Transcript No Slide Title

Merrill Lynch Biotechnology
Eric J. Ende, M.D.
(212) 449-1915
[email protected]
Refer to Important Analyst
Disclosures Beginning on Page 21
Investors should assume that Merrill
Lynch is seeking or will seek
investment banking or other business
relationships with the companies in
this report.
Agenda

Biotech Product Revenues Accelerating

Biotechnology Medicines in Development - By Therapeutic Category

Biotechnology Medicines in Development - By Product Category

Potential Blockbuster Upcoming Drug Approvals

Sales Estimates for Top Selling Drugs

Product Revenue Trends

YTD Biotech Performance

Biotech Drivers

Industry Investment Thesis
Biotech Product Revenues Accelerating
Biotechnology is a young industry that was virtually nonexistent prior to 1980.
By 1990 biotech revenues had reached $3B, climbing to $8B in 1992, $18B in 2000
and $35B in 2001. We estimate that product revenues for the industry will total
approximately $47B in 2005.
Biotech Medicines in Development - By Therapeutic Category

AIDS/HIV/Related Conditions
21

Autoimmune Disorders
26

Blood Disorders

Cancer/Related Conditions

Diabetes/Related Conditions
10

Digestive Disorders
17

Eye Conditions

Genetic Disorders
10

Growth Disorders
4

Heart Disease
15

Infectious Disease
47

Infertility

Neurologic Disorders
22

Respiratory Disorders
19

Skin Disorder
15

Transplantation

Other
3

There are 371
biotechnology drugs in
development by 144
companies and the
National Cancer Institute
for nearly 200 diseases

Currently 95+
biotechnology drugs
approved
178
2
2
6
28
Biotech Medicines in Development - By Product Category

Angiogenesis Inhibitors
6

Interferons
11

Antisense
9

Interleukins
10

Cellular Therapy
13

Monoclonal Antibodies
75

Colony Stimulating Factors
2

Recombinant Human Proteins
18

Gene Therapy
16

Recombinant Soluble Receptors
4

Growth Factors
9

Signaling
7

Human Growth Hormones
3

Vaccines
98

Immune-based Therapy
6

Others
84
Potential Blockbuster Upcoming Drug Approvals
Drug
Indication
Expected Approval
Cialis
Erbitux
Avastin
Tarceva
Macugen
Indiplon
Erectile Dysfunction
Colorectal Cancer
Colorectal Cancer
Non Small Cell Lung Cancer
Age Related Macular Degeneration
Insomnia
YE 2003
Early 2004
1Q 2004
2H 2004
Early 2005
1H 2005
Antegren
Preos
Lucentis
Multiple Sclerosis
Osteoporosis
Age Related Macular Degeneration
2H 2005
2H 2005
1H 2006
Sales Estimates for Top Selling Drugs of Large Cap Biotechs
Company Drug
Indication 2003E
2004E
AMGN
Aranesp/Epogen
Anemia
$3.85 B
$4.67 B
AMGN
Neulasta/Neupogen Neutropenia
$2.53 B
$2.99 B
AMGN
Enbrel
RA
$1.21 B
$1.65 B
BGEN
Avonex
MS
$1.13 B
$1.17 B
DNA/IDPH
Rituxan
NHL
$1.52 B
$1.88 B
GILD
Viread
HIV
$586 M
$804 M
MEDI/ABT
Syangis
RSV
$866 M
$ 968 M
Source: Merrill Lynch Estimates
Product Revenue Trends
Large Cap Biotech revenues expected to double over the next 5 years
YTD Biotech Performance

NBI vs. NASDAQ: 45.0% vs. 33.8%

Large Caps: 48.5%

Mid Caps: 48.3%

Small Caps: 42.0%

Therapeutics: 49.9%

Genomics/Tools: 28.3%

Bottom-Line: Investors are focused on product driven
companies
Biotech Drivers

Clinical Data - New Drug Classes

FDA Issues - More drug approvals

Product Launches

Legal Issues - Patents

Reimbursement

Money Flows - Supply & Demand

Manufacturing
Industry Investment Thesis

- STRONG FUNDAMENTALS + STRONG MONEY FLOW = BTK MOVING HIGHER

- FDA BECOMING MORE ACCOMMODATING: A more risk-tolerant FDA under the leadership of Mark
McClellan has resulted in faster approvals, which are occurring with greater frequency. Following 5
product approvals thus far in 2003, we expect another 5 approvals.

- AVASTIN DATA IMPROVES INVESTOR SENTIMENT: Positive data for Avastin, which improves survival
in front-line metastatic colorectal cancer patients, has helped to validate biotechnology and has improved
investor sentiment.

- DNA & AMGN FIRING ON ALL CYLINDERS: For the first time in many years, both Amgen and
Genentech, the two largest and highest profile biotech companies, are performing well with strong
sustainable growth and upside to estimates.

- MONEY FLOW POSITIVE: For the first time in 15 months, money flow into Healthcare/Biotech mutual
funds turned positive in April.

- VALUATIONS STILL WITHIN NORMAL RANGE: Biotechs tend to trade between a P/E of 25x and 50x
and a PEG of 1.2x and 2.0x. Biotech stock valuations are still below the high end of the range.

- FOCUS ON COMPANIES WITH ACCELERATING FUNDAMENTALS: Focus on companies that
generate strong and sustainable earnings growth of at least 20%, and those that should be able to surprise
to the upside in quarterly revenues and market opportunities for its drugs. Also, focus on companies that
are not yet profitable but should become earnings/product-driven in 12 months.
Merrill Lynch Pharmacy Benefit Managers
Tom Gallucci
(212) 449-5711
[email protected]
Specialty Drug Costs - Historically Not A Focus...



In the Past, Payors Have Typically Not Focused on Specialty Costs
Associated with Chronically-ill Patients

Patients Using Specialty Drugs = Just 1% of Patient Population

Specialty Drug Costs = Just 11% of Total Drug Spend
Managing Specialty Drug Costs Can Initially Be Difficult

Many Specialty Drugs Have Little Competition and Orphan Status
in the U.S Market

Specialty-Related Therapies Can Be Complex
Roughly 70% of Specialty Drug Claims are Covered by Medical
Benefits, Rather Than Their Drug Benefit

Typically Such Claims are Paper-based, Which is Inefficient and
Further Limits the Potential to Manage Related Costs
But Payors Increasingly Seeking to Control Costs

Overall Drug Spend Remains High, And Payors Continue to Explore
Opportunities to Limit the Trend

Specialty Drugs Are Expensive by Nature & Growing Rapidly



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
Average Therapy Costs Between $8,000 and $300,000 Annually
The Average Specialty Patient Spends About $70K Annually
Specialty Drug Costs are Growing in Excess of 20% Annually, and
Represent a Growing Portion of Total Drug Spend
Given the Pipeline of Biotech Drugs, Rapid Growth of the Specialty
Market is Likely to Continue for the Foreseeable Future
As Specialty Costs Have Not Been Managed Historically, They Are
Naturally Becoming a Focus for New Cost Savings by Payors
Specialty Drugs Are Complex…

Specialty Patients/Drugs Are Unique
 Patients are Typically Chronic Patients, May Require Therapy for a
Lifetime
 Injectables can be Unpleasant, Difficult and Time-Consuming to
Administer;
 Products are Typically Unstable, Requiring Temperature Control
and Reconstitution in Many Cases

Side Effects Often Lead to Poor Patient Compliance


40% of Chronic Patients Treated with Injectables will Quit within
First 18 Months of Therapy

30% of Patients on Therapy Miss 25% of Injections
Reimbursement Can Be Especially Complicated

Coverage is Mixed Between Medical and Drug Benefits
And Patients Often Require Additional Services

Specialty-Related Diseases Are Often Complex and Patients Have
Non-Traditional Needs
 Clinical Expertise in a Variety of Unique Disease States
 Special Handling and Delivery Systems for Distribution to both
Physician and Patient Setting
 Pharmaceutical Care Management

Patient Education and Ongoing Support
The Current System Is Inadequate...

Retail Stores not Well Equipped To Handle Specialty Drugs;



Patient Require More Time/Attention Than Most Retail Pharmacists
can Provide Given the Complexity of Administering Drugs, and
Frequent Side Effects
Drugs Often Require Special Handling
Claims System Mostly Paper-Based, Versuss Electronic For Traditional
Drugs
 Inefficient, More Costly
 Little Tracking/Control or Control
PBMs Are Well-Positioned To Manage Specialty

Increased Involvement With Specialty Drugs Represents a Natural
Evolution of PBM Involvement Along the Healthcare Continuum

PBMs Can Apply Traditional Cost Management Techniques to Specialty


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Negotiate Better Drug Pricing Through Increased Buying Power
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Electronic Claims, Tracking
PBMs Offer Additional Value-Added Services

Clinical Programs

Specialty Pharmacy

Disease Management
PBM’s Offer Expertise Across a Broad Range of Disease States such
as Hemophilia, Growth Hormone, Multiple Sclerosis, Hepatitis C, RSV,
Pulmonary Hypertension, Gaucher Disease, and Fabry Disease
PBM Tools Drive Significant Savings, Better Care

PBM Specialty Network Savings Can Average 15% off AWP for
Products Covered Under the Medical Benefit

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PBMs Drive Market Share, Direct Patients to Exclusive Providers
Administrative Savings Range Between 2-4%

Eliminates Paper Claims

No Retail Dispensing Fees
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No Supply Charges and Shipping Costs
Improved Quality of Care

Better Compliance With Drug Administration

Fewer Medical Complications, Driving Better Health and Lower
Medical Costs
PBM Specialty Programs Offer Broad Benefits

Payors


Substantial Cost Savings
Healthier, More Satisfied Plan Members

Patients
 Comprehensive Screening on Drug-to-Drug Interactions Helps
Improve Patient Safety
 Clinical and Reimbursement Support
 Improved Patient Outcomes Through Better Compliance

Manufacturers



PBM-based Pharmacy Provides One Stop Shop For All Drugs
Better Data Reporting Analysis on Specialty Products
Potential Market Share Gains

Important Disclosures

Investment Rating Distribution: Health Care Group (as of 30 September 2003)

Coverage Universe
Percent
Count
Percent
Inv. Banking Relationships*
Count

Buy
80
46.24%
Buy
25
31.25%

Neutral
82
47.40%
Neutral
15
18.29%

Sell
11
6.36%
Sell
1
9.09%

Investment Rating Distribution: Global Group (as of 30 September 2003)

Coverage Universe
Percent
Count
Percent
Inv. Banking Relationships*
Count

Buy
962
40.56%
Buy
328
34.10%

Neutral
1206
50.84%
Neutral
318
26.37%

Sell
204
8.60%
Sell
44
21.57%

* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.

OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10%
or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High
Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 same/lower (dividend not considered to be secure); and 9 - pays no cash dividend.

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from investment banking revenues.

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
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