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Vital SignsEY perspectives on life sciences

Page 2 Vital Signs: EY perspectives on life sciences

Today’s speakers

Ellen LickingSenior Analyst, Global Life Sciences Sector

Andrew FormanGlobal Life Sciences Transaction Advisory Services Sector Resident

Andy LorenzettiTAS Divestitures and IntegrationPrincipal, Ernst & Young LLP

David WomelsdorfGlobal Client Service Partner andPrincipal, Ernst & Young LLP


Pricier targets

Increased execution risk for dealsRepurchase shares or reinvest in the business?

Slowdown in emerging markets

Pricing pressures

Portfolio optimization

Maintaining revenue growth and operating margins Unsustainable R&D costs

Integration challengesInvestors are prepared to take a more aggressive stance. One significant managerial misstep opens the door to activism.

Business pressures increased the importance of getting the capital agenda right


Activist investors shake up the status quo – are biopharma companies prepared?

2010 2011 2012 2013 2014

74

108

132143

136

Source: EY, FactSet’s Shark Repellent and Capital IQ.Number of activist campaigns nearly doubled between 2010 and 2013-14

Number of activist campaigns initiated across all industries


Activists target larger biopharmas over time

Source: EY, Capital IQ, FactSet’s SharkRepellent and company filings. Includes only companies with market cap > US$1b.

A third of activist campaignsare driven by operational or business portfolio concerns.

M

arke

t cap

italiz

atio

n ($

US

b)


The drivers of biopharma value

The R&D cycle

Capital structure

Business portfolioand M&A

2

3 4

Operational performance

1

Page 7

1. Operational performance

Vital signs: EY perspectives on life sciences

Key considerations:

► Revenue growth

► Operating margins

► Shareholder return

► Other: SG&A, effective tax rates

Simply put, “good enough” operational performance is less relevant if shareholders believe more could be done.


2013 2014 2015E 2016E0

100

200

300

400

500

600

700

800

Big pharma Biotech Specialty Generics

Sal

es in

US

$b

-1%

+18%+15%+14%

+14%

-0.6%

+16%

+34%

-0.6%

+10%+12%

+15%

+3%+10%

+11%

+4%

Revenue growth: big pharma underperforms relative to biotech, specialty pharma peers ► Big pharma: growth expected to revive in 2016► Specialty pharma/generics: growth via M&A► Biotech: growth hard to maintain organically

Source: EY, Capital IQ and company filings.


Operating margins: big pharma rebounds but still lags biotech

Generics companies have been included in specialty pharma for this comparison.Source: EY and Capital IQ

0%

10%

20%

30%

40%

50%

60%

Com

pany

repo

rted

EBIT

mar

gins

* Ex-Gilead biotech margins: 41% Q1 2015, 34% 2014

Big pharma Biotech* Specialty pharma

(incl. generics)

2012 2013 2014 Q1 2015


Total shareholder return as a performance measure: bottom tier at greater risk of activism

Source: EY and Capital IQ. Company financials were calculated through 31 December 2014. See ey.com/vitalsigns for full analysis.

► 31 biopharma companies in data set, including four that were targets of activism in 2013 or 2014


2. The R&D cycle

Key considerations:

► R&D as percentage of sales

► Estimated ROIC for pipeline

► Use of milestone or gating mechanisms to improve R&D decisions

The biopharmas that drive the greatest value and productivity from their R&D organizations are the ones that have the most options with respect to capital allocation.▬ Paul Clancy, CFO, Biogen


Nearly 200 new drugs are forecasted to be launched in the next five years …

… continuing a second wave of innovation similar to levels seen in the mid-2000s.

Source: “Global Outlook for Medicines Through 2018,” IMS Health and FDA’s Center for Drug Evaluation and Research.

2006 2007 2008 2009 2010 2011 2012 2013 2014

22

18

2426

21

30

39

27

41

Number of NME approvals (FDA)

Biopharma pipeline renaissance: analysts project ~ 25% increase in approvals


3. Capital structure

Key considerations:

►Current available cash balance

►Leverage

►Excess working capital

Are management teams pulling this lever when it is most likely to create the greatest value for shareholders – or to get a short-term “pop” in earnings?


Big pharmas return cash to shareholders; biotechs, specialty pharmas focus on M&A

-120

-100

-80

-60

-40

-20

0

20

40

60

80

100

120

US$

b

20142013201220112010200920082007 -40

-20

0

20

40

60

80

100

120

140

US$

b

2007 2008 2009 2010 2011 2012 2013 2014

Source: EY, Capital IQ and company financial data.

Big pharma Biotech and specialty pharma

M&A Dividends and buybacks


Working capital key to development of more cost-effective, less risky business models

► Big pharma companies have as much as US$50billion in excess working capital (WC)

► Big pharma’s 2014 WC performance stronger than in 2007, but …

► … WC varies widely overall along the metrics we track (e.g., DSO, DIO, DPO and C2C)

► Individual opportunities for improvement, especially by adopting practices of leading WC performers in other industries


4. Business portfolio and M&A

Key considerations:

► Is there critical mass in a business or therapeutic area?

► Perform sum-of-the-parts analyses

Financial data is not generally captured in ways that make it easy to assess the business implications of different kinds of carve-outs.


Robust M&A market continues in 2015 with strong prospects for second half

0

50000

100000

150000

200000

250000

300000

350000Big pharma Big biotech Specialty PharmaMedtech 2015 Pipeline (2H)

Dea

l val

ue ($

US

b)

Source: EY, Datamonitor, Company Reports. 2015 data thru 4 June 2015.

. 2010 2011 2012 2013 2014 2015

Specialty pharma 2015 pipeline (2H)


As companies focus on core priorities, more emphasis on divestitures

2010 2011 2012 2013 2014 20150

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

0

2

4

6

8

10

12

14

16

Total deal value Number of divestitures

Tota

l dea

l val

ue (U

S$m

)

Num

ber o

f div

estit

ures

Source: EY, ThomsonOne and Informa’s Strategic Transactions database.

2015 data analyzed through 30 June. Only divestitures valued at > US$500 billion included .


Creating long-term value


At each stage of the life cycle, new opportunities and challenges

► Innovative science; no clear path to profitability

► Concerns:► Financial runway► Business

development► Proof-of-concept

Emergent► Growing rapidly;

profitable or likely to be soon

► Concerns:► Expanding operations ► Meeting changing

expectations of stakeholders

Growth► Measurable profits, due

to marketed products► Concerns:

► Maintaining growth► Balancing R&D,

SG&A and other expenses with long-term growth

Mature


Value creation comes from holistic deployment of capital agenda

The R&D cycle

Capital structure

Business portfolio and M&A

2

3 4

Operational performance

1


Summary: Build these 5 steps into strategic planning initiatives

Review cost structures to determine if they are optimized.

Operational performance1

Use milestone and “gating” mechanisms to improve R&D investment decisions.

R&D2

Are capital allocation decisions based on the right metrics? Do they enable optimal use of the balance sheet?

Capital structure3

Perform virtual carve-outs to assess the value of potential divestment opportunities.

Business portfolio and M&A4

Communicate relentlessly with investors about strategic objectives.

Communications strategy5


Additional information

ey.com/vitalsignshttp://ow.ly/NTufL

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