Challenges

facing Major Pharma industries

RISING COST OF R&D Over $280 billion spent on R&D over last decade
30%

25%

20%

R&D as % of sales

15%

10%

5%

0%

Source: Company data, Goldman Sachs Research estimates

DIMINISHING NEW PRODUCT OUTPUT New product launches have been disappointing
400 350 300 250 200 150 100 50 Q1 Q2
Multaq Effient Onglyza Cymbalta Humira

Zyprexa Januvia Vytorin

Sales ($'000)

Simponi Savella

Bystolic

Q3

Q4 Q5 Q6 Quarterly sales post launch

Zyprexa Cymbalta Humira

Q7

Q8

Vytorin
Source: Company data

Januvia

Simponi

Source: FactSet

Onglyza

Effient

Multaq

Savella

Bystolic

REGULATORY HURDLES GETTING HIGHER

FDA NME approvals

60

50

40

30

20

10

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004* 2005* 2006* 2007* 2008* 2009*
Source: FDA
* *Beginning in 2004, these figures include new BLAs for therapeutic biologic products transferred from CBER to CDER

DAUNTING PATENT CLIFF

2010-2014: $92 billion in sales coming off patent (1/3 of total)

30 10.0%

25

27

26

8.0%

Key product s in expiry years

% of prior year's sales

2010 Aricept, Flom ax, Taxotere Lipitor, Avair Diskus, 2011 Plavix, Zyprexa, Levaquin Seroquel, Singulair, Actos, 2012 Lexapro, Diovan, Geodon 2013 Oxycontin, Aciphex Nexium , Cym balta, 2014 Celebrex, Copaxone

Sales ($ billion)

20

19
15

19

6.0%

4.0% 10

12 8

2.0%

0 2009
Source: IMS Health

0.0% 2010 2011 2012 2013 2014

DECLINING R&D PRODUCTIVITY: STATUS QUO OR INFLECTION POINT?

BOOM PERIOD
30,000
Large Cap Pharma R&D Spend ($'000)
Poor capital allocation

LOST DECADE OF INNOVATION

WILL PHARMA TAKE THE RED PILL OR BLUE PILL?

30,000 25,000 20,000
Net Innovation ($'000)

25,000 20,000 15,000 10,000 5,000 1/ 95 11 /9 5 9/ 96 7/ 97 5/ 98 3/ 99 1/ 0 11 0 /0 0 9/ 01 7/ 02 5/ 03 3/ 04 1/ 05 11 /0 5 9/ 06 7/ 07 5/ 08 3/ 09 1/ 10 11 /1 0 9/ 11 7/ 12 5/ 13 3/ 14 1/ 15 11 /1 5

15,000
Reallocation of capital?

10,000 5,000 (5,000) (10,000) (15,000) (20,000)

HIGH UNMET NEEDS TARGETED

Net innovation

Lrg Cap Pharma

Factor Xas Alzheimers HDL Hepatitis C Vaccines Oncology Obesity Diabetes

R&D Spend
Note: Net innovation in a given year represents peak life cycle sales for each drug launched that year, less prior year sales for each drug expiring that year. Source: Goldman Sachs Research, FactSet, company data

HEALTHCARE REFORM INCREASED GOVERNMENT INTERVENTION

US

government now pays for 50% of the $2.5 trillion in national health spending
Government share of national health spending (NHE) Total versus pharmaceutical spending, 1965-2019E
60% 50% 40%

30%
20% 10% 0%

1965

1968

1971

1977

1980

1983

1986

1989

1992

1995

1998

2004

2007

2010

2016

Total spending
Source: CMS National Health Expenditure (NHE), historical and projected.

Pharma spending

2019

1974

2001

2013

HEALTHCARE REFORM INCREASED GOVERNMENT INTERVENTION

Worsening

state of the European economies brings incremental pricing

20%
German Un ification

pressure 7.0%
6.0%

18% 16%

Primary deficit

4.0%

12% 10%

3.0%

8% 6% 4%

2.0%

1.0% 2% 0.0% Primary deficit Healthcare spending growth 0%

Germany as an example of how government deficits lead to decline in healthcare spending growth

Remains a very fluid situation that is difficult to assess but represents a real headwind Cited by several management teams during 2Q earnings calls, at least in 2010 and 2011.Reimbursement cuts could be magnified by reference pricing,parallel importation and increased generic market share Source: Datastream, Goldman Sachs Research estimates.

Healthcare spending growth

5.0%

14%