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Vital Signs
EY perspectives on life sciences

Vital Signs: EY perspectives on life sciences
Today’s speakers
Ellen Licking
Senior Analyst, Global Life Sciences Sector
Andrew Forman
Global Life Sciences Transaction Advisory
Services Sector Resident
Andy Lorenzetti
TAS Divestitures and Integration
Principal, Ernst & Young LLP
David Womelsdorf
Global Client Service Partner and
Principal, Ernst & Young LLP

Pricier targets
Increased execution risk for deals
Repurchase 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 challenges
Investors 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?
74
108
132
143
136
2010 2011 2012 2013 2014
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$1b.
A third of activist
campaigns
are driven by
operational or
business portfolio
concerns.
Marketcapitalization($USb)

The drivers of biopharma value
The R&D cycle
Capital
structure
Business portfolio
and M&A
2
3 4
Operational
performance
1

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.

0
100
200
300
400
500
600
700
800
2013 2014 2015E 2016E
SalesinUS$b
Big pharma Biotech Specialty Generics
-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%
CompanyreportedEBITmargins
* 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.
22
18
24
26
21
30
39
27
41
2006 2007 2008 2009 2010 2011 2012 2013 2014
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
50
100
150
200
250
300
350
Dealvalue($USb)
Big pharma Big biotech Specialty Pharma Medtech 2015 Pipeline (2H)
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
0
2
4
6
8
10
12
14
16
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2010 2011 2012 2013 2014 2015
Numberofdivestitures
Totaldealvalue(US$m)
Total deal value Number of divestitures
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 performance
1
Use milestone and “gating” mechanisms to improve R&D investment decisions.
R&D
2
Are capital allocation decisions based on the right metrics? Do they enable optimal use
of the balance sheet?
Capital structure
3
Perform virtual carve-outs to assess the value of potential divestment opportunities.
Business portfolio and M&A
4
Communicate relentlessly with investors about strategic objectives.
Communications strategy
5

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

EY | Assurance | Tax | Transactions | Advisory
About EY
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Ernst & Young Global Limited, a UK company limited
by guarantee, does not provide services to clients. For
more information about our organization, please visit
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Ernst & Young LLP is a client-serving member firm of
Ernst & Young Global Limited operating in the US.
© 2015 Ernst & Young LLP.
All Rights Reserved.
1509-1697453
EYG No. FN0234
ED none
ey.com/vitalsigns
ey.com/lifesciences

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