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

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Page 1: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Jean Hoffman, PresidentQ Street Advisors, Inc.

APIs for Regulated Market Generics: Whither Europe?

©2006 Q Street Advisors, Inc. All rights reserved.

Rome, 23 January, 2006

Page 2: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Agenda

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

Page 3: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Global Opportunity: Macro Factors

*Source: Mark Lachovsky, Intellipharm

• Demographics & economic growth• Aging populations in advanced countries• Economic & population growth + aging in developing countries

• Political pressure for health care cost containment leading gradually to more favorable legislation & policies supporting generics, plus increased utilization

• Top generic companies consolidating: now huge, global players inspiring confidence in generic drugs

• API market projected to grow 5-7% in volume over the next 5-10 years, but only 1-2% in value due to increased competition*

Page 4: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Global Pharma Sector is Cyclical

• 2005 was a lean year for loss of exclusivity

• 2006-2008 many large selling products losing exclusivity in major markets

• Consolidation amongst global & regional US & EU generic companies + major customers in the US

• EU customers remain fragmented and mostly national, with differing packs, rules, brands supporting national companies…but not forever

• Growing competition from established and emerging Indian companies for a share of this next cycle, China coming

Page 5: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Growth Projections for 2006 Vary by Region

• US market forecast by IMS to grow 8-9% in 2006, up from the 6-7% in 2005. Totals 43% of world market.

• EU top 5 expected to grow 4-5%, down by .5% from 2005

• China expected to grow 17-18% to $13-14 billion

• Indian domestic market growing at 8-9%/year in volume

• India’s total pharma market, including exports, projected by Indian officials to double by 2010

Sources: IMS for US, EU, China projections, G S Sandhu, Joint Secretary, Indian Dept of Chemicals and Petrochemicals, reported in Pharmabiz 5/31/2005 for Indian projections

Page 6: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Performance: Generics Outpace Big Pharma

• Global generics market grew at 17% CAGR in the 5 years prior to 2004, greater than growth rate for branded pharma products

• Big pharma’s top line growth “anemic” (Bear Stearns), with TRx’s declining 3.9% in Oct 2005, excluding generics and older products

• Generics outpacing big pharma earnings performance • Pressure to increase development productivity while reducing time to market & to reduce costs at big pharma

Sources: IMS, Lehman Brothers, Bear Stearns

Page 7: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Generics Outperforming Big Pharma

Source: Lehman Brothers 7/2005

Diluted EPS Growth from Continuing Operations3 Yr.

CAGR5 Yr.

CAGR

US Generic Performance     25.5% 39.2%

US Brand Performance     -12.1% -6.0%

European Brand Performance     6.3% 13.6%

US Generic Outperformance vs. US Brand   37.7% 45.3%

US Generic Outperformance vs. Euro Brand 19.3% 25.7%

Page 8: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Now, Let’s Look Further at the Issues

Page 9: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Pharma Sector Cycle Long Term: Fewer New Launches, Slower Growth

• Slowing US and global market growth• 2004-07 US market growth +6% a year vs. +10% a year 1999-2003• 2004-07 global market growth +6.5% a year vs. +10% a year 1999-2003

• 20% fewer new products• New product launches estimated to average 45 a year 2004-07 vs. 54 a year from 1999-2003

•Fewer products available to generics

•Less API capacity needed by big pharma

•Further consolidation

•Continued API capacity shift to generics

Source: Lehman PharmaPipelines: 2004, IMS

10 Year+ Forecast10 Year+ Forecast

Page 10: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Source: Lehman PharmaPipelinesTM 2004

US Cycle: Growing $ Losing Exclusivity 2006-2008, Modest Slowdown 2009-2010

Page 11: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Growth in Indian Industry

• Ranbaxy now 9th largest generic, the 1st Indian based truly global company

• Indian drug production US$7.5 billion, representing 8% of world production by volume & 1.5% by value in 2004

• India’s exports US$ 3bb in 2004, 22.9% CAGR

• Indian API business ~US$1bb in 2005, with over 400 APIs claimed to be manufactured

• E&Y ranks India’s pharma market 4th in volume & 13th in domestic consumption value

Source: Ranbaxy corporate presentation, G S Sandhu, Joint Secretary, Indian Dept of Chemicals and Petrochemicals, reported in Pharmabiz 5/31/2005, Pharmabiz “China, India Emerge….” 12/22/2005

Page 12: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Growing Competition to Supply EU, US

• Indian companies targeting US and EU • China often in the Indian supply chain • Few private Chinese companies ~3-5 yrs behind

• Growing numbers of new Indian companies attempting to sell lower cost APIs and FDF products to US customers• US customers are using offers to negotiate better prices, mostly from their major generic suppliers of FDF, & must seek lower API prices to stay competitive

•Margins pressured thruout supply chain

•New entrants gain little FDF market share

•Increasing FDF outsourcing

ResultResult

Page 13: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Big Pharma Response to Generics: Increased Outsourcing & CRAMS

• Indian & Chinese API/intermediate mfrs beneficiaries• Traditional US/EU contract mfrs at risk

• Greater long term threat to traditional contract mfrs from R&D collaborations in India

• Ranbaxy NCE/NME research collaboration - GSK• DRL emphasis now on NCE/NME research • Indian companies with NCE/NME efforts will manufacture any successful products• Some of the Indian companies focusing on CRAMS may de-emphasize APIs for generics

Page 14: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

US: Low Prices Expected butDo Not Win the Business

“Generic manufacturers needs to differentiate themselves to the drug retailers by consistency of product and supply, distribution and logistics, capabilities and the pipeline of future products.

Price is not usually a significant negotiating tool, as most generics are multi-sourced and priced similarly.”

- Dennis O’Dell, SVP Pharmacy Services, Walgreen, comments on conference call hosted by Rich

Silver and Meredith Alder, Lehman Brothers NY with George Barrett & Bill Marth of Teva. Dec. 9, 2004

Page 15: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Large increase in DMFs submitted & citedin ANDAs. Includes alliance products.

• No Indian companies other than Ranbaxy and to a lesser extent DRL and Sun/Caraco are yet getting meaningful direct FDF market share in the US FDF generics market • Alliance products hard to measure: FDF market share under US partner’s name • 72 Indians have active US DMFs• Cipla, DRL, Ranbaxy, Matrix, Sun, Wockhardt, Lupin each have more than 25 active DMFs: the pressure is on APIs

US: Increased Competition from India, Little Movement in FDF Market Share

TrendTrend

Page 16: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Reviewed DMFs Received by FDA: Reviewed DMFs Received by FDA: 45% from India 2004 vs <5% 199945% from India 2004 vs <5% 1999

Source: Source: Paul Schwartz, Ph.D., FDA OGD, GPhA API Conference Source: Paul Schwartz, Ph.D., FDA OGD, GPhA API Conference 3/15/20053/15/2005

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1999 2000 2002 2004

North America

Western Europe

Eastern Europe

Middle East

Far East

India

Page 17: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

More Indian DMFs Cited in ANDAs

Source: FDA Office of Generic Drugs, 8/2005

• Many DMFs cited multiple times in multiple ANDAs• Some ANDAs citing Indian DMFs support FDF products via partnerships

0 50 100 150 200

2000

2001

2002

2003

2004

2005E

Year

No. of Indian/Chinese DMFs Cited in ANDAs

China

India

Page 18: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

More ANDAs Cite Indian DMFS,More Indian API Plants Inspected by FDA

Source: presentation by D. G. Shaw, Secretary General, Indian Pharmaceutical Alliance, 3/2005

• FDA only inspects if the DMF is cited in an ANDA • Some ANDAs citing Indian DMFs support FDF products via partnerships

0 111

44

105

0

20

40

60

80

100

120

1985 1990 1995 2000 2004

Year

No

. o

f P

lan

ts

Page 19: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Dossier buying, lack of API quality oversight

*Source: Matt Moran, President, APIC, quoted in SCRIP

• COS obtainable without an inspection by authorities• Dossier buying prevalent. FDF buyers often do not inspect the FDF facility nor the API supplier• Many local EU generics companies licensing dossiers do not have the capabilities to evaluate or audit API suppliers • API suppliers can be changed easily• ~70% of APIs in EU manufactured drugs imported from India and China, up from ~10% in the early 1980s*

EU: Lower Standards, Less Oversight

IssueIssue

Page 20: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

What Are the Key Success Factors in Generic Performance in the US?

• Pipeline• Sales & Marketing • API• Breadth or Niches• Speed and Low Costs

Page 21: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Generic Performance: Pipeline

Strong, growing pipeline of products with competitive advantage

• Product selection: build pipeline that supports company Product selection: build pipeline that supports company strategy: blockbuster, niche, specialty strategy: blockbuster, niche, specialty

• Focused execution of R&D + BD&L to build pipeline to Focused execution of R&D + BD&L to build pipeline to deliver on time approval and launch deliver on time approval and launch

• No generic company can sustain major market leadership No generic company can sustain major market leadership without high performing, internal R&D & high caliber without high performing, internal R&D & high caliber sourcing of APIssourcing of APIs

• Attractive pipeline underpins sales of existing productsAttractive pipeline underpins sales of existing products• New entrants, without attractive pipeline, have difficulty selling New entrants, without attractive pipeline, have difficulty selling

older products, irrespective of cost older products, irrespective of cost

Page 22: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Teva

Ivax

Ranbaxy

Par

Dr. Reddy’s

Mylan

Watson

Barr

Andrx

Sandoz/Eon

APP

Impax

Alpharma

140*

57*

52

49

47

44

40

35

~30

27+?

18

14

12

ANDAs Pending

89+*

29

35

29

10

14+?

3

6

7

Value$Billion

37*

12*

10

NumberFTF

R&D

R&D, Cipla, BD&L

R&D

BD&L, R&D-Kali

R&D

R&D

Cipla, BD&L

R&D, BD&L

R&D

Cipla,BD&L,IndiaR&D

R&D, BD&L

R&D, BD&L

BD&L

Source

Source: Company reports, Lehman Brothers estimates updated 9/05, Q Street assessments; *Teva & Ivax merger impact on respective pipelines unknown

US Generic Pipelines

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

Indian Capabilities: Pipeline

• High quality Indian pharma companies have High quality Indian pharma companies have competitive advantages in R&D to build a pipelinecompetitive advantages in R&D to build a pipeline

• Speed and high technical skill, including:Speed and high technical skill, including:• Development of non infringing processesDevelopment of non infringing processes

• Difficult formulationsDifficult formulations

• Lower cost for scientistsLower cost for scientists

• Generic company core competencies are well Generic company core competencies are well developed in leading Indian companiesdeveloped in leading Indian companies

• Rapid, non-infringing development & regulatory submissionRapid, non-infringing development & regulatory submission

• Low cost, equivalent productsLow cost, equivalent products

• On time for launch at patent loss of exclusivity (LOE)On time for launch at patent loss of exclusivity (LOE)

Page 24: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Issues with Outsourced Pipeline

• Are generic companies that license FDF products Are generic companies that license FDF products assured of quality, cGMP compliant, FDA inspected assured of quality, cGMP compliant, FDA inspected API supplies to their FDF supplier?API supplies to their FDF supplier?

• Are generic companies that lack a pipeline auditing Are generic companies that lack a pipeline auditing their suppliers’ API suppliers? Are they technically their suppliers’ API suppliers? Are they technically competent to do so?competent to do so?

• How secure is the supply chain?How secure is the supply chain?

• How secure is compliance?How secure is compliance?

• Can the API suppliers be relied on to use non-infringing Can the API suppliers be relied on to use non-infringing processes? Are the generic FDF buyers checking?processes? Are the generic FDF buyers checking?

Page 25: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Generic Performance: Sales and Marketing

• Strong relationships with local customers & deep Strong relationships with local customers & deep understanding of and ability to serve customer needsunderstanding of and ability to serve customer needs

• Flawless execution of launch & both inbound and Flawless execution of launch & both inbound and outbound supply chain management in a pure outbound supply chain management in a pure generic marketgeneric market

• Large US chainsLarge US chains

• Wholesalers who do not buy from boutiquesWholesalers who do not buy from boutiques

• Experience in consistently serving the sophisticated, Experience in consistently serving the sophisticated, complex needs of large customers is essentialcomplex needs of large customers is essential

• Delays / misses / API issues are unacceptable Delays / misses / API issues are unacceptable

Page 26: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Indian Capabilities: Sales and Marketing

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

Page 27: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Generic Performance: API

• Either internal API or strong sourcing partnerships Either internal API or strong sourcing partnerships

• Non-infringing of both innovator and IP intensive generics Non-infringing of both innovator and IP intensive generics such as Teva, Ranbaxy such as Teva, Ranbaxy

• Ready early, 7-10 years prior to LOEReady early, 7-10 years prior to LOE• Perfect technical package & support for regulatory filings, Perfect technical package & support for regulatory filings,

responses to any deficiency letters in multiple markets responses to any deficiency letters in multiple markets

• High performing, internal API is a competitive advantage High performing, internal API is a competitive advantage in circumventing or challenging patents, being first to in circumventing or challenging patents, being first to file/first to launch, solving complex technical problemsfile/first to launch, solving complex technical problems

• Internal API lowers costs Internal API lowers costs

• ““If you need milk, you do not have to buy the cow. If you If you need milk, you do not have to buy the cow. If you need a lot of milk, you can buy a cow, but a professional need a lot of milk, you can buy a cow, but a professional farmer must manage it, not a pharmacist”farmer must manage it, not a pharmacist”

Page 28: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Indian Capabilities: API

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

Page 29: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Chinese Capabilities: API

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

Page 30: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

EU Capabilities: API

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

Page 31: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Generic Performance: Low Costs

• Assumed part of the generic business modelAssumed part of the generic business model

• Less important and overrated as a competitive Less important and overrated as a competitive advantageadvantage

• Companies with high costs cannot compete but Companies with high costs cannot compete but companies with lower costs cannot compete on lower companies with lower costs cannot compete on lower costs alonecosts alone

Page 32: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Chinese Capabilities: Low Costs

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

Page 33: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Generics: Speed is Essential

•Within 4 weeks, GSK had lost 65% of total Paxil scripts

Generic price at 40-50% for the 1st 40 weeks

At generic entry, Paxil was $2.3 billion (US)

•Even after deep discounts, a MASSIVE upside for generics

It’s Better to be First than it is to be Better

• Rapid Rapid generic generic price price erosion erosion +180 days+180 days

• May lead May lead to sourcing to sourcing shortcuts in shortcuts in rush to be rush to be FTF; FTF; requires requires fixing prior fixing prior to launchto launch

Slide elements courtesy of Mike Kopp, CardinalHealth

Page 34: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Typical Generic Development Cycle: SOD

BrandBrand

ProducProductt

File DMFFile DMFFileFile

ANDAANDA

FileFilePatentPatentCertCert

Validation &Validation &ApprovalApprovalPrepPrep

ANDAANDAApprovalApproval

PatentPatentReviewReview

SourcingSourcingPre-FormPre-Form

Form &Form &Pilot BioPilot Bio

StabilityStabilityPK StudyPK Study

PortfolioPortfolioReviewReview

9 mo.9 mo. 2 mo.2 mo. 6-12 mo.6-12 mo. 12 mo.12 mo. 5 mo.5 mo. 12-18 mo.12-18 mo.

Outside CounselOutside Counsel

API SuppliersAPI Suppliers

Business DevBusiness Dev

KeyKey

InfluencesInfluences

API SuppliersAPI Suppliers

• API suppliers wield significant power…Early

API selection 5-7 years before loss of exclusivity

API supplier critical to potential FTF/Para IV

Sufficient quantities for development

API SuppliersAPI Suppliers

CROCRO

Slide courtesy of Mike Kopp, CardinalHealth

Page 35: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Increased Partnership, Especially with India

• Maximizes competitive advantage of US/EU company’s Maximizes competitive advantage of US/EU company’s sales, supply chain management & distributionsales, supply chain management & distribution

• Maximizes Indian competitive advantage in API R&D, Maximizes Indian competitive advantage in API R&D, non-infringing process development and lost cost non-infringing process development and lost cost manufacturingmanufacturing

• Are western generic companies with poor R&D licensing Are western generic companies with poor R&D licensing FDF from India adding value for their customers?FDF from India adding value for their customers?

• Are they increasing regulatory risk?Are they increasing regulatory risk?

Page 36: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

In Generic Pharma, Size Matters

• Large, sophisticated companies with R&D and API have advantages in delivering the pipelines and serving large chains and wholesalers

• Increasing M&A by leading Indian and other overseas companies positioning themselves for the US and EU markets

• Licensing and M&A in attempt to compete with Teva

• Broad product line and sophisticated supply chain management and a track record required to sell to major chains and wholesalers in the US: mandates performance on all KSFs

More M&A, but new entrants more likely to take their places in the supply chain Tide ShiftingTide Shifting

Page 37: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

•Target blockbusters at patent-expiryLarge volume SODs, easy to source

•Internal R&D

•Slow brand market/profit erosion over 12-24 mo

•Most API sourced from EuropeSpain, Italy, Hungary, Germany

•Indian & Chinese API considered low cost / dubious quality

•Most generic launches at patent-exp

Old Model

Brand & Generic Business Models Changing

•Differentiated product strategiesIncreased focus on niche specialties

•Trend for BD&L to fill in/expand pipeline short term, especially with FDF

•Very rapid brand market & profit erosion

•Generic expansion into brands via NCE/NME development & licensing

•Consolidation and dominance by largest companies increasing

US: Teva, Mylan, Watson, Sandoz

•API space dominated by Indian/Chinese

•Significant % of Paragraph IV filings

Today’s Model

Sources: Q Street Advisors

Page 38: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Changes Impacting API Initiatives

• Both brand and generic sectors changing API sourcing

• Increasing sourcing from India & moves into China by companies that are new to global sourcing and may or may not have regulatory and quality capabilities to insure compliance and quality

• Many new API manufactures lack a track record of cGMP compliance

• More APIs from India, China. More FDF imports, especially from India. Customers exploring going direct.

Where are the opportunities for EU mfrs?ResponseResponse

Page 39: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

EU API Manufacturer Opportunities

• Alliances with generics companies that lack internal API • Become their R&D pipeline developer • Position for future acquisition by a generic partner

• Independent partner of choice• APIs may become trickier to source as quality Indian companies forward integrate, while still early for China • Become an independent alternative to Teva & Sandoz APIs for their generic competitors

• Niche products for major generics with internal API who cannot make 100% of their needs

• Alliance with Indian manufacturer with high caliber, lower cost scientific talent & development capabilities

Page 40: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Generic Sector Predictions

• Long term growth prospects vary among Western & Long term growth prospects vary among Western & Indian generic companies, based on R&D pipelinesIndian generic companies, based on R&D pipelines

• Companies with fewer capabilities for building pipeline Companies with fewer capabilities for building pipeline • More likely to need M&A, including acquisitions of high caliber More likely to need M&A, including acquisitions of high caliber

API mfrs with pipelines, low cost scientific talent, strong API mfrs with pipelines, low cost scientific talent, strong regulatory capabilities & non infringing process development regulatory capabilities & non infringing process development

• Companies lacking internal API must form alliances with Companies lacking internal API must form alliances with strong API mfrs or license in FDF/dossiersstrong API mfrs or license in FDF/dossiers

• Alliances must be based on information sharing and trust and Alliances must be based on information sharing and trust and provide access to early, low cost development capabilities provide access to early, low cost development capabilities

• API manufacturers without both tight customer and API manufacturers without both tight customer and India/China supply alliances, attractive forward pipelines India/China supply alliances, attractive forward pipelines and access to low cost scientific talent will not thriveand access to low cost scientific talent will not thrive

Page 41: Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

Thank you.

Jean HoffmanPresidentQ Street Advisors, Inc.120 Exchange StreetPortland, ME 04101 USAtel.: 207-828-0880Fax: [email protected]