Biotech: Q408 & 2009 Preview
SECTOR REVIEW
Still Favor Large Cap into 1H09; Start Looking
Selectively at Small/Mid-Cap
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The Defensive Theme of 2008 Will Carry Into 1H09; M&A a Tailwind - 2008 saw large cap
biotech stocks outperform the markets as they were viewed as a safe haven amid the credit crisis
and ensuing market meltdown while small and mid-cap biotech companies were hurt by the
decreased risk appetite and shut down of the capital markets. We believe that the higher beta
small and mid-cap biotech stocks will outperform coming out of a recession as risk appetite
returns; however, we are not ready to make that switch yet. Instead we prefer staying in the higher
growth large-cap names such as GILD and CELG and keeping our investment in AMGN for
denosumab leading to further multiple expansion. The above said, we do believe M&A activity will
increase among the smaller names that have good assets and low valuations, and would start
selectively putting money to work in the small to mid-cap sector.
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Headwinds Include Political Headlines and F/X. While we expect M&A activity to be a tailwind
for the group, political headwinds and F/X fluctuations are likely to be headwinds. Since most of
the biologics are specialty drugs used to treat life threatening disease, we see less pricing pressure
on the biotech industry from legislative actions; however, the a biosimilar bill is likely to pass and
the bigger question is what it will look like, particularly given the recent increased clout of Rep.
Henry Waxman, who is seen as more friendly to the generic industry. The sharp strengthening of
the US dollar in early 4Q08 also raised significant concern over its impact on biotech companies.
However, the US dollar has since weakened and it highlights the difficulty in predicting currency
changes. Still, we don’t expect F/X to be the tailwind it was in 2008 and could be a headwind.
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Large-Cap Top Picks: AMGN: With Aranesp sales expected to hit a bottom and recover by mid-
09, we think the driver for the year will be the denosumab Phase III oncology data, which we
believe has a good chance of demonstrating superiority over Zometa and drive upside to the stock.
GILD: HIV trends remain very strong driven by share gains and market growth. Guideline changes
to recommend even earlier therapy could lead to further upside. The potential for Gilead to move
its “quad-pill” into Phase II/III testing is another potential positive for 2009. CELG: While there is
some uncertainty around next-week’s guidance for 2009, with the stock back down close to its 52-
week lows we think the stock will outperform as investors recognize it has peer-high top- and
bottom- line growth driven by Revlimid and Vidaza even with F/X headwinds and pressure from
competitors. Important Revlimid data which we expect to be positive in 2009 includes the MM-015
trial in front-line myeloma and the IFM 2005-002 trial looking at maintenance use after transplant.
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Small/Mid-Cap: ALXN: We expect continued strong growth from Soliris through new PNH
patients and geographic expansion, although we recognize that FX will be a headwind and our
well above consensus sales numbers may be overly optimistic. Still, we not only believe in Soliris’
opportunity in PNH but also the new indications, which should move forward in 2009. RIGL: We
believe the post ACR-sell off was overdone and think that the strong efficacy and a manageable
safety profile of R788 will garner a favorable partnership despite risks associated with increases in
blood pressure. CYTK: Given the positive Phase IIa efficacy and safety data seen in 2008, we
remain bullish on CK-452 in the heart failure indication, and to that end, we expect Amgen to
exercise its option on the compound early in 2009.

Table of contents
2008 Recap and 2009 Preview 3
2008 Favored Large-Cap over Small/Mid Cap Biotech 3
But Will The 2008 Trade Continue In 2009? We Are Not Ready To Move Out of
Defensive Large Caps Yet 4
Financing For Small Cap Is Still A Concern – But Acquisitions in 1H09 and Return to
Risk Appetite by End of Year Should Make 2009 Better Than 2008 5
Foreign Exchange A Wild Card – Likely a Modest Headwind 7
Politics Are Also A Headwind – But Mostly Headline Risk 8
Large Cap Stock Picks 8
Amgen (AMGN): Upside From Denosumab in Oncology 8
Gilead (GILD): HIV Growth Trends Remain Strong – Upside Potential From
Guideline Changes and Quad-Pill Developments 8
Celgene (CELG): Uncertainty Around 2009 Guidance Should Pass and Reveal Peer
High Growth 9
Mid/Small-Cap 2009 Top Picks: ALXN, CYTK, RIGL 9
Amgen (Outperform, TP $72) 11
Biogen Idec (Neutral, TP $53) 19
Celgene (Outperform, TP $74) 29
Gilead (Outperform, TP $54) 35
Alexion (Outperform, TP $57) 43
BioMarin (Neutral, TP $23) 48
Cytokinetics (Outperform, TP $11) 49
Regeneron (Neutral TP $26) 50
Rigel (Outperform,TP $34) 51
Theravance (Neutral, TP $14) 52
Targanta (Underperform, TP $2) 53
Vertex (Outperform, TP $33) 54
XenoPort (Outperform, TP $47) 55

2008 Recap and 2009 Preview
Summary: Looking back at 2008, large cap biotech was clearly seen as a defensive
sector in the backdrop of a credit crisis and a declining economy. This was in part
predicted from prior performance of biotech in the 2001-2003 recession but perhaps even
to a larger degree this time around because of the strength of biotech’s balance sheets.
On the other hand, with the capital markets essentially closed and risk appetite gone,
small-cap companies, which rely on capital markets for funding, suffered along with the
rest of the market.
Looking to 2009, we do believe that we may see a rotation out of defensive sectors, such
as large cap biotech, by the end of the year as an end becomes in sight of the current
recession. However, we are not ready to get off the large-cap biotech trade and prefer to
stay in those large defensive names at least through 1H09. To that end, our top large cap
picks include: (1) Gilead, where we expect continued strength in the HIV franchise from
market share gains and the potential move to starting therapy earlier, including updates to
treatment guidelines, (2) Amgen, where near term growth is not the major part of the
thesis, rather longer term growth driven by denosumab, where we have a positive view
towards the oncology Phase III trials that are expected this year, and (3) Celgene, where
near term volatility is expected around 2009 guidance but ultimately we believe it will
emerge as the highest growth large cap name over the next few years and justify a 30x
multiple.
While we continue to favor large cap biotech into 2009, we also believe that the pace of
M&A activity in the sector as a whole will increase as pharmaceutical companies look to
build their pipelines. As such, we do think investors should start thinking about the small
and mid-cap space for both acquisition potential and also a potential return to risk appetite
towards the end of the year. We favor those with a near term catalyst and/or cash to get
them through this downturn. Specific names include: (1) Alexion (ALXN), which should
increase its profitability as Soliris continues to grow and where we expect additional data
from new indications, (2) Cytokinetics (CYTK), where we expect Amgen to exercise its
option to develop CK-452, which should provide the company with enough capital and
makes it a potential strategic acquisition candidate, (3) Rigel (RIGL), which we expect to
sign a partnership for R788 in 2009
Other macro factors that we also expect to impact the sector include (1) the strengthening
dollar, although the recent weakening of the dollar highlights the difficulty in predicting
currency trends (particularly by biotech analysts), and (2) political headlines, which include
likely passage of a biosimilar bill and moves towards instituting some form of comparative
effectiveness in the reimbursement process.
2008 Favored Large-Cap over Small/Mid Cap Biotech
While major biotech indices were down ~15% this year, the large-cap biotech group has
not only outperformed the broader indices but actually ended up more than 10% for the
year,, securing its role as a “defensive” space (see Exhibit 1). This is not very surprising
since these biotech companies are relatively immune to a decline in consumer demand
due the broader economic troubles and do not rely on capital markets for financing. This
result was also in-line with our hypothesis going into the year to own large cap into a
recession (see Exhibit 2). However, the smaller, development stage biotech companies
that are cash flow negative and rely on capital markets to fund their research have also
somewhat predictably suffered from both a flight out of riskier assets as well as increased
difficulty accessing capital.