APIs for Regulated Market Generics: Whither Europe? Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? Rome, 23 January, 2006 ©2006 Q Street Advisors, Inc. All rights reserved.

Agenda Global Pharma Sector Trends Future Growth and Competition in the US and EU Performance of Indian and Chinese Companies Key Success Factors for Generic Companies Where do APIs Fit? Trends and Impact on EU Based API Companies Conclusions

Global Opportunity: Macro Factors • Demographics & economic growth • Aging populations in advanced countries • Economic & population growth + aging in developing countries • Political pressure for health care cost containment leading gradually to more favorable legislation & policies supporting generics, plus increased utilization • Top generic companies consolidating: now huge, global players inspiring confidence in generic drugs • API market projected to grow 5-7% in volume over the next 5-10 years, but only 1-2% in value due to increased competition* *Source: Mark Lachovsky, Intellipharm

Global Pharma Sector is Cyclical • 2005 was a lean year for loss of exclusivity • 2006-2008 many large selling products losing exclusivity in major markets • Consolidation amongst global & regional US & EU generic companies + major customers in the US • EU customers remain fragmented and mostly national, with differing packs, rules, brands supporting national companies…but not forever • Growing competition from established and emerging Indian companies for a share of this next cycle, China coming

Growth Projections for 2006 Vary by Region US market forecast by IMS to grow 8-9% in 2006, up from the 6-7% in 2005. Totals 43% of world market. EU top 5 expected to grow 4-5%, down by .5% from 2005 China expected to grow 17-18% to $13-14 billion Indian domestic market growing at 8-9%/year in volume India’s total pharma market, including exports, projected by Indian officials to double by 2010 Sources: IMS for US, EU, China projections, G S Sandhu, Joint Secretary, Indian Dept of Chemicals and Petrochemicals, reported in Pharmabiz 5/31/2005 for Indian projections

Performance: Generics Outpace Big Pharma • Global generics market grew at 17% CAGR in the 5 years prior to 2004, greater than growth rate for branded pharma products • Big pharma’s top line growth “anemic” (Bear Stearns), with TRx’s declining 3.9% in Oct 2005, excluding generics and older products • Generics outpacing big pharma earnings performance • Pressure to increase development productivity while reducing time to market & to reduce costs at big pharma Sources: IMS, Lehman Brothers, Bear Stearns

Generics Outperforming Big Pharma Diluted EPS Growth from Continuing Operations 3 Yr. CAGR 5 Yr. CAGR US Generic Performance   25.5% 39.2% US Brand Performance -12.1% -6.0% European Brand Performance 6.3% 13.6% US Generic Outperformance vs. US Brand 37.7% 45.3% US Generic Outperformance vs. Euro Brand 19.3% 25.7% Source: Lehman Brothers 7/2005

Now, Let’s Look Further at the Issues

Pharma Sector Cycle Long Term: Fewer New Launches, Slower Growth • Slowing US and global market growth • 2004-07 US market growth +6% a year vs. +10% a year 1999-2003 • 2004-07 global market growth +6.5% a year vs. +10% a year 1999-2003 • 20% fewer new products • New product launches estimated to average 45 a year 2004-07 vs. 54 a year from 1999-2003 Fewer products available to generics Less API capacity needed by big pharma Further consolidation Continued API capacity shift to generics 10 Year+ Forecast Source: Lehman PharmaPipelines: 2004, IMS

US Cycle: Growing $ Losing Exclusivity 2006-2008, Modest Slowdown 2009-2010 Source: Lehman PharmaPipelinesTM 2004

Growth in Indian Industry • Ranbaxy now 9th largest generic, the 1st Indian based truly global company • Indian drug production US$7.5 billion, representing 8% of world production by volume & 1.5% by value in 2004 • India’s exports US$ 3bb in 2004, 22.9% CAGR • Indian API business ~US$1bb in 2005, with over 400 APIs claimed to be manufactured • E&Y ranks India’s pharma market 4th in volume & 13th in domestic consumption value Source: Ranbaxy corporate presentation, G S Sandhu, Joint Secretary, Indian Dept of Chemicals and Petrochemicals, reported in Pharmabiz 5/31/2005, Pharmabiz “China, India Emerge….” 12/22/2005

Growing Competition to Supply EU, US • Indian companies targeting US and EU • China often in the Indian supply chain • Few private Chinese companies ~3-5 yrs behind • Growing numbers of new Indian companies attempting to sell lower cost APIs and FDF products to US customers • US customers are using offers to negotiate better prices, mostly from their major generic suppliers of FDF, & must seek lower API prices to stay competitive Result Margins pressured thruout supply chain New entrants gain little FDF market share Increasing FDF outsourcing

Big Pharma Response to Generics: Increased Outsourcing & CRAMS • Indian & Chinese API/intermediate mfrs beneficiaries • Traditional US/EU contract mfrs at risk • Greater long term threat to traditional contract mfrs from R&D collaborations in India • Ranbaxy NCE/NME research collaboration - GSK • DRL emphasis now on NCE/NME research • Indian companies with NCE/NME efforts will manufacture any successful products • Some of the Indian companies focusing on CRAMS may de-emphasize APIs for generics

US: Low Prices Expected but Do Not Win the Business “Generic manufacturers needs to differentiate themselves to the drug retailers by consistency of product and supply, distribution and logistics, capabilities and the pipeline of future products. Price is not usually a significant negotiating tool, as most generics are multi-sourced and priced similarly.” Dennis O’Dell, SVP Pharmacy Services, Walgreen, comments on conference call hosted by Rich Silver and Meredith Alder, Lehman Brothers NY with George Barrett & Bill Marth of Teva. Dec. 9, 2004

US: Increased Competition from India, Little Movement in FDF Market Share • No Indian companies other than Ranbaxy and to a lesser extent DRL and Sun/Caraco are yet getting meaningful direct FDF market share in the US FDF generics market • Alliance products hard to measure: FDF market share under US partner’s name • 72 Indians have active US DMFs • Cipla, DRL, Ranbaxy, Matrix, Sun, Wockhardt, Lupin each have more than 25 active DMFs: the pressure is on APIs Large increase in DMFs submitted & cited in ANDAs. Includes alliance products. Trend

Reviewed DMFs Received by FDA: 45% from India 2004 vs <5% 1999 Source: Source: Paul Schwartz, Ph.D., FDA OGD, GPhA API Conference 3/15/2005

More Indian DMFs Cited in ANDAs • Many DMFs cited multiple times in multiple ANDAs • Some ANDAs citing Indian DMFs support FDF products via partnerships Source: FDA Office of Generic Drugs, 8/2005

More ANDAs Cite Indian DMFS, More Indian API Plants Inspected by FDA • FDA only inspects if the DMF is cited in an ANDA • Some ANDAs citing Indian DMFs support FDF products via partnerships Source: presentation by D. G. Shaw, Secretary General, Indian Pharmaceutical Alliance, 3/2005

EU: Lower Standards, Less Oversight • COS obtainable without an inspection by authorities • Dossier buying prevalent. FDF buyers often do not inspect the FDF facility nor the API supplier • Many local EU generics companies licensing dossiers do not have the capabilities to evaluate or audit API suppliers • API suppliers can be changed easily • ~70% of APIs in EU manufactured drugs imported from India and China, up from ~10% in the early 1980s* Issue Dossier buying, lack of API quality oversight *Source: Matt Moran, President, APIC, quoted in SCRIP

What Are the Key Success Factors in Generic Performance in the US? • Pipeline • Sales & Marketing • API • Breadth or Niches • Speed and Low Costs

Generic Performance: Pipeline Strong, growing pipeline of products with competitive advantage Product selection: build pipeline that supports company strategy: blockbuster, niche, specialty Focused execution of R&D + BD&L to build pipeline to deliver on time approval and launch No generic company can sustain major market leadership without high performing, internal R&D & high caliber sourcing of APIs Attractive pipeline underpins sales of existing products New entrants, without attractive pipeline, have difficulty selling older products, irrespective of cost

US Generic Pipelines Teva 140* 89+* 37* R&D Ivax 57* 12* ANDAs Pending Value $Billion Number FTF Source Teva 140* 89+* 37* R&D Ivax 57* 12* R&D, Cipla, BD&L Ranbaxy 52 R&D Par 49 29 BD&L, R&D-Kali Dr. Reddy’s 47 R&D Mylan 44 35 10 R&D Watson 40 29 Cipla, BD&L Barr 35 10 R&D, BD&L Andrx ~30 R&D Sandoz/Eon 27+? 14+? Cipla,BD&L,IndiaR&D APP 18 3 R&D, BD&L Impax 14 6 R&D, BD&L Alpharma 12 7 BD&L Source: Company reports, Lehman Brothers estimates updated 9/05, Q Street assessments; *Teva & Ivax merger impact on respective pipelines unknown

Indian Capabilities: Pipeline High quality Indian pharma companies have competitive advantages in R&D to build a pipeline Speed and high technical skill, including: Development of non infringing processes Difficult formulations Lower cost for scientists Generic company core competencies are well developed in leading Indian companies Rapid, non-infringing development & regulatory submission Low cost, equivalent products On time for launch at patent loss of exclusivity (LOE)

Issues with Outsourced Pipeline Are generic companies that license FDF products assured of quality, cGMP compliant, FDA inspected API supplies to their FDF supplier? Are generic companies that lack a pipeline auditing their suppliers’ API suppliers? Are they technically competent to do so? How secure is the supply chain? How secure is compliance? Can the API suppliers be relied on to use non-infringing processes? Are the generic FDF buyers checking?

Generic Performance: Sales and Marketing Strong relationships with local customers & deep understanding of and ability to serve customer needs Flawless execution of launch & both inbound and outbound supply chain management in a pure generic market Large US chains Wholesalers who do not buy from boutiques Experience in consistently serving the sophisticated, complex needs of large customers is essential Delays / misses / API issues are unacceptable Have my doubts about ability of some of the would be new customers amongst the PBMs and wholsalers to control quality and delivery from less expereienced indian companies and not risk public health

Indian Capabilities: Sales and Marketing • Indian companies are still learning what Western generic companies and customers require, except Ranbaxy • Experience with major products necessary to supply the big US chains • Supports a partnership or API supply model • Partnerships have higher costs and less ability to compete against R&D based companies and increased regulatory and quality risk if not done properly • Puts further pressure on EU based API suppliers to help their generic customers compete

Generic Performance: API Either internal API or strong sourcing partnerships Non-infringing of both innovator and IP intensive generics such as Teva, Ranbaxy Ready early, 7-10 years prior to LOE Perfect technical package & support for regulatory filings, responses to any deficiency letters in multiple markets High performing, internal API is a competitive advantage in circumventing or challenging patents, being first to file/first to launch, solving complex technical problems Internal API lowers costs “If you need milk, you do not have to buy the cow. If you need a lot of milk, you can buy a cow, but a professional farmer must manage it, not a pharmacist”

Indian Capabilities: API • Indian companies entering the regulated markets all have internal API manufacturing and development capabilities • Experienced Indian companies such as Cipla, Ranbaxy, DRL have sophisticated sourcing and supply chain management for APIs, including China and are world class in quality and API supply chain management • US or EU generic companies without API capabilities almost have to source from India, and understand the “cow,” in order to compete

Chinese Capabilities: API • China is 3-7 years behind India in dose form readiness to enter regulated markets but has fast growing API capabilities and is increasing API sales rapidly • Indian generic companies forward integration into FDF pushes API demand to China • China is a supplier of intermediates to India, helping India to compete by cutting costs • China is an emerging force in API direct sales to regulated markets, especially in simpler, older molecules + fermentation

EU Capabilities: API • Traditional EU API manufacturers have relationships, regulatory experience and market understanding • Track record of non infringement • Companies with sophisticated sourcing and supply chain management for intermediates, including sourcing from China or India, have an advantage in costs • Need to lower costs, including rapid development of non-infringing processes very early, which supports business combinations involving EU and Indian / Chinese companies

Generic Performance: Low Costs Assumed part of the generic business model Less important and overrated as a competitive advantage Companies with high costs cannot compete but companies with lower costs cannot compete on lower costs alone

Chinese Capabilities: Low Costs • China is usually cheaper than India so where capabilities exist or regulatory not essential, China is often the lowest cost producer for 3rd parties • China has low cost and high caliber scientific and technical personnel but much less experience than India in regulatory compliance and business/supply chain mgmt • Communications with China are more of an issue and having an experienced person who speaks Chinese is still important • China is moving up the value chain and will increase cost base as it follows India in investing in infrastructure and “software” related to compliance

It’s Better to be First than it is to be Better Generics: Speed is Essential Rapid generic price erosion +180 days May lead to sourcing shortcuts in rush to be FTF; requires fixing prior to launch Within 4 weeks, GSK had lost 65% of total Paxil scripts Generic price at 40-50% for the 1st 40 weeks At generic entry, Paxil was $2.3 billion (US) Even after deep discounts, a MASSIVE upside for generics It’s Better to be First than it is to be Better Slide elements courtesy of Mike Kopp, CardinalHealth

Typical Generic Development Cycle: SOD API suppliers wield significant power…Early API selection 5-7 years before loss of exclusivity API supplier critical to potential FTF/Para IV Sufficient quantities for development Brand Product File DMF File ANDA Patent Cert Validation & Approval Prep Review Sourcing Pre-Form Form & Pilot Bio Stability PK Study Portfolio 9 mo. 2 mo. 6-12 mo. 12 mo. 5 mo. 12-18 mo. Outside Counsel API Suppliers Business Dev API Suppliers CRO API Suppliers Key Influences Slide courtesy of Mike Kopp, CardinalHealth

Increased Partnership, Especially with India Maximizes competitive advantage of US/EU company’s sales, supply chain management & distribution Maximizes Indian competitive advantage in API R&D, non-infringing process development and lost cost manufacturing Are western generic companies with poor R&D licensing FDF from India adding value for their customers? Are they increasing regulatory risk?

In Generic Pharma, Size Matters • Large, sophisticated companies with R&D and API have advantages in delivering the pipelines and serving large chains and wholesalers • Increasing M&A by leading Indian and other overseas companies positioning themselves for the US and EU markets • Licensing and M&A in attempt to compete with Teva • Broad product line and sophisticated supply chain management and a track record required to sell to major chains and wholesalers in the US: mandates performance on all KSFs More M&A, but new entrants more likely to take their places in the supply chain Tide Shifting

Brand & Generic Business Models Changing Target blockbusters at patent-expiry Large volume SODs, easy to source Internal R&D Slow brand market/profit erosion over 12-24 mo Most API sourced from Europe Spain, Italy, Hungary, Germany Indian & Chinese API considered low cost / dubious quality Most generic launches at patent-exp Old Model Differentiated product strategies Increased focus on niche specialties Trend for BD&L to fill in/expand pipeline short term, especially with FDF Very rapid brand market & profit erosion Generic expansion into brands via NCE/NME development & licensing Consolidation and dominance by largest companies increasing US: Teva, Mylan, Watson, Sandoz API space dominated by Indian/Chinese Significant % of Paragraph IV filings Today’s Model Sources: Q Street Advisors

Changes Impacting API Initiatives • Both brand and generic sectors changing API sourcing • Increasing sourcing from India & moves into China by companies that are new to global sourcing and may or may not have regulatory and quality capabilities to insure compliance and quality • Many new API manufactures lack a track record of cGMP compliance • More APIs from India, China. More FDF imports, especially from India. Customers exploring going direct. Response Where are the opportunities for EU mfrs?

EU API Manufacturer Opportunities • Alliances with generics companies that lack internal API • Become their R&D pipeline developer • Position for future acquisition by a generic partner • Independent partner of choice • APIs may become trickier to source as quality Indian companies forward integrate, while still early for China • Become an independent alternative to Teva & Sandoz APIs for their generic competitors • Niche products for major generics with internal API who cannot make 100% of their needs • Alliance with Indian manufacturer with high caliber, lower cost scientific talent & development capabilities Even established indian cos quick to drop prices to meet new competition Ranbaxy bite ratio reported 100%

Generic Sector Predictions Long term growth prospects vary among Western & Indian generic companies, based on R&D pipelines Companies with fewer capabilities for building pipeline More likely to need M&A, including acquisitions of high caliber API mfrs with pipelines, low cost scientific talent, strong regulatory capabilities & non infringing process development Companies lacking internal API must form alliances with strong API mfrs or license in FDF/dossiers Alliances must be based on information sharing and trust and provide access to early, low cost development capabilities API manufacturers without both tight customer and India/China supply alliances, attractive forward pipelines and access to low cost scientific talent will not thrive

Thank you. Jean Hoffman President Q Street Advisors, Inc. 120 Exchange Street Portland, ME 04101 USA tel.: 207-828-0880 Fax: 207-828-0805 jhoffman@qstreetadvisors.com www.qstreetadvisors.com