State of the Art in Outsourcing

CROs
State of the Art in Outsourcing
• Despite M&A disruption, long-term outsourcing trends should remain healthy.
Faced with significant patent cliffs (>$110bn worth of drugs off patent by 2015),
ineffective R&D, rising clinical trial costs, and more stringent FDA requirements,
biopharmaceutical companies have increasingly turned to M&A (PFE/WYE,
MRK/SGP, Roche/DNA, etc.), pipeline rationalization, and outsourced research to
control costs and improve operating performance. With new management at the
helm of all major pharmaceutical companies, cost cutting (incl. R&D) is expected to
accelerate with the close of M&A deals over the next several quarters, although we
expect the focus on outsourcing to also increase as companies look to embrace a
more variable cost structure and rebuild anemic pipelines.
• From niche providers to strategic partners. Originally positioned as niche service
providers in the 1970s, contract research organizations (CROs) have expanded
greatly in number and scope, although today the $22bn market for outsourced
research is still under-penetrated (~29% of drug development spending outsourced),
highly fragmented, and in our view ripe for share gains for more nimble and
strategic providers. With expectations for low double-digit industry growth longer
term, we believe that larger and more strategic preclinical and clinical companies,
such as CVD, CRL, ICLR, and PPDI, will be positioned to capture growing share,
driven by economies of scale, more diversified revenue streams, and the financial
flexibility for M&A and asset transfer (i.e. CVD/LLY) at the expense of smaller
CROs.
• M&A, overcapacity, and pricing remain near-term but manageable, challenges.
While companies such as PFE have openly discussed plans for additional R&D cuts
(PFE is cutting at least $1.2bn in R&D as part of the WYE integration, most likely
more), the upshot is that many companies are also embracing a more variable cost
structure, incl. evaluating a broader range of strategic outsourcing opportunities.
Looking at the announced transactions, WYE, MRK, and SGP do little outsourcing
(MRK contracts out ~5% of R&D and began contracting out phase III work a year
ago), and as a result consolidation is likely to prove a tipping point, with a
disproportionate number of projects flowing to preferred vendors (the preferred part
being key, as smaller CROs are often deemed unqualified). MRK and LLY have also
shifted the business model from FIPCO (fully integrated pharmaceutical company)
to FIPNET (fully integrated pharmaceutical network), which places a greater
emphasis on external collaborations.
• We initiate coverage of Covance (CVD, $48.65) and ICON (ICLR, $22.50), both
with an Overweight rating. We believe that best-in-breed CROs will emerge in a
position of strength following the close of major M&A transactions and accordingly
that the best approach is to own both CVD and ICLR, while in the near term we
remain cautious on earlier stage CROs in our universe (CRL, WX) given limited
visibility on a return to early stage funding.
North America Equity Research
16 July 2009
Medical & Life Science
Technology
Tycho W. Peterson AC
(1-212) 622-6568
tycho.peterson@jpmorgan.com
Sung Ji Nam
(1-212) 622-4958
sung.j.nam@jpmchase.com
Abigail Darby
(1-212) 622-6628
abigail.w.darby@jpmorgan.com
J.P. Morgan Securities Inc.
See page 47 for analyst certification and important 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
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2
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Table of Contents
Key Investment Points .............................................................3
CRO Industry Overview ...........................................................4
Understanding Drug Development .........................................9
Preclinical ....................................................................................................................9
Clinical.......................................................................................................................10
Near-term CRO industry challenges..........................................................................18
Other trends to watch.................................................................................................28
Competitive Landscape .........................................................34
Preclinical ..................................................................................................................35
Clinical.......................................................................................................................37
The author acknowledges the contribution of Navneet Chahal of J.P. Morgan
Services India Private Ltd., Mumbai, to this report.

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
Key Investment Points
Underlying CRO trends should remain healthy longer term
Despite the challenges of pharmaceutical restructuring, M&A (Pfizer/Wyeth,
Merck/Schering, etc.), and a difficult financing environment for biotech companies,
the $22 billion market for preclinical and clinical research organizations, or CROs,
remains under-penetrated, fragmented, and ripe for share gains for more nimble and
strategically positioned providers. Reimbursement pressure and pending patent cliffs
(over $110 billion worth of drugs going off patent by 2015) have further exacerbated
the challenge for drug developers, as have the rising costs of clinical trials, although
with new management at the helm of all major pharmaceutical companies, we expect
the shift toward outsourcing will continue. As such, despite the near-term disruption
of R&D cuts, we remain favorably biased on the underlying trends and, longer-term,
toward early stage providers, which should ultimately benefit as capacity utilization
begins to normalize and the pendulum swings back to basic research, although this
may take at least a year, if not more.
Flight to quality expected to continue
Despite near-term headwinds, we believe that the CRO industry remains positioned
for at least 7-8% growth (and potentially low double0digit growth) over the next
several years, with better positioned companies such as Covance, Charles River,
ICON, and PPDI able to capture market share. Key to our thesis is the view that
larger preclinical and clinical CROs will continue to benefit from economies of scale,
diversified revenue streams, strong reputations, and the financial flexibility for M&A
and asset transfer (e.g., Covance/Eli Lilly). As customers move toward more variable
cost structures, we also expect the natural weaning process to accelerate, putting
additional pressure on smaller service providers (MPI, WIL, Pharmanet, PRAI, etc.).
M&A, overcapacity, and pricing remain near-term, but manageable, challenges
While companies such as Pfizer have openly discussed plans for additional R&D cuts
(Pfizer is cutting at least $1.2 billion in R&D as part of the Wyeth integration, most
likely more), the upshot is that many companies are also embracing a more variable
cost structure, including evaluating a broader range of strategic outsourcing
opportunities. Looking at the announced transactions, Wyeth, Merck and Schering do
little outsourcing (Merck contracts out ~5% of R&D and only began contracting out
phase III work a year ago), and as a result consolidation is likely to prove a tipping
point, with a disproportionate number of projects flowing to preferred vendors (the
preferred part being key, as smaller CROs are often deemed unqualified). Merck and
Eli Lilly have also shifted the business model from FIPCO (fully integrated
pharmaceutical company) to FIPNET (fully integrated pharmaceutical network),
which places a greater emphasis on external collaborations.
We initiate coverage of Covance (CVD, $48.65) and ICON (ICLR, $22.50), both
with an Overweight rating
We believe that best-in-breed CROs will emerge in a position of strength following
the close of major M&A transactions and accordingly that the best approach is to
own both Covance and ICON, while in the near term we remain cautious on earlier
stage CROs in our universe (Charles River, WuXi) given limited visibility on a
return to early stage funding.
3

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4
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CRO Industry Overview
Contract research organizations (CROs) provide an increasingly broad range of
research and development services for pharmaceutical, biotech, medical, and
academic customers, including product development and formulation, clinical trial
management, central laboratory services, and data management for regulatory filings
(IND, NDA, etc.).
Drug sponsors typically contract CROs to assist in taking products from early stage
development through trials (preclinical through phase IV), FDA approval, and in
some cases post market surveillance, with the primary value drivers being a shift
from fixed to variable costs and added expertise across select therapeutic areas.
Figure 1: CRO Market Summary
Total R&D
Spend:
~$110 Billion
Research
~$36B
Development
~$74B
Source: Covance. 2008 data.
Development
Spend:
~$74 Billion
Internal
~$53B
Outsourced
~$21.5B
CRO
Industry:
~$21.5 Billion
“Other”
Late-Stage
Development
~$12.4B
Early
Development
~$6.1B
CROs saw the first significant growth wave in the 1980s as pharmaceutical
companies moved to outsource overflow projects, although demand and capacity
utilization (and accordingly, margins) remained volatile.
In 1994 Quintiles became the first public CRO, followed by Parexel and PPD (1996)
and Covance (1997).
Industry demand remained strong for several years until pharmaceutical M&A led to
a wave of cancelled and delayed projects beginning in 2000. With excess capacity, a
number of companies were forced to bid for projects at unprofitable levels, and with
multi-year contracts often in place, the fallout dampened earnings, lowered margins,
and caused multiple contractions well into 2003.
However, the proliferation of specialty pharmaceutical and biotechnology companies
in early 2000s led to a second growth wave for CROs as smaller companies, which
often lacked the full capabilities needed for drug development, began outsourcing an

Tycho W. Peterson
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North America Equity Research
16 July 2009
increasingly broad range of preclinical and clinical projects. At the same time,
pharmaceutical companies began to embrace outsourcing more strategically, as a
means to contain costs and address an increasingly global landscape.
Figure 2: Number of Drugs in Development WW by Biopharmaceutical Companies
No. of Drugs
12000
10000
8000
6000
4000
2000
0
Source: Pharmaprojects.
5930 6046 5889
No. of Drugs in Development
6198 6416
6994
7360 7322 7406
7737
9217
9605
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
No. of Drugs
Today, it is estimated that pharmaceutical and biotechnology companies spend over
$110 billion on research and development ($36 billion on research, $74 billion on
development), of which an estimated $22 billion is outsourced, including $6.1 billion
into early stage and $12.4 billion into late stage development. Given the strong
growth for outsourced services, we expect the market could grow to over $35 billion
in the next 3-4 years.
5

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Figure 3: Total Number of Innovative Drugs Approved (1996-2008)
60
50
40
30
20
10
0
3
53
6
39
7
30
3
35
2
27
5
24
7
17
6
21
5
31
2
4
18 18
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Nature Reviews Drug Discovery, February 2009.
Figure 4: Late Stage Pipeline Remains Light
NMEs BLAs
Source: Pharmaprojects. P = Preclinical; C1 = Clinical Phase I, C2 = Clinical Phase II; C3 = Clinical Phase III; PR = Pre-Registration;
R = Registered; L = Launched; S = Suspended.
At the heart of the CRO industry is a continued focus by biopharmaceutical
companies to improve margins and profitability. While there are some advantages in
time, given that an average drug development campaign lasts 6-8 years, the key
advantage stems from shifting personnel and facilities from fixed to variable costs
and adding services that may not be available in house. Cost savings can be
significant as revenues for an FTE (full time employee) on CRO payroll can average
$183,200 (for Covance, in this case), while within large pharmaceutical companies
the cost/employee can be closer to $400,000. The increasing complexity of clinical
trials, a growing focus on international markets, and greater demand for services
2
16
3
21

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
around safety and post market surveillance have also heightened the appetite for
outsourced research and development.
In areas such as toxicology, surprisingly little business is outsourced today, with
approximately 70% of studies still done within large pharmaceutical facilities.
However, as pharmaceutical and biotech companies consolidate and increasingly
focus on core skills (discovery, strategic development, marketing), the emphasis on
outsourced research should increase, and we expect that outsourcing levels could
ultimately reach 50-60%, driven by top-line pressures (i.e., patent expirations,
emergence of biosimilars), M&A cost synergies, and a lingering commitment to
mature, albeit commoditized research methods, such as combinatorial chemistry. As
shown below, the cost of drug development has also continued to escalate, driven by
more complex trials and surveillance needs, and it is estimated that only two out of
every ten marketed drugs ultimately return revenues that match or exceed the R&D
costs. Generics have also taken a growing share of the market, accounting for 72% of
sales today from 54% in 2003 (source: PhRMA).
Table 1: Drug Development Costs Have Escalated
Cost to develop a drug
2006 $1.318 billion
2001 $802 million
1987 $318 million
1975 $138 million
Cost to develop a biologic
2006 $1.2 billion
Source: PhRMA
The emergence of new technologies, such as computer-simulated modeling and
targeted marketing, which may be easier to buy (i.e., outsource) than build, is also
likely to drive continued adoption of outsourced services, while increasing regulatory
requirements, in particular around post marketing surveillance; the increased
globalization of clinical trials to regions where large pharma has not historically
conducted research; and the emergence of “new” therapeutic areas outside of
historical research are all likely to drive demand for more record keeping and
improved data management going forward.
Table 2: Cost of R&D
Year PhRMA Members Total Industry
2008 $50.3 billion $65.2 billion
2007 $47.9 billion $63.2 billion
2006 $43.4 billion $56.1 billion
2005 $39.9 billion $51.8 billion
2004 $37.0 billion $47.6 billion
2000 $26.0 billion not available
1990 $8.4 billion not available
1980
Source: PhRMA
$2.0 billion not available
Finally, with the dramatic reduction in genetic analysis costs and growing effort by
payers to control costs, pharmacogenomics (i.e., personalized medicine) is expected
to play an increasing role, although it remains early and we do not expect DNA
sequencing to be incorporated into clinical trials for at least another decade. In the
interim, as shown below, an increasing number of approved drugs have genetic tests
associated with use, three of which are now mandated.
7

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Table 3: Some of the Drugs with Companion Diagnostics on the Label
Biomarker Drug Other Drugs Associated with Biomarker
C-KIT expression Imatinibmesylate
CYP2C19 Variants Voriconazole Omeprazole, Pantoprazole, Esomeprazole
diazepam, Nelfinavir, Rabeprazole
CYP2C9 Variants Warfarin
CYP2D6 Variants Atomoxetine Venlafaxine, Risperidone, Tiotropium
CYP2D6 with alternate
Context
Source: www.FDA.gov
bromide, Tamoxifen, Timolol, Maleate
Fluoxetine HCL Fluoxetine HCL, Olanzapine, Cevimeline
hydrochloride, Tolterodine, Tolterodine,
Terbinafine, Tramadol + Acetamophen,
Clozapine, Aripiprazole, Metoprolol,
Propranolol, Carvedilol, Propafenone,
Thioridazine, Protriptyline HCl

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
Understanding Drug Development
Drug development remains a highly risky, time consuming, and expensive affair for
biopharmaceutical companies. Average costs incurred in the development of a drug
run close to $1.3 billion (or $1.2 billion for biologics), and it is estimated that only 1
in 5,000 candidate compounds ultimately make it to market.
Figure 5: The Pharma R&D Process
Pre-discovery
Drug
Discovery
5,000-10,000
Compounds
Clinical Trials
Preclinical Phase 1 Phase 2 Phase 3
250 5
Number of Volunteers:
20-100 100-500 1,000-5,000
FDA
Review
3-6 years 6-7 years ½-2 years
IND
submitted
Source: PhRMA's Pharmaceutical Industry Profile 2009
Figure 6: Understanding the New Drug Development Paradigm
Source: Bain & Company
NDA
submitted
Large-
Scale Mfg
One FDA-
Approved Drug
Preclinical
Preclinical studies involve in vitro (test tube) and in vivo (animal) testing to decide
whether a study drug is reasonably safe to be administered to research subjects (i.e.,
“first in human” studies) and can be advanced as an investigational new drug (IND).
Only after an IND application is approved can a drug enter phase I clinical trials,
although notably 80% of candidate drugs fail during the preclinical development
stage. Together with Phase I studies, early activities account for approximately 25%
9
Phase 4: Post-marketing surveillance
surveillance
surveillance

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of CRO revenues and generally require high fixed costs and, depending on the area,
can be highly profitable. Major services include:
• Toxicology: Services include the determination of safe starting doses, effects on
target organs, reversibility and exposure levels. Studies, 70% of which are still
done in house within large pharmaceutical companies (much greater levels of
outsourcing at biotech), are typically done on animals and cells to determine the
toxicity of a drug and metabolites, with results then extrapolated to human
research subjects (FDA requires that new drug candidates be tested on two
species of animals for safety assessment before a drug can move to human
models). Studies can involve the determination of acute, subacute, and chronic
toxicity, carcinogenicity, mutagenicity, and teratogenicity as well as the effects of
a drug on the reproductive system. Early toxicology work is often done in vitro
on cultured bacteria or cells, while subsequent in vivo studies, which test a drug
on animals (rodents, dogs, primates), are more commonly outsourced to CROs.
Toxicology typically requires an investment in dedicated laboratory space, and a
number of CROs have built facilities that match or exceed in-house capabilities
of major pharmaceutical companies.
• Chemistry: In chemistry studies, factors such as stability, solubility, metabolic
stability, absorption, bioavailability, and compound half life are evaluated. Ease
of manufacturing and formulation are also determined and evaluated before the
clinical trial stage. Other services may include developing a pharmacological
profile and evaluating drug absorption, distribution, metabolism and excretion
(ADME), which are essential to the successful launch of the drug. Chemistry labs
can also serve other industries (agricultural, nutritional) by studying the potential
risk of a compound to humans, analyzing nutritional content, etc.
• Other (research products, laboratory services, etc.): CRO laboratories also
leverage infrastructure and know-how to provide clients with a number of
specialized products and services. Examples include polyclonal and monoclonal
antibody services, validated assays, or purpose bred animals. The creation of such
products, which are used in early stage testing, are typically standardized enough
to be outsourced.
Clinical
• Phase I: Phase I studies involve testing an experimental drug or treatment for the
first time on a small group (20-80 people) of generally healthy individuals, over
the course of six to twelve months to evaluate safety (pharmacovigilance), dosage
and side effects. Because Phase I studies are inpatient trials, they require
significant fixed costs, including overnight facilities for patients and full-time
medical staff (Phase I and IIa trials are often referred to by the broader term of
“clinical pharmacology”). A study of drug pharmacokinetics (what does the body
do to the drug) and pharmacodynamics (what does the drug do to the body) is
also done at this stage, as are labeling studies (drug/drug interaction; food/drug
interaction; etc.)
Phase II and III
Phase II and III studies are the bread and butter of the CRO industry, representing
over 25% of overall industry revenues. Less capital intensive than Phase I, Phase II
studies offer large and lucrative contracts that typically run 2-4 years in length.

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• Phase II: In Phase II studies, a drug/treatment is tested on a group of 100-300
people to study effectiveness and further evaluate safety. Phase II studies can be
divided into Phase IIA (dosage requirements) and Phase IIB (efficacy), and
protocol design is critical as each new study requires unique endpoints,
inclusion/exclusion criteria, and drug administration processes. Designers must
also decide what data to collect, layout of the case report form (CRF), and what
statistical analysis will be used to draw conclusions.
• Phase III: Phase III trials involve testing on larger groups (1,000-3,000 people)
to confirm effectiveness and side effects, weigh against commonly used
treatments, and compile safety information. Following successful completion of
Phase III trials, an NDA/BLA is filed with FDA.
• Phase IV/Post Approval: Phase IV trials involve post marketing studies,
including safety surveillance (pharmacovigilance) to detect rare or long-term
adverse effects. In the event that harmful effects are discovered, drug sales may
be halted or restricted to certain uses.
Figure 7: Biopharma R&D Spend by Stage
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
27.3%
Discovery/
Precli ni cal
7.4%
Source: PhRMA, 2009 Annual Membership Survey
13.0%
28.5%
5.0%
13.4%
5.2%
Phase I Phase II Phase III Approval Phase IV Uncategorized
Industry R&D spending has remained stable, despite macroeconomic backdrop
In 2008 U.S.-based pharmaceutical and biotech companies invested approximately
$65 billion in research and development as compared to $63 billion in 2007
according to PhRMA (Pharma Profile 2009 Report).
Today, there are 2,900 compounds in the U.S. biopharmaceutical pipeline awaiting
FDA review.
11

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Figure 8: Recent BioPharma R&D Spending Trend Has Been Steady
$70.0
$63.2
$60.0
$50.0
$40.0
$30.0
$20.0
$10.0
$0.0
$47.6
$51.8
$56.1
$65.2
2004 2005 2006 2007 2008
Source: PhRMA, Pharmaceutical Industry Profile 2009
Table 4: Top R&D Spenders in 2008
Company 2008 budget ($ in billions)
Roche $8.18
Pfizer $7.95
Johnson & Johnson $7.58
Novartis $7.21
GlaxoSmithKline $6.83
Sanofi-Aventis $6.74
AstraZeneca $5.18
Merck & Co. $4.81
Takeda $4.58
Eli Lilly $3.84
Bristol-Myers Squibb $3.59
Schering-Plough $3.53
Wyeth $3.37
Boehringer Ingelheim $3.11
Amgen $3.03
Genentech $2.80
Abbott $2.69
Bayer $2.57
Daiichi Sankyo $1.89
Astellas Pharma $1.62
Source: PharmaLive.com

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North America Equity Research
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Table 5: Top 20 Biopharma (by R&D Spend in 2008) Drugs Awaiting Approval
Company (2008
R&D in US$bn)
Product Disease/Medical Use Region Type of Drug
Pegasys Hepatitis B Europe Biotechnology Drug Delivery
Xeloda Colorectal cancer Europe Chemical
Roche
MabThera Chronic lymphocytic leukemia Europe Biotechnology
($8.18bn)
Avastin
Renal cell carcinoma, Colorectal cancer,
Breast Cancer
Europe Biotechnology
Tarceva Non-small cell lung cancer Europe Chemical
Lyrica Fibromyalgia Europe Chemical
Pfizer ($7.95bn)
Fablyn
Oporia
Osteoporosis
Vaginal atrophy
United States
United States
Chemical
Chemical
Eraxis Candidemia Europe Biotechnology
J&J ($7.58bn)
Paliperidone Palmitate IM Long Acting Injectable
Comfyde Partial onset seizure
United States
United States
Chemical
Chemical
Certican Organ transplant rejection United States, Japan Biotechnology
Reclast Corticosteroid-induced osteoporosis United States Chemical
QAB149 Chronic obstructive pulmonary disease United States Chemical Drug Delivery
Xolair Allergic Asthma United States Biotechnology
Comtan Parkinson disease Japan Chemical
Galvus Type 2 diabetes United States Chemical
Stalevo Parkinson disease United States Chemical
Novartis
($7.21bn)
Extavia
Tekturna fixed dose combination with Valsartan
Exforge HCT
Multiple Sclerosis
Hypertension
Hypertension
United States
United States
Europe
Biotechnology
Chemical
Chemical
Xolair Allergic Asthma Europe Biotechnology
Aclasta Clinical fracture prevention Europe Chemical
Exelon Patch
Dementia associated with parkinson
disease
Europe Chemical Drug Delivery
Eucreas Diabetes Mellitus Europe Chemical
QAB149 Chronic obstructive pulmonary disease Europe Chemical Drug Delivery
Ilaris Cryopyrin-associated periodic syndromes Europe Biotechnology
Arixtra Acute coronary syndrome United States Chemical
Cervarix Human papillomavirus infection United States Biotechnology Biological
Tykerb Metastatic breast cancer United States Chemical
Requib extended release Restless legs syndrome United States Chemical Drug Delivery
GlaxoSmithKline
($6.83bn)
Votrient
Rezonic
Solzira
Renal cell cancer
Postoperative nausea and vomiting
Restless legs syndrome
United States
United States
United States
Chemical
Chemical
Chemical Drug Delivery
Tyverb Metastatic breast cancer Europe Chemical
Synflorix Streptococcus pneumonia Europe Biological
Avandia
Acute coronary syndrome, Type 2
diabetes progression prevention
Europe Chemical
Multaq Atrial fibrillation Europe, United States Chemical
Ketek Skin and soft tissue infections Japan Chemical
Taxotere Prostate cancer Japan Chemical
Sanofi-Aventis
($6.74bn)
Allegra
Apidra
Allegra ODT
Allergies
Diabetes Mellitus
Allergic rhinitis
Europe
Japan, Europe
Japan
Chemical
Biological Biotechnology
Chemical Drug Delivery
Ciltyri Chronic Insomnia Europe, United States Chemical
Lantus Retinopathy United States Biotechnology
Sculptra Nasolabial fold wrinkles United States Chemical
Symbicort pMDI
Asthma, Chronic obstructive pulmonary
disease
Europe, United States Chemical
Seroquel
Bipolar disorder maintainance, bipolar
depression
Europe Chemical
Seroquel Schizophrenia, acute manic episodes United States Chemical
AstraZeneca Nexium Peptic ulcer bleeding Europe Chemical
($5.18bn)
Nexium
Peptic ulcer bleeding, Duodenal ulcers,
Gastric ulcers
United States Chemical
Iressa Non-small cell lung cancer Europe Biotechnology
Seroquel XR
Generalized anxiety disorder, major
depressive disorder, bipolar depression
Europe, United States Chemical Drug Delivery
Onglyza/Metformin Combination Type 2 diabetes Europe Chemical
Merck & Co.
Arcoxia Rheumatoid arthiritis, Pain United States Chemical
13

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($4.81bn)
Takeda ($4.58)
Eli Lilly &
Co.($3.84bn)
Bristol-Myers
Squibb
($3.59bn)
Schering-Plough
($3.53bn)
Wyeth ($3.37bn)
Boehringer
Ingelheim
($3.11bn)
14
Gardasil
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16 July 2009
Cervical Cancer, Cervical intraepithelial
neoplasia, Vulvar intraepithelial
neoplasia, Vaginal intraepithelial
neoplasia, Genital warts, Vaginal Cancer,
Vulvar Cancer
United States Biotechnology
Gardasil Vaginal cancer Europe Biotechnology
Isentress HIV Infection United States Chemical
Basen Impaired glucose tolerance Japan Chemical
Actos Diabetes Japan Chemical
Takepron Gastric Ulcers Japan Chemical
Alogliptin Type 2 diabetes Europe, United States Chemical
Alogliptin Diabetes Mellitus Japan Chemical
Ramelteon Insomnia Japan, Europe Chemical
Enantone 6-Months Depot Prostate cancer Europe Chemical
Vectibix Colorectal cancer Japan Biotechnology
Blopress fixed-dose combination with Amlodipine
Hypertension Japan Chemical
besylate
Alimta Non-small cell lung cancer Europe, United States Chemical
Cialis Pulmonary arterial hypertension Europe, Canada Chemical
Cymbalta Chronic pain United States Chemical
Forteo Osteoporosis United States Biotechnology
Arxxant Diabetic retinopathy United States Chemical
Zyprexa Schizophrenia United States Chemical
Prasugrel Atherosclerosis United States Chemical
Humalog ILPS Diabetes United States Biotechnology
Exenatide Type 2 diabetes United States Chemical
Onglyza Type 2 diabetes United States, Europe Chemical
Iscover Atherothrombotic events Europe Chemical
Ixempra Kit Breast cancer Europe Biotechnology
Ixabepilone Breast cancer Europe, Japan Biotechnology
Peglntron Malignant melanoma United States
Biotechnology Drug Delivery
Biological
Asmanex Asthma Japan Chemical Drug Delivery
Noxafil Fungan Infections United States Chemical
Golimumab
Psoriatic Arthiritis, Ankylosing spondylitis,
Europe Biotechnology
Rheumatoid arthiritis
Saphris Acute mania, Schizophrenia United States Chemical
Sugammadex Neuromuscular blocker United States Chemical
Remeron Depression Japan Chemical
Fertavid Infertility Europe Biotechnology Biological
Sycrest Schizophrenia, Bipolar I disorder Europe Chemical
Viviant Postmenopausal osteoporosis United States Chemical
Prevnar 13 Pneumococcal disease United States, Europe Biological
Pristiq Vasomotor symptoms United States Chemical
Enbrel Psoriasis Europe Biotechnology
Mylotarg Acute myeloid leukemia Europe Biotechnology
Torisel Mantle cell lymphoma Europe Chemical
Conbriza Osteoporosis Europe Chemical
Xeristar Fibromyalgia Europe Chemical
Aptivus Oral Solution HIV supression Europe Chemical
Mimpara Hyperparathyroidism Europe Chemical
Amgen
($3.03bn)
Denosumab
Nplate
Bone loss, Postmenopausal osteoporosis
Blood disorder treatment
United States, Europe,
Canada
Canada
Biotechnology
Biotechnology Biological
Enbrel Psoriasis United States Biotechnology
Genentech Avastin Breast cancer, Renal cell carcinoma United States Biotechnology Biological
($2.80bn) Tarceva Non-small cell lung cancer United States Chemical
Humira Juvinile rheumatoid arthritis Europe Biotechnology
Abbott
Certriad Mixed dyslipidemia United States Chemical
($2.69bn)
Flutiform Asthma United States Chemical Drug Delivery
Vicodin CR Pain United States Chemical Drug Delivery
Bayer ($2.57bn) Visanne Endometriosis Europe Chemical
Menostar Vasomotor symptoms Europe Chemical Drug Delivery
Avelox Pelvic inflammatory disease Europe Chemical
E2/LNG Menopausal symptoms Japan Chemical

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
Daiichi Sankyo
($1.89bn)
Astellas Pharma
($1.62bn)
North America Equity Research
16 July 2009
Magnevist MRA Magnetic resonance angiography Japan Chemical
EOB Primovist Liver magnetic resonance imaging Japan Chemical
DUB-OC Prevention of pregnancy United States Chemical
Rivaroxaban Venous thromboembolism Canada Biotechnology
Sevikar Hypertension Europe Chemical
Feron Hepatitis C Japan Biotechnology
CS-866AZ Hypertension Japan Chemical
Levofloxacin High-Dose Bacterial Infection Japan Chemical
Telavancin
Complicated skin & skin structure
United States Chemical
infection, Hospital acquired pneumonia
YM617 Lower urinary tract syndrome Japan Chemical
YM086 Type 2 diabetic nephropathy Japan Chemical
Prograf Ulcerative colitis Japan Chemical
Protopic Atopic dermatitis Europe Chemical Drug Delivery
YM177 Low back pain, shoulder periarthritis Japan Chemical
Advagraf Organ transplant rejection Europe Chemical Drug Delivery
Nateglinide Type 2 diabetes Japan Chemical
Modigraf Organ transplant rejection Europe Chemical
Qutenza Post-herpetic neuralgia Europe Chemical Drug Delivery
Source: PharmaLive.com
Figure 9: Most Active Therapeutic Categories Awaiting Approval
# Investigational Drugs
80
70
60
50
40
30
20
10
0
Source: PharmaLive.com
78
43
Cancer Drugs Anti-Infectiv e
Agents
32 32 32
Diabetes drugs GastroIntestinalPsy
chotherapeutic
Drugs
Agents
Therapeutic categories
Although drug sales have held, patent expirations loom
Despite a firm market for drug sales, pharmaceutical companies continue to grapple
with sizable headwinds that threaten both pricing and profitability. Specific
challenges include:
• Competition from generic products, which can account for half of drug sales in
major markets
• Patent expiration of major branded products, which need to be replaced by new
revenue streams (see following table)
• Increasingly complex clinical trials and regulatory approval processes, coupled
with shorter exclusivity windows, that challenge profitability of new drugs
15

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
16
North America Equity Research
16 July 2009
• Hostility over end-user costs from government and managed care plans, a threat
to pricing power and profitability
As shown below, patent expirations within the biopharmaceutical industry are one of
the most significant challenges, with over $110 billion in drugs going off patent by
2015.

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
Table 6: Major Drugs Coming Off Patent (2009-2015)
Key Drugs
Amgen
2008 Revs
($ in millions)
Patent expiration
Enbrel $3,598 2009
Neulasta $3,318 2015
Anaresp $3,137 EU: 2010
Epogen $2,456 US: 2012, EU: Expired
Neupogen $1,341 US: 2013, EU Expired
Total
Astra-Zeneca
$13,850
Seroquel $4,452 2012
Symbicort $2,004 2013
Arimidex $1,857 2010
Atacand $1,471 2011
Total
Bristol Myers
$9,784
Plavix $5,603 2012
Avapro $1,290 2012
Sustiva $1,149 2013
Total
Eli Lilly
$8,042
Zyprexa/Zyprexa LAI $4,696 2011
Evista $1,076 2012
Gemzar $1,720 2013
Cymbalta $2,697 2014
Yentreve (Duloxetine SUI) $25 2014
Total
Genentech
$10,213
Rituxan $2,587 5,677,180 in 2014; 5,736,137 in 2015; 2013 in EU
Total
Genzyme
$2,587
Cerezyme $1,239 Manufacturing Patent – 2010; Composition of Matter Patent -2011
Total
Gilead
$1,239
Hepsera $341 2014 in US; 2011 in EU
Total
GlaxoSmithKline
$341
Valtrex $645 2009
Lamictal $500 2009
Avandia $435 2012
Imigran / Imitrex $371 2011
Boniva $128 2012
Total
Merck
$2,078
Singulair $4,336 2012
Cozaar/Hyzaar $3,557 2010
Primaxin $744 2009
Maxalt $530 2012
Crixivan $275 2012
EMEND $264 2013
Total
Novartis
$9,706
Diovan $5,740 2012
Zometa $1,342 2012
Femara $1,129 2011
Sandostatin $1,123 2013
Total
Pfizer
$9,334
Lipitor $12,401 2011
Celebrex $2,489 2014
Viagra $1,934 2012
Xalatan/Xalcom $1,745 2011
Detrol/LA $1,214 2012
Geodon $1,007 2012
17

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
18
North America Equity Research
16 July 2009
Caduet (Norvasc+Lipitor) $589 2011
Relpax $350 2013
Total $21,729
Roche
Cellcept $2,266 2009
Xeloda $1,307 2013
Total $3,573
Sanofi Aventis
Plavix $4,176 2011
Taxotere $1,382 2010
Eloxatin $916 2010
Ambien $563 2009
Actonel $224 2013
Total $7,261
Schering-Plough
Temodar $1,002 2014
Clarinex $789 2007 US; EU 2011
Puregon/Follistim $576 2015 US; EU 2H 2009
Avelox $376 2011
Integrilin $314 2015
Caelyx $296 2010
Implanon $151 2009
Total $3,504
Wyeth
Zosyn/Tazocin $1,264 2009
Effexor XR $3,928 2010
Protonix $806 2011
Rapamune $376 2012
Tygacil $216 2013
Torisel (Temsirolimus) $118 2014
Total $6,709
Source: Phrma; Company reports.
Assuming that pharma R&D growth drops to 3-5%, which we feel is a logical floor
given the need to replenish anemic pipelines, outsourcing – which had been growing
100 bps a year – could still increase 200 bps, bringing the total level of outsourced
work to 39% by 2013. As such, the CRO industry should be positioned to grow at
least 7-8% on the top line for the next several years, while Covance and a few select
others can likely continue to capture share from smaller, more fragmented
competitors.
As a reminder, approximately 29% of dollars spent in development today are
outsourced, and this is expected to continue growing, although we do not expect
penetration to reach significantly more than 60-65%, given that biopharmaceutical
companies still need in-house management to oversee CRO contracts, create study
protocols, make strategic go/no-go decisions, etc.
A better way to look at the market potential, in our view, is to look at the number of
projects outsourced. Today, 40-50% of preclinical GLP projects are outsourced, and
we expect this could reach closer to 80-90% longer-term. While some companies,
such as Eli Lilly, now outsource 100% of GLP work (small/mid-cap biotech
companies often outsource close to 95% in some cases), others such as Merck and
Wyeth outsource less than 5% of projects, something that could increase dramatically
given that pending integrations are likely to force a broader strategic overhaul.
Near-term CRO industry challenges
Despite favorable longer term trends for the CRO industry, the group has faced
challenges in recent years, something reflected by stock performance over the past

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
year. As shown below, performance for a basket of CROs (CVD, ICON, PPDI,
PRXL, KNDL, CRL) has tightened somewhat relative to the S&P, while for
pharmaceutical companies (SGP, PFE, MRK, LLY, BMY, WYE) the correlation has
historically been fairly tight.
Figure 10: Relative Stock Performance: Average CRO vs. Pharma vs. S&P 500 (06/00-06/09)
800
700
600
500
400
300
200
100
0
Jun-00
Oct-00
Feb-01
Jun-01
Oct-01
Feb-02
Jun-02
Oct-02
Feb-03
CRO
Jun-03
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
Oct-05
Feb-06
Jun-06
Oct-06
CRO Pharma S&P 500
Pharma
S&P 500
Feb-07
Jun-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Source: FactSet. CRO Index includes CRL, CVD, ICLR, KNDL, PRXL, and PPDI. Pharma index includes BMY, LLY, MRK, PFE, SGP
and WYE.
Figure 11: Forward P/E: Average CRO vs. Pharma vs. S&P 500 (10/00-06/09)
60.0x
50.0x
40.0x
30.0x
20.0x
10.0x
0.0x
Oct-00
Feb-01
Jun-01
Oct-01
Feb-02
Jun-02
Oct-02
Feb-03
Jun-03
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
Oct-05
Feb-06
Jun-06
CRO Pharma S&P 500
Oct-06
Feb-07
CRO
Pharma S&P 500
Source: FactSet. CRO Index includes CRL, CVD, ICLR, KNDL, PRXL, and PPDI. Pharma index includes BMY, LLY, MRK, PFE, SGP
and WYE.
Jun-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
19

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
20
North America Equity Research
16 July 2009
Pharma restructuring/consolidation
As mentioned previously, low visibility around pharmaceutical R&D plans remains a
significant headwind in the near term, with pending M&A transactions expected to
involve significant cost savings, likely exceeding initial targets.
Table 7: Biopharmaceutical M&A Transactions Announced in 2009
Month Deal Size
January Pfizer/Wyeth $66.7 billion
January GSK/UCB $670 million
February Lundbeck/Ovation $900 million
March Merck/Scherin gPlough $42 billion
March Gilead/CV Therapeutics $1.3 billion
Source: In Vivo (May 2009)
The following table highlights some of the initial anticipated cost synergies from
announced M&A transactions, while Table 9 highlights restructuring initiatives
disclosed over the past year.
Table 8: Expected Synergies from Pending M&A Deals
Expected Total Synergies Expected SG&A Savings Expected R&D and Manufacturing
Savings
PFE/WYE ~$4bn - 50% in first 12 months, 75% in first ~50% from SG&A Combined R&D and Manufacturing
24 months, 100% in first 36 months
savings ~50%
SGP/MRK ~$3.5bn cost savings expected beyond ~60% from Marketing & ~40% from R&D and Manufacturing
2011: 50% in first yr, 75% in first 2 yrs. Administration
combined
RHHBY/DNA Pretax savings of ~$750-850mm/yr NA NA
Source: Company reports

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
Table 9: Top pharma R&D and outsourcing strategies
2008 Revenue /R&D
Company expense Latest corporate / R&D strategy Latest on Outsourcing
Abbott $29.5bn (57%
Annual Shareholders Meeting (April 24, 2009)
pharma)/$2.7bn
“We continue to invest at a high rate to build our diverse R&D pipeline.
With our nine new product launches last year alone, we’re now focused
on our early- to mid-stage opportunities, where we’ve seen productivity
improvements, and have nearly doubled our Phase I and Phase II
starts. Many of the compounds in pharmaceutical pipeline represent truly
novel science and, if successful, would result in significant advances in
treatment for patients.”
Baxter $12.3bn (44%
Annual Meeting of Shareholders Presentation (May 5, 2009)
BioScience)/$868mm -- Accelerated R&D spending to historic level in 2008: 1) Received
approval and launched an array of new products, 2) Initiated 8 Phase III
clinical trials, and 3) Advanced numerous early-stage internal programs
-- R&D Spending 2005 – 2008 = CAGR 18%
2008 Annual Report
-- (Baxter) continues to invest to support the company’s ongoing strategic
focus on R&D with the expansion of research facilities, pilot
manufacturing sites and laboratories.
-- (Baxter) also plans to continue to pursue business development
initiatives, collaborations and alliances as part of the execution of its
long-term growth strategy.
AstraZeneca $31.6bn/$5.2bn June 2009 presentation
June 2009 presentation
-- Restructuring benefits of $2.5bn by 2013; reduction of ~15,000 positions -- Clinical data outsourcing of 82 studies
when completed, incl. R&D headcount reduction of 1,400 when completed Activities in drug discovery/development
-- Investment in externalization (40% of product portfolio in 2009 is -- Forms JV (initially for 5 years) with Jubilant Biosys (Indian
in-licensed, from 15% in 2005) and biologics (25% of product portfolio in subsidiary of Jubilant Organosys), which will develop
2009 vs. 2% in 2005) delivering results
preclinical candidates in return for research funding, milestone
-- Enhanced capabilities in Biologicals (incl. expanding external strategic payments and royalties (May 2009)
opportunities), balanced with reduction in selected small molecule areas -- Extends previous agreement with WX ($14mm, 2-yrs) for
-- “Faster, Leaner, Better”
high throughput screening services for another three years
*Preclinical and Phase I on target for 2010 speed with increased
(June 2008)
volumes and decreased cost
Activities in data management
*Focus on Phase II in 2009
-- Spent ~$12mm in 2008 for electronic clinical data
Financial Times Interview with CEO David Brennan (April 17, 2009)
management system from Medidata
-- “Our view is more oriented toward collaboration than
-- 5-yr deal with Cognizant for maintenance services of
consolidation. If there were acquisition opportunities for AstraZeneca, research, clinical development, sales and marketing (Oct
they would be in the small company, product, technology side of things, 2008)
not a large-scale transaction to take out capacity. That's not what we're -- $95mm, 5-yr deal with Cognizant for a range of data
looking for.”
management services for global clinical development
programs (March 2008)
Bristol- $20.6bn/$3.6bn May 27, 2009 presentation to investors
May 27, 2009 presentation to investors
Myers
-- BMY is more focused – Biopharma is 86% of revenues
-- Various outsourcing initiatives underway (HR, IM, R&D,
Squibb
-- Biopharma headcount is down 14% to about 30,000
Finance)
-- Focus on productivity: $2.5bn in savings initiatives underway (introduced IT outsourcing
in Dec 2007)
-- $715mm, 7-yr agreement with EDS for streamlining global
-- Plans to reduce 27 manufacturing plants by ~50%
IT (Dec 2007)
-- Procurement – vendor consolidation and terms
-- $324mm, 10-yr agreement with IBM for HR functions across
-- Rationalizing:
the globe (Jun 2008)
*155 focused markets in 2007 to 63 in 2011
-- $550mm, 10-yr contract with Accenture for IT and financial
*212 products in 2007 to 92 products in 2011
*6,550 mature brand SKUs to 2,450 SKUs in 2011
support services (Sept 2008)
21

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
22
North America Equity Research
16 July 2009
Eli Lilly $20.4bn/$3.8bn Investor presentation (December 11, 2008)
-- Transitioning from FIPCO (functional outsourcing, Indiana-centric,
centralized decision making, LLY funds, absorbs all risk, control) to:
-- FIPNet:
*Integrated global capacity (continued outsourcing with greater
coordination)
*Global portfolio network
*Common R&D goals, local execution
*Shared risk/reward
*Variety of deal structures, coordination mechanisms
Outsourcing-pharma.com (March 2008)
-- Works with over 80 contractors to perform various functions across its
business
-- 20% of manufacturing and sales, and 40% of IT work outsourced
-- Expectation to outsource up to half of its preclinical and clinical R&D by
2010
GlaxoSmith
Kline
Johnson &
Johnson
$45.1bn/$6.8bn (1) Releasing resources to invest in growth (February 5, 2009 investor
presentation)
-- Simplifying manufacturing network; announced closure of 12 sites since
2006
-- US sales force restructure results in 1,450 headcount reduction in 2008
-- Reducing infrastructure in R&D; announced planned closure of 3
UK R&D sites in the past 2 years
-- R&D strategy
*Diversify and de-risk through externalization (acquisition of platform
technologies, assets, academic collaborations)
*Focused and cost-effective development (~30 assets in Phase III /
registration)
*Overall reduction of 36% internal discovery projects (exited urology,
GI, hypertension)
*Rebuilding portfolios internally and externally (ophthalmology,
sirtuins)
March 2008 announcement
-- Opens first pilot plant in Singapore ($82mm facility) for design of
$63.7bn (39% pharma)
/$7.6bn
manufacturing processes
Pharmaceutical Business Review, June 4, 2009
-- Portfolio expansion through licensing and acquisitions, establishing
collaborations, creating new partnerships in emerging regions
-- Strategy for Pharmaceutical R&D: (1) focus on end-to-end, research
to market approach in five therapeutic areas, (2) combine internal
innovation with external innovation (academic, biotech, govt, consortia),
(3) embed customer, physician, and payor insights, and (4) leverage
broad-based expertise and global capabilities
-- Building capabilities in Asia: (1) chemical pharmaceutical facility
launched in Mumbai, (2) expanding network in China, and (3) expanding
clinical development in Japan
Contract research
-- Cardiovascular R&D collaboration with Zydus, an Indian
company, for up to six years and $300mm in milestone
payments as well as royalties on future commercial products.
Zydus to carry out up to Phase II. (March 2009)
-- ICON to manage all of Lilly’s clinical data outside the US
and Japan (in more than three dozen countries) (Nov 2008)
and clinical trial site set up and monitoring in Europe (>$50mm
value, June 2009)
-- Expands drug discovery collaboration with India’s Jubilant
targeting oncology, metabolic diseases, cardiovascular and
diabetes (up to Phase II) (Oct 2008)
-- Covance buys Lilly’s 600K sq ft Greenfield lab facility in
Indiana (preclinical toxicology and other early-stage drug
discovery work) for $50mm, and receives $1.6bn in drug
development contracts over 10-yrs. (Aug 2008)
-- Quintiles to conduct all of Lilly’s clinical trial monitoring work
in the U.S. and Puerto Rico, as well as Phase III development
for two lead molecules in Alzheimer’s disease program (Aug
2008)
-- i3 to conduct the majority of Lilly’s data management work in
the U.S. (Aug 2008)
-- BioConvergence to provide global materials management
services over 10-yrs (March 2008)
-- India’s Suven to conduct preclinical research of CNS
therapeutic category for up to $23mm per small molecule
candidate, and potentially additional research funding and
royalties (March 2008)
-- India’s NPIL to carry out early clinical development, in a deal
worth up to $110mm (Feb 2008)
July 1, 2009 announcement
-- Multi-million dollar clinical trial services contract with Phase
Forward for licensing and study support services, and data
hosting over a multi-year period
Preclinical services
-- Expands R&D services with WX, which now incl discovery
biology, chemical and analytical development services,
formulation, and preclinical and bio-analytical services, in
addition to discovery chemistry (Oct 2008)
-- €1bn deal with Galapagos to discover and develop five or
six first-in-class joint arthritis drugs (Jan 2008)
Activities in data management
-- Spent ~$11mm in 2008 for electronic clinical data
management system from Medidata
Contract manufacturing
-- Canada-based Draxis to produce >60 of J&J’s non-sterile
specialty semi-solid products for the US market. Deal worth up
to $120mm over 5 yrs.

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
Merck /
Schering-
Plough
MRK: $23.9bn / $4.8bn
SGP: $18.5bn / $3.5bn
North America Equity Research
16 July 2009
May 28, 2009 investor presentation
-- Enhance R&D efforts and pipeline: Add high potential early-, mid-and
late-stage pipeline candidates to provide platform for sustainable
growth (Double the number of Merck Phase III candidates to 18)
-- Expanded global presence: Dramatically accelerated Merck's
international growth efforts, especially in key emerging markets
-- Substantial synergies beyond 2011: $950mm MRK standalone, $1.5bn
SGP standalone, $3.5bn merger synergies
March 9, 2009 MRK/SGP transaction presentation
-- Enhance financial flexibility to invest in promising drug candidates as
well as external R&D
Novartis $41.5bn / $7.2bn March 18, 2009 Investor presentation
-- Portfolio strengthened with targeted acquisitions and strategic
investments: 25% stake in Alcon, Speedel, Protez, Nektar’s pulmonary
business
January 28, 2009, 2008 Annual Results presentation
-- Achieved $648mm in cost savings and reduced headcount by 2,372 in
the Pharma division in 2008
Pfizer /
Wyeth
PFE: $48.3bn / $7.9bn
WYE: $22.8bn / $3.4bn
JPM Pharma team meeting with management (June 18, 2009)
-- Pfizer’s new business structure includes changes to the view of R&D
with internal and external R&D dollars now being evaluated as
interchangeable. Effectively, the company’s new business unit structure
incentivizes unit heads to seek out new revenues regardless of whether
they are internally or externally sourced.
May 19, 2009 presentation to investors
Biopharmaceutical Research following Wyeth closing
-- Two Research Groups (PharmaTherapeutics and BioTherapeutics)
delivering positive Proofs of Concept for the Business Units across key
therapeutic areas
-- Operational design ensures collaboration with Business Units and
between PharmaTherapeutics and BioTherapeutics
January 2008 announcement
-- $25mm, Five-year, ‘innovative” research collaboration with Washington
University (St. Louis) for immuno-inflammatory diseases. Pfizer and
Washington Univ will jointly carry out research projects
Facility divestitures
-- UPS acquires 200K sq ft of pharmaceuticals and vaccines
distribution and logistics space and will provide significant
portion of distribution and package transportation needs (Jan
2009)
-- PPDI buys 130K sq ft vaccine testing and assay
development lab, incl >80 staff members, and will provide
assay development and immunogenicity testing services as
well as central lab and sample storage services to MRK for
five years (Jan 2009)
-- Divests API plant to PRWT Services incl 400 employees.
API supply contract with PRWT is roughly $100-$200m
annually for five years (Jan 2008)
Preclinical offshoring
-- Ranbaxy is responsible for new anti-infective drugs (up to
Phase IIa), and could receive over $100mm for each target
from the collaboration, in addition to royalties and up-front
payment (May 2008)
-- NPIL is responsible for entire process of oncology (2
targets) drug discovery to clinical studies for up to $175mm
per target in milestones and royalties, and MRK will have the
option to advance most promising candidates into late stage
trials and commercialization (Nov 2007)
Research collaboration
-- Morphosys to create antibodies against Novartis targets.
Deal could be worth >$1bn, with guaranteed payment of
$600mm in technology access fees and research funding (Dec
2007)
Contract development and manufacturing
-- Lonza to co-develop and manufacture Novartis’ biological
pipeline (July 2008)
Contract sales
-- PDI, contract sales organization, will supply 100 sales reps
for an unidentified Novartis product over four years (April
2008)
Contract research (PFE)
-- Signs 3-yr contract with WX, which will conduct ADME
assay for in vitro screening compounds WX synthesizes for
PFE (Nov 2008)
Contract manufacturing (PFE)
-- Sells production facility in Latina, Italy (450 employees) to
Haupt Pharma. Haupt will manufacture for PFE on a contract
basis. (Feb 2009)
-- Hovione (Portuguese CMO) buys PFE’s Cork, Ireland
production plant, and will carry out manufacturing for PFE. 70-
80 of the 230 employees to be kept. (Dec 2008)
Contract sales
-- NovaMed to serve as distribution and promotional partner
for six of PFE’s oncology products throughout China (July
2008)
23

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
Roche /
Genenetch
Sanofi
Aventis
24
Roche:
$42.3bn / $8.2bn (2)
DNA:
$13.4bn / $2.8bn
North America Equity Research
16 July 2009
Roche 2008 Business Report
-- “Over the last 18 months Roche Pharmaceuticals has decentralized the
management of its R&D projects by creating five Disease Biology Areas).
The Oncology, Viral Diseases, Inflammation, Metabolic Diseases and
Central Nervous System DBAs set priorities and make portfolio decisions
for their specific diseases. This is already helping to streamline the
research portfolio and is expected to increase the number and quality of
programmes being advanced into clinical development.”
-- “The (Diagnostic) division is also using know-how to support
pharmaceuticals R&D at Roche – for example, by helping in the search for
relevant biomarkers. These could accelerate the development of important
drugs and in some cases might yield companion diagnostics enabling
more targeted therapy.”
-- “Licensing and targeted acquisitions play an important role in
strengthening Roche’s R&D portfolio and expanding the company’s
technology capabilities. In 2008 Roche Pharmaceuticals signed a total
of 57 new agreements, including seven product transactions and 43
research and technology collaborations.”
$40.6bn / $6.7bn (3) Investor presentation (May 19, 2009)
"R&D transformation process is ongoing”
-- Conduct a detailed objective review of our R&D pipeline
-- Redefine investment decision making process
-- Reallocate resources to external R&D partnerships (e.g. BiPar
acquisition)
-- Focus R&D strategy on key technologies and disease areas
-- Implement new R&D organization to encourage innovation
-- 4 Phase II and 4 Phase III projects discontinued since Feb 11, 2009
-- 6 Phase I projects also discontinued in the recent portfolio review
-- Going forward, a complete R&D pipeline review will be conducted
regularly by newly-created “Portfolio Management Group”
-- Expecting a low single digit decline of the R&D spend at constant
exchange rates in 2009
-- Accelerating R&D partnerships & alliances to expand access to
new technologies and enrich our portfolio with innovative
compounds in all stages of development
Source: Company reports; Outsourcing-Pharma.com (1) Used GBP/USD 2008 average exchange rate of 1.8524. (2) Used CHF/USD 2008 average exchange rate of 0.9265. (3) Used EUR/USD
2008 average exchange rate of 1.4712.
Biotech financing environment
Another challenge for the CRO industry has been the dramatic decline in biotech
financings throughout 2008 and 1H09, something that has been noted in recent calls
by both Charles River and Covance.
In 2008 Covance derived 10% of revenues from emerging, VC-backed biotech
customers. While such clients were hit particularly hard during the credit crisis and
are just now showing early signs of resurgence, larger biotech clients (Amgen, etc.)
and smaller self-funded biotech companies have remained more stable customers.
Table 10: U.S. Biotech Financings 2006-08
2006 2007 2008
($mm) Total Total Q1'08 Q2'08 Q3'08 Q4'08 Total
IPOs 920 2,041 6 0 0 0 6
Follow-ons 5,766 6,311 701 312 693 20 1,726
PIPEs 2,027 1,818 370 203 308 197 1,078
Debt 13,978 6,749 1,622 360 408 434 2,824
VC 4,236 4,445 837 1,007 1,085 1,246 4,175
Other 425 611 20 226 20 28 294
Partenering 19,796 23,365 3,091 4,141 2,962 9,829 20,023
Total (ex-Partenering) 27,352 21,975 3,556 2,108 2,514 1,925 10,103
Total 47,148 45,340 6,647 6,249 5,476 11,754 30,126
Source: Burrill & Company

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
Overcapacity and pricing pressure
Following a period of high capital investment in 2007-2008, overcapacity has
emerged as another significant challenge for many CROs, in particular, for smaller
companies (such as MPI) that do not have the financial cushion to absorb lower
utilization.
Today, we estimate that there could be as much as 20-25% excess physical capacity
in certain parts of the preclinical market, such as toxicology, which has led to
significant discounting by some CROs, sometimes as much as 30-40%. For Covance,
we estimate that roughly one-third of the toxicology business has faced pricing
pressure in one form or another, while two-thirds of the business is dedicated space
and therefore is not impacted. Other areas, such as Program Management, are less
impacted given that few companies have full capabilities in this area.
At this point, capacity additions, which can involve both “built” and “built and
staffed” facilities, appear to be largely done, and a number of companies, including
Charles River, are actively working to downsize and shutter redundant facilities (MPI
recently terminated 25% of the staff at the Ann Arbor, MI facility, for example).
Going forward, we expect pricing to stabilize as capacity is worked out of the
system, although this could take several quarters, if not longer. As discussed below,
we also expect additional capacity transfers from large pharmaceutical companies
(akin to the Covance/Lilly deal) given the focus on pipeline rationalization and
expense control, although companies such as Covance remain price sensitive and
may only do such deals if there is a clear pathway to accretion and significant tail of
business.
25

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
Table 11: Key Capacity Additions - Full Service CROs
Full Service CROs
26
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16 July 2009
Key ►Pre-Clinical Facility ■Clinical Facility ♦ Central Lab Facility ● Other
CVD
Quntiles
Region
North America Europe Asia
LatAm and Other Emerging
► May 24, 2007: Opens 21,000 sq. ft. ABSL-2
facility in Denver, P.A. to enhance vaccine
service offering
►3Q07: Expands its preclinical facility
(toxicology centre of excellence) in Muenster,
Germany.
♦3Q07: Opens a new purpose-built 13,000 sq. ft. Central lab in
Shanghai to meet growing demand of Phase III clinical trials
conducted in China.
► Nov 20, 2007: Buys partially-built 410,000
sq. ft. safety testing and chemistry analysis
facility from Eli Lilly (Virginia)
►June, 2008: Completes 50,000 sq. ft clinical
pharmacology research facility (Evansville,
Indiana)
► Aug 6, 2008: Buys toxicology facility from Eli
Lilly (Greenfield, Indiana)
►/■ Dec 16, 2008: Purchases equity stake in
Caprion Proteomics (Canada), with Covance
serving as exclusive provider of Caprion's
proteomic biomarker services
► Mar 26, 2009: Opens 288,000 sq. ft. preclinical
and safety testing facility (Chandler,
Arizona)
► May 15, 2007: Opens 236,000 sq ft.
development services and clinical pharmacology
facility (Kansas)
■ Jan 17, 2008: Opens clinical development
office in Wilmington, N.C.
● May 7, 2008: Acquires Eidetics, a decisionanalytics
and market research consulting firm
(Boston)
♦ Dec 1, 2008: Acquires Targeted Molecular
Diagnostics, a oncology-focused, speciality
diagnostics laboratory (Illinois)
Source: Company reports.
► Feb 18, 2009: Adds an additional 8000 sq.
ft. to its biotechnology services facility in
Harrogate, UK.
■ Feb 3, 2009: Opens clinical development
offices in Ukraine, Slovakia, and Israel.
■ March 13, 2009: Buys Swiss Pharma
Contract, a 50-bed early clinical development
site in Basel, Switzerland.
► Aug 28, 2007: Opens its first US$2 million 5,000 sq. ft.
nutritional chemistry lab for Asia in Singapore.
► Sep 29, 2008: Ends strategy to pursue 50-50 joint venture
with WX, decides to pursue original strategy to build pre-clinical
facility in China organically.
■ April 7, 2009: Opens clinical development offices in Chile,
Peru, and expanded office in Argentina.
♦ Apr 6, 2007: Opens a new Central Lab in Mumbai, India.
♦ Jan 9, 2008: Expands and consolidates Global Central
Laboratories and CDS units in Beijing, China. The new
consolidated Quintiles China facility has approx. 17,000 sq ft of
space expanding the lab space by 2,600 sq ft. CDS occupies
10,000 sq ft of the combined office area, a major expansion over
its old facility of under 3,000 sq ft.
♦ March 26, 2008: Announces an agreement with Medca Japan
to provide central laboratory services in Saitama, Greater
Tokyo, Japan.
■ Jan 27, 2009: Partnership with Apollo Hospitals Group to
open a Phase I clinical trial unit in Hyderabad, India.
■ Oct 30, 2007: Acquires BioTrials, a Lat Am based CRO
having offices in Panama, Costa Rica, Guatemala, Ecuador
and Peru. BioTrials offers clinical monitoring, site co-ordination,
study management and other services.
■ June 16, 2009: Opens new clinical development office in
Ghana.

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
Aptuit
CRL
► Sep 15, 2009: Acquires MIR Preclinical Services,
provider of in vivo imaging and other discovery
services (Michigan)
► April 3, 2009: Acquires Piedoment Research
Center from PPD, provider of preclinical services
focuses on efficacy studies in oncology (N.C.)
► 2Q09: An approx. 300,000 sq ft. Preclinical
facility scheduled to open in Sherbrooke, Quebec,
Canada.
■ Opens Phase I facility (300 beds) in Tempe,
Arizona.
North America Equity Research
16 July 2009
Table 12: Key Capacity Additions - Early Stage CROs
North America
Region
Europe Asia
LatAm and Other Emerging
► December 3, 2007: Acquires Chemical and ► June 18, 2007: Forms a new contract drug
Pharmaceutical Development (CPD) business of development company with Laurus named Aptuit
Evotec, which integrates an API facility in Oxford, Laurus. Adds Laurus's 160,000 sq ft R&D facility in
England and a parenteral (injectable vials)
Hyderabad, India & a manufacturing plant built on over
fill/finish facility in Glasgow, Scotland.
34 acres in Pharma City, Vishakhapatnam, India.
► March 6, 2007: Opens 450,000 sq ft. pre-clinical
► 15 Oct, 2008: Opens 60,000 sq ft. preclinical facility
discovery facility (Shrewsbury, M.A.)
► July 29, 2008: Opens 52,000 sq ft. RMS facility
(Maryland)
in Shanghai which will provide non-GLP and GLP
services. GLP services to begin in 2Q09.
Early Stage CROs
MDS
MPI Research
WX
► April 22, 2008: Takes over two Pfizer facilities in
Kalamazoo, M.I.
Source: Company reports.
● Aug 1, 2007: Expands Development &
Regulatory Services (DRS) business in Europe
♦ Oct 30, 2007: Expands Central Lab Operations in
China with the opening of an almost 25,000 sq. feet
facility in Beijing, China. (currently looking for buyer)
♦ 16 Oct, 2008: Expands Singapore Global Central
Laboratory Operation (currently looking for buyer)
► June 8, 2009: Announces expansion of early-stage
development facility in Taiwan, to be completed in 2010
♦ Jan 28, 2008: Opens clinical trial management office
in Sao Paulo, Brazil
► Dec 19, 2007: JV with Shanghai Medicilon to form
Medicilon-MPI Preclinical Research (Shanghai) LLC. To
open a 50,000 sq. ft. preclinical testing facility in
Shanghai, China.
► June 8, 2009: Opens office in Ahmedabad, India
► Sep 29, 2008: Announces plan to construct, own
and operate a 323,450 square foot GLP facility in
Suzhou, China to open in the second half of 2009.
► 1Q09: Adds to 220,000 sq foot cGMP-quality
process development and manufacturing plant, a
350,000 sq foot commercial manufacturing plant in
Jinshan, China.
27

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
28
ICLR
► Nov 14, 2008: Acquires Prevaleres Life Sciences,
a 49,000 sq. ft immunoassay and bioanalytical
services lab (Whitesboro, N.Y.)
►/■ Jan 8, 2009: Acquires remaining 30% stake in
Beacon Biosciences, provider of digital imaging data
services (M.A.)
■ April 28, 2009: Acquires assets of Qualia Clinical
Services, Phase I facility in Omaha, N.E. (100 beds)
►July 9, 2009: Acquires Veeda Laboratories,
specialist provider of biomarker testing services
■ June 3, 2008: Acquires DecisionLine Clinical
Research Corp. - acq. adds a 36,000 sq-ft, 82-bed
facility in Toronto, Canada.
North America Equity Research
16 July 2009
Table 13: Key Capacity Additions - Late Stage CROs
North America
Region
Europe Asia
LatAm and Other Emerging
■ Feb 11, 2008: Acquires Healthcare Discoveries,
Phase I facility in San Antonio, TX (85 beds)
● July 12, 2007: Acquires DOCS International, European-based
contract staffing business
♦ Late 2007: Opens central
laboratory (limited services) in
Singapore
Late Stage CROs
PRXL
KNDL
PPDI
■ March 31, 2008: Expands clinical pharmacology
facility in Baltimore, M.D. (90 beds)
● Aug 14, 2008: Acquires ClinPhone, clinical
technolgoy organization (IVR, Medical Imaging,
EDC, and others)
► April 3, 2009: Divests Piedmont Research Center
(to CRL), provider of preclinical services focuses on
efficacy studies in oncology (N.C.)
Source: Company reports.
▼ Jan 15, 2008: Opens clinical development offices in Kiev,
Prague, and Bucharest
■ March 27, 2008: Divests bioanalytical laboratory in Poitiers,
France
■ March 31, 2008: Expands clinical pharmacology facilities in
London (64 beds) and Berlin (160 beds)
■ Nov 20, 2008: Opens office in Lima, Peru
■ Feb 22, 2007: Opens new 34,000 sq. ft. facility in Bellshill,
Lanarkshire, Scotland.
■ March 27, 2007: Opens office in Athens, Greece.
■ Feb 6, 2008: Acquires InnoPharm Ltd., an independent CRO,
based in Smolensk, Russia.
■ June, 2008: Opens clinical office in Istanbul, Turkey.
► Dec 18, 2008: Expands into Athlone, Ireland, by initially
establishing a cGMP analytical testing laboratory to meet growing
client demand in EMEA for these services.
■ Apr 21, 2009: Acquires AbCRO and expands its operations in
Central & Eastern Europe.
♦ Nov 12, 2008: Opens a full service
15,000 sq-feet central laboratory in
Bangalore, India.
■ Jan 14, 2009: Opens office in
Ahmedabad, India
■ June 1, 2009: Opens offices in
Kuala Lumpur, Bangkok and
Manila.
■ June 18, 2007: Opens a new
location in Hyderabad, India that
offers a wide range of clinical
research and data management
services
♦ Jan 23, 2008: Enters into an
agreement with PUL (Peking Union
Lawke Biomedical Development
Limited) expanding its global central
lab services into Beijing, China.
■April 2009: Opens clinical office in
Tokyo, Japan.
♦ Dec 16, 2008: Announces plan to
build central laboratory in Singapore
(to be completed mid-2009)
Other trends to watch
Capacity transfers (Covance/Lilly, MPI/Pfizer)
As mentioned, the CRO industry has seen a number of significant capacity transfers,
including Covance/Eli Lilly and MPI/Pfizer. For Covance, the Lilly deal allowed the
company to add more than 600,000 square feet of laboratory space, including over
100 toxicology rooms and 130,000 square feet of new chemistry capacity, as well as
access new specialty service lines, such as non-GLP toxicology, in vivo
pharmacology, and pre-clinical imaging. The Covance/Eli Lilly deal represent the
most significant capacity transfer to date (privately held MPI acquired a smaller
facility from Pfizer in Ann Arbor, although this was without staff and preexisting

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
Table 14: Selected Compound Partnering Programs
North America Equity Research
16 July 2009
contracts, while PPD announced the acquisition of a 130,000 square foot vaccine
development laboratory, along with 80 employees, from Merck).
Going forward, we expect capacity transfers to continue as pharmaceutical
companies shift toward a more variable cost structure, with larger CROs better
positioned to capitalize on opportunities. We expect that some partnering cases may
not involve actual facility transfer but rather management of a given site (Charles
River, for example, has discussed the potential to take over management duties at a
number of customer locations).
Compound partnering (PPDI – J&J, Rambaxy, Takeda, etc.)
Compound partnering has been another growing industry trend and a means for
CROs to take on more potential upside, should a drug prove successful (this was a
model that proved popular in the 1990s for companies such as Pharmacopeia,
Discovery Partners, Albany Molecular, and others). That said, a number of CROs,
including Covance, Charles River, and ICON, are unlikely to embrace the shared
ownership model, given the inherent risks of drug development.
PPDI
Compound Indication Phase Last Stage Partner Market Economics
Priligy (dapoxetine) Premature Ejaculation Market Johnson & Johnson 30% of males with PE Double-digit royalties
grow with sales. Up to
$50mm in sales
milestones
Alogliptin Type 2 Diabetes NDA Takeda $10-12B and growing Up to $52.5mm remaining
in development
milestones. Up to $33mm
in sales milestones. US
royalty rates: mid-single
to double-digit . RoW
royalty rates: mid to upper
single-digit levels
Alogliptin/Actos Type 2 Diabetes NDA Takeda $10-12B and growing Formula based royalties
SYR-472 Type 2 Diabetes Phase II Takeda
PPD10558 (Statin-outlicensed by Ranbaxy) Cholesterol Lowering Phase I Seeking Partner $32B
MAG-131 Multiple Dermatology Indications Pre-IND $12B
Ranbaxy
Program Partner
Drug Discovery and Clinical Development GSK
Statin Molecule Out Licensed PPD, USA
Cipro OD Technology Out Licensed Bayer
Albany Molecular
Compound Indication Phase Partner
Biogenic Amines Central Nervous disorders Phase I Bristol-Myers Squibb
Allegra/Telfast Seasonal allergic rhinitis Market Sanofi Aventis
Source: Company reports.
Growth in imaging services
A growing number of CROs, including Charles River Laboratories, Covance, and
ICON have also recently expanded imaging services encompassing both early stage
preclinical and later stage development and integrating technologies such as MRI and
PET/CT.
ICON Imaging (formerly Beacon Biosciences) provides specialized electronic
solutions for digital imaging data (X-Ray, MRI, CT, nuclear medicine, PET,
29

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
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16 July 2009
ultrasound, video, photography), including a browser interface, real-time data access,
and other collection and analysis services. ICON initially took a 70% stake in
Massachusetts-based Beacon Biosciences in 2004 for $9.9 million and in December
2008 acquired the remaining 30% for $17.4 million.
Charles River recently expanded the Discovery and Imaging Services (DIS) business,
which focuses on earlier-stage work, through the September 2009 acquisition of
Molecular Imaging Research ($12.5 million). The MIR preclinical business, which
was founded in 2003 and operates in a 20,000 square foot facility (30 employees),
focuses on applying in vivo imaging technologies, including MRI, micro-CT,
bioluminescence and PET/CT to oncology and inflammation studies, and ultimately,
we expect, cardiovascular, metabolic and other disease areas.
Finally, when Covance acquired the Greenfield campus, it also acquired a range of
imaging services, including non-clinical imaging, which uses technologies such as
MRI, PET, ultrasound, and optical imaging.
CRO consolidation
With the number of CROs exceeding 1,100 worldwide and a consolidating customer
base (i.e., pharmaceutical M&A), we expect that M&A activity among service
providers could pick up as large/merged entities, such as Pfizer/Wyeth and
Merck/Schering Plough, become more reluctant to parse out smaller ($5-10 million)
studies to niche vendors. That said, the top twenty public and private CROs continue
to dominate the landscape, and given the increasing scrutiny on process and speed,
we expect that some of the smaller providers could face solvency issues.
Table 15: Recent CRO M&A
Announced Date Closed Date Buyer/Investors Role Target Size ($mm)
Mar-13-2009 Mar-13-2009 Covance Inc. Buyer Swiss Pharma Contract AG -
Dec-16-2008 Dec-16-2008 Covance Inc. Buys equity stake Caprion Proteomics, Inc. 3.1
Aug-05-2008 Oct-03-2008 Covance Inc. Buyer Eli Lilly & Co., Greenfield Laboratories 50.0
July 09 2009 July 09 2009 ICON plc Buyer Veeda Laboratories Ltd. -
Apr-20-2009 Apr-20-2009 ICON plc Acquires Assets Qualia Clinical Services, Inc. -
Jan-08-2009 Jan-08-2009 ICON plc Acquires Remaining 30% Beacon BioScience Inc. -
Stake
Nov-14-2008 Nov-14-2008 ICON plc Buyer Prevalere Life Sciences, Inc. 42.6
Feb-08-2008 Feb-08-2008 ICON plc Buyer Healthcare Discoveries LLC 20.9
Apr-03-2009 Apr-03-2009 PPDI Buyer Magen BioSciences, Inc. 14.5
Feb-09-2009 Apr-21-2009 PPDI Buyer AbCRO, Inc. -
Dec-31-2008 Dec-31-2008 PPDI Buyer Merck & Co. Inc., Vaccine Testing Laboratory in
25.5
Wayne, PA
Feb-06-2008 Oct-01-2008 PPDI Buyer InnoPharm Ltd. 9.0
Dec-01-2008 Dec-01-2008 Quintiles Transnational Buyer Targeted Molecular Diagnostics LLC -
May-07-2008 May-31-2008 Quintiles Consulting, Inc. Buyer Eidetics, Inc. -
Jun-13-2008 Aug-14-2008 PRXL Buyer ClinPhone PLC 198.2
Mar-27-2008 Mar-27-2008 Synchron Research
PRXL Sells Bioanalytical Lab PRXL's Bioanalytical Laboratory In Poitiers, France 6.7
Services, Ahemdabad,
India
In Poitiers, France
Apr-03-2009 May-01-2009 CRL Buyer Piedmont Research Center, LLC 46.0
Sep-15-2008 Sep-15-2008 CRL Buyer MIR Preclinical Services 12.5
Aug-05-2008 Sep-10-2008 CRL Buyer NewLab BioQuality GmbH 53.0
May-30-2008 May-30-2008 KNDL Buyer DecisionLine Clinical Research Corporation 24.7
Source: Company reports, Capital IQ
International trials remain a significant focus area
Outside the U.S., the CRO market continues to grow significantly, driven by
favorable economics (a trial in India can cost as little as one tenth per patient versus

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
one in the U.S.), fast approval times, and reduced bureaucracy, although the logistics
of patient enrollment and follow-up can be more complicated.
According to a recent article in the New England Journal of Medicine (February 19,
2009), roughly one-third of phase III trials (n=509) by major U.S. pharmaceutical
companies now take place entirely outside the U.S. with over half of study sites
located overseas. The same study also found that the number of FDA-regulated
investigators running trials abroad has increased by 15 percent per year, while the
number of U.S.-based investigators has declined 5.5 percent.
Not surprisingly, the focus on trials outside the U.S. has skewed toward China and
India, which account for approximately 28% and 37% of CRO revenues, within the
$500 million Asian market. The transition has been driven largely by cost
(investigator fees per patient, which can average over $5,000 in the U.S., can be as
low as $2,000 in China and $1,300 in India), as well as an abundance of patients
(1.17 billion people in India, 30% located in or around large urban areas) and more
concentrated healthcare delivery (fewer trial sites needed) as well as faster start-up
times (final protocol to first patient in India can take as little as 24 weeks versus 32-
33 weeks in the U.S.). Of course, benefits are partially offset by logistical challenges
including language barriers, poor trial management, unreliable transportation, and
hospital overcrowding.
For India, the market has matured beyond fragmented work on generics and
bioavailability, and it is estimated that the country could go from $100 million today
to 15% of outsourced work within three to five years, generating $2 billion in
revenues, according to a recent report by Ernst & Young (there are an estimated 150
CROs in India today). As of June 2009 there were 413 trials in India
(ClinicalTrials.gov), accounting for 1.5% of the 28,500 trials underway or in
enrollment, despite the fact that the market remains limited to Phase I-III, given strict
regulations on animal testing.
Among CROs, Quintiles has had the longest presence in India (starting in 1997) with
1,260 employees at five sites, including a central laboratory in Mumbai and data
management/cardiac safety in Bangalore. Other CROs include PPD (approximately
120 clinical staff in New Delhi and Mumbai); ICON (entered market in 2002, over
400 employees, running 10% of global trials across four locations); Kendle (entered
in 2004, close to fifty employees); Parexel (entered 2004); and PRA (2006). Indian
CROs also continue to expand, led by companies such as Ranbaxy, Siro ClinPharm,
and Sipra Labs.
China also remains an attractive opportunity for CROs. Covance established the first
central lab in 2007. More recently, in September 2008, the company terminated a 50-
50 joint venture LOI with WuXi AppTec, which had been aimed at providing
toxicology services (Covance had planned to invest $30 million initially). That said,
the company continues to move forward in building out a small amount of preclinical
capacity in China, albeit at a slower pace. Other CROs that have also built a presence
in China include PPDI, which in 2008, expanded a central lab agreement with Peking
Union Lawke Biomedical Development and Charles River Laboratories, which
through a collaboration with Shanghai BioExplorer, opened a 60,000 sq. ft.
preclinical facility in 2008.
31

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
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16 July 2009
Beyond India and China, a number of CROs have also expanded in Taiwan and
Japan. Parexel entered Taiwan in 2007 via the acquisition of Apex International;
MDS, which recently sold the late stage clinical business, also recently announced
plans to expand pharmacology/DMPK studies. Parexel also has active programs
underway in Japan, where it has completed over 500 studies.
Figure 12: Open Phase III Clinical Trials Sponsored by the 20 Largest U.S.-Based Pharmaceutical
Companies
Source: N Engl J Med 360;8 (p. 316-323)
Stimulus (i.e., NIH) potential should not be overblown, but also not ignored
Given the focus on areas such as oncology and diabetes, the $10.4 billion NIH influx
(as part of the American Recovery and Reinvestment Act) is also likely to have a
modest impact on CROs, albeit one less pronounced than for the tool suppliers, such
as Bruker Biosciences, Illumina, Life Technologies, Millipore, and Thermo Fisher
Scientific.
As a reminder, the majority of ARRA funding for NIH is skewed toward basic and
applied research grants, with a bias toward already-reviewed, highly meritorious R01
applications that make scientific sense to fund for only two years.

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
Among CROs, Charles River has dedicated two-thirds of a 50,000 square foot
facility in Frederick, Maryland, to a $112 million, 10-year contract with the National
Cancer Institute for research model colonies (~700,000 models per year to
laboratories receiving NCI funding), and we can envision other similar agreements as
a result of ARRA and additional funding.
Comparative effectiveness is another area that could also prove interesting as the
$1.1 billion federal program to compare medical benefits and cost-effectiveness of
surgeries, medicines, and devices is likely to drive additional outsourced research. To
date, comparative-effectiveness research has been limited, but we expect efforts by
the Federal Coordinating Council for Comparative Effectiveness Research to drive
more work given the need to reduce unnecessary medical costs.
Rise of eCROs
Finally, within the CRO market, eCROs, which have developed a range of electronic
tools to support drug, biologic, and device development processes (web-based
document management, trial management systems, auto-encoding of adverse events,
electronic data capture), have become increasingly important. Among CROs, Parexel
has taken a particularly pro active approach to the market with build-out of the
Perceptive Informatics business, which encapsulates clinical trial management
systems, medical imaging, electronic data capture, electronic patient reported
outcomes, and interactive voice/web response systems. Other companies, such as
Phase Forward, have also built a significant presence in the market.
33

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
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16 July 2009
Table 16: 2009 Master Providers (from ClinPage)
Competitive Landscape
The CRO landscape remains highly fragmented with well over 1,100 companies
worldwide engaged in drug development work and competition split between the
CROs themselves, in-house departments of pharmaceutical companies, and to a
lesser extent academic facilities.
Despite the highly dynamic and competitive landscape, CROs distinguish themselves
through a range of areas, including quality and accuracy; speed and efficiency;
clinical expertise; and size and scale.
Company Location 2008 Revenue % Change 2008 Net % Change # Employees Revenue/
(mm)
Y/Y Income Y/Y
employee
Covance Princeton, NJ $1,730 12% $194 12% 9,600 $180,208
ERT Philadelphia, PA $133 34% $25 12% 400 $332,500
Icon Dublin, Ireland $865 37% $78 12% 6,570 $131,659
Kendle Cincinatti, OH $475 19% $29 12% 3,325 $142,857
Medidata (private) New York, NY $117 36% ($7) 12% 535 $218,692
Medpace (private) Cincinatti, OH $143 50% NA 12% 859 $166,473
Omnicare King of Prussia, PA $172 5% NA 12% 1,189 $144,659
Parexel Waltham, MA $843 25% $58 12% 9,250 $91,135
Phase Forward Waltham, MA $170 27% $14 12% 400 $425,000
PPD Wilmington, NC $1,570 11% $188 12% 10,500 $149,524
Quintiles (private) Raleigh, NC $3,000 25% NA 12% 22,000 $136,364
RPS Fort Washington, PA $157 31% $3,740 12% 1,200 $130,833
Source: www.clinpage.com/images/photos/ClinPage_Master_Providers-2009.pdf
Table 17: Book-to-bill trends
Book-to-bill, backlog, cancellation trends
Book to bill, backlog, and cancellation trends are all metrics used by the Street to
gauge performance. On the preclinical side, book-to-bill ratios typically run close to
1 (i.e., eat what you kill during the quarter), although this can be higher for longer
term studies, such as cancer projects, and dedicated space agreements (for example,
in the quarter that the Lilly deal was signed, for example, Covance had book-to-bill
of 4 – the highest ever).
Net Book to Bill CY06 CY07 CY08
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 C1Q09
CVD (Net book to bill) 1.17 1.65 1.27 1.39 1.42 1.26 1.24 1.22 1.14 1.40 4.04 1.26 1.26
CVD (Adj. Net book to bill) 1.31 1.26 1.28 1.24 1.17 1.30 1.20 1.29 1.34
ICLR 1.70 1.60 1.30 1.30 1.60 1.60 1.40 1.90 1.80 1.50 1.60 1.20 1.20
PPDI 1.37 1.44 1.51 1.23 1.39 1.09 1.36 1.45 1.51 1.09 1.36 1.73 1.07
PRXL n/a 1.69 n/a 1.40 1.70 1.60 1.31 1.87 1.52 1.56 1.00 1.20 1.25
KNDL 1.30 1.10 1.90 1.70 1.40 1.60 1.70 1.40 1.40 1.40 1.40 1.30 0.20
Source: Company reports.

Tycho W. Peterson
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North America Equity Research
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Table 18: CRO C2Q09 Earnings Schedule
Earnings Release Conference Call 2Q09
Consensus
JPM
Estimate
Earnings Call
Number
Dial-in
Passcode
CROs (Ticker) Date Time Date Time
Charles River (CRL) 4-Aug AMC 5-Aug 8:30 AM $0.58 $0.56 800-230-1059 -
Covance (CVD) 29-Jul AMC 30-Jul 9:00 AM $0.63 $0.65 877-795-3604 4995453
Icon Plc (ICLR) 22-Jul BMO 22-Jul 10:00 AM $0.34 $0.34 866-966-5335 -
Kendle (KNDL) N/A N/A N/A N/A $0.34 NR - -
MDS Inc (MDZ) Sept-10 (F3Q) BMO N/A N/A $0.01 NR - -
Parexel International (PRXL) 10-Aug AMC 11-Aug 10:00 AM $0.27 NR 706-758-4950 -
Pharm. Prod. Development (PPDI) 21-Jul AMC 22-Jul 9:00 AM $0.32 NR 877-644-0692 89018262
Wuxi Apptech (WX) N/A N/A N/A N/A $0.14 $0.12 - -
Source: Thomson Street Events, Bloomberg Consensus estimates, J.P. Morgan estimates.
Preclinical
Major contract research organizations providing preclinical services include the
following.
Charles River
Charles River Laboratories provides preclinical services and animal research models
to help with research and drug development by pharmaceutical and biotech
companies, government agencies, and hospital and academic institutions.
Charles River operates in two main business segments: PCS (Preclinical services)
and RMS (Research model services). Under the PCS division, the company offers
know-how in the design, execution, and reporting of general and specialty toxicology
studies, especially concerned with new therapies and biologicals. Under the RMS
segment, the company (having ~ 150 different strains) engages in production and
sale of research models, principally genetically and virally defined purpose bred rats
and mice.
Being a preclinical service provider, the company is currently exposed to end market
weakness, driven by pharma restructuring and R&D reprioritization, as well as
continued funding challenges for smaller biotech customers.
Covance
Covance offers a range of non-clinical and clinical services, including toxicology,
clinical pharmacology (Phase I/IIa clinical studies with a focus on high complexity
studies such as first-in-human and drug-drug interaction), and full management and
monitoring of Phase IIb/III trials. The company is the leader in providing central lab
services and is larger than the next several competitors combined, touching nearly
one-quarter of all clinical trials performed. Covance also provides clinical trial
support services, which is a relatively small business that helps clients tracking trials
on a real-time basis using an interactive trial management system. In addition, the
company also offers clients peri-approval services, including studies conducted
around the NDA approval period such as Phase IIIb clinical studies.
Harlan (private)
Harlan provides pre-clinical and non-clinical contract research, research models,
animal diets, and services to clients that include pharmaceutical, biotech, medical
device, agrochemical, chemical industries, as well as universities, government
institutions, and other research organizations. The company has operations in over 12
countries and more than 3,000 employees. Research services offered by Harlan
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include discovery services (over 30,000 square feet of dedicated research space for
rodent and non-rodent species), toxicology (inhalation, reproductive, neurotoxicity,
genotoxicity, and safety pharmacology), drug metabolism, and pharmacokinetics as
well as consulting and program management.
Life Sciences Research (LSR)
Founded in 1951, Life Sciences Research, which is the second largest contract
research organization in the United Kingdom (80% of revenues denominated in
British pounds), has over 1,600 employees and annual revenues of approximately
$240 million. The company provides preclinical and non-clinical testing services for
biological safety evaluation research to pharmaceutical, biotechnology,
agrochemical, and industrial chemical companies. The company also serves the
regulatory and commercial requirements of governments performing safety
evaluations on pharmaceutical and chemical compounds.
Around 85% of orders are from preclinical testing and non-clinical testing services,
while orders from safety and efficacy testing for agrochemical, industrial chemical,
veterinary, and food industries account for the remainder.
On July 9 Life Sciences Research announced plans to enter into a definitive merger
agreement to be acquired by Lion Holdings, an entity controlled by Chairman and
CEO, Andrew Baker, who owns approximately 17.5% of the outstanding shares, for
$8.50 per share in cash. The transaction is expected to close in 4Q09.
MDS
MDS Pharma Services, one of the business units for MDS, provides drug discovery
and development services to pharmaceutical and biotechnology customers. MDS
Pharma Services is headquartered in King of Prussia, PA (MDS Inc. headquartered in
Toronto, Canada), with operations in nine countries around the world.
The company has historically offered services across a range of drug discovery and
development processes, including lead optimization, pre-IND research,
pharmaceutical, and biopharmaceutical early clinical research (bioequivalence,
phases I-IIa), bioanalysis, clinical development, central lab, and centralized cardiac
services. On June 1, however, MDS announced plans to divest the late-stage business
(phase II-IV) to INC Research for $50 million and focus solely on early-stage
(discovery through Phase IIa) services. The late-stage operation had approximately
800 employees conducting multi-site trials in over 25 countries. At the same time,
the company also announced plans to sell the Central Labs business (600 employees
at six sites in Europe, North America, and Asia), which analyzes samples from
clinical trials to monitor safety and test for physiological impact and provides realtime
access to data using proprietary software (Apollo).
MPI Research (private)
MPI, which is the third largest preclinical provider in the U.S., focuses on preclinical
and early clinical services to pharmaceutical, biotech, medical device, animal health
and agrichemical customers. Founded in 1995 and headquartered in Mattawan
Michigan, the company employs over 1,800 employees, with 160 professionals in
analytical services alone, and generates revenues of approximately $113 million.
MPI provides services in general toxicology, infusion toxicology, developmental and
reproductive toxicology, bioanalytical and analytical sciences, safety pharmacology,

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neurobehavioral sciences, drug metabolism, and pharmacokinetics as well as targeted
discovery research, immunology, pathology services, and molecular imaging.
WIL Research (private)
WIL Research provides toxicology, pharmacology, metabolism, and pharmacology
services to biopharmaceutical, chemical, agricultural, veterinary, and food and
consumer products companies. Founded in 1976, the company is based in Ashland,
Ohio, and has over 600 employees generating annual revenues of approximately $45
million. Services provided by the company include developmental and reproductive
toxicology, juvenile toxicology, general toxicology, neurotoxicology, inhalation
toxicology, infusion toxicology, safety pharmacology, pathology, metabolism,
analytical chemistry, bioanalytical chemistry, and support services, including quality
assurance programs, information systems, study analysis, and validation services.
Clinical
In addition to data management companies (such as Phase Forward), CROs
specialized in providing clinical services to biopharmaceutical companies include the
following.
Covance
See prior description.
ICON
ICON, which was founded in 1990 and is headquartered in Dublin, Ireland, is the
fourth largest CRO and provides outsourced development services from compound
selection to Phase I-IV clinical studies to pharmaceutical, biotechnology, and
medical device companies in the U.S., Ireland, and other parts of Europe. The
company also provides various laboratory services, including sample analysis, safety
testing, custom flow cytometry, and electronic transmission of test results. More than
half of ICON revenues are derived from sales outside the U.S.
Kendle
Kendle provides clinical development services on a contract basis to pharmaceutical
and biotechnology companies worldwide. Services include clinical trial management,
data management, statistical analysis, medical writing, regulatory consulting, and
publication. The majority of revenues come from late-stage trial services (Phase II-
IV clinical trial services account for ~90% of revenues), while geographically, over
50% of revenues are attributed to sales outside the U.S.
While the geographic footprint provides some advantages, Kendle is currently facing
significant pricing pressure within the core business lines and has recently reported
high cancellation rates (over 45% in 1Q versus initial expectations of 18%). Strategic
repositioning of the Pfizer pipeline, including a scale back of services provided by
Kendle, coupled with biopharmaceutical consolidation trends and a challenging
biotech funding environment have all put additional pressures on the business.
Parexel
Paraxel offers a number of core services including clinical research services (Phase I-
IV clinical trial services), consulting and medical communication services, and IT
solutions designed to improve product development (via the Perceptive portfolio of
products). Headquartered in Waltham, Massachusetts, the company manages 63
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locations in 51 countries, providing it with wide geographic reach as approximately
56% of revenues are derived from outside the U.S. Revenues are split between three
core segments: Clinical Research Services (73%), Perceptive Informatics (15%), and
Consulting & MedCom Services (12%). Approximately three-quarters of revenues
come from large-cap biopharmaceutical companies, while the remaining quarter
come from small- and mid-cap clients.
PPDI
PPDI is the third largest CRO worldwide (annual revenues over $1.5 billion, 10,500
employees and operations in 33 countries) and provides drug discovery and
development services, post-approval expertise, and compound partnering programs.
The company is a market leader in late-stage development and provides end-to-end
clinical trial management and central lab services. The company also offers several
support services, such as product launch services, medical information, patient
compliance programs, patient and disease registry programs, product safety, and
pharmacovigilance monitoring.
PRA (private)
PRA International helps develop drug compounds, biologics, and drug delivery
devices for pharmaceutical and biotechnology companies in the United States,
Europe, and Japan. Founded in 1976, the company has over 2,700 employees and
annual revenues of approx $400 million. Core areas of service for PRA include
Product Registration (design, management, and implementation of study protocols of
Phase II and Phase III), Scientific and Medical affairs (designing and implementing
clinical development programs in a particular therapeutic area, safety and risk
management services, regulatory affairs advisory, and medical affairs post approval,
Phase IV trials), and Early Development (first-in-man, etc.). The company also
performs clinical trials management services in collaboration with internal staff and
other CROs.
Quintiles (private)
Quintiles is the largest global CRO, with ~14% market share, operations in over 50
countries, 22,000 employees, and annual revenues ~$3 billion. The company
provides services through several channels, including Development Services (Phase I
services, phase II-IV trial services including clinical trial management, medical and
regulatory affairs and drug safety, central labs and data management); Commercial
(services necessary to release a drug in the market and post marketing surveillance,
as well as specifically services such as pricing, due diligence, sales force training,
and advertising); and Partnering Solutions, which provides funding, development,
and commercialization services, and outsourcing/insourcing decisions through the
NovaQuest strategic partnering solutions group.
Quest
Quest provides central laboratory testing in connection with clinical research trials to
test the safety and efficacy of new drugs and vaccines. The company has clinical
trials testing centers in the U.S. and UK and provides clinical trial testing services in
Australia, China, and Singapore through associated labs. The company also provides
routine clinical testing services, gene based and other esoteric testing, and anatomy
pathology services (other than risk assessment services for the life insurance
industry), although it does not have phase III trial capabilities. Quest supports
worldwide clinical trial testing for GlaxoSmithKline and also provides services to
government agencies and commercial laboratories.

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North America Equity Research
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In the following tables we highlight some of broader performance characteristics of CROs.
Table 19: CRO Revenue Growth
Rev Growth y/y
Company 2000 2001 2002 2003 2004 2005 2006 2007 2008
CRL Reported 33% 52% 19% 11% 18% 37% 7% 16% 9%
Organic 12% 17% n/a 3% 11% 10% 6% 13% 8%
PCS Segment (1) 18% 21% 14% 1% 42% 17% 12% 17% 6%
CVD Reported 11% -2% 3% 5% 8% 18% 12% 16% 12%
Organic 8% 10% 9% 3% 6% 17% 12% 13% 11%
ICLR (2) Reported 35% 44% 35% 44% 32% 10% 32% 38% 37%
Organic 35% 25% 35% 33% 21% 10% 31% 35% 32%
KNDL Reported 33% 25% 10% -2% 3% 16% 49% 52% 19%
Organic -4% 20% -3% -11% 4% 17% 22% 34% (3) 19%
MDZ (2) Reported 21% 13% 1% -15% -18% 2% 8% 14% 9%
Organic n/a n/a n/a 4% n/a 4% 6% 3% -1%
Pharma Services 94% 30% 18% -1% 16% 7% 3% 4% -2%
PRXL (2) Reported 30% 7% 17% 9% 6% 3% 13% 21% 27%
Organic 9% 2.5% (3) 14.6% (3) 9% -3% -3% 13% 14% 19%
PPDI (2) Reported 14% 25% 41% 19% 16% 23% 20% 13% 11%
Source: Company reports; FactSet. (1) 2000-2002 represents Biomedical Products and Services business segment. 2001 incl. PAI and Primedica
acquisitions. For 2002, pro forma numbers incl BioLabs and Springborn. 2003 incl. +9.8% from BioLabs and Springborn. 2005 represents pro forma incl
Inveresk. After Phase II-IV divestiture in Aug 2006, segment incl Phase I Clinical. 2008 incl NewLab BioQuality. (2) For ICLR, revenue growth 2000-2005
based on May fiscal year ends. MDS has October fiscal year end. PRXL has June fiscal year end. Only reported growth available for PPDI. (3) Organic
figures unavailable.
Table 20: Preclinical / Early Stage CRO Operating Margins
Operating Margins
Company 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09
CRL PCS Segment 15.8% 16.7% 17.8% 13.1% 13.8% 16.1% 17.2% 13.3% 7.5%
CVD Early Development 24.4% 25.6% 26.0% 24.8% 25.0% 25.4% 25.4% 21.4% 14.1%
Source: Company reports.
Table 21: Preclinical / Early Stage CRO EBITDA Margins
EBITDA Margins
Company 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09
CRL PCS Segment 25.5% 26.3% 27.4% 22.9% 23.1% 25.0% 26.2% 23.0% 17.7%
CVD Early Development 30.2% 31.0% 31.1% 29.7% 31.0% 31.1% 31.0% 27.0% 20.4%
Source: Company reports.
39

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Figure 13: Historical OMs: CRL PCS vs. CVD Early Development
30%
25%
20%
15%
10%
5%
0%
CRL
CVD
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09
CRL PCS Segment CVD Early Development
Source: Company reports and J.P. Morgan estimates.
Figure 14: Historical EBITDA: CRL PCS vs. CVD Early Development
35%
30%
25%
20%
15%
10%
5%
0%
CRL
CVD
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09
CRL PCS Segment CVD Early Development
Source: Company reports and J.P. Morgan estimates.
Table 22: Clinical / Late-Stage CRO Operating Margins
Operating Margins
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09
CVD Late-Stage 16.3% 16.8% 17.5% 16.1% 18.5% 19.2% 19.7% 19.6% 22.6%
ICLR 10.8% 10.9% 11.2% 11.0% 10.7% 11.2% 12.0% 12.0% 12.2%
KNDL 13.1% 11.1% 15.9% 14.6% 12.2% 12.7% 12.7% 10.0% 7.5%
PRXL 8.1% 8.2% 7.9% 8.6% 9.3% 9.9% 8.4% 8.2% 10.0%
PPDI 19.7% 19.0% 16.1% 16.4% 18.5% 18.9% 19.5% 20.9% 19.1%
Source: Company reports, FactSet.
Table 23: Clinical / Late-Stage CRO EBITDA Margins
EBITDA Margins
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09
CVD Late-Stage 19.2% 19.6% 20.2% 18.6% 20.5% 21.1% 21.6% 21.5% 24.3%
ICLR 13.8% 13.9% 14.2% 13.9% 13.7% 14.2% 15.6% 15.2% 15.6%
KNDL 16.9% 14.8% 19.8% 17.3% 15.2% 15.6% 16.1% 13.0% 11.2%
PRXL 12.4% 12.4% 12.0% 12.7% 13.1% 13.6% 12.9% 13.2% 15.0%
PPDI 23.9% 23.3% 20.4% 20.8% 22.5% 22.9% 23.6% 25.3% 23.6%
Source: Company reports, FactSet.

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(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
Figure 15: Historical OMs Comparing: CVD Late-Stage, ICLR, KNDL,
PRXL, and PPDI
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
KNDL
PRXL
PPDI
CVD Late Stage
ICLR
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09
CVD Late Stage ICLR KNDL PRXL PPDI
Source: Company reports and J.P. Morgan estimates.
Table 24: CRO Industry Comparable Company Analysis
Figure 16: Historical EBITDA Comparing: CVD Late-Stage, ICLR,
KNDL, PRXL, and PPDI
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
PRXL
CVD Late Stage
KNDL
PPDI
ICLR
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09
CVD Late Stage ICLR KNDL PRXL PPDI
Source: Company reports and J.P. Morgan estimates.
Price Mkt Cap. FC Calendar Year EPS FC Calendar Year P/E EPS Growth P/E-to-Growth EV / Sales EV / EBITDA
Company
Preclinical (A)
Ticker Rating 7/14/2009 ($ M) 2008 2009E 2010E 2008 2009E 2010E 08/07 09E/08 10E/09E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E
Charles River Laboratories CRL N $31.58 2,240 $2.89 $2.42 $2.78 10.9x 13.0x 11.3x 11% -16% 15% 1.0x nm 0.8x 1.9x 2.0x 1.9x 7.3x 8.3x 7.3x
Covance, Inc. CVD OW $48.65 3,141 $3.03 $2.61 $3.10 16.1x 18.6x 15.7x 14% -14% 19% 1.1x nm 0.8x 1.8x 1.7x 1.5x 8.8x 9.6x 8.2x
MDS, Inc. MDZ - $5.61 642 $0.18 $0.20 $0.30 30.9x 28.1x 18.9x -49% 10% 49% nm nm 0.4x 0.7x 0.8x 0.8x 4.9x 6.7x na
Wuxi Apptech WX N $8.89 638 ($1.01) $0.49 $0.60 nm 18.1x 14.9x nm nm 21% nm nm 0.7x 2.4x 2.3x 1.9x 8.3x 9.0x 7.0x
Clinical (B)
Covance, Inc. CVD OW $48.65 3,141 $3.03 $2.61 $3.10 16.1x 18.6x 15.7x 14% -14% 19% 1.1x nm 0.8x 1.8x 1.7x 1.5x 8.8x 9.6x 8.2x
Icon Plc ICLR OW $22.50 1,263 $1.30 $1.41 $1.63 17.3x 15.9x 13.8x 38% 9% 15% 0.5x 1.8x 0.9x 1.5x 1.4x 1.3x 9.8x 9.3x 8.2x
Kendle International Inc. KNDL - $11.10 182 $1.96 $1.50 $1.55 5.7x 7.4x 7.2x 22% -23% 3% 0.3x nm 2.5x 0.6x 0.7x 0.7x 4.1x 5.9x 5.0x
PAREXEL International Corporation PRXL - $13.21 828 $0.93 $1.02 $1.15 14.2x 13.0x 11.5x 21% 9% 13% 0.7x 1.5x 0.9x 1.0x 0.9x 0.9x 6.9x 6.7x 6.1x
Pharmaceutical Product Development PPDI - $21.81 2,738 $1.70 $1.37 $1.53 12.8x 16.0x 14.2x 25% -20% 12% 0.5x nm 1.2x 1.5x 1.6x 1.5x 6.1x 7.1x 6.5x
Source: FactSet, Company data, J.P. Morgan estimates. ICON and Covance estimates are J.P. Morgan estimates.
Total Group Average 15.4x 16.3x 13.4x 12% -6% 18% 0.7x 1.6x 1.0x 1.4x 1.4x 1.3x 7.0x 7.8x 6.9x
Total Group Average excl MDZ 12.8x 14.6x 12.7x 22% -9% 14% 0.7x 1.6x 1.1x 1.5x 1.5x 1.4x 7.3x 8.0x 6.9x
Median 14.2x 16.0x 14.0x 21% -14% 15% 0.6x 1.6x 0.9x 1.5x 1.5x 1.4x 7.1x 7.7x 7.0x
(A) Average Preclinical 19.3x 19.5x 15.2x -8% -7% 17% 1.1x nm 0.7x 1.7x 1.7x 1.5x 7.3x 8.4x 7.5x
(B) Average Clinical 13.2x 14.2x 12.5x 24% -8% 12% 0.6x 1.6x 1.3x 1.3x 1.3x 1.2x 7.2x 7.7x 6.8x
As shown in the following table, CRO customer mix by end market also vary.
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Table 25: CRO End Market Exposure
End Markets
CRL
Net Revenue Mix FY2008 FY2007
Commercial 84% 84%
All Biotech 20%
Non Rev Co's 5%
Non-Commercial (Academic, Gov, etc) 16% 16%
CVD
Net Revenue Mix FY2008 FY2007
Top 50 BioPharma 80%
Top 10 BioPharma 33%
Emerging Biopharma/Speciality Pharma 10%
Govt./Food Manufacturers/Academia/Others 10%
ICLR
Net New Business Wins FY2008 FY2007
Mid Sized Pharma 18% 18%
Large Pharma 50% 59% (Top 20)
Large Biotech 13%
Mid Biotech 12% 23% (Other Biotech)
Non Rev Co's 7%
PRXL
Net Revenue Mix FY2008 FY2007
Large BioPharma 74%
Small & Midsize BioPharma 26%
PPDI
Net Revenue Mix FY2008 FY2007
Pharma 56% 59%
Biotech 31% 29%
Govt./Academia/Others 13% 12%
WX
Net Revenue Mix 9M08 FY2007
Top Ten Customers 54% 74%
Other Customers 46% 26%
Source: Company reports and J.P. Morgan estimates.
In preclinical, typical metrics include capacity utilization, cash flow yield, margins,
and cost structure. On the clinical side, key metrics include backlog/book to bill,
orders/cancellations, and margins, and cost structure.

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Table 26: CRO Capabilities Overview
Annual Revenue Key: ▲ >$300 million, ► $100-300 million, ▼

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Table 27: CRO Capabilities Overview - Continued
Phase II- IV
Central Laboratory
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CRL CVD ICLR KNDL MDZ (Pharma
Services)
Rating: ▲
Rating: ▲
Rating: ▲
- Clinical development
- Extensive Trial - Clinical Trial
services, safety services management, Services
- Clinical trial support services, monitoring, and - Clincal
data management services pharmacovigilance Development
(EDC, IVR)
capabilitites
services
- Highlights access to
- Data
- Biometrics unit
specialized patient populations management and (connect into
for Phase II trials in specific statistical
and utilize
therapeutic areas
consulting (EDC, company's own
IVR, Imaging data
management management
capabilities)
systems)
Rating: ▲
- Central laboratory services
(4 Labs in Singapore, China,
Switzerland, and U.S.)
- World's largest provider,
estimates process samples for
~1/3 of all clinical trials
conducted)
Rating: ▼
- Central
laboratory services
(4 Labs in
Singapore, India,
New York, and
Ireland).
Source: Company reports, J.P. Morgan estimates. Note * indicates J.P. Morgan estimate.
Rating:►
- Central
laboratory
services (3 Labs
in Kentucky,
Belgium, and
new facility in
Singapore)
Public Private
Rating: ▼
- Looking for
buyer
PPDI PRXL WX Qunitles PRA
International
Rating: ▲
Rating: ▲
Rating: ▲
Rating: ▲
- Study protocol and - Clinical
- Clinical monitoring, - Project
case report form design logistics
data management management
- Site and investigator - Investigator
and biostatistical - Clinical
recruitment, patient recruitment
services
monitoring
enrollment and study and patient
- Patient and
- Analysis and
feasibility
enrollment
investigator
reporting
- Study monitoring and - Program
recruitment
data collection
design and
- Last phase clinical
- Informatics
data
studies
management
- Medical device
- Perceptive
Informatics
studies
Rating: ►
- Central laboratory
services
Rating: ►*
- Central
laboratory
services
Rating:▲*
- Wholly owned
facilities in China,
Singapore, India,
South America,
Scotland, and the
United States
- Subcontractor labs
in Argentina, Brazil,
and Japan
Rating: ▼*
- Relationship
with Frontage
Laboratories in
the U.S.

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Table 28: CRO Capabilities Overview - Continued
Specialty/Other
Recent Divestitures
Emplo
yees
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16 July 2009
CRL CVD ICLR KNDL MDZ (Pharma
Services)
-Research
Model Services
- "Navigators"
consulting
- In Vitro
Services group
- Divests
Edinburgh (U.K)
clinical research
facility in May
2009 (to
Quotient
Bioresearch)
- Market access services
- Regulatory affiars
- Medical writing
- Regulatory affairs
- Medical writing
- North American
staffing service
and European
staffing service
(DOCS
International)
- Regulatory
affairs and
quality
- Medical
education
services
- Medical writing
Public Private
- Divests
Phase II-
Phase IV
services and
Central Lab
business (6
labs) to INC
Research in
June 2009
PPDI PRXL WX Quintiles PRA
International
-Key differentiator: Has
entered into several
compound collaboration
partnerships, that allow
PPDI to share in risks
and rewards of
compound development
- GMP manufacturing
laboratory
- Technical writing and
regulatory submissions
-Divests Piedmont
Research Center (to
CRL) in March 2009, a
provider of preclinical
services focusing on
efficacy studies in
oncology
- Integrated
producted
development
and compliance
consulting
- Medical
writing/communi
cation services
- GMP
Manufacturing
(Jinshan facility)
- Closes
Philadelphia
Apptech
biologics
manufacturing
facility in
December 2008.
No plans to reopen.
- Contract sales and
marketing services
- Other
commercialization
services
- Medical
writing/communicati
on services
- Regulatory
affairs
9,000 9,600 7,100 4,275 3,300 10,500 8,050 3,739 Estimated >20,000 Estimated
>3,000
Source: Company reports, J.P. Morgan estimates.Note: * indicates J.P. Morgan estima
45

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
46
North America Equity Research
16 July 2009

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
Companies Recommended in This Report (all prices in this report as of market close on 15 July 2009)
Charles River Laboratories (CRL/$31.71/Neutral), Covance (CVD/$47.63/Overweight), ICON Plc
(ICLR/$23.31/Overweight), WuXi PharmaTech (WX/$9.00/Neutral)
Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures
• Market Maker: JPMSI makes a market in the stock of ICON Plc.
• Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for
Covance, WuXi PharmaTech within the past 12 months.
• Client of the Firm: Charles River Laboratories is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company investment banking services, non-investment banking securities-related service and non-securities-related
services. Covance is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company
investment banking services and non-securities-related services. WuXi PharmaTech is or was in the past 12 months a client of
JPMSI; during the past 12 months, JPMSI provided to the company investment banking services.
• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking
services from Charles River Laboratories, Covance, WuXi PharmaTech.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from Charles River Laboratories, Covance, WuXi PharmaTech.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from Charles River Laboratories. An affiliate of JPMSI has received compensation in the past 12 months
for products or services other than investment banking from Charles River Laboratories, Covance, WuXi PharmaTech.
• J.P. Morgan Securities Inc and/or its affiliates is acting as a financial advisor to Wuxi Pharma Tech (NYSE: WX) on its announced
acquisition of privately held Apptec Laboratory Services, Inc. announced on January 3, 2008. Under the agreement, Apptec will
become a wholly-owned subsidiary of Wuxi Pharma Tech. The acquisition, which is subject to regulatory and other approvals is
expected to be completed in the first quarter of 2008. This research report and the information herein is not intended to provide
voting advice, serve as an endorsement of the proposed transaction or result in procurement, withholding or revocation of a proxy or
any other action by a security holder.
Charles River Laboratories (CRL) Price Chart
120
100
80
Price($) 60
40
20
0
Jul
06
Oct
06
Jan
07
Apr
07
Jul
07
Oct
07
Jan
08
Apr
08
Jul
08
Oct
08
N $24
Jan
09
N $28
Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Apr
09
Jul
09
Date Rating Share Price
($)
Price Target
($)
12-Jan-09 N 23.62 24.00
11-Feb-09 N 27.56 28.00
47

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
Covance (CVD) Price Chart
48
156
130
104
Price($)
78
52
26
0
Jul
06
Oct
06
Jan
07
Apr
07
Jul
07
North America Equity Research
16 July 2009
Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
ICON Plc (ICLR) Price Chart
70
56
42
Price($)
28
14
0
Jul
06
Oct
06
Jan
07
Apr
07
Jul
07
Oct
07
Oct
07
Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Jan
08
Jan
08
Apr
08
Apr
08
Jul
08
Jul
08
Oct
08
Oct
08
Jan
09
Jan
09
Apr
09
Apr
09
Jul
09
Jul
09

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
WuXi PharmaTech (WX) Price Chart
Price($)
75
60
45
30
15
0
Aug
07
Nov
07
Feb
08
May
08
North America Equity Research
16 July 2009
N N $9
Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Sep 18, 2007. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Aug
08
Nov
08
Feb
09
N $5
N $7
May
09
Aug
09
Date Rating Share Price
($)
18-Sep-07 N 27.11 -
12-Jan-09 N 7.31 9.00
27-Mar-09 N 5.20 5.00
15-May-09 N 5.59 7.00
Price Target
($)
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector
and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Tycho W. Peterson: Accuray (ARAY), Affymetrix (AFFX), American Medical Systems (AMMD),
Beckman Coulter (BEC), Charles River Laboratories (CRL), Covance (CVD), Gen-Probe (GPRO), Genomic Health
(GHDX), Hologic (HOLX), Home Diagnostics, Inc. (HDIX), ICON Plc (ICLR), Illumina, Inc. (ILMN), Intuitive Surgical,
Inc. (ISRG), Life Technologies Corporation (LIFE), Luminex (LMNX), Mettler-Toledo (MTD), Millipore Corp (MIL),
Sirona Dental Systems Inc (SIRO), SonoSite (SONO), Thermo Fisher Scientific (TMO), Varian Medical (VAR), Waters
(WAT), WuXi PharmaTech (WX)
J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2009
Overweight Neutral Underweight
(buy) (hold) (sell)
JPM Global Equity Research Coverage 36% 46% 18%
IB clients* 55% 56% 42%
JPMSI Equity Research Coverage 36% 52% 12%
IB clients* 77% 72% 60%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on
the front of this note or your J.P. Morgan representative.
49

Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
50
North America Equity Research
16 July 2009
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include revenues from, among other business units, Institutional Equities and Investment Banking.
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Tycho W. Peterson
(1-212) 622-6568
tycho.peterson@jpmorgan.com
North America Equity Research
16 July 2009
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Copyright 2009 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan.
51