Accenture Life Sciences Rethink Reshape Restructure...for better patient outcomes

Affordability and Value— The Economics of Pharma’s New Science High Performers in pharma today are all about new science. But achieving high performance will also require adapting operating models to better deliver patient and economic value. Accenture Research Note: Biopharmaceutical High Performance Business Study

$50B

+12%

45 NMEs

In many ways, the pharmaceutical industry is buoyant. Consider: In 2015 in the United States, 45 New Molecular Entities (NMEs) were approved by the Food and Drug Administration’s Center for Drug Evaluation and Research (FDA CDER)—the highest annual total since 1996. Globally, NME approvals (all drugs, vaccines and blood proteins) stood at 46, down from 63 in 2014, but significantly ahead of the average for the last decade.1 In fact, our High Performance Business (HPB) study of the biopharmaceutical industry published last year saw the whole peer group2 return to growth for the first time in four years. This growth is now forecast to accelerate in 2016 and hold over the next five years.3 What’s more, after four years of falling margins, the peer group has also driven modest operating margin improvements in the last year.4 Set against this healthy picture, however, is a stark reality: The pressure is rising to make therapeutics more affordable, and it is also becoming increasingly difficult to get new therapeutics more widely accepted in the market. Analysts are ascribing high sales growth forecasts to the wave of recent and upcoming NME launches, but developed pharmaceutical markets are anticipating only modest budgetary increases, creating “the affordability gap” between the cost of new products coming on the market and the money available to pay for them. Savings from generics and biosimilars will help fund new products to a degree, but we’re already seeing payers responding with more aggressive price negotiations and more selective reimbursement of new drug

launches. Some NMEs approvals are now taking longer than had been anticipated to see post launch ramp up in sales. New science continues to be extremely exciting. But commercializing new science against the headwinds of affordability and accessibility and the movement towards better patient outcomes and economic value presents growing challenges. In light of these pressures, what is the best course of action for pharmaceutical companies? Our analysis reveals what the High Performers are doing, and yields insights into what pharma companies can do to position themselves for exceptional performance in the future.

2 | Affordability and Value—The Economics of Pharma’s New Science

Key Findings Summary 1 1 0 0 0 0 1 0 1 0 1 1 0 1 1 0 0 1 1 0 1 0 1 0 1 1 1 0 0 1 0 1 1 1 1 0 0 0 0 1 0 1 0 1 1

Investors continue to reward new science. 5.2

The Pipeline Replacement Revenue Ratio has shifted markedly—back to levels 2.7 not seen since before the patent cliff of 2012.7

Enterprise Value (EV)5 rose six percent in 2015.

2.8

+6%

1.1

2009

2012

2015

2018E

Pipeline Replacement Revenue Ratio

There were 45 NMEs approved in 2015, the highest number since 1996.

+5%

2015

S&P 500

45 NMEs

In 2015, the industry saw mixed performance at a company level as well as declines since Q4-15, but overall performed five percent

above the S&P500 across the year.6

2

KEY FINDING 2

0 1 1 1 1 0 0 0 0 1 0 1 0 1 1 0 1 1 0 0 1 1 0 1 0 1 0 1 1 1 0 0 1 0 1

KEY FINDING 1

1

1

0 1 1 0 1 0 1 0 1 1 1 0 0 1 0 1 1 1 1 0 0 0 0 1 0 1 0 1 1 0 1 1 0 0 1 1 0 1 0 1 0 1 1 1 0 0 1

Growth has returned and is forecast to accelerate while margins have improved—but growth continues to be polarized at a company level. After three years of negative revenue growth, the peer set overall has returned to positive growth and is forecasted to accelerate.8

+3.6%

26.5%

26.0%

2016E

24.7%

24.1%

23.1%

+0.5% 2015

+1%

-3.8% 2012

2011

Operating Margin

After four years of falling Core Operating Margins, the peer set saw a one percentage point improvement in 2015.

Nov-15 High Performers

Six companies are outperforming their peers, with Eli Lilly joining the High Performers for the first time. Eli Roche Amgen Lilly

Astellas

Rest

BMS

2.9% 5.3%

These High Performers are also growing faster than the rest of their peers.

Novo Nordisk

CAGR 2016-20 Forecast

3

KEY FINDINGS SUMMARY cont’d.

KEY FINDING 3

Affordability and market access will challenge new science as a growth driver. Nearly one-third of new drug launches are significantly missing analysts sales targets.13 50%+

24%

There is a $50B affordability gap between analysts’ sales projections for NME launches 2015-20 and forecasts for developed market spending on pharmaceuticals.9

30%

Missed analyst sales targets by 50% or more

2007-10

$50B

$258B

52.0%

Analyst's forecast sales growth new launches

$208B

Developed market pharma spend growth 2015-20E

2011-14

The average proportion of new drug launches accessible to patients fell 9.5 percentage points from 2011 through 2013.10

-9.5% 2011

42.5% 2013

Average availability of NMEs approved in previous 5 years

0 0 1 0 1 0 1 1 0 1 1 0 0 1 1 0 1 0 1 0 1 1 1 0 0 1 0 1 1 1 1 0 0 0 0 1 0 1 0 1 1 0 1 1 0 0 1 1 0 1 0 1 0 1 1 1 0 0 1 0 1 1 1 1 0 0 0 0 1 0 1 0

4

KEY FINDING 4

0 1 1 0 1 0 1 0 1 1 1 0 0 1 0 1 1 1 1 0 0 0 0 1 0 1 0 1 1 0 1 1 0 0 1 1 0 1 0 1 0 1 1 1 0 0 1 0

High Performers will increasingly combine breakthrough medical science with clearly demonstrated outcomes for patients and healthcare systems. Using M&A

and collaboration to

dominate in target disease areas.

1 1 1 1 0 0

1 1 0 1 1 0 0 1 1 0 1 0 1 0 1 1 1 0 0 1 0 1 1 1 1 0 0 0 0 1 0

3

Developing new

and more agile business models

in response to market realities of affordability and consumerization.

4 | Affordability and Value—The Economics of Pharma’s New Science

Maximizing productivity from R&D investment with smaller, more focused pipelines and the best science.

Excelling at product launches by mastering flexible pricing, market access and demonstrating superior outcomes.

Key Findings 1

KEY FINDING 1

Investors continue to reward new science. Our research shows a continued recovery in the first 11 months of 2015, with Enterprise Value (EV) up 6 percent, representing the fifth consecutive year of growth (Figure 1). Share prices have had a mixed performance as well as declines since Q4-15, but overall performed five percent above the S&P500 across the year. Meanwhile, improvements to Operating Profit Margins have driven the industry’s annual earnings growth up 12 percent, representing a much faster growth rate than EV growth. As a result, the industry’s Future Value (FV)11 has dipped negative again after briefly turning positive in 2014.

This picture reflects continued investor confidence in the pharmaceutical sector’s ability to achieve future growth driven by recent and upcoming new launches. However, it also reflects the increased polarization of performance at a company level between those now growing and those in transition. The companies growing and being rewarded most by investors at present have business models that are largely focused on (and delivering differentiated new products in) innovation in specialty indications. Other companies’ models are more focused on volume, cost efficiency, scale or emerging markets and are not currently favored as much by investors.

Figure 1. Enterprise Value grows for the 5th year in a row. Enterprise Value ($ Billion) for “Pure Plays” 2008-15 $85.4 $69.1

$76.8

$85.1

$80.2

$79.9

$76.3

$85.7

+12% $1,808

$1,703 $1,140

$1,263

$1,501

$1,538

$1,073

$1,178

-$207

-$190

-$323

-$405

-$94

2008

2009

2010

2011

2012

-9%

-18%

-18%

-27%

-31%

-$95

Enterprise Value (EV)

Net Operating Profit Less Adjusted Taxes (NOPLAT)

$1,713

$1,808

+6%

$1,298

$1,165

$1,046

FV/EV =

$1,372

$1,632

$1,714

Current Value (CV)

-$2

-$347

2013

2014

Nov-15

-6%

0%

-19%

Future Value (FV)

Note: 16 pure play biopharma companies only. Japanese companies have March year end (YE14 = Mar-15). Constant USD FOREX used from October 2015. November 19th 2015 share price used in latest EV and Q3-15 NOPLAT. Source: Accenture Research, December 2015.

5

KEY FINDING 1 cont’d. Our analysis of product sales facing patent expiry (Figure 2) shows that 2015 has seen a marked increase of roughly 50 percent above levels seen in the much-publicized “patent cliff” of 2011-12. Patent expiries are forecast to drop again next year before another peak in 2019.12 However this time around, the patent expiry story is very different with a large number of biological products facing patent expiry for the first time and with sales erosion from biosimilars forecast to be much lower than the equivalent erosion of small molecule drugs.

In addition, the Pipeline Replacement Revenue Ratio has jumped markedly from levels in 2011-12, and is forecasted to continue growing reflecting the ability of recent and future launches to replace sales lost to products that are no longer patent protected. Investors’ increased confidence and rising valuations are grounded in companies’ strong pipelines. Looking at the number of the CDER approvals of New Molecular Entities (NMEs), we can see the average for the last five years (2011-15) is 63 percent higher than that of the previous five-year

period (2006-10). The FDA’s CDER division approved 45 NMEs in 2015, surpassing the 41 approvals seen in 2014, and marking the highest level of approvals since 1996. This elevated level of new drug launches is expected to continue for the next five years (Figure 2).

Figure 2. Patent expiries rose markedly in 2015 as did new drug approvals and pipeline replacement ratio. Patent Exposure & Pipeline Replacement Pharma Industry 2005-20E Upcoming key patent expiries:

Lantus Neulasta Gleevec Abilify Nexium Epogen

Humira Advair Crestor Zetia

Zytiga Cialis

Rituxan Remicade Lyrica Spiriva

Revlimid Botox Avastin Tysabri Herceptin Gilenya Levimir Invega Sustena

5.7

5.5

5.2 36.4

4.6

5 year average FDA NME approvals 2011-15

3.6 2.7 22.4

2.7

$8.9

$15.6

$13.4

$8.5

$18.8 $12.6

1.9

1.0 $24.1

$14.8

2.8

$29.0 $27.8

$45.6

$28.4

1.1 $31.6

$28.9

$31.6

$16.8

$21.9

$35.5

$30.6

$19.4

$24.9

$22.7 $19.0

$18.8

$11.7

$33.3 $26.5

$16.3

$22.6

$25.0 $23.7

$0.5

$0.1

$1.4

$0.9

$0.0

$1.5

$1.2

$0.0

2005

2006

2007

2008

2009

2010

2011

2012

Sales Losing Exclusivity (Conventional Rx)

2013

$8.9 $3.9

2015

Sales Losing Exclusivity (Biotech Rx)

Source: Accenture Research, November 2015, based on Evaluate Pharma and FDA CDER Statistics.

6 | Affordability and Value—The Economics of Pharma’s New Science

2014

$16.1

$17.0

$16.0

$12.1 $5.7

Pipeline Replacement Ratio

4.0

$47.4

5 year average FDA NME approvals 2006-10

$15.7

2.5

2.3

4.4 3.2

2016

2017

2018

2019

2020

2

KEY FINDING 2

Growth has returned and is forecast to accelerate while margins have improved—but growth continues to be polarized at a company level. Our analysis shows that after three years of negative revenue growth, the peer group studied has overall returned to revenue growth in 2015 (Figure 3). Revenue growth is forecast to pick up from one percent for the full year 2015 to four percent CAGR 2016-20 forecast. The overall industry’s Operating Margin also improved in 2015 after four years of negative earnings growth and margin erosion, but still remains below pre-patent cliff levels.

But a look below the peer group headlines reveals an increasingly polarized position between the High Performers and the rest of the peer group (Figure 4). The High Performers have stronger forecast growth and pipeline replacement revenue ratio as well as higher operating margins that have held up better in recent years. The rest of the peer group companies’ have demonstrated widely varying performances, but on average they have lower growth forecasts and operating margins, indicating they are still in the throes of reorganizing to find a path back to sustainable profitable growth.

Figure 3. Revenues grew in 2015 after three years of negative growth. Pharma Pure Play Peer set: Total Rev & Earnings Growth 2008-2015 8.7%

7.8%

4.9%

4.7% 2.8% $431,711 $412,443

$443,719

-7%

$445,766 0.5%

-5.0%

$428,962

$424,433

-3.8%

-1.1%

-5.4%

$416,366

0.5% $418,473

-1.9%

-6.2% -8.2%

2008

2009

2010

2011

2012

2013

2014

Nov-15

26.5%

28.0%

26.5%

26.0%

24.7%

23.1%

24.1%

OPERATING MARGIN*:

26.7%

Group Revenue Growth

Group Earnings Growth

Group Revenue ($B)

*Total Peer Group Revenue and Earnings (Core EBIT) in USD at constant FOREX is analysed—meaning larger companies performance does skew trends Source: Accenture Research based on Capital IQ November 2015.

7

KEY FINDING 2 cont’d. Figure 4. High Performers have stronger forecast growth and pipeline replacement revenue7 ratio as well as higher operating margins. Revenue Growth Forecast vs. Pipeline Replacement Revenue Ratio Avg 2.8x

12%

Core Operating Margin vs. Change in last 2 years 45%

Novo Nordisk

Avg -0.1%

40%

Amgen 2015* Core EBIT/Revenue

10% 8%

CAGR 2015-18

Novo Nordisk 

Eli Lilly

6%

BMS

Astellas Amgen

Avg 3.4%

4% 2%

Roche

35%

Roche

30% 25%

BMS Avg 22.2%

20%

Eli Lilly

Astellas

15%

0% 10% -2% 1

2

3

4

5

6

7

8

Pipeline Replacement Ratio 2015-20 High Performers

5%

-15%

-10%

-5%

0%

5%

10%

2013-15*

Rest

*Core EBIT Margin is based on Trailing 12 months to Q3-2015. Pipeline Replacement Revenue Ratio reflects Revenue growth from patented products divided by Revenue lost to unpatented products (and those with undefined patent status). Source: Accenture Research, November 2015, based on Evaluate Pharma & Capital IQ.

Overall, the peer group studied has returned to revenue growth in 2015 after three years of negative growth.

8 | Affordability and Value—The Economics of Pharma’s New Science

3

KEY FINDING 3

Affordability and market access will challenge new science as a growth driver. We compared current forecasts for developed market pharmaceutical net sales growth with analyst consensus sales forecasts for recent and upcoming launches, and noted “the affordability gap” between the two. Analysts’ 2015-20 sales forecasts for recent and upcoming NME launches were $258B, whereas developed markets are forecast to see only $87B in pharma budget increase, along with $121B in cumulative generics savings, totalling $208B. With most of the forecasted spending on NME launches coming from developed markets, this $50B gap between market spend and forecasted sales, is particularly concerning when considering the significant economic and demographic pressures on health budgets.

With drug spending as a proportion of total health spending creeping up, payers and governments will continue to seek greater savings from generics (including biosimilars) and larger price rebates. Reimbursement is also continuing to shift towards prioritizing those new products that differentiate most clearly on patient health and economic outcomes, as payers seek to further control drug spending. Similarly we are seeing drug accessibility falling across many developed markets, with new innovation taking longer to reach patients (Figure 5).

In this tougher affordability and accessibility climate, there will likely be clear new launch winners and losers in the battle to command a share of fixed healthcare funding in increasingly crowded and price-competitive therapeutic categories. Successfully bringing new products to market will require more than just great innovations; pharmaceutical companies will also need to develop operating models that can turn new science into measurable delivered patient value.

Figure 5. Accessibility and affordability are under pressure. Availability of NMEs approved in previous 5 years Selected Developed Markets 2011-13

Affordability of Recent and Upcoming NME approvals 2015-20E ($ Billion)

70% US

65%

$258

60% 55%

UK

50% 52.0% 42.5%

45% 40%

30%

2011

-18.3%

SK

2012

2013

Net Generics Savings

$122

Recent Launches 2011-15

$136

+$50

“The Affordability Gap”

$121

Average CA FR IT JP SP

35%

25%

$208

GY

Upcoming Launches 2016-20

Pharma Net Spending Growth ($B)

$87

Dev Markets Forecast Growth 2015-20E

Recent & Upcoming Launches - Growth 2015-20E

Source: Accenture Research based on Evaluate Pharma Dec-15 and IMS Health Global Outlook for Medicines publications 2012-14.

9

4

KEY FINDING 4

High Performers will increasingly combine breakthrough medical science with clearly demonstrated outcomes for patients and healthcare systems. In a more crowded and competitive market place, where more rapid product substitution is increasingly shortening product life-cycles, a company may not be able to differentiate itself on products alone. High Performers (identified in Figure 4) have greater product strength in their portfolios and pipelines. But importantly, their recent and upcoming launches are also better supported by more robust outcomes-value data versus the standard of care today when compared to the rest of the peer set, which are in varying stages on the path to new product-led growth.

Using M&A and collaboration to dominate in target disease areas

High Performers excel at several operational attributes and capabilities: • Using M&A and collaboration to dominate in target disease areas • Developing new and more agile business models in response to market realities

of affordability and consumerization • Maximizing productivity from R&D investment with smaller, more focused

pipelines and the best science • Excelling at product launches by mastering flexible pricing, market access and

demonstrating superior outcomes

High Performers excel at finding and successfully developing the best new science through external M&A and collaboration deals. Their portfolios are more concentrated around a smaller number of products, with dominant positioning in their disease focus areas. High Performers also lead in their deep understanding of underlying disease pathways and in identifying patient needs and incorporating solutions into their product offerings. They are tireless in the pursuit of excellence in their targeted areas and are prepared to self disrupt to drive better outcomes for patients. For example, consider Amgen: • Amgen has been conducting a wide-ranging strategic research effort in collaboration

with Kite Therapeutics (announced in 2015). As part of this initiative, Amgen is adding its extensive arrays of oncology targets to Kite’s CAR T cell therapy platform. Amgen also announced other Immunotherapy partnerships in 2015, with Xencor and Merck. In a separate move, the company also entered into a major new neuroscience collaboration with Novartis, scaling up its research pipeline in this therapy area. The company also acquired Onyx Pharmaceuticals in 2013 to bolster its strength in targeted cancer drugs.

10 | Affordability and Value—The Economics of Pharma’s New Science

Developing new and more agile business models in response to market realities of affordability and consumerization

New needs and expectations from patients and healthcare systems are being fueled by socio-economic changes coupled with scientific breakthroughs and technology disruptions. Healthcare boundaries are being reinvented, payers are expecting more from companies in return for reimbursing new science, patients are informed partners in their health and wellness and are increasingly expecting a more personalized experience. Healthcare affordability overall is driving each player to think differently.  Pharma companies are adjusting their business models to the new market reality; some are restructuring their businesses to combine services with product to drive more value for the patient and the health system, some are building horizontal organizations across development, supply chain, medical and marketing to bring more tailored offerings to specific populations, others are focusing development, sales and marketing on specific patient populations in addition to the traditional KOLs and HCPs. Most are experimenting with data and new technologies to enhance the patient experience and drive better outcomes for the system. The resulting changes are causing companies to operate differently than in the past, to collaborate with new and non-traditional partners and embrace technology in ways that have not been seen. Consider: • Roche announced a new collaboration with Foundation Medicine (FMI) in January 2015,

including acquiring a majority equity stake. The R&D collaboration will see Roche invest up to $150m in FMI’s molecular information technology to improve oncology product development and patient care. Roche also announced a separate deal with FlatIron in January 2016, in which it led a $175 million private fundraising round. FlatIron gathers and analyzes patient data connected to oncology products and incorporates it into software and services, which Roche have also licensed.

Maximizing productivity from R&D investment with smaller, more focused pipelines and the best science

High Performers spend proportionally more on R&D and have fewer NME approvals than their peers. However, their new products are commercially much larger five years postlaunch; what’s more, a higher proportion of them meet or exceed analysts’ sales growth expectations made at launch. High Performers lead with smaller, more focused pipelines, a deep understanding of underlying disease pathways and identifying patient needs. They strive to drive the innovation agenda and pace in their disease areas and invest in substituting their own products with new innovations before others do. Consider: • Bristol-Myers Squibb launched anti PD-1 Monoclonal Antibody Opdivo in the third

quarter of 2014, then extended its initial second-line melanoma label to cover wider melanoma, non-small cell lung cancer and renal cell carcinoma indications in the next 18 months. The company has used the outcomes (survival rates) in discrete patient groups to understand value to patients; at the same time, it has continued to invest in combination studies. Since launch, the product has exceeded analyst consensus sales forecasts set at the time of its approval, and future forecasts have been revised upwards. The company has also been active in constantly refining its pipeline focus, keeping it smaller and more nimble, and focused on opportunities in growth areas of the market with the science to differentiate. • Novo Nordisk is working on multiple innovative product extensions to sustain its

leadership in diabetes—including once-weekly injectable solutions, injectable-to-oral switching options, and new combination drug pills. They also collaborate closely with healthcare professionals and policy makers to better understand the needs of diabetes patients. 11

Excelling at product launches by mastering flexible pricing, market access and demonstrating superior outcomes

High Performers are mastering the art of “scientific marketing” by directly linking their product’s ability to contribute to improved outcomes in targeted patient groups by leveraging data, devices and technology. This enables them to do better targeting, provide flexible payment structures that improving market access and offer more services around the product to engage patients and their caregivers over the lifetime value of the treatment. Consider: • Roche has discussed its working on combination and indication based pricing of certain

oncology drugs in Europe, with pilots currently taking place and discussions with payers ongoing. • Eli Lilly (partnering with Boehringer Ingelheim) is the first company in the SGLT-2 class

to demonstrate the positive cardiovascular outcomes data of its marketed diabetes drug Jardiance. Lilly invested in a three-year study of 7,000 diabetes patients, which reported impressive outcomes improvements in September 2015.

12 | Affordability and Value—The Economics of Pharma’s New Science

The hallmarks of being a High Performer While growth is expected to accelerate in 2016, it continues to be polarized between a group of High Performers who have great science innovation and the capabilities to differentiate new launches with payers, and the remaining peer group, which struggles at various points in returning to sustainable growth. However, this innovation-driven growth boom comes at a cost and eyes will soon again be back on sliding operating

margins and delivering on post launch sales expectations. Sustained high performance in the sector will come from those companies that can drive operational change that can keep pace with innovation. The challenge ahead will be turning science into value by developing new operating models that can deliver on the commercial promise of new launches in a changing healthcare economy.

High Performers distinguish themselves on the following key metrics:

Figure 6. High Performers distinguish themselves on 7 key metrics. Forecast Growth/Pipeline Strength

Portfolio Freshness New Launch Growth 23.5%

High Performers (n=6)

6.5% 5.3%

2.9% 0.8% 2016 % Growth

10.9%

2015-20 5 Year CAGR

1.6 Pipeline Replacement Revenue Ratio 2015-17

$892B

6.2% $368B

NME Output 2010-15

Avg Sales 5 Years Post Launch

64.2% High Performers (n=6)

Avg Sales ROI on Avg R&D Spend—5 Years Post Launch

3.0 23.7% 15.7%

Top 5 Products Avg Global TA Share and Rank

Performance of NME Launches 2012-14 vs. Analyst Expectations13

Rest (n=10)

0.44

17.3%

2.1

Externalization High Performers (n=6)

0.75

24.9%

2020

Top 5 Products Share of Pharma Revenue 2014

45.7%

$4.0B

2014 Rest (n=10) 2.5 2.4

Recent & Upcoming Launches Growth 2015-19E as % 2015 Pharma Revenue

Avg R&D/NME $2.9B

High Performers (n=6)

Rest (n=10) High Performers (n=6)

Innovation Output/Productivity Rest (n=10)

41.5%

40.7% 4.3

Rest (n=10)

Focus/Therapeutic Area Dominance

Rest (n=10)

5.6% 4.5% 55.3% 2.0% External Products CAGR 2014-20E

High Performers (n=6)

49%

$122

33%

1.2% Total Pharma Revenue CAGR 2014-20E

External Products Growth 2014-20E as % 2014 Pharma Revenue

-$26 % NMEs Significantly Missing Target Avg $ Performance (>30% below) vs Analyst Target

Core Operating Margin High Performers (n=6) Rest (n=10)

28.9%

30% 25%

18.1% 20%

Core Operating Margin 2015

15% 2008 2010 2012

Nov-15

Source: Accenture Research

13

Research notes and sources 1 FDA CDER Statistics, FDA Website Jan 2016. Global NME first Approvals, all biological and chemical drugs, vaccines and blood proteins—Scrip Intelligence, Mar-16. 2 Our Pharma Industry peer group comprises 16 Pure Play Pharma companies, defined as global leaders having 75 percent or more of Group Revenue coming from Human Pharmaceutical products. 3 5 year 2016-20 Equity Analyst consensus forecasts for group revenue at constant forex, sourced from Evaluate Pharma, Jan-16. 4 Core Operating Margins calculated from Capital IQ, Feb-16. 5 Enterprise Value calculated as Market Capitalization plus Net Debt, and totalled across peer group studied. 6 Indexed Performance of Pharma Peer set grouped and compared to S&P500 index in Calendar year 2015, sourced from Capital IQ, Jan-16. Post completion of this research, 2016 has seen some falls in Pharma Indices, which are now slightly under-performing the S&P500. 7 Pipeline Replacement Revenue Ratio is defined as forecast growth from patented existing products and anticipated new launches divided by forecast lost sales from existing off-patent products and those forecast to lose patent coverage. This ratio is measured across a forward 5-year period. Source: Evaluate Pharma, Jan-16. 8 Constant exchange rate growth totalled across Pharma Peer set studied, Accenture Research sourced from Company financial releases. 9 The Affordability gap is calculated from comparing IMS Health forecasts for developed market pharma sales growth (adjusted to Net Sales level, at ex-manufacturing prices) to Evaluate Pharma estimates for sales growth from recent and upcoming new launches (2011-15 and 2016-20 respectively) and forecast savings from off patent drugs and those losing patent coverage 2016-20. IMS health data extracted from Global use of Medicines use in 2020 Report, 2015.

10 Global Outlook for Medicines through 2018. Report by the IMS Institute for Healthcare Informatics, Nov-14. The Global Use of Medicines: Outlook through 2017. Report by the IMS Institute for Healthcare Informatics, Nov-13. The Global Use of Medicines: Outlook through 2016. Report by the IMS Institute for Healthcare Informatics, Jul-12. Patient availability of New Molecular Entity approvals from the previous 5 years is compared across health systems in selected developed and emerging markets. 11 Future Value is defined as Enterprise Value less Current Value, where Current Value is calculated as Net Operating Profit Less Adjusted Taxes (NOPLAT) divided by Weighted Average Cost of Capital (WACC). The calculation is undertaken at Total Peer Group level, and unweighted so larger companies do influence the total more than smaller companies. Future Value reflects that portion of current valuation that may be ascribed to future earnings growth potential. 12 Sales at Risk of Patent Expiry, is Actual Sales of products losing patent coverage in the year in question taken from the previous (patent covered) year. It is not the actual sales forecast to be lost, which varies widely in how much lower it is, according to the product in question. Data is sourced from Evaluate Pharma, Jan-16. 13 Accenture analyzed the performance of a basket of recent new launches 2011-15 from the peer set of 16 companies studied. We compared analyst consensus forecasts taken at the time of approval, with sales achieved in first two years post launch. We considered products achieving sales 30 percent or more below analyst target at launch a significant miss in the first two years. All data sourced from Evaluate Pharma March 2016.

14 | Affordability and Value—The Economics of Pharma’s New Science

Contact Us Anne O’Riordan Senior Managing Director Accenture Life Sciences, Global [email protected]

Tom Schwenger Senior Managing Director Accenture Life Sciences, North America [email protected]

Andrea Brueckner Managing Director Accenture Life Sciences, Europe [email protected]

Author Philip J. Davis Head of Life Sciences & Healthcare Research Accenture Research [email protected]

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15

About Accenture’s High Performance Business Research Program Accenture embarked on its High Performance Business Program in 2003. We have studied thousands of companies across multiple industries and industry segments and come up with definitive answers regarding business performance. Our High Performance Business research methodology is a proprietary approach for analyzing relative peer company performance across five key metrics. For each company, we capture the metrics for profitability, growth, positioning for the future, longevity and consistency with scores graded along a bell curve. In our 2010 research, we added a forward-looking dimension to our research methodology that analyzed a company’s revenue growth forecast and strength of its pipeline relative to its intellectual property exposure. Composite scores demonstrate relative performance within the peer set and highlight the High Performers.

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About Accenture’s High About Accenture Performance Business Research Life Sciences Practice for the Biopharmaceutical Accenture’s Life Sciences group is dedicated to helping companies rethink, reshape or Industry Accenture’s study of the biopharmaceutical industry is in its 11th year and has analyzed the long-term performance of “pure-play” pharmaceutical companies (those with more than 75 percent of their revenue derived from pharmaceutical products). Our 2015 update is based on trailing 12-month Q3 2015 financials and analyzes 16 of the largest pure-play pharmaceutical companies in the world over an 8-year period. Collectively these companies had $423 billion in aggregate global revenue, representing nearly half the global pharmaceutical market by net sales. The results have been compared with our 2014 and 2013 studies to identify relative movements in the performance rankings. The analysis pro forma adjusts for the impact of major M&A deals (but not smaller bolt-on deals) and removes the impact of exceptional costs to reveal a normalized picture of ongoing core business operations. A detailed analysis of historic financial performance averaged over one, three, five and seven-year timeframes is combined with consensus analyst forecasts to gain a forward-looking global picture of forecasted revenue growth from portfolio and new product launches as well as to gauge the impact of patent expirations and mature products.

restructure their businesses to deliver better patient outcomes and drive shareholder returns. We provide end-to-end business services as well as individual strategy, consulting, digital, technology and operations projects around the globe in all strategic and functional areas—with a strong focus on R&D, Sales & Marketing and the Supply Chain. We have decades of experiences working hand-in-hand with the world’s most successful companies to improve their performance across the entire Life Sciences value chain. Accenture’s Life Sciences group connects more than 15,000 skilled professionals in over 50 countries who are personally committed to helping our clients achieve their business objectives and deliver better health outcomes for people around the world.

About Accenture Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions— underpinned by the world’s largest delivery network—Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With approximately 373,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com.