grant program. Under this scenario, the federal government would
provide each state a block grant to pay for the Medicaid program. Each state would have more
flexibility in determining eligibility and benefits provided. Past Republican proposals, which the
Obama Administration routinely rejected, include the attachment of a work requirement or other
cost-sharing mechanisms to obtain Medicaid benefits.
CFRA thinks the more challenging aspect for Republicans would be to elliminate the subsidies
that help 13 million people obtain insurance; this move would be politically unpopular. However,
removing the tax penalty component of the individual mandate provision would be viewed
positively, although it would likely lead to an exodus of the younger and healthier population
from the insurance rolls. This exodus would likely lead to mainly sicker patients seeking out
insurance, which would adversely affect health insurers.
Some Republicans have played with the idea of tax credits as a carrot to entice the purchase of
insurance. However, CFRA thinks that throwing away the stick, namely tax penalties for not
having insurance, would significantly reduce the number of insured people. An idea that Trump
championed is to allow insurers to sell insurance across state lines, based on the notion that it
would lead to increased competition, better pricing, and lower health care costs. However, the
major insurance carriers have not embraced this idea. Critics think this plan could actually lead to
higher health care costs because health care is local; local insurance carriers would enter into
agreements with local health care providers (i.e., hospitals and physicians) by promising them a
healthy volume of patients in exchange for favorable treatment rates. Providers would enter into
these agreements with insurers and agree to preferential treatment rates because they anticipate
enough insured patients to support their practice. However, out-of-state insurance carriers would
likely not have the volume and, therefore, the leverage to obtain favorable provider rates. Patients
may be enticed by lower front-end premiums offered by out-of-state insurance carriers, but their
cost of treatment would be significantly higher.
Eliminating either the Medicaid expansion provision or the individual mandate provision, if not
both, will result in fewer insured patients and would adversely affect pharmaceutical sales.
However, CFRA notes that any changes to the ACA would take time, perhaps up to two years.
Nonetheless, any Republican proposal to change or eliminate the individual mandate and/or the
Medicaid expansion provisions will increase volatility for the pharmaceuticals industry.
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FDA Moves to Enhance Efficiency

A promising innovation (introduced in the FDA Safety & Innovation Act of 2012) allows the FDA
to designate a drug as a breakthrough therapy, which permits faster approval of drugs that
represent significant advances over existing treatments and in areas of particular need.
In January 2013, the FDA granted its first breakthrough drug designations to two drugs under
development by Vertex Pharmaceuticalsits cystic fibrosis drug Kalydeco, and Kalydeco in
combination with investigational agent VX-809. Kalydeco is currently approved for a small subset of
cystic fibrosis patients. In February 2013, the FDA suggested that the designation could result in
approvals for drugs that have completed only the Phase I study, the earliest stage of development.
However, according to the Tufts Center for the Study of Drug Development (CSDD), the
breakthrough designation has been associated with lower total approval and development
timelines, compared with other expedited drug development programs. Part of the reason for this
is the ongoing debate over what constitutes a serious condition, whether existing therapies
adequately address the condition, and if a clinical need that the new drug potentially addresses is
currently unmet.
CFRA thinks that such programs would need to be designed in order to establish their potential
benefits over existing therapies earlier in clinical study than is typically seen, and would need to
show longer-term benefits in order to maintain such an early approval.
From 2012 through October 28, 2016, the FDA received 389 requests for breakthrough
designation and granted 140 approvals for the designation.
Regulatory Issues Affecting Generics
Addressing the Abbreviated New Drug Application (ANDA) backlog issue, the FDA implemented a
user fee system for the generic industry that would help the FDA fund additional staffing to speed
up the approval process. The program, known as the Generic Drug User Fee Act (GDUFA), is
similar to the branded drug sectors Prescription Drug User Fee Act (PDUFA); it was signed into law
in July 2012, and was implemented on October 1 of the same year. GDUFA has wide support
among generic drug companies, consumer groups, and the FDA itself. PDUFA provided a process
for the FDA to collect fees from brand-name drug manufacturers, with the funds used to expand
FDA staffing, upgrade information technology, and speed up the overall new drug approval process.
Competitive Environment
The pharmaceuticals industry is intensely competitivewith numerous companies, including
many well-financed multinational firms, as well as hundreds of smaller firms around the globe
with a concentrated therapeutic focus, developing branded or generic drugs to treat similar
diseases or indications.
Being first to market with a drug to treat a particular indication or disease could significantly
benefit a drug company and establish that company as the clear market leader. Often, the first-tomarket drug maintains a leading market share for many years. A first-to-market drug holds, on
average, a 6% market share advantage 10 years after the drug launched, according to a study by
McKinsey & Co.
The growing influence of third-party payers such as prescription benefit managers and health
insurers, including managed health care organizations, have increased and somewhat changed the
competitive environment within the pharmaceuticals industry. These third-party payers try to get
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the best possible prices from each drug manufacturer and, at times, have dropped competing
drugs from their formularies (lists of approved medicines available to their members) if they are
able to get better pricing from another drug company for the same indication or disease. Insurers
have also denied approval of drugs or treatments that they deem too expensive or not appropriate.
Increasingly, health insurers are also requiring prior authorization for branded drugs.
These third-party payers, including government entities such as the Centers for Medicare and
Medicaid Services (CMS), which administers Medicare and Medicaid benefits, will likely continue
to pressure drug pricing.
The ACA has also contributed to the competitive challenges, as the main objective of the law is to
reduce the level of health care spending while increasing the quality of care to a larger number of
people. This has resulted in numerous payment reform efforts, many of which include quality of
care and treatment outcome to the level of reimbursement, which puts increased pressure on all
stakeholders to manage costs more effectively, thereby pressuring drug pricing.
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HOW THE INDUSTRY OPERATES

The modern pharmaceuticals industry emerged during the 1920s and 1930s, with key discoveries
and the synthesis of sulfa antibacterials, penicillin and other antibiotics, and various other
compounds. Large-scale production capabilities also started during that period. In response to the
growing demand for penicillin and related anti-infectives, industry output expanded markedly
during World War II.
In the postwar years, greater industry investment in research and development (R&D) led to
important scientific breakthroughs in new therapeutics and vaccines. During this period,
corporations capitalized on the discovery of tranquilizers, amphetamines, advanced antibiotics,
and the Salk polio vaccine.
Today, the pharmaceuticals industry derives most of its profits from a broad base of compounds
used to treat infections, cardiovascular conditions, depression, inflammatory disease, and other
chronic conditions. Most leading drugmakers have also collaborated with biotechnology firms to
develop novel therapies based on recombinant deoxyribonucleic acid (DNA) technology,
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-growing segment
of the drug industry in terms of sales.
About 56% of all US firms offered health benefits in 2016, and 62% of employees in these firms
had health insurance provided by their employers, based on the 2016 Employer Health Benefits
survey published by the Henry J. Kaiser Family Foundation (KFF), a private nonprofit foundation
focused on US health care issues. Of those with health insurance, some 99% were covered under
managed care plans, with conventional fee-for-service coverage representing the balance. In the
managed care segment, 48% were in preferred provider organization programs (PPOs), 29% in a
high-deductible plan with a savings option, 15% in more rigid but less costly health maintenance
organizations (HMOs), 9% in point-of-services plans, and 1% in indemnity plans. With PPOs,
patients select providers from the insurers network or pay more to go outside of the network;
with HMOs, they use the networks providers, which are paid a set monthly fee per patient.
Managed care organizations are implementing tiered cost-sharing formulas and increasing drug
copayments. In 2015, 83% of all workers covered by employer-sponsored plans had plans with
some kind of tiered cost sharing (most offering three or four options), up from 81% in 2015. 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 to forgo the use of high-priced medications. Increasingly, the plans also require pharmacists to
dispense generics when available orin therapeutic categories for which a choice of branded drugs
existsa preferred brand for which the plan has negotiated an attractive discount.
Although the pharmaceuticals industry faces challenges, everything taken into account, it is still
among the worlds most profitable industries.
High Risk, High Rewards

Drug manufacturing is a high-risk business: for every 5,000 compounds discovered, only one
reaches the pharmacists shelf. The odds against making a profit are steep as well: fewer than a
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third of marketed drugs achieve enough commercial success to recoup their R&D investments.
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 companies 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
populations. If, in contrast, the companies developed compounds with benefits similar to those of
drugs already on the market (known as me-too drugs), they were unlikely 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 those that target narrower patient populations.
Predictable Life Cycles of Drugs

Drugs have widely different development processes, but their product life cycle nearly always
follows a stable, long-term pattern. In the US, after the average period of 10 years or more for
discovery, development, testing, and approval by the US Food and Drug Administration (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 takes place.
Drugs often require several years of sales build-up to reach their full commercial potential.
Physicians have to become comfortable with the product and its approved application, while
companies often continue conducting clinical trials that will enable them to receive FDA approval
for additional indications.
In some cases, companies 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 customers may opt to replace the
drug with less expensive compounds in the same therapeutic class. The latter tactic, referred to as
therapeutic substitution, is especially popular with HMOs and other managed care companies.
FDA Oversees US Market

The Federal Drug Administration (FDA) is responsible for regulatory oversight of the
pharmaceuticals and medical technologies industries in the US. The agency, which began
operations in the mid-1800s, did not acquire even modest regulatory powers until 1906. Over
time, in response to events, Congress has strengthened the FDAs oversight.
A defining moment for pharmaceutical regulation and for the medical field in general came when
Congress passed the Food, Drug, and Cosmetic Act of 1938. This landmark legislation outlined
the framework for the pharmaceutical approval process in the US. 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 contents, the way 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 Amendments of 1962 to require that manufacturers demonstrate both
the safety and the efficacy of new drugs before receiving approval for commercial sale in the US.
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In addition, this legislation required that drugs be produced according to specified guidelines for
good manufacturing practices, and that manufacturing plants be subject to FDA approval and
periodic inspection.
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 law also extended the popular Prescription Drug User Fee Act (PDUFA), a program
initiated in 1992 that charges drugmakers a fee for filing New Drug Applications (NDAs).
Because the funds were used to hire new FDA personnel, the program has been credited with
significantly reducing new drug approval times.
The latest version of the PDUFA came into effect on October 1, 2012. On June 26, 2012,
Congress passed PDUFA V in the form recommended by the FDA. It would add more than $40
million in new user fees, and bring total expenditures paid by pharmaceutical companies for fiscal
2013 to $693 million. In fiscal 2015, the PDUFA gave the FDA a net collection of $821.9 million
from pharmaceutical companies.
The earlier version of the PDUFA had been renewed in September 2007 as part of a broader law
addressing FDA reforms, calls for user fees to generate nearly $400 million in revenues a year
from fiscal 2008 through fiscal 2012, as well as an additional $225 million for drug safety
monitoring programs. The 1997 law allowed seriously ill patients easier access to experimental
compounds and provided new incentives for the development of pediatric medicines. It also
expanded the drug companies ability to disseminate information on off-label uses of new and
existing drugs.
PDUFA V is slated to expire in September 2017. In August 2016, the FDA held a public meeting
with various stakeholders to discuss the possible PDUFA VI reauthorization and the goals
included in the new plan.
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, or SSRIs) have potentially unacceptable side effects, the FDA began a series of
initiatives to improve its drug safety evaluation processes. These initiatives included the
establishment of an Office of Drug Safety (ODS), which is responsible for post-marketing
surveillance and other drug safety issues. Nonetheless, critics, including some congressional
leaders and FDA insiders, worried that the office would not be independent of the agency, and,
therefore, would not have the authority to bring problematic side effects to the agencys attention
once products are on the market.
How New Drugs Enter the US Market
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, transport,
storage, and sale of all food, biologic, cosmetic, and medical device products in the US.
The FDA requires that pharmaceutical manufacturers perform extensive testing to prove that their
products are safe and effective before it will sanction commercial sale. All animal and human
tests, which often last for years and cost many millions of dollars, are conducted by
manufacturers, often in conjunction with colleges or universities, the National Institutes of Health
(NIHthe medical research agency of the US Department of Health and Human Services), or
similar research institutions. Legislation passed in September 2007 requires the FDA to keep track
of severe adverse events and the safety and effectiveness of drugs that are already on the market.
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Identifying and Testing Candidate Drugs

R&D is the lifeblood of the pharmaceuticals industry. Drugmakers become industry leaders by
spending large sums on R&D in order to produce a steady stream of successful products.
However, ethical pharmaceuticals are patent protected for a finite number of years, so the
pharmaceuticals industry must continually find new drugs to ensure future growth. Companies
with R&D programs that falter often end up struggling, particularly if they face generic
competition for their key drugs. Some weakened companies merge with larger, more successful
companies in order to stay afloat. Those that come up with hit products prosper.
Searching for innovative products is difficult in almost any industry. It is especially challenging in
the pharmaceuticals industry, because products come from highly complex fields, such as
molecular biology and biochemistry, and involve the intricate workings of the human body. The
quest for new pharmaceuticals 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. Proteins, segments of
proteins, or genes (isolated by molecular biologists) or new chemicals (discovered by analytical
chemists) are often the basis of 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 any possible side effects and
efficacy. Most candidates are eliminated at this stage, because they have unacceptable side effects
or 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.
The FDA requires drugs to undergo three phases of clinical testing on humans:
Phase I. In this phase, a small number of healthy people get moderate doses of the drug to test
the drugs safety, safe dosing range, and mechanism of action. If this initial test is successful, the
subjects dosage is slowly increased to determine its safety at higher levels.
Phase II. During Phase II, a larger group of subjects with the disease or condition that the drug
is intended to treat is tested in placebo-controlled clinical trials. Phase II researchers look for
efficacy and continue to study safety and optimal dosing.
Phase III. Drugs that pass the first two hurdles then undergo Phase III trials. At this level, the
most complex and rigorous tests are performed on still larger groups of ill patients to ascertain the
drugs safety, effectiveness, and optimum dosage regimens. Usually, Phase III procedures employ
randomized, double-blind studies with placebo control. This means that one group of patients is
given the drug while another group receives an inert substance. Neither the patients nor their
doctors are aware of which patients are actually receiving the drug being tested.
When the clinical research on a drug is complete, the manufacturer submits an NDA to the FDA.
The application compiles the research completed during the three trial phases and includes full
details of the products formula, production, labeling, and intended use. NDAs are typically
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voluminous documents, sometimes exceeding 50,000 pages. Many firms have taken advantage of
the FDAs new policy of accepting electronic filings via e-mail.
In recent years, the FDA has delayed approvals of an increasing number of NDAs by sending
applicants complete response letters (formerly known as approvable letters), which typically
inform applicants of some type of deficiency with their filings and usually are accompanied with
requests for additional information. These requests, usually made for safety reasons, often delay
the agencys decisions for months to years, with the amount of time dependent on the complexity
of the data sought. Following receipt of a complete response letter, manufacturers sometimes drop
development of a product; others choose to invest additional resources in order to get the drug on
the market.
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,
indications, contraindications, and side effects.
Post-Market Surveillance
Traditionally, the FDA has required companies to conduct post-market surveillance, though in
reality few companies do so, despite recent interest in expanding such programs. Preclinical
studies usually identify common toxicities, but post-market surveillance can be important for
picking up rare side effects or other unexpected developments, which are apparent only after the
drug is widely used. Post-market surveillance is sometimes referred to as Phase IV testing. In the
past, companies often viewed post-market studies as a marketing tool, using data generated from
such studies to support new applications for expanded indications and improve their relationships
with scientific leaders and patient groups.
In the past, the FDA rarely undertook measures against a drug for safety reasons once the drug was
on the market. However, if the safety or efficacy of a drug already on the market was in question,
the FDA could be more stringent: it could order a company to recall selected lots of a product, or, in
a worst-case scenario, it could ask a manufacturer to withdraw a product from the market. These
actions could result from adverse events, defective packaging, misleading labeling, failure to meet
content uniformity tests, loss of sterility, sub-potency, or lack of evidence of effectiveness.
The FDAs attitude toward monitoring drugs already on the market has been evolving rapidly.
Following the Vioxx scandal in 2004, the agency began placing a greater emphasis on post-market
drug safety. The ODS 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 FDA also requires companies that undertake post-market surveillance of certain drugs (either
voluntarily or at the FDAs request) to report on the progress of their commitments. The Food
and Drug Administration Amendments Act of 2007 (FDAAA), signed into law in September
2007, requires manufacturers to work with the FDA to establish a risk management plan as part
of the NDA process. Specifics of the plan are still being worked out, but it has the potential to
significantly increase the value of Phase IV studies.
Exceptions for Life-and-Death Situations
Experimental drugs still in clinical trials are sometimes made available to seriously ill patients
through the FDAs Treatment IND program or its compassionate use protocol. The Treatment
IND lets manufacturers provide unapproved drugs to patients who meet specific criteria if no
other therapies are available. The compassionate use protocol enables patients with life39
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threatening diseases to have access to experimental drugs, provided that Phase I trials have been
completed, even if those patients are not part of the clinical trial. Over 40 drugs have been granted
IND treatment status since this policy was enacted in 1987, many of which were for acquired
immune deficiency syndrome (AIDS) or cancer.
New drugs targeting serious or life-threatening diseases that lack adequate treatments can also receive
expedited review by the FDA under its Subpart E regulation. In this situation, the FDA can approve
the drug based on results of a Phase II trial, although the manufacturer still must conduct a postapproval outcomes study. In recent years, several new breakthrough protease inhibitors for the
treatment of human immunodeficiency virus (HIV) and AIDS were approved only a few months after
their applications were filed. Novartiss important drug Gleevec, for treating chronic myeloid
leukemia, was also 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. Enacted in 1983 to foster the development of drugs to treat
diseases afflicting small populations (i.e., those with 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.
Regulation Outside the US

The pharmaceuticals 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 market in Europe, which is the worlds second-largest pharmaceuticals market.
Companies filing for regulatory approval in the European Union (EU) can either apply through a
centralized EU procedure that enables 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 applications submitted under the centralized process and recommends them to the
European Commission, which grants final marketing authorization. Under EU rules, implemented
in November 2005, the centralized 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, diabetes, 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 authorization, the matter
is submitted to an EMEA scientific committee for arbitration.
In Japan, the Ministry of Health, Labor, and Welfare supervises new drug approvals. Although it is
improving, the approval process moves much more slowly in Japan than in the US 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 pharmaceuticals market,
remains important to US companies. The Japanese health ministry has publicly committed itself to
reducing approval times, which is expected to strengthen Japans pharmaceutical companies.
Prohibitive Barriers to Entry

The pharmaceuticals industry, particularly the branded prescription business, has barriers to entry
that are among the highest of any US industry. Economic, regulatory, and legal obstacles block
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potential new competitors. As noted earlier, the arduous processes of new drug discovery,
development, and regulatory filing require heavy R&D expenditures. All told, development of a
new drug can take from 10 to 15 years, at a total cost of up to $2.6 billion (a total that includes
the costs of unsuccessful compounds), according to the Tufts Center for the Study of Drug
Development(CSDD). To enable manufacturers to recoup these 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 office grants a use patent, which lets the holder manufacture and market the compound
for a specific therapeutic purpose and prevents competitors from using the drug in the same way;
this kind of patent tends to be more vulnerable to competitors challenges in court.
Some countries are better than others are at issuing and enforcing patents. The World Trade
Organization (WTO), an international group set up in 1995 to establish rules for conducting
international trade, requires members to recognize patents. Under WTO rules, new
pharmaceutical patents extend for 20 years from the application date. The previous system
granted protection for 17 years from the date of patent issuance. However, given the length of
time it takes to bring a product from the application stage to market, patent protection for most
products is effectively reduced to only eight to 10 years.
China, India, and other developing countries in Asia have been particularly notorious for ignoring
foreign companies patents. Their attitude has harmed business relationships and angered
countries (and companies) that do adhere to international patent laws. However, because they
wanted to belong to the WTO, China and India have begun to officially recognize international
patents: China has done so since 2001, and India has done so since the beginning of 2005. Their
commitment 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 efficacy and
safety profile of a drug versus its rivals, the size of its market, the competition it faces, and its
development costs. In the US, breakthrough therapies treating life-threatening conditions can
command premium prices, well above those for existing products. New drugs that are not
significant improvements to existing alternatives are usually priced within parameters set by
similar drugs already on the market. This paradigm differs from the other parts of the world,
where government price controls can limit how much drugmakers can charge for their products.
Drug pricing varies widely among different classes of trade (i.e., different kinds of payers). Largescale buyers, such as hospital chains and other institutional customers, usually pay well below list
price; their huge volume purchases enable them to negotiate heavy discounts. Government
organizations, such as the Department of Defense and the Department of Veterans Affairs, and
programs such as Medicaid, typically negotiate some of the steepest discounts for drugs. However,
wholesale distributors and pharmacy chains for the retail (or individual physician/patient) market
pay drug prices 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 customersa practice known as cost shifting. Several pharmacy chains
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and pharmacy trade associations have sued leading drug manufacturers, charging illegal price
fixing and restraint of trade.
Medicaid is a US federal and state program that pays for the medical services (including
prescription drugs) of 73.1 million low-income patients. Under the current Medicaid rebate
program, drugmakers are required to reimburse state Medicaid programs for either 23.1% of
sales or the difference between prices charged to Medicaid and the best price the drugmaker offers
a nongovernmental customer, whichever is higher. With the enactment of the Medicare Part D
prescription drug coverage in 2005, most of the elderly indigent population whose drug costs were
previously covered by Medicaid was shifted into Medicare Part D.
After Patent Expiration Comes the Generic Stage

In the US, 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 to 10 years after a
drug comes on the market. At that time, generic drugsthe chemical equivalents of a branded
drugusually appear immediately, and prices fall rapidly. Once this happens, the profitability of
the branded drug generally erodes, particularly in the US. (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.
Generic drug manufacturers set prices depending on the kind 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 blockbuster drugs go off patent, half a dozen or more
generic competitors may enter the market simultaneously at prices that are as much as 80% or
more below brand pricing. In less competitive situations, involving drugs that maintain some
barrier to entry (such as special manufacturing skills) or those that have exclusivity for a limited
time post-launch (see the Hatch-Waxman Act in the following text), fewer competitors come
into the market at the same time, and pricing, at least initially, is more stable. As more
competitors enter the field, prices drop even further.
The Hatch-Waxman Act
The modern generic drug market originated 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 approval 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 exclusivity for the
first generic to file for FDA approval 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. However, if a company launches a drug before the innovators
patent expires or is invalidated, 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 expired on schedule.
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In recent years, however, many generic firms have become more aggressive, and commenced atrisk launchesi.e., before receiving a final court ruling invalidating a patent. An early example
of this was Teva Pharmaceutical Industries launch of a generic version of Wyeths popular
Protonix heartburn medication in December 2007. CFRA thinks companies now are more willing
to undertake at-risk launches because they think they are more likely to prevail in patent
litigation, based on a number of favorable decisions in recent years. To date, no generic drug
company that has launched a product at risk has had to pay treble damages. Often, companies
take an at-risk launch after lower courts ruled against the brand-name company. However, this is
not always the case, as happened with Tevas Protonix launch.
For a generic drug manufacturer, the advantages of having six months of exclusivity are
enormous. Because competition is limited, the generics supplier has to offer only a slight discount
to the branded drug; in many cases, this enables the generics company to rack up hefty profits.
Without the 180-day exclusivity, the company would likely face a price-sensitive, highly
competitive market for that product.
To compensate the branded drug market for greater competition from generics, the HatchWaxman Act granted patent extensions 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 often encompass
controlled-release or pediatric versions of the branded drugs. Sustained- or controlled-release
dosing typically provides greater efficacy, fewer side effects, and patient compliance benefits.
The Medicare Prescription Drug Improvement and Modernization Act of 2003, best known for
expanding Medicare coverage to prescription drugs for the first time, significantly modified the
Hatch-Waxman Act. The new rules affected the expenditure of moneyfrom tens of millions to
hundreds of millions of dollarsas they clarified confusion over which generics companies are
entitled 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.
A new Generic Initiative for Value and Efficiency (GIVE) program was launched in October 2007.
This program uses additional funding from the FDAAA to add more trained reviewers and
revamp the way that the agency prioritizes applications. Instead of basing reviews on order of
submission, it looks at reviews based on patent expiration date: those targeting brand-name drugs
with patents close to expiration will get priority over those that are directed at drugs with patents
expiring later.
Going Over the Counter
In the US, 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 commercial appeal and extends its economic life. The strategy works best for popular
products used for common, minor maladies. Only the original manufactureror a licenseecan
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 US are OTC,
according to IHS Global Insight, an economic, financial, and political forecaster.
OTC products face more straightforward, free-market forces of supply and demand than do
prescription pharmaceuticals, whose pricing that is affected by heavy discounting to third-party
providers and government agencies. Consumers sensitivity to prices is also greater with OTC
products, because they usually pay for OTC drugs out-of-pocket, and most insurance plans do not
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reimburse for OTC drugs. These drugs are free from the time-consuming, safety-related
recordkeeping that the FDA requires for prescription products.
Compared with the prescription products that they replace, products switched to OTC status have
lower margins. However, because OTC drugs are mass-marketed products, manufacturers often
make up the difference in volume. In addition, popular consumer medications can have long shelf
lives; this bolsters margins by minimizing waste.
Some of the more successful prescription-to-OTC switches in recent years include Schering-Plough
Corp.s Claritin (a non-sedating antihistamine), Mercks Pepcid and GlaxoSmithKlines Zantac 75
(heartburn remedies), Schering-Plough Corp.s Gyne-Lotrimin, and Johnson & Johnsons Monistat
7 (vaginal yeast infection treatments), Johnson & Johnsons Imodium A-D (anti-diarrhea medicine),
Procter & Gamble Co.s Aleve, Wyeths Advil, and Bristol-Myers Squibbs Nuprin (analgesics).
AstraZeneca plcs best-selling heartburn drug Prilosec also went OTC in 2001.
Liability Issues
Inevitably, pharmaceutical companies are subject to lawsuits alleging adverse side effects from
their medications. Some product liability cases are consolidated into class-action suits. A.H.
Robins, a once-large pharmaceutical and medical products company, was driven into bankruptcy
in 1985 by huge liabilities stemming from its sale of intrauterine contraceptive devices that were
later deemed unsafe.
Wyeth was the target of thousands of lawsuits following the recalls in 1997 of its diet drugs
Redux and Pondimin. Pondimin (generically known as fenfluramine) is the fen part of the nowbanned fen-phen weight-loss cocktail. As of the end of 2007, more than 99% of plaintiffs had
agreed to enter into settlement discussions with the company, which had taken charges of $21.1
billion (as of year-end 2007) in order to pay for a trust fund, litigation, and other costs associated
with the diet drug litigation.
In November 2007, Merck agreed to pay $4.9 billion to plaintiffs who contend that they suffered
heart attacks and strokes after taking the companys painkiller Vioxx. The settlement would cover
federal and state lawsuits filed against the company since 2004 alleging adverse cardiac events
that resulted from taking Vioxx. (Merck pulled Vioxx from the market in September 2004.) In
2009, Merck completed the payment of $4.9 billion in settlement funds, covering the majority of
Vioxx cases.
In March 2016, lawsuits were filed against Johnson &Johnson and Bayer for not providing any
warning that their blockbuster blood thinner, Xarelto, could cause uncontrolled bleeding as a side
effect. The first bellwether trials are scheduled for February 2017.
Product liability and insurance coverage for potential damages are increasingly important issues in
the industry. Liability risk is often mentioned as a growing cost within the health care 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.
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KEY INDUSTRY RATIOS AND STATISTICS

National health care expenditures. Annual estimates of health care spending in the US are
released by the Centers for Medicare & Medicaid Services (CMS) each January. The data are
structured according to the type of expenditure, including such categories as hospital care, physician
care, and drugs and other medical nondurables. The annual report, entitled Health, United States,
includes detailed information on the sources of funds for each segment. A summary of this report
also appears in each January/February issue of the policy journal, Health Affairs Health, United
States publishes statistics showing rates of change in total health care spending and by segment.
Proportional changes in pharmaceuticals spending can be measured against other health care sectors
to determine the industrys relative growth. A dearth of new drugscombined with generic
competition for several popular brands, a slowdown in price increases, and more stringent measures
by managed care organizations to migrate members to cheaper generic drugshas helped to slow
rising drug costs, according to the Center for Studying Health System Change, a research group.
Medicare and Medicaid spending. Changes in government spending and reimbursement rates can
have great ramifications for drugmakers that derive sizable sales from Medicare or Medicaid patients.
The CMS provides information on spending and reimbursement rates for Medicaid and Medicare.
The implementation of the Medicare drug benefit that began in January 2006 caused a decline in
Medicaid spending on drugs in 2006, and a parallel rise in total Medicare spending in that year.
Indigent elderly who were previously eligible for Medicaid reimbursement for prescription drugs
are now part of the Medicare Part D program. In general, this is an advantage for the
pharmaceuticals industry, because Medicare pays higher prices for drugs than Medicaid.
Consumer price index. The consumer price index (CPI), compiled by the US Department of
Labor, tracks price inflation in key segments of the economy, including medical care. The medical
care component is further subdivided into products and services, with prescription and
nonprescription drug statistics broken down separately.
During the 1980s, prescription drug prices surged at an average annual rate of 9.6%, compared
with a 4.1% rate for the CPI. By the early 1990s, excessive drug cost inflation began to receive
heightened political attention, and leading drugmakers feared price controls. Although prices
continued to outpace the CPI, the pace of drug cost inflation slowed in the 1990s. However, drug
price inflation has accelerated over the past several years due to the influx of specialty drugs and
orphan drugs. CFRA expects drug price inflation to remain high over the next several years.
R&D as a percentage of sales. As new drugs represent the lifeblood of the pharmaceuticals
industry, the percentage of a companys sales that it devotes to research and development (R&D)
can have an important impact on future trends in sales and earnings. For the drug industry
overall, this percentage in the aggregate is higher than for any other industry.
Foreign currency exchange. US drugmakers 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 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, because foreign sales translate into fewer dollars. A stronger
dollar also makes US goods more expensive abroad, while products manufactured elsewhere become
more competitive in the US. When the dollar is weak, the opposite occurs: exchange rates enhance
drugmakers sales and earnings, and price competitiveness improves.
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HOW TO ANALYZE A COMPANY IN THIS INDUSTRY

In evaluating a company in the pharmaceuticals industry, the most important factors to consider
are its products, markets, and financial health.
Researching the Business

A thorough examination of the companys products and markets is the first step in the analysis. A
pharmaceutical firms drug portfolio is the main ingredient of its success.
Does the company sell primarily prescription or nonprescription products? Prices and profit
margins of prescription drugs are significantly higher than those of nonprescription drugs, which
are essentially 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.
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 expirations 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 offering the greatest sales opportunities. Medications for high blood pressure,
elevated cholesterol levels, depression, ulcers, diabetes, and arthritis are examples. Oncology, once
a niche therapeutic segment, is now exceedingly attractive because of its technological advances,
growth rate, and profitability.
Prescription and nonprescription drug companies vary widely by the type of pharmaceuticals they
offer and the markets that they serve. Does the company have a narrow 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 economic cycles and competition.
However, prescription drugmakers focus their product development and marketing efforts 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 in the growing cholesterol-reduction 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 enlarged prostate
glands. Nonprescription drugmakers do not have to fund major R&D projects, but they must
maintain large advertising budgets to promote 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 manufacturers clout in the marketplace and overall market share.
INDUSTRY SURVEYS
46
If a prescription drugmaker has a diversification 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 companys performance. In general, large
pharmaceutical companies regularly turn to smaller, more entrepreneurial companies as sources of
innovation. Business developmentthe process of scouting for attractive deals and negotiating
termsis an integral part of a companys operating expertise 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 achieved phenomenal success in antidepressants with Prozac,
which dominated the market for more than a decade until 2000, when it was overtaken by Pfizers
Zoloft. Eli Lillys sales of Prozac eroded sharply following the loss of patent protection in August
2001. GlaxoSmithKline (GSK) has maintained dominance in respiratory drugs with its Advair and
Flovent drugs.
In a health care market dominated by managed care, a companys relative size and the breadth of
its product offerings have become increasingly important. Health maintenance organizations
(HMOs), preferred provider organizations (PPOs), hospital chains, and other large-scale
pharmaceutical purchasers prefer to deal with a limited number of large drug manufacturers that
can offer them one-stop shopping.
There are other factors when analyzing a prescription drugmaker. Some questions to ask are:
When do the patents on the companys most important drugs expire? If the expiration dates are
within the next few years, is the company adequately preparing to make up for the revenues lost
to generic competition? If a company loses its marketing exclusivity on key drugs without earning
adequate profits from new products, it can find itself in difficult economic straits. Many of the
leading US drugmakers, including Bristol-Myers Squibb Co., Merck, and Pfizer, sustained
significant patent expiration losses from 2011 to 2015.
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 clinical 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 ratesin terms of lucrative new drugsdiffer
markedly. In addition, R&D productivity can be cyclical, with firms that generated a series of
significant new products experiencing troughs before rebounding.
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 existing therapies are less likely to reap big commercial rewards.
Has the company formed any promising alliances? Large firms often benefit from alliances with
smaller biotechnology and biopharmaceutical firms working on potentially lucrative new drugs.
Conversely, 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 example, many
drugs popular in the US today were discovered by European and Japanese firms, but they are
47
INDUSTRY SURVEYS
marketed by US drugmakers under royalty arrangements. Pfizers Lipitor drug is sold under
license from Sankyo Co. Ltd. of Japan.
Many companies also maintain relationships with scientists at leading medical colleges or other
organizations, such as the federal governments National Institutes of Health (NIH), which can
funnel experimental products to drugmakers. Bristol-Myers Squibb and GSK, for example, have
obtained major new drugs from these sources.
What is the companys international business profile? The US remains the most important
market for US drugmakers, as well as for many foreign drug companies, because of its size and
lack of government-imposed price constraints. Nonetheless, pharmaceutical markets elsewhere
represent an attractive source of growth. Indeed, pharmaceutical sales in developing 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 US. Because many
countries exercise strict price controls, foreign 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 profit potential. In
addition, it is important to assess the possible impact of changes in currency exchange rates.
How diversified is the firms foreign business? 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 outside the US. However, the Japanese
government generally requires across-the-board drug price cuts every few years.
How effective is the company in working with the FDA? Because all drugs sold in the US 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, wellestablished drug companies are adept at working with the agency, while many smaller or newer
firms are less proficient and often encounter major snags in obtaining approval for their products.
Besides New Drug Applications (NDAs), the FDA also inspects and monitors pharmaceutical
plants for product integrity and quality control. (Several generic drugmakers ran into problems in
this area a number of years ago.) In addition, the agency is expanding its role in post-market
surveillance of drug safety.
How effective is the company at working with third-party government and private payers?
Reimbursement is crucial for the commercial success of a product. Private and public payers alike
are taking an increasingly hard line in evaluating the cost effectiveness of recently approved drugs.
In Europe, several governments have established semi-independent organizations to make
recommendations on whether a new drug should be reimbursedand in some controversial cases,
they have argued against coverage. The US has not taken this approach, although it is considering
the establishment of a reimbursement 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 giving patients incentives to use certain drugs. The ability to
negotiate fair deals with Medicare over reimbursement for prescription drugs is also likely to be
increasingly important to drug companies in the future.
INDUSTRY SURVEYS
48
Nonprescription Drugmakers
While the prescription drug market depends on research-intensive innovation to differentiate
among products and bolster sales, the nonprescription segment depends much more on consumerdirected marketing. The main factors that must be considered in evaluating a nonprescription
drug company include the relative strength of its product offerings, its ability to develop new
products, competitive pressures in each market segment, and the manufacturers ability to support
product sales through effective advertising and promotional campaigns.
Companies with a strong presence in both prescription and nonprescription markets 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 cultivate broad consumer loyalty. For example, Johnson & Johnsons Tylenol, launched
as an OTC product in 1955, remains the best-selling nonprescription product in the US. This
highly regarded analgesic has successfully fought off rival painkillers and cheaper private-label
acetaminophen products, 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
damage from overdosing or adverse reactions when combined with alcohol.
Strong recognition for an original brand also gives the manufacturer an ability to expand sales
through line extensions. Leading 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 products, and extra-strength versions.
Analyzing Financial Statements

Once the investor has reviewed a companys products and markets, a look at its financial
statements is in order. The income statement contains some key figures and ratios (described
below). Balance sheet and cash flow data provide further insight into a companys financial
position and performance. Individual company statistics should be compared with those of rival
companies and industry averages.
The Income Statement
When looking at a pharmaceutical companys income statement, it is important to examine trends
in sales growth; profit margins; R&D and selling, general, and administrative (SG&A) expenses;
and return on equity (ROE).
Sales trends. Examine the companys recent and historical sales performance. Has sales growth
been consistent or volatile? How has growth been achieved: through volume, pricing, acquisitions,
or through a combination of these?
Operating margins. Drug companies characteristically have high operating profit margins
(operating earnings before depreciation and non-operating items as a percentage of sales).

Margins have contracted from their highs of about 40% in the early 1990s, due to reduced pricing
flexibility. The high margins reflect drugmakers very low raw material costs and SG&A expenses
per dollar of sales that are less than average. Although substantial costs are incurred during a
drugs R&D phase, once those costs have been covered, most revenues flow 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.
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INDUSTRY SURVEYS
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 improvement, 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 effectiveness in
improving the companys profitability. Restructuring and cost-streamlining efforts often can play
a major role in boosting a companys profit margins.
Pretax and net returns. Drug industry pretax and net income returns have historically been
above the averages in other industries. While the gap narrowed in recent years, as pharmaceutical
margins contracted under more constrained managed care pricing and as patents expired,
pharmaceuticals margins still exceed the overall health care sector by a wide margin. The drug
business is less capital-intensive than most other industries, and it tends to have lower interest
expense and depreciation as a percentage of sales. Drugmakers profit margins also have been
augmented by lower tax rates, R&D credits, and tax credits from manufacturing operations in
Ireland and other areas (though CFRA notes that past tax credits from manufacturing operations
in Puerto Rico now have been largely eliminated). The pharmaceuticals industrys lower-thanaverage tax rates also reflect the large portion of sales derived from countries with tax rates below
those of the US.
A companys geographic business mix should be examined to determine how its blended tax rate
compares with others in the industry. However, before comparing different companies net
returns, make sure that the reported results are truly comparable. Although current accounting
standards require that discontinued operations be segmented out, nonrecurring items (such as
restructuring charges, asset sales gains, foreign exchange gains and losses, and similar nonoperating items) are often buried in the category of other income/expenses and must be factored
out when making comparisons. Accounting practices also vary for inventory and depreciation.
Return on stockholders equity. In the pharmaceuticals industry, ROE, or net earnings as a
percentage of average stockholders equity, is viewed as a key measure of managements effectiveness.

Cash Flow
Another way of looking at profits is cash flowessentially, net earnings plus depreciation and
other noncash charges. It provides a useful gauge of a companys capacity to finance capital
projects. The source and application of funds statement 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 preparing 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 balance sheet analysis focuses on liquidity. To assess a companys short-term
liquidity, investors look at its level of cash and marketable securities. Companies with large 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 working capital ratio is essential to ensure that the company can
adequately meet its current liabilities. This ratio always should be greater than 1.0. Any meaningful
degradation in these items from previous reporting periods may signal a liquidity problem.
INDUSTRY SURVEYS
50
Debt leverage varies significantly among drugmakers. An appropriate debt load largely depends
on a drug companys product line and the strength of its projected new product stream.
Valuation Measures
Investors typically use various valuation metrics to help them determine a stocks worth. Common
measurements usually include multiples of key income statement entries such as sales, earnings
and earnings before interest, tax, depreciation and amortization (EBITDA), often in ratios
combined with past or future growth rates. Valuations can also encompass a number of balance
sheet metrics, such as return on assets (ROA), ROE, and return on invested capital. While these
metrics can be very useful, one must also take into account that stock valuations are also
influenced by various external factors, such as investor sentiment on stocks in general,
competition from bonds and other investments, industry conditions, and other considerations.
Along with other industrial sectors, the price-to-earnings (P/E) ratiothe stock price divided by
either the latest four quarters of earnings per share (EPS), or by the projected forward four
quarters of EPSis typically the most commonly used valuation method. This ratio is useful in
evaluating a companys performance relative to other firms in the same industry, as well as to
companies in other sectors.
Over much of the last decade, drug stocks commanded above-average P/E ratios, largely reflecting
above-average growth rates and high profit margins driven by blockbuster drugs. However, in
more recent years, P/E multiples in the branded pharmaceutical space have contracted
significantly, as generics began to grab the market share of products whose patents have expired.
In addition, the branded pharmaceutical market has been hurt by a tougher global pricing
environment, reflecting efforts by governments and other third-party payers to save money by
curtailing utilization and reducing prices of high-priced branded drugs.
A variant of P/E-to-growth (PEG) ratio, which aims to improve on the simple P/E by adjusting it
to a companys past or future growth rate. A companys PEG is then examined with peer PEGs to
determine if a stock is undervalued or overvalued. A lower-than-average PEG may identify
undervalued stocks, while higher than average PEGs often indicates the reverse.
Another key valuation metric applied widely with pharmaceutical stocks is discounted cash flow
(DCF) analysis. This tool models projections of a companys future cash flows, discounted by a
weighted average cost of capital to derive at a per share present value for any given firm. If the
calculated per share DCF value is higher than the current stock price, the stock may be an
undervalued investment opportunity.
Similar to DCF analysis, another tool commonly used in analyzing pharmaceutical and
biotechnology companies is net present value (NPV) analysis. This metric is often specifically used
to determine the value of a companys new drug R&D pipeline. NPV and DCF analyses may also
play a key role in selecting potential acquisition opportunities.
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INDUSTRY SURVEYS
GLOSSARY
180-day exclusivityThe first generics company to file a completed Abbreviated New Drug Application (ANDA) challenging the
patent of a brand-name drug gets 180 days of exclusivity; only that company can market the generic for six months following the
expiration of the branded drugs patent. Two generics companies can share exclusivity 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 application filed for approval of generic drugs by the US Food and Drug
Administration (FDA). ANDAs require substantially less information than do New Drug Applications (NDAs) for prescription drugs,
because applicants have to prove only that their products are identical (bioequivalent) to the brand products. (See Bioequivalence.)
AntibodyA protein produced by certain types of white blood cells to deactivate foreign proteins.
Authorized genericA generic version of a branded drug, made by the manufacturer or by a company that has been approved
by the manufacturer. 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.
BioequivalenceDrugs that have the same rate and extent of absorption into the body when administered 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 therapeutic effect.
BiologicalA medicine (e.g., vaccine, antigen, serum, or plasma) made of large protein molecules that are derived from living
organisms or their byproducts, not from chemicals; also called a biologic.
BiotechnologyAny technological application that uses biological systems, living organisms, or derivatives to make or modify
products and processes. The approach differs 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 drugA compound that represents a major therapeutic advance because its chemical composition or mode of
action is significantly different than that of existing drugs.
Clinical trialsA series of carefully defined tests through which experimental drugs are administered to humans to determine
their safety and efficacy.
Combination therapyThe use of two or more drugs that together have greater therapeutic power in treating illness and
diseases than either drug used alone.
Deoxyribonucleic acid (DNA)The basic molecule that contains genetic information for most living systems. 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.
Fast trackAn 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.
FormularyA select list of drugs that a health care insurer has approved for reimbursement. Formularies often categorize drugs
into levels, or tiers, depending 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 reimburse for the drug).
GeneThe basic determinant of heredity, genes are chromosomal segments that direct the syntheses of proteins and conduct
other molecular regulatory functions.
Generic drugA 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.
INDUSTRY SURVEYS
52
GenomicsThe study of genes and their functions, including mapping genes within the genome, identifying their nucleic acid
structures, and investigating their functions.
HormoneA chemical produced by a gland and released in the bloodstream.
InfluenzaContagious disease caused by any of several viruses (Types A, B, and C) and characterized by inflammation of the
respiratory tract, fever, and muscle pain. Humans and animals can catch different versions of the virus and sometimes spread
them between 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 proceed to human trials.
Managed careA supervised system of financing and providing health care services for a defined population group. Health
maintenance organizations (HMOs) are currently the most popular form of managed care.
New drug application (NDA)The formal filing that drugmakers submit to the FDA for approval to market new drugs. The
document must contain clinical evidence of the compounds safety and efficacy.
New molecular entity (NME)A new chemical entity (NCE) or biological product, intended for use in a prescription medicine,
that has not received government approval for use in humans.
Orphan drugA 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.
Over-the-counter (OTC) drugsCompounds sold in pharmacies and other outlets without need of a prescription; also known
as proprietary medications.
Therapeutic substitutionA policy that some managed care organizations employ to substitute less expensive drugs for more
expensive ones in the same therapeutic class, although drugs use different modes of action.
Treatment INDAn FDA program that allows experimental drugs (INDs) that treat life-threatening diseases to be made
commercially available to very sick patients before the drugs obtain formal FDA approval.
VirusSimple pathogens made only of a protein coating and genetic material (DNA and ribonucleic acid). Much smaller than
bacteria, viruses straddle the line between living and nonliving. They are inert and dormant until they are absorbed into a living
host, where they reproduce inside cells by combining their genetic 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 infectiousness and potency.
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INDUSTRY SURVEYS
INDUSTRY REFERENCES
PERIODICALS
BOOKS
BioCentury
http://www.biocentury.com/Home
Weekly; covers the pharmaceuticals and biotechnology
industries, with an emphasis on timely analysis of industryrelated news events.
Health, United States

http://www.cdc.gov/nchs/hus.htm
Annual survey of national trends in public health statistics.
Drug Topics
http://drugtopics.modernmedicine.com
Monthly; covers drugs and retail pharmacies.
IN VIVO: The Business and Medicine Report
http://invivo.pharmamedtechbi.com
Monthly newsletters; devoted to strategic and financial
analysis of the pharmaceuticals, biotech, and devices
industries, with an emphasis on deal-making trends and
corporate strategy.
Medical Marketing & Media
http://www.mmm-online.com
Monthly; covers trends in drug marketing and advertising,
regulation, and related topics.
The New England Journal of Medicine
http://www.nejm.org
Weekly; publishes detailed scientific articles on medical
treatments and health issues.
Pharmaceutical Executive
http://www.pharmexec.com
Monthly; covers trends and developments in the
pharmaceuticals industry.
The Pink Sheet
http://pink.pharmamedtechbi.com
Weekly newsletter; covers trade in, and regulation of,
pharmaceuticals and biotechnology.
SCRIP Pharma intelligence
http://scrip.pharmamedtechbi.com
An online daily news and analysis service for the global
pharmaceuticals and biotechnology industries.
US Food and Drug Administration (FDA)
Consumer Updates
http://www.fda.gov/ForConsumers/ConsumerUpdates
Monthly; aimed at consumers, with articles on the FDA and
medical topics.
INDUSTRY SURVEYS
Merck Manuals
http://www.merckmanuals.com
Detailed information for physicians on various diseases and
medical conditions, and on therapeutics for treating them.
Parexels Pharmaceutical R&D
Statistical Sourcebook
http://www.parexel.com
Annual recap of drug industry research and development (R&D)
spending, drugs in development, and regulatory statistics.
Physicians Desk Reference (PDR)
http://www.pdr.net
Annual compendium listing commercial prescription drugs
and their FDA-approved prescribing information.
TRADE ASSOCIATIONS
Biotechnology Innovation Organization (BIO)
http://www.bio.org
Trade association representing the countrys leading
biotechnology companies in business, legislative, and
regulatory affairs.
Consumer Healthcare Products Association (CHPA)
http://www.chpa.org
Represents manufacturers and distributors of OTC
medicines and dietary supplements; promotes industry
interests in legislative and regulatory arenas; and publishes
information on the OTC drug industry.
Generic Pharmaceutical Association (GPhA)
http://www.gphaonline.org
Trade association representing manufacturers and
distributors of generic drugs in legislative, regulatory, and
related matters.
Pharmaceutical Research and Manufacturers of
America (PhRMA)
http://www.phrma.org
Trade association representing the countrys leading
research-based pharmaceutical and biotechnology
companies in legislative and regulatory affairs; publishes
pertinent industry statistics.
54
RESEARCH FIRMS
GOVERNMENT AGENCIES
Decision Resources Group (DRG)

http://www.decisionresourcesgroup.com
A market research and publishing firm focusing on the
pharmaceuticals and biotechnology industries.
Centers for Medicare & Medicaid Services (CMS)

http://cms.gov
A division of the US Department of Health and Human
Services (HHS), the CMS administers the Medicare and
Medicaid programs and sets rates at which program
providers are compensated.
EvaluatePharma
http://www.evaluategroup.com/public/EvaluatePharmaContent.aspx
Provides consensus forecasts from leading industry
analysts, and analysis of the pharmaceuticals and
biotechnology industries and health care sector.
Frost & Sullivan
http://ww2.frost.com
Business research and consulting firm offering comprehensive
coverage of the major health care market sectors.
The Henry J. Kaiser Family Foundation (KFF)
http://www.kff.org
A private nonprofit foundation focused on US health care
issues; publishes studies on a variety of health care topics.
IMS Health
http://www.imshealth.com
Market research firm specializing in pharmaceuticals. A
division of QuintilesIMS.
National Center for Health Statistics (NCHS)

http://www.cdc.gov/nchs
A division of the Centers for Disease Control and
Prevention (CDC), the NCHS provides US data on diseases,
pregnancies, births, mortality, and other categories.
National Institutes of Health (NIH)
http://www.nih.gov
Government agency consisting of 27 institutes and centers;
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)
http://www.fda.gov
US government agency charged with overseeing the food
and pharmaceuticals industries; controls and supervises the
approval of new drugs and the manufacture and sale of
marketed drugs.
National Institute for Health Care Management

(NIHCM) Foundation
http://www.nihcm.org
Nonprofit, nonpartisan group that conducts research on
health care issues.
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INDUSTRY SURVEYS
COMPARATIVE COMPANY ANALYSIS

Operating Revenues
Million $
Ticker
Com pany
Yr. End
2015
2014
2013
2012
CAGR (%)
2011
2010
2005
10-Yr.
Index Basis (2005 = 100)
5-Yr. 1-Yr.
2015
2014
2013
2012
2011
2,214
916
**
**
86
1,333
793
**
**
83
714
527
**
**
85
576
359
**
**
92
308
278
NA
NA
111
PHARMACEUTICALS
AKRX AKORN INC
AGN
[] ALLERGAN PLC
AMPH AMPHASTAR PHARMACEUTICLS INC
ANIP
ANI PHARMACEUTICALS INC
BMY
[] BRISTOL-MYERS SQUIBB CO
DEC
DEC
DEC
DEC
DEC
985.1 A
15,071.0 A,C
251.5
76.3
16,560.0
593.1 A,C
13,062.3 A
210.5 A
56.0
15,879.0
317.7
8,677.6 A
229.7
30.1 A
16,385.0
256.2 A
5,914.9 A
204.3
20.4
17,621.0
136.9 A
4,577.0 A
NA
NA
21,244.0
86.4
3,566.9
NA
NA
19,484.0
44.5
1,646.2
NA
NA
19,207.0 D
36.3
24.8
NA
NA
(1.5)
62.7
33.4
NA
NA
(3.2)
CTLT
DEPO
ENDP
IPXL
JNJ
[]
[]
CATALENT INC
DEPOMED INC
ENDO INTERNATIONAL PLC
IMPAX LABORATORIES INC
JOHNSON & JOHNSON
JUN
DEC
DEC
DEC
DEC
1,830.8
342.7
3,268.7 A,C
860.5 A
70,074.0
1,827.7
390.4
2,877.2 A
596.0
74,331.0 A
1,800.3
134.2 A
2,616.9 D
511.5
71,312.0 A
1,694.8 A,C
90.8
3,027.4
583.7
67,224.0 A
NA
133.0
2,730.1 A
512.9
65,030.0
NA
82.1
1,716.2 A
879.5
61,587.0
NA
4.4
820.2
NA
50,434.0
NA
NM
14.8
NA
3.3
NA
0.2
33.1 (12.2)
13.8 13.6
(0.4) 44.4
2.6
(5.7)
**
7,781
399
**
139
**
8,862
351
**
147
**
3,047
319
**
141
**
2,062
369
**
133
NA
3,019
333
NA
129
LCI
LLY
MNK
MDCO
MRK
[]
[]
[]
LANNETT CO INC
LILLY (ELI) & CO
MALLINCKRODT PLC
MEDICINES CO
MERCK & CO
JUN
DEC
SEP
DEC
DEC
406.8
19,958.7
3,346.9
309.0
39,498.0
273.8
19,615.6
2,540.4 A
724.4 A
42,237.0
151.1
23,113.1
2,204.5
687.9 A
44,033.0 A
123.0
22,603.4
2,056.2
558.6
47,267.0
109.0
24,286.5
2,021.8
484.7
48,047.0
125.2
23,076.0
NA
437.6
45,987.0
44.9
14,645.3
NA
150.2
22,011.9
24.7
3.1
NA
7.5
6.0
26.6 48.6
(2.9)
1.7
NA 31.7
(6.7) (57.3)
(3.0) (6.5)
906
136
**
206
179
610
134
**
482
192
336
158
**
458
200
274
154
**
372
215
243
166
NA
323
218
MYL
NKTR
PRGO
PFE
PAHC
[]
[]
[]
MYLAN NV
NEKTAR THERAPEUTICS
PERRIGO CO PLC
PFIZER INC
PHIBRO ANIMAL HEALTH CORP
DEC
DEC
JUN
DEC
JUN
9,429.3 A
230.8
4,603.9 A
48,851.0 A
748.6
7,719.6
200.7
4,060.8 A
49,605.0 A
691.9
6,909.1
148.9
3,539.8
51,584.0
653.2
6,796.1
81.2
3,173.2 A
58,986.0 A,C
654.1
6,129.8
71.5
2,755.0 D
67,425.0 A,C
NA
5,450.5 A
159.0
2,268.9 A
67,791.0 A
NA
1,257.2
126.3 A
1,024.1 A
51,298.0 A
NA
22.3
6.2
16.2
(0.5)
NA
11.6
7.7
15.2
(6.3)
NA
22.1
15.0
13.4
(1.5)
8.2
750
183
450
95
**
614
159
397
97
**
550
118
346
101
**
541
64
310
115
**
488
57
269
131
NA
PBH
SCLN
SUPN
ZTS
[]
PRESTIGE BRANDS HOLDINGS

SCICLONE PHARMACEUTICALS INC
SUPERNUS PHARMACEUTICALS INC
ZOETIS INC
# MAR
DEC
DEC
DEC
806.2
157.3
144.4
4,789.0 A
714.6 A
134.8
122.0
4,817.0
601.9
127.1
12.0
4,584.0
10.5
18.7
NA
NA
19.1
13.1
NA
5.8
12.8
16.7
18.3
(0.6)
272
555
**
**
241
476
**
**
203
448
**
**
210
552
**
**
149
472
NA
NA
0.4
(0.6)
4.4
14.1
27.3
(5.8)
(4.1)
(0.5)
4.0
54.6
(7.2)
(1.5)
(5.7)
(3.1)
26.4
112
96
163
386
883
109
118
180
387
617
119
115
176
387
379
142
114
182
349
263
A
A,C
C,D
A
OTHER COMPANIES WITH SIGNIFICANT PHARMACEUTICAL OPERATIONS

AZN
ASTRAZENECA PLC -ADR
DEC 25,030.0 A
GSK
GLAXOSMITHKLINE PLC -ADR
DEC 35,762.0 A
NVS
NOVARTIS AG -ADR
DEC 49,440.0
TEVA
TEVA PHARMACEUTICAL INDS-ADR
DEC 19,652.0
VRX
VALEANT PHARMACEUTICALS INTL
DEC 10,446.5 A
26,973.0 A
36,321.7
52,419.0 D
20,272.0
8,263.5 A
A
A
D
A
26,332.0 A
44,570.8 A
57,920.0
20,314.0
5,769.6 A,C
624.0
156.3
1.5
4,368.0
28,632.0
43,484.6
56,617.0
20,317.0
3,546.6
441.1
133.6 A
0.8 D
4,259.0
A
A
A
A
34,201.0
43,046.8 A
58,683.0 A
18,312.0
2,464.5 A
336.5 A,C
85.1
NA
3,612.0
33,791.0
44,167.3
50,624.0
16,121.0
1,182.3
A
A
A
A
296.7 A
28.3
NA
NA
24,143.0
37,854.9
32,212.0
5,250.4
935.5
F
A
A
D
66.1
15.4
19.5
36.4
4.3
104
94
153
374
1,117
Note: Data as originally reported. CAGR-Compound annual grow th rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the follow ing 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.
INDUSTRY SURVEYS
56
Net Income
Million $
Ticker
Com pany
CAGR (%)
Yr. End
2015
2014
2013
2012
PHARMACEUTICALS
AKRX AKORN INC
AGN
[] ALLERGAN PLC
ANIP
BMY
DEC
DEC
DEC
DEC
DEC
150.8
(2,872.5)
(2.8)
15.4
1,565.0
35.8
(1,630.5)
(10.7)
28.7
2,004.0
52.4
(750.4)
11.9
0.1
2,563.0
35.4
97.3
18.1
(1.6)
1,960.0
43.0
260.9
NA
NA
3,709.0
CTLT
DEPO
ENDP
IPXL
JNJ
[]
[]
CATALENT INC
DEPOMED INC
JOHNSON & JOHNSON
JUN
DEC
DEC
DEC
DEC
212.1
(75.7)
(300.1)
39.0
15,409.0
18.9
131.8
(723.5)
57.4
16,323.0
(47.9)
43.3
(535.5)
101.3
13,831.0
0.9
(29.8)
(740.3)
55.9
10,853.0
LCI
LLY
MNK
MDCO
MRK
[]
[]
[]
LANNETT CO INC
LILLY (ELI) & CO
MALLINCKRODT PLC
MEDICINES CO
MERCK & CO
JUN
DEC
SEP
DEC
DEC
149.9
2,408.4
308.2
(221.9)
4,442.0
57.1
2,390.5
(318.6)
(32.2)
11,920.0
13.3
4,684.8
57.8
15.5
4,404.0
MYL
NKTR
PRGO
PFE
PAHC
[]
[]
[]
MYLAN NV
NEKTAR THERAPEUTICS
PERRIGO CO PLC
PFIZER INC
DEC
DEC
JUN
DEC
JUN
847.6
(81.2)
128.0
6,949.0
60.3
929.4
(53.9)
205.3
9,088.0
(3.1)
PBH
SCLN
SUPN
ZTS
[]

ZOETIS INC
99.9
29.5
14.0
339.0
10-Yr.
5-Yr.
1-Yr.
2015
2014
2013
2012
2011
21.8
184.4
NA
NA
3,102.0
(8.6)
138.2
NA
NA
2,992.0
NM
NM
NA
NA
(6.3)
47.2
NM
NA
NA
(12.8)
320.7
NM
NM
(46.5)
(21.9)
NM
(2,078)
**
**
52
NM
(1,180)
**
**
67
NM
(543)
**
**
86
NM
70
**
**
66
NM
189
NA
NA
124
NA
70.7
187.6
65.5
9,672.0
NA
3.9
259.0
250.4
13,334.0
NA
(24.5)
202.3
NA
10,411.0
NA
NM
NM
NA
4.0
NA 1,022.2
NM
NM
NM
NM
(31.1)
(32.0)
2.9
(5.6)
**
NM
(148)
**
148
**
NM
(358)
**
157
**
NM
(265)
**
133
**
NM
(366)
**
104
NA
NM
93
NA
93
3.9
4,088.6
141.3
51.3
6,168.0
(0.3)
4,347.7
157.0
127.9
6,272.0
7.8
5,069.5
NA
104.6
861.0
(32.8)
2,001.6
NA
(7.8)
4,631.3
NM
1.9
NA
NM
(0.4)
80.5
(13.8)
NA
NM
38.8
162.6
0.7
NM
NM
(62.7)
NM
120
**
NM
96
NM
119
**
NM
257
NM
234
**
NM
95
NM
204
**
NM
133
NM
217
NA
NM
135
623.7
(162.0)
441.9
11,380.0
24.9
640.8
(171.9)
393.0
9,490.0
7.0
536.8
(134.0)
340.6
8,697.0
NA
345.1
(37.9)
224.1
8,266.0
NA
184.5
(185.1)
(353.0)
8,094.0
NA
16.5
NM
NM
(1.5)
NA
19.7
NM
(10.6)
(3.4)
NA
(8.8)
NM
(37.7)
(23.5)
NM
459
NM
NM
86
**
504
NM
NM
112
**
338
NM
NM
141
**
347
NM
NM
117
**
291
NM
NM
107
NA
78.3
25.2
19.9
583.0
72.6
11.0
(92.3)
504.0
65.5
9.6
(46.3)
436.0
37.2
28.5
(23.2)
245.0
29.2
21.1
NA
110.0
26.3
(7.7)
NA
NA
14.3
NM
NA
NA
27.9
6.9
NA
25.2
27.7
16.9
(29.5)
(41.9)
380
NM
**
**
298
NM
**
**
276
NM
**
**
249
NM
**
**
142
NM
NA
NA

AZN
DEC
2,825.0
1,233.0
GSK
DEC
12,419.1
4,293.3
NVS
NOVARTIS AG -ADR
DEC
7,025.0
10,654.0
TEVA
DEC
1,588.0
3,055.0
VRX
DEC
(291.7)
913.5
2,556.0
9,009.6
9,175.0
1,269.0
(866.1)
6,297.0
7,423.6
9,505.0
1,963.0
(116.0)
(5.0)
4.4
1.4
4.0
NM
(18.9)
37.6
(6.4)
(13.8)
NM
129.1
189.3
(34.1)
(48.0)
NM
60
154
115
148
(118)
26
53
174
285
370
54
112
150
118
(351)
134
92
155
183
(47)
212
101
149
257
65
9,983.0
8,174.0
9,113.0
2,759.0
159.6
2010
Index Basis (2005 = 100)
2005
# MAR
DEC
DEC
DEC
2011
8,053.0
2,515.1
9,794.0
3,331.0
(208.2)
4,706.0
8,059.5
6,130.0
1,072.3
246.8
Note: Data as originally reported. CAGR-Compound annual grow th rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600.
#Of the follow ing calendar year. **Not calculated; data for base year or end year not available.
57
INDUSTRY SURVEYS
Return on Revenues (%)

Ticker
Com pany
Return on Assets (%)
Return on Equity (%)
Yr. End
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
PHARMACEUTICALS
AKRX AKORN INC
AGN
[] ALLERGAN PLC
ANIP
BMY
DEC
DEC
DEC
DEC
DEC
15.3
NM
NM
20.1
9.5
6.0
NM
NM
51.4
12.6
16.5
NM
5.2
0.4
15.6
13.8
1.6
8.9
NM
11.1
31.4
5.7
NA
NA
17.5
7.5
NM
NM
5.6
4.8
3.1
NM
NM
18.7
5.5
13.1
NM
3.6
NM
6.9
10.5
0.9
NA
NA
5.7
20.6
4.2
NA
NA
11.6
29.9
NM
NM
10.3
10.7
11.1
NM
NM
31.8
13.4
22.7
NM
4.9
NA
17.8
19.7
2.6
NA
NA
13.3
35.1
7.6
NA
NA
23.4
CTLT
DEPO
ENDP
IPXL
JNJ
[]
[]
CATALENT INC
DEPOMED INC
JOHNSON & JOHNSON
JUN
DEC
DEC
DEC
DEC
11.6
NM
NM
4.5
22.0
1.0
33.8
NM
9.6
22.0
NM
32.3
NM
19.8
19.4
0.1
NM
NM
9.6
16.1
NA
53.2
6.9
12.8
14.9
6.8
NM
NM
2.6
11.7
0.6
21.6
NM
5.5
12.4
NM
13.3
NM
10.9
10.9
NA
NM
NM
6.7
9.2
NA
56.3
3.3
8.8
8.9
161.4
NM
NM
4.0
21.9
NA
52.5
NM
6.8
22.7
NA
39.1
NM
13.5
19.9
NA
NM
NM
8.6
17.8
NA
109.6
10.1
11.8
17.0
LCI
LLY
MNK
MDCO
MRK
[]
[]
[]
LANNETT CO INC
LILLY (ELI) & CO
MALLINCKRODT PLC
MEDICINES CO
MERCK & CO
JUN
DEC
SEP
DEC
DEC
36.8
12.1
9.2
NM
11.2
20.9
12.2
NM
NM
28.2
8.8
20.3
2.6
2.3
10.0
3.2
18.1
6.9
9.2
13.0
NM
17.9
7.8
26.4
13.1
35.2
6.6
2.1
NM
4.4
22.4
6.6
NM
NM
11.7
8.2
13.5
1.8
1.1
4.2
2.6
12.0
5.0
6.2
5.8
NM
13.4
NA
21.9
5.9
39.6
16.1
6.0
NM
9.5
27.0
14.5
NM
NM
24.2
11.1
28.9
3.7
2.1
8.6
3.6
28.9
7.7
9.3
11.5
NM
33.5
NA
29.4
11.5
MYL
NKTR
PRGO
PFE
PAHC
[]
[]
[]
MYLAN NV
NEKTAR THERAPEUTICS
PERRIGO CO PLC
PFIZER INC
DEC
DEC
JUN
DEC
JUN
9.0
NM
2.8
14.2
8.1
12.0
NM
5.1
18.3
NM
9.0
NM
12.5
22.1
3.8
9.4
NM
12.4
16.1
1.1
8.8
NM
12.4
12.9
NA
4.4
NM
0.8
4.1
12.5
6.0
NM
2.1
5.3
NM
4.6
NM
9.4
6.4
5.4
5.4
NM
10.9
5.1
NA
4.6
NM
10.8
4.5
NA
13.0
NM
1.3
10.2
269.2
30.0
NA
3.7
12.3
NA
19.9
NA
21.1
14.4
NA
18.8
NM
23.3
11.6
NA
15.1
NM
26.0
10.2
NA
PBH
SCLN
SUPN
ZTS
[]

ZOETIS INC
# MAR
DEC
DEC
DEC
12.4
18.7
9.7
7.1
11.0
18.7
16.3
12.1
12.1
8.6
NM
11.0
10.5
6.2
NM
10.0
8.4
21.3
NM
5.8
3.6
14.8
8.6
4.7
3.5
13.9
16.0
8.9
4.1
6.2
NM
7.9
3.7
5.1
NM
7.3
2.6
19.1
NA
4.5
14.6
17.6
14.7
28.5
13.1
16.7
37.9
51.8
13.9
7.6
NM
20.3
14.9
6.6
NM
11.3
9.7
24.5
NA
6.9

AZN
DEC
11.3
4.6
GSK
DEC
34.7
11.8
NVS
NOVARTIS AG -ADR
DEC
14.2
20.3
TEVA
DEC
8.1
15.1
VRX
DEC
NM
11.1
9.7
20.2
15.8
6.2
NM
22.0
17.1
16.8
9.7
NM
29.2
19.0
15.5
15.1
6.5
4.8
17.5
5.5
3.1
NM
2.2
6.5
8.5
6.5
3.4
4.7
13.1
7.3
2.6
NM
11.8
11.3
7.9
3.9
NM
18.3
12.7
7.6
6.2
1.3
14.8
175.1
9.5
6.3
NM
5.8
47.1
14.7
13.3
17.5
10.9
85.6
12.8
5.6
NM
26.8
67.7
14.1
8.7
NM
43.0
62.5
14.1
12.5
3.6
Note: Data as originally reported. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the follow ing calendar year.
INDUSTRY SURVEYS
58
Current Ratio
Ticker
Com pany
Debt as a % of
Net Working Capital
Debt / Capital Ratio (%)
Yr. End
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
PHARMACEUTICALS
AKRX AKORN INC
AGN
[] ALLERGAN PLC
ANIP
BMY
DEC
DEC
DEC
DEC
DEC
3.2
1.0
2.9
16.4
1.3
3.7
1.4
3.2
15.4
1.7
2.8
1.3
2.6
7.8
1.5
3.7
1.4
2.8
1.1
1.2
5.5
1.4
NA
NA
2.0
54.5
32.3
9.3
41.5
31.4
63.0
32.1
11.2
44.2
32.7
29.5
45.1
3.7
0.0
34.4
34.0
56.2
6.3
0.0
31.9
38.4
18.1
NA
NA
25.1
196.6
NM
26.0
62.7
273.1
309.4
796.9
26.7
58.2
117.8
101.1
747.3
9.4
0.0
123.2
90.7
535.2
15.1
0.0
528.8
79.0
116.2
NA
NA
71.3
CTLT
DEPO
ENDP
IPXL
JNJ
[]
[]
CATALENT INC
DEPOMED INC
JOHNSON & JOHNSON
JUN
DEC
DEC
DEC
DEC
1.8
1.4
1.0
2.5
2.2
1.5
10.7
1.1
4.6
2.4
1.7
2.1
1.7
4.3
2.2
1.6
2.6
1.1
3.8
1.9
NA
2.7
1.6
3.8
2.4
72.8
71.9
54.8
27.2
14.9
110.9
36.7
57.9
0.0
17.2
107.8
0.0
80.2
0.0
14.6
105.2
0.0
66.1
0.0
14.5
NA
0.0
56.9
0.0
18.1
550.7
902.7
NM
85.7
39.6
NM
41.0
NM
0.0
44.2
992.8
0.0
291.9
0.0
43.4
994.8
0.0
NM
0.0
52.6
NA
0.0
514.2
0.0
41.2
LCI
LLY
MNK
MDCO
MRK
[]
[]
[]
LANNETT CO INC
LILLY (ELI) & CO
MALLINCKRODT PLC
MEDICINES CO
MERCK & CO
JUN
DEC
SEP
DEC
DEC
8.4
1.5
2.0
1.6
1.5
5.7
1.1
2.3
1.6
1.8
3.5
1.5
2.3
3.4
2.0
2.6
1.6
2.2
5.6
1.9
2.7
1.6
2.1
3.1
2.0
0.2
35.4
43.4
27.7
31.8
0.3
25.9
34.9
18.5
26.1
4.3
19.2
37.0
18.8
26.6
5.5
27.2
0.5
27.8
21.7
6.4
28.8
0.6
0.0
20.5
0.3
183.5
706.3
108.4
226.6
0.5
552.1
338.8
97.4
129.8
7.0
100.3
117.0
56.6
115.3
9.9
118.7
1.8
36.4
98.5
12.1
102.8
2.4
0.0
91.7
MYL
NKTR
PRGO
PFE
PAHC
[]
[]
[]
MYLAN NV
NEKTAR THERAPEUTICS
PERRIGO CO PLC
PFIZER INC
DEC
DEC
JUN
DEC
JUN
1.6
5.7
1.9
1.5
2.8
1.3
4.5
2.4
2.7
2.7
1.5
2.6
3.0
2.4
2.6
1.8
4.0
2.8
2.1
2.4
1.4
1.0
2.3
2.1
NA
37.5
98.3
29.7
23.9
88.7
62.2
87.3
24.7
24.7
93.7
69.0
154.6
43.9
23.0
122.0
59.6
84.9
41.5
23.2
130.7
54.1
6.9
36.2
25.5
NA
267.8
125.4
352.3
200.1
141.7
387.0
111.4
209.4
87.4
153.3
500.7
159.4
129.6
92.7
202.0
312.3
112.2
116.3
94.6
195.9
445.4
NM
113.5
117.8
NA
PBH
SCLN
SUPN
ZTS
[]

ZOETIS INC
# MAR
DEC
DEC
DEC
2.3
4.6
1.9
2.2
2.0
5.3
4.0
3.2
2.1
4.3
3.7
2.4
1.7
4.5
4.0
2.6
2.3
4.8
2.6
2.7
57.2
0.0
5.7
77.0
61.9
0.0
27.4
69.6
54.6
0.0
50.7
74.3
59.1
0.0
16.1
10.5
66.3
0.0
70.6
12.5
NM
0.0
14.4
217.8
NM
0.0
33.1
153.1
NM
0.0
48.6
187.5
NM
0.0
16.1
29.2
NM
0.0
74.1
39.2

AZN
DEC
1.1
1.0
GSK
DEC
1.2
1.1
NVS
NOVARTIS AG -ADR
DEC
1.0
1.4
TEVA
DEC
1.4
1.2
VRX
DEC
1.0
1.5
1.3
1.1
1.2
1.1
1.5
1.4
1.0
1.2
1.3
1.5
1.5
1.1
1.0
1.0
1.5
40.0
69.8
16.4
21.0
71.9
28.2
77.1
15.2
26.0
66.9
24.8
66.8
12.2
30.4
69.8
26.3
68.3
15.3
32.2
68.0
22.0
58.0
16.0
29.2
55.9
NM
483.4
NM
155.4
NM
NM
NM
130.3
406.5
NM
200.5
997.2
269.3
591.9
NM
182.9
NM
348.6
337.8
NM
94.6
NM
NM
NM
NM
59
INDUSTRY SURVEYS
Price / Earnings Ratio (High-Low)

Ticker
Com pany
Yr. End
2015
2014
2013
2012
Dividend Payout Ratio (%)

2011
Dividend Yield (High-Low, %)
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
PHARMACEUTICALS
AKRX AKORN INC
AGN
[] ALLERGAN PLC
ANIP
BMY
DEC
DEC
DEC
DEC
DEC
44 NMNM55 75 -
15
NM
NM
27
55
NMNMNM24 51 -
59
NM
NM
7
38
48 NMNA NM35 -
23
NM
NA
NM
21
46 NMNA NA 31 -
28
71
NA
NA
26
26 35 NA NA 16 -
11
24
NA
NA
11
0
NM
NM
0
159
0
NM
NM
0
120
0
NM
NA
NM
113
0
0
NA
NA
116
0
0
NA
NA
61
0.0 0.0 0.0 0.0 2.9 -
0.0
0.0
0.0
0.0
2.1
0.0 0.0 0.0 0.0 3.1 -
0.0
0.0
0.0
0.0
2.3
0.0 0.0 NA 0.0 5.4 -
0.0
0.0
NA
0.0
3.2
0.0 0.0 NA NA 4.4 -
0.0
0.0
NA
NA
3.7
0.0 0.0 NA NA 5.3 -
0.0
0.0
NA
NA
3.7
CTLT
DEPO
ENDP
IPXL
JNJ
[]
[]
CATALENT INC
DEPOMED INC
JOHNSON & JOHNSON
JUN
DEC
DEC
DEC
DEC
20 NMNM93 19 -
14
NM
NM
53
15
NM7NM39 19 -
NM
4
NM
25
15
NA 14 NM17 20 -
NA
7
NM
10
14
NA NMNM32 18 -
NA
NM
NM
22
16
NA 828 28 19 -
NA
3
16
14
16
0
NM
NM
0
53
0
0
NM
0
48
NA
0
NM
0
53
NA
NM
NM
0
61
NA
0
0
0
64
0.0 0.0 0.0 0.0 3.6 -
0.0
0.0
0.0
0.0
2.8
0.0 0.0 0.0 0.0 3.2 -
0.0
0.0
0.0
0.0
2.5
NA 0.0 0.0 0.0 3.7 -
NA
0.0
0.0
0.0
2.7
NA 0.0 0.0 0.0 3.9 -
NA
0.0
0.0
0.0
3.3
NA 0.0 0.0 0.0 3.9 -
NA
0.0
0.0
0.0
3.3
LCI
LLY
MNK
MDCO
MRK
[]
[]
[]
LANNETT CO INC
LILLY (ELI) & CO
MALLINCKRODT PLC
MEDICINES CO
MERCK & CO
JUN
DEC
SEP
DEC
DEC
17 41 51 NM40 -
8
30
20
NM
29
35 34 NMNM15 -
17
23
NM
NM
12
72 13 55 NM34 -
10
11
42
89
27
38 15 NA 28 24 -
27
10
NA
19
18
NM- NM
11 - 9
NA - NA
8- 5
19 - 14
0
88
0
NM
115
0
88
NM
NM
43
0
45
0
0
116
0
53
NA
0
83
NM
50
NA
0
76
0.0 2.9 0.0 0.0 4.0 -
0.0
2.2
0.0
0.0
2.8
0.0 3.9 0.0 0.0 3.6 -
0.0
2.6
0.0
0.0
2.8
0.0 4.1 0.0 0.0 4.2 -
0.0
3.4
0.0
0.0
3.4
0.0 5.1 NA 0.0 4.6 -
0.0
3.6
NA
0.0
3.5
0.0 5.9 NA 0.0 5.3 -
0.0
4.7
NA
0.0
4.1
MYL
NKTR
PRGO
PFE
PAHC
[]
[]
[]
MYLAN NV
NEKTAR THERAPEUTICS
PERRIGO CO PLC
PFIZER INC
DEC
DEC
JUN
DEC
JUN
43 NMNM32 26 -
21
NM
NM
25
17
24 NM96 23 NM-
17
NM
70
19
NM
27 NM33 19 NA -
17
NM
21
15
NA
19 NM29 21 NA -
13
NM
21
16
NA
20 NM28 20 NA -
12
NM
17
15
NA
0
NM
50
99
26
0
NM
22
73
NM
0
NM
7
57
NA
0
NM
7
69
NA
0
NM
7
72
NA
0.0 0.0 0.3 3.9 1.5 -
0.0
0.0
0.2
3.1
1.0
0.0 0.0 0.3 3.8 0.0 -
0.0
0.0
0.2
3.1
0.0
0.0 0.0 0.4 3.8 NA -
0.0
0.0
0.2
3.0
NA
0.0 0.0 0.3 4.2 NA -
0.0
0.0
0.3
3.4
NA
0.0 0.0 0.4 4.8 NA -
0.0
0.0
0.3
3.7
NA
PBH
SCLN
SUPN
ZTS
[]

ZOETIS INC
# MAR
DEC
DEC
DEC
29 20 78 81 -
18
11
27
55
25 - 17
19 - 9
24 - 15
39 - 24
26 32 NM35 -
14
21
NM
29
17 - 9
45 - 22
NM- NM
NA - NA
18 - 11
13 - 6
NA - NA
NA - NA
0
0
0
49
0
0
0
25
0
0
NM
19
0
0
NM
0
0
0
NM
NA
0.0 0.0 0.0 0.9 -
0.0
0.0
0.0
0.6
0.0 0.0 0.0 1.0 -
0.0
0.0
0.0
0.6
0.0 0.0 0.0 0.7 -
0.0
0.0
0.0
0.6
0.0 0.0 0.0 NA -
0.0
0.0
0.0
NA
0.0 0.0 NA NA -
0.0
0.0
NA
NA
29 14 21 28 NM-
22
12
17
24
NM
10 16 16 21 NM-
714 17 18 NM-
125
47
91
74
NM
286
148
63
38
0
137
65
65
86
NM
57
82
63
46
NM
37
68
62
29
0
4.7 6.5 3.2 2.5 0.0 -
3.8
4.9
2.5
1.9
0.0
4.8 6.4 3.5 3.4 0.0 -
3.4
4.7
2.8
2.3
0.0
6.3 5.5 3.8 3.5 0.0 -
4.7
4.5
3.0
3.1
0.0
7.2 5.9 4.8 2.8 0.0 -
5.8
5.2
3.9
2.2
0.0
6.6 6.1 4.6 2.5 0.0 -
5.1
4.8
3.6
1.6
0.0

AZN
DEC
33 - 26
84 32 GSK
DEC
10 - 7
NVS
NOVARTIS AG -ADR
DEC
37 - 29
22 TEVA
DEC
39 - 29
16 56 VRX
DEC NM- NM
59
23
18
11
39
8
14
13
16
NM
6
11
13
11
54
INDUSTRY SURVEYS
60
Earnings per Share ($)

Ticker
Com pany
Tangible Book Value per Share ($)
Yr. End
2015
2014
2013
2012
2011
PHARMACEUTICALS
AKRX AKORN INC
AGN
[] ALLERGAN PLC
ANIP
BMY
DEC
DEC
DEC
DEC
DEC
1.29
(8.44)
(0.06)
1.34
0.94
0.35
(7.42)
(0.24)
2.61
1.21
0.54
(5.27)
0.27
(0.96)
1.56
0.37
0.77
0.42
NA
1.17
CTLT
DEPO
ENDP
IPXL
JNJ
[]
[]
CATALENT INC
DEPOMED INC
JOHNSON & JOHNSON
JUN
DEC
DEC
DEC
DEC
1.73
(1.26)
(1.52)
0.56
5.56
0.16
2.26
(4.92)
0.84
5.80
(0.41)
0.76
(4.73)
1.51
4.92
LCI
LLY
MNK
MDCO
MRK
[]
[]
[]
LANNETT CO INC
LILLY (ELI) & CO
MALLINCKRODT PLC
MEDICINES CO
MERCK & CO
JUN
DEC
SEP
DEC
DEC
4.18
2.27
2.64
(3.32)
1.58
1.70
2.23
(4.91)
(0.50)
4.12
MYL
NKTR
PRGO
PFE
PAHC
[]
[]
[]
MYLAN NV
NEKTAR THERAPEUTICS
PERRIGO CO PLC
PFIZER INC
DEC
DEC
JUN
DEC
JUN
1.80
(0.61)
0.92
1.13
1.55
PBH
SCLN
SUPN
ZTS
[]

ZOETIS INC
1.89
0.59
0.30
0.68
# MAR
DEC
DEC
DEC
2015
2014
2013
2012
0.45
2.10
NA
NA
2.18
(4.42)
(108.55)
5.66
7.99
3.57
(7.66)
(57.84)
5.36
8.42
3.66
1.03
(39.61)
5.45
2.98
3.48
0.01
(0.53)
(6.40)
0.85
3.94
NA
1.30
1.61
1.02
3.54
(6.40)
(11.42)
(41.17)
3.44
8.62
(24.40)
4.93
(29.77)
11.70
7.44
0.47
4.33
0.98
0.27
1.49
0.14
3.67
2.35
0.96
2.03
(0.01)
3.90
2.61
2.39
2.04
11.97
5.21
(68.84)
(2.78)
1.56
2.49
(0.42)
1.78
1.43
(0.08)
1.63
(1.40)
4.71
1.67
0.64
1.54
(1.50)
4.22
1.27
0.18
1.25
(1.19)
3.69
1.11
NA
1.50
0.49
0.47
1.16
1.41
0.20
(2.90)
1.01
1.29
0.17
(1.87)
0.87
1.02
3.73
3.76
1.49
(2.70)
2.49
3.02
3.93
2.25
(0.38)

AZN
DEC 1.12
0.49
GSK
DEC 5.15
1.79
NVS
NOVARTIS AG -ADR
DEC 2.92
4.39
TEVA
DEC 1.84
3.58
VRX
DEC (0.85) 2.72
Share Price (High-Low, $)
2011
2015
2014
0.92
(37.26)
4.94
(10.52)
(1.70)
0.69
1.90
NA
NA
4.29
57.10 - 19.08
340.34 - 237.50
18.30 - 10.57
73.54 - 36.15
70.87 - 51.82
45.25 - 20.52
272.75 - 166.38
12.52 6.67
61.43 - 18.52
61.77 - 46.30
(24.15)
0.96
(23.58)
10.81
8.26
(24.06)
1.04
(27.44)
9.02
4.91
NA
1.91
(26.33)
8.65
8.37
34.42 33.74 96.58 52.10 106.50 -
23.63
15.03
46.66
29.76
81.79
30.18 16.64 82.16 33.05 109.49 -
8.25
10.12
(39.30)
(3.95)
5.38
4.37
12.47
5.22
(3.13)
4.67
3.78
9.16
NA
8.38
3.90
3.53
7.59
NA
7.54
2.65
72.44 92.85 134.26 43.79 63.62 -
33.13
68.31
52.01
23.32
45.69
59.44 75.10 101.52 41.28 62.20 -
(5.78)
(0.52)
(31.98)
(3.87)
(0.52)
(8.37)
(0.31)
(12.24)
(0.95)
(0.70)
(10.40)
(1.43)
(0.00)
(0.88)
(1.69)
(6.07)
(0.26)
3.23
(1.30)
(1.52)
(6.23)
1.06
3.41
(2.21)
NA
0.74
0.52
(0.97)
0.49
(36.74)
2.96
2.41
(3.17)
(34.38)
2.42
1.53
(0.78)
(19.73)
2.12
0.81
(1.69)
(20.79)
2.00
1.86
NA
(23.30)
1.27
5.10
NA
54.25 11.71 23.30 55.38 -
33.25
6.47
7.97
37.73
3.66
3.25
3.83
3.10
0.52
(6.34)
(10.19)
4.91
(0.24)
(104.18)
(5.11)
(5.04)
7.35
(0.71)
(45.72)
(1.12)
(4.49)
6.38
(3.41)
(52.49)
(1.05)
(5.87)
3.17
(4.47)
(35.32)
0.93
(2.21)
1.63
(7.26)
(23.66)
36.69 49.08 106.84 72.31 263.81 -
29.50
37.24
83.65
54.17
69.33
76.68 - 37.59
9.16
17.55 215.73 - 140.40
36.46 - 28.47
40.54 - 26.95
2013
2012
2011
26.16 170.51 NA 23.00 54.49 -
12.44
82.02
NA
0.80
32.50
16.87 91.47 NA NA 36.34 -
10.52
55.00
NA
NA
30.64
11.77 73.35 NA NA 35.44 -
4.87
50.47
NA
NA
24.97
19.30
9.85
53.62
21.34
86.09
NA 10.77 67.63 25.50 95.99 -
NA
4.99
25.00
14.41
70.30
NA 7.15 39.29 27.25 72.74 -
NA
4.75
25.49
18.40
61.71
NA 10.40 44.53 28.75 68.05 -
NA
4.20
26.02
14.46
57.50
29.12
50.52
50.47
19.92
49.30
33.95 58.40 53.80 39.40 50.42 -
4.86
47.53
41.00
24.01
40.83
5.29 53.99 NA 26.95 48.00 -
3.72
38.30
NA
18.06
36.91
5.95 41.92 NA 20.00 37.90 -
3.41
33.46
NA
12.33
29.47
59.60 - 41.97
17.53 - 10.10
171.57 - 125.37
33.12 - 27.51
33.89 - 15.10
44.73 14.47 157.47 32.50 NA -
27.38
7.43
98.79
25.33
NA
28.50 10.98 120.78 26.09 NA -
20.21
5.56
90.18
20.75
NA
25.46 12.95 104.70 21.90 NA -
15.49
4.07
62.31
16.63
NA
24.94
4.24
7.09
28.14
36.69 6.30 9.05 35.42 -
19.48
4.29
4.45
28.81
21.92 7.58 16.68 NA -
11.07
3.68
4.30
NA
13.62 6.88 NA NA -
8.15
3.30
NA
NA
41.34 - 29.15
56.73 - 41.29
96.97 - 77.90
58.95 - 39.64
153.10 - 106.00
29.83 54.00 80.55 41.74 118.25 -
22.23
43.68
63.51
36.26
59.34
24.64 47.69 64.40 46.65 61.11 -
19.86
41.68
51.20
36.63
42.47
26.27 45.85 64.82 57.08 57.24 -
20.44
36.28
51.60
35.00
28.06
38.15 9.14 11.47 45.24 -
J-This amount includes intangibles that cannot be identified.
The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.
61
INDUSTRY SURVEYS
Disclosure
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under license. The owner of these trademarks is S&P
Global Inc. or its affiliate, which are not affiliated with
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Surveys) have been prepared by Accounting Research &
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Malaysia
(License
No.
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INDUSTRY SURVEYS
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Industry Surveys

How the Industry Operates

Key Industry Ratios and Statistics

How to Analyze a Company in This Industry

Comparative Company Analysis

PHARMACEUTICALS / NOVEMBER 2016

in 2015 and 57% of total global sales, according to IMS Health.

PHARMACEUTICALS / NOVEMBER 2016

-------------------------- PRICE CHANGES (in percent) --------------------------2016

Health Care Distributors

Health Care Services

Life Sciences Tools & Services

ETF Market Flows and Investing Landscape

PHARMACEUTICALS / NOVEMBER 2016

Health Care Select Sector SPDR

Vanguard Health Care

PHARMACEUTICALS / NOVEMBER 2016

PHARMACEUTICALS / NOVEMBER 2016

Rheumatoid Arthritis, NHL

PHARMACEUTICALS / NOVEMBER 2016

(in local currency)

Total, Global Market

*Covers direct and indirect pharmaceutical channel wholesalers and manufacturers.

candidate. Following Trumps victory, stocks of pharmaceutical companies rose, partly in

PHARMACEUTICALS / NOVEMBER 2016

----- (first half) -----

Source: Company reports.

PHARMACEUTICALS / NOVEMBER 2016

Schizophrenia, Bipolar disorder

Multiple sclerosis (MS)

Benign prostatic hyperplasia

PHARMACEUTICALS / NOVEMBER 2016

PHARMACEUTICALS / NOVEMBER 2016

Resurgence of R&D Pipelines

Median Cost per Patient ($)

PHARMACEUTICALS / NOVEMBER 2016

PHARMACEUTICALS / NOVEMBER 2016

PHARMACEUTICAL COMPANIES IN THE S&P 1500

Johnson & Johnson

S&P 500 Index

S&P 500 Index

Merck & Co.

S&P 500 Index

Allergan (formerly Actavis)

S&P 500 Index

S&P 500 Index

S&P 500 Index

S&P 500 Index

S&P 500 Index

S&P 500 Index

S&P 500 Index

S&P 500 Index

S&P MidCap 400 Index

S&P MidCap 400 Index

S&P MidCap 400 Index

The Medicines Company

S&P SmallCap 600 Index

S&P SmallCap 600 Index

S&P SmallCap 600 Index

S&P SmallCap 600 Index

Phibro Animal Health

S&P SmallCap 600 Index

S&P SmallCap 600 Index

S&P SmallCap 600 Index