North America Equity Research
06 January 2014

2014 Global Biotech Outlook
Differentiated Growth, Advancing Pipelines Should Drive Outperformance; Conf Call at 11am ET Today
The biotech sector had a stellar 2013 (NBI: +65%; S&P: +29%) driven by strong demand for the sector’s key products, many positive phase 3 studies and a wave of successful IPOs. Looking to 2014, we think the fundamental backdrop is very similar with 1) beatable revenue growth expectations (2014e: +16% vs. 2012/2013: +12%) including several high-profile drug launches, 2) many pivotal studies set to read out and 3) a stable/favorable regulatory and reimbursement environment. Notably, these factors should continue to make biotech attractive to generalist investors, who played a major role in the 2013 outperformance. Our bias is to stick with large caps as well as mid-caps with approved products; revenue/EPS/cash flow forecasts for 2015 and beyond look broadly beatable, in our view. In contrast, we suspect that “pure pipeline” or tech platform small caps could be more volatile in 2014. We continue to believe that the biotech industry is in the early innings of an innovation cycle with many labelexpansion opportunities and novel agents in phase 2 or 3 trials that are largely unaccounted for in Street models. Hence, we are bullish on the group for 2014. Please join us for a call today at 11am ET to discuss our sector outlook/favorite names (US dial-in: 888-889-1309; OUS: 773-756-0161; Passcode: BIOTECH).  Large-cap biotech: We don’t believe that a strict assessment of P/E multiples accurately addresses the nuances of the sector (2014e – Biotech: 22x vs. S&P 500: 15x). In our view, large caps are poised for an inflection point in revenue growth over the next two years, driven by significant drug launches in major therapeutic categories. Some of these include Gilead’s Sovaldi in hep C, Biogen’s Tecfidera in MS, Celgene’s myeloma franchise and Vertex’s CF franchise. Importantly, there are many innovative products in SMid-cap biotech that are also in launch mode.  SMid-cap biotech: SMid-cap performance is primarily driven by clinical/ regulatory catalysts which should still be the case in 2014. That said, there are many high-profile drug launches in the SMid-cap space such as Pharmacyclics’ Imbruvica, Biomarin’s Vimizim, Agerion’s Juxtapid and NPS Pharma’s orphan drug franchise. The innovation and scarcity value across SMid-cap biotech makes the group strategically attractive and while it’s difficult to predict, we suspect that M&A will remain a key theme in the group. This should be particularly true for companies in “hot” therapeutic categories and/or with de-risked platform technologies.  2014 Sector tailwinds: The regulatory environment remains stable with only a few surprises in 2013 and the pricing/reimbursement overhang in the EU appears to have abated. In 2014, we expect to hear from more commercial biotechs on the emerging markets opportunity, which is unaccounted for in most Street models.  2014 Sector headwinds: While unlikely, in our view, the biggest sector concern would be a miss versus consensus forecasts on some of the higher-profile drug launches. We’d argue that expectations still look very beatable for these products, but, historically, misses have driven a rapid shift in sentiment across biotech. In addition, 1Q is typically a weaker quarter due to shifts in healthcare coverage, which could be exacerbated by the Affordable Care Act. That said, drug utilization typically accelerates before mid-year.  Favorite Names – Meacham: GILD, VRTX, and NPSP  Favorite Names – Kasimov: INCY, ALKS, CLVS, and AEGR
Biotechnology Geoff Meacham
AC

(1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Bloomberg JPMA MEACHAM J.P. Morgan Securities LLC

Michael E Ulz
(1-212) 622-0900 michael.e.ulz@jpmorgan.com J.P. Morgan Securities LLC

Anupam Rama

AC

(1-212) 622-0105 anupam.rama@jpmorgan.com J.P. Morgan Securities LLC

Carter L Gould
(1-212) 622-4350 carter.l.gould@jpmorgan.com J.P. Morgan Securities LLC

Monika Sahni
(91-22) 6157-3288 monika.x.sahni@jpmorgan.com J.P. Morgan India Private Limited

US SMid Biotechnology Cory Kasimov
AC

(1-212) 622-5266 cory.w.kasimov@jpmorgan.com Bloomberg JPMA KASIMOV J.P. Morgan Securities LLC

Matthew J. Lowe, Ph.D.
(1-212) 622-0848 matthew.j.lowe@jpmorgan.com J.P. Morgan Securities LLC

Whitney G Ijem
(1-212) 622-4668 whitney.g.ijem@jpmorgan.com J.P. Morgan Securities LLC

European Biotechnology Richard Vosser
AC

(44-20) 7742-6652 richard.vosser@jpmorgan.com J.P. Morgan Securities plc

James D Gordon

AC

(44-20) 7742-6654 james.d.gordon@jpmorgan.com J.P. Morgan Securities plc

 Favorite Names – Vosser/Gordon: IPN and SHP (mid-cap), VEC and MOR
(small cap).

See page 89 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com

Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Table of Contents
Overview ...................................................................................3 A Quick Look Back at 2013......................................................4 Healthcare 2014: Stay Constructive........................................5 2014 Biotech Fundamentals Look Good ................................6 Key Themes in Biotech to Monitor in 2014 ..........................12 SMid-Cap Biotech: A Focus on Alpha Generation ..............20 The European View ................................................................22 Favorite Names.......................................................................28 Therapeutic Themes...............................................................43 Sector Catalysts .....................................................................76 2014 Medical Conferences.....................................................86 Biotech Valuation Sheet ........................................................87

Note: Pricing in this report is as of the market close on December 24th, 2013, unless otherwise noted.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Overview
Quick 2013 recap: Biotech had a robust 2013 (NBI Index: +65% vs. S&P 500: +29%) but got off to a relatively slow start as many investors were concerned about valuation following strong 2012 outperformance. We thought that 2013 brought many positives to the sector that drove outperformance—differentiated top-line growth, a steady flow of positive clinical data, very successful drug launches, broadening pipelines, and a stable/predictable regulatory environment. What’s in store for 2014: We expect many of the 2013 sector drivers to remain in place in 2014, with drug launches and major phase 3 catalysts playing a role in early part of the year. Importantly, these factors should also sustain generalist interest in the group. Below we outline some of the key sector themes, which we believe should lead to sector outperformance in 2014. Of note, interest in IPOs could moderate in 2014 following a record year that included many companies in the very early stages of development. We also favor a more selective approach in 2014 with greater focus on more commercial stage companies or those preparing for launches.  Consensus estimates appear beatable: Consensus revenue growth estimates look beatable for 2014 (2013e: +12% vs. 2014e: +10% excluding Gilead’s Sovaldi; +16% including Sovaldi). We believe that a number of high-profile drug launches are likely to beat consensus forecasts.  Favorable regulatory/drug pricing environment: Recent comments by the FDA indicate that expedited drug reviews, in particular Breakthrough status, and rare/orphan diseases will remain a priority in 2014. Additionally, we are not expecting major reimbursement cuts in the EU, which has been a longer-term overhang on the sector and in 1H13 in particular.  Emerging markets should remain a focus: Expanding into emerging markets has started to become an area of focus for commercial biotechs and, we note, this opportunity is not reflected in many Street models.  Innovation cycle still very much alive: Recent innovation in biotech is hard to deny (hep C, prostate cancer, multiple sclerosis, and orphan disease), but plenty of phase 2/3 agents remain in the industry pipeline which are currently unaccounted for in Street models.  M&A activity should remain healthy in 2014: Following recent trends, we expect continued M&A activity going forward with a likely focus on “hot” therapeutic markets, as well as de-risked technology platforms. Favorite names: Large Caps – GILD and VRTX; SMid Caps – NPSP, ALKS, AEGR, CLVS and INCY; EU – IPN and SHP (mid-cap), VEC and MOR (small cap). In this report, we evaluate sector fundamentals, provide our Top Picks, and discuss the “Therapeutic Themes” for 2014. This year we have placed a special emphasis on orphan diseases, Breakthrough Designation, the Affordable Care Act and emerging markets—all of which should be very topical issues in 2014. We are hosting a conference call at 11 am ET today (US dial-in: 888-889-1309; OUS: 773-7560161; Passcode: BIOTECH).

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

A Quick Look Back at 2013
Overall, biotech had a strong 2013 (see Figure 1) with the sector up +65% versus the S&P 500 at +29%. Strong top-line growth, a steady flow of positive clinical data, several very successful drug launches, an uptick in the innovation cycle and a stable/ predictable regulatory environment have all contributed to outperformance. In addition, there has been very strong demand for IPOs from both generalists and specialists. Indeed, compared to prior years, we saw more generalist interest in the sector, particularly for commercial-stage companies. The year started out a bit slow, as there was an EU pricing overhang and some fears that the sector may be overvalued, given 2012 outperformance. In fact, the NBI index didn’t start to separate from the broader markets until the early spring, following 4Q earnings season and in conjunction with the medical conference season. There were brief periods of sector weakness, mostly notably in August, despite solid 2Q earnings for the group. The summer slowdown could have been driven by seasonality, as well as a “sell the winners” mentality. There was also some volatility towards the end of the year, which is not surprising. Of note, however, periods of weakness in biotech were very short lived in 2013. From a macro perspective, in our view, sector fundamentals are very much intact. The EU drug pricing concerns in early 2013 did not materialize and we are not expecting any dramatic cuts near-term. Additionally, multiple biosimilar regulatory filings were pulled, highlighting the high bar for market entry. Finally, the regulatory landscape was stable and predictable in 2013, with only a few notable exceptions.
Figure 1: NBI Index versus S&P 500 (2013)

65% NBI S&P 500 60% Abraxane Approval Pancreatic Cancer 55% 50% IPO 45% Sovaldi Approval 40% Tecfidera EASL ASCO ASCO GU 35% Shire to Approval and WORLD AASLD acquire 30% Amgen VPHM AAN 25% JPM HC Acquires Onyx 20% Conf CROI 15% 10% CELG 5% Analyst Day 0% 4Q Earnings 1Q Earnings 2Q Earnings 3Q Earnings -5% -10%

Source: J.P. Morgan, Bloomberg.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

2013 Biotech Fund Flows
In 2013, fund flows reflected the dynamics in sector with biotech off to a slow start (see Figure 2). Indeed, fund flows were volatile in January/February followed by a steady increase in fund flows over the next few months in conjunction with 1Q earnings and the start of the medical meeting season. However, flows reversed in early June, which typically happens following the ASCO meeting. This was short lived, as a favorable IPO environment and strong 2Q earnings drove meaningful inflows. In late summer, outflows were temporary and quickly reversed post–Labor Day with the fall medical and investor conference season heating up. Not surprisingly, the last few months of the year have been volatile in terms of fund flows given profit taking at year-end. Looking to 2014, we expect fund flows to start the year off strong as fundamentals remain intact with a robust catalyst calendar ahead.
Figure 2: Biotech Fund Flows in 2013

Source: J.P. Morgan.

Healthcare 2014: Stay Constructive
As 2014 gets under way, we believe it is worth taking a look at the performance of all of the S&P 500 subsectors in 2013 and what expectations are for the year ahead (see Table 1). In 2013, the top 3 performing sectors were Discretionary, Healthcare and Industrial, while Telecom and Utilities finished with a single-digit return. Notably, Healthcare has outperformed the broader markets over the past 3 years. Looking to 2014, J.P. Morgan’s Equity Strategy team, led by US Chief Equity Strategist Tom Lee, remains constructive on equities overall. The Strategy Team highlighted its expectations of cyclicals outperforming in 2014 and the top sector pick is large-cap Technology. Of note, the Strategy Team lists healthcare as an Overweight sector for 2014; in fact, it is the only defensive sector with an Overweight rating.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Table 1: Healthcare Valuation Relative to Other S&P 500 Sectors
2014 JPMe EPS Cyclicals Materials Industrials Discretionary Technology Near Cyclicals Energy Financials Defensives Staples Health Care Telecom Utilities S&P 500 $4.00 $12.50 $11.25 $25.00 $14.50 $21.50 $11.75 $13.50 $2.50 $3.50 $120.00 2014 P/E 13.0 17.6 22.2 11.1 12.8 15.0 16.7 17.0 17.3 16.3 15.3 2014 Growth (y/y) 14% 11% 0% 11% 16% 11% 7% 8% 4% 0% 9% 2013-15 CAGR 15% 10% 5% 12% 13% 10% 7% 8% 5% 3% 10% 2014 PEG (1-Yr Growth) 0.9 1.7 NM 1.0 0.8 1.4 2.4 2.3 4.2 NM 1.7 2013 Y/Y Performance 21% 36% 39% 25% 21% 33% 22% 38% 6% 8% 29%

Source: J.P. Morgan Strategy Team.

For 2014, the Healthcare P/E is above the S&P average (17.0x versus 15.3x for the S&P 500). This is not a surprise, in our view, given outperformance in 2013. That said, there are still two sectors that are more expensive than Healthcare (Telecom and Staples). Of note, Healthcare outperformed the S&P 500 throughout 2013, with the relative outperformance increasing every quarter (see Figure 3).
Figure 3: 2012 Quarterly Total Returns by Sector Relative to S&P 500

Source: Bloomberg (Returns relative to the S&P 500).

2014 Biotech Fundamentals Look Good
Compared to sub-sectors within healthcare, biotech had a strong 2013 (see Figure 4). Taking a closer look at biotech fundamentals, both revenue and EPS growth for mid/ large-cap companies were robust in 2013, leading to the highest return among healthcare sub-sectors. Earnings leverage was readily apparent for biotech, which drove meaningful EPS growth. Multiples also expanded in 2013 suggesting that sentiment improved as generalist interest in the group increased throughout the year. Importantly, during 3Q13 earnings season, a majority of commercial-stage biotechs beat on the top and bottom lines. In our view, the fundamental drivers underlying strong 2013 performance are still intact going into 2014.
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Figure 4: Healthcare Industry – Growth and Return Components (2013 versus 2012)

Source: J.P. Morgan estimates, Bloomberg.

Biotech Still Driven by Top-Line Growth
Revenue upside for key large/mid-cap biotechs was roughly the same in 2012 and 2013, though EPS upside was higher in 2013 (2012: revenue +5% and EPS +6% vs. 2013: revenue +6% and EPS +13%). However, share performance was largely similar in 2013 relative to 2012, which is not surprising as biotech tends to trade based on revenues rather than EPS (see Figure 5). In our view, the recipe for outperformance in biotechs in 2014 remains much the same—meaningful clinical data flow and strong product demand. M&A activity, while difficult to predict, is a potential upside lever.
Figure 5: Large/Mid-Cap Biotech Revenue and EPS Upside/Downside vs. Share Price

Source: Bloomberg.

2014 Growth Expectations Look Beatable to Us
Over the past several years, large-cap biotech revenue and earnings growth has increased from 9% and 16%, respectively, on an average in 2008-11, to 12% and 22%, respectively, in 2013 (see Figure 6). Looking ahead to 2014, consensus forecasts for the large-cap group call for 16% revenue growth. On the earnings side,
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

consensus calls for 24% EPS growth. Of note, the uptick in growth in 2014 is largely driven by the launch of Gilead’s Sovaldi, which we expect to be robust given the significant demand expected for new hep C therapies. Indeed, excluding the Sovaldi launch, 2014 growth expectations decrease to 10%. As such, with fundamentals intact and beatable consensus growth expectations for 2014, we believe the levers for continued “beat-and-raise” momentum are in place.
Figure 6: Biotech Revenue and EPS Growth, 2008-2015E

Source: Company reports, Bloomberg and J.P. Morgan estimates.

As in prior years, consensus revenue and EPS estimates for 2014 generally ticked up throughout 2013 (see Figure 7). Consensus revenue estimates (a key driver of biotech stock performance) steadily increased for 2014 in nearly every month throughout 2013 (+11% over the year). Consensus earnings estimates, on the other hand, were largely flat early in the year, before an upward trend began post 1Q13 earnings with some volatility in the summer months.
Figure 7: 2014 Biotech Consensus Forecasts over the Course of 2013

Source: Bloomberg, J.P. Morgan.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Uses of Cash
From 2008 to 2013E, large-cap biotech in aggregate generated an estimated $73B in cash flow from operations (CFO). Interestingly, a vast majority of the cash has been used for share buybacks (~$53B), followed by M&A (~$33B), which includes Gilead’s $11B acquisition of Pharmasset as well as Amgen’s $10B acquisition of Onyx, a modest amount of capital expenditures, business development (BD), and more recently dividend payouts by Amgen (see Figure 8).
Figure 8: Large-Cap Biotech – Aggregate Uses of Cash (2008-2013E)

Source: Company reports and J.P. Morgan estimates.

Going into 2014, CFO should continue to rise, supporting share buybacks, M&A and dividends (see Figure 9). Of note, share buybacks peaked in 2010 and 2012, when many companies in the industry rolled out very large share repurchase plans. We think that buybacks will likely continue to decline in 2014 from a peak of ~$11B in 2011, but still expect strong activity provided that the appetite for large deals remains low. Indeed, large-cap biotech in aggregate has approximately $12.5B remaining under currently authorized share repurchase programs. Amgen remains committed to continued share repurchases, but at a lower rate, while Gilead remains focus on debt repayment. We currently assume ~$4.0B is repurchased in 2014, which is down from 2013 repurchase of ~$6.2B. With respect to dividends, Amgen became the first large-cap biotech to pay a dividend in 2011, with quarterly dividends increasing every year since then ($0.28 in 2011, $0.36 in 2012, $0.47 in 2013 and $0.61 in 2014). For 2014, we still do not expect other largecaps to follow suit; but in the future, we believe Biogen is likely best positioned for a dividend when it reaches a steady state with Tecfidera and has more predictable cash flows. Gilead is likely to follow looking to 2015.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Figure 9: Large-Cap Biotech Aggregate Cash Position over Time (2010-2014E)

Source: Company reports and J.P. Morgan estimates.

IPO Environment Should Remain Favorable, but Likely at a Slower Place
The IPO environment was strong in 2013, with nearly three times the offerings as in 2012. This is by far the highest number of IPOs over the past decade. Of note, interest in earlier-stage companies (phase 1 and 2; even pre-clinical) was much higher than in the past which had favored later-stage companies (phase 3 and commercial). Indeed, ~65% of IPOs in 2013 were for companies with early-stage assets (see Figure 10). Similar to the previous few years, IPOs were still focused on companies in “hot” therapeutic markets: oncology/hematology, autoimmune diseases, rare diseases, orphan space and infectious diseases. Looking to 2014, we expect the appetite for IPOs to moderate, particularly for earlystage companies. However, we still sense an appetite for new ideas among biotech investors. Additionally, given its unmet need and favorable regulatory environment, we would not be surprised to see more IPOs focused on the orphan disease space.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Figure 10: Number of Biotech/Specialty Pharma IPOs (2008-2013)

Source: J.P. Morgan.

M&A Activity
M&A activity stayed relatively stable in 2013, with 10 deals compared to 9 in 2012 (see Figure 11). Of note, acquisitions in 2013 were more balanced between Pharma and Biotech compared to 2012 when Pharma dominated. As Pharma has evolved from managing patent cliffs to growing pipelines organically, a moderating of Pharma deal activity is not surprising, in our view. Of note, the largest transaction was the Amgen/Onyx deal ($10B), followed by Perrigo/Elan ($7B) and Shire/ Viropharma ($4B), with other deals below the $2B level.
Figure 11: M&A Activity, 2007-2013

Source: J.P. Morgan.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Looking to 2014, we continue to expect deal activity that is more focused on “hot” therapeutic areas which we define as disease areas with an unmet need and where meaningful clinical development is occurring. We see assets of the following companies, within the J.P. Morgan US Biotech universe, as having high strategic value.  Hepatitis C: Idenix (IDIX).  Orphan diseases: Amicus (FOLD), Alnylam (ALNY), Synageva (GEVA), Protalix (PLX), NPS Pharma (NPSP), InterMune (ITMN), PTC Therapeutics (PTCT).  Oncology/hematology: Ariad (ARIA), Incyte (INCY), Medivation (MDVN), Merrimack (MACK), Seattle Genetics (SGEN).

Key Themes in Biotech to Monitor in 2014
Breakthrough Designation: Expect More Clarity in 2014 and Interest to Remain High
Breakthrough Therapy Designation went into effect on July 9, 2012 as part of the 2012 Food and Drug Administration Safety and Innovation Act (FDASIA). Since early 2013, interest in obtaining Breakthrough Status among biotechs has been very high. Indeed, since its inception, 135 requests for Breakthrough Designation have been made, exceeding FDA expectations. While Breakthrough Designation has been a positive for the biotech industry, a lack of transparency on specific requirements and the process has caused confusion among many companies. Since Breakthrough Designations usually occur under an IND, the FDA is prohibited from discussing details and companies are not obligated to make public announcements. Additionally, outside of acknowledgment of an unmet need disease area, initially companies were cautious on outlining the potential impact of Breakthrough Designation on a development program. “We are pleased that both KALYDECO and the VX-809 plus ivacaftor combination regimen received Breakthrough Therapy Designation from the FDA. While the specific implications of this new designation are not yet clear, we are committed to working with regulators to explore novel and potentially more rapid development strategies for both the KALYDECO label expansion and VX-809 plus ivacaftor combination regimens.” – Vertex 4Q12 Earnings Call Additionally, draft guidelines were only recently published (June 25, 2013) and final guidance is currently being drafted based on feedback and comments. Importantly, expedited review of new drugs remains a focus for the FDA; Breakthrough Designation was highlighted by Dr. Jenkins, Director of the Office of New Drugs at CDER, at the recent FDA/CMS Summit (Dec 11-12, 2013). Looking ahead, we expect greater clarity on the specifics of a Breakthrough Designation. In order to receive breakthrough therapy designation two key criteria must be met: 1) the drug must treat a serious, life-threatening disease or condition and 2) preliminary clinical evidence must indicate a substantial improvement over existing therapies. Once granted, the FDA expedites the development and review of the Breakthrough drug. This designation provides all the benefits of “fast track” designation as well as
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

more intense FDA guidance on an efficient drug development program. Indeed, companies have become increasingly comfortable in highlighting that Breakthrough Designation should facilitate more frequent discussion with the FDA on the particular development program. “The FDA Breakthrough Therapy designation we received for asfotase alfa in May is an important element in the late-stages of our development program. Through the designation, we expect more frequent interactions with the FDA. These interactions, for example, will help us to strengthen our filing and regulatory strategies for this larger than anticipated patient population.” – Alexion 2Q13 Earnings Call In FY2013 (Oct 2012 to Sep 2013) 103 requests for breakthrough designation were made with 32 requests granted and 62 denied (see Figure 12). Of note, the FDA has 60 days to respond to a request and this deadline has been met in the majority of cases (CBER 100% and CDER 97%). Two months into FY2014, 30 requests have been made with 4 granted and 7 denied. As such, the number of requests appears to be tracking ahead of FY2013 levels, which is not surprising given the advantages of Breakthrough Status.
Figure 12: Breakthrough Request/Granted/Denied in CY2013

Source: FDA (Note: * Indicates through December 20, 2013).

At the recent FDA/CMS Summit, Dr. Jenkins provided common reasons for not granting Breakthrough Status, which included a lack of clinical data, unreliable data (very small number of patients, anecdotal case reports), failure to demonstrate “substantial” improvement, reliance on a novel biomarkers or surrogate endpoint and post-hoc analysis or failed studies that identify a subset of patients with potential benefit. We believe these common reasons highlight confusion among companies, which should decrease in 2014 as clarity on Breakthrough Designation increases. We note, the issue of Breakthrough Designation becomes particularly complicated in orphan diseases, which have limited clinical data in general, yet the unmet need is clear (i.e., Synageva’s sebelipase alfa in early-onset LAL Deficiency). Based on public reports, a look back at 2013 (through late September), reveals the majority of therapies that have received Breakthrough Status are focused on hep C and hematology (see Table 2). Of note, orphan diseases are also a focus. This is
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

consistent with data provided by Dr. Jenkins at the FDA/CMS Summit indicting the majority of breakthrough requests have occurred in oncology (27%), hematology (19%) and antiviral (13%), with the majority of granted requests occurring in the same indications (antiviral 26%, hematology 24% and oncology 18%). Notable drugs from our coverage universe that have received breakthrough designation include Gilead’s fixed-dose combination (sofosbuvir + ledipasvir) for hep C, Vertex’s VX-809 for CF, Alexion’s asfotase alpha for hypophosphatasia and Synageva’s sebelipase alfa for LAL deficiency.
Table 2: Selected Drugs Receiving Breakthrough Designation by FDA in 2013
Company Vertex Vertex Novartis Drug Ivacaftor Ivacaftor + lumacaftor LDK378 Indication Cystic fibrosis Cystic fibrosis Metastatic NSCLC Mantle-cell lymphoma, Waldenström’s macroglobulinemia, chronic lymphocytic leukemia, small lymphocytic lymphoma Breast cancer Advanced melanoma Hepatitis C Epidermolysis bullosa Multiple myeloma Hepatitis C Chronic lymphocytic leukemia Lysosomal acid lipase deficiency Hypophosphatasia Acute heart failure Duchenne’s muscular dystrophy Hepatitis C Sporadic inclusion-body myositis Lambert-Eaton myasthenic syndrome Advanced breast cancer Chronic lymphocytic leukemia Acute myeloid leukemia Advanced NSCLC Date Announced January 6, 2013 January 6, 2013 March 15, 2013

Pharmacyclics

Ibrutinib

April 8, 2013

Pfizer Merck Bristol Scioderm Janssen AbbVie Genentech Synageva Alexion Novartis GSK Gilead Novartis Catalyst Syndax Genmab/GSK Boehringer Ingelheim Roche
Source: J.P. Morgan.

Palbociclib Lambrolizumab Daclatasvir + asunaprevir + BMS791325 SD-101 Daratumumab ABT450/r + ABT-267 + ABT-333 Obinutuzumab Sebelipase alfa Asfotase Alfa Serelaxin Drisapersen Sofosbuvir + ledipasvir Bimagrumab Amifampridine phosphate Entinostat Ofatumumab Volasertib Alectinib

April 10, 2013 April 24, 2013 April 25, 2013 April 29, 2013 May 1, 2013 May 6, 2013 May 15, 2013 May 20, 2013 May 28, 2013 June 21, 2013 June 27, 2013 July 25, 2013 August 20, 2013 August 27, 2013 September 11, 2013 September 13, 2013 September 17, 2013 September 23, 2013

Despite growing pains, 2013 marked the year of approval for the first drug with Breakthrough Designation late in the year. This was Roche’s Gazyva for the treatment of CLL, approved on November 1, 2013. This was quickly followed by approval of Pharmacyclics’ Imbruvica for MCL (Nov 13, 2013) and Gilead’s Sovaldi for hep C (Dec 6, 2013), both of which had obtained Breakthrough Status. While the FDA continues to refine and communicate standards for Breakthrough Designation, we expect biotechs to continue to attempt to utilize the pathway to increase dialogue with the Agency.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Orphan Diseases Remain a Major Opportunity in Biotech
Rare/orphan diseases have been an area of focus for both the FDA and EMEA for many years. Given the small patient populations, regulators have created incentives to fuel drug development in this area. With regulatory and economic incentives in place, rare/orphan diseases have been a bright spot for biotech which we suspect should continue for quite some time. Indeed, at the recent FDA/CMS Summit (Dec 11-12, 2013), Dr. Moscicki, Deputy Directory for Science Operation at CDER, indicated that rare/orphan diseases will remain a priority for 2014. Of note, orphan drug pricing does from time to time become a concern for the sector; however, we note that pricing is often independent of the regulatory process. In the US, over 2008-2013, approximately 1/3 of all drug approvals have been for rare diseases (see Figure 13). Of note, many of these diseases are serious or life threatening and represent an unmet medical need. As such, the majority qualify for at least one expedited review program and in many cases more than one, including Priority Review, Fast Track Designation, and recently Breakthrough Designation.
Figure 13: Drug Approvals at CDER from 2008 to 2013

Source: FDA (Note: * Indicates through December 6, 2013).

A recent trend indicates that targeted therapies are becoming more common in orphan/rare disease drug development. From 2010 to 2013, of the 42 NME/BLA approvals for rare disease, 55% were considered targeted therapies while the remaining 45% were for “common diseases.” Indeed, since 1990 the percentage of drug approvals for targeted therapies has increased meaningfully from 8% to 45% and continues to grow. Looking to 2014, we expect rare/orphan diseases to remain an area of opportunity for biotech companies. Indeed, at the recent FDA/CMS Summit, Dr. Moscicki noted that he expects approval of new drugs for rare/orphan diseases to make up an increasing proportion of all new drug approvals. He anticipates this trend will be supported by high utilization of incentive programs among biotechs, and in particular expedited review pathways. He also expects targeted therapies to become increasingly common in rare/orphan disease drug development consistent with an emerging trend described above. Importantly, Dr. Moscicki acknowledged the need for flexibility in
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

developing novel trial designs and translational drug development. We believe this emphasizes the FDA’s willingness to work with sponsors when it comes to rare/ orphan diseases, which should bode well for biotechs. Similar to the US, Europe has also been focused on improving therapies for orphan/ rare disease. Indeed, in July 2013, the European Union Committee of Experts on Rare Diseases (EUCERD) published an overview of the current status of rare/orphan diseases in Europe as well as accomplishments over the past few years. Indeed, since 2000 the number of applications submitted for rare/orphan diseases in the EU has more than doubled from 72 to 197 in 2012 (see Figure 14). This is likely to further increase in 2013 with 181 applications through mid-November. Of the applications submitted, the Committee of Orphan Medicinal Products (COMP) has adopted a positive opinion recommending orphan designation approximately 70% of the time which has been fairly consistent over the past few years. In our view, this highlights a similarly strong commitment to rare/orphan disease in Europe, which should be a positive for biotechs targeting the European market.
Figure 14: Applications for Orphan Status in EU from 2000 to 2013

Source: CHMP (Note: * Indicates through November 15, 2013).

Emerging Markets: An Evolving Strategy for Biotech
Key emerging markets are generally considered to be the EM-7 countries: Brazil, China, India, Mexico, Russia, South Korea, and Turkey. We note that any focus beyond the EM-7 countries generally centers on Latin America; countries such as Argentina and Columbia are also emerging as focus regions, particularly among orphan disease companies. The challenges in emerging markets are well vetted and include: 1) a de-harmonized regulatory process, 2) drug distribution, 3) pricing/reimbursement, and 4) intellectual property protection. That said, given the size of the addressable population in the EM-7 alone is four times that in the US, EU (Big-5) and Japan, an emerging markets strategy is becoming increasing important for both pharma and biotech (see Table 3).

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Table 3: Total Population Estimates (2014e) – US/EU (Big-5)/Japan vs. EM-7
Country Brazil China India Mexico Russia South Korea Turkey Total Total Population (millions) 203 1,336 1,237 120 142 49 82 3,169 Country United States France Germany Italy Spain UK Japan Total Total Population (millions) 319 66 81 62 48 64 127 767

Source: Census Bureau – International Database.

Commentary on an emerging markets strategy has been prevalent among pharmas for several years now. However, the commercial strategy in these markets for biotechs is still taking shape, with only orphan disease companies having a meaningful presence in key emerging markets thus far. “We observe a steady rate of new patient identification and Soliris treatment initiation in Turkey, Brazil, and Russia. We expect consistent growth in these countries over time, and we are increasingly confident that the aggregate of these three markets provides us with an opportunity to serve patients that is similar in size to the U.S. market.” – Alexion 3Q Earnings Call Importantly, we believe biotech is in an advantageous position in that it can leverage the experience of Big Pharma and orphan biotechs with an existing emerging market presence. Looking to 2014, we expect hear more from commercial biotechs on the long-term emerging markets strategy. We believe it is noteworthy that biotech bellwether, Amgen (once largely US centric), has been particularly aggressive on the emerging markets front. We anticipate other commercial biotechs will follow suit. Indeed, in 2014, we would not be surprised to see commercial biotechs increase their presence in the EM-7 or form regional partnerships. For biotech, in terms of geographic focus, we suspect key focus in China, Turkey, Brazil and Russia, while India will likely be a de-prioritized region in the near term (given IP concerns). “We plan to be promoting our first product in China by 2015.” – Amgen 2013 Business Review “We have made outstanding progress preparing to launch REVLIMID in China and expect to generate our first REVLIMID commercial sales later this quarter.” – Celgene 1Q13 Earnings Call “We’re looking at a number of other geographies that require clinical studies. One of which we are actively enrolling, that’s Russia and the other country we’re looking at is China.” – Gilead 2Q13Earning Call {on Hep C geographic expansion}

The Innovation Cycle in Biotech Is Still in the Early Innings
We have witnessed significant innovation in the biotech industry over the past three years, in our view. Indeed, the sector has observed meaningful/transformative approvals in “hot” therapeutic areas such as hep C, prostate cancer, multiple sclerosis, and orphan diseases. Given this, some have speculated that biotech could be entering a period of an innovation lag. We disagree.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

We believe there are plenty of phase 2/phase 3 agents in development with $500M+ peak potential that are currently largely unaccounted for in Street models. Of note, many of these compounds could be on the market as early as 2015. Below we list 15 key compounds/indications that are worth monitoring (see Table 4). Importantly, many of these agents below are already de-risked with early-stage data and continue to be focused in “hot” therapeutic areas. While all products are unlikely to make it to the market, Table 4 clearly shows that innovation in the sector is still alive. Of note, the list below includes both follow-on indications for market products, as well as agents with novel mechanism of action.
Table 4: Key Drugs to Monitor in 2014 Company Alexion Alkermes Amgen Amgen Ariad Biogen Biomarin Celgene Clovis Gilead Incyte Ironwood Medicines Company Medivation Protalix Asset Soliris ALKS3831 Trebananib Blinatumomab AP26113 LINGO BMN-111 Revlimid rucaparib GS-9973 INCB24360 IW-9179 Carbavance Xtandi PRX-112 MOA/Indication Complement inhibitor / NMO and MG oral atypical antipsychotic / Schizophrenia Inhibitor angiopoietin 1 and 2 / ovarian cancer T-cell engager (BiTE) antibody / R/R ALL oral ALK inhibitor / ALK+ NSCLC anti-LINGO / MS CNP / achondroplasia IMiD / CLL PARP inhibitor / ovarian cancer Syk inhibitor / R/R hematologic malignancies oral IDO inhibitor / melanoma & ovarian cancer GC-C agonist / Upper GI disorders IV beta-lactamase inhibitor + a carbapenem / serious infections androgen receptor inhibitor / upstream prostate cancer ERT / Fabry Disease Current Phase Phase 3 Phase 2 (top-line data in 1H15) Phase 3 Pivotal data expected 2014 Pivotal Phase 2 to start early 2014 Phase 2 Phase 2 ready Phase 3 Phase 3 to start 1Q14 Phase 2 Phase 2 Phase 2 Phase 3 ready Phase 2 /3 Phase 1/2 (interim data 1H14) Potential Launch Timing 2016/2017 2017/2018 2015 (R/R) 2015/2016 2015 2017/2018 2017 2016/2017 2016 2017/2018 2017 2017+ 2015 2015/2016 + 2017+ Peak Potential $1B+ each $500M+ $500M+ $500M+ $250M+ $1B+ $1B+ $1B+ $500M+ $500M+ $1B+ $750M+ $1B $1B+ $500M+

Source: J.P. Morgan estimates.

Drug Launches Should Support Positive Sentiment
Drug launches are expected to remain a key focal point in 2014, with a number of high-profile products anticipated to reach the market. A number of successful launches for high-profile products (e.g., Biogen’s Tecfidera, Medivation’s Xtandi, and Regeneron’s Eylea) over the course of 2012-2013 have largely quelled the reflexive “short the launch” investment strategy. Characterized by transformative products and adroit commercial execution (as well as better management of Street expectations), successful launches have helped drive sector outperformance. However, product introductions inevitably create catalysts and expectations, providing a continued source of volatility. Indeed, history reminds us, however, that high-profile failed drug launches (e.g., Dendreon’s Provenge and Human Genome Sciences’ Benlysta) can result in a dramatic and rapid shift in sector sentiment.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Successful launches against low expectations, particularly in the orphan drug space (e.g., NPS’s launch of Gattex in 2013), provide another example, but in the positive direction. While expectations for new launches have certainly risen relative to our outlook for 2012 and 2013, we believe that 2014/2015 estimates look beatable. Highlighted below is a select group of key drug launches where JPM forecasts differ from consensus (see Table 5). Of note, we are ahead of the Street on many key new drug launches for 2014; our expectations for Gilead’s Sovaldi are reflective of a conservative stance, not concerns on demand or the hep C market overall.
Table 5: Select Drug Launches for 2014-2015
2014E ($ M) Drug Company Launch Date JPMe 271 1,640 73 69 145 50 54 21 Cons 261 2,532 138 34 127 64 4 4 7 2015E ($ M) JPMe 692 3,972 314 264 241 137 193 166 52 Cons 660 6,119 391 129 226 183 104 115 64

Imbruvica (WW) Sofosbuvir Apremilast Afrezza Esbriet Vimizim Contrave Zerenex Natpara
Source: J.P. Morgan estimates.

JNJ / PCYC Gilead Celgene Mannkind Intermune Biomarin Orexigen Keryx NPS Pharma

4Q13 4Q13 1Q14e 2Q14e 1H14e 1H14e Mid-2014e Mid-2014e YE14e

Implementation of ACA Expected to Be a Modest Headwind to 1Q14 Results
The individual mandate portion of the Affordable Care Act (ACA) has dominated headlines following the start of the open-enrollment period for the public exchanges at the start of 4Q13. Despite significant difficulties in the roll-out of the healthcare.gov website, we expect only relatively minor incremental headwinds from implementation of the mandate in 1Q14 on drug sales in biotech and anticipate more headline risk than tangible impact. That said, we remind investors that the traditional 1Q headwinds on growth from the Part D “donut hole”—a factor that has largely been unaffected by the individual mandate portion of the law—remain in place, and that changes to Medicare Advantages plans could increase out-of-pocket drug costs for seniors, which may cause drug companies to increase their rebate programs. The challenging roll-out of the public exchanges, and in particular the back-end implementation of healthcare.gov, has raised some concerns that there could be similar IT hurdles and other logistical challenges between insurers and doctors or pharmacies on January 1, translating to barriers to care or prescriptions. While we undoubtedly expect some issues to arise (and some negative headlines), the staggered nature of patient visits and prescription filling over the course of 1Q14 and 2Q14 should help mitigate potential hiccups to patient access. We also note that there have been encouraging signs that the back-end issues have been or will be addressed in time.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

There has also been much hand-wringing that patients previously on employer coverage or on individual plans would be dumped out of coverage, and unable to find new coverage on an exchange product. So far, there have been few signs of employers dumping employee coverage. Further, the Obama administration (based on analysis by states and insurance companies) estimated that less than 500k patients on individual plans had seen their plans cancelled and been unable to find new coverage, as opposed to the 4-5 million reported by the media. Though additional patients could see their plans lapse over the course of FY14, these patients will be allowed to enroll on the exchange, even outside of the open-enrollment period. On the senior side, we note that Medicare Advantage plans have slashed benefits to their enrollment bases, resulting in cost sharing on drug that will be less favorable across-the-board for most seniors. That said, given the severity of the diseases treated by most drugs in our space, we expect limited impact on compliance, or sales. Finally, we also remind investors that one of the key purposes of ACA was to broaden coverage, and establish a baseline of essential benefit included in that coverage. As such, a meaningful number of patients with limited prior drug coverage, or no insurance, including those patients with pre-existing conditions, will now have greater access to drugs.

SMid-Cap Biotech: A Focus on Alpha Generation
The overall small/mid-cap (SMid) biotech group obviously had an outstanding 2013, with the Nasdaq Biotechnology Index (NBI) significantly outperforming the broader market (NBI +65% vs. S&P 500 +29%). We remain generally constructive on the sector heading into 2014, as we believe fundamentals are still strong, though we would be hard pressed to expect a repeat in 2014. That said, we still assume investor risk appetite for the SMid biotechs to continue to be driven by high-profile clinical and regulatory catalysts, commercial performance, and the continuing potential for M&A activity. In contrast to most industries, SMid biotechs are not as reliant on the performance of the overall economy as long as they have access to capital. Regarding M&A, we anticipate that the uptick in higher-profile activity (Onyx, ViroPharma, Algeta) in 2H13 could extend into 2014 as pharma companies continue to seek out bolt-on deals (facilitated by plush pharma balance sheets and more mature biotech pipelines). This type of tailwind may be necessary for biotech to once again significantly outperform the broader markets. As is typically the case, the biggest biotech movers in 2013 were scattered among companies with clinical or strategic catalysts. See Table 6 below for a list of notable 2013 events and the corresponding stock performance five days post the event.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Table 6: Impact of Major SMid Catalysts in 2013
Arranged by best (top) and worst (bottom) performance Company CLVS ONXX VRTX MACK NPSP MDVN INCY ALKS ITMN PCYC PTCT AMAG VRTX ARRY KERX AEGR BMRN AEGR MNKD ARIA VRTX GERN NKTR ARIA FOLD FOLD DNDN MACK DVAX RIGL ARIA AVEO ZIOP RNA ARIA
Source: J.P. Morgan.

Event CO-1686 Data at ASCO Initial AMGN Bid Positive Phase 2 VX-661 data in CF Positive Phase 2 Data in metastatic breast cancer 2Q Earnings PREVAIL Data Jakafi Top-Line Data in Pancreatic Cancer Phase 2 ALKS 5461 Data 2Q Results Initial Breakthrough Therapy Designation Prosensa’s Phase 3 Miss Faraheme PDUFA Delay Positive Phase 2 VX-787 data in flu ARRY 502 Data in Asthma Positive Phase 2 CKD Data 2Q Earnings Vimizim AdCom 3Q Earnings Positive AFFINITY Data Iclusig New Label/Return to Market Announcement 3Q Results Data from IST in MF at ASH Phase 2 NKTR 181 Data Announcement of EPIC Trial Discontinuation Migalastat Update/Delayed Regulatory Timelines Announcement 6-Month Migalastat Data 2Q Earnings Negative Phase 2 Data for MM-121 in Ovarian Cancer Heplisav CRL OSKIRA-1 Data in RA Announcement of Iclusig Marketing Suspension AdCom Briefing Docs Negative Phase 3 PICASSO Data Phase 3 Trial Miss Initial Iclusig Safety Update (partial clinical hold)

5-Day % Change 96.4% 56.4% 53.6% 39.5% 27.2% 27.1% 26.4% 23.9% 21.1% 20.2% 19.5% 17.2% 14.4% 12.6% 12.4% 10.8% 10.4% -11.5% -11.6% -13.0% -14.9% -18.6% -24.9% -25.6% -27.0% -31.0% -31.4% -32.5% -33.3% -37.8% -41.7% -51.9% -66.9% -73.0% -76.5%

We expect the catalyst-driven performance seen in 2013 to continue in 2014, and thus we think playing the events will once again be key to alpha generation. 2014 is also set to be a year with important regulatory events (e.g., PDUFA dates for PCYC’s ibrutinib for relapsed/refractory chronic lymphocytic leukemia, BMRN’s GALNS for Morquio Syndrome, NKTR/AZN’s Naloxegol for opioid-induced constipation, KERX’s Zerenex, MNKD’s Afrezza, ACOR’s diazepam nasal spray for epileptic seizures, AMAG’s Feraheme in Iron Deficiency Anemia, NPS’s Natpara for hyperparathyroidism) and pivotal data readouts (e.g., ALKS’s ALKS 9070 in schizophrenia, INCY’s Jakafi for polycythemia vera, ARRY/NVS’s MEK162 in NRAS melanoma, INCY/LLY’s baricitinib in RA, BMRN’s PEG-PAL in PKU,
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

IMGN/Roche’s Kadcyla in 1L breast cancer, EXEL’s Cometriq in prostate cancer, FOLD’s migalastat in Fabry, ENTA/ABBV’s 3D regimen in Hep C, Boehringer Ingelheim’s nintedanib in IPF, ITMN’s Esbriet in IPF, MACK’s MM-398 in 2L pancreatic cancer, REGN’s alirocumab in hypercholesterolemia, GEVA’s sebelipase alfa in LAL Deficiency, and VRTX’s Phase 3 Kalydeco data in pediatric CF and Kalydeco+VX-809 data in homozygous F508del CF). Clearly these potential catalysts come with risk, and we would stress selectivity, but we do believe that picking the right SMid caps with potential catalysts will be as important in 2014 as it was in 2013. New launch stories should also be an important driver of Biotech performance in 2014. We believe it will be important for the overall performance of the sector that the new launch stories do not overly disappoint and that some of the launches that began in 2013 continue to make strides in 2014. Within our global universe alone, key launches to monitor include PCYC’s Imbruvica, BMRN’s Vimizim, AEGR’s Juxtapid, VVUS’s Qsymia, ARNA’s Belviq, MDVN’s Xtandi, IMGN’s Kadcyla, IRWD’s Linzess, ITMN’s Esbriet, AMAG’s Feraheme, and VRTX’s Kalydeco.

The European View
2013 saw Biotech/SMid-caps continue to outperform Following outperformance in 2012, in 2013 the SMid caps again outperformed, with a c.52% average return vs. the DJ EU up only 16%. Biotech outperformance was driven by:  Positive pipeline news flow, with positive results for Vyvanse in Binge Eating (SHP), Somatuline in non-functioning NET (IPN), and Vimpat monotherapy in epilepsy (UCB).  Regulatory approvals, e.g., Opsumit (ATLN), Brintellix (LUND), Xofigo (ALGETA), Varisolve (BTG), generic Advair (VEC), and Ultibro (VEC).  Business development, e.g. ViroPharma (SHP), Algeta (potential acquisition by Bayer), Therasphere and Ekosonic (BTG). This was only partly offset by:  Pipeline failures: Lifitegrast (SHP), Anyara (ACTI), and Drisapersen (RNA).  Delays for new products reaching the market or sales disappointments: Jetrea (THR). Overall, the European Biotech sector was up 52% YTD, outperforming the DJ EU by 36pp.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Table 7: European Biotech Universe
Ticker Mid-Caps Actelion Ipsen Lundbeck Shire UCB Weighted Average Small Caps Active Biotech Algeta BTG PLC Morphosys Prosensa Thrombogenics Vectura Weighted Average Total SMid-Cap Weighted Avg Pan-Euro DJ STOXX Index
Source: J.P. Morgan Research and Bloomberg.

JPM Rating Neutral Overweight Neutral Overweight Overweight Underweight Overweight Overweight Overweight Neutral Neutral Overweight

Price on 24/12/2013 Sfr € Dkr £ € SEK NOK £ € $ € £ 75.25 33.70 134.30 28.27 53.64 68.50 358.00 5.73 54.74 4.84 17.80 1.39

3-Month Return 18.4% 21.2% 12.1% 13.6% 24.3% 17.3% 8.3% 48.8% 49.2% -4.1% -30.3% -20.3% 23.2% 29.5% 18.1% 3.4%

6-Month Return 42.1% 24.6% 37.3% 41.7% 39.5% 39.7% 55.7% 59.4% 57.2% 48.6% -43.1% 70.4% 48.3% 38.8% 15.3%

YTD 2013 Return 77.7% 49.1% 62.8% 50.7% 23.9% 49.7% 24.5% 131.3% 72.6% 86.8% -57.7% 65.8% 69.6% 52.1% 15.9%

ATLN VX IPN FP LUN DC SHP LN UCB BB ACTI SS ALGETA NO BTG LN MOR GY RNA US THR BB VEC LN

Mid-Caps: Actelion Was the Best Performer
Actelion was the best-performing Mid-Cap, up 77% in 2013 2013 was a very strong year for Actelion, up 77%, largely on the back of US approval for Opsumit (Macitentan) for the treatment of PAH. Whilst Opsumit approval was a significant de-risking event, we don’t believe Actelion achieved a best-case label, and we believe Opsumit sales of more than our $1bn forecast are already priced in at current levels. Lundbeck was a close second to Actelion, up 63% in 2013 2013 was a strong year for Lundbeck with the stock up 63%, driven by US/EU approval of Brintellix (depression) in October 2013, de-risking the eventual return to growth, as well as partnering of ‘054 (Alzheimer’s disease) with Otsuka in March 2013. UCB was the worst-performing Mid-Cap, but still up 24% in 2013 UCB was the worst-performing Mid-Cap, but still up 24% in 2013. The main reason was a perceived lack of significant catalysts in 2013 as investors wait for epratuzumab and anti-sclerostin data in 2015. In addition, a weak 1Q’13 renewed concerns over the ramp of Cimzia and, as a result, despite the approval of new indications we believe investors are likely to prefer to wait for the benefit of the new indications to accrue in the sales trends before assigning value to them.

Small Caps: Active Biotech Was the Best Performer
Algeta was the best-performing Small Cap, up 132% Algeta was up 132% in 2013 driven firstly by the early approval of Xofigo in the US and Europe, then US Xofigo sales significantly ahead of Consensus expectations in 3Q’13 and finally by the NOK362 offer from Bayer to acquire the company, a deal that is expected to close in 1Q 2014. Morphosys was up 87% in 2013 MorphoSys had a very strong 2013 with two major partnerships announced for proprietary programs, the most significant of which was partnering MOR202
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

(multiple myeloma) with Celgene in June 2013. As a result, MorphoSys saw a share price increase of 87%. Prosensa was the worst-performing Small Cap, down 93% from day 1 of trading Prosensa has had a volatile, and ultimately disappointing, year. Prosensa closed the first day of trading, on June 28th, 2013 at $19, rapidly appreciated by 100%, to a peak of $33 by early August, and then fell back down to the $6-7 range, following announcement on September 20th that the company’s only Phase III asset, Drisapersen, had failed to show a statistically significant benefit in DMD.
Figure 15: Mid-Cap 2013 Performance Figure 16: Small-Cap 2013 Performance

Source: Bloomberg and J.P. Morgan.

Source: Bloomberg and J.P. Morgan.

Key Mid-Cap 2014 Pipeline News Flow
Looking out to 2014, we expect performance to be driven by the typical Phase III read-outs and regulatory approvals, and for 2014 we also expect the pace of new launches to be an important driver. Below in Table 8, we summarize the key data points. Key company events  H2 2014: Shire R&D Day (timing tbc), at which we expect management to discuss recent pipeline developments, and upcoming read-outs.  June 2014: Ipsen will hold a Capital Markets Day in June to give details of Christel Bories’ efficiency programs. The day will also provide an update on the company’s business strategy. Regulatory decisions  Q1 2014: Shire – Clarity on the filing of Vyvanse Binge Eating Disorder; key point of caution has been the regulatory challenges, with Vyvanse to be the first drug to be filed for BED, and with FDA requiring cardiovascular studies to support somewhat similar drugs for Obesity; could generate peak sales of $300m. The company could also provide an update on whether Lifitegrast will be discontinued.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

 2H 2014: Ipsen – Approval of Somatuline in the US for functional and nonfunctional NET for Ipsen. Highly anticipated clinical data  1Q 2014: Dysport PIII Next Generation in Cervical Dystonia [Ipsen] – We believe that stability data has the potential to be a positive catalyst and has the potential to substantially boost the growth of the Dysport franchise.  Mar/Apr 2014: Brexpiprazole PIII depression data [Lundbeck] – An asset with attractive risk/reward with $0.9bn potential peak sales, and low expectations.  Mid-2014: Selexipag PIII PAH data [Actelion] – Highly anticipated data point, with the potential to allow growth beyond the Tracleer patent expiry; estimated $0.8bn peak sales.  Q3 2014: Vyvanse PIII in Depression and head-to-head vs. Concerta in ADHD [Shire] – Depression has the potential of $1bn peak sales.  Q3 2014: PDL1 PI in solid tumors [Merck] – In Japanese patients with substantial commercial potential; early stage though competing with other major players in the development race (ROG/AZN/BMS).  Q3 2014: TH302 PIII Soft Tissue sarcoma data [Merck] – $1bn peak sales potential.  2H 2014: Briveracetam PIII in Epilepsy [UCB] – If successful could leverage the existing epilepsy infrastructure; $0.5bn peak sales potential  4Q 2014: Vimpat Mono in EU H2H vs. carbamazepine [UCB] – Could accelerate the growth of this franchise, further enhancing the growth potential of UCB. Under-appreciated/wild-card clinical data points  Q1 2014: Desmoteplase PIII data in Stroke [Lundbeck] – Offering significant upside if positive, but we believe the most likely outcome is failure, based on previously announced mixed data; potential peak sales of $0.4bn.  2H 2014: TASQ Prostate PIII PFS and OS data [Active Biotech/Ipsen] – Given the competitive nature of the mCRPC market we believe that for commercial success tasquinimod will need to show OS benefit in addition to a PFS benefit which is a high hurdle. Legal  H2 2014: Shire/Vyvanse Patent Case – We see very little chance of the five generic challengers (Sandoz, Ameanl, Watson, Roxane and Mylan) successfully overturning Vyvanse composition-of-matter protection. New launches  2014 will see two important EU mid-cap launches, Actelion’s Opsumit for PAH and Lundbeck’s Brintellix for Depression.  Opsumit: 2014 expectations could prove a touch ambitious; our SFr155m forecast is 12% below consensus for 2014, and our SFr355m forecast is 11% below for 2015. We believe the label does look fairly differentiated vs. Tracleer and Letairis, but we don’t expect a rapid European take-off. The success of

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Selexipag Phase III data mid-2014 may be more important than the initial Opsumit launch trajectory.  Brintellix: We believe near-term expectations look too high. Our Brintellix forecasts are c.50% behind Consensus in 2014 (JPMe: DKr341m vs Cons: DKr667m) and c.30% behind Consensus in 2015 (JPMe: DKr1,020m vs Cons: DKr1,474m). We do see a place for Brintellix, but we think it will take time to convince US physicians, particularly with no cognition differentiation on the label, and with Takeda’s salesforce new to depression.  We prefer Shire and Ipsen for 2014, as we don’t see attractive risk/reward around Macitentan and Opsumit launch trajectories.
Table 8: Mid-Cap News Flow Summary
Timing Actelion 11-Feb-14 Mid 2014 1H 2014 2014 Ipsen 27-Feb-14 (est) 1Q 2014 1H 2014 1H 2014 1H 2014 2014 Lundbeck 14-Feb-14 Mar / Apr 2014 Mar / Apr 2014 07-May-14 Mid 2014 Shire 14-Feb-14 Apr ‘14 1Q 2014 2Q/3Q ‘14 3Q 2014 3Q 2014 2H 2014 UCB 26-Feb-14 2H 2014 4Q 2014 1Q 2015 1H 2015 Event Financials Clinical data Clinical data Clinical data Financials Clinical data Clinical data Other Other Clinical data Financials Clinical data Clinical data Financials Clinical data Financials Data presentation Clinical data Clinical data Clinical data Clinical data Legal Financials Clinical data Clinical data Clinical data Clinical data Drug Q4 / FY 2013 results Selexipag Tracleer Letairis (competition) Q4 / FY 2013 results Dysport Next Generation Dysport Restructuring plan Somatuline Tasquinimod Q4 / FY13 results Desmoteplase Brexpiprazole Q1 2014 results Brintellix Q4 / FY13 results Vyvanse Intuniv EU Vyvanse Vyvanse SPD602 Vyvanse Q4 / FY13 results Briveracetam Vimpat monotherapy in EU Epratuzumab Anti-sclerostin Indication PAH PAH PAH CD AULS NF/F-NET mCRPC Stroke Depression Depression BED ADHD MDD ADHD Iron Overload US patent Epilepsy Epilepsy SLE Osteoporosis Impact ↑/↓ ↑↑↑ / ↓↓↓ ↑ / ↓↓↓ ↑ / ↓↓↓ ↑ / ↓↓ ↑↑↑ / ↓↓↓ ↑↑ / ↓ ↑↑↑ / ↓ ↑ / ↓↓ ↑↑↑ / ↓↓ ↑/↓ ↑↑↑ / ↓↓ ↑↑↑ / ↓↓ ↑/↓ ↑↑ / ↓↓ ↑↑/↓↓ ↑↑/↓ ↑/↓ ↑↑↑/↓↓ ↑↑/↓ ↑↑/↓ ↑↑/↓↓↓ ↑↑ / ↓ ↑↑↑ / ↓ ↑↑ / ↓ ↑↑↑ / ↓ ↑↑↑ / ↓↓↓ Comment GRIPHON PIII results COMPASS-2, Tracleer + PDE5 vs. pbo + PDE5, disease progression study AMBITION, Letairis + PDE5 vs. pbo + PDE5, time to clinical failure study Increlex resupply update/Guidance/Smecta generics US Phase III Spasticity trials data to broaden US label Potential announcement of detailed restructuring and cost saving plan Decision on marketing plans for NET in the US Top-line Phase III data in mCRPC PFS & OS 2014 Guidance update PIII headline data from DIAS-3 Phase III data read-out Active controlled cognition data Detailed 2014 guidance, and details on ViroPharma expectations Likely presentation of PIII data at APA medical conference Phase III data, potential EU approval late 2014; PIII SPD503-315 study Phase III data in MDD. MDD – Major Depressive Disorder Phase III H2H data vs. Concerta Phase II data for iron overload, could be a superior product to NOVN’s Exjade We see little chance of SHP losing BRITE trial to confirm efficacy following mixed data previously Vimpat vs. carbamazepine in monotherapy Phase III data from the EMBODY trials in SLE Anti-sclerostin H2H vs. Forteo in Postmenopausal Osteoporosis

Source: Company data and J.P.Morgan estimates. CD: Cervical Dystonia, AULS: Adult Upper Limb Spasticity, NF/F-NET: Non-Functioning/Functioning- Pancreatic Neuroendocrine Tumors, MS; Multiple Sclerosis, mCRC: metastatic colorectal cancer, BED: Binge Eating Disorder, ROP; Retinopathy of Prematurity.

Key Small-Cap 2014 Pipeline News Flow
Key company events  February 28, 2014: Algeta’s FY 2013 results – We will see the latest Xofigo sales update, although the Bayer acquisition may have closed by then.  March 17, 2014: ThromboGenics FY 2013 results – Will disclose the highly anticipated US sales of Jetrea and potential expectations for the 2014 outlook on growth.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

 Q1 2014: Vectura likely Strategy event – Key for management to discuss current business updates and elaborate on upcoming pipeline. Regulatory decisions  1Q 2014: Laquinimod in MS [Active Biotech] – Possible European approval decision.  1H 2014/End 2014: NVA237/QVA149 in COPD [Vectura] – US filing; potential combined US peak sales of only $0.4bn, vs. EU at ex-US at $1.4bn.  Mid-2014: Generic Advair [GSK/Vectura] – Generic Advair launches in EU, following recent Danish approval. We expect further EU approvals in the coming months.  Mid-2014: Drisapersen in Duchene Muscular Dystrophy [Prosensa] – Final decision as to whether Drisapersen can be filed for approval, following failure of DEMAND PIII study in September ’13. Highly anticipated clinical data  Q4 2014: MOR208 PII in ALL data [Morphosys] – An unpartnered potential blockbuster with c.€2bn peak potential.  2H 2014: TASQ Prostate PIII PFS and OS data [Active Biotech/Ipsen] – Given the competitive nature of the mCRPC market we believe that for commercial success tasquinimod will need to show OS benefit in addition to a PFS benefit which is a high hurdle.

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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

Table 9: Small-Cap News Flow Summary
Timing Active Biotech Early 2014 Feb 13th 2014 2014 2014 2014 Algeta 28-Feb-14 22-May-14 2014 BTG 20-May-14 2Q 2014 H1 2014 Nov’14 2014 2014 2014 or beyond Morphosys 5th Mar ‘14 3rd May ‘14 H1 2014 Mid-2014 Q4 2014 Prosensa Early 2014 18th Feb-14 May-14 Mid 2014 Late 2014 ThromboGenics 29-Jan-14 17-Mar-14 22-May-14 28-Aug-14 Vectura 1Q’14 April’14 1H’14 1H’14 2H ‘14 Nov’14 Late 2014 Event Regulatory Financials Trial initiations Clinical data Other Financials Financials Other Financials Regulatory Regulatory Financials Regulatory Regulatory Regulatory Financials Financials Clinical data Clinical data Clinical data Clinical data Financials Financials Regulatory Legal Financials (partner) Financials Financials Financials Analyst Day Financials Regulatory Regulatory Partnering Financials Regulatory Drug Laquinimod Q4 / FY 2013 results Laquinimod TASQ Potential US out-licensing Q4 / FY 2013 results Q1 2014 results Thorium H2 & FY14 results Varisolve DC Bead H1’15 results DC Bead DC Bead Varisolve Q4 / FY13 results Q1 2014 results Guselkumab MOR202 MOR208 Drisapersen Q4 / FY13 results Q1 2014 results Drisapersen Drisapersen Novartis Q4 / FY 2013 result FY 2013 Results 1Q Business Update 1H 2014 Results FY14 results Seebri (NVA237) Generic Advair Generic Flovent (VR506) H1’15 results Ultibro (QVA149) Indication Multiple Sclerosis Multiple Prostate cancer Prostate cancer Impact ↑↑↑ / ↓↓↓ ↑/↓ ↑/↓ ↑↑↑ / ↓↓↓ ↑↑↑ / ↑↑↑ / ↓↓ ↑↑ / ↓ ↑/↓ ↑/↓ ↔ ↑/↓ ↑/↓ ↑/↓ ↑↑ / ↑/↓ ↑/↓ ↑↑/ ↓↓ ↑/ ↓ ↑↑↑/ ↓↓↓ ↑↑↑/↓↓↓ ↑↑↑/↓↓↓ ↑↑↑/↓↓↓ ↑↑/↑↓ ↑↑↑/↓↓↓ ↑↑/↑↓ ↑↑↑/↓↓↓ ↑↑ / ↓↓ ↑/↓ ↑↑ / ↓↓ ↑↑↑ / ↓ ↑↑ / ↓ ↑/↓ ↑↑ / ↓↓ Comment EU approval verdict, we believe non-approval is the likely outcome Low importance, with no product sales to report Huntington’s, Crohn’s, Lupus Nephritis, PPMS PFS and initial OS results from the PIII 10TASQ10 study US partnering will require a strong Overall Survival benefit Xofigo sales update Q4 / FY 2013 results Further licensing/Partnership deals with mAB manufacturers US launch for symptomatic Varicose Veins Korea, final reimbursement decision Japanese, reimbursement China potential approval, submitted in Oct 2012 Partnering

Oncology Varicose Veins Oncology Oncology Oncology US cosmetic, ex-US

Psoriasis and RA Multiple Myeloma ALL DMD DMD DMD COPD COPD Asthma COPD

Phase II read-out Phase Ib/IIa data Phase II data read-out Drisapersen meta-analysis results Verdict on whether meta-analysis is sufficient for approval Verdict if RNA patents can prevent EU launch of Eteplirsen Potential details on progress of Jetrea EU launch including sales details Update on US sales progression & European royalties

Vectura analyst event, expect update on business development activity US filing Further EU generic Advair approvals Potential partnering and US submission US filing

Source: Company data and J.P.Morgan estimates.

Favorite Names
Gilead Sciences – GILD (OW, $100 PT): Meacham
We expect a robust Sovaldi launch; ION data has de-risked the 1Q FDC filing 2014 Outlook: Gilead shares significantly outperformed in 2013 (GILD: +104% vs. NBI: +65%) driven by market-leading clinical data in hep C and leading up to Sovaldi approval in December. In 2014, we expect a robust launch of Sovaldi which will be closely followed across the Street. We expect momentum in hep C to continue on the back of positive data from the ION studies of the fixed-dose combination (FDC) of sofosbuvir + ledipasvir supporting a filing in 1Q14. Indeed, we project peak sales for the hep C business of $8B-plus, which could be quite conservative as it excludes opportunities outside the US and EU. We also expect the
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

oncology pipeline to gain traction in mid-2014 with US and EU approval of idelalisib in iNHL and CLL (US approval in CLL 2H14). While our model does not include idelalisib revenues, we easily can reach peak WW projections of $5B-plus.With continued momentum ahead in hep C and meaningful progress in oncology, we remain Overweight rated on GILD shares, one of our favorite names for 2014. Expect a robust Sovaldi launch: Recall, Sovaldi was approved on Dec 6th for the treatment of GT1/4 (+Peg-IFN/RBV) and GT2/3 (+RBV) hep C. Of note, this includes liver transplant patients and those co-infected with HCV/HIV. Given meaningful improvements over existing therapies (higher cure rates, fewer side effects and shorter duration of treatment), we anticipate a robust launch, particularly in GT2/3 patients. We anticipate use in GT1 patients (potentially off label with JNJ’s simeprevir), but this may largely be restricted to severe patients in urgent need of care, while others will likely wait for the FDC later in 2014. Regulatory filing for FDC on track for 1Q14: Positive data from the phase 3 ION studies were top-lined in late 2013. Recall, 12 weeks of therapy resulted in 95.9% SVR12, but importantly RBV is not needed and an 8-week duration of therapy appears very viable. We expect data from the ION studies to support approval in 2H14, perhaps in late 3Q14. We expect the FDC to be the regimen of choice in GT1 hep C given the convenience of a single, once-daily pill. However, Gilead remains focused on further improving the FDC by replacing ledipasvir with GS-5816, a more potent, next-gen NS5A with pangenotypic activity. Indeed, data from two phase 2 studies (Study 102 and 109) of this combination are expected in 1Q14. Base HIV business continues to grow: The HIV business grew ~11% in 2013 and we estimate growth of 9% in 2014. This is driven by the continued launch of Stribild and to a lesser extent Complera. However, Gilead continues to innovate in HIV with data from two phase 3 trials (Studies 104 and 111) of single-tablet regimens including TAF expected in 4Q14. Idelalisib in iNHL/CLL: Data at ASH 2013 continued to support a compelling clinical profile for idelalisib. Recall, idelalisib is under regulatory review in the US/EU for R/R iNHL (has also been filed in Europe for R/R CLL; Gilead is in discussion with the FDA to finalize a US filing strategy in CLL). We currently do not include idelalisib in our model, but estimate peak WW sales of $5B-plus. Valuation/Risks: Our December 2014 price target of $100 represents 33x our 2014 forecast (large-cap and SMid-cap peers 27x), with total revenues of $13.3B (cons: $14.2B) and non-GAAP EPS of $3.00 (cons: $3.21). Key downside risks include 1) commercial risk to the HIV franchise, 2) failure of Sovaldi to meet Street expectations, and 3) clinical and regulatory risk for the FDC or for idelalisib.

Vertex Pharmaceuticals – VRTX (OW, $100 PT): Meacham
Many CF Catalysts in 2014 2014 Outlook: Vertex had an eventful year as challenges continued for the hep C business that were offset by momentum in CF (VRTX: +75% versus NBI: +65%). As expected, warehousing of hep C patients put significant pressure on Incivek sales that ultimately led to sales force restructuring and sale of OUS royalties late in the year. Importantly, we view this as positive allowing Vertex to focus resources on CF, the company’s key franchise. Indeed, phase 2 data for VX-661 + Kalydeco in April validated the CF strategy in the larger F508del patient population, driving shares meaningfully higher. Looking to 2014, we expect CF momentum to build with
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

phase 3 data for VX-809 + Kalydeco (TRAFFIC and TRANSPORT) in mid-2014 as well as phase 2 data from VX-661 combination studies. With meaningful potential catalysts ahead and a CF business that remains underappreciated, we reiterate our Overweight rating. Key pivotal data for VX-809 + Kalydeco in mid-2014: The phase 3 TRAFFIC and TRANSPORT studies are evaluating VX-809 + Kalydeco in homozygous F508del CF. We expect these studies to support a filing in 2H14 with approval in 2H15, unlocking an additional $2B-plus WW market opportunity in CF (>28K patients). We believe a 3-5% net FEV1 benefit would be viewed favorably and could be further aided by weight gain and fewer pulmonary exacerbations. Kalydeco expectations: In 2014, we project WW Kalydeco sales of $550M, representing growth of 52% y/y, above consensus ($525M or 45% y/y). While G551D is largely penetrated we see opportunity for growth through geographic and label expansion (approval in other gating mutations in mid-2014). Data from a phase 3 trial in pediatric patients and proof-of-concept data in those with residual function (N of 1 study) are expected in 2Q14. Additionally, Vertex intends to meet with the FDA in early 2014 to discuss label expansion in R117H given phase 3 data that was only positive in a subgroup of patients 18 years or older. These labelexpansion opportunities would double the current addressable population of ~2K with G551D. Data from phase 2 VX-661combo studies in 2014: VX-661 is a next-gen corrector that in a phase 2 combo study with Kalydeco showed significant absolute FEV1 improvements of 4.5-4.8% over 28 days in homozygous F508del. As such, a phase 2b study of VX-661+ Kalydeco for 12 weeks in homozygous F508del is expected to begin in 1Q14. However, in the more difficult heterozygous F508del population a dual corrector + Kalydeco strategy will likely be needed. Of note, a phase 2b proof-of-concept study of VX-661 + VX-809 + Kalydeco for 4 weeks in G551D/F508del heterozygotes (>17K patients) is ongoing with data expected in 1Q14. Other pipeline: VX-509 – Longer-term, 24-week data from the phase 2b trial is expected in early 2014. We expect the longer-term data to accelerate partnering the program and advancement into phase 3. VX-135 – Remains on partial clinical hold and Vertex anticipates responding to the FDA in early 2014 with additional data from the daclatasvir combo in 1Q14. We currently ascribe no value to VX-135. Valuation/Risks: Our December 2014 PT of $100 is based on a sum-of-the-parts analysis of the CF business. In 2014 we estimate total revenues of $722M (cons: $734M) and GAAP loss per share of $1.58 (cons: -$2.09). Key downside risks include (1) the failure of VX-809 to receive FDA approval or insufficient data supporting broader adoption or reimbursement; (2) inability of Kalydeco to expand into indications beyond G551D; and (3) slower-than-expected expansion of CF franchise.

NPS Pharmaceuticals – NPSP (OW, $40 PT): Meacham
Gattex to exceed expectations; key catalysts from Revestive and Natpara 2014 Outlook: NPS shares dramatically outperformed in 2013 (+225% vs. NBI: +65%) driven by the combination of a significantly better than expected US launch of Gattex and the company’s strategic shift to reacquire OUS rights to Revestive (brand name for Gattex ex-US) and Natpara. In 2014, we expect continued
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Geoff Meacham (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com

North America Equity Research 06 January 2014

impressive sales results from Gattex in the US, tangible signs of the company executing on the EU launch of Revestive, as well as FDA approval and launch of Natpara for hypoparathyrodism. We believe NPS could pre-announce 4Q top-line results by the J.P. Morgan Healthcare Conference and provide guidance on its FY14 US sales outlook for Gattex. With meaningful potential catalysts for Gattex/ Revestive and Natpara over the next 12 months, including key approvals in the EU and US, we reiterate our Overweight rating. Expect more signs of a successful Gattex launch: At its Analyst Day in early December, NPS indicated that it already met the lower end of its guidance (275-325) for SBS patients on Gattex by YE13. This implied acceleration in the addition of new patients month-over-month, which should address concerns over a potential deceleration after the company’s 3Q13 earnings report. Indeed, the fundamentals of the launch (demand, reimbursement, compliance, discontinuation rates) all remain very positive, in our view. As such, we remain comfortable with our aboveconsensus estimates for FY14 Gattex US sales of $141M (cons: $108M). Ex-US launch of Revestive could beat estimates: 2014 will bring the formal launch of Revestive in multiple countries (Germany and UK for 1H14), as well as on a named-patient basis in France, Turkey, and Brazil. We expect updates throughout the year on the introduction of Revestive throughout Europe, as well as pricing and reimbursement decisions from national payors. Given that our FY14 ex-US estimates are $1 billion in peak sales (we currently forecast global sales of just over $600 million in 2017), and the company is confident there are 3,000-“plus” patients in the US. In recent conversations with investors, key topics related to 1) expectations for 4Q sales/2014 financial guidance, 2) thoughts on the potential competitive threat from the PCSK9 inhibitor class (a rather on-again/off-again issue), 3) the size of the overall market opportunity, 4) expectations on the ex-US launches, and 4) timing around the break-even/profitability inflection point. Regarding the PCSK9s, AEGR recently stressed that it doesn’t expect this emerging class to negatively impact Juxtapid. Rather it believes the commercial investment will bring awareness and help uncover more Juxtapid patients. We are confident in management’s ability to be able to deliver again in 2014. While there is some uncertainty around 4Q sales potential (given restrictive diet around holidays and fewer selling days), underlying market dynamics are promising, in our view, as highlighted by three consecutive post-launch beat-and-raise quarters. Initial scripts from new prescribers are increasing each quarter, and nearly half of these prescribers have added new additional patients. These initial “new” scripts combined with follow-on scripts should continue to drive accelerating top-line growth. Overall, we were encouraged by the Juxtapid launch metrics provided on the last earnings call: patient dropout (said to be