Changewave Research: Pharmaceutical Industry Trends for 2003

ChangeWave Research: Pharmaceutical Industry Trends for 2003

ChangeWave Research Report:

Pharmaceutical Industry Trends 2003 –

Brands Matter

Abstract

During the week of January 6-10, we surveyed Alliance healthcare members to determine how much brands really matter within the industry and to look at the market presence of Merck, Pfizer and one of the newer biotech companies, Gilead Sciences. We also looked at which generic drug manufacturers had best established their brand presence during 2002. A total of 98 Alliance members participated in the survey.

The results were straightforward and telling. A whopping 86% of respondents said pharmaceutical brands matter a great deal:

39% of respondents said Merck's reputation took a hit last year, and 32% said its brand would be weaker in 2003;

77% said Pfizer's brand held steady or improved last year; and, anecdotally, members told us the company reigns atop the industry;

GileadSciences is not as well known, but is well regarded. And while it has not yet reached about a third of the marketplace with its brand presence, it can look forward to reaching an additional portion of the industry unfamiliar with its brand during 2003.

Finally, Generic drug manufacturerspicked up market share and presence in 2002 and will continue to pressure proprietary pharma companies during 2003. Teva was the clear leader in terms of generic brand presence, with several other firms also receiving mention including Forest Labs, Barr Labs, Dr. Reddy’s Labs and Mylan.

The pharmaceutical industry experienced turbulence in 2002 faced with – among other things – increased generic competition for blockbuster drugs and the failure of several biotech therapies backed by big pharma firms. Importantly, the conservative nature of the healthcare profession and the extreme importance of reputation in the industry produce a high degree of sensitivity to the issue of company brand.

Helping You Profit From A Rapidly Changing World ™

Table of Contents

Summary of Key Findings...... 3

Overview...... 3

(A) Brands Matter...... 4

(B) Merck...... 4

(D) Gilead Sciences...... 6

(E) Generics...... 7

The Findings...... 8

ChangeWave Research Methodology...... 18

About ChangeWave Research...... 19

I. Summary of Key Findings

Overview

During the week of January 6-10, we surveyed Alliance healthcare members to determine how much brands really matter within the industry and to look at the market presence of Merck, Pfizer and one of the newer biotech company, Gilead Sciences. We also looked at which generic drug manufacturers had best established their brand presence during 2002 (back in January, 2002 we had dubbed it “The Year of the Generic”). A total of 98 Alliance members participated in the survey.

The results were straightforward and illuminating. Brands matter a great deal; certain generic companies have successfully established their brand presence; Merck is slipping, Pfizer is holding firm, and Gilead can look forward to reaching a greater portion of the 30% of the industry unfamiliar with its brand during 2003.

Key Highlights

86% of healthcare industry respondents believe brands matter and that they can help a drug's acceptance in the marketplace

76% believe that Generic drug manufacturers established significantly greater brand presence in the pharmaceuticals marketplace during 2002. 76% also say Generics will continue to erode the market of big-name pharma firms in 2003

39% say Merck' s brand and reputation fell during the past 12 months

77% say Pfizer's brand and reputation held steady or improved during the past 12 months

69% say Gilead is gaining awareness among healthcare professionals

Teva was the clear leader in terms of generic brand presence

(A) Brands Matter

Question Asked: Generally speaking, when a pharmaceutical company's name and market brand is well known, does it act to help or hurt a drug's acceptance in the marketplace?

Help86%

Hurt 2%

No Effect 9%

Don't Know 3%

An impressive majority (86%) of healthcare respondents believe a company’s name and market brand helps a drug's acceptance in the marketplace, a clear indication that the industry is extremely sensitive to branding – perhaps more so than consumers. This finding also makes intuitive sense – brand is a combination of research, reputation and representation in this industry – and helps explain the conservative nature of the pharmaceutical business.

(B)Merck Slipped in 2002 and Will Not Regain its Full Strength in 2003

Question Asked: Some analysts believe Merck's market brand and reputation fell during 2002, after having been one of the most admired companies in America for a good part of the 1990s. Other analysts believe Merck improved its market brand and reputation during 2002. What do you think?

Merck's Market Brand and Reputation Fell During 200239%

Merck's Market Brand and Reputation Improved During 2002 4%

No Change - Merck's Market Brand and Reputation is the

Same as it was a Year Ago50%

Don't Know 7%

In contrast to the above disappointing results for Merck, the “open-ended” responses to our follow-up question on the company reveal that things aren’t necessarily as bad as the above response would suggest (for complete findings on Merck, see pp. 8-11).

Question Asked: Do you believe Merck's market brand and reputation will support its marketing efforts in 2003 as successfully as it has in the past?

Yes47%

No32%

Don't Know21%

Respondents expressed considerable depth of feeling about Merck, with many believing the continuing MEDCO problem and other Wall Street-related matters should not have an impact on the company’s reputation and brand within the industry. As WID2493 puts it, “Merck has always come through in the clutch, and while they have had a difficult time or two, their reputation and market brand will continue to support their efforts. Do not count them out as their R&D is still strong and they are one of the best at getting new chemical entities to the market.”

Other respondents pointed to the R&D pipeline as being Merck’s biggest problem. IND7726 writes, “The field has become a lot more competitive than the good old days when Merck's name carried it through. Its research has stagnated compared to some others (such as Pfizer) and the management is not creative or innovative.” JUD1157 adds, “New top level marketing management is untried although bright. Merck Medco will continue to be an albatross with its implications of conflicts of interest in promoting Merck drugs. Needs new products to help differentiate Merck from the others. None in close sight yet.”

Bottom Line: Mixed Signals For Merck.The companystumbled in 2002 and respondents thought this would carry over into 2003, but qualified their answers by focusing on non-drug related issues affecting Merck. These crosscurrents give us a mixed opinion and make us tentative about Merck in the near-term. We see these survey results as a cautionary sign for investors in the company.

(C)Pfizer Tops Proprietary Pharmas

According to 77% of respondents, Pfizer's brand and reputation held steady or improved during the past 12 months. Anecdotally, they told us the company currently reigns atop the industry.

Question Asked: Pfizer is often characterized as the market leader by analysts, based upon their product line and overall financial strength. What do you think happened to Pfizer's market brand and reputation during 2002?

Pfizer's Market Brand and Reputation Fell During 200217%

Pfizer's Market Brand and Reputation Improved During 200220%

No Change - Pfizer's Market Brand and Reputation is the same as it

Was a Year Ago57%

Don't Know 5%

Question Asked: Do you believe Pfizer's market brand and reputation will support its marketing efforts in 2003 as successfully as it has in the past?

Yes61%

No17%

Don't Know21%

Overall, Alliance members tend to view Pfizer as a marketing machine, one respondent going as far as to compare Pfizer to the world’s most renowned market brand:

ANS3402 writes, “Pfizer is the Coca-Cola of the pharmaceutical world, with enormous brand equity.” However, this member finds their R&D side is sputtering. “…despite their huge R&D spending (~$7m following the Pharmacia acquisition) their output of new, internally developed drugs remains poor. Quite frankly, if you can't launch 3 drugs a year on $5bn then you have problems…Perhaps creativity (at the R&D level) is inversely proportional to size? Their marketing is superb though.”

Another respondent paints a rather stark picture of the company, but also admits they have superior marketing. CRL0022 writes, “They are the most ruthless company in terms of how they treat their employees out there. Their emphasis on process and sticking to message allow them to have a sales force that will follow the company's marketing plan regardless of what they have to sell – and they have very good marketing. As a result they will be successful.”

Bottom Line: For investors, Pfizer looks to be a steady brand in 2003 but not a strong one. A net of 3% of respondents said the company improved its brand presence in 2002.Combined with the current hassles of merging with Pharmacia, we expect Pfizer to experience flat growth in the first half of 2003.

(D)Gilead Sciences – A Company on the Rise

Gilead Sciences has a highly specialized product line featuring four core products for the anti-viral, Hepatitis (B and C) and HIV marketplaces. The biotech company turned profitable last year, riding rapid growth among these targeted patient populations. Yet our survey results show almost one-third (31%) of healthcare respondents are still unfamiliar with Gilead and 35% thought this unfamiliarity is limiting them in their sales efforts.

Question Asked: Are you aware of the company Gilead Sciences, Inc. (GILD)?

Yes69%

No27%

Don’t Know 4%

Question Asked: Gilead develops and commercializes molecular therapies for patients suffering from chronic illnesses (notably hepatitis and HIV related viruses). Some analysts believe the newness of the Gilead name (compared to brands such as Merck and Pfizer) may have slowed acceptance of their therapies. What do you think?

Newness of Gilead Name is Slowing Acceptance of their Therapies35%

Newness of Gilead Name is Accelerating Acceptance of their Therapies 3%

Newness of Gilead Name is Having No Effect on Acceptance of

Their Therapies38%

Don't Know24%

These results suggest that Gilead has room for overall growth as its brand builds in 2003, but Gilead's future may depend less on the potency of its brand than the potency of its therapeutics. As LEO7024 points out, “Gilead doesn't sell to the general public, therefore its name recognition is not that important since physicians use medicines based on need and efficacy."

Bottom Line:Gilead will continue its strong growth in 2003.Our survey findings show the company has not touched a third of the market, which means it could outperform the industry with regards to growth rates in its core drugs in 2003. While a highly volatile stock, we believe it will beat the street’s expectations for the year.

(E) Generic Brands and Companies are on the Mind of Healthcare Professionals

Question Asked: Do you believe that generic drug manufacturers established a significantly greater brand presence in the overall pharmaceuticals marketplace during 2002?

Yes76%

No15%

Don't Know 9%

Question Asked: Will generics continue to erode the market strength of big name pharmaceutical companies during 2003, or will big pharma companies grow stronger in 2003 by -- among other things -- launching new, patented therapies similar to their successes of the past?

Generics Will Erode Market Strength of Big Name Pharma Firms in 200376%

Big Name Pharma Firms Will Grow Stronger in 200314%

Don't Know11%

The accompanying open-ended results show that that the healthcare industry has an awareness of generic drug suppliers, not just their copycat products. DRG8647 writes, “Barr Labs (will succeed in 2003), mainly due to the much-publicized battle with Lilly over fluoxetine (Prozac), and Teva with the introduction of generic Augmentin.”

The responses also show traditional factors such as research do not matter much with generic brands. What counts is size (Teva is the world’s largest generic manufacturer), aggressiveness, and the ability to garner attention (i.e. Barr and its lawsuit with Lilly over Prozac).

WSH1329 writes, “I believe in the 'what have you done for me lately philosophy.' It's more important to know what's in the pipeline for new drugs and what drugs are they going to lose patents on. Generics are going to be more and more important in all aspects of medical care.”

Bottom Line: Generic Drug Manufacturers are up. We are bullish on generic drug manufacturers as a segment and see 2003 as an even better year than 2002. Why? Not only do our surveys show increasing acceptance by consumers and physicians but they also tell us the industry believes there will be a Medicare drug plan passed by Congress in 2003 and it will have a heavy dose of generics. Teva was the clear leader in terms of generic brand presence, with several other firms also receiving mention including Forest Labs, Barr Labs, Dr. Reddy's Labs and Mylan.

II. The Findings

Note: This survey was conducted among Alliance members in the healthcare industry. A total of 98 Alliance members participated.

Part One: Merck (MRK)

1. Question Asked: Some analysts believe Merck's market brand and reputation fell during 2002, after having been one of the most admired companies in America for a good part of the 1990s. Other analysts believe Merck improved its market brand and reputation during 2002. What do you think?

Merck's Market Brand and Reputation Fell During 200239%

Merck's Market Brand and Reputation Improved During 2002 4%

No Change - Merck's Market Brand and Reputation is the

Same as it was a Year Ago50%

Don't Know 7%

2. Question Asked: Do you believe Merck's market brand and reputation will support its marketing efforts in 2003 as successfully as it has in the past?

Yes47%

No32%

Don't Know21%

3. Question Asked: Please elaborate.

A. Yes

Good Product/Reputation28%

Strong Brand Recognition11%

Marketing is Excellent 7%

Sampling of Yes Responses

ANS3402 writes, “Although there is no doubt that COX-IIs have lost some of their luster and Medco may have engaged in some dubious tactics, it seems that Merck remains unlikely to merge. The big question is whether its shareholders can accept the fact that it will never regain the #1 spot (in terms of size) unless it does so. However, I'm far from convinced that bigger is better (even in the US!) and in time, Merck's strategy will be vindicated.”

MTA6607 writes, “Always bringing good profitable products. Experienced & savvy.”

SCH0777 writes, “I find no evidence of tarnish to the Merck brand. On the contrary, it has a strong brand name.”

KUR3102 writes, “In general, Merck has a good reputation, and employees like working there.”

DLM6845 writes, “Is still a good company, with excellent marketing team.”

DAV0265 writes, “Merck did not all of a sudden get dumb in 2002! Stuff happens to EVERY company from time to time. Merck is still an awesomely powerful presence, much admired and much feared by their competitors.”

WID2493 writes, “Merck has always come through in the clutch, and while they have had a difficult time or two, their reputation and market brand will continue to support their efforts. Do not count them out as their R&D is still strong and they are one of the best at getting new chemical entities to the market.”

STE3081 writes, “Merck has distinguished themselves with a continuous stream of products and industry relationships. Their business experiment with Medco, IMHO, will not tarnish the Merck name or its business going forward.”

CLI1209 writes, “Merck is a premier company in the industry, but had no success stories in 2002 to offset the bad image related to its marketing/sales slave division. They will recoup in 2003 because management is savvy & flexible, but the stock will not rebound much due to lack of any new blockbuster products to replace those coming off patent.”

WJH7828 writes, “Merck is respected and has helped the human condition immensely. However, any drug must stand on it's own -- if it provides a new solution it will be strongly accepted and praised -- if it's a me too product or addresses a very narrow interest the lack of enthusiasm should be taken as a black mark on the company. One should not forget Merck is still committed to the field of vaccine discovery and production which is rife with problems -- thank God for that commitment which is critical for everyone.”

DRG8647 writes, “Merck took a few unwarranted knocks in 2002, e.g. spurious reports of misleading accounting practices regarding Medco, etc., but I don't think it affected the medical field's regard for the strong ethical reputation of Merck.”

VIT1251 writes, “One year will not change a company like this significantly.”

BOB2633 writes, “Sure Merck has a pressing need for a new blockbuster drug in its arsenal. They could possibly realize this in the next six months or a year. The things external to Merck itself are what could seriously damage its market price. By that I mean Congress and FDA changes to the landscape it now resides in.”

KER5863 writes, “There were concerns about Merck's pipeline of drugs and patent expirations. I think looking forward Merck is in a good position although trailing Pfizer in terms of pipeline.”

B. No

No New Blockbuster Drugs – Loss of Ground to Pfizer13%

Brand Name Use in Decline 9%

Tarnished Reputation 7%

Growth Rates in Decline 7%

Sampling of No Responses

HOW7738 writes, “Merck has lost its leadership position to Pfizer. Given Pfizer's successful merger, the gap will widen in 2003.”

POR7751 writes, “All the big pharma companies suffered injury to their armor plating. The simple fact is that at least a couple of years of difficult times lie ahead (readjusting business plans/structures). Things are changing faster than these dinosaurs can adapt. Big pharma is NOT going out of business but growth rates are and will continue to trend downward for some time to come.”

BAR7151 writes, “Big drug companies are getting squeezed on a number of fronts, the government pricing rules, generics and a system that systematically delays the introduction of new drugs, longer than any other country in the world. Merck is not immune to these problems.”

GRA1199 writes, “Brand names are not as important as contracts with HMO's. The days of our independence of picking meds is long gone. We are told by the HMO's.”

CRL0022 writes, “Many of their best sales reps are looking at what else is out there as very few made good bonuses and that is unlikely to change this year.”

LON6438 writes, “Merck is viewed as arrogant in the industry. They don't have any new blockbusters on the horizon. Competition is fierce. Pfizer is the new leader and the most respected pharmaceutical company.”

GHM8270 writes, “Merck's affiliation with Merck-Medco has tarnished Merck's reputation with professionals. It has become abundantly clear that the affiliation bottom line is NOT patient care and service to the members, but the CORPORATE BOTTOM LINE at any cost to patient. Material presented to physicians is often severely slanted. Also some product problems.”

CAL0835 writes, “Merck's product portfolio and marketing efforts have been blunted by Pfizer, biotech's and generics - they are 'yesterday's news.'”

DDU7628 writes, “Merck’s market will be worse than 2002 as many scientists predicted. It is hard to stop the down trend in 2003.”

JUD1157 writes, “New top level marketing management is untried although bright. Merck Medco will continue to be an albatross with its implications of conflicts of interest in promoting Merck drugs. Needs new products to help differentiate Merck from the others. None in close sight yet.”

MTR0512 writes, “Pipeline is not as good as pipeline of Lilly and Astra. Means additional marketing efforts for existing products. It is not going to be the best year to use innovative processes to be recognized as leader in this area.”

IND7726 writes, “The field has become a lot more competitive than the good old days when Merck's name carried it through. Its research has stagnated compared to some others (such as Pfizer) and the management is not creative or innovative.”

Part Two: Pfizer (PFE)