Biotechnology Industry Outlook: Top 10 Potential Surprises For 2013

Tools

Biotechnology Industry Outlook: Top 10 Potential Surprises For 2013
December 14, 2012
Please see addendum of this report for important disclosures. www.cowen.com

Conclusion: Once again the Cowen Biotech Team has constructed a "Top 10 List" of potential surprises for the New Year. We have scanned our large-, mid-, and small-cap coverage universe for potential events that we believe are (1) underappreciated by the investment community, (2) have at least some chance of occurring during 2013, and (3) would be associated with significant stock price ramifications. Our list includes potential upside and downside surprises. We hope you find it thoughtful, stimulating, and/or entertaining. Happy Holidays! -The Cowen Biotech Team.

  • Own Any ALXN, BIIB, BMRN, GILD, DNDN, ISIS, MDVN, MNTA, ONXX, UTHR or VPHM? Each of these stocks is on our list.

Top 10 Potential Surprises Of 2013

Whether the biotechnology industry is in or out of favor during 2013, the coming year will feature a number of company specific events that will make or break the performance of several individual stocks. Investors can easily anticipate many of 2013's binary events (for example Phase III results pertaining to ANAC, BIIB, CELG, CCXI, GILD, GTXI, INCY, MACK, MDVN, OGXI, ONTY, ONXX, RIGL, and VICL, or regulatory actions for ARIA, AVEO, BIIB, DVAX, FURX, GILD, HPTX, IMGN, ISIS, OREX, and RPTP), and many have already formed opinions on their likely outcome. However, biotechnology is by its nature unpredictable, and the New Year will likely also feature a few true "surprises" from left field. Looking back upon 2012, had one been able to anticipate the influx of generalist investors into biotech, the FDA's change of heart toward obesity drugs, the stumbling of Bristol's/Inhibitex's HCV
nucleoside, managed care pushback on QCOR's Acthar, SRPT's early success in muscular dystrophy, PPHM's mishandling of data, or safety issues with compounded pharmaceuticals, the returns would have been significant. In an effort to stimulate discussion and aid out-of-the-box thinking, we have constructed a list of "Top 10 Potential Surprises of 2013". This report follows the same format from our "Top 10 Surprises" lists published in past years. In order to qualify for our list, a "surprise" must constitute an event that is less than 40% likely, not well discussed or anticipated by the market, and material (associated with significant stock price implications). The Cowen Biotech team has selected ten
events which best fit this definition and rank ordered these events from #10 (most likely to occur) to #1 (least likely to occur). We do not necessarily advocate any investment strategy into these "surprises", but rather hope that a more open debate of their possibility is of interest and potential utility to investors.

Surprise #10: Valuation Starts To Matter Again
Probability: 35%

Consensus view: Growth fund managers have encountered a dearth of investment opportunities outside of biotech. Over the course of 2012 they have piled into the sector, paying little attention to stock valuations. As is the case with most trends, the investment community has grown accustomed to the attention that biotech stocks are receiving from generalist investors, and does not anticipate much change in 2013.

Why a surprise is possible: Unfortunately, we can envision at least three ways in which the status quo could be disrupted:

(1) The economy could recover, allowing other sectors to compete with biotech for investment dollars. We could imagine that with more companies promising clean, visible growth, valuations would become more of a consideration, and assets could bleed away from biotech.

(2) Generalist investors could perceive a change (real or imagined) in the industry's fundamentals. Health care specialists have enough history and domain expertise to see beyond the occasional adverse legislative proposal, FDA pronouncement, or CMS ruling. However, experience tells us that such events can engender a situation wherein generalists sell stocks first and ask questions later.

(3) The stock market itself could undergo a correction. Investors tend to forget that biotech is first and foremost high beta sector, and that the current 17-month biotech rally has coincided with a favorable equity environment. The late October sell-off illustrated the impact that an unfavorable market environment can have on biotech.

Expected timing of event: Hopefully not before bonus season.

Stock impact if surprise comes true: Companies that have gained favor on the prospect of a future commercial opportunity (AMGN, BIIB, BMRN, GILD, ONXX, REGN) have been the biggest beneficiaries of the current environment. Meanwhile, stocks with solid cash flow and valuation support, but little excitement (ACOR, AUXL, EBS, ELN, and UTHR) have been widely ignored. A more valuation-conscious environment could help to even out sentiment toward these stocks.

Surprise #9: United Therapeutics And Sandoz Settle
Probability: 25%

Consensus view: Remodulin's intellectual property is weak, and therefore Sandoz will be able to launch a generic during 2014. With no pipeline catalysts, and
competition likely to come against its main franchise over the next few years, there is little reason to own United Therapeutics during 2013.

Why a surprise is possible: Rational companies ultimately do what is in their best economic interest. Both United Therapeutics and Sandoz have economically compelling reasons to settle the litigation.

United Therapeutics is currently not getting full credit for the Remodulin franchise because many investors worry it could decline precipitously as soon as the Sandoz  30 month stay expires around September 2014. This is one of the biggest overhangs on UTHR shares, and a big reason why the stock trades at about 5.5x forward non- GAAP EPS. A settlement would give investors better clarity on the value of the Remodulin franchise, could expand UTHR's multiple, and increase its market capitalization.

Sandoz must understand the history of generic competition in the prostacyclin space, and realize that there is much risk that a treprostinil generic will capture only meager sales. For example, Actelion's Veletri is a thermostable formulation of GSK's Flolan (epoprostenol). As it is stable at room temperature, it actually has advantages over GSK's Flolan - it is easier to use. Nonetheless, physicians have been hesitant to adopt it as they await good, rigorously collected switch data. Following Veletri's launch during Q2:10 Actelion reported 2010 sales of only CHF 2.8MM, 2011 sales of CHF 14.7MM, and sales during the first 9 months of 2012 were CHF 18MM (Flolan generates approximately $150MM/yr in revenue for GSK). Again, this lackluster adoption is for a formulation of epoprostenol that actually has advantages over Flolan, that was being actively promoted by one of pulmonary hypertension's
bellwether companies, and for which Actelion had an active clinical trial program. Sandoz must realize that there is a real risk that it will launch its undifferentiated treprostinil generic with no clinical data and no marketing support, and gain no share.

How could a settlement be designed? UTHR could grant Sandoz licenses to patents 5,153,222 (expires October 2014), 6,765,117 (Expires October 2017), and/or 7,999,007 (March 2029) and a royalty (or a lump sum payment approximately equal to the expected value of a royalty) in return for some Sandoz technology, and an agreement on when the generic could be launched. We believe that should the launch of the generic be pushed to 2020 or after, UTHR investors would likely consider that a sufficient period of clarity for the issue to no longer dominate the UTHR investment decision. As for the effective royalty rate, we estimate that in 2013 Remodulin will sell about $410MM in the U.S., and that absent a generic, that revenue will grow 4-5% per year. Therefore, should UTHR grant Sandoz a 7% royalty (or payment of approximately $25MM per year of delay), Sandoz would likely realize more net cash flow than they would during the early years of the treprostinil launch, with little risk.

Expected timing of event: United Therapeutics has indicated that it is too early in the trial to contemplate a settlement today. We expect the trial would have to progress, at least through Markman hearings, before a settlement would be structured. Therefore the most likely timing would seem to be H2 or late in the year.

Stock impact if surprise comes true: If a deal were to be struck with a 7% royalty, our 2014 UTHR non-GAAP EPS estimate would fall from $9.50 to $9.07. However, we expect UTHR's multiple on forward non-GAAP EPS would increase from 5.5x today to 8-9x. This would suggest shares are 45-65% undervalued relative to the market. A lump payment would be viewed even more favorably, as there would be no P&L impact, and UTHR has sufficient cash to easily pay one ($752MM as of the end of Q3).

Surprise #8: "2013 Is The Year Of Antisense"
Probability: 20%

Consensus view: An October FDA Advisory panel highlighted many of the shortcomings of Isis/Genzyme's Kynamro and exposed some broader potential risks associated with RNA-based therapeutics (cancer, immunogenicity). Antisense and other RNA-based candidates have disappointed investors for much of the last 20 years, and there is little reason to believe 2013 should be any different.

Why a surprise is possible: Kynamro does not appear to have a particularly compelling profile for the treatment of a severe hypercholesterolemia. However, the drug's clinical experience and likely FDA approval provides ample evidence that 2ndgeneration antisense molecules can be effective. Moreover, early data on Isis/GSK's TTR-Rx and ALNY's ALN-TTR02 provide strong additional support to the fact that oligonucleotide therapeutics can successfully inhibit their targets in humans. When antisense or other RNA-based candidates are applied to more optimal indications (in our view, a high unmet need and preferably orphan condition), there is reason to believe the approach could be clinically and commercially successful. 2013 should witness multiple readouts that could establish the utility of RNA-based drugs in lucrative market opportunities and propel the technology into favor.

RNA-Based Therapeutics With Important Milestones In 2013
Company Therapeutic Indication 2013 Milestone
ALNY/Genzyme ALN-TTR02 TTR amyloidosis Phase II data
ISIS/BIIB SMN-Rx SMA Phase I data, potential Phase I/II results
ISIS ISIS ApoCIII-Rx hypertriglyceridemia Phase II data
ISIS ISIS CRP-Rx RA Phase II data
ISIS ISIS FIX-Rx thrombosis Phase II data
OXGI/TEVA custirsen Prostate Ca Phase III data by the end of 2013
Prosensa/GSK GSK2402968 Duchenne's MD Phase III data in mid-2013
SRPT eteplirsen Duchene's MD Updates from ongoing Phase IIb trial and
discussions with regulators
Source: Cowen and Company

Expected timing of event: Throughout 2013.

Stock impact if surprise comes true: Positive data from the trials could be enough to drive significant outperformance in the individual stocks. In addition, companies with seminal know how and intellectual property (most notably ISIS) would also be expected to benefit from the emergence of the technology.

Surprise #7: FDA Approves Generic Copaxone
Probability: 17%

Consensus view: 2012 has not been kind to Momenta Pharmaceuticals. Sales of its M-Enoxaparin have been hammered by competition and key legal battles have resulted in unfavorable verdicts. MNTA shares are down 36% YTD, and trade only modestly above net cash per share ($7.66). Few investors are paying attention to Momenta. Following a June 2012 District Court decision in Teva's favor, even fewer ascribe much probability to Copaxone's ANDA gaining approval. Why a surprise is possible: Momenta and partner Sandoz's ANDA on Copaxone was accepted in mid-2008. Visibility on the status of the ANDA is admittedly low. However, Momenta continues to state that the FDA is engaged in its review, that the ANDA is progressing forward, and that it "remains confident" that the ANDA will be approved under the 505(j) pathway as interchangeable with generic Copaxone. The company's track record in gaining approval of M-Enoxaparin provides management with some credibility in making this assertion. Moreover, the FDA continues to deny Teva's Citizen's petitions requesting that generic Copaxone not be approved without clinical trials. Most recently, in November the FDA rejected Teva's argument that Copaxone is a colloidal solution (one that has suspended particles and is therefore not a "true solution"), which would be subject to bioequivalence studies. Based upon a comparison to M-Enoxaparin, 2013 would seem like a reasonable timeframe to expect "tentative" approval. The FDA approved M-Enoxaparin's ANDA in just under five years. A similar timeline would suggest Copaxone a decision on Copaxone around mid-2013. Approval would be "tentative" pending expiration of Teva's June 2014 (composition) and September 2015 (manufacturing process) patents, assuming these patents hold up on appeal.

Expected timing of event: 2013

Stock impact if surprise comes true: Tentative approval would make the advent of generic Copaxone a "when" not "if" event. Momenta shares would likely rise sharply depending on investors' estimation for the duration of a Copaxone duopoly ($5-15/share?). Meanwhile, Teva's stock could be under pressure on the greater certainty of a generic entrant and a need to successfully defend Copaxone's patents in the next round of litigation (TEVA; Outperform; $39.50; covered by Ken Cacciatore). Momenta estimates that its appeal will be heard in Q2 and that a verdict could be in hand by H2:13. Hence there is even a slight probability that generic Copaxone could be launched in late 2013.

Surprise #6: Nexavar's Adjuvant STORM Trial Succeeds
Probability: 15%

Consensus view: Anti-VEGF agents have a poor history of success in adjuvant trials. Most notably, despite much enthusiasm and anticipation leading up to the release of
results, Avastin's NSABP-C08 trial failed to show a benefit of adjuvant Avastin in colorectal cancer. Therefore there is little reason to believe that Nexavar's adjuvant STORM trial in hepatocellular cancer could succeed. Results from STORM are likely years away in any case, and so won't come during 2013.

Why a surprise is possible: The planned completion of the STORM trial is closer than most investors realize. According to a clinicaltrials.gov entry updated in October 2012, the primary endpoint of the STORM study will read out in May of 2014, and so even should it go to completion, data will likely be available not long after the end of 2013. However, there is some chance that an interim analysis could trigger a premature end to the trial during 2013. Onyx and Bayer have released few details of the statistical criteria for success in STORM. The companies have said that STORM enrolled over 1,100 patients who have received either surgery or local ablation and randomized to either 400 mg twice daily of Nexavar or placebo for four years. The study has a primary endpoint of recurrence-free survival and several secondary endpoints including overall survival and time to recurrence. Onyx and Bayer have not disclosed the trial's powering, or whether there are any interim analyses. This has lead most investors to assume there are no interim analyses capable of ending the study early. However, based on the design of Avastin's NSABPC08 trial, there is reason to think that STORM could have several. NSABP-C08 included 6 interims which were conducted approximately every 6 months through the trial's completion. As STORM started in 2008, a large number of events should have accrued already. Therefore it seems quite possible that there could be one or more interims in 2013 before STORM's H1:14 completion.

Could Nexavar prolong event-free survival in the adjuvant setting? There are a couple of intriguing reports in the literature that suggest it could. Both trials examined Nexavar's use as adjuvant therapy in HCC patients who received a liver transplant. One was published by Teng et al in the World Journal of Surgical Oncology in February 2012. While the numbers are small (17 patients), the benefit of Nexavar was impressive. The disease-free survival rate at 18 months was 66.7% for patients who had received adjuvant Nexavar, compared to 0% for those who didn't (p = 0.011). Similarly, in 2010, Saab et al from UCLA published a case-control study of adjuvant Nexavar following liver transplant in Experimental and Clinical
Transplantation. Again, patient numbers were small (16 patients). Nonetheless, according to the report, 12.5% of patients who received adjuvant Nexavar developed HCC recurrence, compared to 50% matched controls. Results from such small studies must be interpreted cautiously, particularly since they are examining Nexavar post-transplant, not post-resection. Nonetheless, as they both produced sizable differences in the rate of recurrence, they do provide reasons for optimism that the STORM trial could succeed, and perhaps even be stopped at an interim analysis.

Expected timing of event: Anytime during the year.

Stock impact if surprise comes true: Our consultants estimate that 20-25% of HCC patients are treated with curative intent (the entry criteria of STORM). Excluding the 5% or so that undergo a liver transplant, this leaves approximately 20% that have surgical resection or ablation with curative intent. This implies about 8K patients will be eligible each year in the US and Europe combined. If one assumes that each patient will get 12 months of adjuvant Nexavar at a half dose (dose reductions were common in the two trials cited above), than adjuvant HCC as studied in STORM would be an approximate $400MM opportunity for Nexavar. Incorporating adjuvant sales into our model and valuation analysis would add an estimated $7-10 to the value of Nexavar to Onyx.

Surprise #5: Gilead Becomes Biotech's Most Profitable Company
Probability: 10%

Consensus view: Amgen is biotech's most profitable company. Consensus estimates call for Amgen to produce about $1.3B in net income per quarter during 2013. Gilead is a rather distant second - consensus estimates call for 2013 quarterly net income of only about $800MM. Gilead certainly won't catch Amgen at any point during 2013, and may not ever.

Why a surprise is possible: Assuming no unforeseen disaster befalls Amgen, Gilead would need to produce about $1.4B in net income during a quarter to eclipse Amgen. Sofosbuvir quarterly revenue of at least $700MM, combined with modest growth in Gilead's other products, would drive Gilead's net income to these levels. Admittedly, everything would need to go right for sofosbuvir to achieve such sales during 2013. However, if sofosbuvir were to be on the market before Q4, and is adopted as our consultants suggest it could be, such sales are possible. While most expect a launch of sofosbuvir late in 2013 or early in 2014, a launch by the beginning of Q4 is not impossible. Gilead is completing sofosbuvir's first 4
pivotal Phase III trials. Results from the first, the POSITRON study, were released in November. FISSION, FUSION and NEUTRINO will complete over the next several months. We believe the last study to finish will be the FUSION trial, as this study was among the last to enroll (enrollment completed in July 2012), and it will take 28 weeks from enrollment until SVR12 data are available (it includes a 16 week treatment arm). The last patient should exit in early February, suggesting final data from the trial should be available by early Q2:13. Gilead could complete the FDA submission by the middle of Q2:13, somewhat ahead of its mid-2013 guidance. We believe the FDA urgently wants to eliminate PEG-IFN from the treatment of HCV and therefore a super-accelerated review is likely. Should sofosbuvir be approved within 4 months of filing, it would be on the market during Q3:13. Rapid and broad uptake of sofosbuvir upon its initial approval is also possible. The 4 trials making up sofosbuvir's initial filing are testing it in combination with ribavirin in genotype 2/3 patients, and in combination with pegylated interferon and ribavirin in genotype 1 patients. These will support a label for use in HCV genotypes 1, 2 and 3. While the sofosbuvir and GS-5885 single tablet regimen won't be available for GT1 patients during 2013, we suspect some physicians will use sofosbuvir combined with only ribavirin. In the ELECTRON data presented at AASLD, 12 weeks of sofosbuvir + RBV produced an 84% SVR rate in GT 1 treatment naïve patients. Importantly, no resistance to sofosbuvir has been observed, so people not cured by the doublet retain all future treatment options. These data are quite compelling and in fact one would wonder why any physician would ever use sofosbuvir with PEG-IFN in light of them. Therefore, for all intents and purposes, during Q4:13 physicians will have available simple, potent, and well tolerated sofosbuvir-based, interferon-free regimens for HCV genotypes 1, 2, and 3. In a survey conducted before Cowen's recent Therapeutics Conference, the preponderance of specialists estimated that the availability of an interferon-free regimen for HCV genotypes 1-4 would increase the number of HCV patients initiating therapy by 400%. During Q3:12 Vertex's Incivek generated $254MM in U.S. revenue. Assuming sofosbuvir is priced at parity with Incivek, and that the number of HCV patients initiating therapy during Q4:13 is consistent with our consultants' estimates (400% higher), sofosbuvir will generate $1.2B in revenue during Q4:13. If our consultants were somewhat overly optimistic and the number of patients starting therapy during Q4:13 were to go up by only 200%, sofosbuvir would still garner $750MM in revenue. In the former case GILD would generate $1.75B in net income, while in the latter it would generate $1.4B. In either scenario, Gilead would become biotech's most profitable company.

Expected timing of event: Q4:13

Stock impact if surprise comes true: If Gilead were to produce the same or greater net income as Amgen, but with a much higher growth rate, we suspect it would be given a premium market capitalization. This suggests Gilead's stock would appreciate 20% or more.

Surprise #4: Prostate Cancer Patients Don't Seek Out A Life-Saving Therapy
Probability: 8%

Consensus view: Investors believe it is only a matter of time before Zytiga (Johnson & Johnson) and Xtandi (Medivation/Astellas) move upfront of chemotherapy in the treatment of castration resistant prostate cancer (CRPC). Most believe the size of the pre-chemotherapy marketplace is several-fold larger than the approximately $1B post-chemotherapy market that these anti-androgens currently serve.

Why a surprise is possible: Prostate cancer is a widespread malignancy (240,000 new cases and 28,000 deaths per year in the U.S). However, the treatment paradigm is complex and multi-faceted (monitoring, surgery, radiation, hormone and nonhormonal therapies) and involves multiple groups of physicians (urologists and oncologists). Factors that may confound analysts' ability to accurately estimate the size of this market include the following:

Prostate cancer is a mostly indolent tumor type. According to the SEER database the relative 5-year survival rate for men with prostate cancer is 99.2%. Hence prostate cancer increases one's 5-year risk of death by just 0.8%. Because prostate cancer is rarely deadly, non-treatment strategies such as watchful waiting are fairly common. Most men with advanced prostate cancer are old.
The median age at diagnosis is 67 and the median age at death is 80. Elderly males tend to be less conscientious about their health, and may not seek regular medical care or be willing to pay out-ofpocket expenses for treatment. Dendreon's experience with Provenge (a therapy with an admittedly inferior overall profile) highlights the problems associated with identifying and mobilizing patients to access a drug with a proven survival benefit.

Utilization could be restricted to metastatic disease. Less than 5% of all prostate cancer patients are believed to have Stage IV disease (approximately 30K new U.S. patients per year). Pivotal trials on Zytiga (COU-001 and COU-002) and Xtandi (AFFIRM and PREVAIL) were conducted in patients with metastases, and the high cost of these agents will likely limit off-label reimbursement.

Lack of a therapeutic precedent. The prostate cancer market lacks multi-billion dollar franchises off which to model Zytiga and Xtandi. In 2011, the best-selling prostate cancer drugs in the U.S. were Lupron ($540MM, a therapy that is used continuously though multiple lines of therapy), Provenge ($224MM), and Zytiga ($182MM). Casodex U.S. sales peaked at $300MM prior to going generic. Given the challenges associated with analyzing this market, it may be aggressive to assume that sales of Zytiga and Xtandi greatly eclipse those of all other drugs.

Expected timing of event: JNJ's Zytiga gained approval on December 10 for prechemotherapy metastatic CRPC. Prescription trends will provide the first look at how receptive pre-chemotherapy patients are to a novel therapy by early 2013.

Stock impact if surprise comes true: MDVN shares are most leveraged to the prechemotherapy prostate cancer market place.

Surprise #3: Alexion's Asfostase "Breaks Through" With Early Approval
Probability: 5%

Consensus view: Asfotase alfa, an enzyme replacement therapy for hypophosphatasia (HPP) looks to be an effective therapy. Alexion plans to file for approval in 2014 pending completion of a natural history trial and optimization of manufacturing. FDA approval could come in late 2104 or early 2015.

Why a surprise is possible: Earlier than anticipated approval of asfotase would likely depend on the drug being designated a "Breakthrough Therapy" by the FDA. The Food and Drug Administration Safety and Innovation Act (FDASIA) of 2012 includes a provision that allows the FDA to designate especially promising drugs as Breakthrough Therapies and accelerate their development and review. In order to be designated a breakthrough, the sponsor must provide:

(1) Evidence that the drug is intended , alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and

(2) Preliminary clinical evidence indicating that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.

The FDA has recently indicated that it has received four applications for Breakthrough designation, and that it has approved one such application (for an undisclosed product). We do not know whether Alexion has filed a request for Breakthrough Designation for asfotase alfa. However, the drug would seem an obvious fit for this program. HPP is a lethal disorder with no approved therapies. Our consultants rave about the early data from asfotase alfa's studies and have termed it "the most effective enzyme replacement therapy anyone has ever seen". Should Alexion file for and receive Breakthrough designation, approval timelines could be accelerated. FDASIA grants the FDA fairly broad discretion to expedite the approval process by enhancing communication with the sponsor and increasing resources dedicated to the product's review. While there is no precedent on how such activity might enable faster filing and approval, the FDA has highlighted the program as an important new tool. In publicizing the acceptance of the first Breakthrough therapy earlier this month Janet Woodcock, the director of CDER, called it an exciting development for an agency that has long searched for effective ways to get products to the neediest patients expeditiously.

Expected timing of event: Late 2013

Stock impact if surprise comes true: Investors are viewing 2013 as a year of commercial execution for Alexion and expect little news on the new indication or new product front. Early approval of afotase alfa could revive excitement for the company's pipeline, and might even allow ALXN to post 30%+ stock gains relative to the market for the fifth straight year.

Surprise #2: Flooding Knocks Out A Biologics Manufacturing Facility
Probability: 2%

Consensus view: Although biologics manufacturing is a tricky business, and everything from viral infections to glass particles to FDA inspections can trip it up, no natural disaster has ever impeded manufacturing of a biologic. Clearly companies anticipate many issues when building their manufacturing facilities, since this is the lifeblood of their commercial businesses. Surely all major facilities have been built at high elevations, away from the sea and off of flood plains. That's obvious. Right?

Why a surprise is possible: Though we have seen biotech pass more or less unscathed through natural disasters like 2011's Japanese earthquake and (we hope) 2012's Hurricane Sandy, the latter storm revealed a vulnerability of coastal cities to storm-related flooding that had likely not been previously appreciated by many. We have examined topological data gathered by NASA to assess the potential vulnerability of biologics manufacturers in our coverage universe to rises in sea level due to major storms like Sandy, which produced up to 14-foot (4.3 meter) surges in sea level in the New York City area. Thankfully, most companies in our universe had the foresight (or good fortune) to build on high ground. However, there
are exceptions: we believe a storm like Sandy could seriously jeopardize normal biologics manufacturing for BioMarin, Dendreon, and ViroPharma. A modestly larger
storm than Sandy could spell trouble for Biogen Idec and Genzyme/Sanofi.

Potential Flood Vulnerability Of Biologics Manufacturers
Company Manufacturing Location Sea Level Rise To Submerge "Sandy-Proof?"
Alexion Smithfield, RI > 10ft* (estimate 30m) Yes
Portsmouth, NH 13 - 20 m Yes
Amgen Thousand Oaks, CA > 60 m Yes
Longmont, CO > 60 m Yes
Juncos, Puerto Rico > 60 m Yes
Biogen Idec Research Triangle Park, NC > 60m Yes
Cambridge, MA 7 m No?
Hillerod, Denmark 20 m Yes
BioMarin Novato, CA 4 m No?
Shanbally, Co. Cork, Ireland 20 m Yes
Dendreon Atlanta, GA > 60 m Yes
Los Angeles, CA 3 m No?
Emergent BiosolutionLansing, MI > 60 m Yes
Baltimore, MD 20 m Yes
Genzyme / Sanofi Cambridge, MA 6 m No?
Framingham, MA > 60 m Yes
Geel, Belgium 20 m Yes
Haverhill, England > 60 m Yes
Isis Carlsbad, CA > 60 m Yes
Merrimack Cambridge, MA 9 - 13 m Yes
Regeneron Rensselaer, NY 50 - 60 m Yes
Savient Arugot, Israel 60 m Yes
Synageva Lexington, MA > 60 m Yes
ViroPharma Amsterdam, Netherlands 2 m No?
Brussels, Belgium 50 m Yes
Source: http://flood.firetree.net/ ; * http://www.arcgis.com/ ; Cowen and Company

Expected timing of event: 2013

Stock impact if surprise comes true: Genzyme presents perhaps the best case study of the impact of impaired biologics manufacturing on a company's stock. GENZ fell from $70.00/share on February 26, 2009 to $51.62/share on March 6, 2009 after continued manufacturing problems were revealed, a range where it stayed for more than a year until Sanofi offered to acquire the company. Thus, impaired manufacturing can be very detrimental to a biologics company's stock price. Should a flood inundate a facility, many investments would be under water, too.

Surprise #1: Art Levinson Is Named Next Secretary Of HHS
Probability: <1%

Consensus view: We have no idea who the next secretary of Health and Human Services (HHS) will be, but he or she will probably be a career politician. As the last 3 HHS Secretaries are all former governors, another governor would seem the most likely choice. In any case, we are sure it will be no one from industry, and especially no one who spent any time in an industry that is regulated by HHS.

Why a surprise is possible: With only one prior HHS secretary staying on for the second term of an administration (Secretary Shalala in the Clinton administration), it seems very likely that current Secretary of HHS Kathleen Sebelius will step down and a replacement will be named early in 2013. While in recent history politicians have been appointed to the post, this has not always been the case. Secretary Shalala spent much of her career as an academic, holding teaching posts at Baruch and Columbia, the presidency of Hunter College, and the chancellorship of theUniversity of Wisconsin-Madison, before becoming the secretary of HHS under President Clinton. President George H. W. Bush appointed Louis Sullivan, a physician and founder of Morehouse School of Medicine as secretary of HHS.

With the implementation of many of the provisions of healthcare reform to take place over the next few years, the next HHS secretary will face unique challenges unlike any encountered by prior holders of the post. In fact, it could be argued that the person best suited to manage several of the challenges will be someone who has experience building and running businesses. For example, under the healthcare reform law, insurance exchanges must be created by 2014, and two fully-regulated multi-state plan insurers must be created by January 2017. These reform provisions essentially require the formation of actual, working businesses. Someone who has experience building a business, especially a very large and very successful one, would be particularly well suited to the tasks. Therefore experience in the healthcare industry would seem to be much more valuable than experience in academia or state government for the HHS secretary over the next 4 years. While time in the insurance industry may be most relevant, the appointment of an insurance industry executive would likely be seen as allowing the foxes to watch over the hen house. Therefore the ideal candidate could be someone who has intimate knowledge of healthcare, but is not from the insurance industry. There are few former healthcare executives more well-respected than Genentech Chairman and former CEO Art Levinson. In fact, Dr. Levinson has credentials that few can match in American industry today. He joined fledgling Genentech in 1980 as a research scientist, rose through the ranks to become CEO in 1995, and guided Genentech to become a $100B business before it was sold to Roche. Few would argue with the fact that Genentech contributed to the greater good along the way – it developed groundbreaking and life-saving medicines such as Herceptin and Avastin.

Dr. Levinson has also had success outside of Genentech. He was appointed Chairman of Apple upon the passing of Steve Jobs, and is a former Google board member. Dr. Levinson is also well known by the Obama administration. In 2011 he was appointed by U.S. Commerce Secretary Gary Locke to the Department of Commerce's National Advisory Council on Innovation and Entrepreneurship. Also, Dr. Levinson was the lone biotech industry representative present at a prominent Silicon Valley dinner hosted by President Obama in 2011.

Expected timing of event: H1:13

Stock impact if surprise comes true: Healthcare stocks will likely go up as the market will note that someone who understands business and the workings of the private economy occupies the cabinet post of the most importance to the industry. Unfortunately, on the day an industry veteran is appointed, it is likely that pigs will fly, and the netherworld will freeze over, too.

Price 52 Week Performance (%) EPS Cash Debt Net Shares EV Mkt Cap
Company Ticker Coverage Rating 12/13/2012 High - Low 1 Mo. 3 Mo. 12 Mo. FY11A FY12E FY13E F11 F12 F13 $MM $MM Cash/sh MM $MM $MM
Acorda ACOR Nadeau 1 $25.29 28 - 21 5% -2% 15% $0.77 $0.73 $0.77 33x 35x 33x $319 $0 $7.94 40.2 $697 $1,016
Alexion ALXN Schmidt 1 $94.12 $120 - $63 3% -15% 47% $1.38 $2.04 $2.75 68x 46x 34x $906 $113 $3.92 202.4 $18,255 $19,048
Amgen AMGN Schmidt/Nadeau 1 $89.15 91 - 57 4% 7% 55% $5.33 $6.60 $6.95 17x 14x 13x $25,374 $24,020 $1.73 783.0 $68,450 $69,804
Biogen Idec BIIB Schmidt/Nadeau 1 $151.56 157 - 42 10% -1% 38% $5.85 $6.45 $6.90 26x 23x 22x $1,606 $658 $3.98 238.1 $35,143 $36,090
BioMarin BMRN Nadeau/Schmidt 1 $49.37 53 - 31 2% 29% 53% $0.28 $0.02 ($0.15) 175x NM NM $533 $348 $1.39 133.0 $6,381 $6,566
Celgene CELG Schmidt/Nadeau 1 $79.84 83 - 59 7% 6% 25% $3.79 $4.89 $5.60 21x 16x 14x $3,833 $2,769 $2.44 436.3 $33,768 $34,832
Emergent Biosolutions EBS Schmidt 1 $14.85 18 - 13 4% -1% -11% $0.64 $0.67 $0.75 23x 22x 20x $198 $59 $3.79 36.7 $406 $545
Elan ELN Schmidt 2 $9.87 15 - 10 -6% -8% -13% $0.95 ($0.45) $0.45 10x NM 22x $647 $615 $0.05 592.9 $5,820 $5,852
Gilead Sciences GILD Nadeau/Schmidt 1 $74.77 77 - 37 3% 24% 94% $3.55 $3.27 $4.17 21x 23x 18x $2,651 $7,412 NM 792.3 $64,001 $59,241
Momenta MNTA Schmidt 2 $11.11 20 - 10 0% -25% -30% $3.56 ($1.17) ($1.35) 3x NM NM $387 $0 $7.66 50.5 $174 $561
PDL BioPharma PDLI Nadeau 2 $7.51 8 - 6 -4% 0% 25% $1.17 $1.46 $1.65 6x 5x 5x $160 $307 NM 149.6 $1,271 $1,124
United Therapeutics UTHR Nadeau 1 $50.26 59 - 40 2% -8% 21% $5.98 $9.06 $9.50 8x 6x 5x $752 $500 $4.71 53.6 $2,441 $2,693
ViroPharma VPHM Nadeau 2 $23.93 33 - 19 -3% -14% 1% $2.09 $0.69 $0.60 11x 35x 40x $304 $160 $2.13 67.6 $1,474 $1,618
Vertex VRTX Nadeau 2 $42.15 66 - 29 -4% -25% 47% $0.08 $1.22 ($0.25) 552x 35x NM $1,299 $400 $4.13 217.8 $8,282 $9,180
Achillion ACHN Nadeau 1 $8.20 13 - 5 4% -1% 12% ($0.69) ($0.72) ($0.95) NM NM NM $91 $0 $1.21 74.6 $521 $612
Anacor ANAC Schmidt
Ariad ARIA Nadeau 1 $23.88 25 - 10 13% 5% 117% ($0.93) ($1.33) ($1.15) NM NM NM $207 $0 $1.24 166.3 $3,764 $3,971
Auxilium AUXL Schmidt 1 $17.70 29 - 17 -4% -26% -2% ($0.69) $1.74 $0.05 NM 10x NM $174 $0 $3.53 49.1 $696 $869
Cadence CADX Schmidt 1 $4.44 5 - 3 42% 17% 19% ($1.41) ($0.86) ($0.45) NM NM NM $75 $21 $0.62 85.6 $327 $380
ChemoCentryx CCXI Schmidt 1 $10.82 18 - 9 -12% -11% -2% ($0.15) ($1.16) ($1.25) NM NM NM $128 $1 $3.53 36.2 $264 $391
Dendreon DNDN Schmidt 2 $4.96 17 - 4 18% 5% -31% ($1.27) ($1.42) ($0.40) NM NM NM $445 $526 NM 153.1 $841 $759
Dynavax DVAX Nadeau 1 $2.60 5 - 2 -45% -43% -17% ($0.39) ($0.44) ($0.30) NM NM NM $148 $14 $0.75 177.9 $329 $462
Dyax DYAX Nadeau 1 $3.58 4 - 1 18% 50% 175% ($0.34) ($0.31) ($0.10) NM NM NM $30 $78 NM 99.1 $403 $355
Exelixis EXEL Schmidt 1 $5.00 7 - 4 2% -3% 19% $0.60 ($0.88) ($1.15) 8x NM NM $675 $160 $3.09 166.4 $317 $832
GTx GTXI Schmidt 2 $4.24 7 - 3 12% -4% 64% ($0.58) ($0.42) ($0.75) NM NM NM $39 $0 $0.62 62.8 $228 $266
Hyperion HPTX Nadeau 1 $10.26 12 - 10 -3% -3% 1% ($3.34) ($2.45) $0.30 NM NM NM $57 $9 $1.02 11.3 $169 $257
Incyte INCY Schmidt 1 $16.54 26 - 13 -2% -5% 21% ($1.49) ($0.38) ($0.15) NM NM NM $244 $316 NM 130.9 $2,237 $2,164
Isis Pharmaceuticals ISIS Schmidt 1 $9.61 16 - 7 11% -34% 40% ($0.85) ($0.70) ($0.80) NM NM NM $344 $201 $1.42 100.7 $825 $968
Lexicon Pharmaceuticals LXRX Nadeau 2 $1.77 3 - 1 1% -31% 55% ($0.34) ($0.23) ($0.20) NM NM NM $207 $24 $0.37 490.0 $685 $867
Medivation MDVN Schmidt 2 $54.98 59 - 22 15% 7% 137% ($0.56) ($0.71) ($1.00) NM NM NM $340 $193 $2.00 73.7 $3,905 $4,052
Merrimack MACK Schmidt 1 $6.83 11 - 6 -2% -17% 13% ($1.05) ($1.26) ($1.20) NM NM NM $87 $0 $0.76 113.7 $690 $777
Neurocrine Biosciences NBIX Nadeau 2 $7.66 10 - 6 4% -4% 2% $0.67 ($0.15) ($0.30) 11x NM NM $174 $0 $2.62 66.3 $334 $508
Onyx ONXX Nadeau 1 $80.77 93 - 36 8% 6% 111% $1.17 ($3.13) ($2.00) 69x NM NM $525 $530 NM 68.5 $5,535 $5,530
Puma Biotechnology PBYI Schmidt 1 $19.49 8 - 1 16% -9% 210% ($1.32) ($2.30) ($1.70) NM NM NM $33 $0 $1.66 20.0 $357 $391
Regeneron REGN Nadeau 2 $179.04 189 - 50 21% 22% 247% ($2.46) $3.85 $7.35 NM 47x 24x $583 $440 $1.24 115.8 $20,595 $20,738
Savient SVNT Schmidt 2 $1.22 3 - 0 6% -23% -42% ($1.46) ($1.65) ($0.95) NM NM NM $116 $219 NM 71.0 $189 $87
Sunesis SNSS Schmidt 1 $4.10 7 - 1 -6% -7% 228% ($0.43) ($1.05) ($0.90) NM NM NM $77 $24 $1.11 47.4 $142 $194
Synageva GEVA Schmidt 1 $44.67 58 - 20 -5% -18% 121% ($8.58) ($1.89) ($2.55) NM NM NM $233 $0 $9.80 23.8 $831 $1,064
Threshold THLD Schmidt 1 $4.26 9 - 1 1% -51% 225% ($0.56) ($1.82) $0.00 NM NM NM $66 $0 $1.18 55.7 $171 $237
Vical VICL Schmidt 2 $2.98 5 - 3 -1% -26% -32% ($0.10) ($0.26) ($0.25) NM NM NM $90 $2 $1.02 86.4 $169 $257
Xenoport XNPT Schmidt 2 $8.08 13 3 6% -18% 106% ($0.94) ($1.34) ($1.55) NM NM NM $113 $0 $2.75 41.0 $219 $331
Average 4% -6% 54%

COWEN BIOTECHNOLOGY VALUATION ANALYSIS
P/E Multiple
Research Blackout
Biotechnology
December 14, 2012 19
Addendum
STOCKS MENTIONED IN IMPORTANT DISCLOSURES
Ticker Company Name
ACHN Achillion Pharmaceuticals
ACOR Acorda Therapeutics
ALXN Alexion Pharmaceuticals
AMGN Amgen
ANAC Anacor Pharmaceuticals
ARIA Ariad Pharmaceuticals
AUXL Auxilium Pharmaceuticals
BIIB Biogen Idec
BMRN BioMarin Pharmaceutical
CADX Cadence Pharmaceuticals
CCXI ChemoCentryx
CELG Celgene
DNDN Dendreon
DVAX Dynavax Technologies
DYAX Dyax
EBS Emergent BioSolutions
ELN Elan (ADR)
EXEL Exelixis
GEVA Synageva Biopharma
GILD Gilead Sciences
GTXI GTx
HPTX Hyperion Therapeutics
INCY Incyte
ISIS Isis Pharmaceuticals
LXRX Lexicon Pharmaceuticals
MACK Merrimack Pharmaceuticals
MDVN Medivation
MNTA Momenta Pharmaceuticals
NBIX Neurocrine Biosciences
ONXX Onyx Pharmaceuticals
PBYI Puma Biotechnology
PDLI PDL BioPharma
REGN Regeneron Pharmaceuticals
SNSS Sunesis Pharmaceuticals
SVNT Savient Pharmaceuticals
THLD Threshold Pharmaceuticals
UTHR United Therapeutics
VICL Vical
VPHM ViroPharma
VRTX Vertex
XNPT XenoPort

ANALYST CERTIFICATION
Each author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report.

IMPORTANT DISCLOSURES
Cowen and Company, LLC and or its affiliates make a market in the stock of ACHN, ACOR, ALXN, AMGN, ANAC, ARIA, AUXL, BIIB, BMRN, CADX, CCXI, CELG, DNDN, DVAX, DYAX, EBS, ELN, EXEL, GEVA, GILD, GTXI, HPTX, INCY, ISIS, LXRX, MACK, MDVN, MNTA, NBIX, ONXX, PBYI, PDLI, REGN, SNSS, SVNT, THLD, UTHR, VICL, VPHM, VRTX, XNPT securities. The author(s) of this report own a Long position in the Common shares issued by ALXN, EXEL.

Cowen and Company, LLC and/or its affiliates managed or co-managed a public offering of ALXN, ANAC, ARIA, CCXI, DVAX, EXEL, GEVA, HPTX, MACK, PBYI, SVNT within the past twelve months. Cowen and Company, LLC and/or its affiliates received in the past 12 months compensation for investment banking services from ALXN, ANAC, ARIA, CCXI, DVAX, ELN, EXEL, GEVA, HPTX, MACK, PBYI, SVNT. ALXN, ELN, ANAC, ARIA, CCXI, DVAX, EXEL, HPTX, MACK, PBYI, SVNT, GEVA is or was in the past 12 months a client of Cowen and Company, LLC; during the past 12 months, Cowen and Company, LLC provided IB services. GEVA is or was in the past 12 months a client of Cowen and Company, LLC; during the past 12 months, Cowen and Company, LLC provided Non IB services.
ALXN, ELN, ANAC, ARIA, CCXI, DVAX, EXEL, HPTX, PBYI, SVNT, GEVA have been client(s) of Cowen and Company, LLC in the past 12 months. Cowen and Company, LLC and/or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next 3 months from ANAC, PBYI. Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firm's investor clients. Individual compensation determinations for research analysts, including the author(s) of this report, are based on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources, including revenues from investment banking. Cowen and Company, LLC does not compensate research analysts based on specific investment banking transactions.


DISCLAIMER
This research is for our clients only. Our research is disseminated primarily electronically and, in some cases, in printed form. Research distributed electronically is available simultaneously to all Cowen and Company, LLC clients. All published research, including required disclosures, can be obtained on the Firm's client website, www.cowenresearch.com.

Further information on any of the above securities may be obtained from our offices. This report is published solely for information purposes, and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. Other than disclosures relating to Cowen and Company, LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available data. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice.

Notice to UK Investors: This publication is produced by Cowen and Company, LLC, which is regulated in the United States by FINRA and is disseminated in the United Kingdom by Cowen International Limited ("CIL"). In the United Kingdom, 'Cowen and Company' is a Trading Name of CIL. It is communicated only to persons of a kind described in Articles 19 and
49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. It must not be further transmitted to any other person without the consent of CIL.

Copyright, User Agreement and other general information related to this report
© 2012 Cowen and Company, LLC. Member NYSE, FINRA and SIPC. All rights reserved. This research report is prepared for
the exclusive use of Cowen clients and may not be reproduced, displayed, modified, distributed, transmitted or disclosed,
in whole or in part, or in any form or manner, to others outside your organization without the express prior written
consent of Cowen. Cowen research reports are distributed simultaneously to all clients eligible to receive such research
prior to any public dissemination by Cowen of the research report or information or opinion contained therein. Any
unauthorized use or disclosure is prohibited. Receipt and/or review of this research constitutes your agreement not to
reproduce, display, modify, distribute, transmit, or disclose to others outside your organization the contents, opinions,
conclusion, or information contained in this report (including any investment recommendations, estimates or price
targets). All Cowen trademarks displayed in this report are owned by Cowen and may not be used without its prior
written consent.
Cowen and Company, LLC. New York (646) 562-1000 Boston (617) 946-3700 San Francisco (415) 646-7200
Chicago (312) 577-2240 Cleveland (440) 331-3531 Atlanta (866) 544-7009 London (affiliate) 44-207-071-7500

COWEN AND COMPANY RATING DEFINITIONS (a)
Rating Definition
Outperform (1) Stock expected to outperform the S&P 500
Neutral (2) Stock expected to perform in line with the S&P 500
Underperform (3) Stock expected to underperform the S&P 500
(a) Assumptions: Time horizon is 12 months; S&P 500 is flat over forecast period.

COWEN AND COMPANY RATING ALLOCATION (a)
Rating
Pct of companies under
coverage with this rating
Pct for which Investment Banking services
have been provided within the past 12 months
Buy (b) 55.7% 9.2%
Hold (c) 41.9% 1.7%
Sell (d) 2.4% 0.0%
(a) As of 09/30/2012. (b) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's rating definitions (see above). (c)
Corresponds to "Neutral" as defined in Cowen and Company, LLC's ratings definitions (see above). (d) Corresponds to "Underperform" as defined in
Cowen and Company, LLC's ratings definitions (see above). Note: "Buy," "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in its
ratings system and should not be construed as investment options. Rather, these ratings terms are used illustratively to comply with NASD and NYSE
regulations.
To view price charts, please see http://pricecharts.cowen.com/pricechart.asp or call 1-800-221-5616

Analysts
Cowen Biotech Research Team
(646) 562-1000
biotechteam@cowen.com