Surveying the Contract Services Industry: The Outlook for 2007 and Beyond

1. Surveying the Contract Services Industry: The Outlook for 2007 and Beyond Jim Miller Pharmaceutical Technology Breakfast at AAPS October 30, 2006

2. Agenda • Market conditions • Key Trends • Patheon developments • Final Thoughts

3. Principal indicators: contractor performanceContractor growth slowing, still strong

4. PharmSource/Pharmaceutical Technology SurveySpending growth will slow further in 2007 Source: 2006 PharmSource/ Pharmaceutical Technology survey

5. Principal indicators: pipeline Late stage products increasing slowly

6. Key trendsPOC is the new development paradigm Discovery Proof of Concept Preclinical Phase I Phase IIA Confirmation Phase IIB – Phase IV • For small bio/pharma • Critical financing point • - Out-licensing • - IPO • - More venture capital • Affordable endpoint • For big bio/pharma • Reduce costly Phase III failure • Put more candidates through pipeline • Reduce risk of in-licensing and acquisition

7. Product acquisitions by top 10 pharma Preclinical/Phase I 52 Phase II/III 35 Marketed 5 Principal acquirers Novartis 22 Pfizer 15 Roche 12 GSK 12 Merck 11 Key trendsPOC is the new development paradigm Contractor implications • Growth in early services • Lead optimization (medicinal chemistry) • Preclinical and Phase I services • Formulation • More of late-stage pipeline in big pharma hands • In-licensing and acquisition Source: PharmSource Lead Sheet

8. Current attributes Most activity in Non-GMP intermediates Clinical research Discovery chemistry Motivating factors Cost Local markets Patient access GMP custom manufacturing still some years off Undeveloped base Generics are more attractive Discovery services lessons Western CROs finding niche Faster turnaround Higher-value chemistry IP protection Pharma sourcing more sophisticated Who to use for what Changing market conditions Costs rising in China and India Key trendsOffshoring continues to grow

9. Key trendsSupplier consolidation continues • Clinical research • Major CROs gain share • Small- and mid-size CROs are merging • Preclinical research • Big players building networks of very large facilities • API manufacturing • Excess chemical capacity gone • Pipeline, Tamiflu make capacity tight • Lonza, BI dominate biomanufacturing

10. Key trendsSupplier consolidation continues Pharma driving consolidation • Reduced sourcing overheads • Better pricing • Better integration • Financially stable supplier base An economy-wide trend Source: 2006 PharmSource/ Pharmaceutical Technology survey

11. CMC development Aptuit, Fisher, Almac becoming dominate players $300 + million Low barriers to entry for small CROs CMOs adding development Dose manufacturing More excess capacity players Small companies continue to enter Even profitable niches may be getting overcrowded Key trendsDose-related segments resist consolidation Dose CMOs Solid dose >100 Injectable > 75 Prefilled syringe > 25 Softgel > 10 Source: PharmSource Advantage Contractor Database

12. Patheon storyWill 2006 mark the end of Patheon Vision? Patheon Performance 1995-2005 Revenues EBITDA

13. Slow organic growth Legacy products died faster than expected Big pharma slower to outsource than predicted New business development inherently slow in CM Currency mismatch Revenues in USD, costs in CAD and EUR Weakening dollar hurt margins Costs Few economies of scale Capacity distributed over too many facilities Plants scaled to small, protected markets High cost, high tax locales (Canada, Europe) Low utilization compounds cost issues Management Late in transitioning from entrepreneurial vision to operating/financial focus Patheon storyWhat has gone wrong?

14. Patheon storyAny scenario will hurt some stakeholders Complicating factors: multiple lenders in multiple countries, client contracts and relationships, regulatory considerations

15. Final ThoughtsLessons from the baseball and airline industry • Capacity Economics • Capacity can’t be inventoried • The more complex the capacity, the more expensive to maintain • Sophisticated modeling can help optimize capacity utilization • Customer segmentation • Many customers looking for more than the basic commodity and are willing to pay for it • Revenue per customer can be optimized by recognizing segment requirements • Business Models • Careful segmentation and economic analysis reveal multiple business models and revenue streams • Capacity and capabilities must be modeled to a specific business model and market demand • Execution of the business model is ultimate key to success; difficult to implement multiple models at one time

16. PharmSource Market Intelligence Services • PharmSource Advantage • Bio/Pharmaceutical Outsourcing Report • PharmSource Contractor Database • PharmSource Lead Sheet • Market Intelligence Notes and Briefings • Market research and strategy consulting • Multi-client research

18. PharmSource/Pharmaceutical Technology SurveyClients see slower growth in spend for 2006