01 May 2015 Global Equity Research Major Pharmaceuticals Global Pharma Research Analysts European Pharma Team 44 207 888 0304 creditsuisse.pharmateam@credit-suisse.com Jeffrey Bailin, CFA 212 325 6167 jeffrey.bailin@credit-suisse.com Vamil Divan, MD 212 538 5394 vamil.divan@credit-suisse.com Tyler Harris 212 325 2056 tyler.harris@credit-suisse.com Ari Jahja 212 325 0767 ariyanto.jahja@credit-suisse.com Terence McManus 44 20 7888 2102 terence.mcmanus@credit-suisse.com Ravi Mehrotra PhD 212 325 3487 ravi.mehrotra@credit-suisse.com Glen Santangelo 212 538 5678 glen.santangelo@credit-suisse.com Anuj Shah 212 325 6931 anuj.shah@credit-suisse.com Jo Walton 44 20 7888 0304 jo.walton@credit-suisse.com Rising US Rebates limit margin expansion The reconciliation of gross to net US pharma sales from annual report disclosures helps us understand the full promotional burden in the US. It shows what proportion of the highly visible US list price rises has been retained by innovators and what has been passed on to payers in the form of rebates. For 2014, our 20 company universe has shown net US drug sales of $202bn and reported total rebates of $98bn. We conclude that in 2014 US rebates rose 24% against just a 7% increase in net sales, reflecting continued formulary pressures. We view rebates as the biggest single element of promotional spend available to companies. We estimate that whilst traditional SG&A grew only 4% in 2014, when this spend is combined with rebate expenses, overall promotional costs rose 17%, well ahead of reported sales growth. This goes some way to explain the lack of overall operating margin expansion seen for many companies despite positive sales growth and recent significant restructuring. AZN continues to show the highest level of overall rebates at 56.6% of sales with GSK, Lilly and Sanofi all reporting a >5pp increase in rebates. We believe that product uniqueness remains the best defence against increasing rebates, with companies showing high or growing levels of uniqueness being in the strongest position to withstand payer pressures and sustain operating margins. Roche and Celgene remain the stocks with the highest exposure to unique drugs. Lundbeck and UCB are the most levered to continued US price rises. Figure 1: Net Price as a key driver of 2014 net income growth Impact of '14 US net price rises Matthew Weston PhD 44 20 7888 3690 matthew.weston@credit-suisse.com ANNUAL 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% % chg from US price. % Chge- Other % chg in Net Inc Source: Company data, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 01 May 2015 Key takeaways Rebates rising: Companies with the highest current overall reported rebates are AstraZeneca, followed by Novo and Sanofi. Lilly and GSK saw the largest increase in US rebates in 2014. List prices still rising faster than rebates for most: Companies with the highest net price rises in 2014 were Sanofi (+26%), Novo (+21%) and Actelion (+18%). Companies with the lowest net price rises were GSK (+2%), Eli Lilly (+4%), Roche (+4%) and UCB (+5%). Rebate growth has more than offset reported declines in traditional SG&A: Aggregate promotional costs have risen at least 10% between 2012-2014 for AZN and UCB. We see a decline in overall promotional costs for Amgen, Actelion, Biogen Idec and Shire. The highest current level of uniqueness should provide protection from rebate pressures: Celgene, Gilead and Roche have over 75% of current worldwide (ww) sales rated as unique. Companies with the least unique portfolios include AZN, Bayer and GSK, all with under 20% rated as unique. Companies increasing their contribution of unique drugs by more than 10% include Lundbeck and Biogen Idec. We expect Sanofi and Roche to see the biggest theoretical loss in uniqueness. Exposure to government funded Medicaid and Medicare Part D also raises rebate pressures: IMS data suggest Novo, Lilly and Sanofi are the most exposed, reflecting their diabetes sales. Oncology sales may also be weighted towards the elderly but are typically funded via Medicare Part B. Figure 2: Summary data on US drug sales, US drug price rises, rebates and uniqueness status Company 2014 US Rx sales $m Abbvie Amgen BIIB BMY Celgene Gilead JNJ Lilly Merck Pfizer Actelion AstraZeneca Bayer GSK Novartis Novo Nordisk Roche Sanofi Lundbeck Meda Merck KGaA Shire UCB US & EU weighted avg US total/weighted avg EU total/weighted avg 10,764 14,729 6,684 7,716 4,164 18,520 17,422 7,860 14,215 19,073 1,024 10,120 3,628 10,732 12,325 7,688 17,387 12,640 670 374 1,733 4,047 1,453 204,967 121,146 82,796 List price rises US sales % of Group FY2014 1Q 15 54% 73% 69% 49% 54% 74% 23% 40% 34% 39% 48% 38% 6% 28% 21% 49% 33% 28% 28% 17% 11% 67% 31% 43% 50% 32% 15% 8% 10% 13% 7% 7% 10% 10% 12% 17% 13% 17% 10% 9% 12% 22% 5% 32% 16% 5% 16% 10% 17% 13% 11% 15% 16% 9% 10% 11% 6% 1% 8% 15% 14% 16% 18% 16% 13% 9% 14% 24% 5% 23% 8% 15% 11% 9% 9% 12% 10% 14% Rep. Rebates FY13 32% 27% 23% 35% 14% 21% 30% 26% 28% 28% 18% 55% FY14 31% 28% 46% 37% 27% 47% 40% 45% 33% 32% 27% 29% 35% 29% 23% 35% 15% 20% 32% 32% 32% 31% 14% 57% % chg '14 Net Inc % unique in '14 from and pp chg to price in total '18 15% -9% 18% -5% 11% 4% 49% -2% 10% 44% 56% 14% 18% -16% 59% 4% 6% 15% 92% 0% 7% 279% 80% 3% 4% 3% 27% -4% 14% -47% 34% 2% 8% -10% 26% -6% 11% -16% 26% 8% 17% 16% 45% -11% 15% -48% 12% 9% 2% 5% 15% 7% 8% -24% 13% 5% 7% -7% 44% 8% 17% -10% 24% -6% 3% -1% 77% -11% 21% -20% 30% -14% 12% -49% 44% 13% 0% 17% 22% 2% 5% 0% 22% 2% 12% 30% 46% 0% 28% -50% 22% 5% 10% 41% 10% 43% 11% 37% % exp. toMedicare/ Medicaid 13% 16% 10% 38% 16% 27% 24% 40% 32% 24% 8% 24% 25% 35% 26% 45% 15% 38% 20% 21% 10% 21% 30% 26% 24% 28% Source: Company data, Credit Suisse estimates Global Pharma 2 01 May 2015 Rebates continuing to outpace US pharma sales… Increasing rebate pressures go some way to offsetting the strong list price rises that continue to be a feature of the US pharma market. In this report, we look at the longerterm trends in rebates and pricing covering both speciality and primary care companies. The very public exclusion of key drugs from important formularies effective from January 2014 and 2015 illustrated the growing power of purchasers to control physician prescribing, using buying power to drive incremental rebates. This reinforces our view that companies with a high degree of uniqueness in their portfolios are best positioned to defend against incremental rebate pressures and sustain growth (see Figure 12). In Figure 3, we show the annual disclosure of the percentage of gross US pharma sales passed on in rebates for a selection of companies. This shows that, on average, rebate levels appear to have risen in 2014 from 33.7% to 36.2%, and for the US companies from a sales-weighted average of 31% to 35.9%. Unfortunately, not all EU-based companies report the data, as it is only seen as a best practice requirement for reporting for companies with US listings. Bayer and Roche are the two major EU companies that do not report gross-to-net for their pharma operations. Overall, EU-domiciled companies have reported a consistently higher level of reported rebates than our US universe and have also shown a further increase in 2014 from 38% to 41.1%. Figure 3: Rebate/discounts as a percentage of gross US pharma sales US Drug Rev. $m Com pany 2014 Branded Abbott/Abbvie 10,764 Actelion 1,024 Amgen 14,729 AZN 10,120 Bristol-Myers** 7,716 Elan/BIIB *** 6,684 Celgene 4,164 Gilead 18,520 GSK 10,732 Eli Lilly 7,860 Pfizer 19,073 Wyeth J&J 17,422 Merck 14,215 Regeneron 1,751 Schering-Plough Novartis* 12,325 Novo Nordisk 7,688 Sanofi 12,640 Shire***** 4,047 Vertex 261 Generic/ OTC Perrigo 927 Forest**** Teva 10,461 Valeant 4,387 Full universe 197,508 Total Branded Sales 181,733 US dom iciled brand sales weighted Discount from Gross Sales % 2010 2011 2012 2007 2008 2009 24.5 22.6 25.4 26.0 17.5 30.1 11.6 8.4 17.5 34.9 12.0 6.0 16.4 21.6 10.7 17.1 23.9 19.0 12.6 17.9 23.4 13.2 21.7 29.4 22.5 13.2 15.7 38.7 12.8 6.3 9.8 19.6 26.3 15.0 29.1 27.0 13.8 16.6 41.5 14.8 15.9 12.2 24.7 29.2 16.5 24.0 30.1 21.5 19.2 28.5 31.6 19.1 10.8 19.1 27.7 31.4 21.5 10.5 29.7 32.4 23.6 15.9 29.1 32.9 29.4 24.1 19.2 19.2 19.9 20.7 39.9 53.2 22.2 41.4 27.8 25.1 22.9 30.2 29.2 28.9 20.9 18.8 16.3 23.1 20.8 18.2 24.1 23.7 21.5 29.3 12.1 29.2 44.4 29.2 19.5 14.2 28.5 28.1 21.4 27.5 30.5 24.5 28.5 39.3 31.2 29.7 15.1 EU dom iciled brand sales weighted 24.2 26.3 29.7 32.2 33.9 * Novartis data from 2009 US pharma only, prior data estimated to exclude Sandoz generics, vaccines ** BMY disclosures changed from '07. Data provided seems to encompass all key elements of discounting *** Elan data to 2010, BIIB data from 2011 onwards **** Valeant reports global data , CS assume 75% of global rebates accrue to the 55% of business in the US Rebate inc.'14 -13 2013 2014 28.6 14.3 25.9 48.9 33.7 23.1 13.4 21.1 30.8 21.0 26.5 32.1 17.9 26.8 54.6 34.6 23.4 13.8 24.1 30.7 26.3 27.6 35.1 13.5 29.4 56.6 35.0 22.7 14.8 19.7 36.8 32.3 31.3 28.7 25.8 6.6 28.3 43.2 38.8 29.4 22.7 30.4 27.6 5.9 27.6 46.3 39.8 32.7 23.1 31.5 32.4 6.0 27.1 47.4 45.2 32.3 9.0 -0.6 1.2 5.4 -0.5 -14.1 50.0 26.2 41.4 15.6 31.6 29.6 28.7 50.0 29.1 41.2 34.7 33.7 30.9 31.0 50.0 0.0 49.8 37.4 36.2 32.6 35.9 8.6 2.7 2.5 1.6 4.9 37.0 38.0 41.1 3.1 3.0 -4.5 2.6 2.0 0.5 -0.8 1.0 -4.4 6.1 6.1 3.7 0.0 1.2 4.7 0.1 *****Shire Aggregate data in the 10-K covers only selected discounts and does not include items such as wholesaler chargebacks, which are included in other company disclosures, where they are significant items. We have not made any adjustment for this omission and assume that the trend of reported disclosures shows the direction, if not magnitude of full rebates (Shire reported 67% effective discount from list price for Adderall XR and 38% for Vyvanse for 2014) ****** Actelion data is adjusted for change in rebate policy in 2013, so all data shown pre rebate reversals Source: Company data, Credit Suisse estimates Global Pharma 3 01 May 2015 …but US list prices are still rising faster than rebates In Figure 4, we look at the sales-weighted headline price rises for major companies. For those companies that gain income for products that are not fully consolidated in sales, we have also shown effective prices rises as they may still drive overall profitability. There is no sign of list price rises easing, with 1Q15 continuing with the 11-12% overall trend seen in 2013 and 2014. Novo and Sanofi continue to stand out as having the highest list price rises in 2015, reflecting strong increases for Lantus and Levemir. However, we know that a large element of this is rebated away, given Eli Lilly and Sanofi, two of the three main insulin manufacturers, are also showing relatively high levels of incremental rebates in 2014 (both over 5pp). Novo has high rebate levels, but with only a 1pp increase in 2014 against a 22% list price rise, it appears to have been able to retain effective pricing power in 2014. With higher rebates for key competitor Lantus from Sanofi in 2015, and no expected trade up in effective price for Toujeo, we expect Novo to suffer further this year. Figure 4: US list price rises; company data are sales weighted 2013 2014 Company data US Rx sales $m Abbvie 10,764 Actelion 1,024 Amgen 14,729 BIIB 6,684 BMY 7,716 Celgene 4,164 Gilead 18,520 JNJ 17,422 Lilly 7,860 Merck 14,215 Pfizer 19,073 AstraZeneca 10,120 Bayer 3,628 GSK 10,732 Novartis 12,342 Novo Nordisk 7,688 Roche 17,387 Sanofi 12,640 Lundbeck 670 Meda 374 Merck KGaA 1,733 Shire 4,047 UCB 1,453 US & EU total/weighted average 204,984 US total/weighted average 122,170 EU total/weighted average 82,814 2014 2015 Q1 14.3% 8.9% 7.9% 10.8% 12.5% 8.5% 7.0% 9.9% 15.1% 10.4% 12.9% 12.9% 6.2% 9.4% 10.8% 12.7% 3.6% 8.5% 26.5% 12.1% 20.0% 9.6% 10.5% 10.1% 10.6% 9.3% Q2 13.6% 8.9% 10.4% 18.5% 13.0% 8.5% 7.0% 10.3% 17.2% 10.0% 13.0% 13.0% 8.3% 9.9% 10.7% 15.8% 4.0% 9.5% 17.0% 12.1% 14.6% 8.2% 12.4% 10.8% 11.5% 9.7% Q3 14.4% 12.2% 8.3% 12.9% 13.0% 11.7% 6.3% 10.1% 16.1% 12.5% 13.6% 13.6% 6.2% 10.3% 11.0% 16.1% 5.0% 15.3% 17.6% 7.6% 20.4% 10.7% 15.0% 11.2% 11.3% 11.2% Q4 21.1% 13.0% 8.3% 16.1% 12.5% 5.6% 6.3% 11.2% 14.6% 16.8% 13.6% 13.6% 4.6% 9.3% 9.6% 20.1% 4.2% 22.4% 17.6% 7.6% 24.4% 9.6% 15.6% 12.3% 12.4% 12.1% 1Q 13.7% 7.9% 8.5% 14.2% 15.5% 6.6% 5.8% 9.6% 13.7% 12.5% 14.0% 14.0% 8.3% 8.6% 11.4% 20.7% 4.9% 34.7% 16.5% 3.9% 19.9% 10.3% 22.1% 12.5% 11.0% 14.6% 2Q 13.7% 13.6% 6.0% 8.2% 12.1% 6.6% 7.0% 9.5% 8.4% 12.4% 22.3% 22.3% 5.9% 9.1% 12.2% 24.9% 4.7% 40.0% 16.5% 3.9% 19.9% 11.9% 19.4% 13.6% 11.4% 16.9% 3Q 15.5% 13.8% 8.2% 11.5% 11.6% 6.7% 7.0% 10.3% 9.4% 13.6% 15.3% 15.3% 12.0% 8.3% 12.4% 20.4% 5.0% 30.0% 14.6% 5.4% 14.6% 9.2% 16.2% 12.3% 11.2% 14.0% Q4 15.7% 17.9% 11.3% 4.5% 12.8% 9.7% 7.0% 9.4% 9.3% 9.3% 16.4% 16.4% 13.1% 9.0% 12.8% 21.9% 4.9% 22.9% 18.0% 5.4% 7.8% 8.1% 10.5% 11.8% 10.9% 13.1% 1Q 15.7% 17.6% 9.1% 10.4% 11.4% 5.9% 1.0% 8.0% 15.2% 13.5% 16.0% 16.0% 12.8% 8.5% 14.0% 24.3% 5.0% 23.2% 8.2% 15.3% 10.7% 8.9% 9.4% 11.7% 10.5% 13.5% 0.0% 11.2% 11.5% 20.6% 14.5% 0.0% 15.2% 11.5% 20.6% 14.5% 0.0% 14.5% 23.2% 14.9% 14.6% 8.5% 12.6% 23.2% 2.0% 14.6% 8.5% 18.1% 10.5% 13.7% 14.4% 8.5% 11.5% 13.8% 13.7% 14.4% 17.7% 17.1% 3.0% 15.0% 7.9% 8.5% 17.1% 3.0% 15.0% 18.6% 19.2% 17.4% 3.0% 14.9% 9.9% Other key products Tudorza Onglyza/Bydureon Dysport (aesthetic) Orion/Novartis (Comtan/Stalevo) Xarelto Source: Wolters Kluwer, Credit Suisse estimates, for companies with no disclosure we assume average increase in rebates of 1.5% Global Pharma 4 01 May 2015 Net US prices still a major contributor to EPS growth In this section, we combine information from our pricing and rebate analysis to isolate the effect of net US prices on sales and earnings. In Figure 5 to Figure 7, we translate the impact of the effective net price rises we have calculated to the reported net income and illustrate the % benefit we estimate to have come for US drug pricing to group net income. We look at the universe of US and EU companies over time and for individual companies for 2014. Figure 5: Drivers of U$ net inc. growth for US universe Figure 6: Drivers of U$ net inc. growth for EU universe 20% % change in U$ net income % change in U$ net income 20% 15% 10% 5% 0% -5% -10% -15% 15% 10% 5% 0% -5% -10% -15% -20% -20% 2009 2010 2011 Gwth from Net US Prices 2012 2013 2009 2014 2010 2011 Gwth from Net US Prices Gwth from Other 2012 2013 2014 Gwth from Other Net Inc Growth (EU comps) Net Inc Growth (US comps) Source: Company data, Credit Suisse estimates for Abbvie, Amgen, Source: Company data, Credit Suisse estimates. Actelion, AZN, BIIB, BMY, JNJ, LLY, GILD, MRK, PFE Bayer, GSK, Novartis, Novo, Roche, Sanofi, Shire, UCB We have assumed an effective 80% contribution margin from price-driven incremental US sales and taxed this at the effective corporate tax rate for each company. For companies such as UCB the impact looks particularly high due to the low level of overall group income as the group transfers from the "Keppra" years to earnings driven by Cimzia and Vimpat. Figure 7: Estimate of impact on 2014 net income of net US price rises Impact of '14 US net price rises 60% 40% 20% 0% -20% -40% -60% % chg from US price. % Chge- Other % chg in 2014 Net Inc Source: Company data, Credit Suisse estimates Global Pharma 5 01 May 2015 Rising rebates offset declining SG&A; the real marketing burden is rising We know that reported rebate growth has been faster than sales over time and that overall reported SG&A as a percentage of sales has fallen slightly each year since 2008. However, the overall promotional budget that a company has to influence doctors prescribing and to influence payers' formulary decisions arguably encompasses both rebates and other traditional SG&A. If we look at this expenditure on an aggregate basis, we see that it is rising as a percentage of gross sales. This is illustrated in Figure 8 which indicates that the decline in traditional SG&A is less significant than growth in rebates. Figure 8: Overall promotional expenses still rising, even if reported SG&A as % is falling Expense as a % of gross sales 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 SG&A as % of Gross Sales 2011 2012 2013 2014 Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates In Figure 9, for the key companies, we illustrate our estimate of full promotional expenses made up of traditional SG&A, assuming that US spending mirrors group spend and either reported or Credit Suisse estimates of US rebates, all expressed as a percentage of gross US drug sales. % of '14 gross sales accounted for by rebates and SG&A Figure 9: Full 2014 promotional expenses. Traditional SG&A and rebates all as a percentage of gross US drug sales 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% SG&A as % of Gross US sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Global Pharma 6 01 May 2015 The rise of the co-pay card, an example of novel rebating In addition to growth in regular rebates, which are normally given to establish favourable formulary positioning, we have seen growth in other forms of rebating often designed to get around payer restrictions. In Figure 10, we use IMS Health data to show the growing use of co-pay cards in the diabetes space. These can promise zero co-pays for eligible patients and can completely negate a formulary positioning that encourages the use of favoured products, for which a payer has promised high market share in exchange for rebates, or for which a payer wants to encourage a generics first approach. The data suggest that the new SGLT2 class is particularly affected. What is surprising to us is that, until recently, there were only two US players: Invokana (JNJ) launched in April 2003 and Farxiga (AZN) launched in February 2014. Looking at the product websites we can see that co-pay assistance is clearly advertised and the data in Figure 10 suggest that a high proportion of both drugs must have been used with a co-pay card. Jardience from Boehringer Ingelheim/Lilly was launched as the third entrant in September 2014 and the Jardience website shows the same sort of offer as for the other two drugs with zero co-pay for eligible patients (with insurance but not covered by Medicare up to a value of $337 per month) for one year, with the ability to re-enrol for another year. With only two players on the market for much of this time, the level of co-pay assistance seems very high. What is more surprising is that the same offer of zero co-pay is advertised on the Glyxambi website. Glyxambi is the only combined SGLT2 /DDP IV on the market. It looks as if this sort of rebate is designed to encourage/accelerate a trade up to a new class of drug, rather than to gain share against similar competitors, as at this time Glyxambi is unique. We believe that the cost of these programs is largely accounted for within rebates with admin costs falling into traditional SG&A. Figure 10: Co-pay card utilisation on the rise, example of diabetes care % of Rx filled with copay card 60% 50% 40% 30% 20% 10% 0% 2011 2012 Insulin GLP-1 2013 DPP-4 2014 SGLT-2 Source: Formulary Impact Analyzer (FIA), IMS Institute, Payer and Managed Care Insights Global Pharma 7 01 May 2015 Portfolio uniqueness remains key We continue to believe that the best defence against the price pressures from US purchasers is portfolio uniqueness and we see a correlation between levels of uniqueness and overall rebates (Figure 12). We believe that companies with higher levels of portfolio uniqueness will be able to sustain higher long-term pricing, access to patients and thus sales and profitability. For the 20 companies covered, we see no change in overall level of uniqueness from 2014 to 2018, with an average in both years of 41% of sales. Companies that we believe should sustain at least 65% of sales as unique throughout this period include Celgene, Gilead and Roche. We expect the companies with rising levels of uniqueness should include Bayer, and BIIB, while companies with the biggest decline in percentage of unique drugs are Actelion, Roche and Sanofi, all of which decline by around 10 pp. Figure 11: % of economic sales rated as unique (2 or fewer direct competitors in each region) % '14 & '18 ww sales unique 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % unique 2014 % unique 2018 Source: Company data, Credit Suisse estimates In Figure 12, we plot the ww percentage of unique drugs against 2014 reported rebates and see the expected correlation with companies with the least unique portfolios in general experiencing higher levels of rebates. Full details on the methodology are set out in Appendix 4. Of note is the fact that we count all branded oncology drugs as unique, assuming that prescribing decisions are based on clinical data and that price is secondary. Figure 12: Relationship between product uniqueness and rebates 100.0% AstraZeneca 90.0% decreasing uniquenss ---> 80.0% UCB 70.0% Merck Pfizer 60.0% Actelion BIIB Novo Nordisk Sanofi JNJ Lilly Novartis Shire 50.0% 40.0% GSK Abbvie Amgen BMY 30.0% Gilead 20.0% Celgene 10.0% 0.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 2014 rebate % Source: Company data, Credit Suisse estimates Global Pharma 8 01 May 2015 Abbvie Abbvie provides clear disclosure separating out Medicaid/Medicare, managed care and wholesaler chargebacks, with the biggest increase in recent years in the wholesaler chargebacks. Given that the anti-TNFs have seen some of the highest list price rises of any of the major drug categories, it is perhaps not surprising that associated rebate levels would also rise. Adding rebates back to reported SG&A suggests some increase in overall effective promotional spending, but the overall expense seems in line with peers. Humira is the largest product, which counts as discountable in our analysis in Europe until 2015 and in the US until 2017; after this it moves to substitution risk due to the potential arrival of generic Remicade, although we only model biosimilar Humira effectively entering the market from 2019. We assume that there will be three players with all oral combos in hepatitis C by next year, so this category comes in as discountable and not unique. This analysis is based on the portfolio of Abbvie- before the proposed acquisition of Pharmacyclics, which will add a stake in a low rebate cancer drug Imbruvica into the mix. (Note 2014 10-K for PCYC showed rebates as 11% of gross sales.) % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 14: SG&A and rebates as % of US gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 13: Reported rebates as % of US gross sales -55 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 15: Components of US pharma sales growth Figure 16: Change in uniqueness over time for pharma 30000 40 30 25000 20000 10 0 Sales $m % change 20 -10 -20 -30 15000 10000 5000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 9 01 May 2015 Actelion Actelion reversed some previously provided US rebates in 2013 and 2014, illustrating the uncertainties in forecasting rebates particularly to government agencies (for which Actelion reported there can be a long delay between accrual and payment). Disclosure improved substantially in 2012 (covering the 2011 data) and we have made no estimates for prior periods for which information was very limited. Rebate trends are interesting for Actelion as they will be one lever the company can use to help shift patients away from the older generation PAH drug Tracleer to the newer drug Opsumit and, in the future, to selexipag. In 2014, we see no step up in accrued rebates despite c13% list price rises, suggesting no price-based threat from competition from Adempas, which was launched by Bayer in 2014. The level of uniqueness in this analysis falls first in 2013 from unique to discountable with the launch of Opsumit, although with Tracleer and Opsumit both from Actelion effective competition should be manageable. We use 2016 as the main year for Tracleer patent expiry, but note that in Canada the first generic from Mylan has already been launched. Figure 18: SG&A and rebates as % of US gross 80% 2007 2008 2009 2010 2011 2012 2013 2014 0 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales % of gross US drug sales as rebates SG&A/ Rebates % of Gross US drugs sales Figure 17: Reported rebates as % of US gross sales Rebates as % of Gross Sales -10 -20 -30 -40 -50 -60 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 19: Components of US pharma sales growth Figure 20: Change in uniqueness over time for pharma 20 3000 15 2500 2000 5 0 Sales $m % change 10 -5 -10 1500 1000 500 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -15 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 10 01 May 2015 Amgen In calculating the exposure of Amgen to US rebates, we assume that essentially all of the rebate and chargeback expenses are US expenses and that the "other deductions" accrue globally, based on the geographic percentage breakdown of sales. On this basis, rebate levels have remained very stable over the period of this analysis from 2007, suggesting that reported list prices are flowing through to the bottom line and are not being eroded by increasing rebates. The aggregate rebate and SG&A spend declines in line with the reported overall decline in SG&A as percentage of sales for the group (28% in 2012 to 22% in 2014). The key unique products for Amgen are Prolia/Xgeva, Neulasta and Kyprolis. We deem Enbrel, which is an Amgen drug in the US, to be discountable until 2017 when 2016 patent expiries for competitors Humira and Remicade push the drug into the "substitution risk" category. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 22: SG&A and rebates as % of US gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 21: Reported rebates as % of US gross sales -55 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 23: Components of US pharma sales growth Figure 24: Change in uniqueness over time for pharma 25000 40 30 20000 10 15000 0 Sales $m % change 20 -10 -20 -30 10000 5000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 11 01 May 2015 AstraZeneca AstraZeneca has both the highest overall reported rebates in our universe and one of the highest rates of increase in recent years. We believe that this reflects the lack of uniqueness in the current portfolio and the requirement to rebate extensively in order to sustain branded Crestor sales against the availability of generic Lipitor, and branded Nexium against generic Prilosec, until effective US patent expiry in February 2015. We assume that increased rebating was also key to the growth in market share for Symbicort versus Advair in 2014. From 2014, AZN has consolidated the full sales of the BMY diabetes JV products adding Bydureon and Onglyza rebates for the first time, in what we know to be a high rebate category. AstraZeneca shows one of the highest exposures to the "substitution" risk category. This reflects the availability of broadly similar products such as generics. Symbicort and the majority of the diabetes range remain discountable, in our view, with AZN only improving its uniqueness score as and when the new oncology drugs begin to impact sales. AZN continues to report strong list price rises in 2014, with +17% across the portfolio. 2007 2008 2009 2010 2011 2012 2013 Figure 26: SG&A and rebates as % of US gross 2014 % of gross US drug sales as rebates 0 -10 -20 -30 -40 SG&A/ Rebates % of Gross US drugs sales Figure 25: Reported rebates as % of US gross sales -50 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 -60 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 27: Components of US pharma sales growth Figure 28: Change in uniqueness over time for pharma 40 35000 30 30000 25000 10 20000 0 Sales $m % change 20 -10 -20 -30 15000 10000 5000 Change in discounts implied volume/mix Sales growth 2018 2017 2016 List price rises Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 12 01 May 2015 Bayer Bayer does not report specific US pharma rebate levels, but does report overall rebate levels rising from 2.8% of group sales in 2013 to 3.4% of group sales in 2014. We assume that this covers significant agrochemical and healthcare rebates as well as straight pharma rebates. In the US, looking at the difference between IMS reported gross sales and company reported net sales suggests that Betaseron rebates have been broadly flat at c33% (in line with BIIB reported rebates). A similar analysis for Xarelto suggests rising rebates from 14% in 2013 to 26% in 2014, presumably reflecting increased competition. Mitigating this impact is a growing oncology business, an element of Bayer's contraceptive business that is still self-pay, and a supply shortage for Kogenate, which should help net pricing. Overall, Bayer has reported consistently below the peer group average US list price rises, although we note stronger list price rises for Xarelto sold by JNJ, on which Bayer receives a royalty, and which counts to US revenues/profitability. We see a low overall exposure to substitution risk for Bayer. Sales of older drugs, such as Adalat and Bayer Aspirin, for which one might expect generic substitution, are concentrated in EM where brand loyalty is high. Our aggregate US pharma sales forecast in Figure 31 shows a decline in 2016 driven by a slowdown in US Betaseron sales, which more than offsets increased Xarelto royalties. Figure 30: SG&A and rebates as % of US gross sales SG&A/ Rebates % of Gross US drugs sales Figure 29: Reported rebates as % of US gross sales No data available 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Figure 31: Components of US pharma sales growth Figure 32: Change in uniqueness over time for pharma 20000 40 18000 30 16000 14000 10 12000 0 Sales $m % change 20 -10 -20 -30 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 10000 8000 6000 4000 2000 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 13 01 May 2015 Biogen Idec Biogen Idec is showing revenue growth, with incremental sales for Tecfidera and, to a lesser extent, Tysabri more than offsetting the decline in Avonex. A comparison of IMS gross sales and BIIB reported net sales suggests low and stable discounts for both Tecfidera and Avonex, which is borne out by the corporate level disclosure. The growing sales for Tecfidera account for the growth in unique products for the group out to 2018. We model no patent erosion over this time-frame with an effective patent life until 2024. The slowing of sales reflects a maturing MS market and increasing competition, albeit with different mechanisms of action Figure 34: SG&A and Rebates as % of US Gross SG&A/ Rebates % of Gross US drugs sales Figure 33: Reported rebates as % of US Gross sales 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 35: Components of US pharma sales growth Figure 36: Change in uniqueness over time for pharma 14000 60 12000 40 8000 0 Sales $m % change 10000 20 -20 6000 4000 2000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 14 01 May 2015 Bristol Myers Squibb An analysis of historic data for BMY is of little help in predicting the future given the profound change in the BMY portfolio as it moves from growth driven by Orencia, Yervoy, Atripla, Sprycel and Abilify to an era driven by Opdivo. The company has restated levels of rebates a number of times, in particular expanding the scope of reported discounts in 2012 (with restated 2011 data). This suggests that the 2010-2011 step up shown in Figure 3 and Figure 37 may merely reflect increasing management disclosure. In 2014 BMY deconsolidated the US diabetes JV with AZN. Diabetes is a known high rebate area and we note that, despite a mix shift away from diabetes towards oncology, overall rebate levels as a percentage of sales have not changed over the past two years. The high level of uniqueness reflects the oncology assets (Yervoy and Opdivo) and the unique mechanism of action for Orencia in RA. Figure 38: SG&A and Rebates as % of US Gross SG&A/ Rebates % of Gross US drugs sales Figure 37: Reported rebates as % of US Gross sales 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Figure 39: Components of US pharma sales growth Figure 40: Change in uniqueness over time for pharma 60 25000 40 20000 20 15000 0 Sales $m % change Source: Company data, Credit Suisse estimates -20 10000 5000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 15 01 May 2015 Celgene Celgene has shown a steadily rising level of reported rebates, presumably reflecting the growth in the price-protected element of the business to government programmes (c 15% of operations based on IMS volume data). We note that reported list prices rose only 7% in 2014, and have been consistently lower than peers, suggesting that incremental rebates should be accumulating quite slowly . In this time frame, virtually the whole of the franchise is deemed unique, with the first major patent expiry for Revlimid in the US only in 2019. In our analysis, the overall promotional spend split between rebating and traditional spend has remained broadly flat as a proportion of sales. Celgene's recent co development deal with AstraZeneca for blood cancers with MEDI4736 (durvalumab) will increase exposure to unique products given we assess all cancer drugs as unique. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 42: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 41: Reported rebates as % of US Gross sales -55 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 43: Components of US pharma sales growth Figure 44: Change in uniqueness over time for pharma 16000 60 14000 12000 20 10000 0 Sales $m % change 40 -20 8000 6000 4000 2000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 16 01 May 2015 Eli Lilly Steadily rising effective rebate levels for Lilly mirror those for other key diabetes players Sanofi and Novo. Lilly also shows one of the higher exposures to government funded programmes at c 40% of sales (see Figure 108). On our analysis, the growth in these rebates effectively offsets the decline in traditional SG&A expense leaving the overall promotional spend at around 54% of gross sales, high by US major pharma standards (see Figure 9). In 2014, Lilly lost Cymbalta US exclusivity and looking at the IMS gross sales data suggests that US rebates for Cymbalta rose from a stable 15% level in 201012 to around 25% in 2013 ahead of patent expiry. For chronic therapies, we normally see rebates fall in the immediate period ahead of patent loss as payors can see savings from a switch to generics, and so do not fight brand adoption, so this is a surprising finding. The key unique drugs in the portfolio on our analysis are Cyramza, Alimta and Forteo with the majority of the diabetes franchise either discountable or at risk of substitution. We illustrate in Figure 10 the growing use of co-payment cards in the diabetes space and note that Glyxambi, the combo SGLT2/DPPIV joint development drug with Boehringer Ingelheim, has recently launched with a zero co-pay card despite being a unique product at this time. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 46: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 45: Reported rebates as % of US Gross sales -55 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Figure 47: Components of US pharma sales growth Figure 48: Change in uniqueness over time for pharma 60 25000 40 20000 20 15000 0 Sales $m % change Source: Company data, Credit Suisse estimates -20 10000 5000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 17 01 May 2015 Gilead The past few years have seen the transition of Gilead from an HIV focused company to one driven by hepatitis C with the exceptionally strong growth of Sovaldi/Harvoni in 2014. The 4.4pp decline in rebate levels in 2014 reflects the unique position of Sovaldi/Harvoni at launch, and the lack of need to provide high levels of rebates. This is clearly changing with the launch of Abbvie's Viekira Pak and the expected combo launch from Merck in 2016. Competitive launches together with payer controls suggest no sales growth in 2015 and a decline in US sales from 2016 onwards. Across the HIV portfolio, rebates seem to have been quite stable with the difference between IMS gross to net stable suggesting around 20% rebates for Atripla over the past four years and for Stribild similar discount levels. The speciality nature of the company is reflected in the low traditional SG&A spend. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 50: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 49: Reported rebates as % of US Gross sales -55 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 51: Components of US pharma sales growth Figure 52: Change in uniqueness over time for pharma 30000 60 25000 40 15000 0 Sales $m % change 20000 20 -20 10000 5000 0 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 2010 2011 2012 2013 2014 2015 2016 2017 2018 -5000 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi Source: Company data, Credit Suisse estimates 18 01 May 2015 GlaxoSmithKline GSK gives a detailed breakdown of rebates clearly identifying the components. This shows that government programme rebates have increased from 15.2% in 2013 to 18.5% of sales in 2014 and wholesaler chargebacks from 5.8% to 7.6%. Looking at IMS data suggests that Advair rebates increased from a stable level of 22% from 2010 to 2013 to c.38% in 2014. This is before the full year effect of increasing rebates in 2015 to regain more favourable formulary access for Advair, and to secure favourable access for new drugs Breo and Anoro. Adding rebates to traditional SG&A suggests a growing overall promotional expense, not surprising given the increasing competition in the asthma/COPD space. GlaxoSmithKline has the second highest exposure (after Novo) to Medicare Part D and the lowest exposure to commercial insurance of any of the companies in this report which may also be impacting rebate levels. We see an overall continued decline in US revenues until 2017 with no significant increase in portfolio uniqueness, to mitigate rebate pressures. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 54: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 SG&A/ Rebates % of Gross US drugs sales Figure 53: Reported rebates as % of US Gross sales 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 -45 SG&A as % of Gross Sales Rebates as % of Gross Sales -55 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 55: Components of US pharma sales growth Figure 56: Change in uniqueness over time for pharma 40 40000 30 35000 30000 10 25000 0 Sales $m % change 20 -10 -20 -30 20000 15000 10000 5000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 19 01 May 2015 JNJ The most important assets for JNJ pharma today are its biologics for RA (Remicade) and psoriasis (Stelara) with expected long life cycles followed by JNJ's stake in the cancer drug Imbuvica, at the beginning of its life cycle. Our analysis suggests that JNJ has a lower-than-average exposure to unique products and that this will fall further to one of the lowest levels in our universe of companies (see Figure 11). Of the group's major assets we rate only Stelara and Imbruvica as unique, although we note emerging competition for Stelara from drugs such as Cosentyx (from Novartis). JNJ has an average level exposure to Medicare the other key indicator of rising rebate pressures (see Figure 108). % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 58: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 57: Reported rebates as % of US Gross sales -55 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 59: Components of US pharma sales growth Figure 60: Change in uniqueness over time for pharma 40000 60 35000 30000 20 25000 0 Sales $m % change 40 -20 20000 15000 10000 5000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 20 01 May 2015 Merck Inc The key franchises driving growth today are patent protected but are largely in competitive areas such as diabetes (Januvia) and vaccination (leading products, Gardasil and Proquad). Merck has dominant positions in many areas which should give it a rebating advantage. Overall rebates increased by 4.7pp in 2014 and looking at IMS gross to net sales for Januvia suggests that rebates here have risen from c 17% in 2011/2012 to 28% in 2013 and to 38% in 2014, confirming the high level of diabetes rebates we are seeing across both oral and injectable products. Keytruda is the only unique asset in the top 10 drugs by NPV. Although competition is building in immuno oncology, we rate all cancer drugs as unique as we see them driven much more by clinical data than price discounts. The addition of rebates to SG&A reverses a steady apparent decline in reported SG&A to a rising trend in overall promotional spend. Looking at both, the relatively low level of uniqueness (Figure 11) and the relative high level of Medicare/Medicaid exposure (see Figure 108), we might expect Merck to continue to see an acceleration in rebate levels over the next few years. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 62: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 61: Reported rebates as % of US Gross sales -55 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 63: Components of US pharma sales growth Figure 64: Change in uniqueness over time for pharma 45000 60 40000 35000 30000 20 25000 0 Sales $m % change 40 -20 List price rises implied volume/mix 2018 2017 2016 2015 2013 2012 2011 2014 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 15000 10000 5000 2010 2009 2008 2007 -40 20000 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 21 01 May 2015 Novartis Novartis pharma discounts have remained stable over time (the reported data explicitly covers Rx pharma only and not Sandoz or vaccines) and indeed there was a small decline in rebate levels reported in 2014. We believe that this stability reflects a current mix shift away from primary care towards more speciality products where we believe that formulary pressure is currently lower and physician flexibility to decide on prescribing is higher. The loss of Diovan in primary care may also have freed up some rebates which are being reinvested elsewhere, although we see no evidence of increasing rebates for either Gleevec or Gilenya. At the group level, it is also notable that Novartis continues to have a relatively low US branded drug exposure (31%) relative to the peer group average (40%), and that US pharma exposure is further diluted by Alcon, Sandoz, and the GSK consumer JV. We expect to see an 8pp increase in exposure to unique drugs over the next four years due largely to the addition of the GSK oncology portfolio and the growth of LCZ. This mix shift should limit the need for incremental rebates although we note that LCZ will be sold into a largely Medicare population. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 66: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 SG&A/ Rebates % of Gross US drugs sales Figure 65: Reported rebates as % of US Gross sales 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 -45 SG&A as % of Gross Sales Rebates as % of Gross Sales -55 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 67: Components of US pharma sales growth Figure 68: Change in uniqueness over time for pharma 40 45000 30 40000 35000 30000 10 25000 0 Sales $m % change 20 -10 -20 -30 20000 15000 10000 5000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data, Credit Suisse estimates 22 01 May 2015 Novo Nordisk Novo has shown an acceleration in overall rebates in recent years and given the strong diabetes focus of the group, this must reflect increasing rebate pressure in this important category. The three leading insulin companies, Lilly, Novo and Sanofi, have all shown an increases in rebates, which we assume reflects a continued pay-away of high list price rises for insulins to payers, and the high relative exposure to Medicare part D (Figure 108). In 2011, Novo acknowledged that initial rebates for Victoza had helped drive adoption, but Novo has more recently been vocal about resisting increased rebate pressures where it feels that it has a unique product with superior properties (in the case of Victoza a simpler dosing regimen than Byetta/Bydureon). However IMS data suggest a gradual increase in Levemir discounts from c 30% in 2011 to 56% in 2014. The growth in unique products in our analysis from 2017 comes from the launch of iDeglira in the US. However from mid-2016 we also see an increase in substitution risk, as we expect Lilly to be able to launch its biosimilar Lantus around this time. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 70: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 SG&A/ Rebates % of Gross US drugs sales Figure 69: Reported rebates as % of US Gross sales 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 -45 SG&A as % of Gross Sales Rebates as % of Gross Sales -55 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 71: Components of US pharma sales growth Figure 72: Change in uniqueness over time for pharma 25000 40 30 20000 10 15000 0 Sales $m % change 20 -10 -20 -30 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 10000 5000 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data a, Credit Suisse estimates 23 01 May 2015 Pfizer We have seen a gradual increase in rebate pressures with higher rebates offsetting lower traditional SG&A expenses. Sales have been held broadly stable in the past two years with effective price rises offsetting continued volume declines. The largest NPV product for Pfizer is the Prevnar vaccine franchise, a unique long-term portfolio, which is being evergreened firstly with an enhanced number of pneumococcal sub-types covered.as Pfizer shifted from Prevnar 7 to Prevnar 13 and now with broader use expanding to adults over age 65. The second highest NPV asset is the ex US Enbrel franchise with sales expected to continue at a high level some years beyond first formal patent expiry. Enbrel moves from discountable category to multi source from 2016 in our analysis. The newly launched cancer drug Ibrance (palbociclib) helps to increase the contribution of unique drugs and lift overall US sales growth to be positive until US Lyrica patent expiry in 2019. Overall Pfizer appears to have slightly lower than average exposure to Medicare and Medicaid (see Figure 108). % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 74: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 73: Reported rebates as % of US Gross sales -55 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 75: Components of US pharma sales growth Figure 76: Change in uniqueness over time for pharma 70000 60 60000 40 40000 0 Sales $m % change 50000 20 -20 30000 20000 10000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data a, Credit Suisse estimates 24 01 May 2015 Roche Roche does not publish any rebate data. IMS sales trends for key drugs match the company reported numbers closely, suggesting limited discounting beyond mandatory 340B programme discounts. For Lucentis, we assume that IMS data are not particularly robust as the product is bought/dispensed by physician offices and thus IMS Health will not be able to track sales via normal pharmacy samples. We assume that the launch of Eylea will have increased discounting pressures. Published US list price rises remain moderate at 4-5% per annum. Despite Boniva patent expiry in 2012 and Xeloda in 2014, net US revenue growth has been positive in every year bar 2010. Roche stands out as having the highest level of uniqueness in our EU major pharma universe based on their strong focus on cancer sales. We see much more limited formulary pressures in this specialty area with prescribing decisions too complex, and too individualised to be amenable to centrally directed switches. In Figure 11 we see that Roche's current level of uniqueness in theory falls by around 10pp by 2018 as the patents for Herceptin and Rituxan expire, and we model the emergence of biosimilars. Roche expects biosimilars to be launched first in 2H 2017. However we expect initial caution from regulators and payers about interchangeability, such that in practice we do not expect US oncology sales to be impacted before 2019 when we assume effective erosion of Herceptin by biosimilars may start. We assume that sales of Rituxan in RA are impacted from 2018 as this non-life threatening condition lends itself more to a generics first strategy. Figure 78: SG&A and Rebates as % of US Gross SG&A/ Rebates % of Gross US drugs sales Figure 77: Reported rebates as % of US Gross sales No data available 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Figure 80: Change in uniqueness over time for pharma 40 45000 30 40000 20 35000 10 30000 0 25000 Sales $m % change Figure 79: Components of US pharma sales growth -10 -20 -30 -40 20000 15000 10000 List price rises implied volume/mix 2018 2017 2016 Change in discounts Sales growth Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 5000 0 2010 2011 2012 2013 2014 2015 2016 2017 Sustainable Brand Unique Discountable Sub Risk Generic Risk Multi 2018 Source: Company data a, Credit Suisse estimates 25 01 May 2015 Sanofi Sanofi has seen one of the strongest rates of increase in rebates in our universe. In 2011/12 we felt that a big factor was US generic Lovenox, where Sanofi retained sales for some time despite a substitutable generic. From 2013, the key factor must have been increasing formulary pressure in the diabetes space, with Lilly and Novo the key competitors also reporting increasing levels of rebates. List price rises in 2014 (+32%) still outstripped the rise in reported discounts to suggest a net positive price effect on US sales. A comparison for IMS gross to net sales suggests Lantus rebates rising from 13% in 2013 to 29% in 2014, (31% in 2H14). Management has stated that price should not be a barrier to adoption of Toujeo and guidance for a decline in the US diabetes franchise sales for 2015 suggests further significant discounting this year. Sanofi has one of the largest declines in the level of uniqueness in our universe as competition builds for Lantus (Figure 11), and higher than average Medicare/Medicaid exposure (Figure 108) suggesting that high rebate levels will remain an important factor for the group. We believe that these discount pressures are already factored into company guidance and analyst estimates. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 82: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 SG&A/ Rebates % of Gross US drugs sales Figure 81: Reported rebates as % of US Gross sales 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 -45 SG&A as % of Gross Sales Rebates as % of Gross Sales -55 Source: Company data, Credit Suisse estimates Figure 83: Components of US pharma sales growth Figure 84: Change in uniqueness over time for pharma 40 40000 30 35000 20 30000 10 25000 0 20000 Sales $m % change Source: Company data, Credit Suisse estimates -10 -20 15000 10000 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 0 2008 5000 -40 2007 -30 2010 2011 2012 2013 2014 2015 2016 2017 Change in discounts implied volume/mix Sustainable Brand Unique Discountable List price rises Sales growth Sub Risk Generic Risk Multi Source: Company data, Credit Suisse estimates Global Pharma 2018 Source: Company data a, Credit Suisse estimates 26 01 May 2015 Shire Shire has provided detailed information on rebates for key ADHD drugs in addition to the group-wide disclosure. For Adderall, where Shire has both authorised generics and direct generic competition, we have seen reported rebates rising from 57% of sales in 2011 to c.68% of sales in 2013 and 2014 despite no reported list prices (volatility in the quarterly numbers reflects the level of sales to authorised generics which are included in Medicaid calculations). In contrast, Vyvanse rebates have remained broadly constant at around 40% from 2011 to 2014 despite list price rises averaging 9% p.a. over the past 4 years. This product rebate disclosure covers all types of rebate, although the aggregate company level disclosure in the Annual Report appears to be linked solely to government related discounts/rebates, excluding significant additional wholesaler charge backs. IMS data suggest 22% of sales from Medicaid/Medicare and 77% commercial insurance funding. There has been a notable decrease in reported SG&A as % of sales for the group in recent years as the business mix has shifted more to rare diseases, and the decrease in traditional SG&A spend may be more significant than the increase in rebates, although we can't be sure given we only have partial rebate information. The sales mix stays broadly 50% unique with the growth of new products, Gattex and lifitegrast. Overall US sales growth remains very healthy at c 10% p.a. through 2018, a level which should be enough to sustain further reported margin gains. % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 86: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 85: Reported rebates as % of US Gross sales 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales -55 Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 87: Components of US pharma sales growth Figure 88: Change in uniqueness over time for pharma 9000 40 8000 30 7000 6000 10 5000 0 Sales $m % change 20 -10 -20 4000 3000 2000 1000 -30 0 List price rises implied volume/mix 2018 2017 2016 2010 2011 2012 2013 2014 2015 2016 2017 Change in discounts Sustainable Brand Unique Discountable Sales growth Sub Risk Generic Risk Multi Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 2018 Source: Company data a, Credit Suisse estimates 27 01 May 2015 UCB UCB does not provide any rebate information, but with only two key drugs in the US driving current sales, we can estimate the level of important discounts by looking at just the product data for Cimzia and Vimpat. For Vimpat, we have seen the difference between IMS gross sales to net reported sales expand suggesting rebates rising from c 4% in 2012 to 28% by 2014. The growing Vimpat rebate was effectively highlighted by the company in 2014. Commentary through the year highlighted an increasingly move towards government funded healthcare programmes that require deeper discounts despite Vimpat effectively having a unique mechanism of action. For Cimzia the apparent increase is less marked from 5% in 2012 to 17% in 2014, although IMS is clearly less reliable for Cimzia given both the self-administered and officeadministered formulations. The latter, typically, will not be well captured by the IMS audit. Overall US list price rises seem to still be accounting for around 5% growth down from 1012% in prior years (see Figure 101). % of gross US drug sales as rebates 2007 2008 2009 2010 2011 2012 2013 Figure 90: SG&A and Rebates as % of US Gross 2014 -5 -15 -25 -35 -45 SG&A/ Rebates % of Gross US drugs sales Figure 89: Reported rebates as % of US Gross sales 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 SG&A as % of Gross Sales -55 Rebates as % of Gross Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 91: Components of US pharma sales growth Figure 92: Change in uniqueness over time for pharma 7000 30 6000 20 5000 10 4000 0 Sales $m % change 40 -10 -20 3000 2000 1000 -30 0 List price rises implied volume/mix 2018 2017 2016 2010 2011 2012 2013 2014 2015 2016 2017 Change in discounts Sustainable Brand Unique Discountable Sales growth Sub Risk Generic Risk Multi Source: Company data, Credit Suisse estimates Global Pharma 2015 2014 2013 2012 2011 2010 2009 2008 2007 -40 2018 Source: Company data a, Credit Suisse estimates 28 01 May 2015 Appendix 1: Rebates are a fundamental element of the US system In Figure 93 we look at our estimates of the breakdown of rebates/discounts. This shows that the largest contributor to increased overall rebates appears to be rebates to US government and state funded programmes. We believe that this reflects: ■ The need to give best price discounts to certain government programmes. ■ The inability to retain price rises over CPI for sales into Medicaid programmes which accounts typically 6-8% of US sales. ■ An increase in sales to US government programmes, as more patients access healthcare through government subsidised programmes (Medicare Part D plus Medicaid on average 26% of US branded sales), see Figure 108. ■ Increasing commercial pressures – particularly for undifferentiated products - in part due to greater availability of effective generics which can push branded products to second-line therapy. Our analysis suggests that around $110bn of rebates were paid by the US and EU pharma companies shown in Figure 3 to purchasers in 2014 from a reported US sales base of around $205bn. The data show that rebates increased again in 2014 (+22%) outstripping net sales growth of +9%, as companies moved out from the 2012/2013 patent cliff. Government discounts increased from over $31bn to over $39bn (+25%). We assume that a significant element of the increased rebates reflects the cost of pharma covering 50% of the "donut hole" (see Figure 110). Figure 93: Breakdown of US discounts by key categories Gross turnover U$M US govt and state prog. Chargebacks Managed care Cash discounts Customer returns Other Total Effective discounts % $m US govt and state prog. Chargebacks Managed care Cash discounts Customer returns Other Rebate total $m Net Sales $m* 2007 196,920 4.0 7.2 5.9 1.3 1.6 2014/ 2013 13% CAGR 0814 8% 39,561 34,650 27,004 3,320 2,783 6,951 25% 27% 16% 12% 14% 14% 28% 17% 11% 6% -2% 22% 110,474 204,786 22% 9% 16% 5% 2008 194,346 4.7 7.0 7.4 1.2 1.6 1.1 23.1 2009 211,180 6.1 8.7 7.4 0.7 0.9 1.1 25.0 2010 240,229 9.5 9.0 6.7 1.1 0.9 1.4 28.6 2011 256,653 10.7 8.3 7.9 1.0 0.8 1.6 30.2 2012 265,446 10.7 9.0 7.8 1.0 1.0 2.1 31.6 2013 278,178 11.4 9.8 8.4 1.1 0.9 2.2 33.7 2014 315,261 12.5 11.0 8.6 1.1 0.9 2.2 36.2 7,940 14,176 11,632 2,631 3,080 - 9,093 13,585 14,385 2,400 3,194 2,147 12,853 18,388 15,633 1,542 1,899 2,415 22,771 21,698 16,149 2,538 2,135 3,328 27,336 21,183 20,345 2,514 2,060 4,160 28,469 23,878 20,593 2,695 2,697 5,456 31,765 27,282 23,246 2,954 2,439 6,091 196,920 - 45,210 149,135 53,321 157,858 68,012 172,218 77,387 179,266 82,403 183,043 90,723 187,455 20.9 This data is taken for a wider universe of companies including generics than is used in the main part of this analysis where 20 companies are reviewed in more detail. Where the breakdown of rebates is not provided by the company we have used average splits based on companies that do provide data. Source: Company data, Credit Suisse estimates We believe that this annual rebate flow is an integral part of the funding of the US healthcare system. Our US colleagues covering the pharma wholesalers and PBMs have kindly helped to illustrate the flow of rebates through the system in Figure 114 and in Figure 115. In Figure 94 we illustrate how formulary barriers have decreased the ability to access patients quickly with new drugs using data from IMS Health. Barriers can be erected in a number of ways ranging from formulary tiering, with differential co-pays to other barriers such as high deductibles, step therapy, prior authorisation and quantity limits. Depending on the precise barriers, companies can sometimes circumvent them using co-pay assistance programmes, to offset differential co-pays at the pharmacy. Increasing use of co-pay cards in diabetes is illustrated earlier in this report in Figure 10. Global Pharma 29 01 May 2015 Figure 94: The evolution of contracted access: Expected levels of launch volume with unrestricted formulary access post launch (2005-2015) Historical Model (2005) Post-Part D (2008) Expected in 2015 100% % TRxs 80% 60% 40% 20% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Months Post Launch Source: IMS Institute, Payer and Managed Care Insights With PBM and wholesaler income linked to gross drug revenues, there are powerful incentives for list price rises to continue as they drive profits of the key intermediaries between the manufacturers and the patients. Unless the US system moves away from the current cost-plus approach to a capitated system which would change incentives significantly, we see no mechanism for change. In Figure 95 we illustrate both the list price rises for branded drugs and the overall US pharmaceutical CPI. CPI is much lower at only c1-2% as we are still seeing US generic drug price erosion that offsets the branded list price rises, so that overall CPI for pharmaceuticals has typically been running at 3-4%. Figure 95: US drug List price rises against background of US politics 12.0 11.0 10.0 PRESIDENT 9.0 8.0 6.0 SENATE 5.0 4.0 List price inflation % 7.0 3.0 2.0 HOUSE 1.0 0.0 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Democrat Republican Branded CPI list price inflation Overall price inflation (brand+generic) Source: Company data, Credit Suisse estimates Payers have been able to absorb costs of new product launches with savings from patent expiries. With the "savings windfall" of the 2012 patent cliff now behind them, we expect payers to continue to pressure manufacturers for ever larger effective rebates. Global Pharma 30 01 May 2015 Figure 96: The importance of patent expiries across the US market in containing cost growth % change to US branded pharma market 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% 2008 2009 2010 2011 2012 2013 % from patent expiries % from volume % implied mix Overall growth % 2014 2015 2016 2017 2018 % from price rises Source: Company data, Credit Suisse estimates Figure 97: Aggregate gross sales, net sales and CS estimates of US SG&A for 20 company universe $m Gross US sales Rebates as % gross US sales Net US sales 2008 234,369 -45,781 2009 247,897 -59,023 2010 250,090 -61,421 2011 264,042 -71,456 2012 258,179 -72,438 2013 268,939 -79,594 2014 301,196 -98,989 19.5% 23.8% 24.6% 27.1% 28.1% 29.6% 32.9% 188,589 188,874 188,669 192,587 185,742 189,345 202,207 1% 0% US SG&A -54358 -54436 -53001 -53673 -50772 -51908 -54232 as % gross US sales 23.2% 22.0% 21.2% 20.3% 19.7% 19.3% 18.0% SG&A as % of Gross Sales Rebates as % of Gross Sales Total effective mkting costs 23.2% 19.5% 42.7% 22.0% 23.8% 45.8% 21.2% 24.6% 45.8% 20.3% 27.1% 47.4% 19.7% 28.1% 47.7% 19.3% 29.6% 48.9% 18.0% 32.9% 50.9% -100,139 -113,459 -114,422 -125,128 -123,210 -131,501 -153,222 Aggregate SG&A/rebates CAGR 08-14 4% 14% 7% Source: Company data based on 20 company universe, Credit Suisse estimates A large element of the traditional rebates is volume-related and we wonder to what extent high levels of rebates for incumbent products act as a barrier to entry for new drugs in a field. A company able to give a 20% discount on $1bn of existing sales on a drug to a large purchaser can provide rebates of $200m. A new entrant with only $50m of sales even with a 90% discount would only be able to provide rebates of $45m. With the US system still apparently heavily reliant on elements of the delivery chain getting paid on a percentage of sales, this may act as a real barrier to new entrants if they are not able to offer franchise level rebates. Global Pharma 31 01 May 2015 Appendix 2 :Methodology In Figure 98 to Figure 103 we isolate the contribution to overall US branded drug sales growth of list price rises, increased rebates and volume/mix. This shows that US list prices are continuing to rising faster than rebates, suggesting that the universe of companies covered still saw a net 9.7 pp of US price rises benefiting sales. Bayer, Roche and UCB do not provide any rebate disclosures. We have made no estimates of rebates for Bayer and Roche; however, for UCB, we have made an estimate for overall rebates based on the difference between IMS reported sales and company reported sales for the key drugs Cimzia, and Vimpat. We have found that the difference between IMS "gross sales" and company "reported sales" has, in the past, broadly matched the rebate levels reported by the companies in their annual reports (see Figure 104). We see no material difference between Roche's reported product sales and IMS levels suggesting limited discounting in the hospital channel, and for Bayer the complexity of the business mix including Kogenate (factor VIII) for haemophilia, a range of oral and depot contraceptives and Betaseon for MS make it very difficult to estimate rebate levels. We note a degree of restatement of rebates by a number of companies over time, typically showing restatements to higher levels of rebates. For GSK, 2013 US rebates were initially reported at 29%, but the 2013 data were restated in the 2014 accounts to 31% for the same 2013 period. For GSK, this reflects the exclusion of "established products" from the included analysis, it is not always clear what is covered. We restate historic numbers where possible to maximise the ability to look at the trend rather than absolute level of rebates. Figure 98: Implied contribution from US Gross Prices, % Com pany Abbvie Amgen BIIB BMY Celgene Eli Lilly Gilead JNJ Merck Pfizer Actelion AstraZeneca Bayer GSK Novartis Novo Nordisk Roche Sanofi, inc-Plavix Shire UCB Sales Weighted Avg 2014 US pharm a sales 10764 14729 6684 7716 4164 7860 18520 17422 14215 19073 1024 10120 3628 10732 12342 7688 17387 13819 4047 1453 203386 2007 2008 2009 2010 8.0 12.4 6.1 8.7 6.6 3.9 8.0 8.7 10.0 17.8 8.9 8.5 7.9 4.5 9.5 8.5 10.0 8.3 11.8 17.3 6.3 9.3 5.4 4.1 7.7 9.3 9.0 8.3 8.6 16.7 4.4 11.7 11.4 4.0 10.6 7.3 12.0 8.5 7.0 2011 10.3 3.1 12.4 7.5 4.2 13.1 7.6 11.9 12.0 11.2 3.1 13.2 7.6 6.8 12.1 11.5 4.4 10.1 7.8 13.0 9.2 2012 11.9 7.2 18.8 10.3 5.8 15.6 8.0 8.0 10.8 10.9 7.4 10.6 7.0 8.2 12.2 11.6 5.2 11.0 8.1 15.1 9.2 2013 15.9 8.7 14.6 12.8 8.6 15.8 6.6 10.4 12.4 13.3 10.8 11.6 7.3 7.3 7.7 16.1 4.3 13.1 7.8 14.4 10.6 2014 14.6 8.5 9.6 13.0 7.4 10.2 6.7 9.7 12.0 17.0 13.3 9.3 9.8 8.8 9.5 22.0 4.9 31.8 9.9 16.9 12.1 ** this includes the benefit of 50% of the impact of pricing for Plavix Additional pricing information Sanofi, ex-Plavix Plavix/Avapro Xarelto 12640 7.0 9.4 6.8 10.4 9.6 11.5 13.1 31.8 1180 6.5 2.0 16.9 12.9 14.7 6.0 5.1 14.5 13.8 Source: Company data, Credit Suisse estimates Global Pharma 32 01 May 2015 Figure 99: Reported level of discounts, % Com pany Abbvie Amgen BIIB BMY Celgene Eli Lilly Gilead JNJ Merck Pfizer Actelion AstraZeneca Bayer GSK Novartis Novo Nordisk Roche Sanofi Shire UCB (CS estimate) Sales Weighted Avg US dom icile EU dom icile 2014 US pharm a sales 10764 14729 6684 7716 4164 7860 18520 17422 14215 19073 1024 10120 3628 10732 12342 7688 17387 12640 4047 1453 202207 121146 81060 2007 24.5 26.0 8.4 11.6 2008 22.6 26.0 6.0 12.0 13.2 22.5 13.2 13.2 21.7 2009 25.4 28.5 6.3 12.8 9.8 15.0 27.0 13.8 13.8 29.1 2010 26.0 29.7 15.9 14.8 12.2 16.5 30.1 21.5 21.5 24.0 10.7 19.0 12.6 12.6 17.1 41.5 0.0 29.2 29.1 32.9 0.0 29.4 24.1 1.0 23.4 22.2 23.8 2011 29.3 29.2 19.5 29.2 14.2 21.4 30.5 24.5 24.5 27.5 12.1 44.4 0.0 28.1 28.5 39.3 0.0 31.2 29.7 1.0 26.1 26.2 24.8 2012 28.6 25.9 23.1 33.7 13.4 21.0 28.7 25.8 25.8 26.5 14.3 48.9 0.0 30.8 28.3 43.2 0.0 38.8 29.4 5.0 27.3 26.4 27.6 2013 32.1 26.8 23.4 34.6 13.8 26.3 30.4 27.6 27.6 27.6 17.9 54.6 0.0 30.7 27.6 46.3 0.0 39.8 32.7 9.0 28.9 28.2 29.0 2014 35.1 29.4 22.7 35.0 14.8 32.3 31.5 32.4 32.4 31.3 13.5 56.6 0.0 36.8 27.1 47.4 0.0 45.2 32.3 21.0 32.4 31.8 31.8 30.1 0.0 11.6 19.2 28.5 0.0 19.1 10.8 34.9 0.0 23.4 27.7 31.4 0.0 21.5 10.5 38.7 0.0 26.3 29.7 32.4 0.0 23.6 15.9 15.5 15.7 14.5 18.6 17.3 19.5 21.4 20.5 21.5 2010 -0.6 -1.2 -9.5 -2.0 -2.4 -1.4 -3.1 -7.7 -7.7 5.1 0.0 -2.8 0.0 -2.9 0.6 -0.6 0.0 -5.7 -8.2 -1.0 -1.9 -1.7 -2.2 2011 -3.3 0.5 -3.6 -14.4 -2.0 -4.9 -0.4 -3.1 -3.1 -3.5 -12.1 -2.9 0.0 1.1 0.6 -6.4 0.0 -1.8 -5.6 0.0 -2.9 -4.1 -1.2 2012 0.7 3.2 -3.6 -4.5 0.8 0.5 1.8 -1.3 -1.3 1.0 -2.3 -4.5 0.0 -2.7 0.2 -3.9 0.0 -7.6 0.3 -4.0 -1.3 -0.2 -2.9 2013 -3.5 -0.9 -0.3 -0.9 -0.4 -5.3 -1.7 -1.8 -1.8 -1.1 -3.6 -5.7 0.0 0.1 0.7 -3.0 0.0 -1.0 -3.4 -4.0 -1.7 -1.9 -1.6 2014 -3.0 -2.6 0.8 -0.5 -1.0 -6.1 -1.2 -4.7 -4.7 -3.7 4.5 -2.0 0.0 -6.1 0.6 -1.2 0.0 -5.4 0.5 -12.0 -3.1 -3.5 -2.5 Source: Company data, Credit Suisse estimates Figure 100: Change in discounts, pp ( -ve is an increase in discounts) Com pany Abbvie Amgen BIIB BMY Celgene Lilly Gilead JNJ Merck Pfizer Actelion AstraZeneca Bayer GSK Novartis Novo Nordisk Roche Sanofi Shire UCB Sales Weighted Avg US dom icile EU dom icile 2014 US pharm a sales 10764 14729 6684 7716 4164 7860 18520 17422 14215 19073 1024 10120 3628 10732 12342 7688 17387 12640 4047 1453 202207 121146 81060 2007 2008 2009 -2.8 -2.5 -0.3 -0.8 -9.8 -1.9 -4.5 -0.6 -0.6 -7.3 0.0 -3.8 0.0 -2.9 -2.0 -1.0 0.0 -2.1 -5.4 0.0 -2.7 -3.1 -2.1 Source: Company data, Credit Suisse estimates Global Pharma 33 01 May 2015 Figure 101: Implied US net price growth, % Com pany Abbvie Amgen BIIB BMY Celgene Eli Lilly Gilead JNJ Merck Pfizer Actelion AstraZeneca Bayer** GSK Novartis* Novo Nordisk Roche** Sanofi*** Shire UCB** Sales Weighted Avg US dom icile EU dom icile 2014 US pharm a sales 2007 10764 14729 6684 7716 4164 7860 18520 17422 14215 19073 1024 10120 3628 10732 12342 7688 17387 12640 4047 1453 202207 121146 81060 2008 10.0 17.8 8.9 8.5 7.9 4.5 9.5 8.5 10.0 3.6 0.0 8.7 2009 -2.8 1.8 -0.3 -0.8 -9.8 -1.9 -4.5 -0.6 -0.6 -7.3 0.0 8.0 17.3 3.4 7.3 4.4 4.1 5.6 3.9 9.0 0.9 -2.7 6.1 2010 -0.6 -0.9 -9.5 -2.0 -2.4 -1.4 -3.1 -7.7 -7.7 5.1 0.0 5.8 16.7 1.5 12.3 10.8 4.0 4.9 -0.9 11.0 1.5 -1.7 6.0 2011 7.0 -9.5 8.8 -6.9 2.2 8.2 7.2 8.8 8.9 7.7 -9.0 10.3 7.6 7.9 12.7 5.1 4.4 8.2 2.2 13.0 6.1 4.7 8.1 2012 12.6 10.4 15.2 5.8 6.6 16.1 9.8 6.7 9.5 11.9 5.1 6.1 7.0 5.5 12.4 7.7 5.2 3.4 8.4 11.1 8.9 10.5 6.5 2013 12.4 7.8 14.3 11.9 8.2 10.5 4.9 8.6 10.6 12.2 7.2 5.9 7.3 7.4 8.4 13.1 4.3 12.1 4.4 10.4 9.4 10.6 7.7 2014 11.6 5.9 10.4 12.5 6.4 4.1 5.5 5.0 7.3 13.3 17.8 7.3 9.8 2.7 10.1 20.8 4.9 26.4 10.4 4.9 9.6 9.0 10.4 2009 2.8 -4.7 9.7 12.9 11.4 13.9 4.5 -11.5 -2.5 3.7 0.0 24.1 -19.7 -15.8 7.9 9.9 0.5 -1.8 -12.0 -34.2 1.7 2.2 1.0 2010 11.3 1.9 16.7 8.1 25.6 5.5 19.4 3.7 -4.1 -8.4 11.4 -24.0 -28.1 -12.1 9.8 12.3 -4.4 -19.0 10.3 -31.0 -1.3 3.0 -7.5 2011 3.5 13.7 -2.4 16.6 28.2 -8.3 2.0 -9.9 -9.4 -14.9 10.1 -10.1 -22.5 -11.9 -14.3 13.2 -2.9 -3.6 26.6 -19.8 -3.6 -2.1 -5.8 2012 -7.3 -1.1 -1.9 -31.7 6.5 -23.7 10.8 -6.4 -9.9 -32.8 -0.8 -26.8 -0.3 -8.8 -9.6 11.4 2.6 -3.8 1.5 9.4 -10.9 -14.4 -5.8 2013 -14.8 1.8 31.2 -30.9 18.2 -5.9 13.9 3.7 -23.4 -17.0 -0.9 -14.9 4.1 -5.7 -8.3 4.4 5.4 -12.3 5.7 2.0 -7.3 -9.3 -4.5 2014 -5.9 -1.0 32.8 -19.8 5.3 -36.7 158.2 19.9 -11.6 -19.2 -1.3 -2.9 -2.4 -14.4 -13.8 -10.1 2.2 -18.7 11.2 4.1 -3.2 0.1 -7.9 Source: Company data, Credit Suisse estimates Figure 102: Implied US Volume/mix growth % Com pany Abbvie Amgen BIIB BMY Celgene Lilly Gilead JNJ Merck Pfizer Actelion AZN Bayer GSK Novartis* Novo Nordisk Roche Sanofi Shire UCB Sales Weighted Avg US domicile EU domicile 2014 US pharm a sales 10764 14729 6684 7716 4164 7860 18520 17422 14215 19073 1024 10120 3628 10732 12342 7688 17387 12640 4047 1453 2007 2008 0.0 0.0 21.1 0.0 18.0 0.0 3.4 9.8 -6.2 0.0 2.1 38.1 0.0 -6.2 21.2 20.2 0.0 40.5 8.0 6.1 4.6 8.1 0.2 19.8 18.1 34.5 7.3 0.0 -4.9 -7.3 -9.9 0.0 -8.8 -18.8 -20.2 -10.1 10.9 30.1 -12.1 12.1 -20.7 -0.6 0.3 -1.9 202207 121146 81060 *Novartis impacted in 2010 by first time consolidation of Alcon Pharma Source: Company data, Credit Suisse estimates Global Pharma 34 01 May 2015 Figure 103: US pharma sales growth %, CS forecasts from 2015 Com pany Abbvie Amgen BIIB BMY Celgene Eli Lilly Gilead JNJ Merck Pfizer Actelion AZN Bayer GSK Novartis Novo Nordisk Roche Sanofi Shire UCB Sales Weighted Avg US Sales Weighted Avg EU Sales Weighted Avg 2014 US pharm a sales 2007 10764 14729 6684 7716 4164 7860 18520 17422 14215 19073 1024 10120 3628 10732 12342 7688 17387 12640 4047 1453 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 10.4 4.2 6.4 9.7 30.4 -0.1 9.2 -1.1 -0.5 -7.3 1.1 0.1 -14.9 -4.0 -1.6 18.3 1.5 4.6 28.8 -6.8 5.3 9.3 13.3 -25.8 13.1 -7.7 20.6 0.3 -0.4 -20.9 4.4 -20.6 6.7 -3.3 2.8 19.2 7.8 -0.4 9.9 20.5 -2.4 9.6 45.4 -19.0 26.4 4.6 18.8 12.3 -12.8 -4.9 6.3 -9.0 11.4 1.7 0.1 17.5 9.7 -0.2 10.1 12.4 5.7 4.9 43.2 -7.2 11.7 -32.6 164 24.9 -4.3 -5.9 16.5 4.4 7.4 -11.7 -3.7 10.7 7.1 7.7 21.6 9.0 23.0 6.9 17.2 -4.1 23.9 -0.6 0.3 -0.4 14.5 -6.4 4.7 -9.0 1.7 -1.9 1.8 10.4 4.7 -3.3 10.5 15.8 7.1 2.9 10.7 12.5 14.9 10.8 -3.2 5.1 8.7 5.5 -4.4 -5.4 -5.2 -5.2 2.7 6.5 6.2 3.2 9.9 11.9 3.0 3.6 5.9 11.0 13.2 5.1 -5.9 1.9 0.5 6.5 4.8 -13.7 -0.6 3.6 8.2 4.9 2.9 4.6 10.5 13.3 2.4 -0.2 4.1 2.2 9.3 6.1 -26.5 0.8 5.1 3.3 4.7 14.4 -1.1 3.8 7.7 4.4 6.8 5.8 12.0 11.8 2.2 2.3 2.1 -1.9 -3.9 0.7 2.0 1.1 3.2 6.3 8.7 2.9 3.1 4.8 0.5 4.7 6.9 1.3 3.4 4.1 2.2 3.9 1.5 7.1 18.0 0.2 19.8 18.1 34.5 7.3 -2.8 9.3 12.1 1.7 12.1 3.4 9.8 -6.2 -4.9 -7.3 -9.9 -12.1 -3.1 -3.6 2.1 38.1 1.2 -1.0 -11.3 -1.6 18.8 34.6 -2.6 20.6 -10.7 32.1 -2.4 -12.4 15.2 14.4 4.6 3.8 -8.1 -25.2 10.7 1.1 7.2 6.1 23.1 4.0 16.3 -4.0 -11.8 -3.3 11.4 -18.2 -11.4 -10.7 22.1 23.1 -0.4 -14.1 9.4 -20.0 2.9 0.3 6.8 2.7 -0.2 7.4 0.0 0.9 -1.0 21.1 -6.2 21.2 20.2 40.5 8.0 202207 121146 81060 Source: Company data, Credit Suisse estimates Rebate disclosures are typically made only annually by most companies at an aggregate global or US level. However, we have found that a comparison of IMS gross sales reported quarterly and actual reported net sales from company results give directionally the same results as the more detailed annual company level data suggesting that investors can usefully compare product level data which are available on a more timely basis. In Figure 104 we show that gross to net sales data for Advair comparing IMS gross sales to company reported net sales compares well with the aggregate level of corporate disclosure for GSK. The same can be said for Crestor and aggregate rebate data for AZN, and for Januvia and overall Merck. For Lilly just looking at Humalog data would suggest a much higher overall rebate burden increase than we see from aggregate Lilly data. Figure 104: Comparison of reported overall rebate levels for companies and calculated rebates for key drugs from the 60% 50% 40% 30% 20% 10% Advair ( GSK) CS calc (for product) Crestor (AZN) Company reported (US pharma total) Humalog (Eli Lilly) 2014 2013 2012 2011 2010 2009 2014 2013 2012 2011 2010 2009 2014 2013 2012 2011 2010 2009 2014 2013 2012 2011 2010 0% 2009 Reported agg. company rebates & CS calculated product rebates difference between IMS calculated gross sales and company reported net sales Januvia/Janumet (Merck IMS estimate (for product) Source: Company data, Credit Suisse research. CS calculation based on IMS Health NPA data IMS estimate is made using broader audit information not all regularly available to the financial community. Company reported data reflects full US operations not just one drug. Global Pharma 35 01 May 2015 Appendix 3: Pricing impact of the Medicaid trap In Figure 110 we highlight the key features of the Medicaid and Medicare programmes and in Figure 108 we use IMS Health data on the source of payment by drug to show the exposure of our universe to these funding programmes. Overall data suggest that around 7% of branded drugs are purchased for cash, outside of some form of health insurance programme. Whilst companies are able to price commercial contracts freely, there are onerous pricing restrictions, particularly on sales to Medicaid (c 7% of total). We believe that many Medicare plans have full price protection as a cost of formulary access, such that all price rises are effectively rebated away. There has been only a limited change in the source of payment between 2012 and 2014, with our analysis suggesting that on average commercial insurance has fallen from 68% to 64% of funding. Medicare Part D shows a corresponding increase from 18% to 20% with Medicaid stable at around 7%. On a full market basis, Medicare and Medicaid are more significant players given their high use of generics. The data here reflect just the exposure of the branded drug companies in our analysis (see Figure 108). In Figure 105 we plot the level of rebates against exposure to Medicare. It seems clear that in addition to rebates correlating well with overall product uniqueness which is illustrated in Figure 12, we also see the expected link with exposure to the most price conscious and restrictive access government funded programmes. Figure 105: Exposure to Medicare and Medicaid and 2014 rebates 50.0% Novo Nordisk 45.0% Medicare /medicaid 40.0% Lilly BMY GSK Merck 35.0% 30.0% Gilead UCB 25.0% 20.0% Novartis JNJ Pfizer Shire Celgene 15.0% 10.0% Actelion Sanofi AstraZeneca Amgen Abbvie BIIB 5.0% 0.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 2014 rebate % Source: Company data, Credit Suisse estimates Within Medicaid, companies are only able to inflate drug prices annually in line with the Consumer Price Index (CPI). The resulting price is then used to calculate the “best price” for Medicaid reimbursement, from which a mandatory 23% rebate is then added. Companies with large products that have been on the market for many years will be particularly impacted by the cumulative impact of annual price rises restricted to CPI growth alone. Global Pharma 36 01 May 2015 In Figure 107 we show that the effective US Medicaid price might well be >70% below the list price for drugs more than 10 years old using Novolog for NovoNordisk launched in 2001 as an example. We estimate that a starting AWP of around $4.77 in 2001 is now around $31.4 with a WAC of $26.2. Applying the cumulative CPI inflator for 14 years this suggests a base WAC price for Medicaid rebating of around $5.86 a 78% discount to the current AWP. From this base price there is a mandatory incremental 23% rebate taking the overall price down to $3.42 against a typical WAC price for a cash customer of $25-26. New presentations and delivery devices may allow for some resetting of prices but for a basic product that has been on the market for more than 10 years the cumulative level of discounts could now be well over 70%. We understand that some payers are very resistant to new presentations being added to formularies, presumably in part to avoid seeing this resetting of pre discount prices.. Figure 106: Sales of selected US drugs launched at least 10 years ago Company Brand Name Abbvie Humira Abbvie Synthroid Amgen Enbrel Amgen Neulasta Amgen Neupogen Amgen Sensipar AZN Crestor AZN Nexium AZN Synagis AZN Byetta Bayer Betaseron Bayer Mirena BMY Abilify BMY Reyataz Eli Lilly Humalog Eli Lilly Cialis Eli Lilly Evista Eli Lilly Forteo Eli Lilly Strattera Forest Namenda GSK Advair Diskus GSK Avodart GSK Ventolin HFA JNJ Remicade JNJ Risperdal Consta JNJ Aciphex Merck Zetia Merck Nasonex Merck Vytorin Merck KGaA Rebif Merck KGaA Gonal-F Novartis Gleevec Novartis Sandostatin LAR Novo Nordisk Novolog Novo Nordisk Novolin 70/30 Novo Nordisk Levemir Pfizer Lyrica Pfizer Celebrex Pfizer Viagra Pfizer Lipitor Roche Rituxan Roche Avastin Roche Herceptin Roche Tarceva Roche Tamiflu Roche Pegasys Sanofi Lantus Shire Adderall XR UCB Keppra Sum/sales weighted average Yr of US Launch 2003 1957 1999 2002 1991 2004 2003 2001 2005 2005 1993 2001 2002 2003 1996 2003 1998 2002 2002 2003 2001 2005 1969 1998 2003 1999 2003 1997 2004 2002 2004 2001 2004 2001 1986 2006 2005 1999 1998 2000 1997 2004 2003 2004 1999 2001 2001 2001 2001 2014 US Net Sales ($m) 6,524 709 4,325 3,527 838 807 2,918 1,876 499 199 500 577 3,623 689 1,628 1,040 207 539 455 762 3,254 426 541 4,155 429 27 1,475 576 556 1,289 198 2,170 710 1,831 359 1,213 2,314 1,875 1,136 242 3,173 2,909 2,162 704 754 213 5,615 383 201 73,132 2014 IMS US CS estimate Gross Sales of Gross to ($m) Net 7,222 10% 998 29% 5,506 21% 3,831 8% 839 0% 925 13% 5,848 50% 5,931 68% 646 23% 321 38% 730 32% 588 2% 7,838 54% 892 23% 1,674 3% 1,383 25% 245 16% 635 15% 718 37% 1,588 52% 4,813 32% 499 15% 811 33% 4,502 8% 472 9% 109 75% 2,037 28% 1,184 51% 774 28% 1,387 7% 389 49% 2,307 6% 729 3% 4,424 59% 787 54% 2,535 52% 3,087 25% 2,450 23% 1,318 14% 261 7% 3,473 9% 2,888 -1% 2,193 1% 654 -8% 842 10% 319 33% 7,870 29% 840 54% 253 21% 102,565 29% Dec 2006 AWP $ per day/course 786.6 0.5 196.7 3418.8 424.3 11.7 3.3 698.9 1671.9 7.6 132.9 0.3 15.9 31.0 8.8 13.6 3.4 27.2 9.5 5.4 5.5 3.3 2.1 699.0 10.5 5.3 3.2 5.4 3.4 160.7 556.5 137.0 2299.6 10.9 3.8 5.4 6.2 2.1 11.9 2.9 59.4 343.8 3047.2 120.6 8.4 300.9 8.0 4.0 5.6 April 2015 AWP $ per day/course 1921.3 1.3 437.1 5622.2 610.6 22.0 8.2 1113.9 2962.4 19.1 457.6 0.5 35.7 51.2 24.3 45.5 7.9 75.4 24.2 13.6 9.6 6.1 3.0 1168.5 14.6 16.8 8.6 13.9 8.9 543.4 792.0 368.4 3668.4 31.4 13.1 14.9 21.1 5.6 41.5 5.9 86.9 407.2 4460.3 268.4 12.2 594.2 14.9 8.5 16.6 CAGR List Price Rise 06-15 12% 12% 11% 6% 5% 8% 12% 6% 7% 12% 17% 8% 11% 6% 14% 16% 11% 14% 12% 12% 7% 8% 5% 7% 4% 16% 13% 13% 13% 16% 5% 13% 6% 14% 17% 14% 17% 13% 17% 9% 5% 2% 5% 11% 5% 9% 8% 10% 15% 10% CS calc CS Calc Medicaid base Medicaid base price % vs. April price 2015 $* 15 996.4 48% 0.6 50% 249.1 43% 4330.8 23% 537.5 12% 14.8 33% 4.2 49% 885.4 21% 2117.9 29% 9.7 50% 168.4 63% 0.4 33% 20.1 44% 39.2 23% 11.1 54% 17.2 62% 4.3 46% 34.4 54% 12.0 50% 6.9 49% 7.0 27% 4.2 31% 2.6 12% 885.5 24% 13.4 9% 6.7 60% 4.0 53% 6.8 51% 4.3 51% 203.6 63% 705.0 11% 173.5 53% 2913.0 21% 13.8 56% 4.8 64% 6.8 54% 7.8 63% 2.7 52% 15.1 64% 3.7 38% 75.2 13% 435.5 -7% 3860.1 13% 152.7 43% 10.7 12% 381.1 36% 10.2 32% 5.1 41% 7.1 57% 37% Source: Company data, Wolters Kluwer Prices, Credit Suisse estimates Drugs that have had particularly long effective patent lives with significant sales 10 or even 15 years after launch will have accumulated the highest regulatory rebates, some of these are listed in Figure 106. Here we see c$73bn of net sales of drugs in 2014 all launched Global Pharma 37 01 May 2015 before mid 2006 listed by marketing company. Comparing IMS gross sales to company reported or CS estimated US company sales, we see on average a 29% gross to net adjustment. Of note is the discrepancy between an average gross to net discount for 2014 for Lantus of 28% and a much higher gross to net adjustment suggested for Levemir of 52%. Data for the oncology drug Avastin show no discount at all with IMS sales slightly lower than the sales reported by Roche. Our analysis suggests that for the Medicaid population on average the base price from which the 23% Medicaid discount must be added is already some 37% below the current list price. This suggests that the typical effective Medicaid price for this cohort of drugs is c 48% of current list prices. UCB showed a significant increase in effective rebates in 2014 for Vimpat and attributed this to a marked shift in patients moving to government subsidised healthcare cover with higher rebates. For Vimpat alone, our IMS data suggest that the percentage of sales via Medicare rose from 29.5% in 2012 to 35% in 2014. However, at the US pharma divisional level, the change was only from 18% to 20% given the stability of Medicare exposure for Cimzia reported by IMS at c 6%. Figure 107: Effective Medicaid price could be >70% below list price for older drugs Novo Retail Commercial Medicare Medicaid Novolog 4 58 33 5 Levemir 3 52 42 3 Novolog mix 3 41 51 5 Victoza 2 72 24 2 Diabetes sales Weighted 3 57 36 4 WAC Novolog Apr 2015 26.2 26.2 26.2 26.2 CPI pricing adjustment 0% -78% price for rebate 26.2 26.2 26.2 5.86 mandatory rebate ** 0% -23% commercial rebate -2% -46% -46% 0% effective price 25.68 14.15 14.15 4.52 -2% -46% -46% -83% Weighted Avg 41 22 14 22 100 26.2 26.2 14.20 -46% Source: Company data, Credit Suisse estimates ** mandatory Medicaid rebate moved from 15.1% to 23.1% in 2010 Global Pharma 38 01 May 2015 Figure 108: 2012 and 2014 Source of payment for US drugs Company data Abbvie Amgen BIIB BMY Celgene Gilead JNJ Lilly Merck Pfizer Actelion AstraZeneca Bayer GSK Novartis Novo Nordisk Roche Sanofi Lundbeck Meda Merck KGaA Shire UCB US & EU weighted avg US total/weighted average EU total/weighted average 2012 IMS source of payment Medicare Third Cash Medicaid Part D Party 23% 4% 7% 4% 5% 2% 7% 0% 3% 3% 1% 2% 2% 23% 6% 6% 6% 7% 10% 10% 5% 5% 18% 11% 14% 5% 23% 22% 30% 9% 29% 0% 17% 6% 2% 18% 61% 68% 63% 69% 60% 82% 54% 89% 76% 86% 79% 68% 7% 8% 18% 68% Cash 6% 3% 1% 2% 0% 2% 3% 5% 10% 23% 2% 23% 4% 8% 4% 6% 6% 7% 1% 4% 3% 2% 2% 7% 7% 8% 2014 IMS source of payment Medicare Medicaid Part D Third Party 5% 8% 81% 4% 12% 65% 2% 8% 90% 13% 24% 60% 1% 15% 83% 10% 17% 71% 5% 19% 73% 14% 26% 55% 4% 29% 58% 3% 21% 53% 5% 3% 90% 3% 21% 53% 14% 11% 72% 5% 30% 57% 7% 20% 70% 10% 36% 49% 5% 10% 79% 11% 28% 54% 13% 7% 79% 3% 18% 76% 4% 6% 87% 16% 5% 77% 10% 20% 68% 7% 19% 66% 6% 18% 67% 7% 20% 64% Source: IMS Health Audit Data Company data, Credit Suisse estimates Global Pharma 39 01 May 2015 Figure 109: Payer Mix Highly variable sources of funding, examples from Lundbeck Source: Lundbeck IR, Credit Suisse research Global Pharma 40 01 May 2015 Figure 110: Key features of the Medicaid and Medicare programmes for pharmaceuticals Entitlement Funding Rebates Medicaid for the poor State /Federally funded program Flat rate rebates Medicare for the elderly Federally funded program rebates linked to the donut hole Dual eligibles poor/elderly State /Federally funded program program dependant rebates, no overarching rebate Commercial anyone - self pay/employer pay self/corporate volume /mkt share related rebates * list price less 23% (with a few prompt payment adjustments) Pharma covers 50% of the cost of drugs for beneficiaries whose total drug bill was greater than $2830 (2011), up until it reaches $4550 (2011) when catastrophic cover OR * match best commercial price kicks in. Each year the donut hole BUT Best commercial price is closes a little and the subsidy calculated as price at launch inflated provided by the by CPI only for each year since manufacturer/marketer should fall launch and is NOT ACTUAL best as insurers pay to close the gap price Formularies States can ask for "supplemental " rebates on top of the federal rebates to maintain formulary position, these can be sufficiently high for companies to walk away from Medicaid formulary access on a state by state basis Depends on the source of funding, all part D outpatient drugs provided usually administered by a via Medicare Part D rather than commercial plan manager, and Medicaid. formularies can be similar to commercial formularies in positioning and discounts. Delivery often local providers - working with individual state requirements Medicare Advantage, FFS Contract timing KEY Tends to be January SNP - Special Needs Plan D-SNP = Dual eligible Special Needs Plan FFS - traditional Fee For Service plans , largely unrestricted choice of doctors/hospitals Medicare Advantage: typically brings together part D (outpatient drugs) and part B (hospital) coverage for the elderly. Programs are funded with risk adjustments and bonus payments for special circumstances (frail elderly/chronic mental illness/physically disabled under 65 etc.) Active management of formularies with differential co-pays, rebates earned for directing mkt shares and achieving negotiated targets Medicare Advantage, FFS, SNP. Note eligibility criteria are different for each program and Medicare eligibility takes longer to establish then Medicaid, (who pays for initial health screen?) legal requirements on documentation are different for Medicare and Medicaid, networks are historically different - which ones should be covered? CMS Financial Alignment Demonstration, proposed development of 3 way contracts , Medicare/Medicaid/Health Plans to develop a capitated model PACE - Program of All inclusive Care for the Elderly. This has a frailty adjuster for payments, only certain plans qualify for this Source: Kaiser Health Policy Paper March 2013, Credit Suisse estimates Global Pharma 41 01 May 2015 Appendix 4: Uniqueness Status The data in Figure 112 to Figure 111 look at the level of uniqueness of a company's branded pharmaceutical portfolio and is taken from our PharmaValues database. This database allows us to categorise all drugs sold by our universe of companies in each indication, in each region and in each year based on various rules to determine the level of competition and thus indirectly the level of potential rebates pressure. Unique: For all primary care categories and the majority of specialist categories, we define a drug as unique if there are only one or two drugs with the same mechanism of action in a given indication in a given region. For some specialist categories, such as cancer, we assume that there are no directly substitutable drugs and so all cancer drugs are deemed to be unique until the patent has expired or a generic for each specific product has been launched. For cancer drugs, we assume no impact on any one drug from the patent expiry of another drug with a similar mechanism. A good example of a unique cancer drug would be Avastin from Roche, and examples of unique drugs in diabetes would be Byetta and Victoza as GLP-1 drugs ahead of the launch of Bydureon in early 2012. From 2012, with three competing drugs, all three drugs moved into the discountable category. Discountable: These are drugs with patent protection, but where there are three or more broadly equivalent drugs available, with the same mechanism of action. Good examples in this category would be all of the angiotensin 2 antagonists up until the time of Cozaar patent expiry. When one drug with sales of at least 20% of the category/indication in the year of generic entry has gone off patent then all of the previously discountable drugs are moved into the category of substitution risk. For future launches we only adjust the uniqueness status where we ascribe new entrants to have at least a 50% probability of approval. Substitution risk: This covers patent protected drugs in categories where a “standard of care” product-accounting for a least 20% of category/region sales has gone generic. We expect effective price pressures to increase for other comparable products at this time with evidence of therapeutic substitution impacting all drugs in a category. The best known examples of this sort of “category killing” patent expiry would be in the statins. Up until the patent expiry of Zocor in 2006, we classified all of the branded statins as discountable. After 2006, all of the remaining patented drugs move to the substitution risk group. Up until 2015, both of the long acting basal insulins, Lantus and Levemir, were deemed unique but after the patent expiry Lantus in 2015, then Lantus, the new formulation Toujeo and Novos new generation Tresiba are deemed substitution risk. Generic risk: This covers drugs where patents have expired but where regulatory or other barriers have offered additional protection from generics. We have identified these drugs as a separate group as our modelling suggests no change to the products status, but there is a theoretical risk of unexpected generic competition. Examples in this class would be Lovenox from Sanofi Aventis between 2007 and 2010, covering the period from the patent rejection by the courts to first generic entry. A current example is Flovent from GSK, where the patent expired in 2004 but where there is still no generic competition. We only classify drugs in this group if there are “small molecules”, “biological” products beyond patent expiry remain designated as unique/discountable or at risk of substitution. Multi source: This covers drugs after patent expiry where there is generic competition. Good examples of drugs in this class would be the early years post patent expiry of Prilosec from AstraZeneca and Voltaren from Novartis, where both brands continued to register significant sales despite widespread availability of generic versions of these products. We have also classified all of the residual “tails” of unidentified products as multi source for the purposes of this analysis. Where sales of drugs persist at least 5 years post patent expiry in a region we classify them as sustainable brands and this is where residual Prilosec sales are counted from 2005. Global Pharma 42 01 May 2015 Sustainable Brand: This encompasses sales of prescription drugs sold on brand equity, normally where the choice is highly influenced by the consumer, and where we think patents are largely irrelevant to the pricing/purchasing decision. Examples include the aesthetic drugs Dysport and Botox, which are self-pay and drugs which might otherwise be classified as OTC such as Bayer’s prescription aspirin and all of the cough/cold drugs and anti-diarrhoeal/laxative that we have in our database (e.g. Smecta for Ipsen). We have also classified all branded drugs where we have individual sales forecasts in our database more than 4 years post generic entry to be sustainable brands. Good examples of drugs here would be Prilosec from AstraZeneca (effective patent expiry in 2001 but sales in 2011 outside of the US of $908m) and Voltaren from Novartis (effective patent expiry ex US in 1995 but sales in 2011 $794m). We have not included sales of drugs post patent expiry in Japan as sustainable brands, as we believe that the drivers of growth in Japan are quite different. Figure 111: Global majors: Branded, economic drug sales by uniqueness status vs. forecast operating margins 100% 60% 90% % Branded Drug sales 70% 40% 60% 50% 30% 40% 20% 30% 20% 10% 10% LLY MRK Novo PFE Sanofi 2014 2016 2018 Roche Multisource 2014 2016 2018 2014 2016 2018 2014 2016 2018 2014 2016 2018 Novartis Substitute risk 2014 2016 2018 JNJ 2014 2016 2018 GSK Discountable 2014 2016 2018 BMY 2014 2016 2018 Bayer 2014 2016 2017 2014 2016 2018 AZN Unique+sustainable 2014 2016 2018 2014 2016 2018 Abbvie 2014 2016 2018 0% 2014 2016 2018 0% Operating Margin (line) 50% 80% Takeda Average HC Op Margin Source: Company data, Credit Suisse estimates Figure 112: US biotech: Branded, economic drug sales by uniqueness status vs. forecast operating margins 100% 60% 50% 80% 70% 40% 60% 50% 30% 40% 20% 30% 20% 10% 10% Unique+sustainable Discountable Lundbeck Orion Substitute risk Recordati Multisource UCB 2014 2016 2018 MRCG 2014 2016 2018 Meda 2014 2016 2018 2014 2016 2018 2014 2016 2018 Ipsen 2014 2016 2018 Galenica 2014 2016 2018 Almirall 2014 2016 2018 2014 2016 2018 Alkermes 2014 2016 2018 Actelion 2014 2016 2018 0% 2014 2016 2018 0% Operating Margin (line) % Branded Drug sales 90% Average HC Op Margin Source: Company data, Credit Suisse estimates Global Pharma 43 01 May 2015 Figure 113: Global Speciality: Branded, economic drug sales by uniqueness status vs. forecast operating margins 100% 70% 60% 80% 50% 70% 60% 40% 50% 30% 40% 30% 20% 20% 10% 10% 2014 2016 2018 2014 2016 2017 2014 2016 2018 2014 2016 2018 Celgene 2014 2016 2018 Biomarin Discountable 2014 2016 2018 BIIB 2014 2016 2018 Alexion 2014 2016 2018 Amgen Unique+sustainable 2014 2016 2018 2014 2016 2018 0% 2014 2016 2018 0% Operating Margin (line) % Branded Drug sales 90% Gilead MDVN REGN UTHR Vertex Average Substitute risk Multisource HC Op Margin Source: Company data, Credit Suisse estimates Global Pharma 44 01 May 2015 Appendix 5: US healthcare system, flow of rebates The $76.5bn of rebates we have identified from the 15 companies surveyed is an integral part of the funding of the PBM industry, although the increasing use of generics (typically 70-80% of volume usage) has lessened reliance on branded drug rebates. In Figure 114 we show how rebates flow between manufacturer and payers, both direct and via the medium of the pharmacy benefit managers (PBMs). Figure 114 shows a schematic, whereas Figure 115 attempts to illustrate typical payments for key categories of drug via different distribution channels, with rebates central to most delivery routes. We are grateful to our US colleagues who cover the US healthcare distribution space for sharing the data with us (Glen Santangelo, Jeffrey Bailin, and Tyler Harris). Figure 114: US Pharmaceutical supply chain ( via retail) Source: Company data, Credit Suisse estimates Global Pharma 45 BRAND- retail BRAND- mail-order GENERIC- retail GENERIC- mail-order SPECIALTY- mail-order $190 $575 $48 $200 $2,500 one month of treatment three months of treatment one month of treatment three months of treatment one month of treatment tier 2- 5 $392.4 $11.9 $35.0 $2,052.98 $397.1 $8.1 <--$1975 (AWP less 20-22%) $18 $1,975 Comment Tiering determines patient co-pay made to pharmacist , determined by each PBM with employers typically tier 1 generic, tier 2 preferred brand , tier 3-4 higher co-pay levels Typically tier 1 generic $0-5 per month, Tier 2 preferred brand $20-30, Tier 3-4 higher co-pay levels, tier 5 % co pay rather than flat rate. Employer pays the PBM * AWP less negotiated discount * claims processing fee *Transaction fee *dispensing fee employer pays PBM AWP less 14.75-15.25% PBM pays retail pharmacy $153.8 may be sourced direct from manufacturer- may also have a specific distribution fee for a lot of direct sourcing from manufacturers <--$8 contract pricing - <--$10.45 (MAC AWP less 78%) <--$18 (AWP less 90-92%)- but in practice AWP may not be relevant with contract pricing $17.0 $ any pharmacy related fees for speciality drugs like there are for regular brands , none quoted in your example <--$11.88 (AWP -78%) $1.4 -> $10.04 (PBM collects 8-12% rebate - of which it keeps around 15-20% and passes the rest on to employer)- > <--$419.75 (PBM pays wholesaler AWP less 20% -25-29% less 5-9% wholesaler charge) - > $ 7.6 (3-5% fee for pharmacy information)--> $123.8 - > $23 (3-5% fee for pharmacy information)--> <-$1.5 admin/clinical fee <--$162.5 (AWP -16%) <--$159.6 (AWP less 15-16.5% + $1 dispensing fee) <-$127.7 $53.2 <--$2115.63 (AWP 82-83%) $162.5 <--$35 (AWP 82-83%) 10-20% copay $ 47.5 -> (80-85% of rebate passed on to employer) 0-5 $10.5 <$123.8 Manufacturer (effective income) tier 3- 5 5 PBM ( revenue - pre costs) Wholesaler tier 1 $50-150 Employer/Insurer (effective cost of Rx) Pharmacy tier 1 $20- $60 <--$439.88 (AWP -22-25%) patient payment tier 2- 5 $ 62.25 -> (80-85% of rebate passed on to employer) formulary position $13.13 rebate of 3% retained by PBM - more passed to employer/insurer Typical list price AWP <$407.15 Global Pharma Figure 115: Fund flow for typical drug (prices and rebates) * AWP less negotiated discount BRAND: PBM earns 3-5% from manufacturer for sale of pharmacy information BRAND: PBM pays retail pharmacy AWP -15-16.5% + $1 fee SPECIALTY larger customers secure drug specific pricing on c 150 drugs Pharmacy typically 20% gross margin and 6% op margin Wholesaler Typically overall has 3.5% gross margin and 1.5% net margin Generics - wholesalers offer contract prices which may have no relation to AWP to large retail customers. A typical mark up for a wholesaler might be 15%, PBMs /mail order may source direct from manufacturers bypassing wholesalers Manufacturer pays 3-5% to PBM for sale of pharmacy information pays PBM /employers rebates for volume (in this example c 10%) Effective PBM margin from list price 6% 9% 3% 8.5% 6% Effective manufacturer revenue from list price 65% 69% 17% 8.8% 79% 46 01 May 2015 Source: Company data, Credit Suisse estimates 01 May 2015 Appendix 6: Example Rebate disclosure The disclosure of reconciliation from gross to net sales for US pharmaceuticals arose for US listed companies whose principle business is in pharmaceuticals under SarbanesOxley rules disclosing key assumptions that may impact revenue recognition. Bayer is not a pure healthcare company, and Roche, Merck KGaA, Lundbeck and UCB do not have a full US listing and thus do not need to provide this disclosure, although we believe that it would be best practice. Different companies have different levels of disclosure but most give some breakdown of data into various different elements of discount. We highlight what we perceive to be a best practice disclosure from AstraZeneca PLC in its Annual Report and Form 20-F Information 2014. AZN 2014 Disclosure: Rebates, chargebacks and returns in the US When invoicing sales in the US, we estimate the rebates and chargebacks that we expect to pay. These rebates typically arise from sales contracts with third party managed-care organisations, hospitals, long-term care facilities, group purchasing organisations and various federal or state programmes (Medicaid ‘best price’ contracts, supplemental rebates etc). They can be classified as follows: Chargebacks, where we enter into arrangements under which certain parties, typically hospitals, long-term care facilities, group purchasing organisations, the Department of Veterans Affairs, Public Health Service Covered Entities and the Department of Defense, are able to buy products from wholesalers at the lower prices we have contracted with them. The chargeback is the difference between the price we invoice to the wholesaler and the contracted price charged by the wholesaler. Chargebacks are paid directly to the wholesalers. Regulatory, including Medicaid and other federal and state programmes, where we pay rebates based on the specific terms of agreements with the US Department of Health and Human Services and with individual states, which include product usage and information on best prices and average market prices benchmarks. Contractual, under which entities such as third party managed-care organisations are entitled to rebates depending on specified performance provisions, which vary from contract to contract. The effects of these deductions on our US pharmaceuticals revenue and the movements on US pharmaceuticals revenue provisions are set out opposite. Accrual assumptions are built up on a product-by-product and customer-by customer basis, taking into account specific contract provisions coupled with expected performance, and are then aggregated into a weighted average rebate accrual rate for each of our products. Accrual rates are reviewed and adjusted on a monthly basis. There may be further adjustments when actual rebates are invoiced based on utilisation information submitted to us (in the case of contractual rebates) and claims/ invoices are received (in the case of regulatory rebates and chargebacks). We believe that we have made reasonable estimates for future rebates using a similar methodology to that of previous years. Inevitably, however, such estimates involve judgements on aggregate future sales levels, segment mix and the customers’ contractual performance. Managed-care and group purchasing organisation rebate charges increased by $812 million in 2014 (2013: $1,321 million; 2012: $160 million) mainly due to the impact of price increases on price-protected business and pricing pressure resulting in higher negotiated rates particularly in the Medicare Part D business. Cash discounts are offered to customers to encourage prompt payment. Accruals are calculated based on historical experience and are adjusted to reflect actual experience. Customer Returns Industry practice in the US allows wholesalers and pharmacies to return unused stocks within six months of, and up to 12 months after, shelf-life expiry. The customer is credited for the returned product by the issuance of a credit note. Returned Global Pharma 47 01 May 2015 products are not exchanged for products from inventory and once a return claim has been determined to be valid and a credit note has been issued to the customer, the returned products are destroyed. At the point of sale in the US, we estimate the quantity and value of products which may ultimately be returned. Our returns accruals in the US are based on actual experience. Our estimate is based on the preceding 12 months for established products together with market-related information, such as estimated stock levels at wholesalers and competitor activity, which we receive via third party information services. For newly launched products, we use rates based on our experience with similar products or a pre-determined percentage. Source AZN 2014 Annual Report Figure 116: Gross to net sales- US Pharmaceuticals Source: AstraZeneca PLC Annual Report and Form 20-F Information 2014 Global Pharma 48 01 May 2015 Companies Mentioned (Price as of 26-Apr-2015) AbbVie Inc. (ABBV.N, $66.07) Actelion (ATLN.VX, SFr126.9) Alexion Pharmaceuticals Inc. (ALXN.OQ, $180.08) Alkermes plc (ALKS.OQ, $62.26) Almirall (ALM.MC, €16.98) Amgen Inc. (AMGN.OQ, $167.91) AstraZeneca (AZN.L, 4749.5p) Bayer (BAYGn.DE, €135.3) BioMarin Pharmaceutical, Inc. (BMRN.OQ, $120.28) Biogen Idec (BIIB.OQ, $401.71) Bristol Myers Squibb Co. (BMY.N, $65.8) Celgene Corp. (CELG.OQ, $118.71) Eli Lilly & Co. (LLY.N, $71.58) Galenica (GALN.VX, SFr890.5) Gilead Sciences Inc. (GILD.OQ, $103.7) GlaxoSmithKline plc (GSK.L, 1534.5p) Ipsen (IPN.PA, €48.04) Johnson & Johnson (JNJ.N, $101.08) Lundbeck (LUN.CO, Dkr132.1) Meda (MEDAa.ST, Skr143.2) Medivation (MDVN.OQ, $131.01) Merck & Co., Inc. (MRK.N, $57.6) Merck KGaA (MRCG.DE, €105.15) Novartis (NOVN.VX, SFr99.8) Novo Nordisk A/S (NOVOb.CO, Dkr390.3) Orion (ORNBV.HE, €30.17) Pfizer (PFE.N, $35.27) Recordati (RECI.MI, €18.18) Regeneron Pharmaceutical (REGN.OQ, $480.09) Roche (ROG.VX, SFr276.6) Sanofi (SASY.PA, €95.86) UCB (UCB.BR, €69.02) United Therapeutics Corp (UTHR.OQ, $186.69) Vertex Pharmaceuticals Inc. (VRTX.OQ, $133.2) Disclosure Appendix Important Global Disclosures Vamil Divan, MD, Ravi Mehrotra PhD, Glen Santangelo, Jeffrey Bailin, CFA, Ari Jahja, Matthew Weston PhD, Jo Walton and Terence McManus each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return rela tive to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Global Pharma 49 01 May 2015 Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the anal yst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (53% banking clients) Neutral/Hold* 38% (50% banking clients) Underperform/Sell* 16% (43% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should b e based on investment objectives, current holdings, and other individual factors. Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-andanalytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names The subject company (BIIB.OQ, BMRN.OQ, AMGN.OQ, REGN.OQ, CELG.OQ, PFE.N, AZN.L, ROG.VX, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, JNJ.N, ABBV.N, UCB.BR, BMY.N, MRK.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (AMGN.OQ, REGN.OQ, CELG.OQ, PFE.N, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, ABBV.N, BMY.N, MRK.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (REGN.OQ, ROG.VX) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (AMGN.OQ, CELG.OQ, PFE.N, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, MRK.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (AMGN.OQ, REGN.OQ, CELG.OQ, PFE.N, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, ABBV.N, BMY.N, MRK.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MDVN.OQ, BIIB.OQ, VRTX.OQ, BMRN.OQ, ALXN.OQ, AMGN.OQ, REGN.OQ, CELG.OQ, PFE.N, AZN.L, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, JNJ.N, ABBV.N, LUN.CO, IPN.PA, MRCG.DE, UCB.BR, BMY.N, GILD.OQ, MRK.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (REGN.OQ, ROG.VX) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (MDVN.OQ, BIIB.OQ, VRTX.OQ, BMRN.OQ, UTHR.OQ, ALXN.OQ, AMGN.OQ, REGN.OQ, CELG.OQ, PFE.N, LLY.N, JNJ.N, ABBV.N, BMY.N, GILD.OQ, MRK.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (BAYGn.DE, NOVN.VX, MRCG.DE, ATLN.VX). As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PFE.N). As of the date of this report, an analyst involved in the preparation of this report, Vamil Divan, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in the common stock Pfizer (PFE.N). A member of the analyst's household is an employee of Pfizer (PFE.N). Global Pharma 50 01 May 2015 For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (MDVN.OQ, BIIB.OQ, VRTX.OQ, BMRN.OQ, UTHR.OQ, ALXN.OQ, AMGN.OQ, REGN.OQ, CELG.OQ, NOVOb.CO, PFE.N, PFE.N, PFE.N, AZN.L, ROG.VX, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, JNJ.N, ABBV.N, SASY.PA, LUN.CO, IPN.PA, ALM.MC, MRCG.DE, ATLN.VX, ALKS.OQ, RECI.MI, ORNBV.HE, UCB.BR, MEDAa.ST, GALN.VX, BMY.N, GILD.OQ, MRK.N) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.creditsuisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (AZN.L, SASY.PA, LUN.CO, ATLN.VX, ORNBV.HE, UCB.BR, BMY.N). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (AMGN.OQ, CELG.OQ, PFE.N, LLY.N, BAYGn.DE, NOVN.VX, GSK.L, BMY.N, MRK.N) within the past 3 years. As of the end of the preceding month, Credit Suisse beneficially owned the following percentages of the voting rights of the subject companies: 1.0% or more of GALN.VX As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Europe) Limited ............................... European Pharma Team ; Matthew Weston PhD ; Jo Walton ; Terence McManus For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683. Global Pharma 51 01 May 2015 References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This information is being distributed by Credit Suisse AG, Dubai Branch, duly licensed and regulated by the Dubai Financial Services Authority (DFSA), and is directed at Professional Clients or Market Counterparties only, as defined by the DFSA. The financial products or financial services to which the information relates will only be made available to a client who meets the regulatory criteria to be a Professional Client or Market Counterparty only, as defined by the DFSA, and is not intended for any other person. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2015 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only. XX6545EU.doc Global Pharma 52