1. Threats and Opportunities for the Generic Industry KATE KUHRT JUNE 2006

2. AT FIRST GLANCE, MANY OPPORTUNITIES Increasing demand for low-cost therapies –Aging population –Consumers becoming more cost sensitive –Increased generic substitution –Government involvement US Medicare Drug reimbursement Reference pricing in Europe Source: United Nations, DESA, Population Division Proportion of Population Aged 60 or Over

3. GENERIC OPPORTUNITIES IN THE U.S. Products with $100B in branded drug sales are coming off patent in the next 7 years Patent challenges by generic companies Source: Newport Strategies’ Horizon Global system

4. A CLOSER LOOK… Rapid price erosion in the U.S. and UK Diminishing margins on both dose and API sales New regulations in Germany (AVWG) Settlements between generics and brand companies are delaying generic entry in the U.S. ANDA approval backlog in the U.S. Fewer new launches by innovators over the past years will translate into fewer opportunities for generics down the road 5-10% of $100 billion over 7 years, divided among many players and products, does not necessarily translate into a lot of money for every generic company

5. DOWNWARD PRESSURE ON DOSE PRICES Demand –Purchasers focus on price –Past relationships matter less –Reverse auctions Supply –Generic filings and approvals at all- time high –A number of new entrants, many from India, often with access to low- cost APIs –Overcapacity in manufacturing –Focus on market share rather than bottom line –Authorized generics in the U.S. Source: Newport Strategies’ Horizon Global system U.S. ANDA Approvals

6. DOWNWARD PRESSURE ON API PRICES Demand –Dose manufacturers focus on price –Past relationships matter less –Willingness to take the risk and go with less-known API sources Supply –Overcapacity in manufacturing –Record number of DMF filings –Availability of low-cost APIs from India and China (Too?) many plants FDA approved Many companies hold COS Source: Newport Strategies’ Horizon Global system Number of U.S. DMFs

7. COPING STRATEGIES Consolidation Geographic diversification Backward integration into API Sourcing from India, China, and other low-cost countries Alliances with companies in low-cost countries Moving manufacturing to low-cost countries Focus on niche products

8. COPING STRATEGIES: CONSOLIDATION

9. Likely to see a period of consolidation in pursuit of –Top-line growth –Opportunities in new markets –Synergies Result: Industry will likely be dominated by a handful of global players plus many small players Barr’s rumored $2.1B acquisition of Pliva –Biogenerics 2005 deal to develop a generic version of Amgen Inc.'s Neupogen –New dose forms –Presence in emerging markets –API COPING STRATEGIES: CONSOLIDATION

10. COPING STRATEGIES: GEOGRAPHIC DIVERSIFICATION Opportunities in Europe –Counterweight to the U.S. generics market DRL-Betapharm, Matrix-Docpharma, Ranbaxy-Terapia –Competition among Indian companies driving up prices of companies –Commoditization of German generic market? Japan –Merck KgaA in Japan since 1998 –In November 2005, Ranbaxy increased equity stake in JV with Nippon from 10% to 50% –In March 2006, Teva applied for approval to sell drugs in the Japanese market –Dr. Reddy's considering setting up an office in Tokyo or Osaka by the end of next March

11. COPING STRATEGIES: BACKWARD INTEGRATION INTO API Recent example: Watson - Sekhsaria Pros –More control over cost and access to API Decreasing number of established API manufacturers still independent –Different parts of the value chain may make money in different products Cons –No one plant can make all APIs required by a typical generic –Making just enough for captive use often not economical –Other dose companies wary of buying API from a competitor

12. COPING STRATEGIES: MOVING MANUFACTURING AND R&D TO LOWER- COST COUNTRIES Applies to both API and dose manufacturing Recent example: Watson –Acquired from DRL a small solid oral dose plant in Goa –Increased investment in an FDA-approved Chinese/Taiwanese API manufacturer Sandoz – multiple units in India Teva – scientists in Faridabad, acquired Regent Drugs (JK) Apotex – manufacturing and R&D facilities in Bangalore Ratiopharm – R&D center in Goa Stada –“Complementation of existing Group-owned production sites in GER, NL, and IRL by production sites in “Low Cost Countries” Russia, Vietnam (50:50 JV) and China (currently only local orientation)” (Stada Corporate Presentation 2006)

13. COPING STRATEGIES: ALLIANCES WITH INDIAN COMPANIES Zydus Cadila –Distribution agreement with Mallinckrodt –50/50 JV with Mayne for cytotoxic dose and APIs Glenmark –Development and supply agreement with KV for 8 ANDAs –Agreement with Invagen for 7 products –Deal with Konec for nitroglycerin and with Interpharm for naproxen Lupin –Injectable ceph generics with Baxter –Oral ceph generics with Watson

14. COPING STRATEGIES: SOURCING FROM INDIA & CHINA Many highly qualified API sources in India and China India –68 FDA-inspected API manufacturing sites –33 FDA inspections in FY2005 (20 API, 7 Dose, 3 API/Dose, 3 Labs) 22 NAI (no action), 11 VAI (voluntary action), 0 OAI (official action) China –69 FDA-inspected API manufacturing sites –15 FDA inspections in FY2005 (14 API, 1 repacker) 6 NAI, 9 VAI, 0 OAI Are FDA inspections in India and China less stringent?

15. Generic companies’ willingness to use second- or third-tier API manufacturers is particularly damaging to Italian API manufacturers COPING STRATEGIES: SOURCING FROM INDIA & CHINA Source: Newport Strategies Horizon Global ™

16. COPING STRATEGIES: FOCUS ON NICHE PRODUCTS Products with small sales no longer count as “niche” –Even $20M products attracting a lot of interest Margins in difficult formulations likely to remain higher –Inhaled products, certain injectables Biogenerics –Teva, Sandoz, Pliva

17. FUTURE Will focus on price backfire? Is the number of suppliers going to decrease enough to give the remaining players more negotiating power? What will be the impact of generic entries from China?

18. THANK YOU! Kate Kuhrt Director, Generics and API Intelligence Thomson Reuters 215 Commercial Street Portland, Maine 04101 USA + 1 (207) 871-9700 x26 kate.kuhrt@thomsonreuters.com