Global Pharmaceuticals Companies A Rocky Road to Recovery

Michael Zbinovec Senior Director Corporate Finance, Chicago

Britta Holt Director European Corporates, London Roma Patel Analyst European Corporates, London

Paris, 20 November 2012

Agenda
Patent Cliff

Industry in Recovery
A Brighter Future Outlook Appendix

Agenda
Patent Cliff

Industry in Recovery
A Brighter Future Outlook Appendix

YoY Global Market Growth Pharmaceuticals

(%) 14 12 10 8 6 4 2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Fitch

12 11 10 9 9 8 7 7 7 7 6 5 5 7

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Patent Cliff Company Exposure

2011 Sales At Risk from US Patent Expiry in 2011-2013
(As a % of total company sales)
Bayer GSK J&J Sanofi Roche Abbott Novartis Pfizer AstraZeneca Merck Eli Lilly BMS Amgen 0
Source: Fitch calculation

0 0.3 1.5 2.5 2.8 4.4 7.9 13.7 20.6 28.4 31.3 40.1 40.3 5 10 15 20 25 30 35 40 45 50

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Patent Cliff Sales and EBITDA Margin Pressure

Pressure on Sales Growth: US Pharmaceuticals Companies
(%) 10 5 0 -5 -10 2012F 2013F 2014F

Pressure on Sales Growth: European Companies Under Pressure

(%) 5 0 -5 -10 2012F 2013F 2014F

AstraZeneca

Novartis

Roche

Sanofi

Source: Fitch

www.fitchratings.com

Allergan

Merck

BMS

Amgen

Eli Lilly

Pfizer

Abbott

J&J

-15

Bayer
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5

GSK

-15

Patent Cliff Sales and EBITDA Margin Pressure (cont.)

EBITDAR Margin Development: European Companies
(%) 50 40 40 30 20 10 0 Novartis AstraZeneca Roche Sanofi GSK Bayer Median 27 27 20 20 37 40 40 39 38 37 36 2011A 2012F 2013F 2014F

35

35

Source: Fitch calculation

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Patent Cliff Sales and EBITDA Margin Pressure (cont.)

EBITDAR Margin Development: US Companies
(%) 60 50 50 40 31 30 20 10 0 J&J Pfizer Merck Eli Lilly Abbott BMS Amgen Allergan Median 17 32 45 40 36 33 34 27 27 36 28 38 33 33 35 33 2011A 2012F 2013F 2014F

Source: Fitch calculation

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Agenda
Patent Cliff

Industry in Recovery
A Brighter Future Outlook Appendix

Industry in Recovery: R&D Innovation

R&D Pipeline

Source: Fitch

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Industry in Recovery: R&D Innovation (cont.)

Focus on Personalized Medicines
Example: GSK and Pfizer created rare disease units in 2010; Sanofi acquired Genzyme Majority of FDA new drug approvals in 2011 and 2012 have been for products mainly prescribed by specialists IMS Health: seven of top-20 therapeutic classes in spending in 2012 to 2016 represent specialized pharmaceuticals, including cancer medicines, antivirals, and MS treatments Smaller sales force and less marketing required Very profitable but often small Uptake tied to increased utilization of companion diagnostic

Biological products are difficult to copy and to manufacture

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Industry in Recovery: Strategic Responses Diversification Away from Pure Pharma

Business Diversification - 2011
(Percentage of group sales) 100% 75% 50% 25% 0% 100 100 100 93 89 Pharmaceuticals/Vaccines Consumer Health Diagnostics 7 7 4 19 Generic Drugs Animal Health Other 4 6 17 23 5 3 8 27 16 77 58 56 47 37

6 8 5

21 40 17 15 23 52 7 3 10 28

81

81

Novartis

Merck & Co.

Sanofi

Amgen

Eli Lilly

Roche

Pfizer

Pfizer: Generic sales and emerging markets sales are reported as one unit. Novartis: 'Other' includes Eye Care, Diagnostics and Vaccines, Abbott and J&J: Diagnostics and Medical Devices Sales are shown togther under 'Diagnostics'. Source: Company information and Fitch calculation

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Abbott

Bayer
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BMS

GSK

AZ

J&J

Industry in Recovery: Strategic Responses Diversification Away from Pure Pharma (cont.)
Diversification Away from Ethical Pharmaceuticals
(%) 100 81 75 81 79 73 Pharma Other

50 21 27

25

19

19

0 2005
Source: Fitch calculation

2007

2009

2011

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Industry in Recovery: Strategic Responses Emerging Market Growth

2011 GSK: Operating Profit Margin (Before R&D Costs)
EM 31.3

Europe

55.2

US

69.2

0
Source: Company Information

25

(%)

50

75

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Industry in Recovery: Strategic Responses Emerging Market Growth (cont.)

Geographical Diversification - 2011
(Percentage of group sales) 100% 23 75% 50% 77 25% 65 53 US 4 9 4 18 16 9 22 Europe 10 19 26 18 10 29 EM 16 21 22 41 Asia Pacific/Japan 17 19 24 40 16 7 10 19 26.5 40 9 9 17 25 40 6 7 19 35 33 LA/ME/Africa 20 10 37 4 15 19 30 32 4 9 30 27 30 Other 17 25 37 21

45

43

33

Novartis

Merck & Co.

MEDIAN

Amgen

Eli Lilly

Roche

Source: Fitch Calculation Amgen: Other is international, J&J: Other includes: Western Hemisphere excl. US. BMS: Asia Pacific includes also Jpaan and Canada, Merck, Eli LIlly, Abbott, AstraZeneca, Sanofi: Asia Pacific includes only Japan. Novartis: emerging market sales include the top 6 emerging markets only. Bayer: Only the Pharmaceuticals business included. Emerging Markets contributed 32% of Heathcare Sales. Pharma Market: According to annual report GSK, Abbott: Emerging markets represent 40 percent of sales in these diversifi ed medical products businesses. AstraZeneca is focusing on approximately 70 generic products to be launched in 20 targeted Emerging Markets. Source: Company information and Fitch calculation

www.fitchratings.com

Abbott

Sanofi

Pfizer

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14

Bayer

BMS

GSK

J&J

AZ

0%

Agenda
Patent Cliff

Industry in Recovery
A Brighter Future Outlook Appendix

A Brighter Future: 2015

The patent cliff is over and many companies will benefit from a young portfolio Selective R&D investments in highly profitable therapeutic areas and M&A during the past three years led to improved biotech capabilities allowing growth of specialized medicines Biosimilars are an attractive opportunity for a few developers, such as Novartis, Amgen and Merck, and start to enter the US marketplace The European companies are diversifying into businesses outside prescription drugs while US manufacturers have become leaner and more focused over time The companies are better positioned in emerging markets

Margin decline seen since 2012 due to patent cliff

Source: Fitch

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Agenda
Patent Cliff

Industry in Recovery
A Brighter Future Outlook Appendix

2013 Outlook: Fitch Views

Stable
Governments cost containment policies Commercial payer hurdles remain high Challenging regulatory environment Major 2013 US patent expiry for
Eli Lillys (A/Negative) Cymbalta and Humalog

Novartis (AA/Stable) Zometa

Roches (AA-/Positive) Xeloda Plus potential generic competition for GSKs (A+/Stable) Advair

Continued - but manageable EBITDA margin pressure Investment appetite more moderate
Source: Fitch

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2013 Outlook: Fitch Views (cont.)

Rating headroom
Only BMS and Eli Lillys rating are on a Negative Outlook, reflecting the major patent expiration and shift in capital deployment priorities. Abbotts ratings on RNW, reflecting the business split Roches, AstraZenecas, Mercks, Pfizers and Bayers ratings have high headroom for debt-financed acquisitions Very limited rating headroom exist for Abbott, Eli Lilly and BMS.

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2013 Outlook: Fitch Views (cont.)

Application of FCF
Debt reduction is secondary to shareholders returns
Roche and Bayer are exceptions

Share repurchases favoured over M&A

Acquisition activity directed to filling research and product portfolio gaps, and expanding geographic reach

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Key Messages
1. Government cost containment policies across the globe will persist
2. Regulatory and commercial payer pressures continue 3. Strategies divided: US companies trend to become leaner while European companies increase diversification

4. More focused R&D programs increasing productivity, notably in specialized medicines

5. Pricing deals and risk diversification strategies have a negative impact on profitability. This is currently still offset by the benefits of restructuring measures

6. Biosimilars an attractive market for a few operators, such as Novartis

7. Companies increasing presence and product offerings in emerging markets 8. The need to invest is perceived by almost every company 9. The natural median rating category for big pharma companies is A
Source: Fitch

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Agenda
Patent Cliff

Industry in Recovery
A Brighter Future Outlook Appendix

Global Pharmaceuticals Companies: Sector Credit Factors

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Disclaimer
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The information in this presentation is provided as is without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security.
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