The pharmaceutical industry is facing a strategic crisis according to 65% of executives surveyed. Changing healthcare environments, budget pressures, and upcoming patent expiries are challenging the traditional business model focused on innovative drugs. Diversification is seen as a potential way out of the crisis by 67% of executives. The most common diversification areas pursued are generics, due to their proximity to existing businesses and high margins. Drivers of diversification include the R&D productivity crisis, emerging market opportunities, and the merging of medical disciplines. Executives believe diversification will help overcome challenges and sustain growth.

1. PRESS BRIEFING
O t b 2010October 2010
Fight or flight?Fight or flight?
Diversification vs. Rx-focus
in big pharma's quest for
t i d th
1
sustained growth

2. Contents Page
A. Executive Summary 3
B. Context and study approach 9
C Study findings and discussion 19C. Study findings and discussion 19
2© 2010 Roland Berger Strategy Consultants GmbH

3. E ti SA Executive SummaryA.
PRESS BRIEFING
3

4. Executive Summary
Data basis
• Study is based on a global quantitative survey supported by in-depth desk1. y g q y pp y p
research. The survey results were validated in over 50 CEO and board level face-
to-face interviews with top decision makers of leading pharmaceutical groups
• Participating companies cover 40% of global pharma revenues and include
7 t f th l b l t 10 l7 out of the global top 10 players
Pharma in the midst of a strategic crisis
2
Pharma in the midst of a strategic crisis
• According to 65% of pharma executives, the pharmaceutical industry is currently
experiencing a strategic crisis
• Changing healthcare environments, budget pressures, challenging market
2.
g g , g p , g g
access as well as massive patent expiries ask for a review of the traditional
business model focusing exclusively on high margin, patent-protected innovative
medicine
4
• 57% of 2008 global pharma sales will be going off-patent within the next three
years; 75% within the next five years

5. Executive Summary
Diversification – a potential way out of the crisis?
• 67% of pharma executives think of diversification as a potential way out of the3 p p y
strategic crisis
• For those currently pursuing diversification, the study distinguishes three
alternative dimensions: the de-risk path, the innovation path and the integration
th
3.
path
• At the moment, the industry seems to be focusing on the rather conservative de-
risking strategy. By acquiring particularly generics and consumer health
companies the industry aims at top line growth while also preparing for thecompanies, the industry aims at top-line growth while also preparing for the
opportunities emerging markets offer
• Diversification along the innovation path ranks second. It results from the trend
towards personalized healthcare and diagnosticsp g
• Integration strategies along the healthcare value chain would turn pharma into
active healthcare solution providers – they are not yet in the focus of today's
strategies
5

6. Executive Summary
The art of managing a diversified business
• Leveraging existing capabilities and realizing related synergies is key to any4. g g g p g y g y y
successful diversification
• The largest overlaps of innovative patent-protected pharma with alternative
diversification areas are identified with Generics (45%) followed by Diagnostics
(43%) d V i (37%)(43%) and Vaccines (37%)
• Pharma executives see only very limited functional competencies of their
innovative business model which can be leveraged in other diversification areas
• In particular despite huge investments customer skills such as access to• In particular, despite huge investments, customer skills, such as access to
prescribers or even branding, are not seen as key competencies to be leveraged
in an effort to diversify
R&D d ti it i i d i di ifi tiR&D productivity crisis drives diversification
• Over 60% of executives are re-evaluating their traditional strategy which was
focused on patent-protected, high margin products due to two reasons
Fi tl i t i t th i f i ti di i t d
5.
6
• Firstly, interviewees expect the margins of innovative medicine to come under
tremendous pressure as public household deficits need to be managed across
the globe

7. Executive Summary
R&D productivity crisis drives diversification (Continued)
• Second, massive R&D investments are no longer expected to bring the required
5 g p g q
level of return
• As many as almost 50% of executives expect a negative return of invest for
today's R&D investments
I ti h ill i i l h t j tif th i hi h l l f R&D t
5.
• Innovative pharma will increasingly have to justify their high level of R&D spent.
Many top-players have already started to reassess their R&D operations and
reduced the internal investment level significantly
7

8. Executive Summary
Financial community and shareholders support diversification
• The financial community has already acknowledged this fundamental change – it6 y y g g
no longer penalizes diversified companies
• With over USD 400 billion of market capitalization lost over the past 10 years
among innovative pharma, investors are now linking high growth expectations to
di ifi d i
6.
diversified companies
• Price-to-earnings ratios of diversified companies are already higher than those of
focused players
Diversification is here to stay
• Over 80% of executives believe diversification is a long-term trend that will be7. g
pursued irrespective of R&D productivity
• For the rest, it will be a bridging strategy needed to compensate for profit and
growth shortfalls
8
• The future will bring a more diversified picture: ranging from highly focused,
innovative players to fully integrated healthcare conglomerates

9. C t t d t d hB Context and study approachB.
PRESS BRIEFING
9

10. Top pharma leaders recognize the existence of a looming strategic
crisis in the industry
… fuel a potential strategic crisis in
pharma1)
Today's challenges…
p
Q: Given reduced top-line growth and
margin pressure, do you think the
Public cost containment measures
resulting in margin pressure
pharmaceutical industry is facing a
strategic crisis?
g g p
Looming patent cliff and R&D
productivity crisis
No
35%Restricted market access and health
economic requirements
productivity crisis
Yes65%
economic requirements
Value of innovative Rx drugs
i i l ti d
10
increasingly questioned
Source: Roland Berger Survey 2010

11. Consequently, we observe two different strategic business models
in the pharmaceutical industry
Diversification as a way out of the strategic crisis?
Top management point of +140%Top management point of
view1)
Q: Do you think diversi-
fication is a potential
140%
+120%
+100%
EDBUSINESS1)
Diversification
fication is a potential
way out of the strategic
crisis for pharmaceutical
companies?
+80%
+60%
%
ROMDIVERSIFIE
+
+
3)
No
33%
+40%
+20%
0
ONOFSALESFR
2)
Yes67%
-20%
-40%
-100%
PROPORTIO
Rx Focus 3)
11Source: Roland Berger Survey 2010; Annual reports
2004 2005 2006 2007 2008 2009
100%
1) All sales not resulting from pure innovative Rx business 2) Incl. Sandoz 3) Preliminary data

12. BACKUP
While many big pharma companies are currently diversifying,
others are strongly focusing their businesses
Recent diversification/ focus actions in pharma
Diversification R -focusDiversification Rx-focus
• Mega merger with Wyeth (Consumer
Health, Nutritionals, Vaccines)
• Acquisition of RFCL-Vetnex Animal
Health
• Clear focus strategy on
diagnostics and Rx pharma
• Sale of Roche Consumer Health to Bayer
Health
• Acquisition of Ebewe Pharma
(Generics)
• Announced acquisition of Alcon
(consumer vision care, surgical
equipment & devices)
• IPO and split-off of Mead Johnson
Nutrition
• Monetization of non-pharma businesses,
e.g. sale of BMS Branded to GSK
(G i )
FIGHT
or
• Numerous Generics acquisitions
worldwide
• Acquisition of Chattem Inc. (Consumer
Health) and Merial Ltd. (Animal Health)
f
• SHAPE program to focus on indication
areas Neurology and Immunology, e.g.
divesting primary care organization and
l f E OTC b i
equipment & devices) (Generics)
FLIGHT
??• Increase of Vaccine presence through
joint venture in China
• Investment in Aspen Pharmacare
(Generics)
Additional diversifiers
sale of European OTC business
• Acquisition of Schwarz Pharma AG
(Neurology)??
12Source: Roland Berger
Additional diversifiers

13. Three dimensions of diversification can be distinguished
Roland Berger diversification framework
• Continue on path of medicalINNOVATE
INNOVATE
p
progress by investing into adjacent
medical disciplines
INNOVATE
"High risk,
high fun"
INTEGRATE
• Defend existing top-line by forward
integration along the healthcare
value chain
INTEGRATE
"Maintain
fun" value chain
Reduce dependency on R businessDE RISK
fun
Rx
Focus DE-RISK
• Reduce dependency on Rx business
model by investing into other non-Rx
life science businesses
DE-RISK
"Low risk,
still fun"
13Source: Roland Berger
Focus DE RISK

14. Three dimensions of diversification can be distinguished
Roland Berger diversification framework
INNOVATE
H lth
Medical
Diagnostics Wholesale/
Retail bus.
INTEGRATE
INNOVATE
Healthcare
provision
devices
Consumer
health
Vaccines
Animal
health
GenericsRx-Focus
DE-RISK
14Source: Roland Berger Survey 2010

15. In our current study, we investigate the strategic rationale behind
diversification decisions and generate an outlook to the future
Goals of
our current
Understand drivers behind diversification
our current
study
Analyze status quo and recent evolution with regard to
diversification
Determine most attractive areas for diversification
Evaluate options for management of diversified businesses
Analyze diversification from a stakeholder's perspective
Generate an outlook and suggest next steps
15Source: Roland Berger
Generate an outlook and suggest next steps

16. The survey covers the majority of global pharmaceutical
companies producing patented prescription drugs
Survey population
• Over 25Geographic focus of Global revenues of respondents' O 5
participating
companies
• Participating
i
G g p
respondents [% of respondents]
G p
companies [% of respondents]
AboveBelowGlobalNational
companies cover
over 40% of global
pharma revenues
• 7 out of top 1040%
29%
Above
USD 15 bn
Below
USD 5 bn
Global
focus
National
focus
out o top 0
pharmaceutical
companies
included
(based on 2009
40%
47% 46%
Regional
focus
(
revenues)13%
25%
Between
USD 5 and 15 bn
16Source: Roland Berger Survey 2010

17. Top executive interviews represent the most important input to
validate findings and to derive strategic implications
High level survey results Desk research
Fight or Flight?
R&D, scientific conversion and novel approaches to healthcare
management are seen as the key drivers for diversification
Q: What are the most important drivers for diversification (select top 3)?
Survey results [% of respondents selecting area within top 3] Key finding
• The most important drivers of
diversification are those related to
R&D / scientific conversion and
novel approaches to healthcare
management
Scientific conversion trends
R&D productivity crisis
47%
50%
I DRIVERS
Diversification vs. Rx focus in big pharma's
quest for sustained growth
1510_06_20 - Fight or flight - Top Executive Interviews_v5.pptx
g
Source: Roland Berger Survey 2009
General uncertainty about evolution
of healthcare system
Rx pharmaceutical budget restrictions
Consumerization of healthcare
Shifts in stakeholders/novel
approaches to HC management
12%
18%
18%
20%
42%
Emerging market opportunities
Proposed discussion topics
• Can diversification help to
overcome the R&D productivity
crisis?
• Which scientific conversion trends
should be addressed through
diversification?
• Which capabilities are required to
deal with shifts in stakeholders/
novel approaches to HC
management?
Roland Berger experience
17Source: Roland Berger
Top executive interviews
Roland Berger experience
from global projects

18. St d fi di d di iC Study findings and discussionsC.
PRESS BRIEFING
18

19. We have tackled the topic of diversification along four guiding
questions
What drives pharmaceutical companies to diversify?
Drivers of
diversification
I
What are attractive diversification areas?II Where to diversify?
What are the implications for management of
diversified businesses?
How to diversify?III
How is diversification assessed from a pure financial
and investment perspective and is it here to stay?
Shareholder's per-
spective & outlook
IV
19
ROLAND BERGER STUDY ON DIVERSIFICATION
Source: Roland Berger

20. I DRIVERS OF DIVERSIFICATION
Changing health care environment, R&D and merging of medical
disciplines are seen as the key drivers for diversification
Q: What are the most important drivers for diversification (select top 3)?
S lt [% f d t l ti ithi t 3] K fi diSurvey results [% of respondents selecting area within top 3] Key findings
• In light of the R&D productivity
crisis executives watch out for
investment opportunities outside
Changing health care environment
in industrialized countries
88%
investment opportunities outside
the traditional Rx-innovation model
• Merging of medical disciplines
drives pharmaceutical companies
to secure technological/
R&D productivity crisis 75%
to secure technological/
scientific leadership through
diversification
Emerging market opportunities
Merging of medical disciplines
43%
57%
Consumerization of health care 28%
20Source: Roland Berger Survey 2010
Others 3%

21. R&D PRODUCTIVITY CRISIS – BACKUP
At the same time, pharma companies are facing the expiration of
numerous patents
COMPANY 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Range of LOE exposure within next 5 years in % of total sales 2009
Sanofi-Aventis
Eli Lilly
Novartis
y
Bristol-Myers Squibb
Merck & Co + Schering Plough
Astra-Zeneca
Pfizer+Wyeth
Merck & Co. + Schering-Plough
Roche
GlaxoSmithKline
21Source: US Patent and Trademark Office, Annual Reports
Johnson&Johnson
Source: US Patent and Trademark Office, Annual Reports

22. MERGING OF MEDICAL DISCIPLINES – BACKUP
Merging of medical disciplines drives pharma companies to
innovate through diversification
Examples for merging of medical disciplines
1 Combination of Rx with
2 Combination of medical
3 Combination of imaging
1 x
genetic tests 2 devices and Rx
3 g g
and molecular biology
• Tumor response to treatment
with Erbitux® can be predicted
with genetic testing (K-RAS)
• Patient subpopulations with high
• The IntelliCap technology
allows for controlled drug
delivery in the intestinal tract
• Drug effectiveness can
• Combination of molecular tra-
cers with in-vivo imaging techno-
logies allows for early detection
of diseases at molecular levelp p g
response can be easily selected
g
significantly increase with fewer
side effects
• Bayer-Schering's Florbetaben
can be used for early detection
of Alzheimer's disease
22Source: Roland Berger

23. II WHERE TO DIVERSIFY?
Most important diversification area is the generics business –
forward integration not yet in focus
Q: What is the importance of each diversification area in the current trend toward diversification?
(select top 3)
Survey results1) Key findings
• Pharma companies concentrate
on expanding existing
78%Generics
WHY?
• Close to existing
business?
• Close to existing
businesses instead of innovating
in other areas
• If other areas are entered, those
with highest margins or R&D
50%
42%
Diagnostics 40%
Vaccines
Consumer health
• Close to existing
business?
• High margins /
R&D synergies?
• High margins /
R&D synergies
synergies are in focus
28%Healthcare provision
Medical devices 35%
R&D synergies
• High margins /
R&D synergies
• Securing
revenues?
8%
5%
Wholesale business
Animal health
Retail business
0%
23Source: Roland Berger Survey 2010
Other 0%
1) % of respondents selecting area within top 3

24. II WHERE TO DIVERSIFY?
Drivers vary by diversification area – Restricted healthcare
budgets mainly drive the move into generics
Q: What are the key drivers behind each area of diversification?
K fi di
s/
ment
Key findings
• Move into generics (most important
area) is driven by multiple trends
R&D i i ll i f
RS
roductivity
rmaceutical
restrictions
nstakeholders
approachesto
caremanagem
ingmarket
unities
merizationof
care
gofmedical
nes
• R&D crisis as well as merging of
medical disciplines fuel diversification
into high-margin areas
DIVERSIFICATION
AREAS
DRIVE
R&Dpr
crisis
Rxphar
budget
Shiftsin
novela
healthc
Emergi
opportu
Consum
healthc
Merging
disciplin
Generics
Medical devices
Consumer health
Diagnostics
Healthcare provision
24Source: Roland Berger Survey 2010
Vaccines
Named by more than 50% of respondents per diversification area

25. III HOW TO DIVERSIFY?
Leveraging existing capabilities and choosing the optimal
management approach are key to create value from diversification
How to diversify for value creation?
Identify areas in which Rx
capabilities can be
leveraged
In which areas do you believe, Rx-based pharma players
could most successfully leverage their skills and capabilities?
Q:
Detail relevant Rx
capabilities per
Which core competencies of the Rx pharma business can be
le eraged most s ccessf ll for different di ersification
Q:
capabilities per
diversification area
leveraged most successfully for different diversification
areas?
Determine optimal
management approach for
diversified businesses
Which diversification areas should be integrated into the
existing organization and which should be managed as a
stand-alone business?
Q:
25Source: Roland Berger

26. III HOW TO DIVERSIFY?
The most successful transfer of skills and capabilities is expected
in the areas of generics and diagnostics
In which areas do you believe, Rx-based pharma players could most successfully leverage their
skills and capabilities?
Q:
Di i 43%
Generics 45% • There is no clear "must be in" area
in which Rx skills can be perfectly
l d
Survey results [% of respondents selecting area within top 2] Key findings
Consumer health 28%
Vaccines 37%
Diagnostics 43% leveraged
• According to executives, Rx
companies lack capabilities for
forward integration
13%
Healthcare provision 20%
Medical devices
Wholesale business 2%
Retail business 7%
Animal health 8%
26Source: Roland Berger Survey 2010
Other 0%

27. III HOW TO DIVERSIFY?
Relevant and applicable core competencies vary by diversification
area – There is no single "must have" diversification area
Q: Which core competencies of the Rx pharma business can be leveraged most successfully?
e)
• Pharma companies seek to leverage
manufacturing skills in generics – At
th ti i
Key findings
NAL
ETENCIES
acturing
(public/private
ercial
OMER
ETENCIES
mer/patient
bers
the same time some generics
companies are outsourcing
manufacturing (e.g. TEVA)
• Top executives see no major
opportunity to successfully leverage
DIVERSIFICATION
AREAS
INTERN
COMPE
Generics
R&D
Manufa
Payers
Comme
CUSTO
COMPE
Consum
Prescri
opportunity to successfully leverage
their relationships with prescribers
Vaccines
Diagnostics
Consumer health
Healthcare provision
27Source: Roland Berger Survey 2010
Medical devices
Named by more than 50% of respondents per diversification area

28. III HOW TO DIVERSIFY?
Top executives favor to integrate those businesses where high
R&D synergies are expected
Which diversification areas should be integrated into the existing organization and which should
be managed as a stand-alone business?
Q:
Top-executives
High
Vaccines
Top executives
believe that
diversification areas
with a high level of
R&D synergies
Level of
R&D
Diagnostics
R&D synergies
should be
integrated into
existing innovative
R b i
R&D
synergies
Medical
devices
Rx business
Low
Healthcare
provision
Consumer
health
Generics
28Source: Roland Berger Survey 2010
Stand-alone Integrated
Management approach

29. IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK
The "traditional" stance on R&D productivity favored a focus
strategy – However, the picture might change
Does the R&D productivity crisis tilt the scale towards diversification?
M i M i
Potential
ROIC ?
Margin
WACC
Margin
WACC
depending on R&D
d ti it
consequences
• Margin dilution
• Risk reduction
ROIC ?
productivity
• Value creation?
• Value destruction?
Focus on RX Diversification
29Source: Roland Berger

30. IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK
A significant portion of top executives does not believe in positive
returns from R&D investments – Improvement is expected
Q: Looking specifically at R&D, do you believe that today's investments yield a positive ROI?
Q: Looking at potential scientific advantages, do you believe that the return on R&D investments
will be positive in 10 years?will be positive in 10 years?
NEGATIVE POSITIVE
Key findings
M t ti b li i
53%47%Today's R&D
NEGATIVE POSITIVE • Most executives believe in
improvement of R&D returns in
the next 10 years
• Looking at R&D productivity, at
l t f th ti
67%33%R&D in 10 years
least one of three executives
should consider diversification
30Source: Roland Berger Survey 2010

31. IV SHAREHOLDER'S PERSPECTIVE AND OUTLOOK
Manage for growth or margin? There is a gap between investor's
expectations and management's preference
Conflicting expectations … … and their impact on
diversification activities
Q: What do you believe to be
investors' primary
expectation of pharma-
ceutical companies: high
Q: Please rate the following
statement: "CEOs are
currently limiting their
diversification activities
Q: If you could choose, would
you manage for growth or
margins?
Sales growth High margins
ceutical companies: high
margins or sales growth?
diversification activities
because of the expected
dilution of margins."
23%
44%
56%
68%32%
77%
High margins
56%
Sales growth
Disagree Agree
31Source: Roland Berger Survey 2010
High margins Sales growth

32. IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK
Most executives see diversification as a long-term trend,
irrespective of R&D productivity
Q: Please rate the following statement:
"Diversification is a long-term trend that
will be pursued irrespective of R&D
productivity recovery because it offers
Q: Please rate the following statement: "The
market will split into different segments,
with some players focusing only on the
R&D-based Rx model and others becomingp y y
attractive business opportunities."
x g
diversified healthcare players."
Disagree Disagree
18%
g
22%
Disagree
Agree
82%
Agree
78%
Agree g
32Source: Roland Berger Survey 2010