Global Pharma - Credit Suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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01 May 2015

Global

Equity Research

Major Pharmaceuticals

Global Pharma ANNUAL

Rising US Rebates limit margin expansion

The reconciliation of gross to net US pharma sales from annual report

disclosures helps us understand the full promotional burden in the US. It shows

what proportion of the highly visible US list price rises has been retained by

innovators and what has been passed on to payers in the form of rebates. For

2014, our 20 company universe has shown net US drug sales of $202bn and

reported total rebates of $98bn. We conclude that in 2014 US rebates rose 24%

against just a 7% increase in net sales, reflecting continued formulary pressures.

We view rebates as the biggest single element of promotional spend available

to companies. We estimate that whilst traditional SG&A grew only 4% in 2014,

when this spend is combined with rebate expenses, overall promotional costs

rose 17%, well ahead of reported sales growth. This goes some way to explain

the lack of overall operating margin expansion seen for many companies

despite positive sales growth and recent significant restructuring.

AZN continues to show the highest level of overall rebates at 56.6% of sales

with GSK, Lilly and Sanofi all reporting a >5pp increase in rebates.

We believe that product uniqueness remains the best defence against

increasing rebates, with companies showing high or growing levels of

uniqueness being in the strongest position to withstand payer pressures and

sustain operating margins. Roche and Celgene remain the stocks with the

highest exposure to unique drugs. Lundbeck and UCB are the most levered to

continued US price rises.

Figure 1: Net Price as a key driver of 2014 net income growth

-50%-40%-30%-20%-10%

0%10%20%30%40%50%

Imp

act

of

'14 U

S n

et

pri

ce

ris

es

% chg from US price. % Chge- Other % chg in Net Inc

Source: Company data, Credit Suisse estimates

Research Analysts

European Pharma Team

44 207 888 0304

[email protected]

Jeffrey Bailin, CFA

212 325 6167

[email protected]

Vamil Divan, MD

212 538 5394

[email protected]

Tyler Harris

212 325 2056

[email protected]

Ari Jahja

212 325 0767

[email protected]

Terence McManus

44 20 7888 2102

[email protected]

Ravi Mehrotra PhD

212 325 3487

[email protected]

Glen Santangelo

212 538 5678

[email protected]

Anuj Shah

212 325 6931

[email protected]

Jo Walton

44 20 7888 0304

[email protected]

Matthew Weston PhD

44 20 7888 3690

[email protected]

01 May 2015

Global Pharma 2

Key takeaways

Rebates rising: Companies with the highest current overall reported rebates are

AstraZeneca, followed by Novo and Sanofi. Lilly and GSK saw the largest increase in US

rebates in 2014.

List prices still rising faster than rebates for most: Companies with the highest net

price rises in 2014 were Sanofi (+26%), Novo (+21%) and Actelion (+18%). Companies

with the lowest net price rises were GSK (+2%), Eli Lilly (+4%), Roche (+4%) and UCB

(+5%).

Rebate growth has more than offset reported declines in traditional SG&A:

Aggregate promotional costs have risen at least 10% between 2012-2014 for AZN and

UCB. We see a decline in overall promotional costs for Amgen, Actelion, Biogen Idec and

Shire.

The highest current level of uniqueness should provide protection from rebate

pressures: Celgene, Gilead and Roche have over 75% of current worldwide (ww) sales

rated as unique. Companies with the least unique portfolios include AZN, Bayer and GSK,

all with under 20% rated as unique.

Companies increasing their contribution of unique drugs by more than 10% include

Lundbeck and Biogen Idec. We expect Sanofi and Roche to see the biggest theoretical

loss in uniqueness.

Exposure to government funded Medicaid and Medicare Part D also raises rebate

pressures: IMS data suggest Novo, Lilly and Sanofi are the most exposed, reflecting their

diabetes sales. Oncology sales may also be weighted towards the elderly but are typically

funded via Medicare Part B.

Figure 2: Summary data on US drug sales, US drug price rises, rebates and uniqueness status

Company Rep. Rebates % chg '14 Net Inc

FY2014 1Q 15 FY13 FY14

from

price in total

Abbvie 10,764 54% 15% 16% 32% 35% 15% -9% 18% -5% 13%

Amgen 14,729 73% 8% 9% 27% 29% 11% 4% 49% -2% 16%

BIIB 6,684 69% 10% 10% 23% 23% 10% 44% 56% 14% 10%

BMY 7,716 49% 13% 11% 35% 35% 18% -16% 59% 4% 38%

Celgene 4,164 54% 7% 6% 14% 15% 6% 15% 92% 0% 16%

Gilead 18,520 74% 7% 1% 21% 20% 7% 279% 80% 3% 27%

JNJ 17,422 23% 10% 8% 30% 32% 4% 3% 27% -4% 24%

Lilly 7,860 40% 10% 15% 26% 32% 14% -47% 34% 2% 40%

Merck 14,215 34% 12% 14% 28% 32% 8% -10% 26% -6% 32%

Pfizer 19,073 39% 17% 16% 28% 31% 11% -16% 26% 8% 24%

Actelion 1,024 48% 13% 18% 18% 14% 17% 16% 45% -11% 8%

AstraZeneca 10,120 38% 17% 16% 55% 57% 15% -48% 12% 9% 24%

Bayer 3,628 6% 10% 13% 2% 5% 15% 7% 25%

GSK 10,732 28% 9% 9% 31% 37% 8% -24% 13% 5% 35%

Novartis 12,325 21% 12% 14% 28% 27% 7% -7% 44% 8% 26%

Novo Nordisk 7,688 49% 22% 24% 46% 47% 17% -10% 24% -6% 45%

Roche 17,387 33% 5% 5% 3% -1% 77% -11% 15%

Sanofi 12,640 28% 32% 23% 40% 45% 21% -20% 30% -14% 38%

Lundbeck 670 28% 16% 8% 12% -49% 44% 13% 20%

Meda 374 17% 5% 15% 0% 17% 22% 2% 21%

Merck KGaA 1,733 11% 16% 11% 5% 0% 22% 2% 10%

Shire 4,047 67% 10% 9% 33% 32% 12% 30% 46% 0% 21%

UCB 1,453 31% 17% 9% 28% -50% 22% 5% 30%

US & EU weighted avg 204,967 43% 13% 12% 27% 29% 10% 41% 26%

US total/weighted avg 121,146 50% 11% 10% 10% 43% 24%

EU total/weighted avg 82,796 32% 15% 14% 11% 37% 28%

2014 US Rx

sales $m

US sales

% of

Group

List price rises % unique in '14

and pp chg to

'18

% exp.

toMedicare/

Medicaid


01 May 2015

Global Pharma 3

Rebates continuing to outpace US pharma sales…

Increasing rebate pressures go some way to offsetting the strong list price rises that

continue to be a feature of the US pharma market. In this report, we look at the longer-

term trends in rebates and pricing covering both speciality and primary care companies.

The very public exclusion of key drugs from important formularies effective from January

2014 and 2015 illustrated the growing power of purchasers to control physician prescribing,

using buying power to drive incremental rebates. This reinforces our view that companies

with a high degree of uniqueness in their portfolios are best positioned to defend against

incremental rebate pressures and sustain growth (see Figure 12).

In Figure 3, we show the annual disclosure of the percentage of gross US pharma sales

passed on in rebates for a selection of companies. This shows that, on average, rebate

levels appear to have risen in 2014 from 33.7% to 36.2%, and for the US companies from

a sales-weighted average of 31% to 35.9%. Unfortunately, not all EU-based companies

report the data, as it is only seen as a best practice requirement for reporting for

companies with US listings. Bayer and Roche are the two major EU companies that do not

report gross-to-net for their pharma operations. Overall, EU-domiciled companies have

reported a consistently higher level of reported rebates than our US universe and have

also shown a further increase in 2014 from 38% to 41.1%.

Figure 3: Rebate/discounts as a percentage of gross US pharma sales US Drug Rev. $m Rebate

Company 2014 2007 2008 2009 2010 2011 2012 2013 2014 inc.'14 -13

Branded

Abbott/Abbvie 10,764 24.5 22.6 25.4 26.0 29.3 28.6 32.1 35.1 3.0

Actelion 1,024 12.1 14.3 17.9 13.5 -4.5

Amgen 14,729 17.5 17.5 15.7 16.6 29.2 25.9 26.8 29.4 2.6

AZN 10,120 30.1 34.9 38.7 41.5 44.4 48.9 54.6 56.6 2.0

Bristol-Myers** 7,716 11.6 12.0 12.8 14.8 29.2 33.7 34.6 35.0 0.5

Elan/BIIB *** 6,684 8.4 6.0 6.3 15.9 19.5 23.1 23.4 22.7 -0.8

Celgene 4,164 9.8 12.2 14.2 13.4 13.8 14.8 1.0

Gilead 18,520 16.4 17.9 19.6 24.7 28.5 21.1 24.1 19.7 -4.4

GSK 10,732 21.6 23.4 26.3 29.2 28.1 30.8 30.7 36.8 6.1

Eli Lilly 7,860 10.7 13.2 15.0 16.5 21.4 21.0 26.3 32.3 6.1

Pfizer 19,073 17.1 21.7 29.1 24.0 27.5 26.5 27.6 31.3 3.7

Wyeth 23.9 29.4 - - - 0.0

J&J 17,422 19.0 22.5 27.0 30.1 30.5 28.7 30.4 31.5 1.2

Merck 14,215 12.6 13.2 13.8 21.5 24.5 25.8 27.6 32.4 4.7

Regeneron 1,751 6.6 5.9 6.0 0.1

Schering-Plough 19.2 19.1 - - - - - -

Novartis* 12,325 28.5 27.7 29.7 29.1 28.5 28.3 27.6 27.1 -0.6

Novo Nordisk 7,688 31.6 31.4 32.4 32.9 39.3 43.2 46.3 47.4 1.2

Sanofi 12,640 19.1 21.5 23.6 29.4 31.2 38.8 39.8 45.2 5.4

Shire***** 4,047 10.8 10.5 15.9 24.1 29.7 29.4 32.7 32.3 -0.5

Vertex 261 15.1 22.7 23.1 9.0 -14.1

Generic/OTC

Perrigo 927 53.2 50.0 50.0 50.0 0.0

Forest**** 19.2 19.2 19.9 20.7 22.2 26.2 29.1

Teva 10,461 39.9 41.4 41.4 41.2 49.8 8.6

Valeant 4,387 15.6 34.7 37.4 2.7

Full universe 197,508 20.9 23.1 24.1 27.8 30.2 31.6 33.7 36.2 2.5

Total Branded Sales 181,733 18.8 20.8 23.7 25.1 29.2 29.6 30.9 32.6 1.6

US domiciled brand sales weighted 16.3 18.2 21.5 22.9 28.9 28.7 31.0 35.9 4.9

EU domiciled brand sales weighted 24.2 26.3 29.7 32.2 33.9 37.0 38.0 41.1 3.1

*** Elan data to 2010, BIIB data from 2011 onwards

**** Valeant reports global data , CS assume 75% of global rebates accrue to the 55% of business in the US

Discount from Gross Sales %

** BMY disclosures changed from '07. Data provided seems to encompass all key elements of discounting

* Novartis data from 2009 US pharma only, prior data estimated to exclude Sandoz generics, vaccines

****** Actelion data is adjusted for change in rebate policy in 2013, so all data shown pre rebate reversals

*****Shire Aggregate data in the 10-K covers only selected discounts and does not include items such as wholesaler chargebacks, which are included in

other company disclosures, where they are significant items. We have not made any adjustment for this omission and assume that the trend of reported

disclosures shows the direction, if not magnitude of full rebates (Shire reported 67% effective discount from list price for Adderall XR and 38% for Vyvanse

for 2014)


01 May 2015

Global Pharma 4

…but US list prices are still rising faster than rebates

In Figure 4, we look at the sales-weighted headline price rises for major companies. For

those companies that gain income for products that are not fully consolidated in sales, we

have also shown effective prices rises as they may still drive overall profitability.

There is no sign of list price rises easing, with 1Q15 continuing with the 11-12% overall

trend seen in 2013 and 2014. Novo and Sanofi continue to stand out as having the highest

list price rises in 2015, reflecting strong increases for Lantus and Levemir. However, we

know that a large element of this is rebated away, given Eli Lilly and Sanofi, two of the

three main insulin manufacturers, are also showing relatively high levels of incremental

rebates in 2014 (both over 5pp). Novo has high rebate levels, but with only a 1pp increase

in 2014 against a 22% list price rise, it appears to have been able to retain effective pricing

power in 2014. With higher rebates for key competitor Lantus from Sanofi in 2015, and no

expected trade up in effective price for Toujeo, we expect Novo to suffer further this year.

Figure 4: US list price rises; company data are sales weighted

2014 2015

Company data US Rx sales $m Q1 Q2 Q3 Q4 1Q 2Q 3Q Q4 1Q

Abbvie 10,764 14.3% 13.6% 14.4% 21.1% 13.7% 13.7% 15.5% 15.7% 15.7%

Actelion 1,024 8.9% 8.9% 12.2% 13.0% 7.9% 13.6% 13.8% 17.9% 17.6%

Amgen 14,729 7.9% 10.4% 8.3% 8.3% 8.5% 6.0% 8.2% 11.3% 9.1%

BIIB 6,684 10.8% 18.5% 12.9% 16.1% 14.2% 8.2% 11.5% 4.5% 10.4%

BMY 7,716 12.5% 13.0% 13.0% 12.5% 15.5% 12.1% 11.6% 12.8% 11.4%

Celgene 4,164 8.5% 8.5% 11.7% 5.6% 6.6% 6.6% 6.7% 9.7% 5.9%

Gilead 18,520 7.0% 7.0% 6.3% 6.3% 5.8% 7.0% 7.0% 7.0% 1.0%

JNJ 17,422 9.9% 10.3% 10.1% 11.2% 9.6% 9.5% 10.3% 9.4% 8.0%

Lilly 7,860 15.1% 17.2% 16.1% 14.6% 13.7% 8.4% 9.4% 9.3% 15.2%

Merck 14,215 10.4% 10.0% 12.5% 16.8% 12.5% 12.4% 13.6% 9.3% 13.5%

Pfizer 19,073 12.9% 13.0% 13.6% 13.6% 14.0% 22.3% 15.3% 16.4% 16.0%

AstraZeneca 10,120 12.9% 13.0% 13.6% 13.6% 14.0% 22.3% 15.3% 16.4% 16.0%

Bayer 3,628 6.2% 8.3% 6.2% 4.6% 8.3% 5.9% 12.0% 13.1% 12.8%

GSK 10,732 9.4% 9.9% 10.3% 9.3% 8.6% 9.1% 8.3% 9.0% 8.5%

Novartis 12,342 10.8% 10.7% 11.0% 9.6% 11.4% 12.2% 12.4% 12.8% 14.0%

Novo Nordisk 7,688 12.7% 15.8% 16.1% 20.1% 20.7% 24.9% 20.4% 21.9% 24.3%

Roche 17,387 3.6% 4.0% 5.0% 4.2% 4.9% 4.7% 5.0% 4.9% 5.0%

Sanofi 12,640 8.5% 9.5% 15.3% 22.4% 34.7% 40.0% 30.0% 22.9% 23.2%

Lundbeck 670 26.5% 17.0% 17.6% 17.6% 16.5% 16.5% 14.6% 18.0% 8.2%

Meda 374 12.1% 12.1% 7.6% 7.6% 3.9% 3.9% 5.4% 5.4% 15.3%

Merck KGaA 1,733 20.0% 14.6% 20.4% 24.4% 19.9% 19.9% 14.6% 7.8% 10.7%

Shire 4,047 9.6% 8.2% 10.7% 9.6% 10.3% 11.9% 9.2% 8.1% 8.9%

UCB 1,453 10.5% 12.4% 15.0% 15.6% 22.1% 19.4% 16.2% 10.5% 9.4%

US & EU total/weighted average 204,984 10.1% 10.8% 11.2% 12.3% 12.5% 13.6% 12.3% 11.8% 11.7%

US total/weighted average 122,170 10.6% 11.5% 11.3% 12.4% 11.0% 11.4% 11.2% 10.9% 10.5%

EU total/weighted average 82,814 9.3% 9.7% 11.2% 12.1% 14.6% 16.9% 14.0% 13.1% 13.5%

Other key products

Tudorza 0.0% 0.0% 0.0% 8.5% 8.5% 8.5% 17.7% 8.5% 19.2%

Onglyza/Bydureon 11.2% 15.2% 14.5% 12.6% 18.1% 11.5% 17.1% 17.1% 17.4%

Dysport (aesthetic) 11.5% 11.5% 23.2% 23.2% 10.5% 13.8% 3.0% 3.0% 3.0%

Orion/Novartis (Comtan/Stalevo) 20.6% 20.6% 14.9% 2.0% 13.7% 13.7% 15.0% 15.0% 14.9%

Xarelto 14.5% 14.5% 14.6% 14.6% 14.4% 14.4% 7.9% 18.6% 9.9%

2013 2014

Source: Wolters Kluwer, Credit Suisse estimates, for companies with no disclosure we assume average increase in rebates of 1.5%

01 May 2015

Global Pharma 5

Net US prices still a major contributor to EPS growth

In this section, we combine information from our pricing and rebate analysis to isolate the

effect of net US prices on sales and earnings.

In Figure 5 to Figure 7, we translate the impact of the effective net price rises we have

calculated to the reported net income and illustrate the % benefit we estimate to have

come for US drug pricing to group net income. We look at the universe of US and EU

companies over time and for individual companies for 2014.

Figure 5: Drivers of U$ net inc. growth for US universe Figure 6: Drivers of U$ net inc. growth for EU universe

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2009 2010 2011 2012 2013 2014

% c

han

ge in

U$

ne

t in

com

e

Gwth from Net US Prices Gwth from Other

Net Inc Growth (US comps)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2009 2010 2011 2012 2013 2014

% c

han

ge in

U$

ne

t in

com

e

Gwth from Net US Prices Gwth from Other

Net Inc Growth (EU comps)

Source: Company data, Credit Suisse estimates for Abbvie, Amgen,

BIIB, BMY, JNJ, LLY, GILD, MRK, PFE

Source: Company data, Credit Suisse estimates. Actelion, AZN,

Bayer, GSK, Novartis, Novo, Roche, Sanofi, Shire, UCB

We have assumed an effective 80% contribution margin from price-driven incremental US

sales and taxed this at the effective corporate tax rate for each company. For companies

such as UCB the impact looks particularly high due to the low level of overall group

income as the group transfers from the "Keppra" years to earnings driven by Cimzia and

Vimpat.

Figure 7: Estimate of impact on 2014 net income of net US price rises

-60%

-40%

-20%

0%

20%

40%

60%

Imp

act

of

'14 U

S n

et

pri

ce r

ises

% chg from US price. % Chge- Other % chg in 2014 Net Inc


01 May 2015

Global Pharma 6

Rising rebates offset declining SG&A; the real

marketing burden is rising

We know that reported rebate growth has been faster than sales over time and that overall

reported SG&A as a percentage of sales has fallen slightly each year since 2008.

However, the overall promotional budget that a company has to influence doctors

prescribing and to influence payers' formulary decisions arguably encompasses both

rebates and other traditional SG&A. If we look at this expenditure on an aggregate basis,

we see that it is rising as a percentage of gross sales. This is illustrated in Figure 8 which

indicates that the decline in traditional SG&A is less significant than growth in rebates.

Figure 8: Overall promotional expenses still rising, even if reported SG&A as % is falling

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011 2012 2013 2014

Exp

ense

as

a %

of

gro

ss s

ales

SG&A as % of Gross Sales Rebates as % of Gross Sales


In Figure 9, for the key companies, we illustrate our estimate of full promotional expenses

made up of traditional SG&A, assuming that US spending mirrors group spend and either

reported or Credit Suisse estimates of US rebates, all expressed as a percentage of gross

US drug sales.

Figure 9: Full 2014 promotional expenses. Traditional SG&A and rebates all as a percentage of gross US drug sales

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

% o

f '1

4 g

ross

sal

es

acco

un

ted

fo

r b

y re

bat

es

and

SG

&A

SG&A as % of Gross US sales Rebates as % of Gross Sales


01 May 2015

Global Pharma 7

The rise of the co-pay card, an example of novel

rebating

In addition to growth in regular rebates, which are normally given to establish favourable

formulary positioning, we have seen growth in other forms of rebating often designed to

get around payer restrictions. In Figure 10, we use IMS Health data to show the growing

use of co-pay cards in the diabetes space. These can promise zero co-pays for eligible

patients and can completely negate a formulary positioning that encourages the use of

favoured products, for which a payer has promised high market share in exchange for

rebates, or for which a payer wants to encourage a generics first approach. The data

suggest that the new SGLT2 class is particularly affected. What is surprising to us is that,

until recently, there were only two US players: Invokana (JNJ) launched in April 2003 and

Farxiga (AZN) launched in February 2014. Looking at the product websites we can see

that co-pay assistance is clearly advertised and the data in Figure 10 suggest that a high

proportion of both drugs must have been used with a co-pay card. Jardience from

Boehringer Ingelheim/Lilly was launched as the third entrant in September 2014 and the

Jardience website shows the same sort of offer as for the other two drugs with zero co-pay

for eligible patients (with insurance but not covered by Medicare up to a value of $337 per

month) for one year, with the ability to re-enrol for another year. With only two players on

the market for much of this time, the level of co-pay assistance seems very high. What is

more surprising is that the same offer of zero co-pay is advertised on the Glyxambi

website. Glyxambi is the only combined SGLT2 /DDP IV on the market. It looks as if this

sort of rebate is designed to encourage/accelerate a trade up to a new class of drug,

rather than to gain share against similar competitors, as at this time Glyxambi is unique.

We believe that the cost of these programs is largely accounted for within rebates with

admin costs falling into traditional SG&A.

Figure 10: Co-pay card utilisation on the rise, example of diabetes care

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014

% o

f R

x f

ille

d w

ith

co

pay c

ard

Insulin GLP-1 DPP-4 SGLT-2

Source: Formulary Impact Analyzer (FIA), IMS Institute, Payer and Managed Care Insights

01 May 2015

Global Pharma 8

Portfolio uniqueness remains key

We continue to believe that the best defence against the price pressures from US

purchasers is portfolio uniqueness and we see a correlation between levels of uniqueness

and overall rebates (Figure 12). We believe that companies with higher levels of portfolio

uniqueness will be able to sustain higher long-term pricing, access to patients and thus

sales and profitability. For the 20 companies covered, we see no change in overall level of

uniqueness from 2014 to 2018, with an average in both years of 41% of sales. Companies

that we believe should sustain at least 65% of sales as unique throughout this period

include Celgene, Gilead and Roche. We expect the companies with rising levels of

uniqueness should include Bayer, and BIIB, while companies with the biggest decline in

percentage of unique drugs are Actelion, Roche and Sanofi, all of which decline by

around 10 pp.

Figure 11: % of economic sales rated as unique (2 or fewer direct competitors in each region)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% '

14

& '

18 w

w s

ale

s u

niq

ue

% unique 2014 % unique 2018


In Figure 12, we plot the ww percentage of unique drugs against 2014 reported rebates

and see the expected correlation with companies with the least unique portfolios in general

experiencing higher levels of rebates. Full details on the methodology are set out in

Appendix 4. Of note is the fact that we count all branded oncology drugs as unique,

assuming that prescribing decisions are based on clinical data and that price is secondary.

Figure 12: Relationship between product uniqueness and rebates

Abbvie

AmgenBIIBBMY

Celgene

Gilead

JNJ

Lilly

Merck

Pfizer

Actelion

AstraZeneca

GSK

Novartis

Novo Nordisk

Sanofi

Shire

UCB

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60%

de

cre

asin

g u

niq

ue

nss -

-->

2014 rebate % Source: Company data, Credit Suisse estimates

01 May 2015

Global Pharma 9

Abbvie

Abbvie provides clear disclosure separating out Medicaid/Medicare, managed care and

wholesaler chargebacks, with the biggest increase in recent years in the wholesaler

chargebacks. Given that the anti-TNFs have seen some of the highest list price rises of

any of the major drug categories, it is perhaps not surprising that associated rebate levels

would also rise. Adding rebates back to reported SG&A suggests some increase in overall

effective promotional spending, but the overall expense seems in line with peers.

Humira is the largest product, which counts as discountable in our analysis in Europe until

2015 and in the US until 2017; after this it moves to substitution risk due to the potential

arrival of generic Remicade, although we only model biosimilar Humira effectively entering

the market from 2019. We assume that there will be three players with all oral combos in

hepatitis C by next year, so this category comes in as discountable and not unique. This

analysis is based on the portfolio of Abbvie- before the proposed acquisition of

Pharmacyclics, which will add a stake in a low rebate cancer drug Imbruvica into the mix.

(Note 2014 10-K for PCYC showed rebates as 11% of gross sales.)

Figure 13: Reported rebates as % of US gross sales Figure 14: SG&A and rebates as % of US gross

-55

-45

-35

-25

-15

-5

2007 2008 2009 2010 2011 2012 2013 2014

% o

f gr

oss

US

dru

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2007 2008 2009 2010 2011 2012 2013 2014

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Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 15: Components of US pharma sales growth Figure 16: Change in uniqueness over time for pharma

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implied volume/mix Sales growth

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Sustainable Brand Unique Discountable

Sub Risk Generic Risk Multi


01 May 2015

Global Pharma 10

Actelion

Actelion reversed some previously provided US rebates in 2013 and 2014, illustrating the

uncertainties in forecasting rebates particularly to government agencies (for which Actelion

reported there can be a long delay between accrual and payment). Disclosure improved

substantially in 2012 (covering the 2011 data) and we have made no estimates for prior

periods for which information was very limited. Rebate trends are interesting for Actelion

as they will be one lever the company can use to help shift patients away from the older

generation PAH drug Tracleer to the newer drug Opsumit and, in the future, to selexipag.

In 2014, we see no step up in accrued rebates despite c13% list price rises, suggesting no

price-based threat from competition from Adempas, which was launched by Bayer in 2014.

The level of uniqueness in this analysis falls first in 2013 from unique to discountable with

the launch of Opsumit, although with Tracleer and Opsumit both from Actelion effective

competition should be manageable. We use 2016 as the main year for Tracleer patent

expiry, but note that in Canada the first generic from Mylan has already been launched.


0%

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2007 2008 2009 2010 2011 2012 2013 2014

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01 May 2015

Global Pharma 11

Amgen

In calculating the exposure of Amgen to US rebates, we assume that essentially all of the

rebate and chargeback expenses are US expenses and that the "other deductions" accrue

globally, based on the geographic percentage breakdown of sales. On this basis, rebate

levels have remained very stable over the period of this analysis from 2007, suggesting

that reported list prices are flowing through to the bottom line and are not being eroded by

increasing rebates. The aggregate rebate and SG&A spend declines in line with the

reported overall decline in SG&A as percentage of sales for the group (28% in 2012 to

22% in 2014).

The key unique products for Amgen are Prolia/Xgeva, Neulasta and Kyprolis. We deem

Enbrel, which is an Amgen drug in the US, to be discountable until 2017 when 2016 patent

expiries for competitors Humira and Remicade push the drug into the "substitution risk"

category.


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2007 2008 2009 2010 2011 2012 2013 2014

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2010 2011 2012 2013 2014 2015 2016 2017 2018

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01 May 2015

Global Pharma 12

AstraZeneca

AstraZeneca has both the highest overall reported rebates in our universe and one of the

highest rates of increase in recent years. We believe that this reflects the lack of

uniqueness in the current portfolio and the requirement to rebate extensively in order to

sustain branded Crestor sales against the availability of generic Lipitor, and branded

Nexium against generic Prilosec, until effective US patent expiry in February 2015. We

assume that increased rebating was also key to the growth in market share for Symbicort

versus Advair in 2014. From 2014, AZN has consolidated the full sales of the BMY

diabetes JV products adding Bydureon and Onglyza rebates for the first time, in what we

know to be a high rebate category.

AstraZeneca shows one of the highest exposures to the "substitution" risk category. This

reflects the availability of broadly similar products such as generics. Symbicort and the

majority of the diabetes range remain discountable, in our view, with AZN only improving

its uniqueness score as and when the new oncology drugs begin to impact sales. AZN

continues to report strong list price rises in 2014, with +17% across the portfolio.


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01 May 2015

Global Pharma 13

Bayer

Bayer does not report specific US pharma rebate levels, but does report overall rebate

levels rising from 2.8% of group sales in 2013 to 3.4% of group sales in 2014. We assume

that this covers significant agrochemical and healthcare rebates as well as straight pharma

rebates. In the US, looking at the difference between IMS reported gross sales and

company reported net sales suggests that Betaseron rebates have been broadly flat at

c33% (in line with BIIB reported rebates). A similar analysis for Xarelto suggests rising

rebates from 14% in 2013 to 26% in 2014, presumably reflecting increased competition.

Mitigating this impact is a growing oncology business, an element of Bayer's contraceptive

business that is still self-pay, and a supply shortage for Kogenate, which should help net

pricing. Overall, Bayer has reported consistently below the peer group average US list

price rises, although we note stronger list price rises for Xarelto sold by JNJ, on which

Bayer receives a royalty, and which counts to US revenues/profitability.

We see a low overall exposure to substitution risk for Bayer. Sales of older drugs, such as

Adalat and Bayer Aspirin, for which one might expect generic substitution, are

concentrated in EM where brand loyalty is high. Our aggregate US pharma sales forecast

in Figure 31 shows a decline in 2016 driven by a slowdown in US Betaseron sales, which

more than offsets increased Xarelto royalties.

Figure 29: Reported rebates as % of US gross sales Figure 30: SG&A and rebates as % of US gross sales

No data available

0%

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2007 2008 2009 2010 2011 2012 2013 2014

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01 May 2015

Global Pharma 14

Biogen Idec

Biogen Idec is showing revenue growth, with incremental sales for Tecfidera and, to a

lesser extent, Tysabri more than offsetting the decline in Avonex. A comparison of IMS

gross sales and BIIB reported net sales suggests low and stable discounts for both

Tecfidera and Avonex, which is borne out by the corporate level disclosure. The growing

sales for Tecfidera account for the growth in unique products for the group out to 2018.

We model no patent erosion over this time-frame with an effective patent life until 2024.

The slowing of sales reflects a maturing MS market and increasing competition, albeit with

different mechanisms of action

Figure 33: Reported rebates as % of US Gross sales Figure 34: SG&A and Rebates as % of US Gross

0%

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2007 2008 2009 2010 2011 2012 2013 2014

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01 May 2015

Global Pharma 15

Bristol Myers Squibb

An analysis of historic data for BMY is of little help in predicting the future given the

profound change in the BMY portfolio as it moves from growth driven by Orencia, Yervoy,

Atripla, Sprycel and Abilify to an era driven by Opdivo. The company has restated levels of

rebates a number of times, in particular expanding the scope of reported discounts in 2012

(with restated 2011 data). This suggests that the 2010-2011 step up shown in Figure 3

and Figure 37 may merely reflect increasing management disclosure. In 2014 BMY

deconsolidated the US diabetes JV with AZN. Diabetes is a known high rebate area and

we note that, despite a mix shift away from diabetes towards oncology, overall rebate

levels as a percentage of sales have not changed over the past two years.

The high level of uniqueness reflects the oncology assets (Yervoy and Opdivo) and the

unique mechanism of action for Orencia in RA.


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01 May 2015

Global Pharma 16

Celgene

Celgene has shown a steadily rising level of reported rebates, presumably reflecting the

growth in the price-protected element of the business to government programmes (c 15%

of operations based on IMS volume data). We note that reported list prices rose only 7% in

2014, and have been consistently lower than peers, suggesting that incremental rebates

should be accumulating quite slowly .

In this time frame, virtually the whole of the franchise is deemed unique, with the first

major patent expiry for Revlimid in the US only in 2019. In our analysis, the overall

promotional spend split between rebating and traditional spend has remained broadly flat

as a proportion of sales.

Celgene's recent co development deal with AstraZeneca for blood cancers with MEDI4736

(durvalumab) will increase exposure to unique products given we assess all cancer drugs

as unique.


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2007 2008 2009 2010 2011 2012 2013 2014

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01 May 2015

Global Pharma 17

Eli Lilly

Steadily rising effective rebate levels for Lilly mirror those for other key diabetes players

Sanofi and Novo. Lilly also shows one of the higher exposures to government funded

programmes at c 40% of sales (see Figure 108). On our analysis, the growth in these

rebates effectively offsets the decline in traditional SG&A expense leaving the overall

promotional spend at around 54% of gross sales, high by US major pharma standards

(see Figure 9). In 2014, Lilly lost Cymbalta US exclusivity and looking at the IMS gross

sales data suggests that US rebates for Cymbalta rose from a stable 15% level in 2010-

12 to around 25% in 2013 ahead of patent expiry. For chronic therapies, we normally see

rebates fall in the immediate period ahead of patent loss as payors can see savings from a

switch to generics, and so do not fight brand adoption, so this is a surprising finding.

The key unique drugs in the portfolio on our analysis are Cyramza, Alimta and Forteo with

the majority of the diabetes franchise either discountable or at risk of substitution. We

illustrate in Figure 10 the growing use of co-payment cards in the diabetes space and note

that Glyxambi, the combo SGLT2/DPPIV joint development drug with Boehringer

Ingelheim, has recently launched with a zero co-pay card despite being a unique product

at this time.


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01 May 2015

Global Pharma 18

Gilead

The past few years have seen the transition of Gilead from an HIV focused company to

one driven by hepatitis C with the exceptionally strong growth of Sovaldi/Harvoni in 2014.

The 4.4pp decline in rebate levels in 2014 reflects the unique position of Sovaldi/Harvoni

at launch, and the lack of need to provide high levels of rebates. This is clearly changing

with the launch of Abbvie's Viekira Pak and the expected combo launch from Merck in

2016. Competitive launches together with payer controls suggest no sales growth in 2015

and a decline in US sales from 2016 onwards.

Across the HIV portfolio, rebates seem to have been quite stable with the difference

between IMS gross to net stable suggesting around 20% rebates for Atripla over the past

four years and for Stribild similar discount levels.

The speciality nature of the company is reflected in the low traditional SG&A spend.


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01 May 2015

Global Pharma 19

GlaxoSmithKline

GSK gives a detailed breakdown of rebates clearly identifying the components. This

shows that government programme rebates have increased from 15.2% in 2013 to 18.5%

of sales in 2014 and wholesaler chargebacks from 5.8% to 7.6%. Looking at IMS data

suggests that Advair rebates increased from a stable level of 22% from 2010 to 2013 to

c.38% in 2014. This is before the full year effect of increasing rebates in 2015 to regain

more favourable formulary access for Advair, and to secure favourable access for new

drugs Breo and Anoro. Adding rebates to traditional SG&A suggests a growing overall

promotional expense, not surprising given the increasing competition in the asthma/COPD

space.

GlaxoSmithKline has the second highest exposure (after Novo) to Medicare Part D and

the lowest exposure to commercial insurance of any of the companies in this report which

may also be impacting rebate levels. We see an overall continued decline in US revenues

until 2017 with no significant increase in portfolio uniqueness, to mitigate rebate pressures.


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01 May 2015

Global Pharma 20

JNJ

The most important assets for JNJ pharma today are its biologics for RA (Remicade) and

psoriasis (Stelara) with expected long life cycles followed by JNJ's stake in the cancer

drug Imbuvica, at the beginning of its life cycle. Our analysis suggests that JNJ has a

lower-than-average exposure to unique products and that this will fall further to one of the

lowest levels in our universe of companies (see Figure 11). Of the group's major assets we

rate only Stelara and Imbruvica as unique, although we note emerging competition for

Stelara from drugs such as Cosentyx (from Novartis). JNJ has an average level exposure

to Medicare the other key indicator of rising rebate pressures (see Figure 108).


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01 May 2015

Global Pharma 21

Merck Inc

The key franchises driving growth today are patent protected but are largely in competitive

areas such as diabetes (Januvia) and vaccination (leading products, Gardasil and

Proquad). Merck has dominant positions in many areas which should give it a rebating

advantage. Overall rebates increased by 4.7pp in 2014 and looking at IMS gross to net

sales for Januvia suggests that rebates here have risen from c 17% in 2011/2012 to 28%

in 2013 and to 38% in 2014, confirming the high level of diabetes rebates we are seeing

across both oral and injectable products. Keytruda is the only unique asset in the top 10

drugs by NPV. Although competition is building in immuno oncology, we rate all cancer

drugs as unique as we see them driven much more by clinical data than price discounts.

The addition of rebates to SG&A reverses a steady apparent decline in reported SG&A to

a rising trend in overall promotional spend. Looking at both, the relatively low level of

uniqueness (Figure 11) and the relative high level of Medicare/Medicaid exposure (see

Figure 108), we might expect Merck to continue to see an acceleration in rebate levels

over the next few years.


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01 May 2015

Global Pharma 22

Novartis

Novartis pharma discounts have remained stable over time (the reported data explicitly

covers Rx pharma only and not Sandoz or vaccines) and indeed there was a small decline

in rebate levels reported in 2014. We believe that this stability reflects a current mix shift

away from primary care towards more speciality products where we believe that formulary

pressure is currently lower and physician flexibility to decide on prescribing is higher. The

loss of Diovan in primary care may also have freed up some rebates which are being

reinvested elsewhere, although we see no evidence of increasing rebates for either

Gleevec or Gilenya. At the group level, it is also notable that Novartis continues to have a

relatively low US branded drug exposure (31%) relative to the peer group average (40%),

and that US pharma exposure is further diluted by Alcon, Sandoz, and the GSK consumer

JV.

We expect to see an 8pp increase in exposure to unique drugs over the next four years

due largely to the addition of the GSK oncology portfolio and the growth of LCZ. This mix

shift should limit the need for incremental rebates although we note that LCZ will be sold

into a largely Medicare population.


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List price rises Change in discountsimplied volume/mix Sales growth

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01 May 2015

Global Pharma 23

Novo Nordisk

Novo has shown an acceleration in overall rebates in recent years and given the strong

diabetes focus of the group, this must reflect increasing rebate pressure in this important

category. The three leading insulin companies, Lilly, Novo and Sanofi, have all shown an

increases in rebates, which we assume reflects a continued pay-away of high list price

rises for insulins to payers, and the high relative exposure to Medicare part D (Figure 108).

In 2011, Novo acknowledged that initial rebates for Victoza had helped drive adoption, but

Novo has more recently been vocal about resisting increased rebate pressures where it

feels that it has a unique product with superior properties (in the case of Victoza a simpler

dosing regimen than Byetta/Bydureon). However IMS data suggest a gradual increase in

Levemir discounts from c 30% in 2011 to 56% in 2014.

The growth in unique products in our analysis from 2017 comes from the launch of iDeglira

in the US. However from mid-2016 we also see an increase in substitution risk, as we

expect Lilly to be able to launch its biosimilar Lantus around this time.


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oss

US

dru

g sa

les

as r

eb

ate

s

0%

10%

20%

30%

40%

50%

60%

70%

2007 2008 2009 2010 2011 2012 2013 2014

SG

&A

/Re

ba

tes

% o

f G

ross U

S

dru

gs s

ale

s




-40

-30

-20

-10

0

10

20

30

40

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

% c

han

ge

List price rises Change in discountsimplied volume/mix Sales growth

0

5000

10000

15000

20000

25000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Sa

les $

m



Source: Company data, Credit Suisse estimates Source: Company data a, Credit Suisse estimates

01 May 2015

Global Pharma 24

Pfizer

We have seen a gradual increase in rebate pressures with higher rebates offsetting lower

traditional SG&A expenses. Sales have been held broadly stable in the past two years

with effective price rises offsetting continued volume declines.

The largest NPV product for Pfizer is the Prevnar vaccine franchise, a unique long-term

portfolio, which is being evergreened firstly with an enhanced number of pneumococcal

sub-types covered.as Pfizer shifted from Prevnar 7 to Prevnar 13 and now with broader

use expanding to adults over age 65. The second highest NPV asset is the ex US Enbrel

franchise with sales expected to continue at a high level some years beyond first formal

patent expiry. Enbrel moves from discountable category to multi source from 2016 in our

analysis. The newly launched cancer drug Ibrance (palbociclib) helps to increase the

contribution of unique drugs and lift overall US sales growth to be positive until US Lyrica

patent expiry in 2019. Overall Pfizer appears to have slightly lower than average exposure

to Medicare and Medicaid (see Figure 108).


-55

-45

-35

-25

-15

-5

2007 2008 2009 2010 2011 2012 2013 2014

% o

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US

dru

g sa

les

as r

eb

ate

s

0%

10%

20%

30%

40%

50%

60%

70%

2007 2008 2009 2010 2011 2012 2013 2014

SG

&A

/Re

ba

tes

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ale

s




-40

-20

0

20

40

60

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

% c

han

ge



0

10000

20000

30000

40000

50000

60000

70000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Sa

les $

m




01 May 2015

Global Pharma 25

Roche

Roche does not publish any rebate data. IMS sales trends for key drugs match the

company reported numbers closely, suggesting limited discounting beyond mandatory

340B programme discounts. For Lucentis, we assume that IMS data are not particularly

robust as the product is bought/dispensed by physician offices and thus IMS Health will

not be able to track sales via normal pharmacy samples. We assume that the launch of

Eylea will have increased discounting pressures. Published US list price rises remain

moderate at 4-5% per annum. Despite Boniva patent expiry in 2012 and Xeloda in 2014,

net US revenue growth has been positive in every year bar 2010.

Roche stands out as having the highest level of uniqueness in our EU major pharma

universe based on their strong focus on cancer sales. We see much more limited

formulary pressures in this specialty area with prescribing decisions too complex, and too

individualised to be amenable to centrally directed switches. In Figure 11 we see that

Roche's current level of uniqueness in theory falls by around 10pp by 2018 as the patents

for Herceptin and Rituxan expire, and we model the emergence of biosimilars. Roche

expects biosimilars to be launched first in 2H 2017. However we expect initial caution from

regulators and payers about interchangeability, such that in practice we do not expect US

oncology sales to be impacted before 2019 when we assume effective erosion of

Herceptin by biosimilars may start. We assume that sales of Rituxan in RA are impacted

from 2018 as this non-life threatening condition lends itself more to a generics first

strategy.


No data available

0%

10%

20%

30%

40%

50%

60%

70%

2007 2008 2009 2010 2011 2012 2013 2014

SG

&A

/Re

ba

tes

% o

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S

dru

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ale

s




-40

-30

-20

-10

0

10

20

30

40

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

% c

han

ge



0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Sa

les $

m




01 May 2015

Global Pharma 26

Sanofi

Sanofi has seen one of the strongest rates of increase in rebates in our universe. In

2011/12 we felt that a big factor was US generic Lovenox, where Sanofi retained sales for

some time despite a substitutable generic. From 2013, the key factor must have been

increasing formulary pressure in the diabetes space, with Lilly and Novo the key

competitors also reporting increasing levels of rebates. List price rises in 2014 (+32%) still

outstripped the rise in reported discounts to suggest a net positive price effect on US

sales. A comparison for IMS gross to net sales suggests Lantus rebates rising from 13% in

2013 to 29% in 2014, (31% in 2H14). Management has stated that price should not be a

barrier to adoption of Toujeo and guidance for a decline in the US diabetes franchise sales

for 2015 suggests further significant discounting this year.

Sanofi has one of the largest declines in the level of uniqueness in our universe as

competition builds for Lantus (Figure 11), and higher than average Medicare/Medicaid

exposure (Figure 108) suggesting that high rebate levels will remain an important factor for

the group. We believe that these discount pressures are already factored into company

guidance and analyst estimates.


-55

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-15

-5

2007 2008 2009 2010 2011 2012 2013 2014

% o

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US

dru

g sa

les

as r

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ate

s

0%

10%

20%

30%

40%

50%

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70%

2007 2008 2009 2010 2011 2012 2013 2014

SG

&A

/R

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s

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s




-40

-30

-20

-10

0

10

20

30

40

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

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18

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ge

Change in discounts implied volume/mix

List price rises Sales growth

0

5000

10000

15000

20000

25000

30000

35000

40000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Sa

les $

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01 May 2015

Global Pharma 27

Shire

Shire has provided detailed information on rebates for key ADHD drugs in addition to the

group-wide disclosure. For Adderall, where Shire has both authorised generics and direct

generic competition, we have seen reported rebates rising from 57% of sales in 2011 to

c.68% of sales in 2013 and 2014 despite no reported list prices (volatility in the quarterly

numbers reflects the level of sales to authorised generics which are included in Medicaid

calculations). In contrast, Vyvanse rebates have remained broadly constant at around 40%

from 2011 to 2014 despite list price rises averaging 9% p.a. over the past 4 years. This

product rebate disclosure covers all types of rebate, although the aggregate company

level disclosure in the Annual Report appears to be linked solely to government related

discounts/rebates, excluding significant additional wholesaler charge backs. IMS data

suggest 22% of sales from Medicaid/Medicare and 77% commercial insurance funding.

There has been a notable decrease in reported SG&A as % of sales for the group in

recent years as the business mix has shifted more to rare diseases, and the decrease in

traditional SG&A spend may be more significant than the increase in rebates, although we

can't be sure given we only have partial rebate information. The sales mix stays broadly

50% unique with the growth of new products, Gattex and lifitegrast. Overall US sales

growth remains very healthy at c 10% p.a. through 2018, a level which should be enough

to sustain further reported margin gains.


-55

-45

-35

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-5

2007 2008 2009 2010 2011 2012 2013 2014

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dru

g sa

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ate

s

0%

10%

20%

30%

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2007 2008 2009 2010 2011 2012 2013 2014SG

&A

/R

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-40

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-10

0

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20

07

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9000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Sa

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01 May 2015

Global Pharma 28

UCB

UCB does not provide any rebate information, but with only two key drugs in the US

driving current sales, we can estimate the level of important discounts by looking at just

the product data for Cimzia and Vimpat. For Vimpat, we have seen the difference between

IMS gross sales to net reported sales expand suggesting rebates rising from c 4% in 2012

to 28% by 2014. The growing Vimpat rebate was effectively highlighted by the company in

2014. Commentary through the year highlighted an increasingly move towards

government funded healthcare programmes that require deeper discounts despite Vimpat

effectively having a unique mechanism of action.

For Cimzia the apparent increase is less marked from 5% in 2012 to 17% in 2014,

although IMS is clearly less reliable for Cimzia given both the self-administered and office-

administered formulations. The latter, typically, will not be well captured by the IMS audit.

Overall US list price rises seem to still be accounting for around 5% growth down from 10-

12% in prior years (see Figure 101).


-55

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-5

2007 2008 2009 2010 2011 2012 2013 2014

% o

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US

dru

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s

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2007 2008 2009 2010 2011 2012 2013 2014SG

&A

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-40

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-10

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2010 2011 2012 2013 2014 2015 2016 2017 2018

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01 May 2015

Global Pharma 29

Appendix 1: Rebates are a fundamental element of

the US system In Figure 93 we look at our estimates of the breakdown of rebates/discounts. This shows

that the largest contributor to increased overall rebates appears to be rebates to US

government and state funded programmes. We believe that this reflects:

■ The need to give best price discounts to certain government programmes.

■ The inability to retain price rises over CPI for sales into Medicaid programmes which

accounts typically 6-8% of US sales.

■ An increase in sales to US government programmes, as more patients access

healthcare through government subsidised programmes (Medicare Part D plus

Medicaid on average 26% of US branded sales), see Figure 108.

■ Increasing commercial pressures – particularly for undifferentiated products - in part

due to greater availability of effective generics which can push branded products to

second-line therapy.

Our analysis suggests that around $110bn of rebates were paid by the US and EU pharma

companies shown in Figure 3 to purchasers in 2014 from a reported US sales base of

around $205bn. The data show that rebates increased again in 2014 (+22%) outstripping

net sales growth of +9%, as companies moved out from the 2012/2013 patent cliff.

Government discounts increased from over $31bn to over $39bn (+25%). We assume that

a significant element of the increased rebates reflects the cost of pharma covering 50% of

the "donut hole" (see Figure 110).

Figure 93: Breakdown of US discounts by key categories

2007 2008 2009 2010 2011 2012 2013 2014

2014/

2013

CAGR 08-

14

Gross turnover U$M 196,920 194,346 211,180 240,229 256,653 265,446 278,178 315,261 13% 8%

US govt and state prog. 4.0 4.7 6.1 9.5 10.7 10.7 11.4 12.5

Chargebacks 7.2 7.0 8.7 9.0 8.3 9.0 9.8 11.0

Managed care 5.9 7.4 7.4 6.7 7.9 7.8 8.4 8.6

Cash discounts 1.3 1.2 0.7 1.1 1.0 1.0 1.1 1.1

Customer returns 1.6 1.6 0.9 0.9 0.8 1.0 0.9 0.9

Other 1.1 1.1 1.4 1.6 2.1 2.2 2.2

Total Effective discounts % 20.9 23.1 25.0 28.6 30.2 31.6 33.7 36.2

$m

US govt and state prog. 7,940 9,093 12,853 22,771 27,336 28,469 31,765 39,561 25% 28%

Chargebacks 14,176 13,585 18,388 21,698 21,183 23,878 27,282 34,650 27% 17%

Managed care 11,632 14,385 15,633 16,149 20,345 20,593 23,246 27,004 16% 11%

Cash discounts 2,631 2,400 1,542 2,538 2,514 2,695 2,954 3,320 12% 6%

Customer returns 3,080 3,194 1,899 2,135 2,060 2,697 2,439 2,783 14% -2%

Other - 2,147 2,415 3,328 4,160 5,456 6,091 6,951 14% 22%

Rebate total $m 196,920 45,210 53,321 68,012 77,387 82,403 90,723 110,474 22% 16%

Net Sales $m* - 149,135 157,858 172,218 179,266 183,043 187,455 204,786 9% 5% This data is taken for a wider universe of companies including generics than is used in the main part of this analysis where 20 companies are

reviewed in more detail. Where the breakdown of rebates is not provided by the company we have used average splits based on companies that

do provide data. Source: Company data, Credit Suisse estimates

We believe that this annual rebate flow is an integral part of the funding of the US

healthcare system. Our US colleagues covering the pharma wholesalers and PBMs have

kindly helped to illustrate the flow of rebates through the system in Figure 114 and in

Figure 115.

In Figure 94 we illustrate how formulary barriers have decreased the ability to access

patients quickly with new drugs using data from IMS Health. Barriers can be erected in a

number of ways ranging from formulary tiering, with differential co-pays to other barriers

such as high deductibles, step therapy, prior authorisation and quantity limits. Depending

on the precise barriers, companies can sometimes circumvent them using co-pay

assistance programmes, to offset differential co-pays at the pharmacy. Increasing use of

co-pay cards in diabetes is illustrated earlier in this report in Figure 10.

01 May 2015

Global Pharma 30

Figure 94: The evolution of contracted access: Expected levels of launch volume with

unrestricted formulary access post launch (2005-2015)

0%

20%

40%

60%

80%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

% T

Rxs

Months Post Launch

Historical Model (2005) Post-Part D (2008) Expected in 2015

Source: IMS Institute, Payer and Managed Care Insights

With PBM and wholesaler income linked to gross drug revenues, there are powerful

incentives for list price rises to continue as they drive profits of the key intermediaries

between the manufacturers and the patients. Unless the US system moves away from the

current cost-plus approach to a capitated system which would change incentives

significantly, we see no mechanism for change. In Figure 95 we illustrate both the list price

rises for branded drugs and the overall US pharmaceutical CPI. CPI is much lower at only

c1-2% as we are still seeing US generic drug price erosion that offsets the branded list

price rises, so that overall CPI for pharmaceuticals has typically been running at 3-4%.

Figure 95: US drug List price rises against background of US politics

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

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'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Lis

t p

rice

infl

atio

n %

SENATE

HOUSE

PRESIDENT

Democrat Republican Branded CPI list price inflation Overall price inflation (brand+generic)


Payers have been able to absorb costs of new product launches with savings from patent

expiries. With the "savings windfall" of the 2012 patent cliff now behind them, we expect

payers to continue to pressure manufacturers for ever larger effective rebates.

01 May 2015

Global Pharma 31

Figure 96: The importance of patent expiries across the US market in containing cost

growth

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

% c

han

ge t

o U

S b

ran

de

d p

har

ma

mar

ket

% from patent expiries % from volume % from price rises

% implied mix Overall growth %


Figure 97: Aggregate gross sales, net sales and CS estimates of US SG&A for 20 company universe $m 2008 2009 2010 2011 2012 2013 2014 CAGR 08-14

Gross US sales 234,369 247,897 250,090 264,042 258,179 268,939 301,196 4%

Rebates -45,781 -59,023 -61,421 -71,456 -72,438 -79,594 -98,989 14%

as % gross US sales 19.5% 23.8% 24.6% 27.1% 28.1% 29.6% 32.9%

Net US sales 188,589 188,874 188,669 192,587 185,742 189,345 202,207 1%

US SG&A -54358 -54436 -53001 -53673 -50772 -51908 -54232 0%

as % gross US sales 23.2% 22.0% 21.2% 20.3% 19.7% 19.3% 18.0%

SG&A as % of Gross Sales 23.2% 22.0% 21.2% 20.3% 19.7% 19.3% 18.0%

Rebates as % of Gross Sales 19.5% 23.8% 24.6% 27.1% 28.1% 29.6% 32.9%

Total effective mkting costs 42.7% 45.8% 45.8% 47.4% 47.7% 48.9% 50.9%

Aggregate SG&A/rebates -100,139 -113,459 -114,422 -125,128 -123,210 -131,501 -153,222 7% Source: Company data based on 20 company universe, Credit Suisse estimates

A large element of the traditional rebates is volume-related and we wonder to what extent

high levels of rebates for incumbent products act as a barrier to entry for new drugs in a

field. A company able to give a 20% discount on $1bn of existing sales on a drug to a

large purchaser can provide rebates of $200m. A new entrant with only $50m of sales

even with a 90% discount would only be able to provide rebates of $45m. With the US

system still apparently heavily reliant on elements of the delivery chain getting paid on a

percentage of sales, this may act as a real barrier to new entrants if they are not able to

offer franchise level rebates.

01 May 2015

Global Pharma 32

Appendix 2 :Methodology

In Figure 98 to Figure 103 we isolate the contribution to overall US branded drug sales

growth of list price rises, increased rebates and volume/mix. This shows that US list prices

are continuing to rising faster than rebates, suggesting that the universe of companies

covered still saw a net 9.7 pp of US price rises benefiting sales. Bayer, Roche and UCB do

not provide any rebate disclosures. We have made no estimates of rebates for Bayer and

Roche; however, for UCB, we have made an estimate for overall rebates based on the

difference between IMS reported sales and company reported sales for the key drugs

Cimzia, and Vimpat. We have found that the difference between IMS "gross sales" and

company "reported sales" has, in the past, broadly matched the rebate levels reported by

the companies in their annual reports (see Figure 104).

We see no material difference between Roche's reported product sales and IMS levels

suggesting limited discounting in the hospital channel, and for Bayer the complexity of the

business mix including Kogenate (factor VIII) for haemophilia, a range of oral and depot

contraceptives and Betaseon for MS make it very difficult to estimate rebate levels. We

note a degree of restatement of rebates by a number of companies over time, typically

showing restatements to higher levels of rebates. For GSK, 2013 US rebates were initially

reported at 29%, but the 2013 data were restated in the 2014 accounts to 31% for the

same 2013 period. For GSK, this reflects the exclusion of "established products" from the

included analysis, it is not always clear what is covered. We restate historic numbers

where possible to maximise the ability to look at the trend rather than absolute level of

rebates.

Figure 98: Implied contribution from US Gross Prices, %

Company

2014 US pharma

sales 2007 2008 2009 2010 2011 2012 2013 2014

Abbvie 10764 10.3 11.9 15.9 14.6

Amgen 14729 3.1 7.2 8.7 8.5

BIIB 6684 12.4 18.8 14.6 9.6

BMY 7716 7.5 10.3 12.8 13.0

Celgene 4164 4.2 5.8 8.6 7.4

Eli Lilly 7860 13.1 15.6 15.8 10.2

Gilead 18520 7.6 8.0 6.6 6.7

JNJ 17422 11.9 8.0 10.4 9.7

Merck 14215 12.0 10.8 12.4 12.0

Pfizer 19073 11.2 10.9 13.3 17.0

Actelion 1024 3.1 7.4 10.8 13.3

AstraZeneca 10120 8.0 10.0 11.8 8.6 13.2 10.6 11.6 9.3

Bayer 3628 12.4 17.8 17.3 16.7 7.6 7.0 7.3 9.8

GSK 10732 6.1 8.9 6.3 4.4 6.8 8.2 7.3 8.8

Novartis 12342 8.7 8.5 9.3 11.7 12.1 12.2 7.7 9.5

Novo Nordisk 7688 6.6 7.9 5.4 11.4 11.5 11.6 16.1 22.0

Roche 17387 3.9 4.5 4.1 4.0 4.4 5.2 4.3 4.9

Sanofi, inc-Plavix 13819 8.0 9.5 7.7 10.6 10.1 11.0 13.1 31.8

Shire 4047 8.7 8.5 9.3 7.3 7.8 8.1 7.8 9.9

UCB 1453 10.0 9.0 12.0 13.0 15.1 14.4 16.9

Sales Weighted Avg 203386 7.0 8.3 8.3 8.5 9.2 9.2 10.6 12.1

** this includes the benefit of 50% of the impact of pricing for Plavix

Additional pricing information

Sanofi, ex-Plavix 12640 7.0 9.4 6.8 10.4 9.6 11.5 13.1 31.8

Plavix/Avapro 1180 6.5 2.0 16.9 12.9 14.7 6.0

Xarelto 5.1 14.5 13.8 Source: Company data, Credit Suisse estimates

01 May 2015

Global Pharma 33

Figure 99: Reported level of discounts, %

Company

2014 US pharma

sales 2007 2008 2009 2010 2011 2012 2013 2014

Abbvie 10764 24.5 22.6 25.4 26.0 29.3 28.6 32.1 35.1

Amgen 14729 26.0 26.0 28.5 29.7 29.2 25.9 26.8 29.4

BIIB 6684 8.4 6.0 6.3 15.9 19.5 23.1 23.4 22.7

BMY 7716 11.6 12.0 12.8 14.8 29.2 33.7 34.6 35.0

Celgene 4164 9.8 12.2 14.2 13.4 13.8 14.8

Eli Lilly 7860 10.7 13.2 15.0 16.5 21.4 21.0 26.3 32.3

Gilead 18520 19.0 22.5 27.0 30.1 30.5 28.7 30.4 31.5

JNJ 17422 12.6 13.2 13.8 21.5 24.5 25.8 27.6 32.4

Merck 14215 12.6 13.2 13.8 21.5 24.5 25.8 27.6 32.4

Pfizer 19073 17.1 21.7 29.1 24.0 27.5 26.5 27.6 31.3

Actelion 1024 12.1 14.3 17.9 13.5

AstraZeneca 10120 30.1 34.9 38.7 41.5 44.4 48.9 54.6 56.6

Bayer 3628 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

GSK 10732 11.6 23.4 26.3 29.2 28.1 30.8 30.7 36.8

Novartis 12342 19.2 27.7 29.7 29.1 28.5 28.3 27.6 27.1

Novo Nordisk 7688 28.5 31.4 32.4 32.9 39.3 43.2 46.3 47.4

Roche 17387 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Sanofi 12640 19.1 21.5 23.6 29.4 31.2 38.8 39.8 45.2

Shire 4047 10.8 10.5 15.9 24.1 29.7 29.4 32.7 32.3

UCB (CS estimate) 1453 1.0 1.0 5.0 9.0 21.0

Sales Weighted Avg 202207 15.5 18.6 21.4 23.4 26.1 27.3 28.9 32.4

US domicile 121146 15.7 17.3 20.5 22.2 26.2 26.4 28.2 31.8

EU dom icile 81060 14.5 19.5 21.5 23.8 24.8 27.6 29.0 31.8 Source: Company data, Credit Suisse estimates

Figure 100: Change in discounts, pp ( -ve is an increase in discounts)

Company

2014 US pharma

sales 2007 2008 2009 2010 2011 2012 2013 2014

Abbvie 10764 -2.8 -0.6 -3.3 0.7 -3.5 -3.0

Amgen 14729 -2.5 -1.2 0.5 3.2 -0.9 -2.6

BIIB 6684 -0.3 -9.5 -3.6 -3.6 -0.3 0.8

BMY 7716 -0.8 -2.0 -14.4 -4.5 -0.9 -0.5

Celgene 4164 -9.8 -2.4 -2.0 0.8 -0.4 -1.0

Lilly 7860 -1.9 -1.4 -4.9 0.5 -5.3 -6.1

Gilead 18520 -4.5 -3.1 -0.4 1.8 -1.7 -1.2

JNJ 17422 -0.6 -7.7 -3.1 -1.3 -1.8 -4.7

Merck 14215 -0.6 -7.7 -3.1 -1.3 -1.8 -4.7

Pfizer 19073 -7.3 5.1 -3.5 1.0 -1.1 -3.7

Actelion 1024 0.0 0.0 -12.1 -2.3 -3.6 4.5

AstraZeneca 10120 -3.8 -2.8 -2.9 -4.5 -5.7 -2.0

Bayer 3628 0.0 0.0 0.0 0.0 0.0 0.0

GSK 10732 -2.9 -2.9 1.1 -2.7 0.1 -6.1

Novartis 12342 -2.0 0.6 0.6 0.2 0.7 0.6

Novo Nordisk 7688 -1.0 -0.6 -6.4 -3.9 -3.0 -1.2

Roche 17387 0.0 0.0 0.0 0.0 0.0 0.0

Sanofi 12640 -2.1 -5.7 -1.8 -7.6 -1.0 -5.4

Shire 4047 -5.4 -8.2 -5.6 0.3 -3.4 0.5

UCB 1453 0.0 -1.0 0.0 -4.0 -4.0 -12.0

Sales Weighted Avg 202207 -2.7 -1.9 -2.9 -1.3 -1.7 -3.1

US domicile 121146 -3.1 -1.7 -4.1 -0.2 -1.9 -3.5

EU dom icile 81060 -2.1 -2.2 -1.2 -2.9 -1.6 -2.5 Source: Company data, Credit Suisse estimates

01 May 2015

Global Pharma 34

Figure 101: Implied US net price growth, %

Company

2014 US pharma

sales 2007 2008 2009 2010 2011 2012 2013 2014

Abbvie 10764 -2.8 -0.6 7.0 12.6 12.4 11.6

Amgen 14729 1.8 -0.9 -9.5 10.4 7.8 5.9

BIIB 6684 -0.3 -9.5 8.8 15.2 14.3 10.4

BMY 7716 -0.8 -2.0 -6.9 5.8 11.9 12.5

Celgene 4164 -9.8 -2.4 2.2 6.6 8.2 6.4

Eli Lilly 7860 -1.9 -1.4 8.2 16.1 10.5 4.1

Gilead 18520 -4.5 -3.1 7.2 9.8 4.9 5.5

JNJ 17422 -0.6 -7.7 8.8 6.7 8.6 5.0

Merck 14215 -0.6 -7.7 8.9 9.5 10.6 7.3

Pfizer 19073 -7.3 5.1 7.7 11.9 12.2 13.3

Actelion 1024 0.0 0.0 -9.0 5.1 7.2 17.8

AstraZeneca 10120 10.0 8.0 5.8 10.3 6.1 5.9 7.3

Bayer** 3628 17.8 17.3 16.7 7.6 7.0 7.3 9.8

GSK 10732 8.9 3.4 1.5 7.9 5.5 7.4 2.7

Novartis* 12342 8.5 7.3 12.3 12.7 12.4 8.4 10.1

Novo Nordisk 7688 7.9 4.4 10.8 5.1 7.7 13.1 20.8

Roche** 17387 4.5 4.1 4.0 4.4 5.2 4.3 4.9

Sanofi*** 12640 9.5 5.6 4.9 8.2 3.4 12.1 26.4

Shire 4047 8.5 3.9 -0.9 2.2 8.4 4.4 10.4

UCB** 1453 10.0 9.0 11.0 13.0 11.1 10.4 4.9

Sales Weighted Avg 202207 3.6 0.9 1.5 6.1 8.9 9.4 9.6

US domicile 121146 0.0 -2.7 -1.7 4.7 10.5 10.6 9.0

EU dom icile 81060 8.7 6.1 6.0 8.1 6.5 7.7 10.4 Source: Company data, Credit Suisse estimates

Figure 102: Implied US Volume/mix growth %

Company

2014 US pharma

sales 2007 2008 2009 2010 2011 2012 2013 2014

Abbvie 10764 2.8 11.3 3.5 -7.3 -14.8 -5.9

Amgen 14729 0.0 0.2 -4.7 1.9 13.7 -1.1 1.8 -1.0

BIIB 6684 0.0 19.8 9.7 16.7 -2.4 -1.9 31.2 32.8

BMY 7716 21.1 18.1 12.9 8.1 16.6 -31.7 -30.9 -19.8

Celgene 4164 0.0 34.5 11.4 25.6 28.2 6.5 18.2 5.3

Lilly 7860 18.0 7.3 13.9 5.5 -8.3 -23.7 -5.9 -36.7

Gilead 18520 0.0 0.0 4.5 19.4 2.0 10.8 13.9 158.2

JNJ 17422 3.4 -4.9 -11.5 3.7 -9.9 -6.4 3.7 19.9

Merck 14215 9.8 -7.3 -2.5 -4.1 -9.4 -9.9 -23.4 -11.6

Pfizer 19073 -6.2 -9.9 3.7 -8.4 -14.9 -32.8 -17.0 -19.2

Actelion 1024 0.0 0.0 0.0 11.4 10.1 -0.8 -0.9 -1.3

AZN 10120 2.1 -8.8 24.1 -24.0 -10.1 -26.8 -14.9 -2.9

Bayer 3628 38.1 -18.8 -19.7 -28.1 -22.5 -0.3 4.1 -2.4

GSK 10732 0.0 -20.2 -15.8 -12.1 -11.9 -8.8 -5.7 -14.4

Novartis* 12342 -6.2 -10.1 7.9 9.8 -14.3 -9.6 -8.3 -13.8

Novo Nordisk 7688 21.2 10.9 9.9 12.3 13.2 11.4 4.4 -10.1

Roche 17387 20.2 30.1 0.5 -4.4 -2.9 2.6 5.4 2.2

Sanofi 12640 0.0 -12.1 -1.8 -19.0 -3.6 -3.8 -12.3 -18.7

Shire 4047 40.5 12.1 -12.0 10.3 26.6 1.5 5.7 11.2

UCB 1453 8.0 -20.7 -34.2 -31.0 -19.8 9.4 2.0 4.1

Sales Weighted Avg 202207 6.1 -0.6 1.7 -1.3 -3.6 -10.9 -7.3 -3.2

US domicile 121146 4.6 0.3 2.2 3.0 -2.1 -14.4 -9.3 0.1

EU domicile 81060 8.1 -1.9 1.0 -7.5 -5.8 -5.8 -4.5 -7.9

*Novartis impacted in 2010 by first time consolidation of Alcon Pharma Source: Company data, Credit Suisse estimates

01 May 2015

Global Pharma 35

Figure 103: US pharma sales growth %, CS forecasts from 2015

Company

2014 US pharma

sales 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Abbvie 10764 10.7 10.4 5.3 -2.4 5.7 23.0 7.1 3.0 2.4

Amgen 14729 0.2 -2.8 1.1 4.2 9.3 9.6 4.9 6.9 2.9 3.6 -0.2

BIIB 6684 19.8 9.3 7.2 6.4 13.3 45.4 43.2 17.2 10.7 5.9 4.1

BMY 7716 21.1 18.1 12.1 6.1 9.7 -25.8 -19.0 -7.2 -4.1 12.5 11.0 2.2

Celgene 4164 34.5 1.7 23.1 30.4 13.1 26.4 11.7 23.9 14.9 13.2 9.3

Eli Lilly 7860 18.0 7.3 12.1 4.0 -0.1 -7.7 4.6 -32.6 -0.6 10.8 5.1 6.1

Gilead 18520 16.3 9.2 20.6 18.8 164 0.3 -3.2 -5.9 -26.5

JNJ 17422 3.4 -4.9 -12.1 -4.0 -1.1 0.3 12.3 24.9 -0.4 5.1 1.9 0.8

Merck 14215 9.8 -7.3 -3.1 -11.8 -0.5 -0.4 -12.8 -4.3 14.5 8.7 0.5 5.1

Pfizer 19073 -6.2 -9.9 -3.6 -3.3 -7.3 -20.9 -4.9 -5.9 -6.4 5.5 6.5 3.3

Actelion 1024 11.4 1.1 4.4 6.3 16.5 4.7 -4.4 4.8 4.7

AZN 10120 2.1 1.2 32.1 -18.2 0.1 -20.6 -9.0 4.4 -9.0 -5.4 -13.7 14.4

Bayer 3628 38.1 -1.0 -2.4 -11.4 -14.9 6.7 11.4 7.4 1.7 -5.2 -0.6 -1.1

GSK 10732 -11.3 -12.4 -10.7 -4.0 -3.3 1.7 -11.7 -1.9 -5.2 3.6 3.8

Novartis 12342 -6.2 -1.6 15.2 22.1 -1.6 2.8 0.1 -3.7 1.8 2.7 8.2 7.7

Novo Nordisk 7688 21.2 18.8 14.4 23.1 18.3 19.2 17.5 10.7 10.4 6.5 4.9 4.4

Roche 17387 20.2 34.6 4.6 -0.4 1.5 7.8 9.7 7.1 4.7 6.2 2.9 6.8

Sanofi 12640 -2.6 3.8 -14.1 4.6 -0.4 -0.2 7.7 -3.3 3.2 4.6 5.8

Shire 4047 40.5 20.6 -8.1 9.4 28.8 9.9 10.1 21.6 10.5 9.9 10.5 12.0

UCB 1453 8.0 -10.7 -25.2 -20.0 -6.8 20.5 12.4 9.0 15.8 11.9 13.3 11.8

Sales Weighted Avg 202207 2.9 2.7 0.0 2.2 -1.9 2.0 6.3 3.1 4.7 3.4 3.9

US Sales Weighted Avg 121146 0.3 -0.2 0.9 2.3 -3.9 1.1 8.7 4.8 6.9 4.1 1.5

EU Sales Weighted Avg 81060 6.8 7.4 -1.0 2.1 0.7 3.2 2.9 0.5 1.3 2.2 7.1 Source: Company data, Credit Suisse estimates

Rebate disclosures are typically made only annually by most companies at an aggregate

global or US level. However, we have found that a comparison of IMS gross sales

reported quarterly and actual reported net sales from company results give directionally

the same results as the more detailed annual company level data suggesting that

investors can usefully compare product level data which are available on a more timely

basis.

In Figure 104 we show that gross to net sales data for Advair comparing IMS gross sales

to company reported net sales compares well with the aggregate level of corporate

disclosure for GSK. The same can be said for Crestor and aggregate rebate data for AZN,

and for Januvia and overall Merck. For Lilly just looking at Humalog data would suggest a

much higher overall rebate burden increase than we see from aggregate Lilly data.

Figure 104: Comparison of reported overall rebate levels for companies and calculated rebates for key drugs from the

difference between IMS calculated gross sales and company reported net sales

0%

10%

20%

30%

40%

50%

60%

20

09

20

10

20

11

20

12

20

13

20

14

20

09

20

10

20

11

20

12

20

13

20

14

20

09

20

10

20

11

20

12

20

13

20

14

20

09

20

10

20

11

20

12

20

13

20

14

Advair ( GSK) Crestor (AZN) Humalog (Eli Lilly) Januvia/Janumet (Merck

Rep

ort

ed a

gg. c

om

pan

y r

ebat

es &

CS

calc

ula

ted

pro

du

ct r

ebat

es

CS calc (for product) Company reported (US pharma total) IMS estimate (for product)

Source: Company data, Credit Suisse research. CS calculation based on IMS Health NPA data IMS estimate is made using broader audit

information not all regularly available to the financial community. Company reported data reflects full US operations not just one drug.

01 May 2015

Global Pharma 36

Appendix 3: Pricing impact of the Medicaid trap

In Figure 110 we highlight the key features of the Medicaid and Medicare programmes and

in Figure 108 we use IMS Health data on the source of payment by drug to show the

exposure of our universe to these funding programmes. Overall data suggest that around

7% of branded drugs are purchased for cash, outside of some form of health insurance

programme. Whilst companies are able to price commercial contracts freely, there are

onerous pricing restrictions, particularly on sales to Medicaid (c 7% of total). We believe

that many Medicare plans have full price protection as a cost of formulary access, such

that all price rises are effectively rebated away.

There has been only a limited change in the source of payment between 2012 and 2014,

with our analysis suggesting that on average commercial insurance has fallen from 68% to

64% of funding. Medicare Part D shows a corresponding increase from 18% to 20% with

Medicaid stable at around 7%. On a full market basis, Medicare and Medicaid are more

significant players given their high use of generics. The data here reflect just the exposure

of the branded drug companies in our analysis (see Figure 108).

In Figure 105 we plot the level of rebates against exposure to Medicare. It seems clear

that in addition to rebates correlating well with overall product uniqueness which is

illustrated in Figure 12, we also see the expected link with exposure to the most price

conscious and restrictive access government funded programmes.

Figure 105: Exposure to Medicare and Medicaid and 2014 rebates

Abbvie

Amgen

BIIB

BMY

Celgene

Gilead

JNJ

Lilly

Merck

Pfizer

Actelion

AstraZeneca

GSK

Novartis

Novo Nordisk

Sanofi

Shire

UCB

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60%

Med

icare

/m

ed

icaid

2014 rebate % Source: Company data, Credit Suisse estimates

Within Medicaid, companies are only able to inflate drug prices annually in line with the

Consumer Price Index (CPI). The resulting price is then used to calculate the “best price”

for Medicaid reimbursement, from which a mandatory 23% rebate is then added.

Companies with large products that have been on the market for many years will be

particularly impacted by the cumulative impact of annual price rises restricted to CPI

growth alone.

01 May 2015

Global Pharma 37

In Figure 107 we show that the effective US Medicaid price might well be >70% below the

list price for drugs more than 10 years old using Novolog for NovoNordisk launched in

2001 as an example. We estimate that a starting AWP of around $4.77 in 2001 is now

around $31.4 with a WAC of $26.2. Applying the cumulative CPI inflator for 14 years this

suggests a base WAC price for Medicaid rebating of around $5.86 a 78% discount to the

current AWP. From this base price there is a mandatory incremental 23% rebate taking

the overall price down to $3.42 against a typical WAC price for a cash customer of $25-26.

New presentations and delivery devices may allow for some resetting of prices but for a

basic product that has been on the market for more than 10 years the cumulative level of

discounts could now be well over 70%. We understand that some payers are very

resistant to new presentations being added to formularies, presumably in part to avoid

seeing this resetting of pre discount prices..

Figure 106: Sales of selected US drugs launched at least 10 years ago

Company Brand Name

Yr of US

Launch

2014 US Net

Sales ($m)

2014 IMS US

Gross Sales

($m)

CS estimate

of Gross to

Net

Dec 2006

AWP $ per

day/course

April 2015

AWP $ per

day/course

CAGR List

Price Rise

06-15

CS Calc

Medicaid base

price 2015 $*

CS calc

Medicaid base

price % vs. April

15

Abbvie Humira 2003 6,524 7,222 10% 786.6 1921.3 12% 996.4 48%

Abbvie Synthroid 1957 709 998 29% 0.5 1.3 12% 0.6 50%

Amgen Enbrel 1999 4,325 5,506 21% 196.7 437.1 11% 249.1 43%

Amgen Neulasta 2002 3,527 3,831 8% 3418.8 5622.2 6% 4330.8 23%

Amgen Neupogen 1991 838 839 0% 424.3 610.6 5% 537.5 12%

Amgen Sensipar 2004 807 925 13% 11.7 22.0 8% 14.8 33%

AZN Crestor 2003 2,918 5,848 50% 3.3 8.2 12% 4.2 49%

AZN Nexium 2001 1,876 5,931 68% 698.9 1113.9 6% 885.4 21%

AZN Synagis 2005 499 646 23% 1671.9 2962.4 7% 2117.9 29%

AZN Byetta 2005 199 321 38% 7.6 19.1 12% 9.7 50%

Bayer Betaseron 1993 500 730 32% 132.9 457.6 17% 168.4 63%

Bayer Mirena 2001 577 588 2% 0.3 0.5 8% 0.4 33%

BMY Abilify 2002 3,623 7,838 54% 15.9 35.7 11% 20.1 44%

BMY Reyataz 2003 689 892 23% 31.0 51.2 6% 39.2 23%

Eli Lilly Humalog 1996 1,628 1,674 3% 8.8 24.3 14% 11.1 54%

Eli Lilly Cialis 2003 1,040 1,383 25% 13.6 45.5 16% 17.2 62%

Eli Lilly Evista 1998 207 245 16% 3.4 7.9 11% 4.3 46%

Eli Lilly Forteo 2002 539 635 15% 27.2 75.4 14% 34.4 54%

Eli Lilly Strattera 2002 455 718 37% 9.5 24.2 12% 12.0 50%

Forest Namenda 2003 762 1,588 52% 5.4 13.6 12% 6.9 49%

GSK Advair Diskus 2001 3,254 4,813 32% 5.5 9.6 7% 7.0 27%

GSK Avodart 2005 426 499 15% 3.3 6.1 8% 4.2 31%

GSK Ventolin HFA 1969 541 811 33% 2.1 3.0 5% 2.6 12%

JNJ Remicade 1998 4,155 4,502 8% 699.0 1168.5 7% 885.5 24%

JNJ Risperdal Consta 2003 429 472 9% 10.5 14.6 4% 13.4 9%

JNJ Aciphex 1999 27 109 75% 5.3 16.8 16% 6.7 60%

Merck Zetia 2003 1,475 2,037 28% 3.2 8.6 13% 4.0 53%

Merck Nasonex 1997 576 1,184 51% 5.4 13.9 13% 6.8 51%

Merck Vytorin 2004 556 774 28% 3.4 8.9 13% 4.3 51%

Merck KGaA Rebif 2002 1,289 1,387 7% 160.7 543.4 16% 203.6 63%

Merck KGaA Gonal-F 2004 198 389 49% 556.5 792.0 5% 705.0 11%

Novartis Gleevec 2001 2,170 2,307 6% 137.0 368.4 13% 173.5 53%

Novartis Sandostatin LAR 2004 710 729 3% 2299.6 3668.4 6% 2913.0 21%

Novo Nordisk Novolog 2001 1,831 4,424 59% 10.9 31.4 14% 13.8 56%

Novo Nordisk Novolin 70/30 1986 359 787 54% 3.8 13.1 17% 4.8 64%

Novo Nordisk Levemir 2006 1,213 2,535 52% 5.4 14.9 14% 6.8 54%

Pfizer Lyrica 2005 2,314 3,087 25% 6.2 21.1 17% 7.8 63%

Pfizer Celebrex 1999 1,875 2,450 23% 2.1 5.6 13% 2.7 52%

Pfizer Viagra 1998 1,136 1,318 14% 11.9 41.5 17% 15.1 64%

Pfizer Lipitor 2000 242 261 7% 2.9 5.9 9% 3.7 38%

Roche Rituxan 1997 3,173 3,473 9% 59.4 86.9 5% 75.2 13%

Roche Avastin 2004 2,909 2,888 -1% 343.8 407.2 2% 435.5 -7%

Roche Herceptin 2003 2,162 2,193 1% 3047.2 4460.3 5% 3860.1 13%

Roche Tarceva 2004 704 654 -8% 120.6 268.4 11% 152.7 43%

Roche Tamiflu 1999 754 842 10% 8.4 12.2 5% 10.7 12%

Roche Pegasys 2001 213 319 33% 300.9 594.2 9% 381.1 36%

Sanofi Lantus 2001 5,615 7,870 29% 8.0 14.9 8% 10.2 32%

Shire Adderall XR 2001 383 840 54% 4.0 8.5 10% 5.1 41%

UCB Keppra 2001 201 253 21% 5.6 16.6 15% 7.1 57%

Sum/sales weighted average 73,132 102,565 29% 10% 37% Source: Company data, Wolters Kluwer Prices, Credit Suisse estimates

Drugs that have had particularly long effective patent lives with significant sales 10 or even

15 years after launch will have accumulated the highest regulatory rebates, some of these

are listed in Figure 106. Here we see c$73bn of net sales of drugs in 2014 all launched

01 May 2015

Global Pharma 38

before mid 2006 listed by marketing company. Comparing IMS gross sales to company

reported or CS estimated US company sales, we see on average a 29% gross to net

adjustment. Of note is the discrepancy between an average gross to net discount for 2014

for Lantus of 28% and a much higher gross to net adjustment suggested for Levemir of

52%. Data for the oncology drug Avastin show no discount at all with IMS sales slightly

lower than the sales reported by Roche. Our analysis suggests that for the Medicaid

population on average the base price from which the 23% Medicaid discount must be

added is already some 37% below the current list price. This suggests that the typical

effective Medicaid price for this cohort of drugs is c 48% of current list prices.

UCB showed a significant increase in effective rebates in 2014 for Vimpat and attributed

this to a marked shift in patients moving to government subsidised healthcare cover with

higher rebates. For Vimpat alone, our IMS data suggest that the percentage of sales via

Medicare rose from 29.5% in 2012 to 35% in 2014. However, at the US pharma divisional

level, the change was only from 18% to 20% given the stability of Medicare exposure for

Cimzia reported by IMS at c 6%.

Figure 107: Effective Medicaid price could be >70% below list price for older drugs

Novo Retail Commercial Medicare Medicaid Weighted Avg

Novolog 4 58 33 5 41

Levemir 3 52 42 3 22

Novolog mix 3 41 51 5 14

Victoza 2 72 24 2 22

Diabetes sales Weighted 3 57 36 4 100

WAC Novolog Apr 2015 26.2 26.2 26.2 26.2 26.2

CPI pricing adjustment 0% -78%

price for rebate 26.2 26.2 26.2 5.86 26.2

mandatory rebate ** 0% -23%

commercial rebate -2% -46% -46% 0%

effective price 25.68 14.15 14.15 4.52 14.20

-2% -46% -46% -83% -46% Source: Company data, Credit Suisse estimates ** mandatory Medicaid rebate moved from 15.1% to 23.1% in 2010

01 May 2015

Global Pharma 39

Figure 108: 2012 and 2014 Source of payment for US drugs

Company data Cash Medicaid

Medicare

Part D

Third

Party Cash Medicaid

Medicare

Part D Third Party

Abbvie 6% 5% 8% 81%

Amgen 3% 4% 12% 65%

BIIB 1% 2% 8% 90%

BMY 2% 13% 24% 60%

Celgene 0% 1% 15% 83%

Gilead 2% 10% 17% 71%

JNJ 3% 5% 19% 73%

Lilly 5% 14% 26% 55%

Merck 10% 4% 29% 58%

Pfizer 23% 3% 21% 53%

Actelion 2% 5% 3% 90%

AstraZeneca 23% 2% 14% 61% 23% 3% 21% 53%

Bayer 4% 23% 5% 68% 4% 14% 11% 72%

GSK 7% 6% 23% 63% 8% 5% 30% 57%

Novartis 4% 6% 22% 69% 4% 7% 20% 70%

Novo Nordisk 5% 6% 30% 60% 6% 10% 36% 49%

Roche 2% 7% 9% 82% 6% 5% 10% 79%

Sanofi 7% 10% 29% 54% 7% 11% 28% 54%

Lundbeck 0% 10% 0% 89% 1% 13% 7% 79%

Meda 3% 5% 17% 76% 4% 3% 18% 76%

Merck KGaA 3% 5% 6% 86% 3% 4% 6% 87%

Shire 1% 18% 2% 79% 2% 16% 5% 77%

UCB 2% 11% 18% 68% 2% 10% 20% 68%

US & EU weighted avg 7% 7% 19% 66%

US total/weighted average 7% 6% 18% 67%

EU total/weighted average 7% 8% 18% 68% 8% 7% 20% 64%

2012 IMS source of payment 2014 IMS source of payment

Source: IMS Health Audit Data Company data, Credit Suisse estimates

01 May 2015

Global Pharma 40

Figure 109: Payer Mix Highly variable sources of funding, examples from Lundbeck

Source: Lundbeck IR, Credit Suisse research

01 May 2015

Global Pharma 41

Figure 110: Key features of the Medicaid and Medicare programmes for pharmaceuticals Medicaid Medicare Dual eligibles Commercial

Entitlement for the poor for the elderly poor/elderly anyone - self pay/employer pay

Funding State /Federally funded program Federally funded program State /Federally funded program self/corporate

Rebates Flat rate rebates rebates linked to the donut hole program dependant rebates, no

overarching rebate

volume /mkt share related rebates

* list price less 23% (with a few

prompt payment adjustments)

OR * match best commercial price

BUT Best commercial price is

calculated as price at launch inflated

by CPI only for each year since

launch and is NOT ACTUAL best

price

Formularies States can ask for "supplemental "

rebates on top of the federal

rebates to maintain formulary

position, these can be sufficiently

high for companies to walk away

from Medicaid formulary access on a

state by state basis

Depends on the source of funding,

usually administered by a

commercial plan manager, and

formularies can be similar to

commercial formularies in positioning

and discounts.

all part D outpatient drugs provided

via Medicare Part D rather than

Medicaid.

Active management of formularies

with differential co-pays, rebates

earned for directing mkt shares and

achieving negotiated targets

Delivery often local providers - working with

individual state requirements

Medicare Advantage, FFS Medicare Advantage, FFS, SNP.

Note eligibility criteria are different

for each program and Medicare

eligibility takes longer to establish

then Medicaid, (who pays for initial

health screen?) legal requirements

on documentation are different for

Medicare and Medicaid, networks

are historically different - which ones

should be covered?

Contract timing Tends to be January

KEY SNP - Special Needs Plan

D-SNP = Dual eligible Special Needs Plan

FFS - traditional Fee For Service plans , largely unrestricted choice of doctors/hospitals

CMS Financial Alignment Demonstration, proposed development of 3 way contracts , Medicare/Medicaid/Health Plans to develop a capitated model

PACE - Program of All inclusive Care for the Elderly. This has a frailty adjuster for payments, only certain plans qualify for this

Pharma covers 50% of the cost of

drugs for beneficiaries whose total

drug bill was greater than $2830

(2011), up until it reaches $4550

(2011) when catastrophic cover

kicks in. Each year the donut hole

closes a little and the subsidy

provided by the

manufacturer/marketer should fall

as insurers pay to close the gap

Medicare Advantage: typically brings together part D (outpatient drugs) and part B (hospital) coverage for the elderly. Programs are funded with risk

adjustments and bonus payments for special circumstances (frail elderly/chronic mental illness/physically disabled under 65 etc.)

Source: Kaiser Health Policy Paper March 2013, Credit Suisse estimates

01 May 2015

Global Pharma 42

Appendix 4: Uniqueness Status

The data in Figure 112 to Figure 111 look at the level of uniqueness of a company's

branded pharmaceutical portfolio and is taken from our PharmaValues database. This

database allows us to categorise all drugs sold by our universe of companies in each

indication, in each region and in each year based on various rules to determine the level of

competition and thus indirectly the level of potential rebates pressure.

Unique: For all primary care categories and the majority of specialist categories, we

define a drug as unique if there are only one or two drugs with the same mechanism of

action in a given indication in a given region. For some specialist categories, such as

cancer, we assume that there are no directly substitutable drugs and so all cancer drugs

are deemed to be unique until the patent has expired or a generic for each specific product

has been launched. For cancer drugs, we assume no impact on any one drug from the

patent expiry of another drug with a similar mechanism. A good example of a unique

cancer drug would be Avastin from Roche, and examples of unique drugs in diabetes

would be Byetta and Victoza as GLP-1 drugs ahead of the launch of Bydureon in early

2012. From 2012, with three competing drugs, all three drugs moved into the discountable

category.

Discountable: These are drugs with patent protection, but where there are three or more

broadly equivalent drugs available, with the same mechanism of action. Good examples in

this category would be all of the angiotensin 2 antagonists up until the time of Cozaar

patent expiry. When one drug with sales of at least 20% of the category/indication in the

year of generic entry has gone off patent then all of the previously discountable drugs are

moved into the category of substitution risk. For future launches we only adjust the

uniqueness status where we ascribe new entrants to have at least a 50% probability of

approval.

Substitution risk: This covers patent protected drugs in categories where a “standard of

care” product-accounting for a least 20% of category/region sales has gone generic. We

expect effective price pressures to increase for other comparable products at this time with

evidence of therapeutic substitution impacting all drugs in a category. The best known

examples of this sort of “category killing” patent expiry would be in the statins. Up until the

patent expiry of Zocor in 2006, we classified all of the branded statins as discountable.

After 2006, all of the remaining patented drugs move to the substitution risk group. Up until

2015, both of the long acting basal insulins, Lantus and Levemir, were deemed unique but

after the patent expiry Lantus in 2015, then Lantus, the new formulation Toujeo and Novos

new generation Tresiba are deemed substitution risk.

Generic risk: This covers drugs where patents have expired but where regulatory or other

barriers have offered additional protection from generics. We have identified these drugs

as a separate group as our modelling suggests no change to the products status, but there

is a theoretical risk of unexpected generic competition. Examples in this class would be

Lovenox from Sanofi Aventis between 2007 and 2010, covering the period from the patent

rejection by the courts to first generic entry. A current example is Flovent from GSK, where

the patent expired in 2004 but where there is still no generic competition. We only classify

drugs in this group if there are “small molecules”, “biological” products beyond patent

expiry remain designated as unique/discountable or at risk of substitution.

Multi source: This covers drugs after patent expiry where there is generic competition.

Good examples of drugs in this class would be the early years post patent expiry of

Prilosec from AstraZeneca and Voltaren from Novartis, where both brands continued to

register significant sales despite widespread availability of generic versions of these

products. We have also classified all of the residual “tails” of unidentified products as multi

source for the purposes of this analysis. Where sales of drugs persist at least 5 years post

patent expiry in a region we classify them as sustainable brands and this is where residual

Prilosec sales are counted from 2005.

01 May 2015

Global Pharma 43

Sustainable Brand: This encompasses sales of prescription drugs sold on brand equity,

normally where the choice is highly influenced by the consumer, and where we think

patents are largely irrelevant to the pricing/purchasing decision. Examples include the

aesthetic drugs Dysport and Botox, which are self-pay and drugs which might otherwise

be classified as OTC such as Bayer’s prescription aspirin and all of the cough/cold drugs

and anti-diarrhoeal/laxative that we have in our database (e.g. Smecta for Ipsen). We have

also classified all branded drugs where we have individual sales forecasts in our database

more than 4 years post generic entry to be sustainable brands. Good examples of drugs

here would be Prilosec from AstraZeneca (effective patent expiry in 2001 but sales in 2011

outside of the US of $908m) and Voltaren from Novartis (effective patent expiry ex US in

1995 but sales in 2011 $794m). We have not included sales of drugs post patent expiry in

Japan as sustainable brands, as we believe that the drivers of growth in Japan are quite

different.

Figure 111: Global majors: Branded, economic drug sales by uniqueness status vs. forecast operating margins

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20%

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40%

50%

60%

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Abbvie AZN Bayer BMY GSK JNJ LLY MRK Novartis Novo PFE Roche Sanofi Takeda Average

Op

erat

ing

Mar

gin

(lin

e)

% B

ran

ded

Dru

g sa

les

Unique+sustainable Discountable Substitute risk Multisource HC Op Margin Source: Company data, Credit Suisse estimates

Figure 112: US biotech: Branded, economic drug sales by uniqueness status vs. forecast operating margins

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Actelion Alkermes Almirall Galenica Ipsen Lundbeck Meda MRCG Orion Recordati UCB Average

Op

erat

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Mar

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(lin

e)

% B

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ded

Dru

g sa

les


01 May 2015

Global Pharma 44

Figure 113: Global Speciality: Branded, economic drug sales by uniqueness status vs. forecast operating margins

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Amgen Alexion BIIB Biomarin Celgene Gilead MDVN REGN UTHR Vertex Average

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01 May 2015

Global Pharma 45

Appendix 5: US healthcare system, flow of rebates

The $76.5bn of rebates we have identified from the 15 companies surveyed is an integral

part of the funding of the PBM industry, although the increasing use of generics (typically

70-80% of volume usage) has lessened reliance on branded drug rebates. In Figure 114

we show how rebates flow between manufacturer and payers, both direct and via the

medium of the pharmacy benefit managers (PBMs). Figure 114 shows a schematic,

whereas Figure 115 attempts to illustrate typical payments for key categories of drug via

different distribution channels, with rebates central to most delivery routes.

We are grateful to our US colleagues who cover the US healthcare distribution space for

sharing the data with us (Glen Santangelo, Jeffrey Bailin, and Tyler Harris).

Figure 114: US Pharmaceutical supply chain ( via retail)


0

1 M

ay

20

15

Glo

ba

l Ph

arm

a

46

Figure 115: Fund flow for typical drug (prices and rebates) Comment

Typical list price AWP

formulary position tier 2- 5 tier 2- 5 tier 1 tier 1 tier 3- 5

patient payment

Typically tier 1 generic $0-5 per month, Tier 2 preferred brand $20-30,

Tier 3-4 higher co-pay levels, tier 5 % co pay rather than flat rate.

Employer pays the PBM

* AWP less negotiated discount

* claims processing fee

*Transaction fee

*dispensing fee

employer pays PBM AWP less 14.75-15.25%

PBM

( revenue - pre costs)PBM pays retail pharmacy

* AWP less negotiated discount

BRAND: PBM earns 3-5% from manufacturer for sale of pharmacy

informationBRAND: PBM pays retail pharmacy AWP -15-16.5% + $1 fee

SPECIALTY larger customers secure drug specific pricing on c 150

drugs

Pharmacy Pharmacy

typically 20% gross margin and 6% op margin

Wholesaler

Typically overall has 3.5% gross margin and 1.5% net margin

Generics - wholesalers offer contract prices which may have no relation

to AWP to large retail customers. A typical mark up for a wholesaler

might be 15%, PBMs /mail order may source direct from

manufacturers bypassing wholesalers

$397.1 $8.1 $18 $1,975 Manufacturer pays

3-5% to PBM for sale of pharmacy information

pays PBM /employers rebates for volume (in this example c 10%)

Effective PBM

margin from list price

6% 9% 3% 8.5% 6%

Effective

manufacturer revenue

from list price

65% 69% 17% 8.8% 79%

$1.4

$11.9

three months of treatment

<-$

1.5

adm

in/c

linic

al f

ee

$53.2

5

$10.5

one month of treatment

$190

<--

$162.5

(A

WP

-16%

)

$20- $60


$162.5

BRAND- retail

<--

$159.6

(A

WP

less

15-1

6.5

% +

$1

dis

pensi

ng f

ee)

<--

$10.4

5 (

MA

C -

AW

P le

ss 7

8%

)

<--

$419.7

5 (

PB

M p

ays

whole

sale

r

AW

P le

ss 2

0%

-25-2

9%

less

5-9

%

whole

sale

r ch

arge)

<--

$127.7

<--

$8

contr

act

pric

ing -

-> $

10.0

4

(PB

M c

olle

cts

8-1

2%

rebat

e -

of

whic

h it

keeps

around 1

5-2

0%

and p

asse

s th

e r

est

on t

o e

mplo

yer)

- >

- >

$ 7

.6 (

3-5

% f

ee f

or

phar

mac

y in

form

atio

n)-

->

- >

$23 (

3-5

% f

ee f

or

phar

mac

y in

form

atio

n)-

->

a lo

t of

dire

ct s

ourc

ing f

rom

man

ufa

cture

rs

<--

$439.8

8

(A

WP

-22-2

5%

)

BRAND- mail-order

$575

$50-150

GENERIC- retail

$48

three months of treatment

SPECIALTY- mail-order

$2,500


GENERIC- mail-order

$200

10-20% copay

$2,052.98

$ 4

7.5

->

(

80-8

5%

of

rebat

e p

asse

d o

n t

o e

mplo

yer)

$392.4

<--

$11.8

8

(A

WP

-78%

)

<--

$18 (

AW

P le

ss 9

0-9

2%

)- b

ut

in p

ract

ice A

WP

m

ay n

ot

be r

ele

vant

with

contr

act

pric

ing

0-5

$35.0

<--

$35

(A

WP

82-8

3%

)

$17.0

$123.8

Tiering determines patient co-pay made to pharmacist , determined by

each PBM with employers typically tier 1 generic, tier 2 preferred brand

, tier 3-4 higher co-pay levels

Employer/Insurer

(effective cost of Rx)

Manufacturer

(effective income)

<--

$2115.6

3

(A

WP

82-8

3%

)

$153.8

<--

$1975 (

AW

P le

ss 2

0-2

2%

)

may

be s

ourc

ed d

irect

fro

m

man

ufa

cture

r- m

ay a

lso h

ave a

speci

fic d

istr

ibutio

n f

ee f

or

$ a

ny

phar

mac

y re

late

d f

ees

for

speci

ality

dru

gs

like t

here

are

for

regula

r bra

nds

, none q

uote

d in

your

exa

mple

$13.1

3 r

ebat

e o

f 3%

reta

ined b

y P

BM

- m

ore

pas

sed t

o e

mplo

yer/

insu

rer

$ 6

2.2

5 -

>

(80-8

5%

of

rebat

e p

asse

d o

n t

o e

mplo

yer)

Wholesaler

<$123.8

<$407.1

5


01 May 2015

Global Pharma 47

Appendix 6: Example Rebate disclosure

The disclosure of reconciliation from gross to net sales for US pharmaceuticals arose for

US listed companies whose principle business is in pharmaceuticals under Sarbanes-

Oxley rules disclosing key assumptions that may impact revenue recognition. Bayer is not

a pure healthcare company, and Roche, Merck KGaA, Lundbeck and UCB do not have a

full US listing and thus do not need to provide this disclosure, although we believe that it

would be best practice.

Different companies have different levels of disclosure but most give some breakdown of

data into various different elements of discount. We highlight what we perceive to be a

best practice disclosure from AstraZeneca PLC in its Annual Report and Form 20-F

Information 2014.

AZN 2014 Disclosure: Rebates, chargebacks and returns in the US

When invoicing sales in the US, we estimate the rebates and chargebacks that we expect

to pay. These rebates typically arise from sales contracts with third party managed-care

organisations, hospitals, long-term care facilities, group purchasing organisations and

various federal or state programmes (Medicaid ‘best price’ contracts, supplemental

rebates etc). They can be classified as follows:

Chargebacks, where we enter into arrangements under which certain parties, typically

hospitals, long-term care facilities, group purchasing organisations, the Department of

Veterans Affairs, Public Health Service Covered Entities and the Department of Defense,

are able to buy products from wholesalers at the lower prices we have contracted with

them. The chargeback is the difference between the price we invoice to the wholesaler

and the contracted price charged by the wholesaler. Chargebacks are paid directly to the

wholesalers.

Regulatory, including Medicaid and other federal and state programmes, where we pay

rebates based on the specific terms of agreements with the US Department of Health and

Human Services and with individual states, which include product usage and information

on best prices and average market prices benchmarks.

Contractual, under which entities such as third party managed-care organisations are

entitled to rebates depending on specified performance provisions, which vary from

contract to contract. The effects of these deductions on our US pharmaceuticals revenue

and the movements on US pharmaceuticals revenue provisions are set out opposite.

Accrual assumptions are built up on a product-by-product and customer-by customer

basis, taking into account specific contract provisions coupled with expected performance,

and are then aggregated into a weighted average rebate accrual rate for each of our

products. Accrual rates are reviewed and adjusted on a monthly basis. There may be

further adjustments when actual rebates are invoiced based on utilisation information

submitted to us (in the case of contractual rebates) and claims/ invoices are received (in

the case of regulatory rebates and chargebacks). We believe that we have made

reasonable estimates for future rebates using a similar methodology to that of previous

years. Inevitably, however, such estimates involve judgements on aggregate future sales

levels, segment mix and the customers’ contractual performance.

Managed-care and group purchasing organisation rebate charges increased by $812

million in 2014 (2013: $1,321 million; 2012: $160 million) mainly due to the impact of price

increases on price-protected business and pricing pressure resulting in higher negotiated

rates particularly in the Medicare Part D business.

Cash discounts are offered to customers to encourage prompt payment. Accruals are

calculated based on historical experience and are adjusted to reflect actual experience.

Customer Returns Industry practice in the US allows wholesalers and pharmacies to

return unused stocks within six months of, and up to 12 months after, shelf-life expiry. The

customer is credited for the returned product by the issuance of a credit note. Returned

01 May 2015

Global Pharma 48

products are not exchanged for products from inventory and once a return claim has been

determined to be valid and a credit note has been issued to the customer, the returned

products are destroyed. At the point of sale in the US, we estimate the quantity and value

of products which may ultimately be returned. Our returns accruals in the US are based on

actual experience. Our estimate is based on the preceding 12 months for established

products together with market-related information, such as estimated stock levels at

wholesalers and competitor activity, which we receive via third party information services.

For newly launched products, we use rates based on our experience with similar products

or a pre-determined percentage.

Source AZN 2014 Annual Report

Figure 116: Gross to net sales- US Pharmaceuticals

Source: AstraZeneca PLC Annual Report and Form 20-F Information 2014

01 May 2015

Global Pharma 49

Companies Mentioned (Price as of 26-Apr-2015)

AbbVie Inc. (ABBV.N, $66.07) Actelion (ATLN.VX, SFr126.9) Alexion Pharmaceuticals Inc. (ALXN.OQ, $180.08) Alkermes plc (ALKS.OQ, $62.26) Almirall (ALM.MC, €16.98) Amgen Inc. (AMGN.OQ, $167.91) AstraZeneca (AZN.L, 4749.5p) Bayer (BAYGn.DE, €135.3) BioMarin Pharmaceutical, Inc. (BMRN.OQ, $120.28) Biogen Idec (BIIB.OQ, $401.71) Bristol Myers Squibb Co. (BMY.N, $65.8) Celgene Corp. (CELG.OQ, $118.71) Eli Lilly & Co. (LLY.N, $71.58) Galenica (GALN.VX, SFr890.5) Gilead Sciences Inc. (GILD.OQ, $103.7) GlaxoSmithKline plc (GSK.L, 1534.5p) Ipsen (IPN.PA, €48.04) Johnson & Johnson (JNJ.N, $101.08) Lundbeck (LUN.CO, Dkr132.1) Meda (MEDAa.ST, Skr143.2) Medivation (MDVN.OQ, $131.01) Merck & Co., Inc. (MRK.N, $57.6) Merck KGaA (MRCG.DE, €105.15) Novartis (NOVN.VX, SFr99.8) Novo Nordisk A/S (NOVOb.CO, Dkr390.3) Orion (ORNBV.HE, €30.17) Pfizer (PFE.N, $35.27) Recordati (RECI.MI, €18.18) Regeneron Pharmaceutical (REGN.OQ, $480.09) Roche (ROG.VX, SFr276.6) Sanofi (SASY.PA, €95.86) UCB (UCB.BR, €69.02) United Therapeutics Corp (UTHR.OQ, $186.69) Vertex Pharmaceuticals Inc. (VRTX.OQ, $133.2)

Disclosure Appendix

Important Global Disclosures

Vamil Divan, MD, Ravi Mehrotra PhD, Glen Santangelo, Jeffrey Bailin, CFA, Ari Jahja, Matthew Weston PhD, Jo Walton and Terence McManus each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return rela tive to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10 -15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

01 May 2015

Global Pharma 50

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

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*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (53% banking clients)

Neutral/Hold* 38% (50% banking clients)

Underperform/Sell* 16% (43% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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See the Companies Mentioned section for full company names

The subject company (BIIB.OQ, BMRN.OQ, AMGN.OQ, REGN.OQ, CELG.OQ, PFE.N, AZN.L, ROG.VX, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, JNJ.N, ABBV.N, UCB.BR, BMY.N, MRK.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

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As of the date of this report, Credit Suisse makes a market in the following subject companies (MDVN.OQ, BIIB.OQ, VRTX.OQ, BMRN.OQ, UTHR.OQ, ALXN.OQ, AMGN.OQ, REGN.OQ, CELG.OQ, PFE.N, LLY.N, JNJ.N, ABBV.N, BMY.N, GILD.OQ, MRK.N).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (BAYGn.DE, NOVN.VX, MRCG.DE, ATLN.VX).

As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PFE.N). As of the date of this report, an analyst involved in the preparation of this report, Vamil Divan, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in the common stock Pfizer (PFE.N). A member of the analyst's household is an employee of Pfizer (PFE.N).

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For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (MDVN.OQ, BIIB.OQ, VRTX.OQ, BMRN.OQ, UTHR.OQ, ALXN.OQ, AMGN.OQ, REGN.OQ, CELG.OQ, NOVOb.CO, PFE.N, PFE.N, PFE.N, AZN.L, ROG.VX, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, JNJ.N, ABBV.N, SASY.PA, LUN.CO, IPN.PA, ALM.MC, MRCG.DE, ATLN.VX, ALKS.OQ, RECI.MI, ORNBV.HE, UCB.BR, MEDAa.ST, GALN.VX, BMY.N, GILD.OQ, MRK.N) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.

The following disclosed European company/ies have estimates that comply with IFRS: (AZN.L, SASY.PA, LUN.CO, ATLN.VX, ORNBV.HE, UCB.BR, BMY.N).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (AMGN.OQ, CELG.OQ, PFE.N, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, BMY.N, MRK.N) within the past 3 years.

As of the end of the preceding month, Credit Suisse beneficially owned the following percentages of the voting rights of the subject companies: 1.0% or more of GALN.VX

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (Europe) Limited ............................... European Pharma Team ; Matthew Weston PhD ; Jo Walton ; Terence McManus

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

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