State of the Industry Report, presented by R.T. (Terry) Hisey

Beyond the Hype of Health Reform:Health Science Transformation Trends & ImpactsA Life Sciences Industry UpdateR. T. (Terry) HiseyVice Chairman and U.S. Life Sciences LeaderDeloitte Consulting LLPFebruary 2012 Copyright © 2012 Deloitte Development LLC. All rights reserved.

Today’s comments will touch on…• Health Care Reform and the mega trends in a system in change• How people are recognizing the changing ecosystem and maturing use of facts and analysis to move beyond “how we’ve always done it” from a market coverage standpoint• A framework to think about products, portfolio and the forces affecting adoption We’ll look at these as factors, trends and some real world approaches people are pursuing today Copyright © 2012 Deloitte Development LLC. All rights reserved.

Health reform in the form of legislation is a catalyst not theforcing function of a broader industry transformation Health Care & New Clinical Health Information and Education Coding Clinical Technology Reconciliation Standards Advancements Act of 2010 (ICD-10) Patient Protection & Consumerism Affordable Care Demographic Changes Act Children’s Health Insurance American Recovery Private Employer Program and Reinvestment Act Initiatives Reauthorization (ARRA) & HITECH Act Act Acts or General Regulations Trends3 Copyright © 2012 Deloitte Development LLC. All rights reserved.

As the industry matures it is also undergoing majortransformation – how will your business be positioned forcompetitive growth? Industry Transformation • Business model evolution − Products ►services ► outcomes • R&D focus evolution − Products ►treatment protocols Today? Industry Maturation • Consolidation • Diversification − Portfolio (e.g. device, generics) − Geographic • Efficiency − Commercial transformation − Off-shoring of R&D • Dividend payout? Copyright © 2012 Deloitte Development LLC. All rights reserved.

Formulary pressures experienced through mechanisms such as bundled payments and comparative effectiveness scrutiny necessitate a rethink of the product portfolio Risk of therapeutic • Botox • Lucentis • Peg-Intron substitution, but there Office Administered is upside opportunity to (Injectables) develop wrap around services • Vfend • Tamiflu • Cipro • Exjade Care Delivery Retail - Acute • Nuvaring • Nexium • Zyprexa • Lipitor • Tracleer Retail - Chronic Absolute price pressure • Aranesp • Eloxatin Clinic – Hospital ~70% of total 2010 branded revenue falls Outpatient within the high impact portfolio areas (Infusion) • Lovenox • Xigris • Activase Hospital Inpatient Lifestyle Morbid Morbid Life Threatening Extremely Degree of Formulary Pressure (e.g., wrinkles) Non-Disruptive Disruptive (e.g., Morbid / Fatal (e.g., heartburn) (e.g., migraines, hypertension, (e.g., heart attack, High Med Low / None chronic pain) asthma) stroke) Disease Severity Analysis indicates Reform is anticipated to have 12-14% negative impact on U.S. Pharma revenues, with formulary pressures driving the majority of the impact, predominantly on portfolios serving morbid and life threatening disease areasNote: Deloitte analysis was performed on top 300 revenue generating drugs in 2010. Formulary pressures were modeled by considering restrictions in Kaiser, UK andGermany; patent expirations; market share in the US; and projected manufacturer revenue growth Copyright © 2012 Deloitte Development LLC. All rights reserved.

A range of possible implications of Comparative Effectiveness in action An analysis of three cost sensitive systems (Kaiser, NICE and Germany) highlights strong formulary pressures, where select mega blockbuster, GP drugs totaling $18.9B are restricted across these three systems 2010 Analogue Formulary Rejections Mega Blockbuster – GP Midsized – GP • Asthma & COPD • Anti-Migraine Therapies • Anticonvulsants • Antidepressants Blockbusters – GP Germany Kaiser1 • Benign prostatic • Herpes Antivirals hyperplasia 1 drug 26 drugs 96 Drugs • Neuropathic Pain • Quinolones, antibiotic $0.2B $11.9 $60B • Female Contraceptives • Hypertension – • Oral Antidiabetic Angiotensin II 8 drugs • Triglyceride Treatments antagonists $18.9B • + 37 More • Hypertension – 1 drug 7 drugs Angiotensin II Combos $6.9M Midsized – GP $3.8B • Osteoporosis • Immunosuppressants • Anti-migraine Therapies 21 drugs • Insomnia • Hypertension - Ace Inhib $20.3B • Osteoporosis • Hypertension – Beta United • ADHD Blockers Kingdom • Hypercalcemia • Proton Pump Inhibitors Mega Blockbuster – Mega Blockbusters – GP Specialty/GP • Cholesterol Treatments • Oncology - Monoclonal • Proton Pump Inhibitors Antib Total US branded market = $267.6B revenue • Antipsychotics Midsized – GP Total US retail market = $194B revenue • Alzheimers Disease • Proton Pump Inhibitors • Multiple Sclerosis • Macular Degeneration Deloitte analysis: 1 Kaiser analysis conducted only on products sold through the retail pharmacy channel (excludes • + 8 More6 hospital, clinic and office administered products) Copyright © 2012 Deloitte Development LLC. All rights reserved.

The medical devices industry will likely be impacted byemerging stakeholders and decision making paths that reducephysician choiceIn the post-reform environment, physicians are anticipated to lose purchase decision makingpower to hospitals and to patients Highly Diversified (Low Substitutability)Maturity Maturing (Moderate Substitutability) Commoditized (High Substitutability)Degree of Future Spend Reduction Focus High Medium Low $1 B in US Revenue 2009 Purchase Decision Maker Note: Bare metal stents have already undergone significant spend reduction Copyright © 2012 Deloitte Development LLC. All rights reserved.

Change is occurring across stakeholders, creating theemergence of cross sector mega trends From Defined Employers Drop Employers Stoke Benefits to Defined Coverage Consumerism Contributions Employer Trends Providers Engage in Implementing Radical Cost Cutting HIE and HIT State Healthcare Emergence of the Systems and Healthcare Budgets Under New Consumer Emergence of Strain New Roles in Providers “Get Measurement Healthcare Government Trends Organized” & Analytics Administration Demonstrate Provider Trends Implementing Varying Degrees HIE and HIT Shifting of Involvement Expanded Scope of Payment in Defining Models Regionalization Healthcare Reform Care Delivery Models Marketplace Alignment Transparency Increased Federal of Incentives Cost Taxes, Fees & Providers Take Management Oversight Shifting Health Plan Ownership of Plans Collaborate Care Risk Marketplace Medical Cost on CE Coordination Churn Management Increasing Demonstrate Focus on Regulation and Meeting Performance Varying Degrees of Oversight the Demand & Outcomes Involvement in Physician Shift from Defining Reform Entrepreneurs to Employees Health Plan Trends Migration Toward a Expansion in Basis Plans Collaborate Health Plan Regulated Utility of Plan Competition on CE Marketplace Churn Copyright © 2012 Deloitte Development LLC. All rights reserved.

Four major trends are evidenced through real world data Regionalization: Distinct and growing Employer Trends differences in the way health care is procured and delivered across the U.S. Implementing HIE and HIT Emergence of the Care Coordination: Increased Healthcare importance placed on coordinated care Consumer Emergence of throughout a patient’s lifetime and New Roles in Measurement Healthcare journey through health care systems. Government Trends & Analytics Administration Demonstrate For example innovation around patient-Provider Trends Varying Degrees centered medical home. Shifting of Involvement Payment in Defining Models Regionalization Healthcare Reform Focus on Performance and Marketplace Outcomes: The shift from disease Alignment Transparency of Incentives Cost oriented outcomes to patient oriented Shifting Management Health Plan outcomes, including performance Plans Collaborate Care Risk Coordination Marketplace measures that will lead to payment on CE Churn Increasing reform. Focus on Regulation and Meeting Performance Oversight the Demand & Outcomes Emergence of the Health Care Consumer: Expanded influence of the patient in treatment decisions often Health Plan Trends driven by increased access to online and socially generated health care data. Copyright © 2012 Deloitte Development LLC. All rights reserved.

Regionalization as seen today in the use of real world dataSegmentation analytics applied to a range of health care system data shows distinct marketarchetypes that challenge the way we manage our business Self-Organizing Maps Hint at 4 Clusters of MSAs With Different Risk and Opportunity Scree plot Innovation Index Cost Index ee.risk 1.5 3.0 PC patient.risk FA 0.5 0.5 2.5 ponents payer.consol -0.5 -0.5 clinical.consol Eigen values of factors and com 2.0 -1.5 -1.5 cost.control 1.5 1 2 3 4 1 2 3 4 oa.activity Quality Index Consolidation Index quality.init 1.0 0.0 0.5 1.0 1.0 innovation 0.5 0.0 community.activity standardization 0.0 -1.0 -1.0 innovation patient.risk ee.risk oa.activity community.activity standardization quality.init payer.consol clinical.consol cost.control 2 4 6 8 10 1 2 3 4 1 2 3 4 factor or component number Geographic Market Assessment Findings Increasing Cost and Quality Focus Shifting Risk toward Providers Conventional Outcomes Driven Leading PA: Four Increasing Cost and Quality Focus Dallas Distinct Archetypes Scranton 1 Houston San Antonio Increasing Quality Focus Pittsburgh Philadelphia Cost Driven Cost Focus 2 Harrisburg Evolution of Care Delivery Copyright © 2012 Deloitte Development LLC. All rights reserved.

Care Coordination as seen today in the use of real world dataStructurally different treatment patterns in the treatment of Diabetes Chicago network San Antonio with at least 2 shared patients with at least 2 shared patients % Physicians Shared Patients % All Market % Insulin Market (Base=Chicago) At least 2 patients in insulin market: CHICAGO 5% 62% 66% At least 2 patients in insulin market 3% 53% 57%11 Source: Deloitte 2011 analysis of De-identified Patient Data Copyright © 2012 Deloitte Development LLC. All rights reserved.

Focus on performance and outcomes as seen today in the useof real world dataGene sequencing algorithm applied to patient longitudinal data reveals treatment patterns thatare studies against patient outcomes The expectation is that insulin usage by patients in period 1 would be the same as period 2 1 2 3 Patients who drop Clustering rows (patients) and 4 Drug D Patients who columns (drugs) reveal pick up Drug 5 P in 2nd usage patterns period 6 7 8 9 Patients who drop 10 11 Drugs B &C 12 LA UL 1 LA U 2 NO NT S 1 NO VO S 2 M L IN 1 M OG 2 VO R A 1 2 AP L O 1 ID G 2 NT O 1 NT S 2 AP U S 1 R 2 1 LE EM S 2 HU EM 1 HU U 2 M IN NT IN VO OG LA U G NO PID A HU VO IN ID S S S V IR M IR U A R L A LE R A L L NO L LA L HU A A ID V AP12 Source: Deloitte 2011 analysis of De-identified Patient Data Copyright © 2012 Deloitte Development LLC. All rights reserved.

Emergence of health care consumer as seen today in the useof real world dataPatients are online, looking for answers and connecting with other “patients like me.” Theirsentiment is analyzed and tracked, begging new questions about engagement. Social Analytics Elements Factors driving engagement in self-ID women in PA Average Factors Scan Collect Validate & Analyze & Predict Respond Engagement Females PA Age & mine cleanse categorize Sentiment Measures Source Gender Verbatim ScoreA - social M I was scared to death when I was 9.5networking diagnosed with t2, but I joined a supportservice & group and leaned that it’s not a deathwebsite sentence you CAN manage it and live with it so don’t get discouraged!B - blog- F Im still experiencing high bgs on the I:C 12.1publishing ratio way of taking insulin. Ive beenservice pretty diligent with looking up how many carbs are in the meal I am about to eat, and also correction dose for what my bgs are at other times.A - social M I forget to test sometimes. Especially 4.5networking when Im at work and very busy. Doesntservice & it just stink to be human! LOLwebsiteC - online F I hate needles! Sticking myself scares 2.0social me. Im not sure I can do this!networkingservice & M Im exercising more and monitoring 13.7microblogging regularly because my wife makes sureservice that I do. 0 0 14.5 14.5Low Engagement High Engagement Source: Copyright 2012, PredictivEdge Technologies LLC. 13 Copyright © 2012 Deloitte Development LLC. All rights reserved.

In this era of health science industry transformation, you needto question yourself to enable long-term competitiveeffectiveness. The types of questions to ask include…1. How does your company identify innovators, leaders and influencers to apply to its marketing strategies?2. Are social media and other professional networks and memberships used to assess drug adoption rates and utilization strategies?3. Does your company estimate the timing, sequencing, and delivery of messages to the right innovators, leaders, and influencers; and if so, how accurately?4. How does your organization promote drugs to physicians and leverage spend in selecting a marketing strategy?5. Have you considered both the direct and indirect impacts when assessing how health reform will affect your organization?6. Are you proactively building informatics capabilities and leveraging data to develop effective product value propositions to compete in the post reform environment?7. Have you thought through what the revenue impact health reform will have on your current portfolio mix and pipeline? How does reform impact your product development strategy?14 Copyright © 2012 Deloitte Development LLC. All rights reserved.

Thank you for your timeComments, questions, etc…For more information, please contact:R. T. (Terry) HiseyVice Chairman and U.S. Life Sciences LeaderDeloitte Consulting LLPrhisey@deloitte.com215-246-2332 Copyright © 2012 Deloitte Development LLC. All rights reserved.

Disclaimer:This publication contains general information only and is based on the experiences and research ofDeloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial,investment, or other professional advice or services. This publication is not a substitute for suchprofessional advice or services, nor should it be used as a basis for any decision or action that mayaffect your business. Before making any decision or taking any action that may affect your business,you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shallnot be responsible for any loss sustained by any person who relies on this publication.As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP.Please see www.deloitte.com/us/about for a detailed description of the legal structure of DeloitteLLP and its subsidiaries. Certain services may not be available to attest clients under the rules andregulations of public accounting.Copyright © 2012 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited

State of the Industry Report, presented by R.T. (Terry) Hisey

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State of the Industry Report, presented by R.T. (Terry) Hisey — Presentation Transcript