Healthcare & Life Sciences

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February 12, 2007

This Week's Industry Focus:

Pharmaceuticals & Biotechnology

In Acquisitions We Trust
Author: Adriana Rusu, Research Analyst, Pharmaceuticals & Biotechnology

The pharmaceutical industry is going through changes these days. Recent increased concern about drugs safety profiles, the specter of
diminishing pipelines and imminent patent expirations worth billions of dollars are hanging above the heads of many pharmaceutical
companies. When many in the industry are turning to biotechs for an answer to these troubles, the need for a rigorous evaluation of
potential acquisition deals becomes imperative.

Research and development in the industry has

been in the upswing. According to a recent
Figure 1: Research and Development Expenses, Total NDA, and NDA for NME
report published by the Government Submissions, 1993-2004
Accountability Office (GAO), R&D spending in
the pharmaceutical industry grew by 147 percent
between 1993 and 2005. Increased spending,
however, did not translate into higher
productivity, as the number of new drug
applications submitted for FDA review increased
by only 38 percent during the same period.
Moreover, about 68% of these applications were
modifications to existing drugs, as opposed to
new molecular entities, whose risk of rejection is
higher; cases such as that of Pfizer, which
recently lost about $20 billion in market
capitalization after withdrawing torcetrapib,
might provide an explanation. To exacerbate the
pharma industry’s troubles, IMS Health reported
that products worth approximately $23 billion
went off patent in 2006, with another $16 billion Source: GAO Report on the Pharmaceutical
to follow this year. Industry, November 2006

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 This Week's Industry Focus
Pharmaceuticals & Biotechnology

Historically, pharmaceutical companies have relied on licensed products for an average of 15-20 percent of their revenues, and that is
projected to increase in the future. Currently, biotech-based drugs account for about 44% of all drug candidates in the development
phase and 27% of those in clinical and pre-clinical trials, according to the journal Nature Biotechnology. Are acquisitions of biotech
companies then the answer that will fuel growth for the ailing pharmaceutical industry?

Types of pharmaceutical-biotech alliances

Since its inception in the 1970’s, the biotech industry has witnessed a myriad of partnerships between large pharmaceutical and smaller
biotech companies. The types of pharmaceutical-biotech alliances have taken different forms, such as research and development
collaborations, product or technology licensing, marketing alliances or mergers and acquisitions. Mergers and acquisitions (M&A’s) are
the most involved and complex deals, the degree of coordination and collaboration required from both parties exceeding that of other
types of alliances. M&A’s demand not only substantial due diligence prior to “sealing the deal”, but also post-integration scrutiny to
ensure that the expected benefits of cooperation are reaped.

The type and extent of the partnerships depend on several Figure 2: Pharma-Biotech Alliance Management: Types of Alliances
reasons. For example, the most common reasons for (World), 2006
pharmaceutical companies to acquire a company included
access to new products, technologies and/or intellectual
property; scale or scope economies (through market and
product expansion, respectively); diversification to reduce
risks; or simply unused free cash. Biotech companies have
considered acquisitions as one of the exit strategies, along
with Initial Public Offerings (IPO’s). While IPO’s were given
preference during the glory days of the late 1990’s when the
stock market performance warranted good valuations of
biotech companies, more recently acquisitions by big pharma –
or larger biotechs - are regarded as more stable and valuable
exit routes. The specter of patent expirations and diminishing
pipelines that is hanging above many pharmaceutical
companies favors the acquisition scenario, and also shifts the Source: Frost & Sullivan
balance of power towards the acquired companies, giving them
considerable negotiation power. Traditionally, companies were acquired while development products were in advanced clinical trials
stages. Lately, increased competition is pushing the acquisition point to earlier pre-clinical development stages; such is the case of
Novartis’ acquisition of Astex Therapeutics. In such an environment, the need for careful evaluation of acquisitions has become more
stringent than ever.

In the evolving landscape of medicine, besides providing immediate access to new products and markets to fuel growth, acquisitions of
biotechs can also advantageously position the new integrated company. Both pharma and biotech companies recognize that no single
molecule is the magic solution to diseases, and that in the future multiple types of drugs will be incorporated in the treatment of a
disease. Simultaneously with big pharma expanding into biotech territory, leading biotech companies such as Genentech and Amgen
are taking steps to assemble or expand their chemistry research departments, hoping to expand their lines of attack in the battle
against diseases. Having the combined expertise of biologics and small molecules can allow integrated bio-pharmaceutical companies
to establish leading positions in the therapeutic areas of choice.

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 This Week's Industry Focus
Pharmaceuticals & Biotechnology

Acquisitions can also facilitate access to areas of

increased future demand, such as personalized medicine.
Figure 3: The integrated company should build on the combined expertise
Although a small part of medicine at the present time, of integrated biotech and pharmaceutical companies
this area should hold commercial promise in the US,
considering the potential demand from an imminently
aging population of baby-boomers – a highly educated,
active and affluent demographic segment. Certain
current medicines have enjoyed market success on the
basis of targeted medicine: Genentech’s Herceptin, used
in the treatment of breast cancer in patients who
overexpress the human epidermal growth factor HER-2
receptor, and ImClone’s Erbitux, used to treat metastatic Source: Frost & Sullivan
colorectal cancers that express the EGF cell surface
receptor are two such examples.

Some criteria for evaluating potential acquisition targets

Some factors to evaluate prior to deciding on the acquisition target include market trends and revenue potential, therapeutic area
compatibility, cultural aspects, geographic motivations, and brand image considerations. The extent to which they influence each
individual deal varies case by case.

Take calculated risks after identifying relevant market and earnings trends
As acquisitions during pre-clinical development stages are becoming more common, the risk of failure and its cost are mounting. Out
of about 250 compounds that enter the pre-clinical phase after passing the discovery stage, only five make it into clinical trials, and
ultimately only one will be successfully launched to market. The odds of failure are expected to increase substantially for the pharma
company that enters into a pre-clinical acquisition deal. Considering the hefty prices paid for biotechs, this seems a risky business
proposition to pharma companies that will also have to bear the full cost of clinical trials. Bain & Co estimates that the median value
of biotech acquisitions nearly tripled to $170 million from 2004 to 2005. To complicate matters, as market trends evolve, some biotechs
may find themselves working in fields that will not necessarily materialize in large earnings. For a pharma company that needs to fulfill
its promise to shareholders, the expenditure for such acquisitions may not always produce the expected rewards.

Evaluate the degree of diversification versus that of therapeutic area compatibility

Overlapping or compatible therapeutic areas may provide the advantage of increased asset utilizations, such as R&D capabilities,
platform technologies or an existing sales force. That does not imply overlooking the possibility of gaining expertise and expanding into
new areas. Certain acquired platform technologies can provide companies with a competitive advantage in multiple therapeutic areas.
Merck recently bought Sirna Therapeutics to gain access to its RNA interference technology, despite the fact that Sirna had only one
compound in early clinical trials; Sirna’s technology should allow Merck to capitalize on different therapeutic areas in the future, if the
selectivity and delivery issues associated with RNAi- based drugs are solved. Similarly, GlaxoSmithKline acquired the US biotech Praecis
Pharmaceuticals to complement its own discovery capabilities with the chemical synthesis and screening technologies developed by
Praecis.

However, expansions ought to be carefully evaluated, to avoid simply opportunistic expansions and choose rather focused ones that
increase the ability to capitalize on core competencies. An increased number of products or markets can dilute the strategic intent of
the company, as well as impede the company’s flexibility and agility to effectively respond to market conditions. Nonetheless, a certain
degree of diversification has its merits. During these challenging times for the pharma industry, some of the more diversified companies,

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 This Week's Industry Focus
Pharmaceuticals & Biotechnology

like Novartis, may very well have the best pipelines. Furthermore, looking at diversification as an avenue to providing integrated medical
solutions may be another approach to acquisitions, and may give a valuable perspective on the strategic future of the company.

Lines of communication must stay open between partners to grasp cultural aspects
Along the lines of creating a flexible and agile company, culture is a significant factor to evaluate before acquisitions. Although cultural
differences between biotech and pharma companies are well-known, the extent to which they become a major issue after acquisitions
varies. Some big pharma companies have historically maintained alliances with biotechs, and strived to accommodate the
entrepreneurial, research-oriented culture on which biotechs take pride. Eli Lilly, for example, established an internal Office of Alliance
Management that promotes the company’s image as “the partner of choice” for other companies and aims to attract the most
promising partners to its network. Lilly’s alliance management professionals use processes and practices that enhance communication
between partners and speed up conflict resolution. Roche, with its numerous partnerships and long-term experience in this arena, also
has an enviable position as a potential partner for smaller companies. Roche prides itself in its partnering culture that encourages
innovation through a combination of autonomy and collaboration. Johnson & Johnson has a long history of bringing onboard new
smaller companies to its large family and maintaining the entrepreneurial culture. Pfizer’s very recent plan to sponsor a biotech
incubator in La Jolla, CA could certainly enhance its image among potential biotech partners.

The acquired company’s post-integration status - standalone

entity versus assimilated – can be a factor prior to making the
Figure 4: Suggested Criteria for Evaluating Acquisition Targets
choice of targets. The internal dynamics of the acquired company
may give preference to one form over the other, as the interests
of owners and managers may not coincide. While owners are
sometimes interested to sell the company regardless of the final
post-integration status, managers may prefer the “continuity” of a
standalone entity. A better understanding of such dynamics prior
to making a choice could exclude certain options, or establish a
preferred status in the negotiation process.

Regardless of the path chosen, the integrated company must

strive to exhibit the same creative and innovative culture that
drove the biotech’s success. The two companies must align their
driving forces to be able to achieve coordination and ultimately
successful integration. Clear communication, along with shared
ownership and responsibility create an environment conducive to
enhanced performance. Considering the different needs of
biotech and pharma companies, clear communication pre- and
post- acquisition is essential to ensure that partners build on the
common aspirations to strengthen core competencies, rather Source: Frost & Sullivan
than let the differences diminish the value of the deal. Most
importantly, the ensued company should adhere to a flexible and
agile business model, able to respond in a timely manner to
market and environmental changes.

Target: local versus global?

Cross-border transactions have not been dominant in the biotech industry, while at the pharmaceuticals end they were rather common
during the 1990’s. The upward trend in the pharmaceutical sector has started to pick up again in 2005, according to Young & Partners,

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 This Week's Industry Focus
Pharmaceuticals & Biotechnology

a life sciences investment bank. The limited number of biotech cross-border deals might be explained by the industry’s almost exclusive
presence in the US and Europe – about 90%. However, the increasingly global economy will eventually spur more cross-border
acquisitions, fueled by high growth areas such as Asia Pacific. In 2005 this region posted the highest growth in the world, according to
Ernst &Young. Combine that with excellent research capabilities and substantial labor cost savings, and the argument for cross-border
acquisitions becomes serious. The concerns of patent protection and counterfeit drugs associated with expansion into emerging
markets are gradually being addressed by these countries’ governments, many of which view biotechnology as a strategic priority.
Interestingly, companies in the emerging markets are also looking for acquisitions of US biotechs. Ranbaxy, India’s largest drug company,
is looking to acquire a US biotech that would also give it access to a new therapeutic area, besides access to the US market. Such a
strategy underscores the importance and growth of the global bio-pharma market. Besides opening new markets and lowering costs,
cross-border acquisitions are also opportunities to exchange operational know-how.

Strong corporate brands capitalize on biotechs’ strengths

Pharmaceutical companies can also look at biotech acquisitions - or any type of alliance - from the perspective of corporate image.
Corporate image, transcending that of products alone, is a strategic concern that can certainly impact the level of success of
pharmaceutical companies. The partnership between Roche and Genentech is a good example of a whole greater than the sum of its
parts. Corporate brands can help create sustainable and synergistic relationships with partners – regardless of the alliance type - and
ensure alignment and unity after integration. Building and maintaining a solid image is not an easy task; the industry often finds itself
the target of public debates. As biotechs have traditionally focused on underserved patient segments, by blending the biotech’s
strengths into the corporate brand pharmaceutical companies can also take a step closer to their social responsibility goals.

Conclusion

While current circumstances favor the acquisition scenario, the advantages and disadvantages must be carefully pondered. Rapid access
to products, technologies and markets may not necessarily guarantee a successful acquisition. Only a small fraction of mergers and
acquisitions are truly successful in the end, as synergies may fail to materialize as expected. Market trends, revenue potential, cultural
and geographic fit, along with corporate brands compatibility must be weighed prior to deciding the best type of partnership, as well
as the best partner company. A clear strategic intent, along with a careful evaluation of these decision criteria, as well as other
important factors intrinsic to each company, can reveal potential pitfalls and prevent costly mistakes.

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 This Week's Industry Focus
Pharmaceuticals & Biotechnology

Company Spotlight: AmpliMed

AmpliMed is a clinical-stage pharmaceutical company that specializes in developing

small molecules drugs in the oncology area. The company focuses on researching and
developing drugs with novel mechanisms of action. Amplimexon, the company’s lead
drug, is currently in Phase II clinical trials. The company is also developing benzimate,
currently in Phase I, and Amplizone, scheduled to begin Phase I this year. The
company's portfolio includes 30 patented Amplimexon analogues (cyanoairidines), and 150 patented azonafides among which
are many novel compounds with the potential for further preclinical and clinical development.

Key Technology or Flagship Product:

Amplimexon, the company’s lead drug, exhibits a unique mechanism of action in attacking cancer cells. Amplimexon causes
toxic substances to build up inside the cancer cells exposed to the drug. Eventually the cell undergoes the process of
apoptosis, or controlled cell death. The drug has shown early evidence of efficacy and low levels of toxicity. It has also been
shown to work synergistically with other cancer drugs, restoring their efficacy in cases where the tumor has become resistant
to drugs. Furthermore, Amplimexon is only moderately myelosuppressive (suppressing blood cell counts) and circumvents the
multi-drug resistance mechanism of cancer cells. The FDA granted Amplimexon orphan drug status for four cancer types:
malignant melanoma, pancreatic adenocarcinoma, multiple myeloma and ovarian cancer.

Noteworthy Milestones:

1989: Founding by senior faculty members at the Arizona Cancer Center (AZCC) in Tucson, Arizona

2003: FDA granted IND exemption for Amplimexon

2004: Completed an extended Series "A" Preferred stock financing

2006: Phase I study began for benzimate

2007: Phase I clinical trials scheduled to begin for Amplizone; Phase III clinical trials scheduled to begin for Amplimexon

Contact Information:

Robert A. Ashley, Chairman, CEO, President

AmpliMed Corporation
4380 North Campbell Avenue, Suite 205
Tucson, AZ 85718
rashley@amplimed.com
Phone: 520.529.1000
Fax: 520.529.3001

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 This Week's Industry Focus
Pharmaceuticals & Biotechnology

Reimbursement & Regulatory News

Recent FDA Approval Announcements:

Date Company Product Name Function Designation

Propanolol HCl Extended Release, in 60, 80,
Par Pharmaceutical 120, 160 mg dosage for the treatment of
Generic Inderal (R)-
29-Jan Companies (Woodcliff hypertension, migraine, angina pectoris due to FDA Approval
LA ER
Lake, NJ) coronary atherosclerosis, and hypertrophic
subaortic stenosis

Product expansion to include 100 milimeter

PolarCath
Boston Scientific (Natick, baloon to address a wider range of peripheral
29-Jan Peripheral FDA Clearance
MA) artery blockages in patients with critical limb
Dilatation System
ischemia

Finasteride - 5 mg tablets used to treat symptomatic benign

Barr Laboratories
30-Jan Generic prostatic hyperplasia in men suffering from FDA Approval
(Woodcliff Lake, NJ)
PROSCAR(R) enlarged prostate

Amoxicillin and 600 mg/42.9 mg (base) / 5 mL for Oral

Ranbaxy Pharmaceuticals Clavulanate Suspension USP for pediatric patients with
31-Jan FDA Approval
(Jacksonville, FL) Potassium - generic recurrent or persistent acute otitis media due to
Augmentin® S. pneumoniae, H. influenzae or M. catarrhalis

500 mg (base) and 1 g (base) tablets for the

Valacyclovir
Ranbaxy Pharmaceuticals treatment of herpes zoster (shingles), genital
1-Feb Hydrochloride - FDA Approval
(Jacksonville, FL) herpes in immunocompetent individuals, cold
generic Valtrex®
sores (herpes labialis)

Injectable anticoagulant, one/day, to treat

ARIXTRA unstable angina or non-ST segment elevation
GlaxoSmithKline
2-Feb (fondaparinux myocardial infarction (UA/NSTEMI), and ST- FDA Approval
(Philadelphia, PA)
sodium) segment elevation myocardial infarction
(STEMI)

new dosing recommendations for use of

Wyeth Pharmaceuticals RAPAMUNE(R) RAPAMUNE(R) in combination with antibody
2-Feb FDA Approval
(Madison, NJ) (sirolimus) induction therapy to treat high immunologic risk
renal transplant recipients

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