CHAPTER 1 EXECUTIVE SUMMARY 4
Scope of the report 4
Key findings 4
Key macro-environmental trends triggering industry changes 4
Corporate strategy trends shaping the way that drug developers will increase cost savings 5
Trends shaping the way that drug developers will drive revenue growth 6

CHAPTER 2 KEY MACRO-ENVIRONMENTAL TRENDS TRIGGERING INDUSTRY CHANGES 13
Datamonitor believes there are three key macro-environmental factors that drove industry change in 2006 14
Reference pricing is an increasingly dominant cost containment tool in Western markets 14
Reference pricing extends into new geographical markets and new drug markets 14
Reference pricing is set to become increasingly restrictive in Europe and play a more significant role in the US 15
Price cuts remain a key tool in containing pharmaceutical spending across Europe and Japan 16
A range of price cuts were extensively used in both the European markets and Japan in 2006 to contain costs 16
Price cuts are set to remain a leading cost containment tool in Japan and Europe going forward 17
Political/legislative events continue to significantly impact the healthcare industry 18
A number of political/legislative events have impacted pharmaceutical market dynamics in 2006 18
By securing majorities in the House of Representatives and the Senate, the Democrats are set to have a more significant impact on healthcare in the US 18
With the implementation of Part D, Medicare patients received outpatient drug coverage for the first time in 2006 19
The 2006 healthcare reform in Spain increases the government's focus on cost containment 21
The introduction of the AVWG prioritizes cost containment in the German pharmaceutical market 22
The Médecin Traitant scheme impacts healthcare provision in France 23
The introduction of rules and guidelines for DTC advertising in the US 24
Generic usage is being increasingly incentivized 25
Globally, a number of initiatives were used to boost generic uptake in 2006 25
The introduction of biosimilars offers new opportunities for savings in the biologics market 26
2006 saw the first biosimilars launched in Europe and the US 26
In Europe, the biosimilars environment is relatively advanced 27
The development of biosimilars is further behind in the US 27
Europe is set to lead the biosimilars market 27
European and US healthcare markets are becoming increasingly fragmented 29
Devolution in Europe, together with continued fragmentation in the US increase the complexity of the major healthcare markets 29
Drug companies need to devote greater resources to targeting the correct stakeholders to ensure strong profit margins and market penetration 30

CHAPTER 3 CORPORATE STRATEGY TRENDS SHAPING THE WAY THAT DRUG DEVELOPERS WILL DRIVE COST SAVINGS 31
Changes to the R&D strategy will help drive up productivity 31
The need to develop efficacious innovative drugs prioritizes R&D spending as the industry transitions away from blockbuster development 33
More structured decision making in R&D is being introduced 34
Prioritizing pricing and reimbursement in clinical trial design will help rationalize and improve the drug development process 35
Licensing and alliance strategies have evolved for early-stage R&D 35
GSK's CEDDs and CEEDD have helped to build up the company's early-stage pipeline 36
Companies are set to improve internal infrastructure to better segregate and prioritize important functionalities and improve communication within the company 37
Increased globalization in the pharmaceutical and biotech markets in 2006 is set to continue 39
India - the partner of choice for contracting out manufacturing and research activities by Western manufacturers 40
China - a key country in which multinational pharmaceutical players are performing drug discovery 42

CHAPTER 4 CORPORATE STRATEGY TRENDS SHAPING THE WAY THAT DRUG DEVELOPERS WILL DRIVE REVENUE GROWTH 46
Inorganic growth through M&A set to continue throughout 2007 and beyond 46
A number of types of M&A are used to allow drug developers to evolve 47
Big Pharma mergers: is the time for mega mergers over? 48
Mid-Pharma showing evidence of the next wave of consolidation 52
Pharma-Biotech mergers allow Big Pharma to capture greater innovation and revenue growth potential 53
Pharma turns to acquisitions of generics companies to support sales and buy into generics market growth 54
Pharma-Non-Pharma mergers: still rare, but may represent an alternative profit growth strategy in the future 56
Biotech-Biotech mergers help smaller-scale biotech companies achieve greater stability and give Big Biotech stronger pipelines 56
Generic-Generic mergers increase market consolidation 58
Increasing complexity of supplementary technology helps drug manufacturers stay ahead of the competition 60
New technologies make it easier to demonstrate comparability of biosimilars 61
Directed molecular evolution: lifecycle management for biologics 61
Novel diagnostics drive clearer market segmentation, and personalized medication in the future 63
Increasing impact of emerging markets on revenue growth in the Pharma industry 64
China is set to become the largest pharmaceutical market by 2050 65
India is increasingly becoming an important source of Pharma revenue 67
Other emerging markets are also likely targets for global manufacturers in the future 67
Biosimilars and the emerging markets 68
Increased brand protection is essential in protecting future revenues 68
Merck's Zocor novel brand protection 70
The failure of a follow-on drug to support revenues: Pfizer's torcetrapib discontinued 71
Know your patent situation and don't make assumptions: BMS's patent problems with Plavix 71
Counterfeit medicines continue to threaten branded revenues 73

CHAPTER 5 BIBLIOGRAPHY 75
Publications and online articles 75
Conference literature 80
Datamonitor resources 80
Suggested reading 80

CHAPTER 6 GLOSSARY 82
Glossary of terms 82

List of Tables 
Table 1: Forecast sales for specific pharmaceutical and biotechnology peer sets, 2005-2011 32
Table 2: Key Biotech-Biotech deals in 2006 56
Table 3: Key Generic-Generic deals in 2006 58
Table 4: Brand strategy selection - pros and cons 69

List of Figures 
Figure 1: Seven factors triggering industry changes can be grouped into three key trends 13
Figure 2: Driving cost savings, 2006 and beyond 31
Figure 3: Pros and cons of drug discovery and clinical trials in China 44
Figure 4: Positioning of emerging markets in terms of their outsourcing/offshoring potential, 2006 45
Figure 5: Driving revenue growth, 2006 and beyond 46
Figure 6: Summary of M&A in the Pharma, Biotech and Non-Pharma sectors in 2006 47
Figure 7: Comparison of the major seven developed, and emerging pharmaceutical markets, 2001-05 65