US Pharma 2009 Outlook
Themes For The Year Ahead
Pharmaceuticals
Chris Schott, CFAAC
(1-212) 622-5676
christopher.t.schott@jpmorgan.com
Jessica Fye
(1-212) 622-4165
jessica.m.fye@jpmorgan.com
Yuriy A Prilutskiy
(1-212) 622-4162
yuriy.a.prilutskiy@jpmorgan.com
J.P. Morgan Securities Inc.
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In this report, we address major macro and company specific drivers that
could impact our coverage universe in 2009. Overall, we continue to see
the generics as the best positioned names within our coverage universe. In
addition, while challenges remain for major pharma, we believe the sector
remains attractive at current valuations (65% and 75% discount to the S&P
500 on ‘09E and ‘10E).
• Major Pharma (9.2x ’09E, 8.6x ’10E EPS): Headlines Remain
Difficult But Everything Has Its Price. While fundamental challenges
remain, we are seeing increasing signs that the sector is moving to more
aggressively shift its business model through a combination of expense
reductions, R&D re-prioritization and M&A, and we see modest upside
potential for the sector despite political headlines and lingering FX
uncertainty. Overweight rated names: SGP and MRK
• Specialty Pharma (11.3x ‘09E, 10.0x ‘10E EPS): Similar Challenges,
Magnified Impact. While our specialty pharma universe faces many of
the same challenges as the major pharma group, we are more cautious on
this sub-sector of our coverage given its premium valuation relative to
major pharma. However, despite this view, we see select product specific
stories as remaining well positioned. Overweight rated name: CEPH
• Generics (14.2x ‘09E, 10.4x ‘10E EPS): Best Positioned Of Our Subsectors.
We believe the generic companies remain extremely well
positioned due to a combination of a favorable US operating
environment, strong ex-US growth dynamics, as well as political and
economic tailwinds. Overweight rated names: TEVA and MYL
• What Could Go Right/Wrong In 2009 – Branded Pharma:
Opportunities include 1) greater than expected traction with expense
reduction, 2) improving pipeline data flow in 2H/09; while risks include
1) more meaningful than expected political change as it relates to
Medicare Part D, 2) a further acceleration of FDA headwinds with the
appointment of a new commissioner of the agency, and 3) greater than
expected deceleration of branded prescription volumes due to higher
employment/co-pays.
• What Could Go Right/Wrong In 2009 – Generics: Opportunities
include 1) base business pricing stability as a result of recent
manufacturing challenges at a number of companies, 2) continued
favorable terms as they relate to patent settlements and 3) an acceleration
in generic utilization outside of the US; while risks include 1) slower
than expected realization of synergies from recent mergers in the space
and 2) greater than expected competition from non-traditional players as
it relates to follow-on biologics.

Branded Pharma: What Could Go Right/Wrong In 2009?
What Could Go Right?
• Cost-Cutting Keeps Coming. Significant
restructuring announcements serve to increase the
market’s conviction on the sustainability of the
industry’s long-term margin structure.
• Acceleration Of Phase II Clinical Data/Phase III
Starts. Very little value currently assigned to the
industry’s mid-stage pipeline despite an increase in
the number of products in development. Promising
phase II/early phase III data could suggest improving
pipeline prospects and could translate into a better
long-term growth profile.
• More Defensive Than Most. In the difficult
economic environment, the industry proves more
defensive than expected against the challenging
macro backdrop in ’09. Valuation relative to the
market becoming increasingly compelling.
• M&A: A Positive For Both Acquirer and
Acquiree? Substantial cash balances enable the
industry to take advantage of low valuations to
acquire early-stage assets at a reasonable price. In
addition, if a mega-merger occurs, could trigger a
wave of consolidation/further expense reduction
sector wide.
• FX Impact Turns Neutral/Positive. The US Dollar
weakens from current levels against foreign
currencies, particularly the Euro. As a result, upside
to estimates that assume mid-single digit topline
impact from currency.
What Could Go Wrong?
• Political Risk Plays Out. Changes to Part D (noninterference
clause removal leads to significant
government involvement in price discussions, dualeligible
claw-backs, etc) result in worse-thanexpected
pricing environment.
• FDA: Just When We Thought It Couldn’t Get
Worse… New FDA commissioner appointed pushes
pendulum further toward focus on safety and longer
clinical trials. This once again raises the regulatory
bar, particularly for primary care focused products.
• Early Communication! Increasing In-Market
Product Regulatory Risk. The FDA initiates an
increasing number of safety investigations for
approved products, resulting in product withdrawals,
and negative label revisions, causing script declines.
Increases perceived risk for the entire sector, driving
lower multiples.
• Slowing Economy = Slowing Volumes.
Combination of increased unemployment and higher
co-pays translates to weaker-then-expected branded
drug volumes. Similarly, weakening global economic
conditions drive a more difficult volume/price
environment.
• FX Impact Negative. The US Dollar strengthens
from current levels against foreign currencies and
topline/EPS impact becomes increasingly negative.